UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2004
Commission File Number: 0-30031
MAIN STREET TRUST, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Illinois 37-1338484
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(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
100 West University, Champaign, Illinois 61820
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(Address of principal executive offices) (Zip Code)
(217) 351-6500
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by "X" whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
Indicate by "X" whether the registrant is an accelerated filer (as defined by
Rule 12b-2 of the Exchange Act). Yes X No
--- ---
Indicate the number of shares outstanding of the registrant's common stock, as
of May 4, 2004
Main Street Trust, Inc. Common Stock 9,476,003
Table of Contents
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements (Unaudited) 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 25
Item 4. Controls and Procedures 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities, Use of Proceeds and Issuer 25
Purchases of Equity Securities
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 27
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements.
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 2004 and December 31, 2003
(Unaudited, in thousands, except share data)
March 31, December 31,
2004 2003
---------------------------------
ASSETS
Cash and due from banks $ 35,830 $ 45,899
Federal funds sold and interest
bearing deposits 22,172 30,004
----------------------------------
Cash and cash equivalents 58,002 75,903
----------------------------------
Investments in debt and equity securities:
Available-for-sale, at fair value 267,122 265,914
Held-to-maturity, at cost (fair value of
$117,828 and $96,628 at March 31, 2004
and December 31, 2003, respectively) 116,651 97,056
Non-marketable equity securities 7,753 7,756
----------------------------------
Total investments in debt and equity
securities 391,526 370,726
----------------------------------
Loans, net of allowance for loan losses
of $9,951 and $9,786 at March 31, 2004
and December 31, 2003, respectively 691,242 666,259
Mortgage loans held for sale 2,147 632
Premises and equipment 17,104 17,622
Accrued interest receivable 6,787 6,430
Other assets 15,794 16,602
----------------------------------
Total assets $1,182,602 $1,154,174
==================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 160,214 $ 162,175
Interest bearing 750,007 736,297
----------------------------------
Total deposits 910,221 898,472
----------------------------------
Federal funds purchased, repurchase
agreements and notes payable 116,152 102,998
Federal Home Loan Bank advances and
other borrowings 29,939 29,980
Accrued interest payable 1,773 1,669
Other liabilities 9,746 9,605
----------------------------------
Total liabilities 1,067,831 1,042,724
----------------------------------
Shareholders' equity:
Preferred stock, no par value;
2,000,000 shares authorized -- --
Common stock, $0.01 par value;
15,000,000 shares authorized;
11,219,319 shares issued 112 112
Paid in capital 55,199 55,271
Retained earnings 103,382 101,521
Accumulated other comprehensive income 2,545 1,941
----------------------------------
161,238 158,845
Less: treasury stock, at cost,
1,685,076 and 1,718,950 shares
at March 31, 2004 and December 31, 2003,
respectively (46,467) (47,395)
----------------------------------
Total shareholders' equity 114,771 111,450
----------------------------------
Total liabilities and shareholders'
equity $1,182,602 $1,154,174
==================================
See accompanying notes to unaudited consolidated financial statements.
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Forthe Three Months Ended March 31, 2004 and 2003
(Unaudited, in thousands, except share data)
2004 2003
-----------------------------
Interest income:
Loans and fees on loans $ 10,051 $ 11,054
Investments in debt and equity securities
Taxable 2,714 2,823
Tax-exempt 503 587
Federal funds sold and interest bearing
deposits 113 102
-----------------------------
Total interest income 13,381 14,566
-----------------------------
Interest expense:
Deposits 3,202 3,873
Federal funds purchased, repurchase
agreements and notes payable 281 267
Federal Home Loan Bank advances and
other borrowings 399 380
-----------------------------
Total interest expense 3,882 4,520
-----------------------------
Net interest income 9,499 10,046
Provision for loan losses 330 330
-----------------------------
Net interest income after provision
for loan losses 9,169 9,716
-----------------------------
Non-interest income:
Remittance processing 1,892 1,766
Trust and brokerage fees 1,662 1,462
Service charges on deposit accounts 579 580
Securities transactions, net 8 (43)
Gain on sales of mortgage loans, net 203 544
Other 803 527
-----------------------------
Total non-interest income 5,147 4,836
-----------------------------
Non-interest expense:
Salaries and employee benefits 4,708 4,649
Occupancy 645 623
Equipment 633 649
Data processing 532 529
Office supplies 305 303
Service charges from correspondent banks 225 229
Other 1,149 1,082
-----------------------------
Total non-interest expense 8,197 8,064
-----------------------------
Income before income taxes 6,119 6,488
Income taxes 2,176 2,190
-----------------------------
Net income $ 3,943 $ 4,298
=============================
Per share data:
Basic earnings per share $ 0.41 $ 0.41
Weighted average shares of common
stock outstanding 9,509,487 10,479,172
Diluted earnings per share $ 0.41 $ 0.41
Weighted average shares of common
stock and dilutive potential
common shares outstanding 9,630,341 10,582,223
See accompanying notes to unaudited consolidated financial statements.
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Three Months Ended March 31, 2004 and 2003
(Unaudited, in thousands)
2004 2003
-------------------------------
Net income $ 3,943 $ 4,298
-------------------------------
Other comprehensive income (loss), before tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during period, net of tax of $405 and
($493), for March 31, 2004 and 2003,
respectively 609 (740)
Less: reclassification adjustment for
gains (losses) included in net income,
net of tax of ($3) and $17, for
March 31, 2004 and 2003, respectively (5) 26
-------------------------------
Other comprehensive income (loss) 604 (714)
-------------------------------
Comprehensive income $ 4,547 $ 3,584
===============================
See accompanying notes to unaudited consolidated financial statements.
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Three Months Ending March 31, 2004 and 2003
(Unaudited, in thousands)
2004 2003
--------------------------
Cash flows from operating activities:
Net income $ 3,943 $ 4,298
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 648 646
Amortization of bond discounts and premiums,
net 468 462
Provision for loan losses 330 330
Securities transactions, net (8) 43
Federal Home Loan Bank stock dividend (65) (71)
Undistributed loss from non-marketable
equity securities 67 --
Gain on sales of mortgage loans, net (203) (544)
(Gain) Loss on disposal of premises and
equipment (293) 2
Proceeds from sales of mortgage loans
originated for sale 16,834 50,059
Mortgage loans originated for sale (18,146) (50,629)
Other, net 216 (434)
--------------------------
Net cash provided by operating activities 3,791 4,162
--------------------------
Cash flows from investing activities:
Net (increase) decrease in loans (25,313) 29,380
Proceeds from maturities and calls
of investments in debt securities:
Held-to-maturity 5,270 3,541
Available-for-sale 46,210 55,615
Proceeds from sales of investments:
Available-for-sale 88 11,085
Purchases of investments in debt and
equity securities:
Held-to-maturity (33,750) (24,468)
Available-for-sale (48,887) (94,005)
Other equity securities -- (330)
Principal paydowns from mortgage-backed
securities:
Held-to-maturity 8,707 3,154
Available-for-sale 2,106 6,632
Return of principal on other equity securities -- 115
Purchases of premises and equipment (460) (240)
Proceeds from sales of premises and equipment 623 1
--------------------------
Net cash used in investing activities (45,406) (9,520)
--------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits 11,749 (20,610)
Net increase in federal funds purchased,
repurchase agreements, and notes payable 13,154 13,597
Payments on Federal Home Loan Bank and
other borrowings (41) (41)
Cash dividends paid (1,996) (1,570)
MSTI stock transactions, net 848 650
--------------------------
Net cash provided by (used in)
financing activities 23,714 (7,974)
--------------------------
Net decrease in cash and cash equivalents (17,901) (13,332)
Cash and cash equivalents at beginning of year 75,903 102,746
--------------------------
Cash and cash equivalents at end of period $ 58,002 $ 89,414
==========================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 3,778 $ 4,833
Income taxes 200 400
Real estate acquired through or
in lieu of foreclosure -- 10
Dividends declared not paid 2,002 1,575
See accompanying notes to unaudited consolidated financial statements.
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements for Main Street
Trust, Inc. have been prepared in accordance with the instructions to Form 10-Q
and therefore do not include all information and footnotes necessary for fair
presentation of financial position, results of operations, and cash flows in
conformity with accounting principles generally accepted in the United States of
America. These financial statements should be read in conjunction with the
audited consolidated financial statements and related notes as of and for the
year ended December 31, 2003, and schedules included in Main Street Trust,
Inc.'s Form 10-K filed on March 12, 2004.
In the opinion of management, the consolidated financial statements of Main
Street Trust, Inc. and its subsidiaries, as of March 31, 2004 and for the
three-month periods ended March 31, 2004 and 2003, include all adjustments
necessary for a fair presentation of the results of those periods. All such
adjustments are of a normal recurring nature.
Results of operations for the three-month period ended March 31, 2004 are not
necessarily indicative of the results which may be expected for the year ended
December 31, 2004.
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash and due from banks and federal funds sold and interest
bearing deposits. Generally, federal funds are sold for one-day periods.
Certain amounts in the 2003 consolidated financial statements have been
reclassified to conform with the 2004 presentation. Such reclassifications have
no effect on previously reported net income or shareholders' equity.
Note 2. Company Information/Business Combination
Main Street Trust, Inc. (the "Company"), an Illinois corporation, is a bank
holding company registered under the Bank Holding Company Act of 1956, as
amended. The Company was incorporated on August 12, 1999, and is the parent
company of BankIllinois, The First National Bank of Decatur and FirsTech, Inc.
On March 23, 2000, the Company acquired all of the outstanding stock of
BankIllinois, The First National Bank of Decatur, First Trust Bank of
Shelbyville and FirsTech, Inc. following the merger of BankIllinois Financial
Corporation and First Decatur Bancshares, Inc. into the Company. The merger,
which was accounted for as a pooling of interests, was completed on March 23,
2000. The Company subsequently merged the Company's former banking subsidiary,
First Trust Bank of Shelbyville, into BankIllinois effective June 19, 2002.
On June 14, 2001, the Company was certified by the Board of Governors of the
Federal Reserve System as a financial holding company. This designation allows
the Company to engage in a wider range of nonbanking activities, including
greater authority to engage in securities and insurance activities. However, the
Company has no current plans to do so.
The Company completed a tender offer on June 7, 2002 with 711,832 shares,
representing approximately 6.3% of the total shares then outstanding,
repurchased at a cost, including expenses, of $16.556 million. The Company
completed a second tender offer on September 30, 2003 with 1,074,140 shares,
representing approximately 10.2% of the total shares then outstanding,
repurchased at a cost, including expenses, of approximately $32.395 million.
Note 3. Income per Share
Net income per common share has been computed as follows:
Three Months Ended
-------------------------------
March 31,
-------------------------------
2004 2003
-------------------------------
Net Income $ 3,943,000 $ 4,298,000
===============================
Shares:
Weighted average common shares
outstanding 9,509,487 10,479,172
Dilutive effect of outstanding
options, as determined by
the application of the treasury -------------------------------
stock method 120,854 103,051
Weighted average common shares oustanding,
as adjusted 9,630,341 10,582,223
===============================
Basic earnings per share $ 0.41 $ 0.41
===============================
Diluted earnings per share $ 0.41 $ 0.41
===============================
Note 4. Stock Option Plans
The Company has established a stock incentive plan, which provides for the
granting of options of the Company's common stock to certain directors, officers
and employees. As permitted under accounting principles generally accepted in
the United States of America, grants of options under the plans are accounted
for under the recognition and measurement principles of APB Opinion No. 25
Accounting for Stock Issued to Employees, and related interpretations. Because
options granted under the plans had an exercise price equal to market value of
the underlying common stock on the grant date, no stock-based employee
compensation cost is included in determining net income. The following table
illustrates the effect on net income (in thousands, except per share data and
earnings per share) if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation,
to stock-based employee compensation.
March 31,
------------------------
2004 2003
------------------------
Net income on common stock:
As reported $ 3,943 $ 4,298
Deduct total stock-based compensation expense
determined under the fair value method for all
awards, net of related tax effects (95) (45)
------------------------
Pro forma $ 3,848 $ 4,253
========================
Basic earnings per share:
As reported $ 0.41 $ 0.41
Pro forma 0.40 0.41
Diluted earnings per share:
As reported $ 0.41 $ 0.41
Pro forma 0.40 0.40
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.
March 31,
---------------------
2004 2003
---------------------
Number of options granted 140,500 129,000
Risk-free interest rate 3.94% 3.64%
Expected life, in years 8.00 8.00
Expected volatility 15.95% 13.35%
Expected dividend yield 2.75% 2.42%
Note 5. Commitments and Financial Instruments
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of amounts recognized in the
consolidated balance sheets. The contractual amounts of those instruments
reflect the extent of involvement the Company has in particular classes of
financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. Management
does not anticipate any significant losses as a result of these transactions.
The following table summarizes these financial instruments and commitments (in
thousands) at March 31, 2004 and 2003:
March 31,
----------------------------
2004 2003
----------------------------
Financial instruments whose contract
amounts represent credit risk:
Commitments $ 251,729 $ 202,678
Standby letters of credit 18,419 8,640
The majority of commitments are agreements to extend credit to a customer as
long as there is no violation of any condition established in the contract.
Commitments, principally variable interest rates, generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. For commitments to extend credit, the Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based
on management's credit evaluation. Collateral held varies, but may include
accounts receivable; inventory; property, plant and equipment; and
income-producing commercial properties. Also included in commitments is $3.440
million to purchase other equity securities.
Standby letters of credit are conditional commitments issued by the Banks to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements and,
generally, have terms of one year or less. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Banks may hold collateral, which include accounts
receivables, inventory, property and equipment, and income producing properties,
supporting those commitments, if deemed necessary. In the event the customer
does not perform in accordance with the terms of the agreement with the third
party, the Banks would be required to fund the commitment. The maximum potential
amount of future payments the Banks could be required to make is represented by
the contractual amount shown in the summary above. If the commitment is funded,
the Banks would be entitled to seek recovery from the customer. At March 31,
2004 and 2003, no amounts have been recorded as liabilities for the Banks'
potential obligations under these guarantees.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition
Assets and Liabilities
Total assets increased $28.428 million, or 2.5%, to $1.183 billion at March 31,
2004 compared to $1.154 billion at December 31, 2003. Increases in loans,
investments in debt and equity securities, mortgage loans held for sale and
accrued interest receivable were partially offset by decreases in cash and due
from banks, federal funds sold and interest bearing deposits, premises and
equipment, and other assets.
Cash and due from banks decreased $10.069 million, or 21.9% to $35.830 million
at March 31, 2004 compared to $45.899 million at December 31, 2003, primarily
due to a smaller dollar amount of deposit items in process of collection at
March 31, 2004 compared to December 31, 2003.
Federal funds sold and interest bearing deposits decreased $7.832 million, or
26.1%, to $22.172 million at March 31, 2004 compared to $30.004 million at
December 31, 2003. Federal funds sold and interest bearing deposits fluctuate
with loan demand, deposit volume and investment opportunities.
Total investments in debt and equity securities increased $20.800 million, or
5.6%, to $391.526 million at March 31, 2004 compared to $370.726 million at
December 31, 2003. This overall increase was primarily due to an increase in
investments in securities held-to-maturity of $19.595 million, or 20.2%, and an
increase in securities available-for-sale of $1.208 million, or 0.5%.
Investments fluctuate with loan demand, deposit volume and investment
opportunities.
Loans, net of allowance for loan losses, increased $24.983 million, or 3.7%, to
$691.242 million at March 31, 2004 from $666.259 million at December 31, 2003.
Commercial, financial and agricultural loans increased $25.766 million, or
10.3%, primarily as a result of the favorable rate environment, the Company's
emphasis on business development and relative improvement in the economy in
recent months. Real estate loans increased $1.205 million, or 0.3%.
Installment and consumer loans decreased $1.823 million, or 2.4%, primarily due
to competition from alternative funding sources available to consumers, such as
special financing offered by the auto manufacturers' captive financing
companies.
Mortgage loans held for sale increased $1.515 million, or 239.7%, to $2.147
million at March 31, 2004 compared to $632,000 at December 31, 2003. This
increase was primarily due to a higher volume of loan originations in March 2004
compared to December 2003 as a result of a drop in interest rates in March 2004
and the timing of subsequent sales of those loans.
Premises and equipment decreased $518,000, or 2.9%, from $17.622 million at
December 31, 2003 to $17.104 million at March 31, 2004. The decrease included
depreciation and amortization expense of $648,000 and proceeds from sale of
property of $623,000, offset somewhat by purchases of $460,000 and gain on
disposal of property of $293,000.
Total liabilities increased $25.107 million, or 2.4%, to $1.068 billion at March
31, 2004 from $1.043 billion at December 31, 2003. Increases in total deposits,
federal funds purchased, repurchase agreements and notes payable, accrued
interest payable and other liabilities were somewhat offset by a decrease in
Federal Home Loan Bank advances and other borrowings.
Total deposits increased $11.749 million, or 1.3%, to $910.221 million at March
31, 2004 from $898.472 million at December 31, 2003. Interest bearing deposits
increased $13.710 million, or 1.9%, and were somewhat offset by a decrease of
$1.961 million, or 1.2%, in non-interest bearing deposits.
Federal funds purchased, repurchase agreements and notes payable increased
$13.154 million, or 12.8%, to $116.152 million at March 31, 2004 compared to
$102.998 million at December 31, 2003. Included in this change were increases of
$11.604 million in repurchase agreements and $1.550 million in federal funds
purchased.
Federal Home Loan Bank advances and other borrowings decreased $41,000, or 0.1%,
to $29.939 million at March 31, 2004 compared to $29.980 million at December 31,
2003.
Investment Securities
The carrying value of investments in debt and equity securities was as follows
for March 31, 2004 and December 31, 2003:
Carrying Value of Securities
(in thousands)
--------------------------------------------------------------------------------
March 31, 2004 December 31, 2003
--------------------------------------------------------------------------------
Available-for-sale:
Federal agencies $ 222,760 $220,199
Mortgage-backed securities 21,290 23,007
State and municipal 17,394 17,317
Marketable equity securities 5,678 5,391
--------------------------------------------------------------------------------
Total available-for-sale $ 267,122 $265,914
================================================================================
Held-to-maturity:
Federal agencies $ 36,378 $ 10,704
Mortgage-backed securities 46,854 50,029
State and municipal 33,419 36,323
--------------------------------------------------------------------------------
Total held-to-maturity $ 116,651 $ 97,056
================================================================================
Non-marketable equity securities:
FHLB and FRB stock1 $ 4,324 $ 4,259
Other equity investments 3,429 3,497
--------------------------------------------------------------------------------
Total non-marketable equity
securities $ 7,753 $ 7,756
================================================================================
Total investment securities $ 391,526 $370,726
================================================================================
1 FHLB and FRB are commonly used acronyms for Federal Home Loan Bank and
Federal Reserve Bank, respectively.
The following table shows the maturities and weighted-average yields of
investment securities at March 31, 2004. All securities are shown at their
contractual maturity.
Maturities and Weighted Average Yields of Debt Securities
(dollars in thousands)
-----------------------------------------------------------------------------------
March 31, 2004
-----------------------------------------------------------------------------------
1 year 1 to 5 5 to 10 Over 10
or less years years years Total
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
-----------------------------------------------------------------------------------
Securities available-
for-sale:
Federal agencies ............... $65,608 4.35% $156,152 3.14% $1,000 2.61% $ -- -- $222,760 3.49%
Mortgage-backed
securities1 .................. $ 575 4.58% $ 20,547 4.91% $ 134 6.69% $ 34 3.53% $ 21,290 4.91%
State and municipal ............ $ 2,867 2.94% $ 9,106 4.34% $4,296 5.02% $1,125 5.11% $ 17,394 4.33%
Marketable equity
securities2 .................. $ -- -- $ -- -- $ -- -- $ -- -- $ 5,678 --
------------------------------------------------------------------------------------------------------------------------
Total .................... $69,050 $185,805 $5,430 $1,159 $267,122
------------------------------------------------------------------------------------------------------------------------
Average Yield .................... 4.29% 3.39% 4.62% 5.06% 3.66%
========================================================================================================================
Securities held-
to-maturity:
Federal agencies ............... $ 1,226 2.04% $ 31,627 2.86% $3,525 4.08% $ -- -- $ 36,378 2.95%
Mortgage-backed
securities1 .................. $30,731 1.81% $ 15,914 3.79% $ 103 3.70% $ 106 5.48% $ 46,854 2.49%
State and municipal ............ $11,959 3.87% $ 20,074 4.06% $ 881 4.69% $ 505 5.25% $ 33,419 4.02%
------------------------------------------------------------------------------------------------------------------------
Total .................... $43,916 $ 67,615 $4,509 $ 611 $116,651
========================================================================================================================
Average Yield .................... 2.38% 3.43% 4.19% 5.29% 3.08%
========================================================================================================================
Non-marketable equity securities2:
FHLB and FRB stock ............. $ -- -- $ -- -- $ -- -- $ -- -- $ 4,324 --
Other equity investments ....... $ -- -- $ -- -- $ -- -- $ -- -- $ 3,429 --
------------------------------------------------------------------------------------------------------------------------
Total .................... $ -- -- $ -- -- $ -- -- $ -- -- $ 7,753 --
========================================================================================================================
1 Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties and certain securities require principal
repayments prior to maturity.
2 Due to the nature of these securities, they do not have a stated maturity
date or rate.
Loans
The following tables present the amounts and percentages of loans at March 31,
2004 and December 31, 2003 according to the categories of commercial, financial
and agricultural; real estate; and installment and consumer loans.
Amount of Loans Outstanding
(dollars in thousands)
--------------------------------------------------------------------------------
March 31, 2004 December 31, 2003
--------------------------------------------------------------------------------
Amount Percentage Amount Percentage
--------------------------------------------------------------------------------
Commercial, financial and
agricultural $275,561 39.30% $249,795 36.95%
Real estate 350,202 49.94% 348,997 51.62%
Installment and consumer 75,430 10.76% 77,253 11.43%
--------------------------------------------------------------------------------
Total loans $701,193 100.00% $676,045 100.00%
================================================================================
The balance of loans outstanding as of March 31, 2004 by maturity is shown in
the following table:
Maturity of Loans Outstanding
(dollars in thousands)
--------------------------------------------------------------------------------
March 31, 2004
--------------------------------------------------------------------------------
1 year 1 to 5 Over 5
or less years years Total
--------------------------------------------------------------------------------
Commercial, financial and
agricultural $173,956 $84,763 $16,842 $275,561
Real estate 60,849 172,560 116,793 350,202
Installment and consumer1 25,571 39,902 9,957 75,430
--------------------------------------------------------------------------------
Total $260,376 $297,225 $143,592 $701,193
================================================================================
Percentage of total loans
outstanding 37.13% 42.39% 20.48% 100.00%
================================================================================
1 Net of unearned discount
Capital
Total shareholders' equity increased $3.321 million from December 31, 2003 to
March 31, 2004. Treasury stock transactions were $848,000, primarily due to
stock option exercises. The change in shareholders' equity is summarized as
follows:
Shareholders' Equity (in thousands)
--------------------------------------------------------------------------------
Shareholders' equity, December 31, 2003 $111,450
Net income 3,943
Treasury stock transactions, net 848
Stock appreciation rights (72)
Cash dividends declared (2,002)
Other comprehensive income 604
---------
Shareholders' equity, March 31, 2004 $114,771
=========
On March 16, 2004, the Board of Directors of the Company declared a quarterly
cash dividend of $0.21 per share of the Company's common stock. The dividend of
$2.002 million was paid on April 23, 2004 to holders of record on April 9, 2004.
The Company and its subsidiary banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's and its subsidiary banks' financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, banks must meet specific guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Company's and its
subsidiary banks' capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and its subsidiary banks to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of March 31,
2004, that the Company and its subsidiary banks exceeded all capital adequacy
requirements to which they are subject.
As of March 31, 2004, the most recent notifications from primary regulatory
agencies categorized both of the Company's subsidiary banks as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, banks must maintain minimum total capital to risk-weighted
assets, Tier I capital to risk-weighted assets, and Tier I capital to average
assets ratios as set forth in the table. There are no conditions or events since
that notification that management believes have changed any of the Company's
subsidiary banks' categories.
The Company's and the Banks' actual capital amounts and ratios are presented in
the following table (in thousands):
To be well
For capital capitalized under
adequacy prompt corrective
Actual purposes: action provisions:
--------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------------------------
As of March 31, 2004:
Total capital
(to risk-weighted assets)
Consolidated $121,809 14.3% $67,939 8.0% N/A
BankIllinois $ 61,105 11.6% $42,273 8.0% $52,842 10.0%
First National Bank
of Decatur $ 35,829 11.8% $24,252 8.0% $30,316 10.0%
Tier I capital
(to risk-weighted assets)
Consolidated $111,739 13.2% $33,969 4.0% N/A
BankIllinois $ 54,968 10.4% $21,137 4.0% $31,705 6.0%
First National Bank
of Decatur $ 32,038 10.6% $12,126 4.0% $18,189 6.0%
Tier I capital
(to average assets)
Consolidated $111,739 9.5% $46,845 4.0% N/A
BankIllinois $ 54,968 7.7% $28,534 4.0% $35,668 5.0%
First National Bank
of Decatur $ 32,038 7.2% $17,692 4.0% $22,115 5.0%
Interest Rate Sensitivity
The concept of interest rate sensitivity attempts to gauge exposure of the
Company's net interest income to adverse changes in market driven interest rates
by measuring the amount of interest-sensitive assets and interest-sensitive
liabilities maturing or subject to repricing within a specified time period.
Liquidity represents the ability of the Company to meet the day-to-day demands
of deposit customers balanced by its investments of these deposits. The Company
must also be prepared to fulfill the needs of credit customers for loans with
various types of maturities and other financing arrangements. The Company
monitors its interest rate sensitivity and liquidity through the use of static
gap reports which measure the difference between assets and liabilities maturing
or repricing within specified time periods as well as financial
forecasting/budgeting/reporting software packages.
The following table presents the Company's interest rate sensitivity at various
intervals at March 31, 2004:
Rate Sensitivity of Earning Assets and Interest Bearing Liabilities
(dollars in thousands)
--------------------------------------------------------------------------------------------------------------
1-30 31-90 91-180 181-365 Over
Days Days Days Days 1 year Total
--------------------------------------------------------------------------------------------------------------
Interest earning assets:
Federal funds sold and
interest bearing deposits $ 22,172 $ -- $ -- $ -- $ -- $ 22,172
Debt and equity securities 1 15,742 49,320 14,130 49,819 262,515 391,526
Loans 2 276,727 29,708 45,314 58,360 293,231 703,340
---------------------------------------------------------------------------------------------------------------
Total earning assets $ 314,641 $79,028 $ 59,444 $ 108,179 $ 555,746 $1,117,038
---------------------------------------------------------------------------------------------------------------
Interest bearing liabilities:
Savings and interest bearing
demand deposits $ 45,869 $ 1,592 $ 2,388 $ 4,784 $ 181,632 $ 236,265
Money market savings
deposits 160,041 -- -- -- -- 160,041
Time deposits 21,440 31,299 57,134 111,711 132,117 353,701
Federal funds purchased,
repurchase agreements,
and notes payable 113,397 422 1,665 83 585 116,152
FHLB advances and
other borrowings 7,268 10,000 -- 92 12,579 29,939
---------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities $ 348,015 $43,313 $ 61,187 $116,670 $ 326,913 $ 896,098
---------------------------------------------------------------------------------------------------------------
Net asset (liability) funding gap (33,374) 35,715 (1,743) (8,491) 228,833 220,940
---------------------------------------------------------------------------------------------------------------
Repricing gap 0.90 1.82 0.97 0.93 1.70 1.25
Cumulative repricing gap 0.90 1.01 1.00 0.99 1.25 1.25
---------------------------------------------------------------------------------------------------------------
1 Debt and equity securities include securities available-for-sale,
securities held-to-maturity, and non-marketable equity securities.
2 Loans are gross and include mortgage loans held-for-sale.
Included in the 1-30 day category of savings and interest-bearing demand
deposits are non-core deposits plus a percentage, based upon industry-accepted
assumptions and Company analysis, of the core deposits. "Core deposits" are the
lowest average balance of the prior twelve months for each product type included
in this category. "Non-core deposits" are the difference between the current
balance and core deposits. The time frames include a percentage, based upon
industry-accepted assumptions and Company analysis, of the core deposits, as
follows:
1-30 Days 31-90 Days 91-180 Days 181-365 Days Over 1 Year
--------------------------------------------------------
Savings and
interest-bearing
demand deposits 0.45% 0.85% 1.25% 2.45% 95.00%
At March 31, 2004, the Company was slightly liability-sensitive in the 1-30 days
category and slightly asset-sensitive in the 1-90 day category. As such, the
effect of a decrease in the interest rate for all interest earning assets and
interest bearing liabilities of 100 basis points would increase annualized net
interest income by approximately $334,000 in the 1-30 days category, but
decrease annualized net interest income by approximately $23,000 in the 1-90
days category assuming no management intervention. An increase in interest rates
would have the opposite effect for the same time periods. The Company's Asset
and Liability Management Policy states that the cumulative ratio of
rate-sensitive assets ("RSA") to rate-sensitive liabilities ("RSL") for the
12-month period should fall within the range of 0.75-1.25. As of March 31, 2004,
the Company's RSA/RSL was 0.99, which was within the established guidelines.
In addition to managing interest rate sensitivity and liquidity through the use
of gap reports, the Company has provided for emergency liquidity situations with
informal agreements with correspondent banks that permit the Company to borrow
federal funds on an unsecured basis. Additionally, the Company has a $10 million
unsecured line of credit with a correspondent bank, and can borrow approximately
$54 million from the Federal Home Loan Bank on a secured basis.
The Company uses financial forecasting/budgeting/reporting software packages to
perform interest rate sensitivity analysis for all product categories. The
Company's primary focus of its analysis is on the effect of interest rate
increases and decreases on net interest income. Management believes that this
analysis reflects the potential effects on current earnings of interest rate
changes. Call criteria and prepayment assumptions are taken into consideration
for investments in debt and equity securities. All of the Company's financial
instruments are analyzed by a software database which includes each of the
different product categories which are tied to key rates such as prime, Treasury
Bills, or the federal funds rate. The relationships of each of the different
products to the key rate that the product is tied to is proportional. The
software reprices the products based on current offering rates. The software
performs interest rate sensitivity analysis by performing rate shocks of plus or
minus 200 basis points in 100 basis point increments.
The following table shows projected results at March 31, 2004 and December 31,
2003 of the impact on net interest income from an immediate change in interest
rates. The results are shown as a percentage change in net interest income over
the next twelve months.
Basis Point Change
-----------------------------------------------------
+200 +100 -100 -200
----------------------------------------------------
March 31, 2004 13.1% 6.5% (6.5%) (13.1%)
December 31, 2003 11.7% 5.9% (5.9%) (11.7%)
The foregoing computations are based on numerous assumptions, including relative
levels of market interest rates, prepayments and deposit mix. The computed
estimates should not be relied upon as a projection of actual results. Despite
the limitations on preciseness inherent in these computations, management
believes that the information provided is reasonably indicative of the effect of
changes in interest rate levels on the net earning capacity of the Company's
current mix of interest earning assets and interest bearing liabilities.
Management continues to use the results of these computations, along with the
results of its computer model projections, in order to enhance earnings
potential while positioning the Company to minimize the effect of a prolonged
shift in interest rates that would adversely affect future results of
operations.
At the present time, the most significant market risk affecting the Company is
interest rate risk. Other market risks such as foreign currency exchange risk
and commodity price risk do not occur in the normal business of the Company. The
Company also is not currently using trading activities or derivative instruments
to control interest rate risk.
Liquidity and Cash Flows
The Company was able to meet liquidity needs during the first three months of
2004. A review of the consolidated statements of cash flows included in the
accompanying financial statements shows that the Company's cash and cash
equivalents decreased $17.901 million from December 31, 2003 to March 31, 2004.
In general, funds provided by customer deposits, federal funds purchased,
repurchase agreements, and notes payable, and maturities, calls and paydowns of
investment securities are used to fund loans and purchase investment securities.
Available funds are used to fund demand for loans that meet the Company's credit
quality guidelines, with the remaining funds used to purchase investment
securities and/or federal funds sold.
The decrease in cash and cash equivalents came from cash used in investing
offset somewhat by cash provided by financing and operating activities. There
were differences in the sources and uses of cash during the first three months
of 2004 compared to the first three months of 2003. More cash was used in
investing activities during the first quarter of 2004 compared to the first
quarter of 2003. Cash was used in the area of loans during the first quarter of
2004 compared to cash provided by loans during the first quarter of 2003. Net
loans increased during the first three months of 2004 compared to a decrease
during the same period in 2003. Somewhat offsetting this increase in cash used
in the area of loans was a net decrease in cash used in investing activities
involving the Company's investment portfolio, which was $20.256 million in the
first quarter of 2004 compared to $38.661 million during the same period in
2003. Cash was provided by financing activities during the first three months of
2004 compared to cash used during the same period in 2003. This was mainly due
to funds provided by an increase in deposits during the first three months of
2004 compared to funds used as a result of deposits decreasing during the same
period in 2003. Slightly less cash was provided by operating activities during
the first quarter of 2004 compared to the first quarter of 2003.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting standards
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and the related disclosures of contingent
assets and liabilities. Actual results could differ from those estimates under
different assumptions and conditions. The Company believes that it has one
critical accounting policy, allowance for loan losses, that is subject to
estimates and judgements used in the preparation of its consolidated financial
statements.
Provision and Allowance for Loan Losses
The provision for loan losses is based on management's evaluation of the loan
portfolio in light of national and local economic conditions, changes in the
composition and volume of the loan portfolio, changes in the volume of past due
and nonaccrual loans, and other relevant factors. The allowance for loan losses,
which is reported as a deduction from loans, is available for loan charge-offs.
The allowance is increased by the provision charged to expense and is reduced by
loan charge-offs net of loan recoveries. The allowance is allocated between the
commercial, financial and agricultural, residential real estate and installment
and consumer loan portfolios according to the historical losses experienced in
each of these portfolios as well as the current level of watch list loans and
nonperforming loans for each portfolio. Loans for which borrower cash flow and
the estimated liquidation value of collateral are inadequate to repay the total
outstanding balance are evaluated separately and assigned a specific allocation.
The unallocated portion of the allowance is determined by economic conditions
and other factors mentioned above. The balance of the allowance for loan losses
was $9.951 million at March 31, 2004 compared to $9.786 million at December 31,
2003, as net charge-offs were $165,000 and provisions totaled $330,000 during
the first three months of 2004. The allowance for loan losses as a percentage of
gross loans, including loans held-for-sale, was 1.41% at March 31, 2004,
compared to 1.45% at December 31, 2003. Gross loans, including loans
held-for-sale, increased 3.9% to $703.340 million at March 31, 2004 from
$676.677 million at December 31, 2003.
One measure of the adequacy of the allowance for loan losses is the ratio of the
allowance to nonperforming loans. The allowance for loan losses as a percentage
of nonperforming loans was 391.2% at March 31, 2004 compared to 959.4% at
December 31, 2003. Nonperforming loans increased from $1.020 million at December
31, 2003 to $2.544 million at March 31, 2004. The $1.524 million increase in
nonperforming loans during the first three months of 2004 resulted from a $1.503
million increase in nonaccrual loans and an increase of $21,000 in loans past
due 90 days or more. The increase in nonaccruals was primarily the result of the
addition of one commercial loan in the amount of $1.435 million. As of March 31,
2004, a specific valuation allowance of $300,000 had been assigned to this loan,
and the remaining balance was considered adequately collateralized. Management
believes that nonperforming and potential problem loans are appropriately
identified and monitored based on the extensive loan analysis performed by the
credit administration department, the internal loan committees and the board of
directors. Historically, there have not been a significant amount of loans
charged off which had not been previously identified as problem loans by the
credit administration department or the loan committees.
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)
--------------------------------------------------------------------------------
March 31, 2004 March 31, 2003
--------------------------------------------------------------------------------
Allowance for loan losses at
beginning of year $ 9,786 $ 9,259
--------------------------------------------------------------------------------
Charge-offs during period:
Commercial, financial and agricultural $ -- $ --
Residential real estate -- (9)
Installment and consumer (265) (115)
--------------------------------------------------------------------------------
Total $ (265) $ (124)
--------------------------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial, financial and agricultural $ 53 $ 95
Residential real estate -- 11
Installment and consumer 47 51
--------------------------------------------------------------------------------
Total $ 100 $ 157
--------------------------------------------------------------------------------
Net (charge-offs) recoveries $ (165) $ 33
Provision for loan losses 330 330
--------------------------------------------------------------------------------
Allowance for loan losses at end
of quarter $ 9,951 $ 9,622
================================================================================
Ratio of net (charge-offs) recoveries to
average net loans (0.02%) 0.01%
The following table shows the allocation of the allowance for loan losses
allocated to each loan category.
Allocation of the Allowance for Loan Losses
(in thousands)
--------------------------------------------------------------------------------
March 31, 2004 December 31, 2003
--------------------------------------------------------------------------------
Allocated:
Commercial, financial and agricultural $ 6,365 $ 5,973
Residential real estate 155 153
Installment and consumer 2,077 2,428
--------------------------------------------------------------------------------
Total allocated allowance $ 8,597 $ 8,554
Unallocated allowances 1,354 1,232
--------------------------------------------------------------------------------
Total 9,951 9,786
================================================================================
The following table presents the aggregate amount of loans considered to be
nonperforming for the periods indicated. Nonperforming loans include loans
accounted for on a nonaccrual basis, accruing loans contractually past due 90
days or more as to interest or principal payments and loans which are troubled
debt restructurings as defined in Statement of Financial Accounting Standards
No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings."
Nonperforming Loans (dollars in thousands)
--------------------------------------------------------------------------------
March 31, 2004 December 31, 2003
================================================================================
Nonaccrual loans1 $ 1,902 $ 399
================================================================================
Loans past due 90 days or more $ 642 $ 621
================================================================================
Restructured loans $ 259 $ 18
--------------------------------------------------------------------------------
1 Includes $322,000 at March 31, 2004 and $269,000 at December 31, 2003 of
real estate and consumer loans which management does not consider impaired
as defined by the Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" (SFAS 114).
Other Nonperforming Assets (dollars in thousands)
--------------------------------------------------------------------------------
March 31, 2004 December 31, 2003
================================================================================
Other real estate owned $ - $ -
================================================================================
Nonperforming other assets $ 198 $ 55
================================================================================
Results of Operations
Results of Operations For the Three Months Ended March 31, 2004
Net income for the first three months of 2004 was $3.943 million, a $355,000, or
8.3%, decrease from $4.298 million for the same period in 2003. Basic and
diluted earnings per share remained stable at $0.41 per share in the first
quarters of 2004 and 2003, primarily as a result of the Company utilizing
approximately $32.4 million of its capital to repurchase 1,074,140 shares of
Main Street Trust, Inc. common stock on September 30, 2003.
The following schedule "Consolidated Average Balance Sheet and Interest Rates"
provides details of average balances, interest income or interest expense, and
the average rates for the Company's major asset and liability categories.
Consolidated Average Balance Sheet and Interest Rates
(dollars in thousands)
-------------------------------------------------------------------------------------------------------
Three Months Ended March 31,
-------------------------------------------------------------------------------------------------------
2004 2003
-------------------------------------------------------------------------------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
-------------------------------------------------------------------------------------------------------
Assets
Taxable investment securities1 $ 307,326 $ 2,714 3.55% $ 275,639 $ 2,823 4.15%
Tax-exempt investment
securities1 (TE) 50,135 774 6.21% 56,876 903 6.44%
Federal funds sold and interest
bearing deposits2 40,568 113 1.12% 32,105 102 1.29%
Loans3,4 (TE) 686,628 10,053 5.89% 658,378 11,058 6.81%
-------------------------------------------------------------------------------------------------------
Total interest earning assets
and interest income (TE) $1,084,657 $13,654 5.06% $1,022,998 $14,886 5.90%
-------------------------------------------------------------------------------------------------------
Cash and due from banks $ 47,782 $ 49,495
Premises and equipment 17,518 18,203
Other assets 21,242 16,960
-------------------------------------------------------------------------------------------------------
Total assets $1,171,199 $1,107,656
=======================================================================================================
Liabilities and Shareholders' Equity
Interest bearing demand deposits $ 93,191 $ 151 0.65% $ 82,942 $ 176 0.86%
Savings 304,141 638 0.84% 278,185 704 1.03%
Time deposits 347,281 2,413 2.79% 337,391 2,993 3.60%
Federal funds purchased, repurchase
agreements, and notes payable 107,838 281 1.05% 85,878 267 1.26%
FHLB advances and other borrowings 29,966 399 5.36% 27,793 380 5.54%
-------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities and interest
expense $ 882,417 $ 3,882 1.77% $ 812,189 $ 4,520 2.26%
-------------------------------------------------------------------------------------------------------
Noninterest bearing demand deposits $ 99,744 $ 89,858
Noninterest bearing savings deposits 66,153 60,151
Other liabilities 9,824 9,716
-------------------------------------------------------------------------------------------------------
Total liabilities $1,058,138 $ 971,914
Shareholders' equity 113,061 135,742
-------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $1,171,199 $1,107,656
=======================================================================================================
Interest spread (average rate earned
minus average rate paid) (TE) 3.29% 3.64%
=======================================================================================================
Net interest income (TE) $ 9,772 $10,366
=======================================================================================================
Net yield on interest
earnings assets (TE) 3.62% 4.11%
=======================================================================================================
See next page for Notes 1 - 4.
Notes to Consolidated Average Balance Sheet and Interest Rate Tables:
1 Investments in debt securities are included at carrying value.
2 Federal funds sold and interest bearing deposits included approximately
$20,000 and $14,000 in 2004 and 2003, respectively, of interest income from
third party processing of cashier checks.
3 Loans are net of allowance for loan losses and include mortgage loans held
for sale. Nonaccrual loans are included in the total.
4 Loan fees of approximately $296,000 and $498,000 in 2004 and 2003,
respectively, were included in total loan income.
Net interest income, the most significant component of the Company's earnings,
is the difference between interest received or accrued on the Company's earning
assets - primarily loans and investments - and interest paid or accrued on
deposits and borrowings. In order to compare the interest generated from
different types of earning assets, the interest income on certain tax-exempt
investment securities and loans is increased for analysis purposes to reflect
the income tax savings provided by 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 following table
presents, on a tax equivalent (TE) basis, an analysis of changes in net interest
income resulting from changes in average volumes of earning assets and interest
bearing liabilities and average rates earned and paid. The change in interest
due to the combined rate/volume variance has been allocated to rate and volume
changes in proportion to the absolute dollar amounts of change in each.
Analysis of Volume and Rate Changes
(in thousands)
--------------------------------------------------------------------------------
Three Months Ended March 31, 2004
--------------------------------------------------------------------------------
Increase
(Decrease)
from
Previous Due to Due to
Year Volume Rate
--------------------------------------------------------------------------------
Interest Income
Taxable investment securities $ (109) $ 1,420 $ (1,529)
Tax-exempt investment
securities (TE) (129) (99) (30)
Federal funds sold and interest
earning deposits 11 80 (69)
Loans (TE) (1,005) 2,681 (3,686)
--------------------------------------------------------------------------------
Total interest income (TE) $(1,232) $ 4,082 $ (5,314)
--------------------------------------------------------------------------------
Interest Expense
Interest bearing demand and
savings deposits $ (91) $ 439 $ (530)
Time deposits (580) 562 (1,142)
Federal funds purchased,
repurchase agreements and
notes payable 14 229 (215)
FHLB advances and other borrowings 19 87 (68)
--------------------------------------------------------------------------------
Total interest expense $ (638) $ 1,317 $ (1,955)
--------------------------------------------------------------------------------
Net Interest Income (TE) $ (594) $ 2,765 $ (3,359)
--------------------------------------------------------------------------------
Net interest income on a tax equivalent basis was $594,000, or 5.7%, lower for
the first three months of 2004 compared to 2003. Total tax-equivalent interest
income was $1.232 million, or 8.3%, lower in 2004 compared to 2003, and interest
expense decreased $638,000, or 14.1%. The decrease in both tax-equivalent
interest income and interest expense was mainly due to lower rates, offset
somewhat by an increase in average balances.
The decrease in total tax-equivalent interest income was primarily due to
decreases in interest income from loans and both taxable and tax-exempt
investment securities. The decreases in interest income from loans and taxable
investment securities were due to lower rates offset somewhat by higher average
balances. The decrease in interest income from tax-exempt investment securities
was due to lower rates and lower average balances.
The decrease in total interest expense was due to decreases in interest expense
from interest bearing demand and savings deposits and time deposits, offset
slightly by increases in federal funds purchased, repurchase agreements and
notes payable and FHLB advances and other borrowings. Interest expense on both
interest bearing demand and savings deposits and time deposits decreased due to
lower rates, offset somewhat by an increase in average balances. Interest
expense on both federal funds purchased, repurchase agreements and notes payable
and FHLB advances and other borrowings increased due to higher average balances,
offset somewhat by lower rates.
The provision for loan losses recorded was $330,000 during the first three
months of both 2004 and 2003. The provision during both periods was based on
management's analysis of the loan portfolio, as discussed in the provision for
loan losses section above.
Noninterest Income and Expense
for the Three Months Ended
March 31, 2004 and 2003
(in thousands)
--------------------------------------------------------------------------------
03/31/2004 03/31/2003 $ change % change
--------------------------------------------------------------------------------
Noninterest income:
Remittance processing 1 $ 1,892 $ 1,766 $ 126 7.13%
Trust and brokerage fees 2 1,662 1,462 200 13.68%
Service charges on deposit
accounts 579 580 (1) (0.17%)
Securities transactions, net 8 (43) 51 118.60%
Gain on sales of mortgage
loans, net 3 203 544 (341) (62.68%)
Other 4 803 527 276 52.37%
----------------------------------------------
Total non-interest income $ 5,147 $ 4,836 $ 311 6.43%
==============================================
Noninterest Expense:
Salaries and employee
benefits $ 4,708 $ 4,649 $ 59 1.27%
Occupancy 645 623 22 3.53%
Equipment 633 649 (16) (2.47%)
Data processing 532 529 3 0.57%
Office supplies 305 303 2 0.66%
Service charges from
correspondent banks 225 229 (4) (1.75%)
Other 1,149 1,082 67 6.19%
----------------------------------------------
Total non-interest
expense $ 8,197 $ 8,064 $ 133 1.65%
==============================================
1 In August 2003, a new product, Internet Agent, was introduced for one new
customer and, during the fourth quarter of 2003, three existing customers
switched from mechanical processing to this product. Internet Agent income
accounted for $401,000 of total remittance processing income in the first
quarter of 2004. This increase was offset somewhat by decreases in
mechanical collection, lockbox processing and electronic payment income.
Emphasis has continued to be placed on new sales of, and conversion of
existing customers to, Internet Agent processing, as it is a better product
and more profitable compared to mechanical, lockbox and electronic
processing.
2 The increase in trust and brokerage fees was mainly due to an increase in
assets under management of approximately $166 million at March 31, 2004
compared to March 31, 2003 as a result of booking new assets and market
appreciation.
3 The decrease in gains on sales of mortgage loans reflected a $33.225
million, or 66.4%, decrease in funded mortgage loans held-for sale, from
$50.059 million in the first quarter of 2003 to $16.834 million in the
first quarter of 2004. The volume of funded mortgage loans, which peaked in
the third quarter of 2003, has decreased in both of the last two quarters,
mainly due to a decline in demand for refinancing.
4 The increase in other non-interest income was due to a gain of $291,000 on
the sale of two parking lots.
Income tax expense decreased $14,000, or 0.6%, during the first three months of
2004 compared to the same period in 2003. The effective tax rate increased to
35.6% during the first quarter of 2004 from 33.8% during the first quarter of
2003.
Business Segment Information
The Company currently operates in two industry segments. The primary business
involves providing banking services to central Illinois. The Banks offer a full
range of financial services to business and individual customers. These services
include demand, savings, time and individual retirement accounts; commercial,
consumer (including automobile loans and personal lines of credit),
agricultural, and real estate lending; safe deposit and night depository
services; farm management; full service trust departments that offer a wide
range of services such as investment management, acting as trustee, serving as
guardian, executor or agent and miscellaneous consulting; discount brokerage
services and purchases of installment obligations from retailers, primarily
without recourse. The other industry segment involves retail payment processing.
FirsTech provides the following services to electric, water and gas utilities,
telecommunication companies, cable television firms and charitable
organizations: retail lockbox processing of payments delivered by mail on behalf
of the biller; processing of payments delivered by customers to pay agents such
as grocery stores, convenience stores and currency exchanges; and concentration
of payments delivered by the Automated Clearing House network, money management
software such as Quicken and through networks such as Visa e-Pay and MasterCard
RPS.
Company information is provided for informational purposes only, since it is not
considered a separate segment for reporting purposes. Certain administrative,
audit, compliance, accounting, finance, property management, human resources,
sales management and marketing, courier, information systems and other support
services are performed by the Company. The net expenses of these functions are
allocated to the subsidiaries by charging a monthly management fee.
Banking Remittance
Services Services Company Eliminations Total
-------------------------------------------------------------------------------------------------------------
March 31, 2004
Total interest income $ 13,421 $ 4 $ (17) $ (27) $ 13,381
Total interest expense 3,892 - 17 (27) 3,882
Provision for loan losses 330 - - - 330
Total non-interest income 3,282 1,912 1,180 (1,227) 5,147
Total non-interest expense 6,576 1,316 1,532 (1,227) 8,197
Income before income tax 5,905 600 (386) - 6,119
Income tax expense 2,079 252 (155) - 2,176
Net income 3,826 348 (231) - 3,943
Total assets 1,163,592 3,940 121,659 (106,589) 1,182,602
Depreciation and amortization 384 149 115 - 648
March 31, 2003
Total interest income $ 14,416 $ 18 $ 155 $ (23) $ 14,566
Total interest expense 4,543 - - (23) 4,520
Provision for loan losses 330 - - - 330
Total non-interest income 3,226 1,787 1,101 (1,278) 4,836
Total non-interest expense 6,641 1,251 1,450 (1,278) 8,064
Income before income tax 6,128 554 (194) - 6,488
Income tax expense 2,038 222 (70) - 2,190
Net income 4,090 332 (124) - 4,298
Total assets 1,103,743 7,101 140,933 (133,767) 1,118,010
Depreciation and amortization 449 100 97 - 646
Recent Regulatory Development
On March 31, 2004, Illinois Governor Blagojevich signed an Executive Order that
would create a new state agency called the Department of Financial and
Professional Regulation (the "DFPR"). As issued, the Executive Order provides
that the DFPR would replace the Office of Banks and Real Estate, the Department
of Financial Institutions, the Department of Insurance and the Department of
Professional Regulation. The DFPR would be established on July 1, 2004, unless
the Executive Order is challenged. At this time, it is not possible to predict
the impact that the creation of the DFPR would have on the Company and its
subsidiaries.
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. Factors which could have a material adverse
effect on the operations and future prospects of the Company and its
subsidiaries include, but are not limited to, the following:
o The strength of the United States economy in general and the strength of
the local economies in which the Company conducts its operations which may
be less favorable than expected and may result in, among other things, a
deterioration in the credit quality and value of the Company's assets.
o The economic impact of past and any future terrorist attacks, acts of war
or threats thereof, and the response of the United States to any such
threats and attacks.
o The effects of, and changes in, federal, state and local laws, regulations
and policies affecting banking, securities, insurance and monetary and
financial matters.
o The effects of changes in interest rates (including the effects of changes
in the rate of prepayments of the Company's assets) and the policies of the
Board of Governors of the Federal Reserve System.
o The ability of the Company to compete with other financial institutions as
effectively as the Company currently intends due to increases in
competitive pressures in the financial services sector.
o The inability of the Company to obtain new customers and to retain existing
customers.
o The timely development and acceptance of products and services, including
products and services offered through alternative delivery channels such as
the Internet.
o Technological changes implemented by the Company and by other parties,
including third party vendors, which may be more difficult or more
expensive than anticipated or which may have unforeseen consequences to the
Company and its customers.
o The ability of the Company to develop and maintain secure and reliable
electronic systems.
o The ability of the Company to retain key executives and employees and the
difficulty that the Company may experience in replacing key executives and
employees in an effective manner.
o Consumer spending and saving habits which may change in a manner that
affects the Company's business adversely.
o Business combinations and the integration of acquired businesses which may
be more difficult orexpensive than expected.
o The costs, effects and outcomes of existing or future litigation.
o Changes in accounting policies and practices, as may be adopted by state
and federal regulatory agencies and the Financial Accounting Standards
Board.
o The ability of the Company to manage the risks associated with the
foregoing as well as anticipated.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements.
Additional information concerning the Company and its business, including other
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
See the "Interest Rate Sensitivity" section above.
Item 4. Controls and Procedures
An evaluation was performed under the supervision and with the participation of
the Company's management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
promulgated under the Securities and Exchange Act of 1934, as amended) as of
March 31, 2004. Based on that evaluation, the Company's management, including
the Chief Executive Officer and Chief Financial Officer, concluded that the
Company's disclosure controls and procedures were effective. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the Company or its
subsidiaries is a party other than ordinary routine litigation incidental to
their respective businesses.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities
---------------------------------------------------------------------------------------------
Issuer Purchases of Equity Securities
(c) Total (d) Maximum
Number of Number
Shares of Shares
Purchased as that May
Part of Yet Be
(a) Total Publicly Purchased
Number of (b) Average Announced Under the
Shares Price Paid per Plans or Plans or
Period Purchased Share Programs 1 Programs 1
------------------------------------------------------------------------------------------
January 1 -
January 31, 2004 - $ - - 500,000
February 1 -
February 29, 2004 2,000 $ 30.75 2,000 498,000
March 1 -
March 31, 2004 - $ - - 498,000
--------------------------------------------------------------------------
Total 2,000 $ 30.75 2,000 498,000
==========================================================================
1 On October 27, 2003, the Company announced that its Board of Directors had
reinstated the Stock Repurchase Program allowing the purchase of up to
500,000 shares of the Company's outstanding stock.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
31.1 Certification of Chief Executive Officer Pursuant to Rule
13-a-14(a)/15d-14(a)
31.2 Certification of Chief Financial Officer Pursuant to Rule
13-a-14(a)/15d-14(a)
32.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
b. Reports
On January 23, 2004, the Company filed a report on Form 8-K
pursuant to Item 12 that reported the Company's financial
information for the fiscal quarter and fiscal year ended December
31, 2003.
On April 26, 2004, the Company filed a report on Form 8-K pursuant
to Item 12 that reported the Company's financial information for
the fiscal quarter ended March 31, 2004.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MAIN STREET TRUST, INC.
Date: May 6, 2004
By: /s/ David B. White
----------------------------------------
David B. White, Executive Vice President
and Chief Financial Officer
By: /s/ Van A Dukeman
----------------------------------------
Van A. Dukeman, President
and Chief Executive Officer