UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2003
Commission File Number: 0-30031
MAIN STREET TRUST, INC.
(Exact name of Registrant as specified in its charter)
Illinois 37-1338484
--------------------------------- -------------------------------
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
100 West University, Champaign, Illinois 61820
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
(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 November 3, 2003.
Main Street Trust, Inc. Common Stock 9,499,212
1
Table of Contents
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 29
Item 4. Controls and Procedures 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 2. Changes in Securities and Use of Proceeds 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 30
SIGNATURES 31
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2003 and December 31, 2002
(Unaudited, in thousands, except share data)
September 30, December 31,
2003 2002
----------------------------
ASSETS
Cash and due from banks ............................................ $ 47,970 $ 59,744
Federal funds sold and interest bearing deposits ................... 38,806 43,002
--------------------------
Cash and cash equivalents .................................. 86,776 102,746
--------------------------
Investments in debt and equity securities:
Available-for-sale, at fair value ................................ 262,273 240,616
Held-to-maturity, at cost (fair value of $100,342 and $70,489
at September 30, 2003 and December 31, 2002, respectively) ..... 100,990 68,563
Non-marketable equity securities ................................. 7,469 7,031
--------------------------
Total investments in debt and equity securities ............ 370,732 316,210
--------------------------
Loans, net of allowance for loan losses of $9,693 and $9,259
at September 30, 2003 and December 31, 2002, respectively ........ 645,839 664,142
Mortgage loans held for sale ....................................... 1,887 2,972
Premises and equipment ............................................. 17,594 18,349
Accrued interest receivable ........................................ 7,449 7,315
Other assets ....................................................... 17,196 10,994
--------------------------
Total assets ............................................... $ 1,147,473 $ 1,122,728
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing ........................................... $ 151,747 $ 163,903
Interest bearing ............................................... 710,110 704,683
--------------------------
Total deposits ............................................. 861,857 868,586
--------------------------
Federal funds purchased, repurchase agreements and notes payable ... 102,710 80,651
Federal Home Loan Bank advances and other borrowings ............... 29,999 27,806
Accrued interest payable ........................................... 1,605 2,252
Other liabilities .................................................. 42,013 8,963
--------------------------
Total liabilities .......................................... 1,038,184 988,258
--------------------------
Shareholders' equity:
Preferred stock, no par value; 2,000,000 shares authorized ...... -- --
Common stock, $0.01 per value; 15,000,000 shares authorized;
11,219,319 shares issued at September 30, 2003 and
December 31, 2002 .............................................. 112 112
Paid in capital .................................................. 55,268 55,337
Retained earnings ................................................ 99,720 92,853
Accumulated other comprehensive income ........................... 2,231 3,776
--------------------------
157,331 152,078
Less: treasury stock, at cost, 1,742,435 and 755,047 shares
at September 30, 2003 and December 31, 2002, respectively ........ (48,042) (17,608)
--------------------------
Total shareholders' equity ................................. 109,289 134,470
--------------------------
Total liabilities and shareholders' equity ................. $ 1,147,473 $ 1,122,728
==========================
See accompanying notes to unaudited consolidated financial statements.
3
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Nine Months Ended September 30, 2003 and 2002
(Unaudited, in thousands, except share data)
2003 2002
----------------------------
Interest income:
Loans and fees on loans ........................................ $ 31,548 $ 36,381
Investments in debt and equity securities
Taxable ...................................................... 8,647 9,632
Tax-exempt ................................................... 1,722 1,783
Federal funds sold and interest bearing deposits ............... 363 302
----------------------------
Total interest income .................................... 42,280 48,098
Interest expense:
Deposits ....................................................... 10,837 14,403
Federal funds purchased, repurchase agreements and notes payable 817 919
Federal Home Loan Bank advances and other borrowings ........... 1,156 1,444
----------------------------
Total interest expense ................................... 12,810 16,766
----------------------------
Net interest income ...................................... 29,470 31,332
Provision for loan losses ........................................ 990 990
----------------------------
Net interest income after provision for loan losses ...... 28,480 30,342
Non-interest income:
Remittance processing .......................................... 5,312 5,555
Trust and brokerage fees ....................................... 4,230 4,625
Service charges on deposit accounts ............................ 1,906 1,762
Securities transactions, net ................................... (49) 228
Gain on sales of mortgage loans, net ........................... 2,214 773
Other .......................................................... 1,577 1,214
----------------------------
Total non-interest income ................................ 15,190 14,157
Non-interest expense:
Salaries and employee benefits ................................. 13,893 14,407
Occupancy ...................................................... 1,847 1,759
Equipment ...................................................... 1,787 2,069
Data processing ................................................ 1,563 1,732
Office supplies ................................................ 962 959
Service charges from correspondent banks ....................... 698 709
Other .......................................................... 3,685 3,614
----------------------------
Total non-interest expense ............................... 24,435 25,249
Income before income taxes ............................... 19,235 19,25
Income taxes ..................................................... 6,540 6,318
----------------------------
Net income ............................................... $ 12,695 $ 12,932
============================
Per share data:
Basic earnings per share ....................................... $ 1.21 $ 1.19
Weighted average shares of common stock outstanding ............ 10,491,883 10,900,115
Diluted earnings per share ..................................... $ 1.20 $ 1.18
Weighted average shares of common stock and dilutive potential
common shares outstanding .................................... 10,604,327 10,979,889
See accompanying notes to unaudited consolidated financial statements.
4
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Nine Months Ended September 30, 2003 and 2002
(Unaudited, in thousands)
2003 2002
--------------------
Net income ............................................................... $ 12,695 $ 12,932
--------------------
Other comprehensive income, before tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period, net of tax of
($1,050) and $1,111 for September 30, 2003 and 2002, respectively ... (1,574) 1,352
Less: reclassification adjustment for (gains) losses included in net
income, net of tax of $20 and $(91), for September 30, 2003
and 2002, respectively ............................................. 29 (137)
--------------------
Other comprehensive income, net of tax ................................. (1,545) 1,215
--------------------
Comprehensive income ................................................... $ 11,150 $ 14,147
====================
See accompanying notes to unaudited consolidated financial statements.
5
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Three Months Ended September 30, 2003 and 2002
(Unaudited, in thousands, except share data)
2003 2002
----------------------------
Interest income:
Loans and fees on loans ........................................ $ 10,146 $ 11,999
Investments in debt and equity securities
Taxable ...................................................... 2,875 3,177
Tax-exempt ................................................... 556 589
Federal funds sold and interest bearing deposits ............... 109 106
----------------------------
Total interest income .................................... 13,686 15,871
Interest expense:
Deposits ....................................................... 3,346 4,678
Federal funds purchased, repurchase agreements and notes payable 270 270
Federal Home Loan Bank advances and other borrowings ........... 392 451
----------------------------
Total interest expense ................................... 4,008 5,399
----------------------------
Net interest income ...................................... 9,678 10,472
Provision for loan losses ........................................ 330 330
----------------------------
Net interest income after provision for loan losses ...... 9,348 10,142
Non-interest income:
Remittance processing .......................................... 1,814 1,769
Trust and brokerage fees ....................................... 1,435 1,743
Service charges on deposit accounts ............................ 666 612
Securities transactions, net ................................... (6) (62)
Gain on sales of mortgage loans, net ........................... 972 378
Other .......................................................... 539 198
----------------------------
Total non-interest income ................................ 5,420 4,638
Non-interest expense:
Salaries and employee benefits ................................. 4,650 4,556
Occupancy ...................................................... 641 598
Equipment ...................................................... 575 707
Data processing ................................................ 505 494
Office supplies ................................................ 334 325
Service charges from correspondent banks ....................... 233 226
Other .......................................................... 1,312 1,185
----------------------------
Total non-interest expense ............................... 8,250 8,091
Income before income taxes ............................... 6,518 6,689
Income taxes ..................................................... 2,253 2,210
----------------------------
Net income ............................................... $ 4,265 $ 4,479
============================
Per share data:
Basic earnings per share ....................................... $ 0.41 $ 0.43
Weighted average shares of common stock outstanding ............ 10,499,741 10,486,735
Diluted earnings per share ..................................... $ 0.40 $ 0.42
Weighted average shares of common stock and dilutive potential
common shares outstanding .................................... 10,631,293 10,591,587
See accompanying notes to unaudited consolidated financial statements.
6
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Three Months Ended September 30, 2003 and 2002
(Unaudited, in thousands)
2003 2002
------------------
Net income ............................................................... $ 4,265 $ 4,479
------------------
Other comprehensive income, before tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period, net of tax of
($1,099) and $635 for September 30, 2003 and 2002, respectively .... (1,647) 953
Less: reclassification adjustment for losses included in
net income, net of tax of $3 and $25 for September 30, 2003
and 2002, respectively ............................................. 3 37
------------------
Other comprehensive income, net of tax ................................. (1,644) 990
------------------
Comprehensive income ................................................... $ 2,621 $ 5,469
==================
See accompanying notes to unaudited consolidated financial statements.
7
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Nine Months Ending September 30, 2003 and 2002
(Unaudited, in thousands)
2003 2002
----------------------
Cash flows from operating activities:
Net income .......................................................... $ 12,695 $ 12,932
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ...................................................... 1,826 1,969
Amortization of bond discounts and premiums, net .................. 1,534 830
Provision for loan losses ......................................... 990 990
Securities transactions, net ...................................... 49 (228)
Gain on sales of mortgage loans, net .............................. (2,214) (773)
Federal Home Loan Bank stock dividend ............................. (247) (121)
Proceeds from sales of mortgage loans originated for sale ......... 188,245 79,865
Mortgage loans originated for sale ................................ (184,946) (74,011)
Other, net ........................................................ (5,672) 45
----------------------
Net cash provided by operating activities ..................... 12,260 21,498
----------------------
Cash flows from investing activities:
Net decrease (increase) in loans .................................... 17,303 (5,295)
Proceeds from maturities and calls of investments in debt securities:
Held-to-maturity .................................................. 9,753 1,841
Available-for-sale ................................................ 140,574 72,620
Proceeds from sales of investments:
Available-for-sale ................................................ 11,085 44,732
Purchases of investments in debt and equity securities:
Held-to-maturity .................................................. (58,691) (14,058)
Available-for-sale ................................................ (192,787) (108,702)
Other equity securities ........................................... (830) (1,720)
Principal paydowns from mortgage-backed securities:
Held-to-maturity .................................................. 15,924 12,262
Available-for-sale ................................................ 16,049 8,934
Return of principal on other equity securities ...................... 490 106
Purchases of premises and equipment ................................. (1,071) (1,521)
----------------------
Net cash (used in) provided by investing activities ........... (42,201) 9,199
----------------------
Cash flows from financing activities:
Net decrease in deposits ............................................ (6,729) (20,988)
Net increase (decrease) in federal funds purchased,
repurchase agreements, and notes payable .......................... 22,059 (26,641)
Advances from Federal Home Loan Bank and other borrowings ........... 2,268 13,000
Payments on Federal Home Loan Bank and other borrowings ............. (75) (18,072)
Cash dividends paid ................................................. (5,243) (4,273)
Issuance of new shares of common stock, net ......................... -- 1,222
MSTI stock transactions, net ........................................ 1,691 (15,003)
----------------------
Net cash used in financing activities ......................... 13,971 (70,755)
----------------------
Net decrease in cash and cash equivalents ..................... (15,970) (40,058)
Cash and cash equivalents at beginning of year ........................ 102,746 95,379
----------------------
Cash and cash equivalents at end of period ............................ $ 86,776 $ 55,321
======================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest .......................................................... $ 12,810 $ 17,522
Income taxes ...................................................... 6,745 6,734
Real estate acquired through or in lieu of foreclosure .............. 10 289
Dividends declared not paid ......................................... 1,896 1,361
Obligation to purchase treasury stock ............................... 32,385 --
See accompanying notes to unaudited consolidated financial statements.
8
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements for Main Street
Trust, Inc. have been prepared in accordance with the instructions to Form 10-Q
and therefore do not include all information and footnotes necessary for fair
presentation of financial position, results of operations, and cash flows in
conformity with accounting principles generally accepted in the United States of
America. These financial statements should be read in conjunction with the
audited consolidated financial statements and related notes as of and for the
year ended December 31, 2002, and schedules included in Main Street Trust,
Inc.'s Form 10-K filed on March 21, 2003.
In the opinion of management, the consolidated financial statements of Main
Street Trust, Inc. and its subsidiaries, as of September 30, 2003 and for the
three-month and nine-month periods ended September 30, 2003 and 2002, include
all adjustments necessary for a fair presentation of the results of those
periods. All such adjustments are of a normal recurring nature.
Results of operations for the three-month and nine-month periods ended September
30, 2003 are not necessarily indicative of the results which may be expected for
the year ended December 31, 2003.
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 2002 consolidated financial statements have been
reclassified to conform with the 2003 presentation. Such reclassifications have
no effect on previously reported net income or shareholders' equity.
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 "BHCA"). The Company was incorporated on August 12, 1999, and is
the parent company of BankIllinois, The First National Bank of Decatur and
FirsTech, Inc. The Company's two banking subsidiaries are referred to as "the
Banks".
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.
9
Note 3. Income per Share
Net income per common share has been computed as follows:
Nine Months Ended Three Months Ended
September 30, September 30,
2003 2002 2003 2002
-----------------------------------------------------
Net Income .............................. $12,695,000 $12,932,000 $ 4,265,000 $ 4,479,000
=====================================================
Shares:
Weighted average common shares
outstanding ......................... 10,491,883 10,900,115 10,499,741 10,486,735
Dilutive effect of outstanding options,
as determined by the application of
the treasury stock method ........... 112,444 79,774 131,552 104,852
-----------------------------------------------------
Weighted average common shares
outstanding, as adjusted ............ 10,604,327 10,979,889 10,631,293 10,591,587
=====================================================
Basic earnings per share ................ $ 1.21 $ 1.19 $ 0.41 $ 0.43
=====================================================
Diluted earnings per share .............. $ 1.20 $ 1.18 $ 0.40 $ 0.42
=====================================================
Note 4. Stock Option Plans
The Company has four stock-based compensation plans, which have been in
existence for all periods presented. As permitted under accounting principles
generally accepted in the United States of America, grants of options under the
plans are accounted for under the recognition and measurement principles of APB
Opinion No. 25 Accounting for Stock Issued to Employees, and related
interpretations. Because options granted under the plans had an exercise price
equal to market value of the underlying common stock on the grant date, no
stock-based employee compensation cost is included in determining net income.
The following table illustrates the effect on net income (in thousands, except
per share data and earnings per share) if the Company had applied the fair value
recognition provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.
Nine Months Ended Three Months Ended
September 30, September 30,
2003 2002 2003 2002
--------------------------------------------------
Net income on common stock:
As reported .................................. 12,695 12,932 4,265 4,479
Deduct total stock-based compensation expense
determined under the fair value method for all
awards, net of related tax effects ........... (189) (249) (72) (39)
--------------------------------------------------
Pro forma ................................. 12,506 12,683 4,193 4,440
==================================================
Basic earnings per share:
As reported .................................. $ 1.21 $ 1.19 $ 0.41 $ 0.43
Pro forma .................................... 1.19 1.16 0.40 0.42
Diluted earnings per share:
As reported .................................. $ 1.20 $ 1.18 $ 0.40 $ 0.42
Pro forma .................................... 1.18 1.16 0.39 0.42
The fair value of the stock options granted has been estimated using the
Black-Scholes option-pricing model with the following weighted average
assumptions. The Black-Scholes option-pricing model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions.
In addition, such models require the use of subjective assumptions, including
expected stock price volatility. In management's opinion, such valuation models
may not necessarily provide the best single measure of option value.
Nine Months Ended
September 30,
---------------------------
2003 2002
---------------------------
Number of options granted .............. 129,000 158,000
Risk-free interest rate ................ 3.64% 5.20%
Expected life, in years ................ 8.00 8.00
Expected volatility .................... 13.35% 10.34%
Expected dividend yield ................ 2.42% 2.80%
10
Note 5. Commitments and Financial Instruments
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
Those financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of amounts recognized in the
consolidated balance sheets. The contractual amounts of those instruments
reflect the extent of involvement the Company has in particular classes of
financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. Management
does not anticipate any significant losses as a result of these transactions.
The following table summarizes these financial instruments and commitments (in
thousands) at September 30, 2003 and December 31, 2002:
September 30, December 31,
2003 2002
------------------------------
Financial instruments whose contract amounts
represent credit risk:
Commitments ................................... $207,784 $201,181
Standby letters of credit .................... 11,181 11,563
The majority of commitments are agreements to extend credit to a customer as
long as there is no violation of any condition established in the contract.
Commitments, principally variable interest rates, generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. For commitments to extend credit, the Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based
on management's credit evaluation. Collateral held varies, but may include
accounts receivables; inventory; property, plant and equipment; and
income-producing commercial properties. Also included in commitments at
September 30, 2003 was $3.672 million to purchase other equity securities,
compared to $1.750 million at December 31, 2002.
Standby letters of credit are conditional commitments issued by the Company 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 Company 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 Company would be required to fund the commitment. The maximum
potential amount of future payments the Company could be required to make is
represented by the contractual amount shown in the summary above. If the
commitment is funded, the Company would be entitled to seek recovery from the
customer. At September 30, 2003 and December 31, 2002, no amounts have been
recorded as liabilities for the Company's 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 $24.745 million, or 2.2%, to $1.147 billion at September
30, 2003 compared to $1.123 billion at December 31, 2002. Increases in all
categories of investment securities, other assets and accrued interest
receivable were partially offset by decreases in loans, cash and due from banks,
federal funds sold and interest bearing deposits, mortgage loans held for sale
and premises and equipment.
11
Cash and due from banks decreased $11.774 million, or 19.7%, to $47.970 million
at September 30, 2003 compared to $59.744 million at December 31, 2002,
primarily due to a smaller dollar amount of deposit items in process of
collection at September 30, 2003 compared to December 31, 2002.
Federal funds sold and interest bearing deposits decreased $4.196 million, or
9.8%, to $38.806 million at September 30, 2003 compared to $43.002 million at
December 31, 2002. Federal funds sold and interest bearing deposits fluctuate
with loan demand, deposit volume and investment opportunities.
Total investments in debt and equity securities increased $54.522 million, or
17.2%, to $370.732 million at September 30, 2003 compared to $316.210 million at
December 31, 2002. There were increases in all categories of investment
securities as investments in securities available-for-sale increased $21.657
million, or 9.0%, investments in securities held-to-maturity increased $32.427
million, or 47.3%, and non-marketable equity securities increased $438,000, or
6.2%, at September 30, 2003 compared to December 31, 2002. Investments fluctuate
with loan demand, deposit volume and other investment opportunities.
Loans, net of allowance for loan losses, decreased $18.303 million, or 2.8%, to
$645.839 million at September 30, 2003 from $664.142 million at December 31,
2002. Decreases in installment and consumer loans, and in real estate loans,
were partially offset by an increase in commercial, financial and agricultural
loans. Installment and consumer loans decreased $17.637 million, or 18.5%, due
to alternative funding sources available to consumers, such as special financing
offered by the auto manufacturers' captive financing companies. Real estate
loans decreased $9.448 million, or 2.7%. The decrease in real estate loans
included a decrease of $26.766 million in residential real estate caused by
long-term fixed rate loans being refinanced and subsequently sold on the
secondary market, offset somewhat by an increase of $17.318 million in
commercial real estate. Commercial, financial and agricultural loans increased
$9.216 million, or 3.9%. The increases in both commercial real estate and
commercial, financial and agricultural loans were due to an increase in loan
demand in these areas.
Mortgage loans held for sale decreased $1.085 million, or 36.5%, to $1.887
million at September 30, 2003 compared to $2.972 million at December 31, 2002.
This decrease was reflective of a decrease in demand at the end of September
2003 compared to December 2002.
Premises and equipment decreased $755,000, or 4.1%, to $17.594 million at
September 30, 2003 from $18.349 million at December 31, 2002. The decrease
included depreciation expense of $1.826 million offset somewhat by purchases of
$1.071 million.
Other assets increased $6.202 million, or 56.4%, to $17.196 million at September
30, 2003 from $10.994 million at December 31, 2002. The increase included an
investment in a low-income housing property development and a lower deferred tax
asset due to the decrease in market value on securities available for sale.
Total liabilities increased $49.926 million, or 5.1%, to $1.038 billion at
September 30, 2003 from $988.258 million at December 31, 2002. Increases in
other liabilities, federal funds purchased, repurchase agreements and notes
payable, and Federal Home Loan Bank advances and other borrowings were partially
offset by decreases in total deposits and accrued interest payable.
Total deposits decreased $6.729 million, or 0.8%, to $861.857 million at
September 30, 2003 from $868.586 million at December 31, 2002. The decrease in
deposits included a decrease of $12.156 million, or 7.4%, in non-interest
bearing deposits offset somewhat by an increase of $5.427 million, or 0.8%, in
interest bearing deposits.
Federal funds purchased, repurchase agreements and notes payable increased
$22.059 million, or 27.4%, to $102.710 million at September 30, 2003 compared to
$80.651 million at December 31, 2002. Included in this change was an increase of
$22.321 million in repurchase agreements offset by decreases of $200,000 in
federal funds purchased and $62,000 in notes payable.
Federal Home Loan Bank advances and other borrowings increased $2.193 million,
or 7.9%, to $29.999 million at September 30, 2003 compared to $27.806 million at
December 31, 2002. The increase was due to borrowing to finance the investment
in a low-income housing development offset partially by payments on FHLB
advances.
Other liabilities increased $33.050 million, or 368.7%, to $42.013 million at
September 30, 2003 compared to $8.963 million at December 31, 2002 primarily due
to the accrual of $32.385 million related to the purchase of stock pursuant to
the tender offer.
12
Investment Securities
The carrying value of investments in debt and equity securities was as follows
for September 30, 2003 and December 31, 2002:
Carrying Value of Securities
(in thousands)
September 30, December 31,
2003 2002
---------------------------
Available-for-sale:
U.S. Treasury .................................. $ 2,009 $ 3,066
Federal agencies ............................... 213,730 185,469
Mortgage-backed securities ..................... 26,114 30,884
State and municipal ............................ 15,678 16,168
Corporate and other obligations ................ -- 1,008
Marketable equity securities ................... 4,742 4,021
-----------------------
Total available-for-sale ................. $262,273 $240,616
=======================
Held-to-maturity:
Federal agencies ............................... $ 7,415 $ 1,750
Mortgage-backed securities ..................... 53,313 23,595
State and municipal ............................ 40,262 43,218
-----------------------
Total held-to-maturity ................... $100,990 $ 68,563
=======================
Non-marketable equity securities:
FHLB and FRB stock1 ............................ $ 4,190 $ 3,963
Other equity investments ....................... 3,279 3,068
-----------------------
Total .................................... $ 7,469 $ 7,031
=======================
Total investment securities .............. $370,732 $316,210
=======================
1 FHLB and FRB are commonly used acronyms for Federal Home Loan Bank and
Federal Reserve Bank, respectively.
13
The following table shows the maturities and weighted-average yields of
investment securities at September 30, 2003. All securities are shown at their
contractual maturity.
Maturities and Weighted Average Yields of Debt Securities
(dollars in thousands)
----------------------------------------------------------------------------------------
September 30, 2003
----------------------------------------------------------------------------------------
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
U.S. Treasury ................. $ 2,009 3.03% $ -- -- $ -- -- $ -- -- $ 2,009 3.03%
Federal agencies .............. $65,243 3.62% $145,563 3.44% $ 2,924 3.45% $ -- -- $213,730 3.50%
Mortgage-backed
securities1 ................. $ 4,988 4.34% $ 19,263 4.39% $ 95 6.23% $ 1,768 8.11% $ 26,114 4.64%
State and municipal ........... $ 1,403 3.74% $ 8,223 4.72% $ 4,743 5.02% $ 1,309 5.10% $ 15,678 4.75%
Marketable equity
securities2 ................. $ -- -- $ -- -- $ -- -- $ -- -- $ 4,742 --
----------------------------------------------------------------------------------------
Total ................... $73,643 $173,049 $ 7,762 $ 3,077 $262,273
----------------------------------------------------------------------------------------
Average Yield ................... 3.66% 3.61% 4.44% 6.83% 3.68%
========================================================================================
Securities held-to-maturity
Federal agencies .............. $ -- -- $ 2,490 2.68% $ 4,925 4.53% $ -- -- $ 7,415 3.91%
Mortgage-backed
securities1 ................. $40,143 -1.13% $ 11,026 3.62% $ 105 0.00% $ 2,039 5.26% $ 53,313 0.10%
State and municipal ........... $11,242 3.61% $ 25,704 3.98% $ 3,146 4.57% $ 170 5.25% $ 40,262 3.93%
----------------------------------------------------------------------------------------
Total ................... $51,385 $ 39,220 $ 8,176 $ 2,209 $100,990
========================================================================================
Average Yield ................... -0.09% 3.79% 4.49% 5.26% 1.90%
========================================================================================
Non-marketable equity securities2
FHLB and FRB stock ............ $ -- -- $ -- -- $ -- -- $ -- -- $ 4,190 --
Other equity investments ...... $ -- -- $ -- -- $ -- -- $ -- -- $ 3,279 --
----------------------------------------------------------------------------------------
Total ................... $ -- -- $ -- - - $ -- -- $ -- $ 7,469 --
========================================================================================
1 Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties and certain securities require principal
repayments prior to maturity.
2 Due to the nature of these securities, they do not have a stated maturity
date or rate.
Loans
The following table presents the amounts and percentages of loans at September
30, 2003 and December 31, 2002 according to the categories of commercial,
financial and agricultural; real estate; and installment and consumer loans.
Amount of Loans Outstanding
(dollars in thousands)
---------------------------------------
September 30, December 31,
2003 2002
---------------------------------------
Amount Percentage Amount Percentage
---------------------------------------
Commercial, financial and agricultural $243,261 37.11% $234,045 34.75%
Real estate .......................... 334,379 51.01% 343,827 51.06%
Installment and consumer1 ............ 77,892 11.88% 95,529 14.19%
---------------------------------------
Total loans .......................... $655,532 100.00% $673,401 100.00%
=======================================
1 Net of unearned discount
14
The balance of loans outstanding as of September 30, 2003 by maturity is shown
in the following table:
Maturity of Loans Outstanding
(dollars in thousands)
September 30, 2003
--------------------------------------------
1 Year 1 to 5 Over 5
Or Less Years Years Total
--------------------------------------------
Commercial, financial and agricultural $143,541 $ 75,594 $ 24,126 $243,261
Real estate .......................... 64,389 156,130 113,860 334,379
Installment and consumer1 ............ 28,480 41,174 8,238 77,892
--------------------------------------------
Total ........................ $236,410 $272,898 $146,224 $655,532
============================================
Percentage of total loans outstanding 36.06% 41.63% 22.31% 100.00%
============================================
1 Net of unearned discount
Capital
Total shareholders' equity decreased $25.181 million from December 31, 2002 to
September 30, 2003. Treasury stock transactions were $30.694 million, primarily
due to completion of the tender offer, offset partially by the exercise of
employee stock options. Stock options exercised prior to the completion of the
tender offering were fulfilled using existing treasury stock. The change in
shareholders' equity is summarized as follows:
Shareholders' Equity (in thousands)
Shareholders' equity, December 31, 2002 ..................... $ 134,470
Net income .................................................. 12,695
Treasury stock transactions, net ............................ (30,694)
Stock appreciation rights ................................... (69)
Cash dividends declared ..................................... (5,568)
Other comprehensive income .................................. (1,545)
---------
Shareholders' equity, September 30, 2003 .................... $ 109,289
=========
On September 16, 2003, the Board of Directors of the Company declared a
quarterly cash dividend of $0.20 per share of the Company's common stock. The
dividend of $1.896 million was paid on October 24, 2003 to holders of record on
October 14, 2003. On August 11, 2003, the Company commenced a tender offer to
acquire up to 1,400,000 of its shares of common stock at a price of $30.00 per
share. The tender offer was completed on September 30, 2003 with 1,074,140
shares, representing 10.2% of the total shares outstanding, repurchased at a
cost, including expenses, of $32.395 million.
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 September
30, 2003, that the Company and its subsidiary banks exceeded all capital
adequacy requirements to which they are subject.
15
As of September 30, 2003, the most recent notifications from primary regulatory
agencies categorized all the Company's subsidiary banks as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, banks must maintain minimum total capital to risk-weighted
assets, Tier I capital to risk weighted-assets, and Tier I capital to average
assets ratios as set forth in the table. There are no conditions or events since
that notification that management believes have changed any of the Company's
subsidiary banks' categories.
The Company's and the Banks' actual capital amounts and ratios are presented in
the following table (in thousands):
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes: Action Provisions:
----------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------------
As of September 30, 2003:
Total capital
(to risk-weighted assets)
Consolidated ................. $115,833 14.6% $63,398 8.0% N/A
BankIllinois ................. $ 60,304 12.4% $38,920 8.0% $48,650 10.0%
First National Bank of Decatur $ 35,349 12.2% $23,172 8.0% $28,965 10.0%
Tier I capital
(to risk-weighted assets)
Consolidated ................. $106,140 13.4% $31,699 4.0% N/A
BankIllinois ................. $ 54,328 11.2% $19,460 4.0% $29,190 6.0%
First National Bank of Decatur $ 31,726 11.0% $11,586 4.0% $17,379 6.0%
Tier I capital
(to average assets)
Consolidated ................. $106,140 9.4% $45,334 4.0% N/A
BankIllinois ................. $ 54,328 7.9% $27,629 4.0% $34,536 5.0%
First National Bank of Decatur $ 31,726 7.4% $17,219 4.0% $21,523 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.
16
The following table presents the Company's interest rate sensitivity at various
intervals at September 30, 2003:
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 ............ $ 38,806 $ -- $ -- $ -- $ -- $ 38,806
Debt and equity securities 1 ........... 18,714 33,402 23,280 62,275 233,061 370,732
Loans 2 ................................ 239,572 28,333 32,827 63,872 292,815 657,419
------------------------------------------------------------------------------
Total earning assets ............. $ 297,092 $ 61,735 $ 56,107 $ 126,147 $ 525,876 $1,066,957
------------------------------------------------------------------------------
Interest bearing liabilities:
Savings and interest bearing
demand deposits ...................... $ 40,695 $ 1,502 $ 2,253 $ 4,511 $ 171,452 $ 220,413
Money market savings
deposits ............................. 159,954 -- -- -- -- 159,954
Time deposits .......................... 27,277 58,157 67,097 67,618 109,594 329,743
Federal funds purchased,
repurchase agreements,
and notes payable .................... 99,905 24 1,034 1,262 485 102,710
FHLB advances and
other borrowings ..................... 7,268 10,000 115 -- 12,616 29,999
------------------------------------------------------------------------------
Total interest bearing liabilities $ 335,099 $ 69,683 $ 70,499 $ 73,391 $ 294,147 $ 842,819
------------------------------------------------------------------------------
Net asset (liability) funding gap ........ (38,007) (7,948) (14,392) 52,756 231,729 224,138
------------------------------------------------------------------------------
Repricing gap ............................ 0.89 0.89 0.80 1.72 1.79 1.27
Cumulative repricing gap ................. 0.89 0.89 0.87 0.99 1.27 1.27
==============================================================================
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 September 30, 2003, the Company was liability-sensitive due to the levels of
savings and interest bearing demand deposits, short-term time deposits, and
short-term borrowings. 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 $380,000
in the 1-30 days category and $460,000 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 September 30, 2003, 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 which permit the Company to borrow
federal funds on an unsecured basis. The Company has a $10 million unsecured
line of credit with a correspondent bank. Additionally, the Company can borrow
approximately $51.570 million from the Federal Home Loan Bank on a secured
basis.
17
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 Company
analyzes interest rate sensitivity by performing rate shocks of plus or minus
200 basis points in 100 basis point increments.
The following table shows projected results at September 30, 2003 and December
31, 2002 of the impact on net interest income from an immediate change in
interest rates. The results are shown as a percentage change in net interest
income over the next twelve months.
Basis Point Change
-------------------------------------
+200 +100 -100 -200
September 30, 2003 .................... 10.9% 5.5% (5.5%) (10.9%)
December 31, 2002 ..................... 7.6% 3.8% (3.9%) (7.8%)
The foregoing computations are based on numerous assumptions, including relative
levels of market interest rates, prepayments and deposit mix. The computed
estimates should not be relied upon as a projection of actual results. Despite
the limitations on preciseness inherent in these computations, management
believes that the information provided is reasonably indicative of the effect of
changes in interest rate levels on the net earning capacity of the company's
current mix of interest earning assets and interest bearing liabilities.
Management continues to use the results of these computations, along with the
results of its computer model projections, in order to enhance earnings
potential while positioning the company to minimize the effect of a prolonged
shift in interest rates that would adversely affect future results of
operations.
At the present time, the most significant market risk affecting the Company is
interest rate risk. Other market risks such as foreign currency exchange risk
and commodity price risk do not occur in the normal business of the Company. The
Company also is not currently using trading activities or derivative instruments
to control interest rate risk.
Liquidity and Cash Flows
The Company was able to meet liquidity needs during the first nine months of
2003. A review of consolidated statements of cash flows included in the
accompanying financial statements shows that the Company's cash and cash
equivalents decreased $15.970 million from December 31, 2002 to September 30,
2003. This decrease came from cash used in investing activities offset somewhat
by cash provided by financing and operating activities.
18
There were differences in the sources and uses of cash during the first nine
months of 2003 compared to the first nine months of 2002. Cash was used in
investing activities during 2003 compared to cash provided by investing
activities during 2002. During the first nine months of 2003, net cash used in
investing activities involving the Company's investment portfolio was $58.433
million compared to cash provided during the first nine months of 2002 of
$16.015 million. During the first nine months of 2003, the Company's investment
portfolio grew versus the first nine months of 2002 when the Company's
investment portfolio was reduced. The size of the Company's investment portfolio
varies in response to volume of loans and deposits as well as investment
opportunities. Somewhat offsetting this difference was cash provided by loans
during the first nine months of 2003 due to a decrease in loans, compared to
cash used by loans during the same period of 2002 when loans increased slightly.
Somewhat offsetting this change was cash provided by financing activities during
the first nine months of 2003 compared to cash used during the first nine months
of 2002. This was mainly due to changes in federal funds purchased, repurchase
agreements and notes payable, net MSTI stock transactions, deposits and FHLB
advances and other borrowings. Cash was provided by an increase in federal funds
purchased, repurchase agreements and notes payable during the first nine months
of 2003 compared to cash used during the same period in 2002, mainly due to a
change in volume of repurchase agreements. Cash was provided from net MSTI stock
transactions during the first nine months of 2003 compared to cash used during
the same period of 2002 due to completion of the tender offer during the second
quarter of 2002. There was a larger decrease in deposits during the first nine
months of 2002 compared to the same period of 2003. The decrease in 2002
included the maturity of a large short-term time deposit. Also, cash was
provided by an increase in FHLB advances and other borrowings during the first
nine months of 2003 compared to cash used because of a decrease during the first
nine months of 2002. Less cash was provided by operating activities during the
first nine months of 2003 compared to the same period of 2002 due, in part, to
an increase in other assets.
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, residential real estate 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 $9.693 million at
September 30, 2003 compared to $9.259 million at December 31, 2002, as net
charge-offs were $556,000 and provisions totaled $990,000 during the first nine
months of 2003. The allowance for loan losses as a percentage of gross loans,
including loans held-for-sale, was 1.47% at September 30, 2003, compared to
1.37% at December 31, 2002. Gross loans, including loans held-for-sale,
decreased 2.8% to $657.419 million at September 30, 2003 from $676.373 million
at December 31, 2002.
19
The allowance for loan losses as a percentage of nonperforming loans was 383.1%
at September 30, 2003 compared to 416.9% at December 31, 2002. Nonperforming
loans increased from $2.221 million at December 31, 2002 to $2.530 million at
September 30, 2003. The $309,000 increase in nonperforming loans during the
first nine months of 2003 resulted from a $461,000 increase in loans past due 90
days or more, offset somewhat by a $152,000 decrease in nonaccrual loans.
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.
While the economy has shown recent strength, we are still concerned about the
weakness in the labor market. Many economists believe that the sustainability of
the current economic expansion is dependent upon a resurgence in new job
creation. Any improvement in our levels of problem assets, delinquencies and
losses on loans is similarly dependent upon a recovery in employment levels to
materialize. Due to increases in several leading economic indicators (including
the stock market, temporary worker hiring and ISM survey data), we are
cautiously optimistic that the employment picture will brighten. However, it is
still too early to consider robust jobs growth a certainty.
The following table summarizes changes in the allowance for loan losses by loan
categories for each period and additions to the allowance for loan losses which
have been charged to operations.
Allowance for Loan Losses
(dollars in thousands)
September 30, September 30,
2003 2002
----------------------------
Allowance for loan losses at beginning of year ... $ 9,259 $ 9,259
---------------------
Charge-offs during period:
Commercial, financial and agricultural ......... $ (138) $ (96)
Residential real estate ........................ (9) (32)
Installment and consumer ....................... (799) (969)
---------------------
Total .................................... $ (946) $(1,097)
---------------------
Recoveries of loans previously charged off:
Commercial, financial and agricultural ......... $ 209 $ 187
Residential real estate ........................ 46 28
Installment and consumer ....................... 135 123
---------------------
Total .................................... $ 390 $ 338
---------------------
Net (charge-offs) recoveries ............. $ (556) $ (759)
Provision for loan losses ........................ 990 990
---------------------
Allowance for loan losses at end of quarter ...... $ 9,693 $ 9,490
=====================
Ratio of net (charge-offs) recoveries to
average net loans .............................. (0.09)% (0.11)%
=====================
The following table shows the allocation of the allowance for loan losses
allocated to each category.
Allocation of the Allowance for Loan Losses
(in thousands)
September 30, December 31,
2003 2002
---------------------------
Allocated:
Commercial, financial and agricultural ........ $6,153 $5,732
Residential real estate ....................... 180 345
Installment and consumer ...................... 2,460 1,763
-------------------
Total allocated allowance ............... $8,793 $7,840
Unallocated allowances .......................... 900 1,419
-------------------
Total ........................................... $9,693 $9,259
===================
20
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.
Nonaccrual, Past Due and Restructured Loans (dollars in thousands)
September 30, December 31,
2003 2002
----------------------------
Nonaccrual loans1 ............................ $1,240 $1,392
=====================
Loans past due 90 days or more .... .......... $1,290 $ 829
=====================
Restructured loans2 .......................... $ 18 $ 20
=====================
1 Includes $500,000 at September 30, 2003 and $628,000 at December 31, 2002
of real estate and consumer loans which management does not considered
impaired as defined by the Statement of Financial Accounting Standards No.
114, Accounting by Creditors for Impairment of a Loan (SFAS 114).
2 Restructured loans of $18,000 at September 30, 2003 and $20,000 at December
31, 2002 are not considered nonperforming.
Other Nonperforming Assets (dollars in thousands)
September 30, 2003 December 31, 2002
-----------------------------------------
Other real estate owned ........... $ 50 $ 58
==============================
Nonperforming other assets ........ $ 344 $ 94
===============================
Results of Operations
Results of Operations For the Nine Months Ended September 30, 2003
Net income for the first nine months of 2003 was $12.695 million, a $237,000, or
1.8%, decrease from $12.932 million for the same period in 2002. Basic earnings
per share increased $0.02, or 1.7%, to $1.21 per share in the first nine months
of 2003 from $1.19 per share in the same period in 2002. Diluted earnings per
share increased $0.02, or 1.7%, to $1.20 per share in the first nine months of
2003 from $1.18 per share in the first nine months of 2002. The increase in
basic and diluted earnings per share was mainly due to a decrease in weighted
average shares outstanding after the completion of the tender offer for 6.3% of
the Company's outstanding common stock near the end of the second quarter of
2002. This was offset somewhat by other treasury stock transactions.
21
The following schedule "Consolidated Average Balance Sheet and Interest Rates"
provides details of average balances, interest income or interest expense, and
the average rates for the Company's major asset and liability categories.
Consolidated Average Balance Sheet and Interest Rates
(dollars in thousands)
Nine Months Ended September 30,
----------------------------------------------------------------------
2003 2002
----------------------------------------------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
----------------------------------------------------------------------
Assets
Taxable investment securities1 ......... $ 300,672 $ 8,647 3.85% $ 264,543 $ 9,632 4.87%
Tax-exempt investment securities1 (TE) . 55,916 2,649 6.33% 55,083 2,743 6.66%
Federal funds sold and interest bearing
deposits2 ............................ 39,493 363 1.23% 20,794 302 1.94%
Loans3,4 (TE) .......................... 643,594 31,562 6.56% 676,320 36,396 7.20%
--------------------------------------------------------------------
Total interest earning assets
and interest income (TE) ....... $1,039,675 $ 43,221 5.56% $1,016,740 $ 49,073 6.45%
--------------------------------------------------------------------
Cash and due from banks ................ $ 46,310 $ 46,970
Premises and equipment ................. 17,940 19,022
Other assets ........................... 18,794 18,599
--------------------------------------------------------------------
Total assets ................... $1,122,719 $1,101,331
====================================================================
Liabilities and Shareholders' Equity
Interest bearing demand deposits ....... $ 85,187 $ 468 0.73% $ 93,182 $ 788 1.13%
Savings ................................ 279,874 1,964 0.94% 257,588 2,827 1.47%
Time deposits .......................... 338,320 8,405 3.32% 349,112 10,788 4.13%
Federal funds purchased, repurchase
agreements, and notes payable ........ 92,426 817 1.18% 68,859 919 1.78%
FHLB advances and other borrowings ..... 27,987 1,156 5.52% 34,555 1,444 5.59%
--------------------------------------------------------------------
Total interest bearing
liabilities and interest expense $ 823,794 $ 12,810 2.08% $ 803,296 $ 16,766 2.79%
--------------------------------------------------------------------
Noninterest bearing demand deposits .... $ 87,994 $ 96,384
Noninterest bearing savings deposits ... 63,036 53,948
Other liabilities ...................... 9,899 10,778
--------------------------------------------------------------------
Total liabilities .............. $ 984,723 $ 964,406
Shareholders' equity ................... 137,996 136,925
--------------------------------------------------------------------
Total liabilities and
shareholders' equity ........... $1,122,719 $1,101,331
====================================================================
Interest spread (average rate earned
minus average rate paid) (TE) ........ 3.48% 3.66%
====================================================================
Net interest income (TE) ............... $ 30,411 $ 32,307
====================================================================
Net yield on interest
earnings assets (TE) ................. 3.91% 4.25%
====================================================================
See next page for Notes 1-4.
Notes to Consolidated Average Balance Sheet and Interest Rate Table:
1 Investments in debt securities are included at carrying value.
2 Federal funds sold and interest bearing deposits include approximately
$47,000 and $49,000 in 2003 and 2002, respectively, of interest income from
third party processing of cashier checks.
3 Loans are net of allowance for loan losses and include mortgage loans held
for sale. Nonaccrual loans are included in the total.
4 Loan fees of approximately $1.368 million and $742,000 in 2003 and 2002,
respectively, are included in total loan income.
22
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% at September 30, 2003 and
2002. The following table presents, on a tax equivalent (TE) basis, an analysis
of changes in net interest income resulting from changes in average volumes of
earning assets and interest bearing liabilities and average rates earned and
paid. The change in interest due to the combined rate/volume variance has been
allocated to rate and volume changes in proportion to the absolute dollar
amounts of change in each.
Analysis of Volume and Rate Changes
(in thousands)
------------------------------------
Nine Months Ended September 30, 2003
------------------------------------
Increase
(Decrease)
from
Previous Due to Due to
Year Volume Rate
-----------------------------
Interest Income
Taxable investment securities .................. $ (985) $ 1,744 $(2,729)
Tax-exempt investment securities (TE) .......... (94) 62 (156)
Federal funds sold and interest bearing deposits 61 254 (193)
Loans (TE) ..................................... (4,834) (1,705) (3,129)
-----------------------------
Total interest income (TE) ............... $(5,852) $ 355 $(6,207)
-----------------------------
Interest Expense
Interest bearing demand and savings deposits ... $(1,183) $ 231 $(1,414)
Time deposits .................................. (2,383) (325) (2,058)
Federal funds purchased,
repurchase agreements and notes payable ...... (102) 367 (469)
FHLB advances and other borrowings ............. (288) (272) (16)
-----------------------------
Total interest expense ................... $(3,956) $ 1 $(3,957)
-----------------------------
Net Interest Income (TE) ......................... $(1,896) $ 354 $(2,250)
=============================
Net interest income on a tax equivalent basis was $1.896 million, or 5.9%, lower
for the first nine months of 2003 compared to the same period in 2002. Total
tax-equivalent interest income was $5.852 million, or 11.9%, lower in 2003
compared to 2002, and interest expense decreased $3.956 million, or 23.6%. The
decrease in tax-equivalent interest income was due to lower rates, offset
slightly by an increase in average balances. The decrease in interest expense
was due to lower rates.
The decrease in total tax-equivalent interest income was due to a decrease in
interest income from loans, taxable investment securities and tax-exempt
investment securities, offset slightly by an increase in interest income from
federal funds sold and interest bearing deposits. The decrease in interest
income from loans was due to lower rates and lower average balances. The
decrease in interest income from taxable investment securities and tax-exempt
investment securities was due to lower rates, offset somewhat by an increase in
average balances. The slight increase in interest income from federal funds sold
and interest bearing deposits was due to higher average balances offset somewhat
by lower interest rates.
The decrease in total interest expense was due to decreases in interest expense
from all categories of interest bearing liabilities. Interest expense on
interest bearing demand and savings deposits decreased primarily due to lower
rates, offset slightly by an increase in average volume. Interest expense on
time deposits and FHLB advances and other borrowings decreased due to lower
rates and lower average balances. Interest expense on federal funds purchased,
repurchase agreements and notes payable decreased due to lower rates, offset
somewhat by an increase in average balances.
The provision for loan losses recorded was $990,000 during the first nine months
of both 2003 and 2002. 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.
23
Total non-interest income increased $1.033 million, or 7.3%, during the first
nine months of 2003 compared to the first nine months of 2002. Included in this
increase was an increase of $1.441 million, or 186.4%, in gains on sales of
mortgage loans held-for-sale during the first nine months of 2003 compared to
the same period in 2002. This increase reflected a $108.380 million, or 135.7%,
increase in funded mortgage loans held-for-sale during the first nine months of
2003 compared to the first nine months of 2002. This increase was reflective of
lower mortgage interest rates during the first nine months of 2003 compared to
the same period in 2002. While mortgage rates remain at historically low levels,
this level of mortgage sales gains may not continue throughout the rest of the
year. Other non-interest income increased $363,000, or 29.9%, in the first nine
months of 2003 compared to the first nine months of 2002. During the first nine
months of 2002, other non-interest income included a write-down of approximately
$300,000 in the value of mortgage servicing rights as a result of the sharp rise
in prepayment speeds. Service charges on deposit accounts increased $144,000, or
8.2%, during the first nine months of 2003 compared to the same period in 2002.
Somewhat offsetting these increases was a decrease in trust and brokerage fees
of $395,000, or 8.5%, in the first nine months of 2003 compared to the first
nine months of 2002. This decrease was due, in part, to lower market values of
assets upon which fees were charged during the first nine months of 2003
compared to the same period in 2002. Income from securities transactions
decreased $277,000, or 121.5%, in the first nine months of 2003 compared to the
same period in 2002. This decrease included recognition of loss on a
non-marketable equity security, offset somewhat by a gain on the sale of one
available-for-sale government agency security. Remittance processing income
decreased $243,000, or 4.4%, in the first nine months of 2003 compared to the
same period in 2002. This was due to a reduction of volume at the Company's
remittance processing subsidiary, FirsTech, associated with a gradual volume
reduction in electronic payments processed for a large telecommunications
company since 2002 as a result of their conversion to an internal processing
platform. This was offset somewhat by additional revenue produced by the
conversion of new clients to FirsTech's agent payment processing platform and
the renegotiation of some existing contracts.
Total non-interest expense decreased $814,000, or 3.2%, during the first nine
months of 2003 compared to the same period of 2002. Of this decrease, salaries
and employee benefits decreased $514,000, or 3.6%, during the first nine months
of 2003 compared to the first nine months of 2002. Contributing to salaries and
employee benefits in the first nine months of 2002 was $529,000 in salaries and
benefits related to organizational restructuring that resulted in termination of
employment contracts. Equipment expense decreased $282,000, or 13.6%, during the
first nine months of 2003 compared to the same period in 2002. Equipment expense
decreased largely due to efficiencies gained from restructuring and the merger
of BankIllinois and First Trust Bank of Shelbyville in June 2002. Data
processing expense decreased $169,000, or 9.8%, in the first nine months of 2003
compared to the first nine months of 2002. Contributing to data processing
expense in the first nine months of 2002 were conversion to a new system and
software upgrade at the Company's remittance processing subsidiary FirsTech, and
costs to merge First Trust Bank of Shelbyville and BankIllinois computer
records. Service charges from correspondent banks decreased $11,000, or 1.6%, in
the first nine months of 2003 compared to the same period in 2002. Somewhat
offsetting these decreases were increases of $88,000, or 5.0%, in occupancy
expense, $71,000, or 2.0%, in other non-interest expense and $3,000, or 0.3%, in
office supplies expense in the first nine months of 2003 compared to the same
period in 2002.
Income tax expense increased $222,000, or 3.5%, during the first nine months of
2003 compared to the first nine months of 2002. The effective tax rate increased
to 34.0% during the first nine months of 2003 from 32.8% during the first nine
months of 2002.
Results of Operations For the Three Months Ended September 30, 2003
Net income for the third quarter of 2003 was $4.265 million, a $214,000, or
4.8%, decrease from $4.479 million for the same period in 2002. Basic earnings
per share decreased $0.02, or 4.7%, to $0.41 per share in the third quarter of
2003 compared to $0.43 per share in the third quarter of 2002. Diluted earnings
per share decreased $0.02, or 4.8%, to $0.40 per share in the third quarter of
2003 compared to $0.42 per share in the third quarter of 2002.
24
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 September 30,
-------------------------------------------------------------------------
2003 2002
-------------------------------------------------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
-------------------------------------------------------------------------
Assets
Taxable investment securities1 ......... $ 319,930 $ 2,875 3.57% $ 257,827 $ 3,177 4.89%
Tax-exempt investment securities1 (TE) . 53,826 855 6.30% 54,891 906 6.55%
Federal funds sold and interest bearing
deposits2 ............................ 39,129 109 1.11% 22,088 106 1.90%
Loans3,4 (TE) .......................... 640,184 10,149 6.29% 675,502 12,006 7.05%
-------------------------------------------------------------------------
Total interest earning assets
and interest income (TE) ....... $1,053,069 $ 13,988 5.27% $1,010,308 $ 16,195 6.36%
-------------------------------------------------------------------------
Cash and due from banks ................ $ 45,852 $ 45,600
Premises and equipment ................. 17,718 18,930
Other assets ........................... 21,250 18,279
-------------------------------------------------------------------------
Total assets ................... $1,137,889 $1,093,117
=========================================================================
Liabilities and Shareholders' Equity
Interest bearing demand deposits ....... $ 88,121 $ 142 0.64% $ 77,190 $ 205 1.05%
Savings ................................ 282,914 597 0.84% 270,914 952 1.39%
Time deposits .......................... 337,854 2,607 3.06% 362,314 3,521 3.86%
Federal funds purchased, repurchase
agreements, and notes payable ........ 98,040 270 1.09% 63,319 270 1.69%
FHLB advances and other borrowings ..... 28,411 392 5.47% 32,215 451 5.55%
-------------------------------------------------------------------------
Total interest bearing
liabilities and interest expense $ 835,340 $ 4,008 1.90% $ 805,952 $ 5,399 2.66%
-------------------------------------------------------------------------
Noninterest bearing demand deposits .... $ 91,292 $ 81,186
Noninterest bearing savings deposits ... 61,556 64,642
Other liabilities ...................... 9,975 10,900
-------------------------------------------------------------------------
Total liabilities .............. $ 998,163 $ 962,680
Shareholders' equity ........... 139,726 130,437
-------------------------------------------------------------------------
Total liabilities and
shareholders' equity ........... $1,137,889 $1,093,117
=========================================================================
Interest spread (average rate earned
minus average rate paid) (TE) ........ 3.37% 3.70%
=========================================================================
Net interest income (TE) ............... $ 9,980 $ 10,796
=========================================================================
Net yield on interest
earnings assets (TE) ................. 3.76% 4.24%
=========================================================================
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 include approximately
$17,000 and $16,000 in 2003 and 2002, respectively, of interest income from
third party processing of cashier checks.
3 Loans are net of allowance for loan losses. Nonaccrual loans are included
in the total.
4 Loan fees of approximately $437,000 and $250,000 in 2003 and 2002,
respectively, are included in total loan income.
25
The following table presents, on a tax 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)
-----------------------------------
Three Months Ended
September 30, 2003
-------------------------------
Increase
(Decrease)
From
Previous Due to Due to
Year Volume Rate
-----------------------------
Interest Income
Taxable investment securities .................. $ (302) $ 3,071 $(3,373)
Tax-exempt investment securities (TE) .......... (51) (17) (34)
Federal funds sold and interest bearing deposits 3 230 (227)
Loans (TE) ..................................... (1,857) (606) (1,251)
-----------------------------
Total interest income (TE) ............... $(2,207) $ 2,678 $(4,885)
-----------------------------
Interest Expense
Interest bearing demand and savings deposits ... $ (418) $ 460 $ (878)
Time deposits .................................. (914) (226) (688)
Federal funds purchased,
repurchase agreements and notes payable ........ -- 461 (461)
FHLB advances and other borrowings ............. (59) (53) (6)
-----------------------------
Total interest expense ................... $(1,391) $ 642 $(2,033)
-----------------------------
Net Interest Income (TE) ......................... $ (816) $ 2,036 $(2,852)
=============================
Net interest income on a tax equivalent basis was $816,000, or 7.6%, lower for
the third quarter of 2003 compared to the third quarter of 2002. Total
tax-equivalent interest income was $2.207 million, or 13.6%, lower in 2003
compared to 2002, and interest expense decreased $1.391 million, or 25.8%. The
decrease in interest income and interest expense was due primarily to a decrease
in rates offset somewhat by an increase in average balances.
The decrease in total interest income was due to decreases in interest income
from loans and both taxable and tax-exempt investment securities. These
decreases were offset slightly by an increase in interest income from federal
funds sold and interest bearing deposits. The decreases in interest income from
loans and tax-exempt investment securities were due to decreases in rates and
average balances during the third quarter of 2003 compared to the same period in
2002. The decrease in interest income from taxable investment securities was due
to a decrease in rates, offset somewhat by an increase in average balances
during the third quarter of 2003 compared to the third quarter of 2002. The
increase in federal funds sold and interest bearing deposits was due to an
increase in average balances, offset somewhat by a decrease in rates.
The decrease in total interest expense was due to decreases in interest expense
on all categories of interest bearing liabilities, with the exception of federal
funds purchased, repurchase agreements and notes payable, which recorded no
change in interest expense in the third quarter of 2003 compared to the same
period in 2002. The decreases in interest expense on time deposits and on FHLB
advances and other borrowings were due to decreases in rates and average
balances during the third quarter of 2003 compared to the same period in 2002.
The decrease in interest expense from interest bearing demand and savings
deposits was due to a decrease in rates, offset somewhat by an increase in
average balances during the third quarter of 2003 compared to the third quarter
of 2002.
The provision for loan losses recorded was $330,000 during both the third
quarter of 2003 and 2002. The provision during both periods was based on
management's analysis of the loan portfolio, as discussed in the provision and
allowance for loan losses section above.
26
Total non-interest income increased $782,000, or 16.9%, during the third quarter
of 2003 compared to the third quarter of 2002. Included in this increase was an
increase of $594,000, or 157.1%, in gains on sales of mortgage loans
held-for-sale in the third quarter of 2003 compared to the same period in 2002.
This increase reflected a $38.307 million, or 111.2%, increase in funded
mortgage loans held-for-sale in the third quarter of 2003 compared to the same
period in 2002. This increase was reflective of lower mortgage interest rates
during the third quarter of 2003 compared to the same period in 2002. While
mortgage rates remain at historically low levels, this level of mortgage sales
gains may not continue throughout the rest of the year. Other non-interest
income increased $341,000, or 172.2%, in the third quarter of 2003 compared to
the third quarter of 2002. In the third quarter of 2002, other non-interest
income included a write down of approximately $300,000 in the value of mortgage
servicing rights as a result of the sharp rise in prepayment speeds. Service
charges on deposit accounts increased $54,000, or 8.8%, in the third quarter of
2003 compared to the third quarter of 2002. Income from remittance processing
increased $45,000, or 2.5%, in the third quarter of 2003 compared to the same
quarter in 2002. This was due to a combination of the conversion of new clients
to FirsTech's agent payment processing platform and the renegotiation of some
existing contracts that produced additional revenue. Securities transactions
generated a net loss of $6,000 during the third quarter of 2003 compared to a
net loss of $62,000 in the third quarter of 2002. Somewhat offsetting these
increases was a decrease in trust and brokerage fees of $308,000, or 17.7%, in
the third quarter of 2003 compared to the same quarter in 2002. This was due, in
part, to lower market values of assets upon which fees were charged during the
third quarter of 2003 compared to the same period in 2002.
Total non-interest expense increased $159,000, or 2.0%, during the third quarter
of 2003 compared to the same period in 2002. Of this increase, other
non-interest expense increased $127,000, or 10.7%, in the third quarter of 2003
compared to the third quarter of 2002. Of this increase, $45,000 was
attributable to marketing and charitable contributions. Expenses in this
category vary based on the timing of advertising and promotions. Salaries and
employee benefits increased $94,000, or 2.1%, in the third quarter of 2003
compared to the third quarter of 2002 primarily due to the increase in volume of
mortgage loans held for sale during the third quarter of 2003 compared to the
same period in 2002. Also contributing to the overall increase in non-interest
expense in the third quarter of 2003 compared to the same period in 2002 were
increases of $43,000, or 7.2%, in occupancy expense, $11,000, or 2.2% in data
processing expense, $9,000 or 2.8%, in office supplies expense and $7,000, or
3.1%, in service charges from correspondent banks. Somewhat offsetting these
increases was a decrease of equipment expense of $132,000, or 18.7%, in the
third quarter of 2003 compared to the third quarter of 2002. Equipment expense
decreased largely due to efficiencies gained from restructuring, and the merger
of BankIllinois and First Trust Bank of Shelbyville in June of 2002.
Income tax expense increased $43,000, or 1.9%, during the third quarter of 2003
compared to the third quarter of 2002. The effective tax rate increased to 34.6%
during the third quarter of 2003 from 33.0% during the same period in 2002.
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.
27
Company information is provided for informational purposes only, since it is not
considered a separate segment for reporting purposes. Effective January 1, 2003,
certain administrative, audit, compliance, accounting, finance, property
management, human resources, courier, information systems and other support
services previously included in the budgets of the Banks were moved to the
Company. During this process, approximately 80 full time equivalent employees
were moved from the Banks to the Company. The net expenses of these functions
are now allocated to the subsidiaries by charging a monthly management fee.
Banking Remittance
Services Services Company Eliminations Total
-------------------------------------------------------------------------------------------------
September 30, 2003
Total interest income ....... $ 42,063 $ 43 $ 257 $ (83) $ 42,280
Total interest expense ...... 12,888 -- 5 (83) 12,810
Provision for loan losses ... 990 -- -- -- 990
Total non-interest income ... 10,115 5,372 3,495 (3,792) 15,190
Total non-interest expense .. 20,105 3,680 4,442 (3,792) 24,435
Income before income tax .... 18,195 1,735 (695) -- 19,235
Income tax expense .......... 6,118 698 (276) -- 6,540
Net income .................. 12,077 1,037 (419) -- 12,695
Total assets ................ 1,130,724 3,359 148,339 (134,949) 1,147,473
Depreciation and amortization 1,159 304 363 -- 1,826
September 30, 2002
Total interest income ....... $ 47,963 $ 69 $ 185 $ (119) $ 48,098
Total interest expense ...... 16,869 -- 16 (119) 16,766
Provision for loan losses ... 990 -- -- -- 990
Total non-interest income ... 9,070 5,646 (76) (483) 14,157
Total non-interest expense .. 20,662 3,853 1,217 (483) 25,249
Income before income tax .... 18,512 1,862 (1,124) -- 19,250
Income tax expense .......... 6,021 744 (447) -- 6,318
Net income .................. 12,491 1,118 (677) -- 12,932
Total assets ................ 1,083,664 6,451 134,817 (129,343) 1,095,589
Depreciation and amortization 1,584 383 22 -- 1,989
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
This document contains, and future oral and written statements of the Company
and its management may contain, forward-looking statements, within the meaning
of such 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 an don 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.
28
o The effects of changes in interest rates (including the effects of changes
in the rate of prepayments of the Company's assets) and the policies of the
Board of Governors of the Federal Reserve System.
o The ability of the Company to compete with other financial institutions as
effectively as the Company currently intends due to increases in
competitive pressures in the financial services sector.
o The inability of the Company to obtain new customers and to retain existing
customers.
o The timely development and acceptance of products and services, including
products and services offered through alternative delivery channels such as
the Internet.
o Technological changes implemented by the company and by other parties,
including third party vendors, which may be more difficult or more
expensive than anticipated or which may have unforeseen consequences to the
Company and its customers.
o The ability of the Company to develop and maintain secure and reliable
electronic systems.
o The ability of the Company to retain key executives and employees and the
difficulty that the Company may experience in replacing key executives and
employees in an effective manner.
o Consumer spending and saving habits which may change in a manner that
affects the Company's business adversely.
o Business combinations and the integration of acquired businesses which may
be more difficult or expensive than expected.
o The costs, effects and outcomes of existing or future litigation.
o Changes in accounting policies and practices, as may be adopted by state
and federal regulatory agencies and the Financial Accounting Standards
Board.
o The ability of the Company to manage the risks associated with the
foregoing as well as anticipated.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements.
Additional information concerning the Company and its business, including other
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
See the "Interest Rate Sensitivity" section above.
Item 4. Controls and Procedures
An evaluation was performed under the supervision and with the participation of
the Company's management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
promulgated under the Securities and Exchange Act of 1934, as amended) as of
September 30, 2003. Based on that evaluation, the Company's management,
including the Chief Executive Officer and Chief Financial Officer, concluded
that the Company's disclosure controls and procedures were effective. There have
been no significant changes in the Company's internal controls or in other
factors that could significantly affect internal controls.
PART 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 and Use of Proceeds
None
29
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
13a-14(a)/15d-14(a)
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-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 October 27, 2003, the Company filed a report on Form 8-K, pursuant to
Item 12 regarding the issuance of a letter to shareholders and a press
release announcing its earnings for the quarter ended September 30, 2003,
and pursuant to Item 5 on Form 8-K regarding the announcement of the
reinstatement of the Company's stock repurchase plan.
On July 21, 2003, the Company filed a report on Form 8-K, pursuant to Item
12 regarding the issuance of a letter to shareholders and a press release
announcing its earnings for the quarter ended June 30, 2003.
30
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: November 7, 2003
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
31