UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
Commission File Number: 33-90342
MAIN STREET TRUST, INC.
(Exact name of registrant as specified in its charter)
Illinois 37-1338484
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(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
100 West University, Champaign, Illinois 61820
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(Address of principal executive offices) (Zip Code)
(217) 351-6500
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Each Class on which registered
------------------- ----------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No[ X ]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No[ X ]
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ X ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ X ] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Exchange Act Rule 12b-2). Yes [ ] No [ X ]
As of March 2, 2006, the Registrant had issued and outstanding 10,138,875 shares
of the Registrant's Common Stock.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, based on the last reported price on June 30,
2005, the last business day of the registrant's most recently completed second
fiscal quarter, was approximately $202,040,337*.
* Based on the last reported price ($28.75) of an actual transaction in
Registrant's Common Stock on June 30, 2005, and reports of beneficial
ownership filed by directors and executive officers of Registrant and by
beneficial owners of more than 5% of the outstanding shares of Common
Stock of Registrant; however, such determination of shares owned by
affiliates does not constitute an admission of affiliate status or
beneficial interest in shares of Registrant's Common Sock.
Documents Incorporated By Reference
Part III of Form 10-K - Portions of Proxy Statement for annual meeting of
shareholders to be held May 17, 2006.
1
MAIN STREET TRUST, INC.
Form 10-K Annual Report
Table of Contents
Part I
Item 1. Description of Business......................................... 3
A. General
B. Business of the Company and Subsidiaries
C. Competition
D. Monetary Policy and Economic Conditions
E. Supervision and Regulation
F. Employees
G. Internet Website
Item 1.a. Risk Factors.................................................... 10
Item 1.b. Unresolved Staff Comments....................................... 14
Item 2. Properties...................................................... 14
Item 3. Legal Proceedings............................................... 14
Item 4. Submission of Matters to a Vote of Security Holders............. 14
Part II
Item 5. Market for Registrant's Common Equity, Related Shareholder Matters
And Issuer Purchases of Equity Securities..................... 14
Item 6. Selected Consolidated Financial Data............................ 16
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 16
Item 7a. Quantitative and Qualitative Disclosures about Market Risk...... 39
Item 8. Financial Statements and Supplementary Data..................... 40
Item 9. Changes in and Disagreements on Accounting and
Financial Disclosure.......................................... 71
Item 9a. Controls and Procedures......................................... 71
Item 9b. Other Information............................................... 73
Part III
Ite- 10. Directors and Executive Officers of the Registrant.............. 73
Item 11. Executive Compensation.......................................... 73
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Shareholder Matters................ 74
Item 13. Certain Relationships and Related Transactions.................. 74
Item 14. Principal Accountant Fees and Services.......................... 74
Part IV
Item 15. Exhibits and Financial Statement Schedules...................... 74
2
PART I
Item 1. Description of Business
A. General
MAIN STREET TRUST, INC. (the "Company"), an Illinois corporation, is a bank
holding company registered under the Bank Holding Company Act of 1956, as
amended (the "BHCA"). The Company was incorporated on August 12, 1999, and is
the parent company of Main Street Bank & Trust, and FirsTech, Inc.
On March 23, 2000, the Company acquired all of the outstanding stock of
BankIllinois, The First National Bank of Decatur, First Trust Bank of
Shelbyville and FirsTech, Inc. following the merger of BankIllinois Financial
Corporation and First Decatur Bancshares, Inc. into the Company. The merger,
which was accounted for as a pooling of interests, was completed on March 23,
2000. The Company subse1uently merged the Company's former banking subsidiary,
First Trust Bank of Shelbyville, into BankIllinois effective June 19, 2002. On
November 10, 2004, the Company merged BankIllinois and The First National Bank
of Decatur into BankIllinois and renamed the bank Main Street Bank & Trust.
On April 1, 2005, the Company acquired all of the outstanding stock of Citizens
First Financial Corp. ("Citizens"), which was the parent company of Citizens
Savings Bank, based in Bloomington, Illinois. The transaction has been accounted
for as a purchase. The Company merged Citizens Savings Bank into Main Street
Bank & Trust as of the close of business on October 7, 2005.
B. Business of the Company and Subsidiaries
General
The Company conducts the business of banking and offers trust services through
Main Street Bank & Trust ("the Bank"), and retail payment processing through
FirsTech, Inc., its wholly owned subsidiaries. As of December 31, 2005 the
Company had consolidated total assets of $1.625 billion, shareholders' equity of
$143.769 million and Wealth Management Group assets under management on of
approximately $1.959 billion. Substantially all of the income of the Company is
currently derived from dividends received from the subsidiaries and income from
other investments. The amount of these dividends is directly related to the
earnings of the subsidiaries and is subject to various regulatory restrictions.
See "Supervision and Regulation".
Banking Segment
The Bank conducts a general banking business embracing most of the services,
both consumer and commercial, which banks may lawfully provide, including the
following principal services: the acceptance of deposits to demand, savings,
time and individual retirement accounts and the servicing of such accounts;
commercial, consumer and real estate lending, including installment loans and
personal lines of credit; safe deposit operations; and additional services
tailored to the needs of individual customers, such as the sale of traveler's
checks, cashier's checks and other specialized services. The Company offers
personalized financial planning services through Raymond James, which services
include a broad spectrum of investment products, including stocks, bonds, mutual
funds and tax advantaged investments. In addition, the Wealth Management
division offers a wide range of services such as investment management, acting
as trustee, serving as guardian, executor or agent, farm management, 401K
administration and miscellaneous consulting.
Commercial lending at the Bank covers such categories as agriculture,
manufacturing, capital, inventory, construction, real estate development and
commercial mortgages. Commercial lending, particularly loans to small and medium
sized businesses, accounts for a major portion of the Bank's loan portfolios.
The Bank's retail banking division makes loans to consumers for various
purposes, including home equity and automobile loans. The consumer mortgage loan
department, which is part of the retail banking division, specializes in real
estate loans to individuals. The Bank also purchases installment obligations
from retailers, primarily without recourse.
The Bank's principal sources of income are interest and fees on loans and
investments and service fees. Its principal expenses are interest paid on
deposits and general operating expenses. The Bank's primary service area is
Central Illinois.
3
Remittance Services Segment
FirsTech, Inc. provides the following services to electric, water and gas
utilities, telecommunication companies, cable television firms and charitable
organizations: retail lockbox processing of payments delivered by mail on behalf
of the biller; processing of payments delivered by customers to pay agents such
as grocery stores, convenience stores and currency exchanges; and concentration
of payments delivered by the Automated Clearing House network, money management
software such as Quicken and through networks such as Visa e-Pay and Mastercard
RPS. For the years ended December 31, 2005, 2004 and 2003, FirsTech accounted
for $6.9 million (7%), $7.3 million (10%) and $7.3 million (10%), respectively,
of the consolidated total revenues of the Company and accounted for $2.6 million
(9%), $2.3 million (10%), and $2.3 million (9%), respectively, of the
consolidated income before income tax of the Company. See Note 1 to the
Consolidated Financial Statements for an analysis of segment operations.
In 2003, FirsTech introduced a new remittance processing product called Internet
Agent. A portion of the additional income generated by the Internet Agent
product was partially offset by decreases in mechanical collection, lockbox
processing and electronic payment income. FirsTech has continued to experience
success in the expansion of the Internet Agent product among new and existing
customers, and management believes it is at the forefront of technology compared
to similar products within the payment industry.
Over the past three years, FirsTech's sources of processing revenue has shifted
toward the processing of payments to paying agents. FirsTech's retail lockbox
processing for organizations provided approximately 20%, 30% and 41% of the
total revenue of FirsTech in 2005, 2004 and 2003, respectively. FirsTech
processes payments delivered by customers to pay agents. Many businesses and
merchants such as grocery stores and convenience stores located throughout the
United States serve as agents of utilities in collecting customer payments. In
2005, 2004 and 2003, the remittance collection business for these companies
accounted for approximately 79%, 69% and 55%, respectively, of the total revenue
of FirsTech.
FirsTech competes in the retail payment processing business with companies that
range from large national companies to small, local businesses. In addition,
many companies do their own remittance processing rather than out-source the
work to an independent processor such as FirsTech. The principal methods of
competition in the remittance processing industry are pricing of services, use
of technology and quality of service.
C. Competition
The Company faces strong competition both in originating loans and in attracting
deposits. Competition in originating real estate loans comes primarily from
other commercial banks, savings institutions and mortgage bankers making loans
secured by real estate located in the Company's market area. Commercial banks
and finance companies, including finance company affiliates of automobile
manufacturers, provide vigorous competition in consumer lending. In addition to
competition from the local market, the Company faces competition from large
national organizations, such as financial organizations and insurance companies,
for large commercial real estate loans. The Company competes for real estate and
other loans primarily on the basis of the interest rates and loan fees it
charges, the types of loans it originates and the quality of services it
provides to borrowers.
The Company faces substantial competition in attracting deposits from other
commercial banks, savings institutions, money market and mutual funds, credit
unions, insurance agencies, brokerage firms, and other investment vehicles. The
ability of the Company to attract and retain deposits depends on its ability to
provide investment opportunities that satisfy the requirements of investors as
to rate of return, liquidity, risk and other factors. The Company attracts a
significant amount of deposits through its branch offices, primarily from the
communities in which those branch offices are located; therefore, competition
for those deposits is principally from other commercial banks, savings
institutions, and credit unions located in the same communities. The Company
competes for these deposits by offering a variety of deposit accounts at
competitive rates, convenient business hours, internet banking, and convenient
branch locations with interbranch deposit and withdrawal privileges at each.
Under the Gramm-Leach-Bliley Act, which was enacted in 2000, securities firms
and insurance companies that elect to become financial holding companies may
acquire banks and other financial institutions. Although the Company has seen no
significant impact from this change, it has the potential to change the
competitive environment in which the Company and the Bank conduct business. The
financial services industry is also likely to become more competitive as further
technological advances enable more companies to provide financial services.
These technological advances may diminish the importance of depository
institutions and other financial intermediaries in the transfer of funds between
parties.
4
D. Monetary Policy and Economic Conditions
The earnings of commercial banks and bank holding companies are affected not
only by general economic conditions, but also by the policies of various
governmental regulatory agencies. In particular, the Federal Reserve regulates
money and credit conditions and interest rates in order to influence general
economic conditions and interest rates, primarily through open market operations
in U.S. government securities, varying the discount rate on member banks and
nonmember bank borrowings and setting reserve requirements against bank
deposits. Such Federal Reserve policies and acts have a significant influence on
overall growth and distribution of bank loans, investments, deposits and related
interest rates. The Company cannot accurately predict the effect, if any, such
policies and acts may have in the future on its business or earnings.
E. Supervision and Regulation
General
Financial institutions, their holding companies and their affiliates are
extensively regulated under federal and state law. As a result, the growth and
earnings performance of the Company may be affected not only by management
decisions and general economic conditions, but also by the requirements of
federal and state statutes and by the regulations and policies of various bank
regulatory authorities, including the Illinois Department of Financial and
Professional Regulation (the "DFPR"), the Board of Governors of the Federal
Reserve System (the "Federal Reserve") and the Federal Deposit Insurance
Corporation (the "FDIC"). Furthermore, taxation laws administered by the
Internal Revenue Service and state taxing authorities and securities laws
administered by the Securities and Exchange Commission (the "SEC") and state
securities authorities have an impact on the business of the Company. The effect
of these statutes, regulations and regulatory policies may be significant, and
cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions regulate, among other things, the scope of business, the kinds and
amounts of investments, reserve requirements, capital levels relative to
operations, the nature and amount of collateral for loans, the establishment of
branches, mergers and consolidations and the payment of dividends. This system
of supervision and regulation establishes a comprehensive framework for the
respective operations of the Company and its subsidiaries and is intended
primarily for the protection of the FDIC-insured deposits and depositors of the
Bank, rather than shareholders.
The following is a summary of the material elements of the regulatory framework
that applies to the Company and its subsidiaries. It does not describe all of
the statutes, regulations and regulatory policies that apply, nor does it
restate all of the requirements of those that are described. As such, the
following is qualified in its entirety by reference to applicable law. Any
change in statutes, regulations or regulatory policies may have a material
effect on the business of the Company and its subsidiaries.
The Company
General. The Company, as the sole shareholder of the Bank, is a bank holding
company. As a bank holding company, the Company is registered with, and is
subject to regulation by, the Federal Reserve under the Bank Holding Company Act
of 1956, as amended (the "BHCA"). In accordance with Federal Reserve policy, the
Company is expected to act as a source of financial strength to the Bank and to
commit resources to support the Bank in circumstances where the Company might
not otherwise do so. Under the BHCA, the Company is subject to periodic
examination by the Federal Reserve. The Company is also required to file with
the Federal Reserve periodic reports of the Company's operations and such
additional information regarding the Company and its subsidiaries as the Federal
Reserve may require.
Acquisitions, Activities and Change in Control. The primary purpose of a bank
holding company is to control and manage banks. The BHCA generally requires the
prior approval of the Federal Reserve for any merger involving a bank holding
company or any acquisition by a bank holding company of another bank or bank
holding company. Subject to certain conditions (including deposit concentration
limits established by the BHCA), the Federal Reserve may allow a bank holding
company to acquire banks located in any state of the United States. In approving
interstate acquisitions, the Federal Reserve is required to give effect to
applicable state law limitations on the aggregate amount of deposits that may be
held by the acquiring bank holding company and its insured depository
institution affiliates in the state in which the target bank is located
(provided that those limits do not discriminate against out-of-state depository
institutions or their holding companies) and state laws that require that the
target bank have been in existence for a minimum period of time (not to exceed
five years) before being acquired by an out-of-state bank holding company.
5
The BHCA generally prohibits a bank holding company from acquiring direct or
indirect ownership or control of more than 5% of the voting shares of any
company that is not a bank and from engaging in any business other than that of
banking, managing and controlling banks or furnishing services to banks and
their subsidiaries. This general prohibition is subject to a number of
exceptions. The principal exception allows bank holding companies to engage in,
and to own shares of companies engaged in, certain businesses found by the
Federal Reserve to be "so closely related to banking... as to be a proper
incident thereto." This authority would permit the Company to engage in a
variety of banking-related businesses, including the operation of a thrift,
consumer finance, equipment leasing, the operation of a computer service bureau
(including software development), and mortgage banking and brokerage. The BHCA
generally does not place territorial restrictions on the domestic activities of
non-bank subsidiaries of bank holding companies.
Additionally, bank holding companies that meet certain eligibility requirements
prescribed by the BHCA and elect to operate as financial holding companies may
engage in, or own shares in companies engaged in, a wider range of nonbanking
activities, including securities and insurance underwriting and sales, merchant
banking and any other activity that the Federal Reserve, in consultation with
the Secretary of the Treasury, determines by regulation or order is financial in
nature, incidental to any such financial activity or complementary to any such
financial activity and does not pose a substantial risk to the safety or
soundness of depository institutions or the financial system generally. The
Company has elected (and the Federal Reserve has accepted the Company's
election) to operate as a financial holding company.
Federal law also prohibits any person or company from acquiring "control" of an
FDIC-insured depository institution or its holding company without prior notice
to the appropriate federal bank regulator. "Control" is conclusively presumed to
exist upon the acquisition of 25% or more of the outstanding voting securities
of a bank or bank holding company, but may arise under certain circumstances at
10% ownership.
Capital Requirements. Bank holding companies are required to maintain minimum
levels of capital in accordance with Federal Reserve capital adequacy
guidelines. If capital levels fall below the minimum required levels, a bank
holding company, among other things, may be denied approval to acquire or
establish additional banks or non-bank businesses.
The Federal Reserve's capital guidelines establish the following minimum
regulatory capital requirements for bank holding companies: (i) a risk-based
requirement expressed as a percentage of total assets weighted according to
risk; and (ii) a leverage requirement expressed as a percentage of total assets.
The risk-based requirement consists of a minimum ratio of total capital to total
risk-weighted assets of 8% and a minimum ratio of Tier 1 capital to total
risk-weighted assets of 4%. The leverage requirement consists of a minimum ratio
of Tier 1 capital to total assets of 3% for the most highly rated companies,
with a minimum requirement of 4% for all others. For purposes of these capital
standards, Tier 1 capital consists primarily of permanent stockholders' equity
less intangible assets (other than certain loan servicing rights and purchased
credit card relationships). Total capital consists primarily of Tier 1 capital
plus certain other debt and equity instruments that do not qualify as Tier 1
capital and a portion of the company's allowance for loan and lease losses.
The risk-based and leverage standards described above are minimum requirements.
Higher capital levels will be required if warranted by the particular
circumstances or risk profiles of individual banking organizations. For example,
the Federal Reserve's capital guidelines contemplate that additional capital may
be required to take adequate account of, among other things, interest rate risk,
or the risks posed by concentrations of credit, nontraditional activities or
securities trading activities. Further, any banking organization experiencing or
anticipating significant growth would be expected to maintain capital ratios,
including tangible capital positions (i.e., Tier 1 capital less all intangible
assets), well above the minimum levels. As of December 31, 2005, the Company had
regulatory capital in excess of the Federal Reserve's minimum requirements.
Dividend Payments. The Company's ability to pay dividends to its shareholders
may be affected by both general corporate law considerations and policies of the
Federal Reserve applicable to bank holding companies. As an Illinois
corporation, the Company is subject to the limitations of the Illinois Business
Corporation Act, as amended, which prohibit the Company from paying a dividend
if, after giving effect to the dividend: (i) the Company would be insolvent; or
(ii) the net assets of the Company would be less than zero; or (iii) the net
assets of the Company would be less than the maximum amount then payable to
shareholders of the company who would have preferential distribution rights if
the Company were liquidated. Additionally, policies of the Federal Reserve
caution that a bank holding company should not pay cash dividends that exceed
its net income or that can only be funded in ways that weaken the bank holding
company's financial health, such as by borrowing. The Federal Reserve also
possesses enforcement powers over bank holding companies and their non-bank
subsidiaries to prevent or remedy actions that represent unsafe or unsound
practices or violations of applicable statutes and regulations. Among these
powers is the ability to proscribe the payment of dividends by banks and bank
holding companies.
6
Federal Securities Regulation. The Company's common stock is registered with the
SEC under the Securities Act of 1933, as amended, and the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). Consequently, the Company is
subject to the information, proxy solicitation, insider trading and other
restrictions and requirements of the SEC under the Exchange Act.
The Bank
General. The Bank is an Illinois-chartered bank, the deposit accounts of which
are insured by the FDIC's Bank Insurance Fund ("BIF"). As an Illinois-chartered
FDIC-insured bank, the Bank is subject to the examination, supervision,
reporting and enforcement requirements of the DFPR, the chartering authority for
Illinois Banks, and the FDIC, designated by federal law as the primary federal
regulator of insured state banks that, like the Bank, are not members of the
Federal Reserve System ("non-member banks'). The Bank is a member of the Federal
Home Loan Bank System, which provides a central credit facility primarily for
member institutions.
Deposit Insurance. As an FDIC-insured institution, the Bank is required to pay
deposit insurance premium assessments to the FDIC. The FDIC has adopted a
risk-based assessment system under which all insured depository institutions are
placed into one of nine categories and assessed insurance premiums based upon
their respective levels of capital and results of supervisory evaluations.
Institutions classified as well-capitalized (as defined by the FDIC) and
considered healthy pay the lowest premium while institutions that are less than
adequately capitalized (as defined by the FDIC) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
During the year ended December 31, 2005, BIF assessments ranged from 0% of
deposits to 0.27% of deposits. For the semi-annual assessment period beginning
January 1, 2006, BIF assessment rates will continue to range from 0% of deposits
to 0.27% of deposits.
FICO Assessments. Since 1987, a portion of the deposit insurance assessments
paid by members of the FDIC's Savings Association Insurance Fund ("SAIF") has
been used to cover interest payments due on the outstanding obligations of the
Financing Corporation ("FICO"). FICO was created in 1987 to finance the
recapitalization of the Federal Savings and Loan Insurance Corporation, the
SAIF's predecessor insurance fund. As a result of federal legislation enacted in
1996, beginning as of January 1, 1997, both SAIF members and BIF members became
subject to assessments to cover the interest payments on outstanding FICO
obligations until the final maturity of such obligations in 2019. These FICO
assessments are in addition to amounts assessed by the FDIC for deposit
insurance. During the year ended December 31, 2005, the FICO assessment rate for
BIF and SAIF members was approximately 0.01% of deposits.
Supervisory Assessments. All Illinois banks are required to pay supervisory
assessments to the DFPR to fund its operations. The amount of the assessment
paid by an Illinois bank to the DFPR is calculated on the basis of the
institution's total assets, including consolidated subsidiaries, as reported to
the DFPR. During the year ended December 31, 2005, the Bank paid supervisory
assessments to the DFPR totaling $188,000.
Capital Requirements. Banks are generally required to maintain capital levels in
excess of other businesses. The FDIC has established the following minimum
capital standards for insured state non-member banks, such as the Bank: (i) a
leverage requirement consisting of a minimum ratio of Tier 1 capital to total
assets of 3% for the most highly-rated banks with a minimum requirement of at
least 4% for all others; and (ii) a risk-based capital requirement consisting of
a minimum ratio of total capital to total risk-weighted assets of 8% and a
minimum ratio of Tier 1 capital to total risk-weighted assets of 4%. In general,
the components of Tier 1 capital and total capital are the same as those for
bank holding companies discussed above.
The capital requirements described above are minimum requirements. Higher
capital levels will be required if warranted by the particular circumstances or
risk profiles of individual institutions. For example, regulations of the FDIC
provide that additional capital may be required to take adequate account of,
among other things, interest rate risk or the risks posed by concentrations of
credit, nontraditional activities or securities trading activities.
Further, federal law and regulations provide various incentives for financial
institutions to maintain regulatory capital at levels in excess of minimum
regulatory requirements. For example, a financial institution that is
"well-capitalized" may qualify for exemptions from prior notice or application
requirements otherwise applicable to certain types of activities and may qualify
for expedited processing of other required notices or applications.
Additionally, one of the criteria that determines a bank holding company's
eligibility to operate as a financial holding company is a requirement that all
of its financial institution subsidiaries be "well-capitalized". Under the
regulations of the FDIC, in order to be "well-capitalized", a financial
institution must maintain a ratio of total capital to total risk-weighted assets
of 10% or greater, a ratio of Tier 1 capital to total risk-weighted assets of 6%
or greater and a ratio of Tier 1 capital to total assets of 5% or greater.
7
Federal law also provides the federal banking regulators with broad power to
take prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "adequately capitalized", "undercapitalized",
"significantly undercapitalized", or "critically undercapitalized", in each case
as defined by regulation. Depending upon the capital category to which an
institution is assigned, the regulators' corrective powers include: (i)
requiring the institution to submit a capital restoration plan; (ii) limiting
the institution's asset growth and restricting its activities; (iii) requiring
the institution to issue additional capital stock (including additional voting
stock) or to be acquired; (iv) restricting transactions between the institution
and its affiliates; (v) restricting the interest rate the institution may pay on
deposits; (vi) ordering a new election of directors of the institution; (vii)
requiring that senior executive officers or directors be dismissed; (viii)
prohibiting the institution from accepting deposits from correspondent banks;
(ix) requiring the institution to divest certain subsidiaries; (x) prohibiting
the payment of principal or interest on subordinated debt; and (xi) ultimately,
appointing a receiver for the institution.
As of December 31, 2005: (i) the Bank was not subject to a directive from the
FDIC to increase its capital to an amount in excess of the minimum regulatory
capital requirements; (ii) the Bank exceeded its minimum regulatory capital
requirements under FDIC capital adequacy guidelines; and (iii) the Bank was
"well-capitalized", as defined by applicable regulations.
Dividend Payments. The primary source of funds for t(e Company is dividends from
the Bank. Under the Illinois Banking Act, the Bank generally may not pay
dividends in excess of its net profits.
The payment of dividends by any financial institution or its holding company is
affected by the requirement to maintain adequate capital pursuant to applicable
capital adequacy guidelines and regulations, and a financial institution
generally is prohibited from paying any dividends if, following payment thereof,
the institution would be undercapitalized. As described above, the Bank exceeded
its minimum capital requirements under applicable guidelines as of December 31,
2005. As of December 31, 2005, approximately $51.826 million was available to be
paid as dividends by the Bank. Notwithstanding the availability of funds for
dividends, however, the FDIC may prohibit the payment of dividends if it
determines such payment would constitute an unsafe or unsound practice.
Insider Transactions. The Bank is subject to certain restrictions imposed by
federal law on extensions of credit to the Company and its subsidiaries, on
investments in the stock or other securities of the Company and its subsidiaries
and the acceptance of the stock or other securities of the Company or its
subsidiaries as collateral for loans made by the Bank. Certain limitations and
reporting requirements are also placed on extensions of credit by the Bank to
its directors and officers, to directors and officers of the Company and its
subsidiaries, to principal shareholders of the Company and to "related
interests" of such directors, officers and principal shareholders. In addition,
federal law and regulations may affect the terms upon which any person who is a
director or officer of the Company or one of its subsidiaries or a principal
shareholder of the Company may obtain credit from banks with which the Bank
maintains correspondent relationships.
Safety and Soundness Standards. The federal banking agencies have adopted
guidelines that establish operational and managerial standards to promote the
safety and soundness of federally insured depository institutions. The
guidelines set forth standards for internal controls, information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, asset quality and
earnings.
In general, the safety and soundness guidelines prescribe the goals to be
achieved in each area, and each institution is responsible for establishing its
own procedures to achieve those goals. If an institution fails to comply with
any of the standards set forth in the guidelines, the institution's primary
federal regulator may require the institution to submit a plan for achieving and
maintaining compliance. If an institution fails to submit an acceptable
compliance plan, or fails in any material respect to implement a compliance plan
that has been accepted by its primary federal regulator, the regulator is
required to issue an order directing the institution to cure the deficiency.
Until the deficiency cited in the regulator's order is cured, the regulator may
restrict the institution's rate of growth, require the institution to increase
its capital, restrict the rates the institution pays on deposits or require the
institution to take any action the regulator deems appropriate under the
circumstances. Noncompliance with the standards established by the safety and
soundness guidelines may also constitute grounds for other enforcement action by
the federal banking regulators, including cease and desist orders and civil
money penalty assessments.
Branching Authority. Illinois banks have the authority under Illinois law to
establish branches anywhere in the State of Illinois, subject to receipt of all
required regulatory approvals.
8
Federal law permits state and national banks to merge with banks in other states
subject to: (i) regulatory approval; (ii) federal and state deposit
concentration limits; and (iii) state law limitations requiring the merging bank
to have been in existence for a minimum period of time (not to exceed five
years) prior to the merger. The establishment of new interstate branches or the
acquisition of individual branches of a bank in another state (rather than the
acquisition of an out-of-state bank in its entirety) is permitted only in those
states the laws of which expressly authorize such expansion.
State Bank Investments and Activities. The Bank generally is permitted to make
investments and engage in activities directly or through subsidiaries as
authorized by Illi.ois law. However, under federal law and FDIC regulations,
FDIC-insured state banks are prohibited, subject to certain exceptions, from
making or retaining equity investments of a type, or in an amount, that are not
permissible for a national bank. Federal law and FDIC regulations also prohibit
FDIC-insured state banks and their subsidiaries, subject to certain exceptions,
from engaging as principal in any activity that is not permitted for a national
bank unless the bank meets, and continues to meet, its minimum regulatory
capital requirements and the FDIC determines the activity would not pose a
significant risk to the deposit insurance fund of which the bank is a member.
These restrictions have not had, and are not currently expected to have, a
material impact on the operations of the Bank.
Federal Reserve System. Federal Reserve regulations, as presently in effect,
require depository institutions to maintain non-interest earning reserves
against their transactions accounts (primarily NOW and regular checking
accounts), as follows: for transaction accounts aggregating $48.3 million or
less, the reserve requirement is 3% of total transaction accounts; and for
transaction accounts aggregating in excess of $48.3 million, the reserve
requirement is $1.215 million plus 10% of the aggregate amount of total
transaction accounts in excess of $48.3 million. The first $7.8 million of
otherwise reservable balances are exempted from the reserve requirements. These
reserve requirements are subject to annual adjustment by the Federal Reserve.
The Bank is in compliance with the foregoing requirements.
Recent Regulatory Developments. On February 8, 2006, President Bush signed the
Federal Deposit Insurance Reform Act of 2005 ("FDIRA") into law as part of the
Deficit Reduction Act of 2005. On February 15, 2006, President Bush signed into
law the technical and conforming amendments designed to implement FDIRA. FDIRA
provides for legislative reforms to modernize the federal deposit insurance
system.
Among other things, FDIRA: (i) merges the BIF and the SAIF of the FDIC into a
new Deposit Insurance Fund (the "DIF"); (ii) allows the FDIC, after March 31,
2010, to increase deposit insurance coverage by an adjustment for inflation and
requires the FDIC's Board of Directors, not later than April 1, 2010 and every
five years thereafter, to consider whether such an increase is warranted; (iii)
increases the deposit insurance limit for certain employee benefit plan deposits
from $100,000 to $250,000, subject to adjustments for inflation after March 31,
2010, and provides for pass-through insurance coverage for such deposits; (iv)
increases the deposit insurance limit for certain retirement account deposits
from $100,000 to $250,000, subject to adjustments for inflation after March 31,
2010; (v) allows the FDIC's Board of Directors to set deposit insurance premium
assessments in any amount the Board of Directors deems necessary or appropriate,
after taking into account various factors specified in FDIRA; (vi) replaces the
fixed designated reserve ratio of 1.25% with a reserve ratio range of
1.15%-1.50%, with the specific reserve ratio to be determined annually by the
FDIC by regulation; (vii) permits the FDIC to revise the risk-based assessment
system by regulation; (viii) requires the FDIC, at the end of any year in which
the reserve ratio of the DIF exceeds 1.50% of estimated insured deposits, to
declare a dividend payable to insured depository institutions in an amount equal
to 100% of the amount held by the DIF in excess of the amount necessary to
maintain the DIF's reserve ratio at 1.50% of estimated insured deposits or to
declare a dividend equal to 50% of the amount in excess of the amount necessary
to maintain the reserve ratio at 1.35% if the reserve ratio is between
1.35%-1.50% of estimated insured deposits; and (ix) provides a one-time credit
based upon the assessment base of the institution on December 31, 1996 to each
insured depository institution that was in existence as of December 31, 1996 and
paid a deposit insurance assessment prior to that date (or a successor to any
such institution).
The merger of the BIF and the SAIF will take effect no later than July 1, 2006,
while the remaining provisions are not effective until the FDIC issues final
regulations. FDIRA requires the FDIC to issue final regulations no later than
270 days after enactment: (i) designating a reserve ratio; (ii) implementing
increases in deposit insurance coverage; (iii) implementing the dividend
requirement; (iv) implementing the one-time assessment credit; and (v) providing
for assessments in accordance with FDIRA.
9
F. Employees
The Company had a total of 499 employees at December 31, 2005, consisting of 399
full-time employees and 100 part-time. The Company places a high priority on
staff development, which involves extensive training, including customer service
training. New employees are selected on the basis of both technical skills and
consumer service capabilities. None of the Company's employees are covered by a
collective bargaining agreement with the Company or its subsidiaries. The
Company offers a variety of employee benefits, and management considers its
employee relations to be good.
G. Internet Website
The Company maintains an internet site for its subsidiary bank at
www.mainstreettrust.com. The Company makes available free of charge on these
sites its annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and other reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after it
electronically files such material with, or furnishes it to, the Securities and
Exchange Commission.
Item 1.a. Risk Factors
In addition to the other information in this Annual Report on Form 10-K,
shareholders or prospective investors should carefully consider the following
risk factors:
Our business is concentrated in and dependent upon the continued growth and
welfare of central Illinois:
We operate primarily in central Illinois, with branch locations in eight central
Illinois communities, including our headquarters located in Champaign, Illinois.
As a result, our financial condition, results of operations and cash flows are
subject to changes in the economic conditions in central Illinois and our
success depends upon the business activity, population, income levels, deposits
and real estate activity in this area. Although our customers' business and
financial interests may extend well beyond central Illinois, adverse economic
conditions that affect this area could reduce our growth rate, affect the
ability of our customers to repay their loans and generally affect our financial
condition and results of operations. Because of our geographic concentration, we
are less able than other regional or national financial institutions to
diversify our credit risks across multiple markets.
We may experience difficulties in managing our growth and our growth strategy
involves risks that may negatively impact our net income:
As part of our general strategy, we may acquire banks and related businesses
that we believe provide a strategic fit with our business. To the extent that we
grow through acquisitions, we cannot assure you that we will be able to
adequately and profitably manage this growth. Acquiring other banks and
businesses will involve risks commonly associated with acquisitions, including:
o potential exposure to unknown or contingent liabilities of banks and
businesses we acquire;
o exposure to potential asset quality issues of the acquired bank or
related business;
o difficulty and expense of integrating the operations and personnel of
banks and businesses we acquire;
o potential disruption to our business;
o potential diversion of our management's time and attention; and
o the possible loss of key employees and customers of the banks and
businesses we acquire.
In addition to acquisitions, we may expand into additional communities or
attempt to strengthen our position in our current markets by undertaking de novo
bank formations or branch openings. Generally, it may take several years for new
banking facilities to first achieve operational profitability, due to the impact
of organization and overhead expenses and the start-up phase of generating loans
and deposits. To the extent that we undertake branching and de novo bank and
business formations, we are likely to continue to experience the effects of
higher operating expenses relative to operating income from the new operations,
which may have an adverse effect on our levels of reported net income, return on
average equity and return on average assets.
10
Our continued pace of growth may require us to raise additional capital in the
future, but that capital may not be available when it is needed:
We are required by federal and state regulatory authorities to maintain adequate
levels of capital to support our operations. We anticipate that our existing
capital resources will satisfy our capital requirements for the foreseeable
future. However, we may at some point need to raise additional capital to
support continued growth, both internally and through acquisitions. Our ability
to raise additional capital, if needed, will depend on conditions in the capital
markets at that time, which are outside our control, and on our financial
performance. Accordingly, we cannot assure you of our ability to raise
additional capital if needed on terms acceptable to us. If we cannot raise
additional capita, when needed, our ability to further expand our operations
through internal growth and acquisitions could be materially impaired.
We face intense competition in all phases of our business from other banks and
financial institutions:
As described in the business section of this Form 10-K, the banking and
financial services business in our market is highly competitive. Our competitors
include large regional banks, local community banks, savings and loan
associations, securities and brokerage companies, mortgage companies, insurance
companies, finance companies, money market mutual funds, credit unions and other
non-bank financial service providers. Increased competition in our market may
result in a decrease in the amounts of our loans and deposits, reduced spreads
between loan rates and deposit rates or loan terms that are more favorable to
the borrower. Any of these results could have a material adverse effect on our
ability to grow and remain profitable. If increased competition causes us to
significantly discount the interest rates we offer on loans or increase the
amount we pay on deposits, our net interest income could be adversely impacted.
If increased competition causes us to relax our underwriting standards, we could
be exposed to higher losses from lending activities. Additionally, many of our
competitors are much larger in total assets and capitalization, have greater
access to capital markets and offer a broader range of financial services than
we can offer.
Interest rates and other conditions impact our results of operations:
Our profitability is in part a function of the spread between the interest rates
earned on investments and loans and the interest rates paid on deposits and
other interest-bearing liabilities. Like most banking institutions, our net
interest spread and margin will be affected by general economic conditions and
other factors, including fiscal and monetary policies of the federal government,
that influence market interest rates and our ability to respond to changes in
such rates. At any given time, our assets and liabilities will be such that they
are affected differently by a given change in interest rates. As a result, an
increase or decrease in rates, the length of loan terms or the mix of adjustable
and fixed rate loans in our portfolio could have a positive or negative effect
on our net income, capital and liquidity. We measure interest rate risk under
various rate scenarios and using specific criteria and assumptions. A summary of
this process is presented under "Interest Rate Sensitivity" included under Item
7 of Part II of this Form 10-K. Although we believe our current level of
interest rate sensitivity is reasonable and effectively managed, significant
fluctuations in interest rates may have an adverse effect on our business,
financial condition and results of operations.
Our community banking strategy relies heavily on our management team, and the
unexpected loss of key managers may adversely affect our operations:
Much of our success to date has been influenced strongly by our ability to
attract and to retain senior management experienced in banking and financial
services and familiar with the communities in our market area. Our ability to
retain executive officers, the current management teams, branch managers and
loan officers will continue to be important to the successful implementation of
our strategy. It is also critical, as we grow, to be able to attract and retain
qualified additional management and loan officers with the appropriate level of
experience and knowledge about our market area to implement our community-based
operating strategy. The unexpected loss of services of any key management
personnel, or the inability to recruit and retain qualified personnel in the
future, could have an adverse effect on our business, financial condition and
results of operations.
11
Government regulation can result in limitations on our operations:
We operate in a highly regulated environment and are subject to supervision and
regulation by a number of governmental regulatory agencies, including the Board
of Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, and the Illinois Department of Financial and Professional
Regulation. Regulations adopted by these agencies, which are generally intended
to provide protection for depositors and customers rather than for the benefit
of shareholders, govern a comprehensive range of matters relating to ownership
and control of our shares, our acquisition of other companies and businesses,
permissible activities for us to engage in, maintenance of adequate capital
levels and other aspects of our operations. These bank regulators possess broad
authority to prevent or remedy unsafe or unsound practices or violations of law.
The laws and regulations applicable to the banking industry could change at any
time and we cannot predict the effects of these changes on our business and
profitability. Increased regulation could increase our cost of compliance and
adversely affect profitability. For example, new legislation or regulation may
limit the manner in which we may conduct our business, including our ability to
offer new products, obtain financing, attract deposits, make loans and achieve
satisfactory interest spreads.
We have a continuing need for technological change and we may not have the
resources to effectively implement new technology:
The financial services industry is undergoing rapid technological changes with
frequent introductions of new technology-driven products and services. In
addition to better serving customers, the effective use of technology increases
efficiency and enables financial institutions to reduce costs. Our future
success will depend in part upon our ability to address the needs of our
customers by using technology to provide products and services that will satisfy
customer demands for convenience as well as to create additional efficiencies in
our operations as we continue to grow and expand our market area. Many of our
larger competitors have substantially greater resources to invest in
technological improvements. As a result, they may be able to offer additional or
superior products to those that we will be able to offer, which would put us at
a competitive disadvantage. Accordingly, we cannot provide you with assurance
that we will be able to effectively implement new technology-driven products and
services or be successful in marketing such products and services to our
customers.
We are subject to certain operational risks, including, but not limited to,
customer or employee fraud and data processing system failures and errors:
Employee errors and misconduct could subject us to financial losses or
regulatory sanctions and seriously harm our reputation. Misconduct by our
employees could include hiding unauthorized activities from us, improper or
unauthorized activities on behalf of our customers or improper use of
confidential information. It is not always possible to prevent employee errors
and misconduct, and the precautions we take to prevent and detect this activity
may not be effective in all cases. Employee errors could also subject us to
financial claims for negligence.
We maintain a system of internal controls and insurance coverage to mitigate
against operational risks, including data processing system failures and errors
and customer or employee fraud. Should our internal controls fail to prevent or
detect an occurrence, or if any resulting loss is not insured or exceeds
applicable insurance limits, it could have a material adverse effect on our
business, financial condition and results of operations.
System failure or breaches of our network security could subject us to increased
operating costs as well as litigation and other liabilities:
The computer systems and network infrastructure we use could be vulnerable to
unforeseen problems. Our operations are dependent upon our ability to protect
our computer equipment against damage from physical theft, fire, power loss,
telecommunications failure or a similar catastrophic event, as well as from
security breaches, denial of service attacks, viruses, worms and other
disruptive problems caused by hackers. Any damage or failure that causes an
interruption in our operations could have a material adverse effect on our
financial condition and results of operations. Computer break-ins, phishing and
other disruptions could also jeopardize the security of information stored in
and transmitted through our computer systems and network infrastructure, which
may result in significant liability to us and may cause existing and potential
customers to refrain from doing business with us. Although we, with the help of
third-party service providers, intend to continue to implement security
technology and establish operational procedures to prevent such damage, there
can be no assurance that these security measures will be successful. In
addition, advances in computer capabilities, new discoveries in the field of
cryptography or other developments could result in a compromise or breach of the
algorithms we and our third-party service providers use to encrypt and protect
customer transaction data. A failure of such security measures could have a
material adverse effect on our financial condition and results of operations.
12
We must effectively manage our credit risk:
There are risks inherent in making any loan, including risks inherent in dealing
with individual borrowers, risks of nonpayment, risks resulting from
uncertainties as to the future value of collateral and risks resulting from
changes in economic and industry conditions. We attempt to minimize our credit
risk through prudent loan application approval procedures, careful monitoring of
the concentration of our loans within specific industries and periodic
independent reviews of outstanding loans by our credit review department.
However, we cannot assure you that such approval and monitoring procedures will
reduce these credit risks.
Commercial, financial and agricultural loans make up a significant portion of
our loan portfolio:
Commercial, financial and agricultural loans were $319.861 million, or
approximately 31.5% of our total loan portfolio as of December 31, 2005. These
loans are primarily made based on the identified cash flow of the borrower and
secondarily on the underlying collateral provided by the borrower. Most often,
this collateral is accounts receivable, inventory, machinery or real estate.
Credit support provided by the borrower for most of these loans and the
probability of repayment is based on the liquidation of the pledged collateral
and enforcement of a personal guarantee, if any exists. As a result, in the case
of loans secured by accounts receivable, the availability of funds for the
repayment of these loans may be substantially dependent on the ability of the
borrower to collect amounts due from its customers. The collateral securing
these loans may depreciate over time, may be difficult to appraise and may
fluctuate in value based on the success of the business.
Our loan portfolio has a large concentration of commercial real estate loans,
which involve risks specific to real estate value:
Commercial real estate lending (including $119.673 million in commercial
construction loans discussed in the Commercial Construction Loan section below)
is a large portion of our loan portfolio. These categories were $469.506
million, or approximately 46.2% of our total loan portfolio as of December 31,
2005. The market value of real estate can fluctuate significantly in a short
period of time as a result of market conditions in the geographic area in which
the real estate is located. Although a significant portion of such loans are
secured by real estate as a secondary form of collateral, adverse developments
affecting real estate values in one or more of our markets could increase the
credit risk associated with our loan portfolio. Additionally, real estate
lending typically involves higher loan principal amounts and the repayment of
the loans generally is dependent, in large part, on sufficient income from the
properties securing the loans to cover operating expenses and debt service.
Economic events or governmental regulations outside of the control of the
borrower or lender could negatively impact the future cash flow and market
values of the affected properties.
If the loans that are collateralized by real estate become troubled during a
time when market conditions are declining or have declined, then we may not be
able to realize the amount of security that we anticipated at the time of
originating the loan, which could cause us to increase our provision for loan
losses and adversely affect our operating results and financial condition.
Our commercial construction loans are based upon estimates of costs and value
associated with the complete project. These estimates may be inaccurate and we
may be exposed to more losses on these projects than on other loans:
At December 31, 2005, commercial construction loans, including land acquisition
and development, totaled $119.673 million, or 11.8%, of our total loan
portfolio. Construction and land acquisition and development lending involve
additional risks because funds are advanced upon the security of the project,
which is of uncertain value prior to its completion. Because of the
uncertainties inherent in estimating construction costs, as well as the market
value of the completed project and the effects of governmental regulation of
real property, it is relatively difficult to evaluate accurately the total funds
required to complete a project and the related loan-to-value ratio. As a result,
commercial construction loans often involve the disbursement of substantial
funds with repayment dependent, in part, on the success of the ultimate project
and the ability of the borrower to sell or lease the property, rather than the
ability of the borrower or guarantor to repay principal and interest. If our
appraisal of the value of the completed project proves to be overstated, we may
have inadequate security for the repayment of the loan upon completion of
construction of the project.
Our concentration of one-to-four family residential mortgage loans may result in
lower yields and profitability:
One-to-four family residential mortgage loans comprised $140.304 million, or
13.8%, and home equity lines of credit (included in installment and consumer
loans) comprised $39.078 million, or 3.8%, of our loan and lease portfolio at
December 31, 2005, and are secured primarily by properties located in the
counties of Champaign, Macon, Shelby, Tazewell, McLean, Livingston, and
contiguous counties. Our concentration of these loans results in lower yields
and lower profitability for us. These loans are generally made on the basis of
the borrower's ability to make repayments from his or her employment and the
value of the property securing the loan.
13
Our allowance for loan losses may prove to be insufficient to absorb potential
losses in our loan portfolio:
Our management establishes our allowance for loan losses and maintains it at a
level considered adequate to absorb loan losses that are inherent in the
portfolio. The allowance for loan losses is a material estimate that is
particularly susceptible to significant changes in the near term relating to
economic, operating and other conditions, including changes in interest rates,
which may be beyond our control, and such losses may exceed current estimates.
At December 31, 2005, our allowance for loan losses as a percentage of total
loans was 1.32% and as a percentage of total non-performing loans was
approximately 449.07%. Although management believes that the allowance for loan
losses is adequate to absorb probable losses inherent in the loan portfolio, we
cannot predict loan losses with certainty, and we cannot assure you that our
allowance for loan losses will prove sufficient to cover actual loan losses in
the future. Loan losses in excess of our reserves may adversely affect our
business, financial condition and results of operations.
Item 1.b. Unresolved Staff Comments
None
Item 2. Properties
The Company and its subsidiaries conduct business in twenty-three locations. The
Company's and Main Street Bank & Trust's headquarters are located at 100 W.
University Ave. in Champaign, Illinois. The Company and/or its subsidiaries own
the land and buildings for fifteen locations and lease eight locations, three of
which are located in supermarkets. The company has plans to construct an
additional facility in Peoria, Illinois and to lease a new facility in Normal,
Illinois which would replace its current location.
Item 3. Legal Proceedings
In the course of business, the Company and its subsidiaries become involved in
various legal proceedings, claims and litigation arising out of the ordinary
course of business. As of the date of filing this report, there were no causes
of action which would have a material adverse effect on the consolidated
financial position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
There were no items submitted to a vote of security holders in the fourth
quarter of 2005.
PART II
Item 5. Market for Registrant's Common Equity, Related Shareholder Matters
and Issuer Purchases of Equity Securities
The Company's common stock was held by approximately 700 shareholders of record
as of March 1, 2006 and is traded in the over-the-counter market.
The following table shows, for the periods indicated, the range of closing
prices per share of the Company's common stock in the over-the-counter market,
as reported to the Company by the brokers known to the Company to regularly
follow the market for the common stock. Certain other private transactions may
have occurred during the periods indicated of which the Company has no
knowledge. The following prices represent inter-dealer prices without retail
markups, markdowns or commissions.
Cash
High Low Dividends
---------------------------------
2004 First quarter $ 31.25 $ 30.60 $ 0.21
Second quarter 32.00 30.25 0.21
Third quarter 32.00 30.30 0.21
Fourth quarter 32.50 28.50 0.21
2005 First quarter $ 30.00 $ 28.90 $ 0.22
Second quarter 30.00 28.65 0.22
Third quarter 29.40 28.55 0.22
Fourth quarter 30.00 29.30 0.22
14
During the fourth quarter of 2005, the Company declared a $0.23 per share cash
dividend, which was paid on January 27, 2006. The ability of the Company to pay
dividends in the future will be primarily dependent upon its receipt of
dividends from the Bank. In determining cash dividends, the Board of Directors
considers the earnings, capital requirements, debt and dividend servicing
requirements, financial ratio guidelines it has established, the financial
condition of the Company and other relevant factors. The Bank's ability to pay
dividends to the Company and the Company's ability to pay dividends to its
shareholders are also subject to certain regulatory restrictions. See "Business
- Supervision and Regulation - The Company - Dividend Payments" and "Business -
Supervision and Regulation - The Bank Subsidiaries - Dividend Payments" for a
more detailed description of these limitations.
On October 27, 2003, the Company announced that its Board of Directors had
reinstated the Stock Repurchase Program (the "Program"), allowing the purchase
of up to 500,000 shares of the Company's outstanding stock. 82,712 shares were
repurchased during the fourth quarter of 2005.
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 Plans or Plans or
Period Purchased Per Share Programs Programs
-----------------------------------------------------------------------------------------
October 1 -
October 31, 2005 ................ 6,400 $ 29.50 6,400 243,912
November 1 -
November 30, 2005 ............... 46,312 $ 29.62 46,312 197,600
December 1 -
December 31, 2005 ............... 30,000 $ 30.00 30,000 167,600
-----------------------------------------------
Total ...................... 82,712 $ 29.75 82,712 167,600
===============================================
15
Item 6. Selected Consolidated Financial Data
The following table presents selected consolidated financial information for the
Company for each of the five years ended December 31, 2005. The selected
consolidated financial data should be read in conjunction with the Consolidated
Financial Statements of the Company, including the related notes, presented
elsewhere herein.
Year Ended December 31,
------------------------------------------------------------------
2005 2004 2003 2002 2001
------------------------------------------------------------------
(dollars in thousands, except per share data)
------------------------------------------------------------------
Interest income ................................... $ 76,992 $ 54,805 $ 55,686 $ 63,363 $ 73,195
Interest expense .................................. 27,479 16,852 16,723 21,717 33,598
------------------------------------------------------------------
Net interest income ............................... 49,513 37,953 38,963 41,646 39,597
Provision for loan losses ......................... 1,530 1,100 1,470 1,450 2,670
------------------------------------------------------------------
Net interest income after provision for loan losses 47,983 36,853 37,493 40,196 36,927
Non-interest income ............................... 20,477 19,847 20,294 18,866 17,266
Non-interest expense .............................. 39,779 33,879 32,341 33,161 30,286
Income tax expense ................................ 10,373 8,043 8,841 8,520 7,736
------------------------------------------------------------------
Net income ................................... $ 18,308 $ 14,778 $ 16,605 $ 17,381 $ 16,171
------------------------------------------------------------------
Basic earnings per share .......................... $ 1.82 $ 1.56 $ 1.62 $ 1.61 $ 1.48
------------------------------------------------------------------
Diluted earnings per share ........................ $ 1.80 $ 1.54 $ 1.60 $ 1.60 $ 1.45
------------------------------------------------------------------
Return on average total assets .................... 1.24% 1.22% 1.47% 1.58% 1.47%
Return on average shareholders' equity ............ 13.40% 13.08% 12.67% 12.79% 12.32%
Dividend payout ratio ............................. 48.90% 54.49% 46.91% 33.54% 30.41%
Cash dividends declared per common share .......... $ 0.89 $ 0.85 $ 0.76 $ 0.54 $ 0.45
------------------------------------------------------------------
Total assets ...................................... $1,625,137 $1,228,118 $1,154,174 $1,122,728 $1,151,511
Investment in debt and equity securities .......... 444,623 358,726 370,726 316,210 335,422
Loans held for investment, net .................... 1,002,927 761,227 666,259 664,142 673,061
Deposits .......................................... 1,275,972 974,577 898,472 868,586 884,109
Borrowings ........................................ 185,838 126,782 132,978 108,457 120,102
Total shareholders' equity ........................ 143,769 113,975 111,450 134,470 135,993
Total shareholders' equity to total assets ........ 8.85% 9.28% 9.66% 11.98% 11.81%
Average shareholders' equity to average assets .... 9.26% 9.34% 11.63% 12.35% 11.91%
------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis is designed to provide the reader with a
comprehensive review of the consolidated results of operations for 2005, 2004
and 2003 for the Company, including all subsidiaries, and an analysis of the
Company's financial condition at December 31, 2005 compared to December 31, 2004
and at December 31, 2004 compared to December 31, 2003. This discussion and
analysis should be read in conjunction with the consolidated financial
statements and related notes, which begin at page 34 of this report.
Overview
Net income increased from $14.778 million in 2004 to $18.308 million in 2005,
and diluted earnings per share increased from $1.54 in 2004 to $1.80 in 2005,
due in part to the acquisition of Citizens on April 1, 2005. The net interest
margin increased during 2005 as a result of eight rate hikes by the Federal
Reserve during 2005 and an increase of $1.253 million in income from investments
in venture capital funds in 2005 compared to 2004. Due to the nature of venture
capital investments, future results cannot be predicted based on past results.
Loan demand grew during 2005 and loan quality remained strong, with
non-performing loans as a percentage of gross loans at 0.29% in 2005 and 2004
and 0.15% in 2003. Net income declined slightly, from $16.605 million in 2003 to
$14.778 million in 2004, due to the compression of the Company's net interest
margin; one-time expenses associated with the merger and name change of our
subsidiary banks, The First National Bank of Decatur and BankIllinois, in the
fourth quarter; and a decline in mortgage loan sales and related income.
Interest rates remained at unprecedented low levels during the first half of
2004 and they increased in the second half of 2004 as a result five rate hikes
by the Federal Reserve. However, the net interest margin showed a pattern of
increasing during the fourth quarter of 2004, a trend that continued into 2005.
16
On April 1, 2005, the Company acquired all of the outstanding stock of Citizens.
The transaction has been accounted for as a purchase. Assets and liabilities
related to the acquisition of Citizens are reported as of the April 2005
acquisition date. Results of operations of Citizens since the acquisition date
have been included in the Company's consolidated financial statements.
Segment Operations
FirsTech, Inc. operates as a separate segment of the Company. Results of
Firstech's operations are included as non-interest income and non-interest
expense of the Company.
Critical Accounting Policies
The Company's significant accounting policies are more fully described in Note 1
to the Company's consolidated financial statements located in Item 8 of this
Annual Report on form 10-K. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues, and expenses and the related
disclosures of contingent assets and liabilities. Actual results could differ
from those estimates under different assumptions or conditions. The Company
believes that it has one critical accounting policy that is subject to estimates
and judgements used in the preparation of its consolidated financial statements.
Allowance for Loan Losses. The allowance for loan losses is a material estimate
that is particularly susceptible to significant changes in the near term. The
allowance for loan losses is increased by provisions charged to operations and
is reduced by loan charge-offs less recoveries. Management utilizes an approach,
which provides for general and specific valuation allowances, that is based on
current economic conditions, past losses, collection experience, risk
characteristics of the portfolio, assessment of collateral values by obtaining
independent appraisals for significant properties, and such other factors which,
in management's judgmen4, deserve current recognition in estimating loan losses,
to determine the appropriate level of the allowance for loan losses.
The allowance for loan losses related to impaired loans that are identified for
evaluation is based on discounted cash flow using the loan's initial effective
interest rate or the fair value, less selling costs, of the collateral for
collateral dependent loans. Loans are categorized as "impaired" when, based on
current information or events, it is probable that the Company will be unable to
collect all amounts due, including principal and interest, in accordance with
the contractual terms of the loan agreement. The Company reviews all non-accrual
and substantially delinquent loans, as well as problem loans identified by
management, for impairment as defined above. A specific allowance amount will be
established for impaired loans in which the present value of the expected cash
flows to be generated is less than the amount of the loan recorded on the
Company's books. As an alternative to discounting, the Company may use the "fair
value" of any collateral supporting a collateral-dependent loan in reviewing the
necessity for establishing a specific loan loss allowance amount. Specific
allowances will be established for accounts having a collateral deficiency
estimated to be $50,000 or more. The Company's general allowance is maintained
at an adequate level to cover accounts having a collateral deficiency of less
than $50,000. Loans evaluated as groups or homogeneous pools of loans will be
excluded from this analysis.
The Company utilizes its data processing system to identify loan payments not
made by their contractual due date and to calculate the number of days each loan
exceeds the contractual due date. The accrual of interest on any loan is
discontinued when, in the opinion of management, there is reasonable doubt as to
the collectibility of interest or principal. Management believes the allowance
for loan losses is adequate to absorb probable credit losses inherent in the
loan portfolio. However, there can be no assurance that the allowance for loan
losses will be adequate to cover all losses. While management uses available
information to recognize loan losses, future additions to the allowance for loan
losses may be necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the adequacy of the allowance for loan losses. Such agencies
may require the Company to recognize additions to the allowance for loan losses
based on their judgments of information available to them at the time of their
examination.
Results of Operations
The Company had earnings of $18.308 million in 2005 compared to $14.778 million
in 2004 and $16.605 million in 2003. The Company had a return on average assets
of 1.24%, 1.22% and 1.47% in 2005, 2004 and 2003, respectively. Basic earnings
per share were $1.82, $1.56 and $1.62 in 2005, 2004 and 2003, respectively.
Diluted earnings per share was $1.80, $1.54 and $1.60 in 2005, 2004 and 2003,
respectively. Management believes that a strong balance sheet and earnings are
critical to success.
17
Net Interest Income
Interest rates and fees charged on loans are affected primarily by the market
demand for loans and the supply of money available for lending purposes. These
factors are affected by, among other things, general economic conditions and the
policies of the Federal government, including the Board of Governors of the
Federal Reserve, legislative tax policies and governmental budgetary matters.
Net interest income, the most significant component of the Company's earnings,
is the difference between interest received or accrued on the Company's earning
assets--primarily loans and investments--and interest paid or accrued on
deposits and borrowings. In order to compare the interest generated from
different types of earning assets, the interest income on certain tax-exempt
investment securities and loans is increased for analysis purposes to reflect
the income tax savings provided by these tax-exempt assets. The adjustment to
interest income for tax-exempt investment securities and loans was calculated
based on the federal income tax statutory rate of 35%. The adjustment to net
interest income for the tax effect of tax-exempt assets is shown in the
following schedule.
Net Interest Income on a Tax Equivalent Basis
(in thousands)
--------------------------------------------------------------------------------
2005 2004 2003
---------------------------------
Total interest income ................... $76,992 $54,805 $55,686
Total interest expense .................. 27,479 16,852 16,723
---------------------------------
Net interest income ................ 49,513 37,953 38,963
Tax equivalent adjustment:
Tax-exempt investments ............. 816 993 1,222
Tax-exempt loans ................... 15 12 16
---------------------------------
Total adjustment ................. 831 1,005 1,238
---------------------------------
Net interest income (TE) ................ $50,344 $38,958 $40,201
=================================
18
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)
---------------------------------------------------------------------------------------------
2005 2004 2003
---------------------------------------------------------------------------------------------
Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------------------------------------------------------------------------------------------
Assets
Taxable investment securities(1) ... $ 326,932 $ 12,465 3.81% $ 327,064 $ 10,793 3.30% $ 305,146 $ 11,502 3.77%
Tax-exempt investment
securities(1)(TE) ................ 39,195 2,332 5.95% 46,214 2,837 6.14% 55,601 3,492 6.28%
Federal funds sold and interest
bearing deposits(2) .............. 49,020 2,023 4.13% 37,910 600 1.58% 36,786 447 1.22%
Loans (3),(4) (TE) ................. 945,089 61,003 6.45% 711,986 41,580 5.84% 645,543 41,483 6.43%
---------------------------------------------------------------------------------------------
Total interest earning assets
and interest income (TE) ....... $1,360,236 $ 77,823 5.72% $1,123,174 $ 55,810 4.97% $1,043,076 $ 56,924 5.46%
---------------------------------------------------------------------------------------------
Cash and due from banks ............ $ 44,210 $ 44,965 $ 45,872
Premises and equipment ............. 21,239 17,184 17,864
Other assets ....................... 49,006 23,944 19,848
---------------------------------------------------------------------------------------------
Total assets ..................... $1,474,691 $1,209,267 $1,126,660
=============================================================================================
Liabilities and Shareholders' Equity
Interest bearing demand deposits ... $ 74,976 $ 426 0.57% $ 93,315 $ 635 0.68% $ 87,351 $ 641 0.73%
Savings ............................ 427,341 7,529 1.76% 345,624 3,432 0.99% 284,641 2,586 0.91%
Time deposits ...................... 440,592 13,634 3.09% 352,596 9,905 2.81% 337,737 10,843 3.21%
Federal funds purchased, repurchase
agreements and notes payable ..... 115,679 3,097 2.68% 97,503 1,271 1.30% 95,029 1,094 1.15%
FHLB advances & other
borrowings ....................... 60,351 2,793 4.63% 29,925 1,609 5.38% 28,492 1,559 5.47%
---------------------------------------------------------------------------------------------
Total interest bearing liabilities
and interest expense ........... $1,118,939 $ 27,479 2.46% $ 918,963 $ 16,852 1.83% $ 833,250 $ 16,723 2.01%
---------------------------------------------------------------------------------------------
Non-interest bearing demand
deposits ......................... 132,982 100,913 89,935
Non-interest bearing savings
deposits ......................... 71,535 66,163 62,056
Other liabilities .................. 14,614 10,260 10,339
---------------------------------------------------------------------------------------------
Total liabilities ................ $1,338,070 $1,096,299 $ 995,580
Shareholders' equity ............... 136,621 112,968 131,080
---------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity ........... $1,474,691 $1,209,267 $1,126,660
=============================================================================================
Interest spread (average
rate earned minus
average rate paid) (TE) .......... 3.26% 3.14% 3.45%
=============================================================================================
Net interest income (TE) ........... $ 50,344 $ 38,958 $ 40,201
=============================================================================================
Net yield on interest
earnings assets (TE) ............. 3.70% 3.47% 3.85%
=============================================================================================
Notes: see next page for notes 1-4.
Notes to Consolidated Average Balance Sheet and Interest Rates Table:
(1) Investments in debt securities are included at carrying value. Income
from investments in venture capital funds of approximately $1.557
million, $304,000 and $303,000 in 2005, 2004 and 2003, respectively,
is included in interest income from taxable investment securities. Due
to the nature of venture capital investments, future results cannot be
predicted based on past performance.
(2) Federal funds sold and interest earning deposits include approximately
$275,000, $66,000 and $71,000 in 2005, 2004 and 2003, respectively, of
interest income from third party processing of cashier checks.
(3) Loans are net of allowance of loan losses and include mortgage loans
held for sale. Nonaccrual loans are included in the total.
(4) Loan fees of approximately $1.181 million, $1.410 million and $1.706
million in 2005, 2004 and 2003, respectively, are included in total
loan income.
19
The following table presents, on a fully taxable equivalent basis, an analysis
of changes in net interest income resulting from changes in average volumes of
earning assets and interest bearing liabilities and average rates earned and
paid. The change in interest due to the combined rate/volume variance has been
allocated to rate and volume changes in proportion to the absolute dollar
amounts of change in each.
Analysis of Volume and Rate Changes
(in thousands)
----------------------------------------------------------------------
2005 2004
----------------------------------------------------------------------
Increase Increase
(Decrease) (Decrease)
from from
Previous Due to Due to Previous Due to Due to
Year Volume Rate Year Volume Rate
----------------------------------------------------------------------
Interest Income
Taxable investment securities ..... $ 1,672 $ (4) $ 1,676 $ (709) $ 788 $ (1,497)
Tax-exempt investment securities .. (505) (420) (85) (655) (578) (77)
Federal funds sold and interest
bearing deposits ................ 1,423 219 1,204 153 14 139
Loans ............................. 19,423 14,697 4,726 97 4,063 (3,966)
---------------------------------------------------------------------
Total interest income ........... $ 22,013 $ 14,492 $ 7,521 $ (1,114) $ 4,287 $ (5,401)
---------------------------------------------------------------------
Interest Expense
Interest bearing demand
and savings deposits ............ $ 3,888 $ 393 $ 3,495 $ 840 $ 609 $ 231
Time deposits ..................... 3,729 2,650 1,079 (938) 461 (1,399)
Federal funds purchased, repurchase
agreements and notes payable .... 1,826 275 1,551 177 29 148
Federal Home Loan Bank advances
and other borrowings ............ 1,184 1,435 (251) 50 77 (27)
---------------------------------------------------------------------
Total interest expense .......... $ 10,627 $ 4,753 $ 5,874 $ 129 $ 1,176 $ (1,047)
---------------------------------------------------------------------
Net Interest Income (TE) ............ $ 11,386 $ 9,739 $ 1,647 $ (1,243) $ 3,111 $ (4,354)
=====================================================================
Total average earning assets increased from $1.123 billion in 2004 to $1.360
billion in 2005 and generated higher interest income on a tax equivalent (TE)
basis, mainly as a result of the Citizens acquisition along with increased
interest rates in 2005 compared to 2004. Average loans increased $233.103
million, resulting in an increase in interest income (TE) of $19.423 million, of
which $14.697 million was due to higher volume and $4.726 million due to an
increase in rates. Average federal funds sold and interest-bearing deposits
increased $11.110 million and generated $1.423 million more interest income than
in 2004, of which $1.204 million was due to an increase in rates and $219,000
due to higher volume. Somewhat offsetting these increases in average balances
was a decrease in average tax-exempt investment securities of $7.019 million,
resulting in a decrease in interest income of $505,000, mainly due to lower
volume. Average taxable investment securities decreased $132,000, but generated
$1.672 million more interest income, primarily due to higher rates.
Total average earning assets increased from $1.043 billion in 2003 to $1.123
billion in 2004, but generated lower interest income mainly as a result of
reduced interest rates in 2004 compared to 2003. Average loans increased $66.443
million, resulting in an increase in interest income of $97,000, of which $4.063
million was due to volume, offset somewhat by $3.966 million due to a decrease
in interest rates. Average taxable investment securities increased $21.918
million, but generated $709,000 less interest income, of which $1.497 million
was due to lower rates, offset somewhat by $788,000 due to an increase in
volume. Average federal funds sold and interest-bearing deposits increased
$1.124 million and generated $153,000 more interest income, mainly due to an
increase in rates. Somewhat offsetting these increases in average balances was a
decrease in average tax-exempt investment securities of $9.387 million,
resulting in a decrease in interest income of $655,000, of which $578,000 was
due to lower volume and $77,000 was attributable to a decrease in rates.
20
The following table summarizes the quarterly increase (decrease) in total
interest income, total interest expense and net interest income in 2005 and 2004
compared to the same periods the prior year. Between July 1, 2004 and December
31, 2005, there were 13 increases in the prime interest rate of 25 basis points
each.
Total Total Net
Interest Interest Interest
Income (TE) Expense Income (TE)
------------------------------------
2004 First quarter ...... $ (1,232) $ (638) $ (594)
Second quarter ..... (824) (264) (560)
Third quarter ...... (83) 376 (459)
Fourth quarter ..... 1,025 655 370
----------------------------------
Year-to-date ....... $ (1,114) $ 129 $ (1,243)
==================================
2005 First quarter ...... $ 956 $ 611 $ 345
Second quarter ..... 6,818 2,923 3,895
Third quarter ...... 7,415 3,166 4,249
Fourth quarter ..... 6,824 3,927 2,897
----------------------------------
Year-to-date ....... $ 22,013 $ 10,627 $ 11,386
==================================
The Company establishes interest rates on loans and deposits based on market
rates such as the 91-day Treasury Bill rate and the national prime rate, while
at the same time being mindful of interest rates offered by other financial
institutions in the local community. The level of risk and the value of
collateral also are evaluated when determining loan rates. Rates were generally
higher in 2005 compared to 2004. The average yield on federal funds sold and
interest bearing-deposits increased 255 basis points, from 1.58% in 2004 to
4.13% in 2005. The average rate earned on loans increased 61 basis points from
5.84% in 2004 to 6.45% in 2005. The average yield on taxable investment
securities increased 51 basis points, from 3.30% in 2004 to 3.81% in 2005. These
higher average yields were primarily due to eight interest rate hikes initiated
by the Federal Reserve during 2005. Somewhat offsetting these higher yields was
a decrease in the average yield on tax-exempt investment securities of 19 basis
points from 6.14% in 2004 to 5.95% in 2005.
The total actual balance of loans at December 31, 2005 was higher than at
December 31, 2004. Commercial, financial and agricultural loans increased $5.204
million from 2004 to 2005. Commercial real estate loans increased $159.676
million from 2004 to 2005. Residential real estate loans increased $77.840
million from 2004 to 2005. Installment and consumer loans increased $2.802
million from 2004 to 2005.
Average rates on total interest bearing liabilities increased 63 basis points,
from 1.83% in 2004 to 2.46% in 2005 and interest expense increased $10.627
million in 2005 compared to 2004 due to increases in both rates and volume. The
overall increase in interest expense was caused by an increase in interest
expense on all categories of interest bearing liabilities. The average rate paid
on federal funds purchased, repurchase agreements and notes payable i.creased
138 basis points from 1.30% in 2004 to 2.68% in 2005. This resulted in an
increase in interest expense of $1.826 million, of which $1.551 million was due
to higher rates and $275,000 was due to an increase in volume. The average rate
paid on interest bearing demand and savings deposits increased 65 basis points,
from 0.93% in 2004 to 1.58% in 2005. This resulted in an increase in interest
expense of $3.888 million in 2005, of which $3.495 million was attributable to
increased rates and $393,000 was due to higher rates. The average rate paid on
time deposits increased 28 basis points, from 2.81% in 2004 to 3.09% in 2005.
This resulted in an increase of $3.729 million in interest expense, of which
$2.650 million was due to an increase in volume and $1.079 million was due to
higher rates. Although the average rate paid on Federal Home Loan Bank advances
and other borrowings decreased 75 basis points, from 5.38% in 2004 to 4.63% in
2005, interest expense increased a total of $1.184 million, of which $1.435
million was due to higher volume, offset somewhat by $251,000 due to a decrease
in rates.
21
Average rates on total interest bearing liabilities decreased 18 basis points,
from 2.01% in 2003 to 1.83% in 2004, but interest expense increased $129,000 in
2004 compared to 2003 due to an increase in volume, offset somewhat by a
decrease in rates. The overall increase in interest expense was caused by an
increase in interest expense on interest bearing demand and savings deposits,
federal funds purchased, repurchase agreements and notes payable and Federal
Home Loan Bank advances and other borrowings, offset somewhat by a decrease in
interest expense on time deposits. The average rate paid on time deposits
decreased 40 basis points, from 3.21% in 2003 to 2.81% in 2004. This resulted in
a decrease of $938,000 in interest expense, of which $1.399 million was due to
lower rates, offset somewhat by a $461,000 increase in volume. The average rate
paid on Federal Home Loan Bank advances and other borrowings decreased 9 basis
points, from 5.47% in 2003 to 5.38% in 2004. However, interest expense increased
a total of $50,000, comprised of $77,000 due to higher volume, which was offset
somewhat by $27,000 due to a decrease in rates. The average rate paid on federal
funds purchased, repurchase agreements and notes payable increased 15 basis
points from 1.15% in 2003 to 1.30% in 2004. This resulted in an increase in
interest expense of $177,000 of which $148,000 was due to higher rates and
$29,000 was due to an increase in volume. The average rate paid on interest
bearing demand and savings deposits increased 6 basis points, from 0.87% in 2003
to 0.93% in 2004. This resulted in an increase in interest expense of $840,000
in 2004, of which $609,000 was attributable to increased volume and $231,000 was
due to higher rates.
Provision for Loan Losses
The quality of the Company's loan portfolio is of prime importance to the
Company's management and its board of directors, as loans are the largest
component of the Company's assets. The Company maintains an independent credit
administration function, which performs reviews of all large credit
relationships and all loans that present indications of additional credit risk.
Net charge-offs decreased to $1.142 million in 2005 from $1.236 million in 2004.
The Company charged off $1.459 million in loans during 2005 compared to $1.692
million in 2004. This was due to a decrease in charge-offs for installment and
consumer loans of $513,000 in 2005 compared to 2004. This decrease was primarily
the result of a reduction in Owners Option indirect vehicle program charge-offs
from $415,000 in 2004 to $5,000 in 2005. This decreases was offset somewhat by
increases in charge-offs for commercial, financial and agricultural loans and
residential real estate loans of $264,000 and $16,000, respectively. Recoveries
of previously charged off loans decreased from $456,000 in 2004 to $317,000 in
2005, with the largest decrease in the area of commercial, financial and
agricultural loans, which decreased $180,000 from 2004 to 2005. The provision
for loan losses increased $430,000 from $1.100 million in 2004 to $1.530 million
in 2005 and the ratio of net charge-offs to average net loans decreased to 0.12%
in 2005 from 0.17% in 2004. The Company continues to emphasize credit analysis
and early detection of problem loans.
22
Noninterest Income and Expense
The following table summarizes selected categories of non-interest income and
non-interest expense for the years ended December 31 2005, 2004 and 2003. The
acquisition of Citizens on April 1, 2005, has been accounted for as a purchase.
Results of operations of Citizens since the acquisition date have been included
in the Company's consolidated financial statements. The Company's new banking
center in East Peoria, Illinois became fully operational in the fourth quarter
of 2004.
Noninterest Income and Expense
for the Year Ended: December 31,
-------------------------------------------------------------------------------
Non-interest Income (in thousands) 2005 2004 2003
--------------------------------
Remittance processing (1).................... $ 6,748 $ 7,201 $ 7,211
Trust and brokerage fees (2) ................ 7,599 6,492 5,783
Service charges on deposit accounts (3) ..... 2,923 2,419 2,545
Securities transactions, net (4) ............ (586) 133 (12)
Gain on sales of mortgage loans, net (5) .... 886 997 2,536
Other (6) ................................... 2,907 2,605 2,231
--------------------------------
Total non-interest income ............ $ 20,477 $ 19,847 $ 20,294
================================
Non-interest Expense (in thousands) 2005 2004 2003
--------------------------------
Salaries and employee benefits (7) .......... $ 23,099 $ 18,889 $ 18,245
Occupancy (8) ............................... 3,074 2,669 2,489
Equipment ................................... 2,592 2,512 2,389
Data processing (9) ......................... 2,416 2,283 2,108
Office supplies ............................. 1,245 1,247 1,266
Service charges from correspondent banks (10) 513 781 931
Amortization of core deposit intangibles (11) 653 -- --
Other (12) .................................. 6,187 5,498 4,913
--------------------------------
Total non-interest expense ........... $ 39,779 $ 33,879 $ 32,341
================================
(1) Remittance processing income decreased $453,000, or 6.3%, in 2005
compared to 2004. This was due to an $867,000, or 40.2%, decrease in
lockbox processing income, offset somewhat by a $434,000, or 8.7%,
increase in electronic processing income. The decrease in lockbox
processing income was mainly due to the loss of two major accounts in
the fourth quarter of 2004. This decrease was offset somewhat by an
increase in electronic processing income from new and existing
Internet Agent customers. In 2004, remittance processing income
remained almost unchanged compared to 2003.
(2) Trust and brokerage fees increased $1.107 million, or 17.1%, in 2005
compared to 2004. Included in this increase were a $391,000, or
262.7%, increase in farm realty income mainly attributable to the
environment surrounding elevated land values and sales activity as a
result, and a $325,000, or 127.9%, increase in estate fees primarily
as a result of serving as executor to one large estate. Wealth
Management Group assets under management increased $194.000 million,
or 11.0%, to $1.959 billion at December 31, 2005 from $1.765 billion
at December 31, 2004. Trust and brokerage fees increased $709,000, or
12.3%, in 2004 compared to 2003. This increase was the result of
strong investment performance for existing clients and obtaining new
investment accounts. Wealth Management Group assets under management
increased $251.000 million to $1.765 billion at December 31, 2004
compared to $1.514 billion at December 31, 2003.
(3) Service charges on deposit accounts increased $504,000, or 20.8%, in
2005 compared to 2004. The Company's new Bloomington locations
generated $733,000 in service charges on deposit accounts. In 2004,
service charges on deposit accounts decreased $126,000, or 5.0%, from
$2.545 million at December 31, 2003 to $2.419 million at December 31,
2004.
(4) Loss from securities transactions was $586,000 in 2005, compared to a
gain of $133,000 in 2004. This loss was due to $601,000 in losses
realized on an investment in one venture capital fund, offset slightly
by net gains of $15,000 on sales of several equity securities. The
income from securities transactions of $133,000 in 2004 represented an
increase of $145,000 compared to 2003. This increase was due to a gain
on the sale of one security.
23
(5) Gains on sales of mortgage loans decreased $111,000, or 11.1%, in 2005
compared to 2004. This decrease was due to a decrease of approximately
$11.530 million, or 15.0%, in mortgage loans funded in 2005 compared
to 2004, primarily as a result of a decrease in refinancings. Gains on
sales of mortgage loans decreased $1.539 million, or 60.7%, in 2004
compared to 2003. This decrease was due to a decrease of approximately
$132.328 million, or 63.3%, in mortgage loans funded in 2004 compared
to 2003, primarily as a result of a decrease in refinancings.
(6) Other non-interest income increased $302,000, or 11.6%, in 2005
compared to 2004. Included in this increase was a $178,000 increase in
key man insurance income due to $120,000 of income from the Company's
new Bloomington locations and $58,000 in proceeds from two policies.
Other non-interest income increased $374,000, or 16.8%, in 2004
compared to 2003. Included in other non-interest income in 2004 was a
$291,000 gain on the sale of two parking lots.
(7) Salaries and employee benefits increased $4.210 million, or 22.3%, in
2005 compared to 2004. Included in salaries and employee benefits in
2005 was $2.265 million attributable to the Company's new Bloomington
locations and $454,000 attributable to the Company's new East Peoria
banking branch. In 2004, salaries and employee benefits increased
$644,000, or 3.5%, compared to 2003.
(8) Occupancy expense increased $405,000, or 15.2%, in 2005 compared to
2004. Of this increase, $400,000 was attributable to the Company's new
Bloomington locations. In 2004, occupancy expense increased $180,000,
or 7.2%, compared to 2003.
(9) Data processing expense increased $133,000, or 5.8%, in 2005 compared
to 2004. This increase was attributable, in part, to the Company's new
Bloomington locations. Data processing expense increased $175,000, or
8.3%, in 2004 compared to 2003. In 2004, data processing expense
included additional costs related to the subsidiary merger of
BankIllinois and The First National Bank of Decatur.
(10) Service charges from correspondent banks decreased $268,000, or 34.3%,
in 2005 compared to 2004. This was largely due to the loss of two
lockbox accounts in the fourth quarter of 2004 as described in
footnote 1, which resulted in a significant decrease in cleared checks
during 2005 compared to 2004.
(11) The amortization of core deposit intangibles of $653,000 was
attributable to the acquisition of Citizens.
(12) Other non-interest expense increased $689,000, or 12.5%, in 2005
compared to 2004. This was mainly due to the acquisition of Citizens
and the Company's new East Peoria banking location. Other non-interest
expense increased $585,000, or 11.9%, in 2004 compared to 2003.
Included in other non-interest expense in 2004 were approximately
$413,000 of additional marketing research and agency fees, primarily
related to the merger of BankIllinois and The First National Bank of
Decatur for purposes of marketing, promotion and branding the new
entity, Main Street Bank & Trust, direct loan promotional costs
relating to the increase in home equity loans and additional costs
related to Sarbanes-Oxley compliance.
Income Tax Expense
Income tax expense increased $2.330 million, or 29.0%, from $8.043 million in
2004 to $10.373 million in 2005. This was mainly due to an increase in taxable
income. In 2004, income tax expense decreased $798,000, or 9.0%, from $8.841
million in 2003. The Company's effective tax rate was 36.2%, 35.2% and 34.7% for
the years ended December 31, 2005, 2004 and 2003, respectively.
The tax effects of temporary differences, which gave rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2005 and 2004, are shown in note 11 in the Notes to Consolidated Financial
Statements.
Financial Condition
Total assets increased $397.019 million, or 32.3%, to $1.625 billion at December
31, 2005 compared to $1.228 billion at December 31, 2004. There were increases
in all asset categories except investments in debt and equity securities held to
maturity. Most of the change in total assets was attributable to the acquisition
of Citizens. Assets and liabilities related to the acquisition of Citizens are
reported as of the April 2005 acquisition date. On April 1, 2005, Citizens total
assets were $330.983 million.
Cash and due from banks increased $18.874 million, or 57.0%, to $52.007 million
at December 31, 2005 compared to $33.133 million at December 31, 2004. The
Citizens acquisition contributed $6.022 million to the increase in cash and due
from banks.
24
Federal funds sold and interest bearing deposits increased $10.264 million, or
32.3%, to $42.059 million at December 31, 2005 compared to $31.795 million at
December 31, 2004. The Citizens acquisition contributed $16.630 million. Federal
funds sold and interest bearing deposits fluctuate with loan demand, deposit
volume and investment opportunities.
Total investments in debt and equity securities increased $85.897 million, or
23.9%, to $444.623 million at December 31, 2005 compared to $358.726 million at
December 31, 2004. Included in the change were increases of $73.507 million, or
27.3%, in investments in securities available for sale and $17.012 million, or
213.1%, in non-marketable equity securities offset somewhat by a decrease of
$4.622 million, or 5.7%, in securities held to maturity. $16.374 million of FHLB
Stock owned by Citizens on April 1, 2005 is included in the increase in
non-marketable equity securities. The Citizens acquisition contributed $23.865
million of investments in securities available for sale. Investments fluctuate
with loan demand, deposit volume and investment opportunities.
Loans, net of allowance for loan losses, increased $241.700 million, or 31.8%,
to $1.003 billion at December 31, 2005 from $761.227 million at December 31,
2004. The Citizens acquisition contributed $228.114 million to the increase in
loans.
Mortgage loans held for sale increased $656,000, or 65.3%, to $1.661 million at
December 31, 2005 compared to $1.005 million at December 31, 2004. The Citizens
acquisition contributed $282,000 to the increase.
The increase in year-end assets was primarily the result of the acquisition of
Citizens which had total assets of $330.983 million at April 1, 2005.
Contributing to the increase in total assets was the $301.395 million increase
in total deposits at December 31, 2005 compared to December 31, 2004. Of this
$301.395 million increase in total deposits, $232.089 million was attributable
to the acquisition of Citizens. The increase in deposits included $67.915
million in non-interest bearing deposits ($28.496 million due to the acquisition
of Citizens) and $233.480 million in interest bearing deposits ($203.593 million
due to the acquisition of Citizens). Also contributing to the increase in
year-end assets was a $21.552 million increase in federal funds purchased,
repurchase agreements and notes payable (none due to the Citizens acquisition),
a $37.504 million increase in Federal Home Loan Bank advances and other
borrowings ($37.599 million due to the acquisition of Citizens).
Average assets were $265.424 million, or 21.9%, higher in 2005 than 2004.
Included in the increase in average assets were increases in net loans of
$233.103 million, or 32.7%, other assets of $25.062 million, or 104.7%, federal
funds sold and interest bearing deposits of $11.110 million, or 29.3%, and
premises and equipment of $4.055 million, or 23.6%. These increases were
somewhat offset by average decreases of $7.019 million, or 15.2%, in tax-exempt
investment securities, a decrease of $755,000, or 1.7%, in cash and due from
banks, and a decrease of $132,000 in taxable investment securities.
Shifts in funding sources occurred as total average deposits increased $188.815
million, or 19.7%, total average federal funds purchased, repurchase agreements
and notes payable increased $18.176 million, or 18.6%, and average Federal Home
Loan Bank advances and other borrowings increased $30.426 million, or 101.7%, in
2005 from 2004. Included in the increase in average deposits was a shift in the
average deposit mix in 2005 versus 2004. There were increases in four out of
five categories of deposits. Average time deposits increased $87.996 million, or
25.0%, average savings increased $81.717 million, or 23.6%, average non-interest
bearing demand deposits increased $32.069 million, or 31.8%, and average
non-interest bearing savings increased $5.372 million, or 8.1%. Somewhat
offsetting these increases in average deposits was a decrease in average
interest bearing demand deposits of $18.339 million, or 19.7%.
25
Investment Securities
The carrying value of investments in debt and equity securities was as follows:
Carrying Value of Securities(1)
(in thousands)
December 31, 2005 2004 2003
--------------------------------------------------------------------------------
Securities available-for-sale:
Federal agencies ...................... $312,484 $218,994 $220,199
Mortgage-backed securities ............ 13,657 27,713 23,007
State and municipal ................... 13,834 16,715 17,317
Marketable equity securities .......... 3,112 6,158 5,391
----------------------------------
Total .......................... $343,087 $269,580 $265,914
==================================
Securities held-to-maturity:
Federal agencies ...................... $ 38,650 $ 40,931 $ 10,704
Mortgage-backed securities ............ 17,091 14,992 50,029
State and municipal ................... 20,801 25,241 36,323
----------------------------------
Total .......................... $ 76,542 $ 81,164 $ 97,056
==================================
Non-marketable equity securities:
FHLB and FRB stock(2) ................. $ 21,450 $ 4,279 $ 4,259
Other equity investments .............. 3,544 3,703 3,497
----------------------------------
Total .......................... $ 24,994 $ 7,982 $ 7,756
----------------------------------
Total securities ............... $444,623 $358,726 $370,726
==================================
(1) Investment securities available-for-sale are carried at fair value.
Investment securities held-to-maturity are carried at amortized cost.
(2) FHLB and FRB are commonly used acronyms for Federal Home Loan Bank and
Federal Reserve Bank, respectively. All FRB stock was redeemed after
the merger in November 2004.
The unrealized loss on securities available-for-sale, net of tax effect,
increased $1.379 million to a loss of $1.597 million at December 31, 2005 from a
loss of $218,000 at December 31, 2004.
26
The following table shows the maturities and weighted-average yields of
investment securities at December 31, 2005:
Maturities and Weighted Average Yields of Debt Securities
(dollars in thousands)
December 31, 2005
-------------------------------------------------------------------------------------------
1 year 1 to 5 5 to 10 Over
or less years years 10 years Total
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
-------------------------------------------------------------------------------------------
Securities available-for-sale:
Federal agencies ................ $146,255 3.06% $164,779 3.87% $ 1,450 4.72% $ -- --% $312,484 3.49%
Mortgage-backed securities(1) ... 3,125 3.84% 10,016 4.46% 516 6.05% -- -- $ 13,657 4.38%
State and municipal (TE)(2) ..... 3,638 5.07% 7,011 6.53% 2,711 7.59% 474 7.76% 13,834 6.40%
Marketable equity securities(3) . -- -- -- -- -- -- -- -- 3,112 --
-----------------------------------------------------------------------------------------
Total .................... $153,018 $181,806 $ 4,677 $ 474 $343,087
=========================================================================================
Average Yield (TE)(2) ............. 3.12% 4.01% 6.53% 7.76% 3.65%
=========================================================================================
Securities held-to-maturity:
Federal agencies ................ $ 11,344 2.63% $ 22,581 3.04% $ 4,725 3.85% $ -- -- $ 38,650 3.02%
Mortgage-backed securities(1) ... 2,675 3.06% 10,614 4.60% 704 5.16% 3,098 5.50% 17,091 4.54%
State and municipal (TE)(2) ..... 9,475 5.21% 10,971 6.27% 195 7.31% 160 7.95% 20,801 5.81%
-----------------------------------------------------------------------------------------
Total .................... $ 23,494 $ 44,166 $ 5,624 $ 3,258 $ 76,542
=========================================================================================
Average Yield (TE)(2) ............. 3.72% 4.22% 4.13% 5.62% 4.12%
=========================================================================================
Non-marketable equity securities(3)
FHLB stock ...................... -- -- -- -- -- -- -- -- $ 21,450 --
Other equity investments ........ -- -- -- -- -- -- -- -- 3,544 --
-----------------------------------------------------------------------------------------
Total .................... $ -- -- $ -- -- $ -- -- $ -- -- $ 24,994 --
=========================================================================================
(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) The average yield has been tax equivalized (TE) on state and municipal
tax-exempt securities.
(3) Due to the nature of these securities, they do not have a stated
maturity date or rate.
27
Loans
The following tables present the amounts and percentages of loans at December 31
for the years indicated according to the categories of commercial, financial and
agricultural; real estate commercial; real estate residential; and installment
and consumer loans.
Amount of Loans Outstanding
(dollars in thousands)
2005 2004 2003 2002 2001
---------------------------------------------------------------
Commercial, financial and agricultural.. $ 319,861 $ 314,657 $ 249,795 $ 234,045 $ 246,042
Real Estate - Commercial ............... 469,506 309,830 298,075 265,970 209,950
Real Estate - Residential .............. 140,304 62,464 50,922 77,857 106,743
Installment and consumer ............... 86,728 83,926 77,253 95,529 119,585
---------------------------------------------------------------
Total loans ....................... $1,016,399 $ 770,877 $ 676,045 $ 673,401 $ 682,320
==============================================================
Percentage of Loans Outstanding
2005 2004 2003 2002 2001
----------------------------------------------------
Commercial, financial and agricultural.. 31.47% 40.82% 36.95% 34.75% 36.06%
Real Estate - Commercial ............... 46.19% 40.19% 44.09% 39.50% 30.77%
Real Estate - Residential .............. 13.81% 8.10% 7.53% 11.56% 15.64%
Installment and consumer ............... 8.53% 10.89% 11.43% 14.19% 17.53%
----------------------------------------------------
Total ............................. 100.00% 100.00% 100.00% 100.00% 100.00%
====================================================
The Company's loan portfolio totaled approximately $1.016 billion at December
31, 2005, representing 62.5% of total assets at that date. Total loans increased
$245.522 million, or 31.8%, from December 31, 2004 to December 31, 2005 with
increases in commercial, financial and agricultural loans, commercial real
estate loans, residential real estate loans, and installment and consumer loans
of $5.204 million, $159.676 million, $77.840 and $2.802 million, respectively.
Total loans increased $94.832 million, or 14.0%, from December 31, 2003 to
December 31, 2004, with increases in commercial, financial and agricultural
loans, commercial real estate loans, residential real estate loans, and
installment and consumer loans of $64.862 million, $11.755 million, $11.542
million and $6.673 million, respectively.
The balance of loans outstanding as of December 31, 2005 by maturities is shown
in the following table:
Maturity of Loans Outstanding
(dollars in thousands)
----------------------------------------------------
December 31, 2005
----------------------------------------------------
1 year 1-5 Over 5
or less years years Total
----------------------------------------------------
Commercial, financial and agricultural .............. $ 192,458 $ 93,223 $ 34,180 $ 319,861
Real Estate - Commercial ............................ 168,024 198,056 103,426 $ 469,506
Real Estate - Residential ........................... 12,354 38,016 89,934 $ 140,304
Installment and consumer ............................ 24,175 38,761 23,792 $ 86,728
----------------------------------------------------
Total .......................................... $ 397,011 $ 368,056 $ 251,332 $1,016,399
====================================================
Percentage of total loans outstanding ............... 39.06% 36.21% 24.73% 100.00%
====================================================
As of December 31, 2005, commercial, financial and agricultural loans with
maturities of greater than one year were comprised of $41.572 million in
fixed-rate loans and $85.831 million in floating-rate loans. Commercial real
estate loans with maturities greater than one year at December 31, 2005 were
comprised of $66.673 million in fixed-rate loans and $234.809 million in
floating-rate loans. Residential real estate loans with maturities greater than
one year at December 31, 2005 included $52.804 million in fixed-rate loans and
$75.146 million in floating-rate loans.
28
Allowance for Loan Losses and Loan Quality
The following table summarizes changes in the allowance for loan losses by loan
categories for each period and additions to the allowance for loan losses, which
have been charged to operations.
Allowance for Loan Losses
(dollars in thousands)
-------------------------------------------------------------
2005 2004 2003 2002 2001
-------------------------------------------------------------
Allowance for loan losses at
beginning of year ....................... $ 9,650 $ 9,786 $ 9,259 $ 9,259 $ 8,879
Allocation for loan losses attributable to
acquisition of Citizens ................. $ 3,434 $ -- $ -- $ -- $ --
-------------------------------------------------------------
Charge-offs during period:
Commercial, financial and agricultural .. $ (552) $ (288) $ (148) $ (55) $ (1,165)
Real Estate - Commercial ................ -- -- -- (48) --
Real Estate - Residential ............... (64) (48) (42) (125) (27)
Installment and consumer ................ (843) (1,356) (1,450) (1,699) (1,481)
-------------------------------------------------------------
Total ................................ $ (1,459) $ (1,692) $ (1,640) $ (1,927) $ (2,673)
-------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial, financial and agricultural .. $ 34 $ 214 $ 452 $ 245 $ 179
Real Estate - Commercial ................ 5 -- 2 -- --
Real Estate - Residential ............... -- 15 46 31 37
Installment and consumer ................ 278 227 199 201 167
-------------------------------------------------------------
Total ................................ $ 317 $ 456 $ 699 $ 477 $ 383
-------------------------------------------------------------
Net charge-offs ................. $ (1,142) $ (1,236) $ (941) $ (1,450) $ (2,290)
Provision for loan losses ................. 1,530 1,100 1,470 1,450 2,670
-------------------------------------------------------------
Allowance for loan losses at end of year .. $ 13,472 $ 9,650 $ 9,788 $ 9,259 $ 9,259
============================================================
Ratio of net charge-offs to
average net loans ....................... 0.12% 0.17% 0.15% 0.22% 0.34%
============================================================
Management reviews criteria such as the customer's historic loan payment
performance, financial statements, financial ratios, cash flow, net worth,
collateral and guaranties, as well as local and national economic factors, in
determining whether loans should be written off as uncollectible. The Company
records a loss if it is probable that a loss will occur and the amount can be
reasonably estimated.
The Company's risk of loan loss is dependent on many factors: economic
conditions, the extent and values of underlying collateral, significant
concentrations of loans within the portfolio, the ability and willingness of
borrowers to perform according to loan terms and management's competence and
judgment in overseeing lending, collecting and loan-monitoring activities. The
risk of loss from commercial, financial and agricultural loans is significantly
impacted by economic factors and how these factors affect the particular
industries involved. The risk of loss from commercial real estate loans is
impacted by the value of real estate, which can fluctuate significantly in a
short period of time. Additionally, real estate lending typically involves
higher loan principal amounts and the repayment of the loans generally is
dependent, in large part, on sufficient income from the properties securing the
loans to cover operating expenses and debt service.
An analysis of the allowance for loan loss adequacy is performed on a quarterly
basis by the Company's credit administration department. This analysis is
reported to executive management and discussed at a quarterly meeting where
specific allocations for problem credits, charge-offs and monthly provisions for
loan losses are reviewed and revised, as necessary. The results are reported to
the board of directors. The analysis includes assessment of the allowance for
loan loss adequacy based on historic loan losses and current quality grades of
specific credits reviewed, credit concentrations, current delinquent and
nonperforming loans, current economic conditions, peer group information and
results of recent audits or regulatory examinations. Charged off commercial,
financial and agricultural loans in 2001 included two agricultural credits
totaling $847,000. The level of charge-offs of installment and consumer loans
reported between 2001 and 2004 were reflective of the significant growth of the
indirect loan portfolio in 1999 and 2000. The level of charge-offs of
installment and consumer loans decreased in 2005 compared to 2004 as a result of
a reduction in Owners Option indirect vehicle program charge-offs from $415,000
in 2004 to $5,000 in 2005.
29
The following table shows the allocation of the allowance for loan losses to
each loan category.
Allocation of the Allowance for Loan Losses
(in thousands)
-----------------------------------------------
2005 2004 2003 2002 2001
-----------------------------------------------
Allocated:
Commercial, financial and agricultural $ 4,433 $ 2,945 $ 2,540 $ 2,438 $ 2,333
Real Estate - Commercial ............. 5,991 3,981 3,433 3,294 3,154
Real Estate - Residential ............ 424 198 153 345 419
Installment and consumer ............. 1,447 1,605 2,428 1,763 2,000
-----------------------------------------------
Total allocated allowance .... $12,295 $ 8,729 $ 8,554 $ 7,840 $ 7,906
Unallocated allowances ................. 1,177 921 1,232 1,419 1,353
-----------------------------------------------
Total ........................ $13,472 $ 9,650 $ 9,786 $ 9,259 $ 9,259
===============================================
The allocated portion of the allowance for loan losses increased $3.566 million
from $8.729 million at December 31, 2004 to $12.295 million at December 31,
2005. Of this increase, the allowance for commercial, financial and agricultural
loans increased $1.488 million from $2.945 million at December 31, 2004 to
$4.433 million at December 31, 2005. The allowance for loan losses for
commercial real estate loans increased $2.010 million from $3.981 million at
December 31, 2004 to $5.991 million at December 31, 2005, which was reflective
of the increase in commercial real estate loans in 2005 compared to 2004. The
allowance for residential real estate loans increased $226,000 from $198,000 at
December 31, 2004 to $424,000 at December 31, 2005. Somewhat offsetting these
increases was a decrease in the allowance for installment and consumer loans of
$158,000 from $1.605 million at December 31, 2004 to $1.447 million at December
31, 2005. The portion of the allowance for loan losses that was unallocated
increased by $256,000 to $1.177 million at December 31, 2005 from $921,000 a
year earlier. The unallocated amount is determined based on management's
judgment, which considers, in addition to the other factors previously
discussed, the risk of error in the specific allocation.
Management believes that nonperforming and potential problem loans are
appropriately identified and monitored based on the extensive loan analysis
performed by the credit administration department, the internal loan committees
and the board of directors. Historically, there has not been a significant
amount of loans charged off which had not been previously identified as problem
loans by the credit administration department or the loan committees.
The following table presents the aggregate amount of loans considered to be
nonperforming for the periods indicated. Nonperforming loans include loans
accounted for on a nonaccrual basis, accruing loans contractually past due 90
days or more as to interest or principal payments and loans which are troubled
debt restructurings as defined in Statement of Financial Accounting Standards
No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings."
Nonperforming Loans
(in thousands)
------------------------------------------
2005 2004 2003 2002 2001
------------------------------------------
Nonaccrual loans(1) ............... $2,234 $1,689 $ 399 $1,392 $3,341
Loans past due 90 days or more .... $ 766 $ 547 $ 621 $ 829 $1,774
Restructured loans ................ $ 324 $ 497 $ 18 $ 20 $ 67
(1) Includes $975,000, $509,000, $269,000, $628,000 and $3.216 million at
December 31, 2005, 2004, 2003, 2002 and 2001, respectively, of loans
which management does not consider impaired as defined by the
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairments of a Loan" (SFAS 114).
30
Other Nonperforming Assets
(in thousands)
---------------------------------------
2005 2004 2003 2002 2001
---------------------------------------
Other real estate owed ............... $188 $ -- $ -- $ 58 $ --
Nonperforming other assets ........... $ 36 $ 33 $ 55 $ 94 $153
There were no other interest earning assets that would be required to be
disclosed as being nonperforming if such other assets were loans.
At December 31, 2005, the Company had $21.410 million in potential problem
loans, excluding nonperforming loans. Potential problem loans are those loans
identified by management as being worthy of special attention, and although
currently performing, may have some underlying weaknesses. None of these
potential problem loans were considered impaired as defined in SFAS 114. The
$21.410 million of potential problem loans have either had timely payments or
are adequately secured and loss of principal or interest is determined to be
unlikely.
Loans over 90 days past due, which are not well secured and in the process of
collection, are placed on nonaccrual status. There were $2.234 million of
nonaccrual loans at December 31, 2005 compared to $1.689 million at December 31,
2004. Included in nonaccrual loans at December 31, 2005 was $599,000
attributable to one commercial loan. As of December 31, 2005, a specific
valuation allowance of $250,000 had been assigned to this loan, and the
remaining balance was considered adequately collateralized. Loans past due 90
days or more but still accruing interest increased by $219,000 in 2005 to a
balance of $766,000 at December 31, 2005, from $547,000 at December 31, 2004.
These loans are well secured and in the process of collection.
The following table categorizes nonaccrual loans as of December 31, 2005 based
on levels of performance and also details the allocation of interest collected
during the period in 2005 in which the loans were on nonaccrual. Substantial
performance, yet contractually past due, includes borrowers making sizable
periodic payments relative to the required periodic payments due. A borrower
that is not making substantial payments but is making periodic payments would be
included in the limited performance category.
Nonaccrual and Related Interest Payments
(in thousands)
--------------------------------------------------------
Cash Interest Payments Applied As:
At December 31, 2005 -----------------------------------
-------------------- Recovery of Reduction
Book Contractual Interest Prior Partial of
Balance Balance Income Charge-offs Principal
--------------------------------------------------------
Not contractually past due ........... $ 179 $ 179 $ 16 $ -- $ 1
Contractually past due with:
Substantial performance ............ -- -- -- -- --
Limited performance ................ 411 411 6 -- 8
No performance ..................... 1,644 1,649 -- -- --
-------------------------------------------------------
Total ................................ $ 2,234 $ 2,239 $ 22 $ -- $ 9
=======================================================
The difference between the book balance and the contractual balance represents
charge-offs made since the loans were funded.
Management believes that the allowance for loan losses at December 31, 2005 was
adequate to absorb credit losses in the total loan portfolio and that the
policies and procedures in place to identify potential problem loans are being
effectively implemented. However, there can be no assurance that the allowance
for loan losses will be adequate to cover all losses.
Premises and Equipment
Total premises and equipment increased $5.960 million, or 34.9%, from $17.087
million at December 31, 2004 to $23.047 million at December 31, 2005. The
increase included the acquisition of Citizens, which contributed $5.993 million
and purchases of $2.516 million offset somewhat by depreciation and amortization
expense of $2.533 million, loss on disposal of property of $8,000 and proceeds
from sale of property of $8,000.
31
Goodwill
Goodwill of $20.736 million at December 31, 2005, was due to the acquisition of
Citizens.
Core Deposit Intangibles
Core deposit intangibles of $4.569 million at December 31, 2005, were due to the
acquisition of Citizens.
Other Assets
Other assets increased $6.472 million, or 34.8%, to $25.047 million at December
31, 2005 compared to $18.575 million at December 31, 2004. The Citizens
acquisition contributed $6.174 million to the increase in other assets.
Deposits
The following table shows the average balance and weighted average rate of
deposits at December 31 for the years indicated:
Average Balance and Weighted Average Rate of Deposits
(dollars in thousands)
-------------------------------------------------------------------
2005 2004 2003
-------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average Average Average Average
Balance Rate Balance Rate Balane Rate
-------------------------------------------------------------------
Demand
Non-interest bearing ................. $ 132,982 -- $ 100,913 -- $ 89,935 --
Interest bearing ..................... 74,976 0.57% 93,315 0.68% 87,351 0.73%
Savings
Non-interest bearing ................. 71,535 -- 66,163 -- 62,056 --
Interest bearing ..................... 427,341 1.76% 345,624 0.99% 284,641 0.91%
Time
$100,000 and more .................... 126,344 3.17% 111,317 2.64% 113,604 3.22%
Under $100,000 ....................... 314,248 3.06% 241,279 2.89% 224,133 3.21%
-------------------------------------------------------------------
Totals ........................... $1,147,426 $ 958,611 $ 861,720
===================================================================
In analyzing its deposit activity, management has noted that average total
deposits increased $188.815 million, or 19.7%, during 2005. Included in this
increase were shifts in the average deposit mix in 2005 versus 2004. There were
increases in average non-interest bearing deposits of $32.069 million, or 31.8%,
average non-interest bearing savings deposits of $5.372 million, or 8.1%,
average interest bearing savings deposits of $81.717 million, or 23.6%, average
time deposits of $100,000 and more of $15.027 million, or 13.5%, and average
time deposits under $100,000 of $72.969 million, or 30.2%. Slightly offsetting
these increases in average deposits was a decrease in average interest bearing
demand deposits of $18.339 million, or 19.7%.
The table below sets forth the maturity of time deposits greater than $100,000
at December 31, 2005:
Maturity of Time Deposits of $100,000 or More
(in thousands)
----------------------------------------------------------------------------------------------------
Total Time
State of Illinois Brokered Deposits of
Maturity at December 31, 2005: Time Deposits CDs CDs IRAs $100,000 or More
----------------------------------------------------------------------------------------------------
3 months or less ............. $ 3,070 $ -- $ 27,524 $ 900 $ 31,494
3 to 6 months ................ -- -- 17,511 473 17,984
6 to 12 months ............... 5,000 1,477 30,957 1,557 38,991
Over 12 months ............... 575 -- 36,332 4,827 41,734
------------------------------------------------------------
Total ................ $ 8,645 $ 1,477 $112,324 $ 7,757 $130,203
============================================================
32
Federal Funds Purchased, Repurchase Agreements and Notes Payable
This category includes federal funds purchased, which are generally overnight
transactions and securities sold under repurchase agreements, which mature from
one day to three years from the date of sale. The table in note 8 in the Notes
to Consolidated Financial Statements shows the balances of federal funds
purchased and repurchase agreements at December 31, 2005 and 2004, the average
balance for the years ended December 31, 2005, 2004 and 2003, and the maximum
month-end value during each year.
Fair Values of Financial Instruments
The estimated fair values of financial instruments for which no listed market
exists and the fair values of investment securities, which are based on listed
market quotes at December 31, 2005 and 2004, are disclosed in note 17 in the
Notes to Consolidated Financial Statements.
Capital
Total shareholders' equity increased $29.794 million from $113.975 million at
December 31, 2004 to $143.769 million at December 31, 2005. Net income of
$18.308 million and an increase of $27.804 million due to the issuance of
treasury stock for the acquisition of Citizens, were offset somewhat by cash
dividends declared of $8.926 million, a decrease of $6.013 million as a result
of net treasury stock transactions, and a decrease in accumulated other
comprehensive income of $1.379 million.
Financial institutions are required by regulatory agencies to maintain minimum
levels of capital based on asset size and risk characteristics. Currently, the
Company and the Bank are required by their primary regulators to maintain
adequate capital based on two measurements: the total assets leverage ratio and
the risk-weighted assets ratio.
Based on Federal Reserve guidelines, a bank holding company generally is
required to maintain a leverage ratio of 3% plus an additional cushion of at
least 100 to 200 basis points. The Company's total assets leverage ratio at both
December 31, 2005 and 2004 was 7.8% and 9.2%, respectively. The leverage ratio
for the Bank is disclosed in note 19 in the Notes to the Consolidated Financial
Statements and is well above the regulatory minimum.
The minimum risk-weighted assets ratio for bank holding companies is 8%. The
Company's total risk-weighted assets ratio at both December 31, 2005 and 2004
was 11.7% and 13.3%, respectively - significantly higher than the regulatory
minimum. The Bank's total risk-weighted assets ratio is disclosed in note 19 in
the Notes to the Consolidated Financial Statements and is significantly higher
than the regulatory minimum.
Inflation and Changing Prices
Changes in interest rates and a bank's ability to react to interest rate
fluctuations have a much greater impact on a bank's balance sheet and net income
than inflation. A review of net interest income, liquidity and rate sensitivity
should assist in the understanding of how well the Company is positioned to
react to changes in interest rates.
Liquidity and Cash Flows
The Company requires cash to fund loan growth and deposit withdrawals. Cash
flows fluctuate with changes in economic conditions, current interest rate
trends and as a result of management strategies and programs. 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 Company monitors the demand for cash and initiates programs and
policies as considered necessary to meet funding gaps.
33
The Company was able to adequately fund loan demand and meet liquidity needs in
2005. A review of the consolidated statement of cash flows in the accompanying
financial statements shows that the Company's cash and cash equivalents
increased $29.138 million from December 31, 2004 to December 31, 2005. The
increase in 2005 resulted from cash provided by financing and operating
activities, offset somewhat by cash used in investing activities. There were
differences in sources and uses of cash during 2005 compared to 2004. Cash
provided by financing activities during 2005 was $76.079 million compared to
$59.981 million during the same period in 2004, primarily due to an increase in
federal funds purchased, repurchase agreements and notes payable during 2005 of
$21.552 million, mainly as a result of an increase in repurchase agreements
compared to a decrease of $6.098 million in federal funds purchased, repurchase
agreements and notes payable during the same period in 2004 primarily due to a
decrease in repurchase agreements. Less cash was provided by deposit growth
during 2005 compared to 2004 at the Company's Main Street Bank & Trust
subsidiary. The Company expected deposits to decrease during the first half of
2005 due to a planned outflow of short-term deposits attributable to the
Company's Wealth Management division which had grown approximately $43 million
during the second half of 2004. More cash was used in 2005 for treasury stock
transactions compared to 2004. Cash provided by Federal Home Loan Bank advances
and other borrowings of $39.000 million during 2005 was used mainly as a source
of working capital and $39.095 million was repaid during the year. More cash was
provided by operating activities in 2005 compared to 2004 primarily due to an
increase in net income.
Less cash was used by investing activities during 2005 compared to the same
period in 2004, primarily due to differences in investments in debt and equity
securities and volume of loan growth. Cash used by investing activities during
2005 was $47.272 million compared to cash provided of $6.702 million during the
same period in 2004. In 2005, cash used to purchase debt and equity securities
of $335.505 million was somewhat offset by proceeds of $288.233 million from
maturities, calls and sales of debt and equity securities, principal paydowns on
mortgage-backed securities and return of equity on other equity securities. In
2004, proceeds of $275.371 million from maturities, calls and sales of debt and
equity securities, principal paydowns on mortgage-backed securities, return of
equity on other equity securities and proceeds from redemption of non-marketable
equity securities were offset somewhat by cash used to purchase debt and equity
securities of $268.669 million. Also contributing to the difference in investing
activities was the difference in loan growth during these two periods. Cash used
to fund loan growth during 2005 was $15.116 million compared to $96.108 million
during the same period in 2004. In addition, $6.385 million was used to fund the
acquisition of Citizens in 2005.
On April 1, 2005, the Company borrowed $6.000 million, to be repaid within 3
years, to fund a portion of the Citizens acquisition cost. In addition, the
Company negotiated an increase of its $10.000 million line of credit from a
third party lender to $15.000 million and immediately advanced $4.000 million.
At December 31, 2005, the Company had $1.500 million outstanding on its $15.000
million line of credit which was repaid in January 2006. The Company's future
short-term cash requirements are expected to be provided by maturities and sales
of investments, sales of loans and deposits. Cash required to meet longer-term
liquidity requirements will mostly depend on future goals and strategies of
manag%ment, the competitive environment, economic factors and changes in the
needs of customers. If current sources of liquidity cannot provide needed cash
in the future, the Company can obtain long-term funds from several sources,
including, but not limited to, utilizing the Company's remaining $13.500 million
line of credit from a third party lender, FHLB borrowings and brokered CDs. To
meet short-term liquidity needs, the Company is able to borrow funds on a
temporary basis from the Federal Reserve Bank, the FHLB and correspondent banks.
With sound capital levels, the Company continues to have several options for
longer-term cash needs, such as for future expansion and acquisitions.
Management is not aware of any current recommendations by the Company's primary
regulators which if implemented would have a material effect on the Company's
liquidity, capital resources or operations.
34
The following table summarizes significant obligations and other commitments at
December 31, 2005 (in thousands):
FHLB and Other Operating
Years Ended December 31, Time Deposits borrowings(1) Leases Total
-----------------------------------------------------------------------------------------
2006 ............................. $330,335 $ 29,910 $ 266 $360,511
2007 ............................. 84,915 2,453 189 $ 87,557
2008 ............................. 35,000 35,023 16 $ 70,039
2009 ............................. 13,810 -- 12 $ 13,822
2010 ............................. 10,382 -- 9 $ 10,391
Thereafter ....................... 15 -- -- $ 15
---------------------------------------------------
Total ............................ $474,457 $ 67,386 $ 492 $542,335
===================================================
Commitments to extend credit:
Commitments ...................... $279,647
Standby letters of credit ........ 34,512
(1) Fixed rate callable FHLB advances are included in the period of their
modified duration rather than in the period in which they are due.
FHLB and other borrowings include fixed rate callable advances of
$24.000 million maturing in fiscal year 2008.
Interest Rate Sensitivity
The concept of interest sensitivity attempts to gauge exposure of the Company's
net interest income to adverse changes in market driven interest rates by
measuring the amount of interest-sensitive assets and interest-sensitive
liabilities maturing or subject to repricing within a specified time period.
Liquidity represents the ability of the Company to meet the day-to-day demands
of deposit customers balanced by its investments of these deposits. The Company
must also be prepared to fulfill the needs of credit customers for loans with
various types of maturities and other financing arrangements. One way the
Company monitors its interest rate sensitivity and liquidity is through the use
of static gap reports, which measure the difference between assets and
liabilities maturing or repricing within specified time periods.
35
The following table shows the Company's interest rate sensitivity position at
various intervals at December 31, 2005:
Rate Sensitivity of Earning Assets and Interest Bearing Liabilities
(in thousands)
-----------------------------------------------------------------------
1 - 30 31 - 90 91 - 180 181 - 365 Over
Days Days Days Days 1 year Total
-----------------------------------------------------------------------
Interest earning assets:
Federal funds sold and interest bearing deposits $ 42,059 $ -- $ -- $ -- $ -- $ 42,059
Debt and equity securities(1) 23,101 4,350 36,901 60,043 320,228 444,623
Loans(2) 346,663 55,395 51,134 97,072 467,796 1,018,060
-----------------------------------------------------------------------
Total interest earning assets $ 411,823 $ 59,745 $ 88,035 $157,115 $ 788,024 $1,504,742
-----------------------------------------------------------------------
Interest bearing liabilities:
Savings and interest bearing demand deposits $ 63,750 $ 1,700 $ 2,550 $ 8,697 $ 190,168 $ 266,865
Money market savings deposits 293,828 -- -- -- -- 293,828
Time deposits 38,913 63,227 66,121 162,045 144,150 474,456
Federal funds purchased, repurchase agreements
and notes payable 96,314 7,759 5,156 9,223 - 118,452
FHLB Advances and other borrowings 15,575 34,069 75 10,150 7,517 67,386
-----------------------------------------------------------------------
Total interest bearing liabilities $ 508,380 $ 106,755 $ 73,902 $190,115 $ 341,835 $1,220,987
=======================================================================
Net asset (liability) funding gap $ (96,557) $ (47,010) $ 14,133 $ (33,000) $ 446,189 $ 283,755
-----------------------------------------------------------------------
Repricing gap 0.81 0.56 1.19 0.83 2.31 1.23
Cumulative repricing gap 0.81 0.77 0.81 0.82 1.23 1.23
=======================================================================
(1) Debt and equity securities include securities available-for-sale.
(2) Loans include mortgage loans held-for-sale.
36
Included in the 1-30 day category of savings and interest bearing demand
deposits is non-core deposits plus a percentage, based upon industry-accepted
assumptions, of the core deposits. "Core deposits" are the lowest average
balance of the prior twelve months for each product type included in this
category. "Non-core deposits" are the difference between the current balance and
core deposits. The time frames include a percentage, based upon
industry-accepted assumptions, of the core deposits as follows:
1-30 31-90 91-180 181-365 Over
Days Days Days Days 1 Year
----------------------------------------------------
Savings and interest bearing
demand deposits ............................ 0.45% 0.85% 1.25% 2.45% 95.00%
At December 31, 2005, the Company tended to be somewhat liability sensitive due
to the levels of savings and interest bearing demand deposits, time deposits,
federal funds purchased, repurchase agreements and notes payable. As such, the
effect of a decrease in the prime rate of 100 basis points would increase net
interest income by approximately $966,000 in 30 days and $1.436 million in 90
days assuming no management intervention. A rise in interest rates would have
the opposite effect for the same periods. The Company's Asset and Liability
Management Policy states that the cumulative ratio of rate-sensitive assets
("RSA") to rate-sensitive liabilities "(RSL") for the 12-month period shall fall
within the range of 0.75-1.25. As of December 31, 2005, the Company's RSA/RSL
was 0.82, which was within the established guidelines.
In addition to managing interest sensitivity and liquidity through the use of
gap reports, the Company has provided for emergency liquidity situations with
informal agreements with correspondent banks, which permit the Company to borrow
federal funds on an unsecured basis. The Company has a $15.000 million unsecured
line of credit with a correspondent bank, of which $13.500 million was available
at December 31, 2005. Additionally, the Company has sufficient borrowing
capacity to permit it to borrow additional funds from the Federal Home Loan Bank
on a secured basis.
The Company uses financial forecasting/budgeting/reporting software packages to
perform interest rate sensitivity analysis for all product categories. The
Company's primary focus of its analysis is on the effect of interest rate
increases and decreases on net interest income. Management believes that this
analysis reflects the potential effects on current earnings of interest rate
changes. Call criteria and prepayment assumptions are taken into consideration
for investments in debt and equity securities. All of the Company's financial
instruments are analyzed by a software database, which includes each of the
different product categories, which are tied to key rates such as prime,
Treasury Bills, or the federal funds rate. The relationships of each of the
different products to the key rate that the product is tied to is proportional.
The software reprices the products based on current offering rates. The software
performs interest rate sensitivity analysis by performing rate shocks of plus or
minus 200 basis points in 100 basis point increments.
The following table shows projected results at December 31, 2005 and December
31, 2004 of the impact on net interest income from an immediate change in
interest rates. The results are shown as a percentage change in net interest
income over the next twelve months.
+200 +100 -100 -200
December 31, 2005 ...................... 8.9% 4.7% (4.7%) (9.4%)
December 31, 2004 ...................... 10.3% 5.1% (5.1%) (10.3%)
The foregoing computations are based on numerous assumptions, including relative
levels of market interest rates, prepayments and deposit mix. The computed
estimates should not be relied upon as a projection of actual results. Despite
the limitations on preciseness inherent in these computations, management
believes that the information provided is reasonably indicative of the effect of
changes in interest rate levels on the net earning capacity of the Company's
current mix of interest earning assets and interest bearing liabilities.
Management continues to use the results of these computations, along with the
results of its computer model projections, in order to maximize current earnings
while positioning the Company to minimize the effect of a prolonged shift in
interest rates that would adversely affect future results of operations.
At the present time, the most significant market risk affecting the Company is
interest rate risk. Other market risks such as foreign currency exchange risk
and commodity price risk do not occur in the normal business of the Company. The
Company also is not currently using trading activities or derivative instruments
to control interest rate risk.
37
Emerging Accounting Standards
In December 2004, the Financial Accounting Standards Board published Statement
No. 123 (revised 2004), Share-Based Payment ("FAS 123(R)"). FAS 123(R) requires
that the compensation cost relating to share-based payment transactions,
including grants of employee stock options and shares under employee stock
purchase plans, be recognized in financial statements. That cost will be
measured based on the fair value of the equity or liability instruments issued.
FAS 123(R) permits entities to use any option-pricing model that meets the fair
value objectives in the Statement. The Statement was originally effective at the
beginning of the Company's third quarter in 2005, however, in April 2005 the
adoption of a new rule, by the Securities and Exchange Commission, changed the
dates for compliance with this standard. The Company will now be required to
implement Statement No. 123(R) beginning January 1, 2006.
As of the effective date, the Company will have the option of applying the
Statement using the modified prospective application or a modified retrospective
application. Under the prospective method, compensation cost would be recognized
for (1) all awards granted after the required effective date and for awards
modified, cancelled or repurchased after that date and (2) the portion of prior
awards for which the requisite service has not yet been rendered, based on the
grant-date fair value of those awards calculated for pro forma disclosures under
SFAS 123. Under the retrospective application method, compensation cost would be
recognized as in (1) above and (2) for prior periods would be restated
consistent with the pro forma disclosures required for those periods by SFAS
123. The valuation model and amortization assumption we have used will continue
to be used.
The impact of this Statement on the Company after the effective date and beyond
will depend upon various factors, among them being the future compensation
strategy. The pro forma compensation costs presented in Note 1 in the Notes to
Consolidated Financial Statements and in prior filings for the Company have been
calculated using the Black-Scholes option pricing model and may not be
indicative of amounts which should be expected in future periods.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections, which provides guidance on the accounting for and reporting of
accounting changes and error corrections. It establishes, unless impracticable,
retrospective application as the required method for reporting a change in
accounting principle in the absence of explicit transition requirements specific
to the newly adopted accounting principle. The reporting of a correction of an
error by restating previously issued financial statements is also addressed by
this statement. SFAS No. 154 is effective for accounting changes and corrections
of errors made in fiscal years beginning after December 15, 2005. Management
does not believe that this statement will have a material impact on the
Company's financial statements.
On February 8, 2006, President Bush signed the Federal Deposit Insurance Reform
Act of 2005 ("FDIRA") into law as part of the Deficit Reduction Act of 2005 and
on February 15, 2006, President Bush signed into law the technical and
conforming amendments designed to implement FDIRA. FDIRA provides for
legislative reforms to modernize the federal deposit insurance system.
Among other things, FDIRA: (i) merges the BIF and the SAIF of the FDIC into a
new Deposit Insurance Fund (the "DIF"); (ii) allows the FDIC, after March 31,
2010, to increase deposit insurance coverage by an adjustment for inflation and
requires the FDIC's Board of Directors, not later than April 1, 2010 and every
five years thereafter, to consider whether such an increase is warranted; (iii)
increases the deposit insurance limit for certain employee benefit plan deposits
from $100,000 to $250,000, subject to adjustments for inflation after March 31,
2010, and provides for pass-through insurance coverage for such deposits; (iv)
increases the deposit insurance limit for certain retirement account deposits
from $100,000 to $250,000, subject to adjustments for inflation after March 31,
2010; (v) allows the FDIC's Board of Directors to set deposit insurance premium
assessments in any amount the Board of Directors deems necessary or appropriate,
after taking into account various factors specified in FDIRA; (vi) replaces the
fixed designated reserve ratio of 1.25% with a reserve ratio range of
1.15%-1.50%, with the specific reserve ratio to be determined annually by the
FDIC by regulation; (vii) permits the FDIC to revise the risk-based assessment
system by regulation; (viii) requires the FDIC, at the end of any year in which
the reserve ratio of the DIF exceeds 1.5% of estimated insured deposits, to
declare a dividend payable to insured depository institutions in an amount equal
to 100% of the amount held by the DIF in excess of the amount necessary to
maintain the DIF's reserve ratio at 1.5% of estimated insured deposits or to
declare a dividend equal to 50% of the amount in excess of the amount necessary
to maintain the reserve ratio at 1.35% if the reserve ratio is between
1.35%-1.50% of estimated insured deposits; and (ix) provides a one-time credit
based upon the assessment base of the institution on December 31, 1996 to each
insured depository institution that was in existence as of December 31, 1996 and
paid a deposit insurance assessment prior to that date (or a successor to any
such institution).
38
The merger of the BIF and SAIF takes effect no later than July 1, 2006, while
the remaining provisions are not effective until the FDIC issues final
regulations. FDIRA requires the FDIC to issue final regulations no later than
270 days after enactment: (i) designating a reserve ratio; (ii) implementing
increases in deposit insurance coverage; (iii) implementing the dividend
requirement; (iv) implementing the one-time assessment credit; and (v) providing
for assessments in accordance with FDIRA.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
This document (including information incorporated by reference) contains, and
future oral and written statements of the Company and its management may
contain, forward-looking statements, within the meaning of such term in the
Private Securities Litigation Reform Act of 1995, with respect to the financial
condition, results of operations, plans, objectives, future performance and
business of the Company. Forward-looking statements, which may be based upon
beliefs, expectations and assumptions of the Company's management and on
information currently available to management, are generally identifiable by the
use of words such as "believe," "expect," "anticipate," "plan," "intend,"
"estimate," "may," "will," "would," "could," "should" or other similar
expressions. Additionally, all statements in this document, including
forward-looking statements, speak only as of the date they are made, and the
Company undertakes no obligation to update any statement in light of new
information or future events.
The Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. The factors, which could have a material
adverse effect on the operations and future prospects of the Company and its
subsidiaries are detailed in the "Risk Factors" section included under Item 1A.
of Part I of this Form 10-K. In addition to the risk factors described in that
section, there are other factors that may impact any public company, including
ours, which could have a material adverse effect on the operations and future
prospects of the Company and its subsidiaries. These additional factors include,
but are not limited to, the following:
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 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, the Financial Accounting
Standards Board, the Securities and Exchange Commission and the Public
Company Accounting Oversight 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.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
See the "Interest Rate Sensitivity" section contained in Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Item 8. Financial Statements and Supplementary Data
The financial statements begin on page 40.
39
MAIN STREET TRUST, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2005, 2004 and 2003
40
MAIN STREET TRUST, INC.
AND SUBSIDIARIES
TABLE OF CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM .................. 42
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets ............................................. 43
Consolidated Statements of Income ....................................... 44
Consolidated Statements of Changes in Shareholders' Equity .............. 45
Consolidated Statements of Cash Flows ................................... 46-47
Notes to Consolidated Financial Statements .............................. 48-70
41
McGladrey & Pullen, LLP
Certified Public Accountants
Report of Independent Registered Public Accounting Firm
The Board of Directors
Main Street Trust, Inc.
Champaign, Illinois
We have audited the accompanying consolidated balance sheets of Main Street
Trust, Inc. and subsidiaries as of December 31, 2005 and 2004, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2005. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Main
Street Trust, Inc. and subsidiaries as of December 31, 2005 and 2004, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2005, in conformity with accounting principles
generally accepted in the United States of America.
We also have audited, in accordance with standards of the Public Accounting
Oversight Board (United States), the effectiveness of Main Street Trust, Inc.
and subsidiaries' internal control over financial reporting as of December 31,
2005 based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) and our report dated March 7, 2006 expressed an unqualified opinion on
management's assessment of the effectiveness of Main Street Trust, Inc. and
subsidiaries' internal control over financial reporting and an unqualified
opinion on the effectiveness of Main Street Trust, Inc. and subsidiaries'
internal control over financial reporting.
/s/ McGladrey & Pullen, LLP
Champaign, Illinois
March 7, 2006
McGladrey & Pullen, LLP is a member firm of RSM International -
an affiliation of separate and independent legal rights
42
MAIN STREET TRUST, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2005 and 2004
(in thousands, except share data)
2005 2004
--------------------------
Assets
Cash and due from banks .......................................... $ 52,007 $ 33,133
Federal funds sold and interest bearing deposits ................. 42,059 31,795
--------------------------
Cash and cash equivalents ................................... 94,066 64,928
--------------------------
Investments in debt and equity securities:
Available-for-sale, at fair value .............................. 343,087 269,580
Held-to-maturity, at cost (fair value of $75,665 and $81,099
at December 31, 2005 and 2004, respectively) ................. 76,542 81,164
Non-marketable equity securities ............................... 24,994 7,982
--------------------------
Total investments in debt and equity securities ............ 444,623 358,726
--------------------------
Loans, net of allowance for loan losses of $13,472 and $9,650
at December 31, 2005 and 2004, respectively .................... 1,002,927 761,227
Mortgage loans held for sale ..................................... 1,661 1,005
Premises and equipment ........................................... 23,047 17,087
Goodwill ......................................................... 20,736 --
Core deposit intangibles ......................................... 4,569 --
Accrued interest receivable ...................................... 8,461 6,570
Other assets ..................................................... 25,047 18,575
--------------------------
Total assets ................................................ $ 1,625,137 $ 1,228,118
===========================
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Non-interest bearing ......................................... $ 240,823 $ 172,908
Interest bearing ............................................. 1,035,149 801,669
--------------------------
Total deposits .............................................. 1,275,972 974,577
Federal funds purchased, repurchase agreements and notes payable 118,452 96,900
Federal Home Loan Bank advances and other borrowings ........... 67,386 29,882
Accrued interest payable ....................................... 4,657 2,601
Other liabilities .............................................. 14,901 10,183
--------------------------
Total liabilities ........................................... 1,481,368 1,114,143
--------------------------
Commitments and Contingencies (Notes 17 and 18)
Shareholders' equity:
Preferred stock, no par value; 2,000,000 shares authorized .... -- --
Common stock, $0.01 par value; 15,000,000 shares authorized;
11,219,319 shares issued ..................................... 112 112
Paid in capital ................................................ 55,189 55,189
Retained earnings .............................................. 120,238 108,071
Accumulated other comprehensive loss ........................... (1,597) (218)
--------------------------
173,942 163,154
Less: treasury stock, at cost, 1,072,644 and 1,770,329 shares
at December 31, 2005 and 2004, respectively ................. (30,173) (49,179)
--------------------------
Total shareholders' equity .................................. 143,769 113,975
--------------------------
Total liabilities and shareholders' equity .................. $ 1,625,137 $ 1,228,118
==========================
See accompanying notes to consolidated financial statements.
43
MAIN STREET TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended December 31, 2005, 2004 and 2003
(in thousands, except share and per share data)
2005 2004 2003
-------------------------------------------
Interest income:
Loans and fees on loans ........................................ $ 60,988 $ 41,568 $ 41,467
Investments in debt and equity securities
Taxable ....................................................... 12,465 10,793 11,502
Tax-exempt .................................................... 1,516 1,844 2,270
Federal funds sold and interest bearing deposits ............... 2,023 600 447
--------------------------------------------
Total interest income ....................................... 76,992 54,805 55,686
Interest expense:
Deposits ....................................................... 21,589 13,972 14,070
Federal funds purchased, repurchase agreements and notes payable 3,097 1,271 1,094
Federal Home Loan Bank advances and other borrowings ........... 2,793 1,609 1,559
--------------------------------------------
Total interest expense ...................................... 27,479 16,852 16,723
--------------------------------------------
Net interest income ......................................... 49,513 37,953 38,963
Provision for loan losses ........................................ 1,530 1,100 1,470
--------------------------------------------
Net interest income after provision for loan losses ......... 47,983 36,853 37,493
Non-interest income:
Remittance processing .......................................... 6,748 7,201 7,211
Trust and brokerage fees ....................................... 7,599 6,492 5,783
Service charges on deposit accounts ............................ 2,923 2,419 2,545
Securities transactions, net ................................... (586) 133 (12)
Gain on sales of mortgage loans, net ........................... 886 997 2,536
Other .......................................................... 2,907 2,605 2,231
--------------------------------------------
Total non-interest income ................................... 20,477 19,847 20,294
Non-interest expense:
Salaries and employee benefits ................................. 23,099 18,889 18,245
Occupancy ...................................................... 3,074 2,669 2,489
Equipment ...................................................... 2,592 2,512 2,389
Data processing ................................................ 2,416 2,283 2,108
Office supplies ................................................ 1,245 1,247 1,266
Service charges from correspondent banks ....................... 513 781 931
Amortization of core deposit intangibles ....................... 653 -- --
Other .......................................................... 6,187 5,498 4,913
--------------------------------------------
Total non-interest expense .................................. 39,779 33,879 32,341
Income before income taxes .................................. 28,681 22,821 25,446
Income taxes ..................................................... 10,373 8,043 8,841
--------------------------------------------
Net income .................................................. $ 18,308 $ 14,778 $ 16,605
============================================
Per share data:
Basic earnings per share ....................................... $ 1.82 $ 1.56 $ 1.62
Weighted average shares of common stock outstanding ............ 10,060,032 9,481,034 10,242,929
Diluted earnings per share ..................................... $ 1.80 $ 1.54 $ 1.60
Weighted average shares of common stock and dilutive potential
common shares outstanding .................................... 10,157,409 9,594,148 10,359,836
Dividends declared per share ................................... $ 0.89 $ 0.85 $ 0.76
See accompanying notes to consolidated financial statements.
44
MAIN STREET TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
Years Ended December 31, 2005, 2004 and 2003
(in thousands, except share and per share data)
Accumulated
Other
Comprehensive
Common Stock Paid-in Retained Income Treasury Stock
Shares Amount Capital Earnings (Loss) Shares Amount Total
------------------------------------------------------------------------------------
Balance, December 31, 2002 ................ 11,219,319 $ 112 $ 55,337 $ 92,853 $ 3,776 755,047 $(17,608) $ 134,470
Comprehensive Income:
Net income ............................ -- -- -- 16,605 -- -- -- 16,605
Net change in unrealized
gain (loss) on securities
available-for-sale, net of
taxes of ($1,228) ................... -- -- -- -- (1,842) -- -- (1,842)
Reclassification adjustment,
net of tax of $5 .................... -- -- -- -- 7 -- -- 7
----------
Comprehensive income .................. 14,770
----------
Stock appreciation rights ............... -- -- (66) -- -- -- -- (66)
Cash dividends declared ($0.76 per share) -- -- -- (7,567) -- -- -- (7,567)
Treasury stock transactions, net ........ -- -- -- (370) -- 963,903 (29,787) (30,157)
--------------------------------------------------------------------------------------
Balance, December 31, 2003 ................ 11,219,319 112 55,271 101,521 1,941 1,718,950 (47,395) 111,450
Comprehensive Income:
Net income ............................ -- -- -- 14,778 -- -- -- 14,778
Net change in unrealized
gain (loss) on securities
available-for-sale, net of
taxes of ($1,386) ................... -- -- -- -- (2,079) -- -- (2,079)
Reclassification adjustment,
net of tax of ($53) ................. -- -- -- -- (80) -- -- (80)
----------
Comprehensive income .................. 12,619
----------
Stock appreciation rights ............... -- -- (82) -- -- -- -- (82)
Cash dividends declared ($0.85 per share) -- -- -- (8,056) -- -- -- (8,056)
Treasury stock transactions, net ........ -- -- -- (172) -- 51,379 (1,784) (1,956)
--------------------------------------------------------------------------------------
Balance, December 31, 2004 ................ 11,219,319 112 55,189 108,071 (218) 1,770,329 (49,179) 113,975
Comprehensive Income:
Net income ............................ -- -- -- 18,308 -- -- -- 18,308
Net change in unrealized
gain (loss) on securities
available-for-sale, net of
taxes of ($1,154) ................... -- -- -- -- (1,731) -- -- (1,731)
Reclassification adjustment,
net of tax of $234 .................. -- -- -- -- 352 -- -- 352
----------
Comprehensive income .................. 16,929
----------
Cash dividends declared ($0.89 per share) -- -- -- (8,926) -- -- -- (8,926)
Acquisition of Citizens First
Financial Corp. ....................... -- -- -- 2,888 -- (896,899) 24,916 27,804
Treasury stock transactions, net ........ -- -- -- (103) -- 199,214 (5,910) (6,013)
--------------------------------------------------------------------------------------
Balance, December 31, 2005 ................ 11,219,319 $ 112 $ 55,189 $120,238 $ (1,597) 1,072,644 $(30,173) $ 143,769
======================================================================================
See accompanying notes to consolidated financial statements.
45
MAIN STREET TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 2005, 2004 and 2003
(in thousands)
2005 2004 2003
-----------------------------------
Cash flows from operating activities:
Net income .......................................................... $ 18,308 $ 14,778 $ 16,605
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ..................................... 2,533 2,544 2,453
Amortization of bond premiums, net of accretion ................... 1,082 2,386 2,249
Amortization of core deposit intangibles .......................... 653 -- --
Provision for loan losses ......................................... 1,530 1,100 1,470
Deferred income taxes ............................................. (13) 208 (637)
Securities transactions, net ...................................... 586 (133) 12
Federal Home Loan Bank stock dividend ............................. (797) (250) (296)
Undistributed earnings from non-marketable equity securities ...... (1,555) (304) (172)
Gain on sales of mortgage loans, net .............................. (886) (997) (2,536)
Loss (gain) on disposal of premises and equipment ................. 8 (236) (2)
Proceeds from sales of mortgage loans originated for sale ......... 65,334 76,864 209,192
Mortgage loans originated for sale ................................ (64,822) (76,240) (204,316)
Other, net ........................................................ 2,527 503 (3,281)
-----------------------------------
Net cash provided by operating activities ........................ 24,488 20,223 20,741
-----------------------------------
Cash flows from investing activities:
Net increase in loans ............................................... (15,264) (96,108) (3,647)
Proceeds from maturities and calls of investments in debt securities:
Held-to-maturity .................................................. 9,549 20,793 15,217
Available-for-sale ................................................ 194,110 192,975 163,034
Proceeds from sales of investments in debt and equity securities:
Available-for-sale ................................................ 56,245 3,223 11,085
Purchases of investments in debt and equity securities:
Held-to-maturity .................................................. (17,377) (49,029) (63,526)
Available-for-sale ................................................ (317,443) (219,215) (222,498)
Non-marketable equity securities .................................. (685) (425) (830)
Principal paydowns from mortgage-backed securities:
Held-to-maturity .................................................. 11,752 42,967 18,923
Available-for-sale ................................................ 14,777 14,660 18,738
Return of principal on non-marketable equity securities ............. 1,800 522 490
Proceeds from redemption of non-marketable equity securities ........ -- 231 --
Purchases of premises and equipment ................................. (2,516) (2,396) (1,749)
Proceeds from disposal of premises and equipment .................... 8 623 25
Acquisition of Citizens First Financial Corporation, net
of cash and cash equivalents acquired ............................. (6,385) -- --
-----------------------------------
Net cash (used in) investing activities .......................... (71,429) (91,179) (64,738)
-----------------------------------
Cash flows from financing activities:
Net increase in deposits ............................................ 69,306 76,105 29,886
Net increase (decrease) in federal funds purchased,
repurchase agreements, and notes payable .......................... 21,552 (6,098) 22,347
Advances from Federal Home Loan Bank advances and other borrowings .. 39,000 -- 2,268
Payments on Federal Home Loan Bank advances and other borrowings .... (39,095) (98) (94)
Cash dividends paid ................................................. (8,671) (7,972) (7,142)
Treasury stock transactions, net .................................... (6,013) (1,956) (30,111)
-----------------------------------
Net cash provided by financing activities ........................ 76,079 59,981 17,154
-----------------------------------
Net increase (decrease) in cash and cash equivalents ............. 29,138 (10,975) (26,843)
Cash and cash equivalents at beginning of year ........................ 64,928 75,903 102,746
-----------------------------------
Cash and cash equivalents at end of period ............................ $ 94,066 $ 64,928 $ 75,903
===================================
See accompanying notes to consolidated financial statements.
46
MAIN STREET TRUST, INC.
AND SUBSIDIARIES
Supplemental Disclosure of Cash Flow Information
Years Ended December 31, 2005, 2004 and 2003
(in thousands)
2005 2004 2003
-----------------------------------
Cash paid during the year for:
Interest ............................................. $ 25,616 $ 15,920 $ 17,306
Income Taxes ......................................... 8,931 6,780 8,937
Real estate acquired through or in lieu of foreclosure 148 40 60
Dividends declared not paid ............................ 2,334 2,079 1,995
Acquisition of Citizens First Financial Corporation:
Stock issued ......................................... 27,804
Cash paid ............................................ 28,416
Capitalized expenses ................................. 621
---------
Total cost of acquisition ......................... 56,841
=========
Assets acquired:
Cash and due from banks .............................. 6,022
Federal funds sold and interest bearing deposits ..... 16,630
---------
Cash and cash equivalents ......................... 22,652
Investments in debt and equity securities:
Available-for-sale, at fair value .................... 23,865
Non-marketable equity securities ..................... 16,374
Loans, net of allowance for loan losses ................ 228,114
Mortgage loans held for sale ........................... 282
Premises and equipment ................................. 5,993
Accrued interest receivable ............................ 1,571
Goodwill ............................................... 20,736
Core deposit intangibles ............................... 5,222
Other assets ........................................... 6,174
Liabilities assumed:
Deposits ............................................... (232,089)
Federal Home Loan Bank advances and other borrowings ... (37,599)
Accrued interest payable ............................... (193)
Other liabilities ...................................... (4,261)
---------
Net assets acquired .................................... 56,841
=========
See accompanying notes to consolidated financial statements
47
MAIN STREET TRUST, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
(a) Nature of Operations
Through Main Street Bank & Trust (the "Bank"), Main Street Trust, Inc.
(the "Company") provides a full range of banking services to individual
and corporate customers located within Champaign, Decatur, Peoria,
Bloomington, and Shelbyville, Illinois, and the surrounding
communities. In addition, the Company provides retail payment
processing services through FirsTech, Inc. The subsidiaries are subject
to competition from other financial institutions and nonfinancial
institutions providing financial products and similar payment
processing services. Additionally, the Company is subject to the
regulations of certain regulatory agencies and undergo periodic
examinations by those regulatory agencies.
(b) Use of Estimates
The consolidated financial statements of the company have been prepared
in conformity with accounting principles generally accepted in the
United States of America and conform to predominant practices within
the banking industry. The preparation of the consolidated financial
statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates
and assumptions, including the determination of the allowance for loan
losses, impairment of goodwill and the valuation of real estate
acquired in connection with foreclosure or in satisfaction of loans,
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(c) Principles of Consolidation
The consolidated financial statements include the accounts of Main
Street Trust, Inc. and its wholly owned subsidiaries, Main Street Bank
& Trust and FirsTech, Inc., a retail payment processing company. On
April 1, 2005, the Company purchased Citizens First Financial Corp.,
which was the parent company of Citizens Savings Bank, based in
Bloomington, Illinois. At the close of business on October 7, 2005,
Citizens Savings Bank was merged into Main Street Bank & Trust. During
2004, the Company's subsidiary banks, BankIllinois and The First
National Bank of Decatur, were merged to form Main Street Bank & Trust.
Significant intercompany accounts and transactions have been eliminated
in consolidation.
Property held in fiduciary or agency capacities for its customers is
not included in the accompanying consolidated balance sheets, since
such items are not assets of the Company.
(d) Segment Information
The Company currently operates in two industry segments. The primary
business involves providing banking services to central Illinois. The
Bank offers 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 department that offer a wide range of
services such as investment management, acting as trustee, serving as
guardian, executor or agent, miscellaneous consulting, full service
brokerage services offered through a third party provider, farm realty;
and purchases of installment obligations from retailers, primarily
without recourse. The other industry segment involves retail payment
processing. FirsTech provides the following services to electric, water
and gas utilities, telecommunication companies, cable television firms
and charitable organizations: retail lockbox processing of payments
delivered by mail on behalf of the biller; processing of payments
delivered by customers to pay agents such as grocery stores,
convenience stores and currency exchanges; and concentration of
payments delivered by the Automated Clearing House network, money
management software such as Quicken and through networks such as Visa
e-Pay and MasterCard RPS.
48
Company information is provided for informational purposes only, since
it is not considered a separate segment for reporting purposes.
Effective January 1, 2003, certain administrative, audit, compliance,
accounting, finance, property management, human resources, courier,
information systems and other support services previously included in
the budgets of the Company's subsidiary banks were moved to the
Company. During this process, approximately 80 full time equivalent
employees were moved from the banks to the Company. The net expenses of
these functions were allocated to the subsidiaries by charging a
monthly management fee. Effective January 1, 2005, these functions were
moved to the Banking Services Segment. During this process,
approximately 77 full time equivalent employees were moved from the
Company to Main Street Bank & Trust. The net expenses of these
functions were allocated to the Company and FirsTech by charging a
monthly management fee.
The following is a summary of selected data for the various business
segments as of and for the year ending December 31 (in thousands):
Banking Remittance
Services Services Company Eliminations Total
------------------------------------------------------------------------------------------------
2005
Total interest income ...... $ 75,087 $ 14 $ 1,935 $ (44) $ 76,992
Total interest expense ..... 27,180 -- 343 (44) 27,479
Provision for loan losses .. 1,530 -- -- -- 1,530
Total non-interest income .. 15,238 6,899 (592) (1,068) 20,477
Total non-interest expense . 35,199 4,281 1,367 (1,068) 39,779
Income before income tax ... 26,416 2,632 (367) -- 28,681
Income tax expense ......... 9,428 1,107 (162) -- 10,373
Net income ................. 16,988 1,525 (205) -- 18,308
Goodwill ................... 20,736 -- -- -- 20,736
Total assets ............... 1,610,026 3,365 153,974 (142,228) 1,625,137
Depreciation and amortization 2,126 354 53 -- 2,533
2004
Total interest income ...... $ 54,383 $ 23 $ 497 $ (98) $ 54,805
Total interest expense ..... 16,876 -- 74 (98) 16,852
Provision for loan losses .. 1,100 -- -- -- 1,100
Total non-interest income .. 12,779 7,283 4,697 (4,912) 19,847
Total non-interest expense . 27,120 5,012 6,659 (4,912) 33,879
Income before income tax ... 22,066 2,294 (1,539) -- 22,821
Income tax expense ......... 7,709 963 (629) -- 8,043
Net income ................. 14,357 1,331 (910) -- 14,778
Total assets ............... 1,209,207 3,936 121,348 (106,373) 1,228,118
Depreciation and amortization 1,535 623 386 -- 2,544
2003
Total interest income ...... $ 55,288 $ 46 $ 466 $ (114) $ 55,686
Total interest expense ..... 16,816 -- 21 (114) 16,723
Provision for loan losses .. 1,470 -- -- -- 1,470
Total non-interest income .. 13,314 7,294 4,653 (4,967) 20,294
Total non-interest expense . 26,486 5,014 5,808 (4,967) 32,341
Income before income tax ... 23,830 2,326 (710) -- 25,446
Income tax expense ......... 8,185 942 (286) -- 8,841
Net income ................. 15,645 1,384 (424) -- 16,605
Total assets ............... 1,136,418 3,740 118,241 (104,225) 1,154,174
Depreciation and amortization 1,542 429 482 -- 2,453
(e) Comprehensive Income
Accounting principles generally require that recognized revenue,
expenses, gains, and losses be included in net income. Although certain
changes in assets and liabilities, such as unrealized gains and losses
on available-for-sale securities, are reported as a separate component
of the equity section of the balance sheet, such items, along with net
income, are components of comprehensive income.
(f) Investments in Debt and Equity Securities
Debt securities classified as held-to-maturity are those securities
which the Company has the ability and intent to hold until maturity.
These securities are carried at amortized cost, in which the
amortization of premiums and accretion of discounts, which are
recognized as adjustments to interest income, are recorded using
methods which approximate the interest method. These methods consider
the timing and amount of prepayments of underlying mortgages in
estimating future cash flows on individual mortgage-related securities.
Unrealized holding gains and losses for held-to-maturity securities are
excluded from earnings and shareholders' equity.
49
Debt and equity securities classified as available-for-sale are those
securities that the Company intends to hold for an indefinite period of
time but not necessarily to maturity. Any decision to sell a security
classified as available-for-sale is based on various factors, including
significant movements in interest rates, changes in the maturity mix of
the Company's assets and liabilities, liquidity needs, regulatory
capital considerations, and other similar factors. Securities
available-for-sale are carried at fair value. The difference between
fair value and cost, adjusted for amortization of premium and accretion
of discounts, results in an unrealized gain or loss. Unrealized gains
or losses are reported as accumulated other comprehensive income
(loss), net of the related deferred tax effect. Gains or losses from
the sale of securities are determined using the specific identification
method. Premiums and discounts are recognized in interest income using
methods, which approximate the interest method over their amortization
periods. Amortization period is defined as call date if the security
was purchased at a premium or maturity date if purchased at a discount.
Declines in the fair value of held-to-maturity and available-for-sale
securities below their cost that are deemed to be other than temporary
are reflected in earnings as realized losses. In estimating
other-than-temporary impairment losses, management considers (1) the
length of time and the extent to which the fair value has been less
than cost, (2) the financial condition and near-term prospects of the
issuer, and (3) the intent and ability of the Company to retain its
investment in the issuer for a period of time sufficient to allow for
any anticipated recovery in fair value.
Effective for the period ended December 31, 2005, the Company modified
its policy for evaluating investments for other-than-temporary
impairment. Under its new policy, investments, other than debt security
investments where the impairment is deemed to be due solely to interest
rate movements, are assumed to be impaired and the impairment
recognized through earnings no later than twelve months from the date
the security was first impaired, unless there is "overwhelming evidence
to the contrary." Under the policy, "overwhelming evidence to the
contrary" is a rare instance, but might include, among other things, an
announced sale soon after a reporting period where the price would
cause an impairment to reverse. Further, under certain circumstances,
including a bankruptcy, catastrophic event or other circumstances which
cause the Company to determine, after analyzing the specific facts,
that the decline in the fair value is other than temporary, the Company
would recognize an other than temporary impairment write-down upon such
occurrence or determination, and not wait twelve months from the time
of the impairment.
Non-marketable equity securities include other investments which are
carried at fair value as well as the Bank's required investment in the
capital stock of the Federal Home Loan Bank which is carried at cost
which approximates fair value.
(g) Loans
Loans are stated at the principal amount outstanding, net of the
allowance for loan losses. Interest is credited to income as earned,
based upon the principal amount outstanding.
The accrual of interest on loans is discontinued when, in the opinion
of management, the borrower is unable to meet payments as they become
due. Interest accrued in the current year is reversed against interest
income, and prior years' interest is charged to the allowance for loan
losses. Interest income on impaired loans is recognized to the extent
interest payments are received and the principal is considered fully
collectible.
Mortgage loans held for sale are carried at the lower of aggregate cost
or estimated market value. Gains or losses on sales of loans held for
sale are computed using the specific-identification method and are
reflected in income at the time of sale.
Loan origination fees and certain direct origination costs are being
amortized as an adjustment of the yield over the contractual life of
the related loan, adjusted for prepayments, using the interest method.
(h) Mortgage Servicing Rights
The fair market value of servicing rights on mortgage loans that are
sold with servicing retained is capitalized. The capitalized servicing
rights are amortized against income based on the estimated lives of the
loans. Capitalized servicing rights are evaluated for impairment based
on the fair value of the servicing rights and any impairment is
reflected in income.
50
(i) Allowance for Loan Losses
The allowance for loan losses is increased by provisions charged to
operations and is reduced by loan charge-offs less recoveries.
Management utilizes an approach, which provides for general and
specific valuation allowances, that is based on current economic
conditions, past losses, collection experience, risk characteristics of
the portfolio, assessment of collateral values by obtaining independent
appraisals for significant properties, and such other factors which, in
management's judgment, deserve current recognition in estimating loan
losses, to determine the appropriate level of the allowance for loan
losses.
The allowance for loan losses related to impaired loans that are
identified for evaluation is based on discounted cash flow using the
loan's initial effective interest rate or the fair value, less selling
costs, of the collateral for collateral dependent loans.
Loans are categorized as "impaired" when, based on current information
or events, it is probable that the Company will be unable to collect
all amounts due, including principal and interest, in accordance with
the contractual terms of the loan agreement. The Company reviews all
non-accrual and substantially delinquent loans, as well as problem
loans identified by management, for impairment as defined above. A
specific reserve amount will be established for impaired loans in which
the present value of the expected cash flows to be generated is less
than the amount of the loan recorded on the Company's books. As an
alternative to discounting, the Company may use the "fair value" of any
collateral supporting a collateral-dependent loan in reviewing the
necessity for establishing a specific loan loss reserve amount.
Specific reserves will be established for accounts having a collateral
deficiency estimated to be $50,000 or more. The Company's general
reserve is maintained at an adequate level to cover accounts having a
collateral deficiency of less than $50,000. Loans evaluated as groups
or homogeneous pools of loans will be excluded from this analysis.
The Company utilizes its data processing system to identify loan
payments not made by their contractual due date and calculate the
number of days each loan exceeds the contractual due dates. The accrual
of interest on any loan is discontinued when, in the opinion of
management, there is reasonable doubt as to the collectibility of
interest or principal.
Management believes the allowance for loan losses is adequate to absorb
probable credit losses inherent in the loan portfolio. While management
uses available information to recognize loan losses, future additions
to the allowance for loan losses may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the
adequacy of the allowance for loan losses. Such agencies may require
the Company to recognize additions to the allowance for loan losses
based on their judgments of information available to them at the time
of their examination.
(j) Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation and amortization applicable to furniture
and equipment and buildings and leasehold improvements is charged to
the related occupancy or equipment expense using straight-line and
accelerated methods over the estimated useful lives of the assets.
Estimated lives are 2 to 39 years for buildings and leasehold
improvements and 1 to 10 years for furniture and equipment.
(k) Other Real Estate
Other real estate, included in other assets in the accompanying
consolidated balance sheets, is initially recorded at fair value, if it
will be held and used, or at its fair value less costs to sell if it
will be disposed of. If, subsequent to foreclosure, the fair value is
less than the carrying amount, the carrying value is reduced through a
charge to income. Expenses incurred in maintaining the properties are
charged to operations. The Company had $188,000 of other real estate at
December 31, 2005 and none at December 31, 2004.
(l) Income Taxes
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates in effect for the year in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
51
(m) Earnings Per Share
Basic earnings per share is computed by dividing net income by the
weighted average number of commo. stock shares outstanding. Diluted
earnings per share is computed by dividing net income by the weighted
average number of common stock and dilutive potential common shares
outstanding. Options to purchase shares of the Company's common stock
are the only dilutive potential common shares. The weighted average
number of dilutive potential common shares is calculated using the
treasury stock method.
Earnings per share has been computed as follows:
2005 2004 2003
---------------------------------------
Net Income ............................................ $18,308,000 $14,778,000 $16,605,000
Shares:
Weighted average common shares outstanding .......... 10,060,032 9,481,034 10,242,929
Dilutive effect of outstanding options, as determined
by the application of the treasury stock method ... 97,377 113,114 116,907
---------------------------------------
Weighted average common shares outstanding,
as adjusted ....................................... 10,157,409 9,594,148 10,359,836
=======================================
Basic earnings per share .............................. $ 1.82 $ 1.56 $ 1.62
=======================================
Diluted earnings per share ............................ $ 1.80 $ 1.54 $ 1.60
=======================================
(n) Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and
cash equivalents include cash and due from banks and federal funds sold
and interest bearing deposits. Generally, federal funds are sold for
one-day periods. Cash flows from loans, deposits, and federal funds
purchased, repurchase agreements and notes payable are reported net.
(o) Emerging Accounting Standards
In December 2004, the Financial Accounting Standards Board ("FASB")
published FASB Statement No. 123 (revised 2004), "Share-Based Payment"
("FAS 123(R)" or the "Statement"). FAS 123(R) requires that the
compensation cost relating to share-based payment transactions,
including grants of employee stock options, be recognized in the
financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. FAS 123(R) permits
entities to use any option-pricing model that meets the fair value
objective in the Statement. The Statement was originally effective at
the beginning of the Company's third quarter in 2005, however, in April
2005 the adoption of a new rule, by the Securities and Exchange
Commission, changed the dates for compliance with this standard. The
Company will now be required to implement Statement No. 123(R)
beginning January 1, 2006.
As of the effective date, the Company will have the option of applying
the Statement using the modified prospective application or a modified
retrospective application. Under the prospective method, compensation
cost would be recognized for (1) all awards granted after the required
effective date and for awards modified, cancelled or repurchased after
that date and (2) the portion of prior awards for which the requisite
service has not yet been rendered, based on the grant-date fair value
of those awards calculated for pro forma disclosures under SFAS 123.
Under the retrospective application method, compensation cost would be
recognized as in (1) above and (2) for prior periods would be restated
consistent with the pro forma disclosures required for those periods by
SFAS 123. The valuation model and amortization assumption we have used
will continue to be used.
The impact of this Statement on the Company after the effective date
and beyond will depend upon various factors, among them being the
future compensation strategy. The SFAS 123 pro forma compensation costs
presented (see Note 1(p) below) to the financial statements have been
calculated using the Black-Scholes option-pricing model and may not be
indicative of amounts which may be recognized as expense in future
periods.
52
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections, which provides guidance on the accounting for and
reporting of accounting changes and error corrections. It establishes,
unless impracticable, retrospective application as the required method
for reporting a change in accounting principle in the absence of
explicit transition requirements specific to the newly adopted
accounting principle. The reporting of a correction of an error by
restating previously issued financial statements is also addressed by
this statement. SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15,
2005. Management does not believe that this statement will have a
material impact on the Company's financial statements.
On February 8, 2006, President Bush signed the Federal Deposit
Insurance Reform Act of 2005 ("FDIRA") into law as part of the Deficit
Reduction Act of 2005 and on February 15, 2006, President Bush signed
into law the technical and conforming amendments designed to implement
FDIRA. FDIRA provides for legislative reforms to modernize the federal
deposit insurance system.
Among other things, FDIRA: (i) merges the BIF and the SAIF of the FDIC
into a new Deposit Insurance Fund (the "DIF"); (ii) allows the FDIC,
after March 31, 2010, to increase deposit insurance coverage by an
adjustment for inflation and requires the FDIC's Board of Directors,
not later than April 1, 2010 and every five years thereafter, to
consider whether such an increase is warranted; (iii) increases the
deposit insurance limit for certain employee benefit plan deposits from
$100,000 to $250,000, subject to adjustments for inflation after March
31, 2010, and provides for pass-through insurance coverage for such
deposits; (iv) increases the deposit insurance limit for certain
retirement account deposits from $100,000 to $250,000, subject to
adjustments for inflation after March 31, 2010; (v) allows the FDIC's
Board of Directors to set deposit insurance premium assessments in any
amount the Board of Directors deems necessary or appropriate, after
taking into account various factors specified in FDIRA; (vi) replaces
the fixed designated reserve ratio of 1.25% with a reserve ratio range
of 1.15%-1.50%, with the specific reserve ratio to be determined
annually by the FDIC by regulation; (vii) permits the FDIC to revise
the risk-based assessment system by regulation; (viii) requires the
FDIC, at the end of any year in which the reserve ratio of the DIF
exceeds 1.5% of estimated insured deposits, to declare a dividend
payable to insured depository institutions in an amount equal to 100%
of the amount held by the DIF in excess of the amount necessary to
maintain the DIF's reserve ratio at 1.5% of estimated insured deposits
or to declare a dividend equal to 50% of the amount in excess of the
amount necessary to maintain the reserve ratio at 1.35% if the reserve
ratio is between 1.35%-1.5% of estimated insured deposits; and (ix)
provides a one-time credit based upon the assessment base of the
institution on December 31, 1996 to each insured depository institution
that was in existence as of December 31, 1996 and paid a deposit
insurance assessment prior to that date (or a successor to any such
institution).
The merger of the BIF and SAIF takes effect June 1, 2006, while the
remaining provisions are not effective until the FDIC issues final
regulations. FDIRA requires the FDIC to issue final regulations no
later than 270 days after enactment: (i) designating a reserve ratio;
(ii) implementing increases in deposit insurance coverage; (iii)
implementing the dividend requirement; (iv) implementing the one-time
assessment credit; and (v) providing for assessments in accordance with
FDIRA.
53
(p) Stock Option Plans
The Company has a stock-based compensation plan which has been in
existence for all periods presented, and is more fully described in
Note 13. As permitted under accounting principles generally accepted in
the United States of America, grants of options under the plans are
accounted for under the recognition and measurement principles of APB
Opinion No 25, Accounting for Stock Issued to Employees, and related
interpretations. Because options granted under the plans had an
exercise price equal to market value of the underlying common stock on
the grant date, no stock-based employee compensation cost is included
in determining net income. The following table illustrates the effect
on net income (in thousands) 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.
2005 2004 2003
-------------------------------------
Net income on common stock:
As reported .................................... $ 18,308 $ 14,778 $ 16,605
Deduct total stock-based compensation expense
determined under the fair value method for all
awards, net of related tax effects ........... (365) (366) (263)
-------------------------------------
Pro forma ................................... $ 17,943 $ 14,412 $ 16,342
======================================
Basic earnings per share:
As reported .................................... $ 1.82 $ 1.56 $ 1.62
Pro forma ...................................... 1.78 1.52 1.60
Diluted earnings per share:
As reported .................................... $ 1.80 $ 1.54 $ 1.60
Pro forma ...................................... 1.77 1.50 1.58
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.
2005 2004 2003
--------------------------------------------
Number of options granted ..... 137,500 140,500 135,000
Risk-free interest rate ....... 3.83% - 4.08% 3.94% 3.64%
Expected life, in years ....... 7.00 - 8.00 8.00 8.00
Expected volatility ........... 15.05% - 15.42% 15.95% 13.35%
Expected dividend yield ....... 2.97% - 3.06% 2.75% 2.42%
(q) Acquired Goodwill and Intangible Assets
Goodwill of $20.736 million resulted from the acquisition of Citizens
First Financial Corp. in 2005. Goodwill was tested for impairment on
October 31, 2005. No impairment was found.
54
Intangible assets consist of core deposit intangibles from business
acquisitions. This amount is amortized into other expense on a
straight-line basis over a six year period. On a periodic basis, the
Company reviews the intangible assets for events or circumstances that
may indicate a change in recoverability of the underlying basis.
As of December 31, 2005
-----------------------------
Gross Carrying Accumulated
Amount Amortization
-----------------------------
Amortized intangible assets
Core deposit intangibles ............................... $ 5,222 $ 653
Unamortized intangible assets
Goodwill ............................................... $ 20,736 $ --
Aggregate Amortization Expense:
For the year ended 12/31/05 .............................. $ 653
For the year ended 12/31/06 .............................. 870
For the year ended 12/31/07 .............................. 871
For the year ended 12/31/08 .............................. 870
For the year ended 12/31/09 .............................. 870
For the year ended 12/31/10 .............................. 870
For the year ended 12/31/11 .............................. 218
2. Acquisition of Citizens First Financial
On April 1, 2005, the Company acquired all of the outstanding stock of Citizens
First Financial Corp. ("Citizens"), which was the parent company of Citizens
Savings Bank, based in Bloomington, Illinois. The transaction has been accounted
for as a purchase. Assets and liabilities related to the acquisition of Citizens
are reported as of the April 2005 acquisition date. Results of operations of
Citizens since the acquisition date have been included in the Company's
consolidated financial statements. The Company merged Citizens Savings Bank into
the Bank as of the close of business on October 7, 2005. The Citizens
acquisition purchase price of approximately $56.841 million was allocated based
upon the fair value of the assets acquired and liabilities assumed. The Citizens
excess purchase price has been allocated to goodwill and identifiable intangible
assets in accordance with current accounting literature, to the extent that
supportable documentation was available at December 31, 2005. Such amounts are
subject to minor adjustments in the near term as additional analysis is
performed or obtained from third party sources. $5.222 million was allocated to
core deposit intangibles at acquisition and is being amortized over a period of
six years.
Proforma unaudited operating results for the year ended December 31, 2005 and
2004, giving effect to the Citizens acquisition as if it had occurred as of
January 1, 2004 are as follows:
2005 2004
-----------------------------
(in thousands, except
per share data)
-----------------------------
Interest Income .......................... $81,160 $72,854
Interest Expense ......................... 29,074 23,952
Net Income ............................... 18,297 17,393
Basic EPS ................................ 1.82 1.68
Diluted EPS .............................. 1.80 1.66
These unaudited proforma results have been prepared for comparative purposes
only and include certain adjustments, such as additional amortization expense on
revalued purchased assets and implied interest on additional borrowings to fund
the acquisition. In addition, 2005 merger related expenses were reallocated to a
period prior to the pro forma dates presented. All adjustments were tax
effected. They do not purport to be indicative of the results of operations that
actually would have resulted had the combination occurred on January 1, 2004 or
of future results of operations of the consolidated entities.
55
3. Cash and Due from Banks
The compensating balances held at correspondent banks were $35.711 million and
$20.845 million at December 31, 2005 and 2004, respectively. The Bank maintains
such compensating balances with correspondent banks to offset charges for
services rendered by those banks. In addition, the Bank was required by the
Federal Reserve Bank to maintain reserves in the form of cash on hand or
balances at the Federal Reserve Bank. The balance of reserves held was $12.014
million and $6.341 million at December 31, 2005 and 2004, respectively.
4. Investments in Debt and Equity Securities
The amortized cost and fair values of investments in debt and equity securities
(in thousands) were as follows:
Available-for-Sale
-------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
-------------------------------------------
December 31, 2005
U.S. Treasury and other
government agencies ......................................................... $315,930 $ 15 $ 3,461 $312,484
Mortgage-backed securities .................................................... 13,729 79 151 13,657
Obligations of state and political subdivisions ............................... 13,539 363 68 13,834
Other ......................................................................... 2,551 619 58 3,112
-------------------------------------------
$345,749 $ 1,076 $ 3,738 $343,087
==========================================
December 31, 2004
U.S. Treasury and other
government agencies ......................................................... $220,718 $ 326 $ 2,050 $218,994
Mortgage-backed securities .................................................... 27,731 309 327 27,713
Obligations of state and political subdivisions ............................... 16,037 698 20 16,715
Other ......................................................................... 5,457 1,524 823 6,158
-------------------------------------------
$269,943 $ 2,857 $ 3,220 $269,580
==========================================
Held-to-Maturity
-------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
-------------------------------------------
December 31, 2005
U.S. Treasury and other
government agencies ......................................................... $ 38,650 $ -- $ 919 $ 37,731
Mortgage-backed securities .................................................... 17,091 55 162 16,984
Obligations of state and political subdivisions ............................... 20,801 230 81 20,950
-------------------------------------------
$ 76,542 $ 285 $ 1,162 $ 75,665
==========================================
December 31, 2004
U.S. Treasury and other
government agencies ......................................................... $ 40,931 $ -- $ 625 $ 40,306
Mortgage-backed securities .................................................... 14,992 37 223 14,806
Obligations of state and political subdivisions ............................... 25,241 761 15 25,987
-------------------------------------------
$ 81,164 $ 798 $ 863 $ 81,099
==========================================
56
Unrealized losses and fair value, aggregated by investment category and length
of time that individual securities have been in a continuous unrealized loss
position, as of December 31, 2005 are summarized as follows:
Continuous unrealized Continuous unrealized
losses existing for less losses existing greater
than 12 months than 12 months Total
---------------------------------------------------------------------------
Fair Value Unrealized Fair Value Unrealized Fair Value Unrealized
Losses Losses Losses
---------------------------------------------------------------------------
Available-for-Sale:
U.S. Treasury and other
government agencies .......... $149,575 $ 420 $139,128 $ 3,041 $288,703 $ 3,461
Mortgage-backed securities ..... 2,511 22 6,654 129 $ 9,165 $ 151
Obligations of state and
political subdivisions ....... -- -- 3,188 68 $ 3,188 $ 68
-------------------------------------------------------------------------
Subtotal, debt securities $152,086 $ 442 $148,970 $ 3,238 $301,056 $ 3,680
Other .......................... 847 58 -- -- 847 58
-------------------------------------------------------------------------
Total temporarily impaired
securities ............... $152,933 $ 500 $148,970 $ 3,238 $301,903 $ 3,738
=========================================================================
Held-to-Maturity:
U.S. Treasury and other
government agencies .......... $ 492 $ 8 $ 37,239 $ 911 $ 37,731 $ 919
Mortgage-backed securities ..... 8,708 90 3,321 72 $ 12,029 $ 162
Obligations of state and
political subdivisions ....... 3,996 39 3,332 42 $ 7,328 $ 81
-------------------------------------------------------------------------
Total temporarily impaired
securities ............... $ 13,196 $ 137 $ 43,892 $ 1,025 $ 57,088 $ 1,162
=========================================================================
Unrealized losses and fair value, aggregated by investment category and length
of time that individual securities have been in a continuous unrealized loss
position, as of December 31, 2004, are summarized as follows:
Continuous unrealized Continuous unrealized
losses existing for less losses existing greater
than 12 months than 12 months Total
---------------------------------------------------------------------------
Fair Value Unrealized Fair Value Unrealized Fair Value Unrealized
Losses Losses Losses
---------------------------------------------------------------------------
Available-for-Sale:
U.S. Treasury and other
government agencies ............ $153,851 $ 1,591 $ 18,537 $ 459 $172,388 $ 2,050
Mortgage-backed securities ....... 9,016 58 7,862 269 16,878 327
Obligations of state and
political subdivisions ......... 3,575 20 -- -- 3,575 20
-------------------------------------------------------------------------
Subtotal, debt securities $166,442 $ 1,669 $ 26,399 $ 728 $192,841 $ 2,397
Other ............................ 764 74 1,056 749 1,820 823
-------------------------------------------------------------------------
Total temporarily impaired
securities ............... $167,206 $ 1,743 $ 27,455 $ 1,477 $194,661 $ 3,220
=========================================================================
Held-to-Maturity:
U.S. Treasury and other
government agencies ............ $ 37,098 $ 506 $ 2,506 $ 119 $ 39,604 $ 625
Mortgage-backed securities ....... 6,069 71 6,963 152 13,032 223
Obligations of state and
political subdivisions ......... 2,195 15 -- -- 2,195 15
-------------------------------------------------------------------------
Total temporarily impaired
securities ............... $ 45,362 $ 592 $ 9,469 $ 271 $ 54,831 $ 863
=========================================================================
57
Management evaluates securities for other-than-temporary impairment on at least
a quarterly basis, and more frequently when economic or market concerns warrant
such evaluation. In estimating other-than-temporary impairment losses,
management considers (1) the length of time and the extent to which the fair
value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of the Company to retain
its investment in the issuer for the period of time sufficient to allow for any
anticipated recovery in fair value.
For the period ended December 31, 2005, the $3.238 million continuous unrealized
loss greater than 12 months on available-for-sale securities was made up of
forty two debt securities and was believed to be a temporary loss. Other
securities, which were comprised of equity securities, have no continuous
unrealized loss greater than 12 months, a reduction of $749,000 from the loss on
December 31, 2004. The $1.025 million continuous unrealized loss greater than 12
months on held-to-maturity securities was made up of thirty one debt securities
and was believed to be a temporary loss.
For the period ended December 31, 2004, the $1.477 million continuous unrealized
loss greater than 12 months on available-for-sale securities was made up of four
debt securities and seven other securities which were comprised of equity
securities. Equity securities represented $749,000 of the continuous unrealized
loss on available-for-sale securities, which was a reduction of $232,000 from
the loss on equity securities of $981,000 on December 31, 2003. The $271,000
continuous unrealized loss greater than 12 months on held-to-maturity securities
was made up of four debt securities.
Unrealized losses on debt securities are generally due to changes in interest
rates and, as such, are considered by the Company to be temporary. Because of
the nature of U.S. Agency securities, most of which are single pay at maturity,
and because the Company has the ability to hold these investments until a
recovery of market value, which may be maturity, the Company does not consider
these investments to be other than temporarily impaired. Because the Company
believes the decline in market value of mortgage-backed securities is
attributable to changes in interest rates and not credit quality and because the
Company has the ability to hold these investments until recovery of market
value, the Company does not consider these investments to be other than
temporarily impaired.
Management has analyzed the equity securities to determine whether an other than
temporary loss exists and considered several factors, including, but not limited
to, the length of time and the extent to which the market value of the security
has been less than cost, the financial condition and near-term prospects of the
issuer and the intent and ability of the Company to retain its investment in the
issuer for a period of time sufficient to allow for any anticipated recovery in
market value. Effective for the period ended December 31, 2005, the Company
modified its policy for evaluating investments for other-than-temporary
impairment. Under its new policy, investments, other than debt security
investments where the impairment is deemed to be due solely to interest rate
movements, are assumed to be impaired and the impairment recognized through
earnings no later than twelve months from the date the security was first
impaired, unless there is "overwhelming evidence to the contrary." Under the
policy, "overwhelming evidence to the contrary" is a rare instance, but might
include, among other things, an announced sale soon after a reporting period
where the price would cause an impairment to reverse. Further, under certain
circumstances, including a bankruptcy, catastrophic event or other circumstances
which cause the Company to determine, after analyzing the specific facts, that
the decline in the fair value is other than temporary, the Company would
recognize an other than temporary impairment write-down upon such occurrence or
determination, and not wait twelve months from the time of the impairment.
A summary of non-marketable equity securities (in thousands) at December 31,
2005 and 2004 is as follows:
2005 2004
---------------------
Federal Home Loan Bank Stock, at cost .............. $21,450 $ 4,279
Other investments, at fair value ................... 3,544 3,703
---------------------
$24,994 $ 7,982
=====================
58
Realized gains and (losses) (in thousands) on sales, maturities and impairment
losses for the years ended December 31, 2005, 2004 and 2003 were as follows:
2005 2004 2003
---------------------------------
Gross gains ............................. $ 1,228 $ 380 $ 173
Gross (losses) .......................... (1,814) (247) (185)
---------------------------------
Net gains (losses) ...................... $ (586) $ 133 $ (12)
=================================
Applicable income taxes (benefit) ....... $ (234) $ 53 $ (5)
=================================
Investments in debt and equity securities with a carrying value of $275.609
million and $280.851 million were pledged at December 31, 2005 and 2004,
respectively, to secure public deposits, repurchase agreements, and for other
purposes as required or permitted by law.
The amortized cost and fair value of investments in debt and marketable equity
securities (in thousands) at December 31, 2005, by amortization date, are shown
below. Amortization date is defined as call date if the security was purchased
at a premium or maturity date if purchased at a discount. Borrowers may have the
right to call or prepay obligations with or without call or prepayment penalties
and certain securities require principal repayments prior to maturity.
Therefore, these securities and equity securities with no stated maturities are
not included in the following maturity summary.
Available-for-sale Held-to-maturity
-----------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-----------------------------------------
Due in one year or less ........................................ $150,661 $149,893 $ 20,819 $ 20,681
Due after one year through five years .......................... 174,293 171,790 33,552 33,128
Due after five years through ten years ......................... 4,077 4,160 4,920 4,694
Due after ten years ............................................ 438 475 160 178
-----------------------------------------
$329,469 $326,318 $ 59,451 $ 58,681
Mortgage-backed securities ..................................... 13,729 13,657 17,091 16,984
Marketable equity securities ................................... 2,551 3,112 -- --
-----------------------------------------
Total ................................................ $345,749 $343,087 $ 76,542 $ 75,665
=========================================
5. Loans
A summary of loans (in thousands), by classification, at December 31, 2005 and
2004 is as follows:
2005 2004
--------------------------
Commercial, financial, and agricultural ........ $ 319,861 $ 314,657
Real Estate - Commercial ....................... 469,506 309,830
Real Estate - Residential ...................... 140,304 62,464
Installment and consumer ....................... 86,728 83,926
--------------------------
$1,016,399 $ 770,877
Less:
Allowance for loan losses ................... 13,472 9,650
--------------------------
$1,002,927 $ 761,227
==========================
The Company makes commercial, financial, and agricultural; commercial real
estate; residential real estate; and installment and consumer loans to customers
located in central Illinois and the surrounding communities. As such, the
Company is susceptible to changes in the economic environment in central
Illinois.
59
The loan portfolio includes a concentration of loans in commercial real estate
amounting to $459.506 million and $309.830 million at of December 31, 2005 and
2004, respectively. The loans are expected to be repaid from cash flows or from
proceeds from the sale of selected assets of the borrowers. The concentration of
credit with commercial real estate is taken into consideration by management in
determining the allowance for loan losses. The Company's opinion as to the
ultimate collectibility of these loans is subject to estimates regarding future
cash flows from operations and the value of the property, real and personal,
pledged as collateral. These estimates are affected by changing economic
conditions and the economic prospects of the borrowers.
During 2005, 2004 and 2003, the Company sold approximately $65.334 million,
$76.864 million and $209.192 million, respectively, of residential mortgage
loans in the secondary market with servicing released on approximately $19.982
million, $28.860 million and $50.595 million, respectively. Capitalized mortgage
servicing rights totaled $1.311 million and $992,000 at December 31, 2005 and
2004, respectively. The fair values of these rights were $1.938 million and
$1.378 million at December 31, 2005 and 2004, respectively. An independent
evaluation was performed on the loan portfolio to assess the fair value of the
servicing rights in each year reported.
Mortgage loans serviced for others are not included in the accompanying
consolidated financial statements. The unpaid balances of these loans consisted
of the following (in thousands) at December 31, 2005, 2004 and 2003:
2005 2004 2003
--------------------------------
Fannie Mae ................................. $186,840 $196,174 $191,505
Freddie Mac ................................ 81,643 9,564 10,287
Illinois Housing Development Authority ..... 758 939 1,219
In the normal course of business, loans are made to directors, executive
officers, and principal shareholders of the Company and to parties which the
Company or its directors, executive officers, and shareholders have the ability
to significantly influence its management or operating policies (related
parties). The terms of these loans, including interest rates and collateral, are
similar to those prevailing for comparable transactions with other customers and
do not involve more than a normal risk of collectibility. Activity associated
with loans (in thousands) made to related parties during 2005 was as follows:
2005
------------
Balance, January 1 $ 40,408
Change of relationship 3,663
New loans 22,314
Repayments (13,718)
------------
Balance, December 31 $ 52,667
============
At December 31, 2005 one to four family real estate mortgage loans of
approximately $180.088 million were pledged to secure advances from the Federal
Home Loan Bank.
Activity in the allowance for loan losses (in thousands) for 2005, 2004 and 2003
was as follows:
2005 2004 2003
--------------------------------
Balance, beginning of year ................. $ 9,650 $ 9,786 $ 9,259
Balance, acquisition of Citizens ........... $ 3,434 $ -- $ --
Provision charged to expense ............... 1,530 1,100 1,470
Loans charged off .......................... (1,459) (1,692) (1,640)
Recoveries on loans previously charged off . 317 456 697
--------------------------------
Balance, end of year ....................... $ 13,472 $ 9,650 $ 9,786
================================
60
The following table presents summary data on nonaccrual and other impaired loans
(in thousands) at December 31, 2005, 2004 and 2003:
2005 2004 2003
------------------------
Impaired loans on nonaccrual ........................ $1,144 $1,126 $ 130
Impaired loans continuing to accrue interest ........ 324 1,005 288
------------------------
Total impaired loans ................................ $1,468 $2,131 $ 418
========================
Other non-accrual loans not classified
as impaired ...................................... $1,090 $ 563 $ 269
========================
Loans contractually past due 90 days or
more, still accruing interest and not classified
as impaired ...................................... $ 664 $ 547 $ 590
========================
Allowance for loan losses on impaired loans ......... $ 374 $ 491 $ 63
========================
Impaired loans for which there is no related
allowance for loan losses ........................ $ 545 $ 863 $ --
========================
Average recorded investment in impaired
loans ............................................ $2,005 $2,336 $ 847
========================
Interest income recognized from impaired
loans ............................................ $ 67 $ 68 $ 13
========================
Cash basis interest income recognized from
impaired loans ................................... $ 34 $ 16 $ 10
========================
6. Premises and Equipment
A summary of premises and equipment (in thousands) at December 31, 2005 and 2004
is as follows:
2005 2004
-------------------
Land ................................................... $ 7,257 $ 4,488
Furniture and equipment ................................ 15,191 14,715
Buildings and leasehold improvements ................... 28,517 24,431
-------------------
$50,965 $43,634
Less: accumulated depreciation and amortization ........ 27,918 26,547
-------------------
$23,047 $17,087
===================
The Company leases various operating facilities and equipment under
noncancellable operating lease arrangements. These leases expire at various
dates through November 2010 and have renewal options to extend the lease terms
for various dates. The rental expense for these operating leases was $270,000,
$222,000 and $218,000 in 2005, 2004 and 2003, respectively.
Minimum annual rental payments required under the operating leases (in
thousands), which have initial or remaining terms in excess of one year at
December 31, 2005 are as follows:
2006 $266
2007 189
2008 16
2009 12
2010 9
----
$492
====
7. Deposits
The aggregate amount of time certificate of deposits in denominations of
$100,000 or more was $130.203 million and $107.125 million at December 31, 2005
and 2004, respectively. As of December 31, 2005, the scheduled maturities of
time deposits (in thousands) were as follows:
2006 $330,335
2007 84,915
2008 35,000
2009 13,810
2010 and thereafter 10,397
--------
$474,457
========
61
8. Federal Funds Purchased, Repurchase Agreements, and Notes Payable
A summary of short-term borrowings (in thousands) at December 31, 2005 and 2004
is as follows:
2005 2004
---------------------
Federal funds purchased .............................. $ 4,100 $ 3,300
Securities sold under agreements to repurchase ....... 114,352 93,600
---------------------
$118,452 $ 96,900
=====================
Information relating to short-term borrowings (dollars in thousands) is as
follows:
2005 2004 2003
-----------------------------------------
Federal funds purchased:
Average daily balance ....................... $ 5,869 $ 3,515 $ 5,004
Maximum balance at month-end ................ $ 24,225 $ 5,575 $ 7,550
Weighted average interest rate at year-end .. 3.56% 1.75% 0.56%
Weighted average interest rate for the year . 3.08% 0.94% 0.81%
Securities sold under agreements to repurchase:
Average daily balance ....................... $ 109,810 $ 93,246 $ 89,261
Maximum balance at month-end ................ $ 119,845 $ 112,052 $ 100,448
Weighted average interest rate at year-end .. 3.31% 1.65% 1.06%
Weighted average interest rate for the year . 2.66% 1.32% 1.17%
The securities underlying the agreements to repurchase are under the control of
the Bank.
9. Federal Home Loan Bank Advances and Other Borrowings
A summary of Federal Home Loan Bank (FHLB) advances and other borrowings
(dollars in thousands) at December 31, 2005 and 2004 is as follows:
December 31
-------------------------------------------------------
2005 2004
-------------------------------------------------------
Weighted
FHLB Other Average
Advances Borrowings Total Rate Total
-------------------------------------------------------
Maturing in year ending:
2005 $ -- $ -- $ -- -- $ 93
2006 28,387 1,523 29,910 3.55% 7,221
2007 2,430 23 2,453 6.83% 2,545
2008 29,000 6,023 35,023 5.25% 20,023
-------------------------------------------------------
$59,817 $ 7,569 $ 67,386 4.56% $ 29,882
=======================================================
The terms of a security agreement with the FHLB require the Bank to pledge as
collateral for advances both qualifying first mortgage loans in an amount equal
to at least 167% of these advances and all stock of the FHLB. Advances are
subject to restrictions or penalties in the event of prepayment. At December 31,
2005, the Company had sufficient borrowing capacity to permit it to borrow
additional funds from the FHLB at a rate equal to the FHLB's current advance
rates.
The other borrowings included $7.500 million to help fund the acquisition of
Citizens and general operating needs and $69,000 for the purchase of the land.
Of the $7.500 million, $6.000 million was a term loan due March 31, 2008 and
floats quarterly based on the 90-day LIBOR rate plus 1.15%. The loan rate at
December 31, 2005 was 5.67%. The remaining $1.500 million were advances on the
Company's line of credit (see Note 10 below). The land was originally purchased
in 1999 at a cost of $266,000, with principal of $23,000 and annual interest due
March 8th of each year until the balance has been paid in full. Interest is
based on the prime rate at March 8th of each year. The rate at December 31, 2005
was 5.50%.
62
10. Line of Credit
The Company has an unsecured line of credit of $15.000 million from a third
party lender. As of December 31, 2005, the Company had borrowed $1.000 million
at 5.58% and $500,000 at 5.52%, both of which were paid off in January 2006. As
of December 31, 2005, $13.500 million of this line was available.
11. Income Taxes
Income tax expense (in thousands) for 2005, 2004 and 2003 is summarized as
follows:
2005 2004 2003
-------------------------------------------
Federal ................... $ 9,560 $ 7,029 $ 8,480
State ..................... 826 806 998
-------------------------------------------
Current .............. 10,386 7,835 9,478
Deferred .................. (13) 208 (637)
-------------------------------------------
Total ................ $ 10,373 $ 8,043 $ 8,841
===========================================
Actual income tax expense (in thousands) for 2005, 2004 and 2003 differ from the
"expected" income taxes (computed by applying the maximum U.S. federal corporate
income tax rate of 35% to earnings before income taxes) as follows:
2005 2004 2003
-----------------------------------
Computed "expected" income taxes ........ $ 10,038 $ 7,987 $ 8,906
Tax-exempt interest income, net of
disallowed interest expense ........... (488) (607) (744)
State tax, net of federal benefit ....... 537 524 649
Other, net .............................. 286 139 30
-----------------------------------
$ 10,373 $ 8,043 $ 8,841
==================================
The tax effects of temporary differences (in thousands) that give rise to
significant portions of the deferred tax assets and deferred tax liabilities,
included in other assets, at December 31, 2005 and 2004 are as follows:
2005 2004
------------------
Deferred tax assets:
Unrealized holding loss on available-for-sale securities $ 1,065 $ 145
Allowance for loan losses .............................. 5,238 3,835
Deferred compensation .................................. 1,943 1,622
Other employee benefits ................................ 348 310
Phantom stock .......................................... 242 253
Net Operating Loss Carryforward ........................ 148 --
Other .................................................. 434 271
------------------
Total deferred tax assets .................... $ 9,418 $ 6,436
------------------
Deferred tax liabilities:
Premises and equipment ................................. $ (817) $ (373)
Mortgage servicing rights .............................. (481) (348)
Deferred loan fees ..................................... (394) (369)
Discount accretion ..................................... (75) (56)
FHLB Stock Dividend .................................... (1,867) (459)
Prepaid Expenses ....................................... (258) (222)
Purchase Accounting .................................... (1,286) --
------------------
Total deferred tax liabilities ............... $(5,178) $(1,827)
------------------
Net deferred tax assets ...................... $ 4,240 $ 4,609
==================
At December 31, 2005, the Company had Federal net operating loss carryforwards
of approximately $423,000 for income tax purposes. The difference between book
and tax net operating income results from interest income from certain loans and
investments which are exempt for state income tax purposes. The net operating
loss carryforwards expire through 2024.
12. Retirement Plans
The Company has established a profit sharing plan and a 401(k) plan for
substantially all employees who meet the eligibility requirements. The 401(k)
plan allowed for participant contributions up to the maximum amount allowed by
IRS regulations, of which, the first 6% of gross salary was available for the
Company's 50% match. The profit sharing plan is non-contributory. All
contributions to the profit sharing plan are at the discretion of the Company.
Contributions by the Company totaled $1.101 million, $927,000 and $887,000 for
2005, 2004 and 2003, respectively.
63
Certain key officers and directors participate in various deferred compensation
or supplemental retirement agreements with the Company. The Company accrues the
liability for these agreements based on the present value of the amount the
employee or director is currently eligible to receive. The Company recorded
expenses of $281,000, $277,000 and $288,000 in 2005, 2004 and 2003,
respectively, related to these agreements. At December 31, 2005 and 2004, the
Company had a recorded liability in the amount of approximately $3.868 million
and $3.769 million, respectively for these plans. The Company has purchased life
insurance policies, which are reported as other assets, to cover the
aforementioned liabilities and other employee benefits, with recorded cash
surrender values in 2005 and 2004 of approximately $10.533 million and $5.852
million, respectively.
Additionally, in connection with the merger of BankIllinois Financial
Corporation and First Decatur Bancshares, Inc., the Company assumed the
outstanding liability for a deferred compensation plan for nonemployee directors
of the Company which allowed participating directors to defer directors' fees in
a fixed income fund or, alternatively, in the form of "phantom stock units." For
directors that elected to receive phantom stock, a deferred compensation
account, included in other liabilities on the consolidated balance sheet, was
credited with phantom stock units. After the merger, no additional contributions
were allowed to these plans, however, phantom stock units continue to be
increased by any dividends or stock splits declared by the Company. At December
31, 2005 and 2004, $296,000 and $305,000 had been deferred for the phantom stock
plan, which represented 20,708 and 21,977 phantom stock units. At December 31,
2005 and 2004, the Company had a recorded liability in the amount of $618,000
and $651,000, respectively for these plans.
Additionally, in connection with the acquisition of Citizens First Financial
Corp., the Company assumed the outstanding liability for the Director Emeritus
Plan. At December 31, 2005, the Company had a recorded liability in the amount
of $1.263 million which is fully funded through single premium insurance
annuities.
13. Stock Options and Related Plans
In 2000, after the merger of BankIllinois Financial Corporation and First
Decatur Bancshares, Inc. to form the Company, the Company established a stock
incentive plan, which provides for the granting of options of the Company's
common stock to certain directors, officers and employees. This plan provides
for the granting of both qualified and non-qualified options. Existing director
options granted prior to 2003 are fully vested and exercisable on the date
granted while director options granted in or after 2003 vest, and thus become
exercisable, ratably over a one-year period from the date granted. Existing
officer and employee options vest, and thus become exercisable, ratably over a
three-year period from the date granted. Under the 2000 incentive plan, the
Company has outstanding options of 767,413 shares and 1,359,018 shares remain
eligible for grant. The following is a summary of the changes in options
outstanding under the stock incentive and stock option plans:
2005 2004 2003
------------------------------------------------------------------------------------
Grant Grant Grant
Price Price Price
Shares Range Shares Range Shares Range
------------------------------------------------------------------------------------
Options outstanding,
beginning of year ..................... 661,465 $17.50 - $30.60 581,780 $ 6.92 - $24.85 589,250 $ 6.92 - $19.76
Granted ................................. 137,500 $28.80 - $29.60 140,500 $30.60 - $30.60 135,000 $24.80 - $24.85
Exercised ............................... (22,886) $17.50 - $24.80 (58,921) $ 6.92 - $24.80 (142,470) $ 6.92 - $24.80
Options forfeited ....................... (8,666) $18.60 - $30.60 (1,894) $18.60 - $30.60 -- --
------------------------------------------------------------------------------------
Options outstanding, end of year ........ 767,413 $17.50 - $30.60 661,465 $17.50 - $30.60 581,780 $ 6.92 - $24.85
====================================================================================
Options exercisable, end of year ........ 654,463 $17.50 - $30.60 547,769 $17.50 - $30.60 467,769 $ 6.92 - $24.85
====================================================================================
Weighted average fair value
of options granted $4.71 $ 5.39 $ 3.96
===== ====== ======
64
Options Outstanding Options Exercisable
------------------------------------------------------------------------------------------------------------
Weighted
Outstanding average Weighted Exercisable Weighted
Range as of remaining average as of average
of December 31, contractual exercise December 31, exercise
Exercise price 2005 life price 2005 price
------------------------------------------------------------------------------------------------------------
$17.50 - $17.50 ................................. 130,530 4.8 $ 17.50 130,530 $ 17.50
$18.37 - $18.60 ................................. 239,196 5.1 18.50 239,196 18.50
$24.80 - $24.85 ................................. 127,846 7.0 24.80 121,840 24.80
$28.80 - $30.60 ................................. 269,841 8.4 30.10 162,897 30.22
----------------------------------------------------------
767,413 6.5 $ 23.46 654,463 $ 22.39
==========================================================
14. Dividend Restrictions
Federal and state banking regulations place certain restrictions on dividends
paid and loans or advances made by the Bank to the Company. Without prior
approval, the Bank is restricted by Illinois law and regulations of the Illinois
Department of Financial and Professional Regulation and the Federal Deposit
Insurance Corporation as to the maximum amount of dividends it can pay to its
parent to the balance of the retained earnings account, as adjusted (as
defined). At December 31, 2005, the Bank had available retained earnings of
approximately $51.826 million for the payment of dividends without obtaining
prior regulatory approval. In addition, dividends paid by the Bank to the
Company would be prohibited if the effect thereof would cause the Bank's capital
to be reduced below applicable minimum capital requirements.
15. Condensed Financial Information of Parent Company
Following are the condensed balance sheets as of December 31, 2005 and 2004 and
the related condensed statements of income and cash flows for the years ended
December 31, 2005, 2004 and 2003 for Main Street Trust, Inc.:
Condensed Balance Sheets
(in thousands)
2005 2004
----------------------
Assets:
Cash ............................................. $ 342 $ 9,208
Investment in Bank ............................... 136,399 91,182
Investment in FirsTech ........................... 3,264 3,739
Investment in other securities ................... 6,303 9,571
Loans, net of allowance for loan losses .......... 2,682 --
Other assets ..................................... 6,000 7,648
----------------------
$154,990 $121,348
======================
Liabilities and shareholders' equity:
Dividend payable ................................. $ 2,334 $ 2,079
Other borrowings ................................. 7,500 2,268
Other liabilities ................................ 1,387 3,026
Shareholders' equity ............................. 143,769 113,975
----------------------
$154,990 $121,348
======================
65
Condensed Statements of Income
(in thousands)
2005 2004 2003
--------------------------------
Revenue:
Equity in net income of subsidiaries ......... $ 18,512 $ 15,688 $ 17,029
Interest income on deposits .................. 174 102 77
Income on securities ......................... 1,622 395 389
Interest income on loans ..................... 139 -- --
Securities transactions, net ................. (598) (1) (106)
Other ........................................ 6 4,698 4,759
-------------------------------
Total revenue ............................. 19,855 20,882 22,148
-------------------------------
Expenses:
Salary and benefits .......................... 17 4,433 4,066
Interest expense on other borrowings ......... 343 74 21
Other ........................................ 1,349 2,226 1,742
-------------------------------
Total expenses ............................ 1,709 6,733 5,829
Income before applicable income tax benefit 18,146 14,149 16,319
--------------------------------
Applicable income tax benefit ................... (162) (629) (286)
--------------------------------
Net income ............................ $ 18,308 $ 14,778 $ 16,605
================================
Condensed Statements of Cash Flows
(in thousands)
2005 2004 2003
--------------------------------
Cash flows from operating activities:
Net income ......................................................... $ 18,308 $ 14,778 $ 16,605
Adjustments to reconcile net income to net
cash provided by operating activities:
Distributions in excess of (less than) net income of subsidiaries 7,488 (5,688) 30,371
Depreciation .................................................... 53 386 482
Other, net ...................................................... 2,073 (509) (2,043)
--------------------------------
Net cash provided by operating activities: .................. 27,922 8,967 45,415
--------------------------------
Cash flows from investing activities:
Acquisition of Citizens First Financial Corporation ................ (28,738) -- --
Securities transactions, net ....................................... 3,065 (273) (462)
Proceeds from sales of premises and equipment ...................... 558 -- --
Net decrease in loans .............................................. 780 -- --
Purchases of premises and equipment ................................ (2) (316) (1,348)
--------------------------------
Net cash used in investing activities ........................ (24,337) (589) (1,810)
--------------------------------
Cash flows from financing activities:
Stock transactions, net ............................................ (6,013) (1,956) (30,111)
Proceeds from other borrowings, net ................................ 2,233 -- 2,268
Cash dividends paid ................................................ (8,671) (7,972) (7,142)
Other, net ......................................................... -- (83) (66)
--------------------------------
Net cash used in financing activities ........................ (12,451) (10,011) (35,051)
--------------------------------
Net increase (decrease) in cash and cash equivalents ......... (8,866) (1,633) 8,554
Cash at beginning of year ............................................. 9,208 10,841 2,287
--------------------------------
Cash at end of year ................................................... $ 342 $ 9,208 $ 10,841
================================
66
16. Quarterly Results of Operations (Unaudited) (in thousands, except per share
data)
Year Ended December 31, 2005
Three Months Ended:
-----------------------------------------------------
December 31 September 30 June 30 March 31
-----------------------------------------------------
Interest income .................................................... $21,354 $21,116 $20,131 $14,391
Interest expense ................................................... 8,495 7,550 6,941 4,493
-------------------------------------------------
Net interest income ........................................... 12,859 13,566 13,190 9,898
Provision for losses on loans ...................................... 450 450 300 330
-------------------------------------------------
Net interest income after
provision for losses
on loans .................................................... 12,409 13,116 12,890 9,568
Non-interest income ................................................ 5,106 5,298 5,058 5,015
Non-interest expense ............................................... 10,465 10,311 10,554 8,449
-------------------------------------------------
Income before income taxes .................................... 7,050 8,103 7,394 6,134
Income taxes ....................................................... 2,553 2,952 2,667 2,201
-------------------------------------------------
Net income .................................................... $ 4,497 $ 5,151 $ 4,727 $ 3,933
=================================================
Basic earnings per share ........................................... $ 0.44 $ 0.50 $ 0.46 $ 0.42
=================================================
Diluted earnings per share ......................................... $ 0.44 $ 0.50 $ 0.45 $ 0.41
=================================================
Year Ended December 31, 2004
Three Months Ended:
-----------------------------------------------------
December 31 September 30 June 30 March 31
-----------------------------------------------------
Interest income .................................................... $14,498 $13,663 $13,263 $13,381
Interest expense ................................................... 4,568 4,384 4,018 3,882
-------------------------------------------------
Net interest income ........................................... 9,930 9,279 9,245 9,499
Provision for losses on loans ...................................... 110 330 330 330
-------------------------------------------------
Net interest income after
provision for losses
on loans .................................................... 9,820 8,949 8,915 9,169
Non-interest income ................................................ 4,570 4,958 5,172 5,147
Non-interest expense ............................................... 8,922 8,442 8,318 8,197
-------------------------------------------------
Income before income taxes .................................... 5,468 5,465 5,769 6,119
Income taxes ....................................................... 1,906 1,910 2,051 2,176
-------------------------------------------------
Net income .................................................... $ 3,562 $ 3,555 $ 3,718 $ 3,943
=================================================
Basic earnings per share ........................................... $ 0.38 $ 0.38 $ 0.39 $ 0.41
=================================================
Diluted earnings per share ......................................... $ 0.37 $ 0.37 $ 0.39 $ 0.41
=================================================
17. Disclosures About Commitments and Financial Instruments
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of amounts recognized in the
consolidated balance sheets. The contractual amounts of those instruments
reflect the extent of involvement the Company has in particular classes of
financial instruments.
67
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. Management
does not anticipate any significant losses as a result of these transactions.
The following table summarizes these financial instruments and commitments (in
thousands) at December 31, 2005 and 2004:
2005 2004
---------------------
Financial instruments whose contract amounts
represent credit risk:
Commitments .................................... $279,647 $239,074
Standby letters of credit ...................... 34,512 33,897
The acquisition of Citizens resulted in an additional $21.351 million in
commitments and $549,000 in additional standby letters of credit at April 1,
2005.
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 at December
31, 2005 was $2.330 million to purchase other equity securities.
Standby letters of credit are conditional commitments issued by the Bank 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 Bank 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 Bank would be required to fund the commitment. The maximum potential
amount of future payments the Bank could be required to make is represented by
the contractual amount shown in the summary above. If the commitment is funded,
the Bank would be entitled to seek recovery from the customer. At December 31,
2005 and 2004, no amounts have been recorded as liabilities for the Bank's
potential obligations under these guarantees.
Following is a summary of the carrying amounts and fair values of the Company's
financial instruments at December 31, 2005 and 2004:
2005 2004
--------------------------------------------------
Carrying Fair Carrying Fair
amount Value amount Value
--------------------------------------------------
Assets:
Cash and cash equivalents .................................. $ 94,066 $ 94,066 $ 64,928 $ 64,928
Investments in debt and equity securities .................. 444,623 443,746 358,726 358,661
Mortgage loans held for sale ............................... 1,661 1,661 1,005 1,005
Loans ...................................................... 1,002,927 1,000,301 761,227 761,763
Accrued interest receivable ................................ 8,461 8,461 6,570 6,570
Liabilities:
Deposits ................................................... $1,275,972 1,272,296 $ 974,577 $ 963,413
Federal funds purchased, repurchase agreements,
and notes payable ........................................ 118,452 118,436 96,900 96,855
FHLB advances and other borrowings ......................... 67,386 67,559 29,882 30,650
Accrued interest payable ................................... 4,657 4,657 2,601 2,601
68
Management's fair value estimates, methods, and assumptions are set forth below
for the Company's financial instruments.
Cash and Cash Equivalents
The carrying value of cash and cash equivalents approximates fair value due to
the relatively short period of time between the origination of the instrument
and its expected realization.
Investments in Debt and Equity Securities
The fair value of investments in debt and equity securities is estimated based
on bid prices received from securities dealers. Venture capital investments are
valued at fair value based upon their financial statements. FHLB stock is valued
at cost which approximates fair value.
Mortgage Loans Held For Sale
Fair values of mortgage loans held for sale are based on commitments on hand
from investors or prevailing market prices.
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, commercial
real estate, residential mortgage, and consumer. Each loan category is further
segmented into fixed and adjustable rate interest terms and by performing and
nonperforming categories. The fair value of performing loans is calculated by
discounting scheduled cash flows through the estimated maturity using estimated
market discount rates equal to rates at which loans, similar in type, would be
originated at December 31, 2005 and 2004. Estimated maturities are based upon
the average remaining contractual lives for each loan classification. Fair value
for nonperforming loans is based on the use of discounted cash flow techniques.
Accrued Interest Receivable
The carrying value of accrued interest receivable approximates fair value due to
the relatively short period of time between the origination of the instrument
and its expected realization.
Deposit Liabilities
The fair value of deposits with no stated maturity, such as non-interest bearing
and interest bearing demand deposits and savings deposits is the amount payable
on demand. The fair value of time deposits is based on the discounted value of
contractual cash flows. The discount rate is estimated using rates currently
offered for deposits of similar remaining maturities. The fair value estimates
do not include the benefit that results from the low-cost funding provided by
the deposit liabilities compared to the cost of borrowing funds in the market
nor the benefit derived from the customer relationship inherent in existing
deposits.
Federal Funds Purchased, Repurchase Agreements, and Notes Payable
The carrying values of federal funds purchased, daily repurchase agreements and
notes payable, approximate fair value due to the relatively short period of time
between the origination of the instruments and their expected realization. The
fair value of term repurchase agreements is based on the discounted value of
contractual cash flows. The discount rate is estimated using rates currently
offered for comparable instruments of similar remaining maturities.
Federal Home Loan Bank Advances and Other Borrowings
The fair value of FHLB advances is based on the discounted value of contractual
cash flows. The discount rate is estimated using rates on current FHLB advances
with similar remaining maturities.
Accrued Interest Payable
The carrying value of accrued interest payable approximates fair value due to
the relatively short period of time between the origination of the instrument
and its expected realization.
Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments to extend credit is generally estimated using the
fees currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates. The
fair value of letters of credit is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise settle the
obligations with the counterparties. The estimated fair value of commitments to
extend credit and standby letters of credit approximates the balances of such
commitments.
69
18. Litigation
The Company and its subsidiaries are involved in various legal proceedings,
claims and litigation arising out of the ordinary course of business.
It is the opinion of management that the disposition or ultimate resolution of
any other claims and lawsuits arising out of the ordinary course of business
will not have a material adverse effect on the consolidated financial position
of the Company.
19. Regulatory Capital
The Company and its subsidiary bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's and its subsidiary bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, banks must meet specific capital guidelines that
involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Company's and its subsidiary bank's 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 bank to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2005, that the Company and its subsidiary bank exceeded all capital adequacy
requirements to which they are subject.
As of December 31, 2005, the most recent notifications from primary regulatory
agencies categorized the Company's subsidiary bank 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 bank's categories.
The Company's and the Bank's actual capital amounts and ratios as of December
31, 2005 and 2004 are presented in the following tables:
To be well capitalized
For capital adequacy under prompt corrective
Actual purposes: action provisions:
--------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------
As of December 31, 2005:
Total capital
(to risk-weighted assets)
Consolidated ........................................... $135,368 11.7% $ 92,324 8.0% N/A
Main Street Bank & Trust ............................... $128,227 11.3% $ 91,010 8.0% $ 113,762 10.0%
Tier I capital
(to risk-weighted assets)
Consolidated ........................................... $121,644 10.5% $ 46,162 4.0% N/A
Main Street Bank & Trust ............................... $114,652 10.1% $ 45,505 4.0% $ 68,257 6.0%
Tier I capital
(to average assets)
Consolidated ........................................... $121,644 7.8% $ 62,693 4.0% N/A
Main Street Bank & Trust ............................... $114,652 7.4% $ 62,162 4.0% $ 77,202 5.0%
As of December 31, 2004:
Total capital
(to risk-weighted assets)
Consolidated ........................................... $123,656 13.3% $ 74,513 8.0% N/A
Main Street Bank & Trust ............................... $101,381 11.1% $ 73,008 8.0% $ 91,260 10.0%
Tier I capital
(to risk-weighted assets)
Consolidated ........................................... $113,691 12.2% $ 37,257 4.0% N/A
Main Street Bank & Trust ............................... $ 91,607 10.0% $ 36,504 4.0% $ 54,756 6.0%
Tier I capital
(to average assets)
Consolidated ........................................... $113,691 9.2% $ 49,595 4.0% N/A
Main Street Bank & Trust ............................... $ 91,607 7.5% $ 48,865 4.0% $ 61,801 5.0%
70
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure
None.
Item 9a. Controls and Procedures
A. Disclosure Controls
As of the date of the end of the period covered by this Annual Report on
Form 10-K, the Company carried out an evaluation under the supervision
and with the participation of the Company's management, including the
Company's Chief Executive Officer along with the Company's Chief
Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures pursuant to Rule
13a-15(b), as adopted by the Securities and Exchange Commission (SEC)
under the Securities Exchange Act of 1934 (Exchange Act). Based upon
that evaluation, the Company's Chief Executive Officer along with the
Company's Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective to timely alert them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic SEC
filings.
Disclosure controls and procedures are the controls and other procedures
that are designed to ensure that information required to be disclosed in
the reports that the Company files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed
to ensure that information required to be disclosed in the reports that
the Company files or submits under the Exchange Act is accumulated and
communicated to management, including the Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
There have been no changes in the Company's internal controls, or in
other factors which could significantly affect these controls, over
financial reporting that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over
financial reporting.
B. Management's Report on Internal Control Over Financial Reporting
The management of Main Street Trust, Inc. (the Company) is responsible
for establishing and maintaining adequate internal control over
financial reporting. The Company's internal control over financial
reporting is a process designed under the supervision of the Company's
Chief Executive and Chief Financial officers to provide reasonable
assurance regarding the reliability of financial reporting and the
preparation of the Company's financial statements for external reporting
purposes in accordance with U.S. generally accepted accounting
principles.
As of December 31, 2005, management assessed the effectiveness of the
Company's internal control ov%r financial reporting based on the
criteria for effective internal control over financial reporting
established in "Internal Control - Integrated Framework" issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on the assessment, management determined that the Company
maintained effective internal control over financial reporting as of
December 31, 2005, based on those criteria
The Company acquired Citizens First Financial and it's subsidiary,
Citizens Savings Bank (Citizens) on April 1, 2005 and merged the
subsidiary banks at the close of business on October 7, 2005. Management
has excluded from it's assessment of the effectiveness of Main Street
Trust, Inc's internal control over financial reporting as of December
31, 2005, Citizen's internal control over financial reporting included
in the consolidated financial statements of Main Street Trust, Inc for
the period of April 1, 2005 until October 8, 2005. While the acquisition
was considered material to the Company, it did not result in a material
change in our internal controls over financial reporting.
McGladrey & Pullen, LLP, the independent registered public accounting
firm that audited the consolidated financial statements of the Company
included in this Annual Report on Form 10-K, has issued an attestation
report on management's assessment of the effectiveness of the Company's
internal control over financial reporting as of December 31, 2005. The
report, which expresses unqualified opinions on management's assessment
and on the effectiveness of the Company's internal control over
financial reporting as of December 31, 2005, is included in this Item
under the heading "Report of Independent Registered Public Accounting
Firm."
71
McGladrey & Pullen, LLP
Certified Public Accountants
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Main Street Trust, Inc.
Champaign, Illinois
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that Main
Street Trust, Inc. maintained effective internal control over financial
reporting as of December 31, 2005, based on criteria established in Internal
Control- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Main Street Trust, Inc.'s
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America. A
company's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States of
America, and the receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Main Street Trust, Inc. maintained
effective internal control over financial reporting as of December 31, 2005, is
fairly stated, in all material respects, based on criteria established in
Internal Control- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion, Main
Street Trust, Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2005, based on criteria
established in Internal Control- Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
The Company acquired Citizens First Financial and its subsidiary, Citizens
Savings Bank(Citizens) on April 1, 2005 and merged the subsidiary banks at the
close of business on October 7, 2005. Management excluded from it's assessment
of the effectiveness of the Company's internal control over financial reporting
as of December 31, 2005, Citizen's internal control over financial reporting
included in the consolidated financial statements of Main Street Trust, Inc for
the period of April 1, 2005 until October 8, 2005. Our audit of internal control
over financial reporting of the Company also excluded an evaluation of the
internal control over financial reporting of Citizens from the period of April
1, 2005 to October 8, 2005.
We have also audited, in accordance with the standards of the Public Company
Oversight Board (United States), the consolidated balance sheets of Main Street
Trust, Inc. and subsidiaries as of December 31, 2005 and 2004 and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the three years ended December 31, 2005 and our report dated
March 7, 2006 expressed an unqualified opinion.
/s/ McGladrey & Pullen, LLP
Champaign, Illinois
March 7, 2006
McGladrey & Pullen, LLP is a member firm of RSM International -
an affiliation of separate and independent legal rights
72
Item 9b. Other Information
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information in the Company's 2006 Proxy Statement under the caption
"Election of Directors" and under the caption "Security Ownership of Certain
Beneficial Owners and Management" is incorporated by reference. The information
regarding executive officers not provided in the 2006 Proxy Statement is noted
below.
Executive Officers
The term of office for the executive officers of the Company is from the date of
election until the next annual organizational meeting of the Board of Directors.
In addition to the information provided in the 2006 Proxy Statement, the names
and ages of the executive officers of the Company as of December 31, 2005, as
well as the offices of the Company and the Subsidiaries held by these officers
on that date, and principal occupations for the past five years are set forth
below.
Name Position with Main Street, its subsidiaries
(Age) and occupation for the last five years
----------------------------------------------------------------------------------------------
Paul C. Donohue Executive Vice President of Sales & Marketing for Main
(Age 42) Street and Main Street Bank & Trust; General Manager,
WSMH-TV, Flint, MI (2003-2004); Station Manager, WICD-TV,
Champaign, IL (2001-2003)
Donna R. Greene Executive Vice President of Main Street and President
(Age 52) of Main Street Bank & Trust Wealth Management; Senior Vice
President and Certified Financial Planner with First Busey
Securities, Inc. (1998-2004)
Leanne C. Heacock Executive Vice President, Management Information Systems
(Age 40) for Main Street and Main Street Bank & Trust and Director of
FirsTech; Executive Vice President, Management Information
Systems, BankIllinois and The First National Bank of Decatur
(2001-2002)
Howard F. Mooney II President, FirsTech and Executive Vice President
(Age 41) for Main Street and Director of FirsTech;
Robert F. Plecki, Jr. Executive Vice President of Main Street and
(Age 45) President of Main Street Bank & Trust Retail Banking;
President and Director of BankIllinois (2001-2004)
Christopher M. Shroyer Executive Vice President of Main Street and President of
(Age 40) Main Street Bank & Trust Commercial Banking; President,
Chief Executive Officer and Director of The First National
Bank of Decatur (2001-2004)
David B. White Executive Vice President and Chief Financial Officer of
(Age 54) Main Street and Main Street Bank & Trust and Director of
FirsTech
Phillip C. Wise Executive Vice President of Main Street Bank & Trust and
(Age 67) Chairman of FirsTech; Director and Executive Vice President
of Main Street and Chairman of the Board of The First
National Bank of Decatur (2001-2004)
Section 16(a) Beneficial Ownership Compliance
Section 16(a) of the Securities Exchange Act requires that the directors,
executive officers and persons who own more than 10% of our common stock file
reports of ownership and changes in ownership with the Securities and Exchange
Commission. These persons are also required to furnish us with copies of all
Section 16(a) forms they file. Based solely on our review of the copies of such
forms furnished to us and representations made by any reporting person
concerning whether a Form 5 was required to be filed for 2004, we are not aware
of any failures to comply with the filing requirements of Section 16(a) during
2004 except for Mr. Kenney and Mr. Sloan, who each filed a Form 4 one day late.
Item 11. Executive Compensation
The information in the 2006 Proxy Statement under the caption "Executive
Compensation" is incorporated by reference.
73
Item 12. Security Ownership Of Certain Beneficial Owners and Management and
Related Shareholder Matters
The information in the 2006 Proxy Statement under the caption "Security
Ownership of Certain Beneficial Owners and Management and Related Shareholder
Matters" is incorporated by reference.
Equity Compensation Plan Information
The table below sets forth the following information as of December 31, 2005 for
all compensation plans previously approved by our shareholders:
(a) the number of securities to be issued upon the exercise of outstanding
options, warrants and rights;
(b) the weighted-average exercise price of such outstanding options,
warrants and rights;
(c) other than securities to be issued upon the exercise of such
outstanding options, warrants and rights, the number of securities
remaining available for future issuance under the plans.
EQUITY COMPENSATION PLAN INFORMATION
------------------------------------------------------------------------------------------------------------------------------------
Number of securities to be
Plan category issued upon exercise of Weighted-average exercise Number of securities remaining
outstanding options price of outstanding options available for future issuance
------------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved
by security holders............... 767,413 $23.46 1,359,018
Equity compensation plans not
approved by security holders...... 0 0 0
Total............................. 767,413 $23.46 1,359,018
Item 13. Certain Relationships And Related Transactions
The information in the 2006 Proxy Statement under the caption "Transactions with
Management" is incorporated by reference.
Item 14. Principal Accountant Fees and Services
The information in the 2006 Proxy Statement under the caption "Independent
Registered Public Accounting Firm" is incorporated by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Index to Financial Statements
See page 35.
(a)(2) Financial Statement Schedules
N/A
(a)(3) Schedule of Exhibits
The Exhibit Index which immediately follows the signature page
to this Form 10-K is incorporated by reference.
(b) Exhibits
The exhibits required to be filed with this Form 10-K are
included with this Form 10-K and are located immediately
following the Exhibit Index to this Form 10-K.
74
MAIN STREET TRUST, INC.
EXHIBIT INDEX
TO
ANNUAL REPORT ON FORM 10-K
Incorporated
Exhibit No. Description Herein by Filed
Reference To Herewith
-------------- ---------------------------- ------------------------------------------------------
3.1 Amended and Restated Exhibit 3.1 to the Form S-4 filed
Articles of Incorporation with the Commission on December 23,
2004 (SEC File No. 333-121579)
3.2 Amendment to Articles of Exhibit 3.2 to the Form S-4 filed
Incorporation of Main with the Commission on December 23,
Street Trust, Inc. 2004 (SEC File No. 333-121579)
3.3 Bylaws Exhibit 3.3 to the Form S-4 filed
with the Commission on December 23,
2004 (SEC File No. 333-121579)
4.1 Specimen common stock Exhibit 4.1 to the Form 10-K filed
certificate with the Commission on March 30,
2001 (SEC File No.000-30031)
4.2 Second Amended and Exhibit 4.2 to the Form 10-K filed
Restated Shareholders' with the Commission on March 30,
Agreement, dated as of 2001 (SEC File No. 000-30031)
November 1, 2000
10.1 Employment Agreement by Exhibit 10.1 to the Form 10-K filed
and between the Company with the Commission on March 29,
and Gregory B. Lykins 2002 (SEC File No. 000-30031)
10.2 Employment Agreement by Exhibit 10.2 to the Form 10-K filed
and between the Company with the Commission on March 29,
and Van A. Dukeman 2002 (SEC File No. 000-30031)
10.3 Employment Agreement by Exhibit 10.5 to the Registration
and between the Company Statement on Form S-4 filed with
and David B. White the Commission on March 15, 1996,
as amended (SEC File No. 33-90342)
10.4 Employment Agreement by Exhibit 10.4 to the Form 10-K filed
and between the Company, with the Commission on March 29,
FirsTech, Inc. and Phillip 2002 (SEC File No. 000-30031)
C. Wise
10.5 Employment Agreement by Exhibit 10.5 to the Form 10-K filed
and between The First with the Commission on March 24,
National Bank of Decatur 2003 (SEC File No. 000-30031)
and Chris Shroyer
10.6 Employment Agreement by Exhibit 10.6 to the Form 10-K filed
and between the Company with the Commission on March 15,
and Robert F. Plecki 2004 (SEC File No. 000-30031)
10.7 Employment Agreement by Exhibit 10.5 to the Form 10-K filed
and between the Company with the Commission on March 15,
and Paul E. Donohue 2005 (SEC File No. 000-30031)
10.8 Employment Agreement by Exhibit 10.5 to the Form 10-K filed
and between the Company with the Commission on March 15,
and Donna R. Greene 2005 (SEC File No. 000-30031)
10.9 Main Street Trust, Inc. Exhibit 10.1 to the Form S-8 filed
2000 Stock Incentive Plan with the Commission on November 29,
2000 (SEC File No. 333-50890)
10.10 Main Street Trust, Inc. Exhibit 10.5 to the Form 10-K filed
2000 Stock Incentive Plan with the Commission on March 15,
Director Stock Option 2005 (SEC File No. 000-30031)
Agreement
10.11 Main Street Trust, Inc. Exhibit 10.5 to the Form 10-K filed
2000 Stock Incentive Plan with the Commission on March 15,
Employee Stock Option 2005 (SEC File No. 000-30031)
Agreement
10.12 Credit Agreement dated as Exhibit 10.1 to the Form 10-Q filed
of March 31, 2005 between with the Commission on May 10, 2005
JP Morgan Chase Bank, N.A. (SEC File No. 000-30031)
and Main Street Trust, Inc.
75
10.13 Main Street Trust, Inc. X
Summary of Director
Compensation
10.14 Agreement and Plan of Exhibit 2.1 to the Form S-4 filed
Merger dated as of with the Commission on December 23,
December 7, 2004 2004 (SEC File No. 333-121579)
21.1 Subsidiaries of the X
Registrant
23.1 Consent of McGladrey & X
Pullen, LLP
31.1 Certification of Chief X
Executive Officer Pursuant
to Rule 13a-14(a)/15d-14(a)
31.2 Certification of Chief X
Financial Officer Pursuant
to Rule 13a-14(a)/15d-14(a)
32.1 Certification of Chief X
Executive Officer Pursuant
to 18 U.S.C. Section 1350,
as adopted Pursuant to
Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief X
Executive Officer Pursuant
to 18 U.S.C. Section 1350,
as adopted Pursuant to
Section 906 of the
Sarbanes-Oxley Act of 2002
76
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on March 16, 2006.
By: /s/ Van A. Dukeman By: /s/ David B. White
----------------------------- ---------------------------
Van A. Dukeman David B. White
President, CEO and Director Executive Vice President and
Principal Financial and
Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on March 16, 2006.
/s/ Gregory B. Lykins
--------------------------------------
Gregory B. Lykins Chairman and Director
/s/ Van A. Dukeman
--------------------------------------
Van A. Dukeman President, CEO and Director
/s/ David J. Downey
--------------------------------------
David J. Downey Director
/s/ Larry D. Haab
--------------------------------------
Larry D. Haab Director
/s/ Frederic L. Kenney
--------------------------------------
Frederic L. Kenney Director
--------------------------------------
August C. Meyer, Jr. Director
/s/ George T. Shapland
--------------------------------------
George T. Shapland Director
/s/ Thomas G. Sloan
--------------------------------------
Thomas G. Sloan Director
/s/ H. Gale Zacheis
--------------------------------------
H. Gale Zacheis Director
77