UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2002
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 the number of shares outstanding of the registrant's common stock, as
of May 7, 2002
Main Street Trust, Inc. Common Stock 11,206,390
1
Table of Contents
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 3 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 22
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 2002 and December 31, 2001
(Unaudited, in thousands, except share data)
March 31, December 31,
2002 2001
--------------------------
ASSETS
Cash and due from banks .......................................................... $ 40,063 $ 87,895
Federal funds sold and interest earning deposits ................................. 31,329 7,484
Investments in debt and equity securities:
Available-for-sale, at fair value .............................................. 258,436 266,496
Held-to-maturity, at cost (fair value of $59,689 and $64,727 at March 31,
2002 and December 31, 2001, respectively) .................................... 58,623 63,818
Non-marketable equity securities ............................................... 5,146 5,108
Mortgage loans held for sale ..................................................... 2,797 8,775
Loans, net of allowance for loan losses of $9,457 and $9,259
at March 31, 2002 and December 31, 2001, respectively .......................... 670,589 673,061
Premises and equipment ........................................................... 18,990 19,259
Accrued interest receivable ...................................................... 8,504 8,890
Other assets ..................................................................... 11,790 10,725
--------------------------
Total assets ............................................................. $ 1,106,267 $ 1,151,511
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand, non-interest bearing ................................................. $ 122,064 $ 133,406
Demand, interest bearing ..................................................... 109,998 111,241
Savings ...................................................................... 272,055 267,838
Time, $100 and over .......................................................... 109,386 140,042
Other time ................................................................... 224,173 231,582
--------------------------
Total deposits ........................................................... 837,676 884,109
Federal funds purchased, repurchase agreements and notes payable ................. 81,477 85,207
Federal Home Loan Bank advances and other borrowings ............................. 34,855 34,895
Accrued interest payable ......................................................... 2,675 3,390
Other liabilities ................................................................ 8,920 7,917
--------------------------
Total liabilities ........................................................ 965,603 1,015,518
-------------------------
Shareholders' equity:
Preferred stock, no par value; 2,000,000 shares authorized .................... -- --
Common stock, $0.01 par value; 15,000,000 shares authorized; 11,199,947 and
11,111,281 shares issued at March 31, 2002 and December 31, 2001, respectively 112 111
Paid in capital ................................................................ 55,040 54,147
Retained earnings .............................................................. 84,346 83,810
Accumulated other comprehensive income ......................................... 1,395 2,750
--------------------------
140,893 140,818
Less: treasury stock, at cost, 12,242 and 267,783 shares at March 31, 2002
and December 31, 2001, respectively .......................................... (229) (4,825)
-------------------------
Total shareholders' equity ............................................... 140,664 135,993
--------------------------
Total liabilities and shareholders' equity ............................... $ 1,106,267 $ 1,151,511
==========================
See accompanying notes to unaudited consolidated financial statements.
3
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Three Months Ended March 31, 2002 and 2001
(Unaudited, in thousands, except share data)
2002 2001
-------------------------
Interest income:
Loans and fees on loans ........................................ $ 12,187 $ 14,236
Investments in debt and equity securities
Taxable ...................................................... 3,325 3,682
Tax-exempt ................................................... 600 543
Federal funds sold and interest earning deposits ............... 95 660
-------------------------
Total interest income .................................... 16,207 19,121
-------------------------
Interest expense:
Demand, savings, and other time deposits ....................... 3,915 6,756
Time deposits $100 and over .................................... 1,092 1,430
Federal funds purchased, repurchase agreements and notes payable 326 779
Federal Home Loan Bank advances and other borrowings ........... 494 614
-------------------------
Total interest expense ................................... 5,827 9,579
-------------------------
Net interest income ...................................... 10,380 9,542
Provision for loan losses ........................................ 330 235
-------------------------
Net interest income after provision for loan losses ...... 10,050 9,307
-------------------------
Non-interest income:
Remittance processing .......................................... 1,949 1,660
Trust and brokerage fees ....................................... 1,453 1,277
Service charges on deposit accounts ............................ 554 484
Securities transactions, net ................................... 70 77
Gain on sales of mortgage loans, net ........................... 219 155
Other .......................................................... 479 434
-------------------------
Total non-interest income ................................ 4,724 4,087
-------------------------
Non-interest expense:
Salaries and employee benefits ................................. 4,755 4,516
Occupancy ...................................................... 552 614
Equipment ...................................................... 688 761
Data processing ................................................ 563 464
Office supplies ................................................ 341 389
Service charges from correspondent banks ....................... 236 202
Other .......................................................... 1,033 1,120
-------------------------
Total non-interest expense ............................... 8,168 8,066
-------------------------
Income before income taxes ............................... 6,606 5,328
Income taxes ..................................................... 2,196 1,660
-------------------------
Net income ............................................... $ 4,410 $ 3,668
=========================
Per share data:
Basic earnings per share ....................................... $ 0.40 $ 0.33
Weighted average shares of common stock outstanding ............ 11,097,242 10,988,282
Diluted earnings per share ..................................... $ 0.40 $ 0.33
Weighted average shares of common stock and dilutive potential
common shares outstanding .................................... 11,147,974 11,187,231
See accompanying notes to unaudited consolidated financial statements.
4
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Three Months Ended March 31, 2002 and 2001
(Unaudited, in thousands)
2002 2001
------------------
Net income ............................................................... $ 4,410 $ 3,668
Other comprehensive income:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during period, net of tax of
($693) and $599, for March 31, 2002 and 2001, respectively .......... (1,309) 1,162
Less: reclassification adjustment for gains included in
net income, net of tax of ($24) and ($26), for March 31, 2002
and 2001, respectively ............................................... (46) (51)
------------------
Other comprehensive income (loss) ...................................... (1,355) 1,111
------------------
Comprehensive income ................................................... $ 3,055 $ 4,779
==================
See accompanying notes to unaudited consolidated financial statements.
5
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Three Months Ending March 31, 2002 and 2001
(Unaudited, in thousands)
2002 2001
----------------------
Cash flows from operating activities:
Net income .......................................................... $ 4,410 $ 3,668
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ..................................... 666 713
(Accretion) amortization of bond discounts and premiums, net ...... 283 (344)
Provision for loan losses ......................................... 330 235
Securities transactions, net ...................................... (70) (77)
Gain on sales of mortgage loans, net .............................. (219) (155)
Federal Home Loan Bank stock dividend ............................. (41) (66)
Proceeds from sales of mortgage loans originated for sale ......... 26,810 15,818
Mortgage loans originated for sale ................................ (20,613) (17,730)
Other, net ........................................................ 326 295
----------------------
Net cash provided by operating activities ..................... 11,882 2,357
----------------------
Cash flows from investing activities:
Net decrease in loans ............................................... 2,142 2,954
Proceeds from maturities and calls of investments in debt securities:
Held-to-maturity .................................................. 863 15,338
Available-for-sale ................................................ 20,615 29,825
Proceeds from sales of investments:
Available-for-sale ................................................ 28,889 39,189
Purchases of investments in debt and equity securities:
Held-to-maturity .................................................. (500) (6,932)
Available-for-sale ................................................ (45,664) (51,877)
Other equity securities ........................................... -- (250)
Principal paydowns from mortgage-backed securities:
Held-to-maturity .................................................. 4,795 1,536
Available-for-sale ................................................ 1,974 467
Purchases of premises and equipment ................................. (391) (511)
----------------------
Net cash provided by investing activities ..................... 12,723 29,739
----------------------
Cash flows from financing activities:
Net (decrease) increase in deposits ................................. (46,433) 4,526
Net decrease in federal funds purchased,
repurchase agreements, and notes payable .......................... (3,730) (2,652)
Advances from Federal Home Loan Bank and other borrowings ........... 5,000 5,000
Payments on Federal Home Loan Bank and other borrowings ............. (5,040) (5,038)
Cash dividends paid ................................................. (1,452) (1,047)
Issuance of new shares of common stock, net ......................... 886 --
Treasury stock transactions, net .................................... 2,177 (395)
----------------------
Net cash (used in) provided by financing activities ........... (48,592) 394
----------------------
Net (decrease) increase in cash and cash equivalents .......... (23,987) 32,490
Cash and cash equivalents at beginning of year ........................ 95,379 84,139
----------------------
Cash and cash equivalents at end of period ............................ $ 71,392 $ 116,629
======================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest .......................................................... $ 6,542 $ 10,035
Income taxes ...................................................... 220 1,533
Dividends declared not paid ......................................... 1,454 1,149
See accompanying notes to unaudited consolidated financial statements.
6
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, 2001, and schedules included in Main Street Trust,
Inc.'s Form 10-K filed on March 29, 2002.
In the opinion of management, the consolidated financial statements of Main
Street Trust, Inc. (the "Company") and its subsidiaries, as of March 31, 2002
and for the three-month periods ended March 31, 2002 and 2001, include all
adjustments necessary for a fair presentation of the results of those periods.
All such adjustments are of a normal recurring nature.
Results of operations for the three-month period ended March 31, 2002 are not
necessarily indicative of the results which may be expected for the year ended
December 31, 2002.
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
earning deposits. Generally, federal funds are sold for one-day periods.
Certain amounts in the 2001 consolidated financial statements have been
reclassified to conform with the 2002 presentation. Such reclassifications have
no effect on previously reported net income.
Note 2. Company Information/Business Combination
On March 23, 2000, BankIllinois Financial Corporation and First Decatur
Bancshares, Inc. completed a "merger of equals" between the two companies,
structured as a merger of the two companies into the Company. The merger has
been accounted for as a pooling of interests and, accordingly, all prior
financial statements have been restated to include both companies. As a result
of the merger, former shareholders of BankIllinois Financial Corporation and
First Decatur Bancshares, Inc. received 6,119,673 and 4,990,281 shares of
Company common stock, respectively.
The Company operates 17 banking centers and is the parent company of
BankIllinois, First National Bank of Decatur, First Trust Bank of Shelbyville
and FirsTech, Inc., a retail payment processing company. The Company has applied
with its bank regulators for approval to merge BankIllinois and First Trust Bank
of Shelbyville effective late in the second quarter of 2002. The resulting bank
will be BankIllinois. The merger is not expected to have a significant impact on
the consolidated financial statements.
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.
On April 23, 2002, the Company commenced a tender offer to acquire up to
1,200,000 of its shares of common stock at a price of $23.00 per share.
Note 3. New Accounting Rules and Regulations
In June 2001, Statement on Financial Accounting Standards No. 143 "Accounting
for Asset Retirement Obligations" was issued to address financial reporting and
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This Statement applies to all entities and to
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development or normal operations of a
long-lived asset, except for certain obligations of lessees. Statement No. 143
is effective for financial statements issued for fiscal years beginning after
June 15, 2002. Management does not believe the adoption of Statement No. 143
will have a significant impact on its financial statements.
7
Note 4. Income per Share
Net income per common share has been computed as follows:
Three Months Ended
-------------------------
March 31,
-------------------------
2002 2001*
-------------------------
Net Income ............................................... $ 4,410,000 $ 3,668,000
Shares:
Weighted average common shares outstanding ............. 11,097,242 10,988,282
Dilutive effect of outstanding options, as determined by
the application of the treasury stock method ......... 50,732 198,949
-------------------------
Weighted average common shares oustanding,
as adjusted .......................................... 11,147,974 11,187,231
=========================
Basic earnings per share ................................. $ 0.40 $ 0.33
=========================
Diluted earnings per share ............................... $ 0.40 $ 0.33
=========================
* As restated for 5% Sept. 2001 stock dividend
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Condition
Assets and Liabilities
Total assets decreased $45.244 million, or 3.9%, to $1.106 billion at March 31,
2002 compared to $1.152 billion at December 31, 2001. Increases in federal funds
sold and interest earning deposits, other assets and non-marketable equity
securities were offset by decreases in all other asset categories.
Cash and due from banks decreased $47.832 million, or 54.4%, to $40.063 million
at March 31, 2002 compared to $87.895 million at December 31, 2001, primarily
due to a smaller dollar amount of deposit items in process of collection at
March 31, 2002 compared to December 31, 2001.
Federal funds sold and interest earning deposits increased $23.845 million, or
318.6%, to $31.329 million at March 31, 2002 compared to $7.484 million at
December 31, 2001. This increase was due to a smaller dollar amount of deposit
items in process of collection at March 31, 2002 compared to December 31, 2001.
Total investments in debt and equity securities decreased $13.217 million, or
3.9%, to $322.205 million at March 31, 2002 compared to $335.422 million at
December 31, 2001. Investments in securities available-for-sale decreased $8.060
million, or 3.0%, and investments in debt and equity securities held-to-maturity
decreased $5.195 million, or 8.1%, at March 31, 2002 compared to December 31,
2001. Slightly offsetting these decreases was an increase in non-marketable
equity securities of $0.038 million, or 0.7%, for the same period. Investments
fluctuate with loan demand and deposit volume.
Mortgage loans held for sale decreased $5.978 million, or 68.1%, to $2.797
million at March 31, 2002 compared to $8.775 million at December 31, 2001. This
decrease was attributable to the decrease in demand due to the interest rate
environment, which has seen a slight increase in mortgage rates since the end of
2001.
Loans, net of allowance for loan losses, decreased $2.472 million, or 0.4%, to
$670.589 million at March 31, 2002 from $673.061 million at December 31, 2001.
Decreases in commercial, financial and agricultural loans of $25.347 million, or
10.3%, and installment and consumer loans of $9.137 million, or 7.6%, were
partially offset by an increase of $32.210 million, or 10.2%, in real estate
loans at March 31, 2002 compared to December 31, 2001.
Premises and equipment decreased $0.269 million, or 1.4%, from $19.259 million
at December 31, 2001 to $18.990 million at March 31, 2002. The decrease was
caused by depreciation expense of $0.660 million offset by purchases of $0.391
million.
8
Other assets increased $1.065 million, or 9.9%, from $10.725 million at December
31, 2001 to $11.790 million at March 31, 2002 primarily due to an increase of
$0.478 million in accrued trust income receivable.
Total liabilities decreased $49.915 million, or 4.9%, to $965.603 million at
March 31, 2002 from $1.016 billion at December 31, 2001. Decreases in total
deposits, federal funds purchased, repurchase agreements and notes payable,
accrued interest payable and Federal Home Loan Bank advances and other
borrowings were slightly offset by an increase in other liabilities.
Total deposits decreased $46.433 million, or 5.3%, to $837.676 million at March
31, 2002 from $884.109 million at December 31, 2001. Decreases in deposits
included $30.656 million, or 21.9%, in time deposits $100,000 and over, $11.342
million, or 8.5%, in non-interest bearing demand deposits, $7.409 million, or
3.2%, in other time and $1.243 million, or 1.1%, in interest bearing demand
deposits. Somewhat offsetting these decreases was an increase of $4.217 million,
or 1.6%, in savings deposits. The decrease in time deposits $100,000 and over
was mainly due to the maturity of a large short-term deposit at the beginning of
2002.
Federal funds purchased, repurchase agreements and notes payable decreased
$3.730 million, or 4.4%, to $81.477 million at March 31, 2002 compared to
$85.207 million at December 31, 2001. Included in this change were decreases of
$4.007 million in repurchase agreements and $1.825 million in federal funds
purchased. Somewhat offsetting these decreases was an increase in notes payable
of $2.102 million.
Other liabilities increased $1.003 million, or 12.7%, to $8.920 million at March
31, 2002 from $7.917 million at December 31, 2001. This change was primarily due
to a $0.588 million increase in federal income taxes payable due to income tax
expense being $536,000 higher in the first quarter of 2002 compared to the same
period in 2001.
Investment Securities
The carrying value of investments in debt and equity securities was as follows
for March 31, 2002 and December 31, 2001:
Carrying Value of Securities
(in thousands)
March 31, December 31,
2002 2001
------------------------
Available-for-sale:
U.S. Treasury .................................. $ 6,999 $ 8,577
Federal agencies ............................... 184,096 191,325
Mortgage-backed securities ..................... 42,535 28,279
State and municipal ............................ 16,126 15,642
Corporate and other obligations ................ 3,082 3,099
Marketable equity securities ................... 5,598 19,574
--------------------
Total available-for-sale ................. $258,436 $266,496
====================
Held-to-maturity:
Federal agencies ............................... $ 1,750 $ 1,750
Mortgage-backed securities ..................... 15,028 19,842
State and municipal ............................ 41,845 42,226
--------------------
Total held-to-maturity ................... $ 58,623 $ 63,818
====================
Non-marketable equity securities:
FHLB and FRB stock1 ............................ $ 3,807 $ 3,766
Other equity investments ....................... 1,339 1,342
--------------------
Total .................................... $ 5,146 $ 5,108
====================
Total investment securities .............. $322,205 $335,422
====================
1 FHLB and FRB are commonly used acronyms for Federal Home Loan Bank and
Federal Reserve Bank, respectively.
9
The following table shows the maturities and weighted-average yields of
investment securities at March 31, 2002. All securities are shown at their
contractual maturity.
Maturities and Weighted Average Yields of Debt Securities
(dollars in thousands)
March 31, 2002
--------------------------------------------------------------------------------------------
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 ................. $ 4,453 6.10% $ 2,546 3.59% $ -- -- $ -- -- $ 6,999 5.19%
Federal agencies .............. $ 28,694 6.13% $153,410 4.80% $ 1,993 6.24% $ (1) -- $184,096 5.02%
Mortgage-backed
securities1 ................. $ 6,305 2.27% $ 20,583 5.41% $ 5,683 5.50% $ 9,964 6.38% $ 42,535 5.18%
State and municipal ........... $ 1,020 6.00% $ 6,561 6.15% $ 6,679 7.53% $ 1,866 7.67% $ 16,126 6.89%
Other securities .............. $ -- -- $ 3,082 5.31% $ -- -- $ -- -- $ 3,082 5.31%
Marketable equity
securities .................. $ -- -- $ -- -- $ - - -- $ -- -- $ 5,598 --
--------------------------------------------------------------------------------------------
Total ................... $ 40,472 $186,182 $14,355 $ 11,829 $258,436
--------------------------------------------------------------------------------------------
Average Yield ................... 5.52% 4.91% 6.55% 6.58% 5.18%
============================================================================================
Securities held-
to-maturity
Federal agencies .............. $ 1,750 6.04% $ -- -- $ -- -- $ -- -- $ 1,750 6.04%
Mortgage-backed
securities1 ................. $ 9,891 4.70% $ 3,679 6.53% $ 1,458 6.53% $ -- -- $ 15,028 5.33%
State and municipal ........... $ 3,626 6.40% $ 30,918 6.25% $ 7,301 7.13% $ -- -- $ 41,845 6.42%
--------------------------------------------------------------------------------------------
Total ................... $ 15,267 $ 34,597 $ 8,759 $ -- $ 58,623
============================================================================================
Average Yield ................... 5.26% 6.28% 7.03% -- 6.13%
============================================================================================
Non-marketable equity securities2
FHLB and FRB stock ............ $ -- -- $ -- -- $ -- -- $ -- -- $ 3,807 --
Other equity investments ...... $ -- -- $ -- -- $ -- -- $ -- -- $ 1,339 --
--------------------------------------------------------------------------------------------
Total ................... $ -- -- $ -- -- $ -- -- $ -- -- $ 5,146 --
=============================================================================================
1 Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties and certain securities require principal
repayments prior to maturity.
2 Due to the nature of these securities, they do not have a stated maturity
date or rate.
Loans
The following tables present the amounts and percentages of loans for March 31,
2002 and December 31, 2001 according to the categories of commercial, financial
and agricultural; real estate; and installment and consumer loans.
Amount of Loans Outstanding
(dollars in thousands)
March 31, 2002 December 31, 2001
------------------- -------------------
Amount Percentage Amount Percentage
---------------------------------------
Commercial, financial and agricultural $220,695 32.45% $246,042 36.06%
Real estate .......................... 348,903 51.31% 316,693 46.41%
Installment and consumer1 ............ 110,448 16.24% 119,585 17.53%
---------------------------------------
Total loans .................. $680,046 100.00% $682,320 100.00%
=======================================
1 Net of unearned discount
10
The balance of loans outstanding as of March 31, 2002 by maturity is shown in
the following table:
Maturity of Loans Outstanding
(dollars in thousands)
March 31, 2002
1 year 1 to 5 Over 5
or less years years Total
--------------------------------------------
Commercial, financial and agricultural $106,999 $ 98,991 $ 14,705 $220,695
Real estate .......................... 43,412 131,035 174,456 348,903
Installment and consumer1 ............ 35,294 68,317 6,837 110,448
--------------------------------------------
Total ........................ $185,705 $298,343 $195,998 $680,046
============================================
Percentage of total loans outstanding 27.31% 43.87% 28.82% 100.00%
============================================
1 Net of unearned discount
Capital
Total shareholders' equity increased $4.671 million from December 31, 2001 to
March 31, 2002. Treasury stock transactions were $3.063 million, primarily due
to the exercise of employee stock options. The change in capital is summarized
as follows:
(in thousands)
--------------
Shareholders' equity, December 31, 2001 .................... $ 135,993
Net income ............................................... 4,410
Treasury stock transactions, net ......................... 3,063
Stock appreciation rights ................................ 7
Cash dividends declared .................................. (1,454)
Other comprehensive income ............................... (1,355)
---------
Shareholders' equity, March 31, 2002 ....................... $ 140,664
=========
On March 19, 2002, the Board of Directors of the Company declared a quarterly
cash dividend of $0.13 per share of the Company's common stock. The dividend of
$1.454 million was paid on April 23, 2002 to holders of record on April 5, 2002.
On April 23, 2002, the Company commenced a tender offer to acquire up to
1,200,000 of its shares of common stock at a price of $23.00 per share.
The Company and its subsidiary banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's and its subsidiary banks' financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, banks must meet specific guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Company's and its
subsidiary banks' capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and its subsidiary banks to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of March 31,
2002, that the Company and its subsidiary banks exceeded all capital adequacy
requirements to which they are subject.
11
As of March 31, 2002, 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 March 31, 2002:
Total capital
(to risk-weighted assets)
Consolidated .................. $148,640 19.2% $ 61,927 8.0% N/A
BankIllinois .................. $ 67,616 15.9% $ 34,074 8.0% $ 42,592 10.0%
First National Bank of Decatur $ 49,162 16.7% $ 23,520 8.0% $ 29,400 10.0%
First Trust Bank of Shelbyville $ 11,337 26.2% $ 3,464 8.0% $ 4,330 10.0%
Tier I capital
(to risk-weighted assets)
Consolidated .................. $139,080 18.0% $ 30,963 4.0% N/A
BankIllinois .................. $ 62,364 14.6% $ 17,037 4.0% $ 25,555 6.0%
First National Bank of Decatur $ 45,501 15.5% $ 11,760 4.0% $ 17,640 6.0%
First Trust Bank of Shelbyville $ 10,794 24.9% $ 1,732 4.0% $ 2,598 6.0%
Tier I capital
(to average assets)
Consolidated .................. $139,080 12.5% $ 44,400 4.0% N/A
BankIllinois .................. $ 62,364 10.4% $ 23,940 4.0% $ 29,925 5.0%
First National Bank of Decatur $ 45,501 10.6% $ 17,118 4.0% $ 21,397 5.0%
First Trust Bank of Shelbyville $ 10,794 14.1% $ 3,069 4.0% $ 3,837 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.
12
The following table presents the Company's interest rate sensitivity at various
intervals at March 31, 2002:
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 earning deposits ............ $ 31,329 $ -- $ -- $ -- $ -- $ 31,329
Debt and equity securities 1 ........... 15,491 20,359 11,621 38,001 236,733 322,205
Loans 2 ................................ 176,762 24,376 35,606 52,868 393,231 682,843
-------------------------------------------------------------------------------
Total earning assets ............. $ 223,582 $ 44,735 $ 47,227 $ 90,869 $ 629,964 $1,036,377
-------------------------------------------------------------------------------
Interest bearing liabilities:
Savings and interest bearing
demand deposits 3 .................... $ 35,338 $ 1,449 $ 2,173 $ 4,346 $ 165,149 $ 208,455
Money market savings
deposits ............................. 146,348 -- -- -- -- 146,348
Time deposits .......................... 33,468 43,610 55,078 86,709 114,694 333,559
Federal funds purchased,
repurchase agreements,
and notes payable .................... 77,976 505 2,320 91 585 81,477
FHLB advances and
other borrowings ..................... -- -- 5,000 7,138 22,717 34,855
-------------------------------------------------------------------------------
Total interest bearing liabilities $ 293,130 $ 45,564 $ 64,571 $ 98,284 $ 303,145 $ 804,694
-------------------------------------------------------------------------------
Net asset (liability) funding gap ........ (69,548) (829) (17,344) (7,415) 326,819 231,683
-------------------------------------------------------------------------------
Repricing gap ............................ 0.76 0.98 0.73 0.92 2.08 1.29
Cumulative repricing gap ................. 0.76 0.79 0.78 0.81 1.29 1.29
--------------------------------------------------------------------------------
1 Debt and equity securities included securities available-for-sale,
securities held-to-maturity, and non-marketable equity securities.
2 Loans are gross and include mortgage loans held-for-sale.
3 The total of savings and interest-bearing demand deposits does not include
$27.250 million of non-transactional accounts which are savings accounts
that are non-interest bearing.
13
Included in the 1-30 day category of savings and interest-bearing demand
deposits are non-core deposits plus a percentage, based upon industry-accepted
assumptions and Company analysis, of the core deposits. "Core deposits" are the
lowest average balance of the prior twelve months for each product type included
in this category. "Non-core deposits" are the difference between the current
balance and core deposits. The time frames include a percentage, based upon
industry-accepted assumptions and Company analysis, of the core deposits, as
follows:
1-30 Days 31-90 Days 91-180 Days 181-365 Days Over 1 Year
--------- ---------- ----------- ------------ -----------
Savings and interest-bearing
demand deposits 0.45% 0.85% 1.25% 2.45% 95.00%
At March 31, 2002, 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 $695,000
in the 1-30 days category and $704,000 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.
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. Additionally, the Company can borrow
approximately $37 million from the Federal Home Bank on a secured basis.
The Company uses financial forecasting/budgeting/reporting software packages to
perform interest rate sensitivity analysis for all product categories. The
Company's primary focus of its analysis is on the effect of interest rate
increases and decreases on net interest income. Management believes that this
analysis reflects the potential effects on current earnings of interest rate
changes. Call criteria and prepayment assumptions are taken into consideration
for investments in debt and equity securities. All of the Company's financial
instruments are analyzed by a software database which includes each of the
different product categories which are tied to key rates such as prime, Treasury
Bills, or the federal funds rate. The relationships of each of the different
products to the key rate that the product is tied to is proportional. The
software reprices the products based on current offering rates. The software
performs interest rate sensitivity analysis by performing rate shocks of plus or
minus 200 basis points in 100 basis point increments.
The following table shows projected results at March 31, 2002 and December 31,
2001 of the impact on net interest income from an immediate change in interest
rates. The results are shown as a percentage change in net interest income over
the next twelve months.
Basis Point Change
---------------------------------------
+200 +100 -100 -200
---------------------------------------
March 31, 2002 2.8% 1.4% (1.4%) (3.3%)
December 31, 2001 4.2% 2.1% (2.1%) (3.6%)
The foregoing computations are based on numerous assumptions, including relative
levels of market interest rates, prepayments and deposit mix. The computed
estimates should not be relied upon as a projection of actual results. Despite
the limitations on preciseness inherent in these computations, management
believes that the information provided is reasonably indicative of the effect of
changes in interest rate levels on the net earning capacity of the Company's
current mix of interest earning assets and interest bearing liabilities.
Management continues to use the results of these computations, along with the
results of its computer model projections, in order to maximize current earnings
while positioning the Company to minimize the effect of a prolonged shift in
interest rates that would adversely affect future results of operations.
At the present time, the most significant market risk affecting the Company is
interest rate risk. Other market risks such as foreign currency exchange risk
and commodity price risk do not occur in the normal business of the Company. The
Company also is not currently using trading activities or derivative instruments
to control interest rate risk.
14
Liquidity and Cash Flows
The Company was able to meet liquidity needs during the first three months of
2002. A review of the consolidated statements of cash flows included in the
accompanying financial statements shows that the Company's cash and cash
equivalents decreased $23.987 million from December 31, 2001 to March 31, 2002.
This decrease came from cash used in financing activities offset somewhat by
cash provided by operating and investing activities.
There were differences in the sources and uses of cash during the first three
months of 2002 compared to the first three months of 2001. More cash was
provided by operating activities during the first three months of 2002 compared
to the same period of 2001. Cash was provided during the first three months of
2002 for net loans originated for sale because proceeds from sales were higher
than originated loans, whereas during the first three months of 2001, originated
loans were higher than proceeds from sales. Less cash was provided by investing
activities during the first three months of 2002 compared to the same period of
2001 due to changes in the Company's investment portfolio. During the first
three months of 2002, net cash provided by investing activities involving the
Company's investment portfolio was $10.972 million compared to $27.296 million
during the same period in 2001. Cash was used in financing activities during the
first three months of 2002 compared to cash provided during the first three
months of 2001. This was primarily due to cash used because of decreases in
deposits during the first three months of 2002 compared to cash provided from
increases in deposits during the same period of 2001.
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 $9.457 million at March
31, 2002 compared to $9.259 million at December 31, 2001, as net charge-offs
were $132,000 and provisions totaled $330,000 during the first three months of
2002. The allowance for loan losses as a percentage of gross loans, including
loans held-for-sale, was 1.38% at March 31, 2002, or slightly more than the
December 31, 2001 percentage of 1.34%. Gross loans, including loans
held-for-sale, decreased 1.2% to $682.843 million at March 31, 2002 from
$691.095 million at December 31, 2001.
The allowance for loan losses as a percentage of nonperforming loans was 201.3%
at March 31, 2002 compared to 181.0% at December 31, 2001. Nonperforming loans
decreased from $5.115 million at December 31, 2001 to $4.699 million at March
31, 2002. The $416,000 decrease in nonperforming loans during the first three
months resulted from a $1.125 million decrease in loans past due 90 days or
more, offset somewhat by a $709,000 increase in nonaccrual loans. The increase
in nonaccruals consisted primarily of residential mortgage loans as well as a
more aggressive approach toward placing 90-day consumer loan delinquencies on
nonaccrual status. Management believes that nonperforming and potential problem
loans are appropriately identified and monitored based on the extensive loan
analysis performed by the credit administration department, the internal loan
committees and the board of directors. Historically, there has not been a
significant amount of loans charged off which had not been previously identified
as problem loans by the credit administration department or the loan committees.
Along with other financial institutions, management shares a concern for the
outlook of the economy in 2002. In addition to the softening of the economy in
2001, the tragic events of September 11, 2001 further clouded the economic
outlook, severely impacting several major industries, as well as the economy as
a whole. Additionally, consumer confidence, a key factor in the economy, was
negatively impacted. Although the economy shows signs of improving, the past
economic slowdown could still adversely affect cash flows from both commercial
and individual borrowers, as a result of which, the Company could experience
increases in problem assets, delinquencies and losses on loans.
15
The following table summarizes changes in the allowance for loan losses by loan
categories for each period and additions to the allowance for loan losses which
have been charged to operations.
Allowance for Loan Losses
(dollars in thousands)
March 31,
----------------------
2002 2001
----------------------
Allowance for loan losses at
beginning of year ................................ $ 9,259 $ 8,879
Charge-offs during period:
Commercial, financial and agricultural ........... $ (16) $ (15)
Real estate ...................................... -- --
Installment and consumer ......................... (278) (213)
----------------------
Total ...................................... $ (294) $ (228)
----------------------
Recoveries of loans previously charged off:
Commercial, financial and agricultural ........... $ 88 $ 44
Residential real estate .......................... 24 63
Installment and consumer ......................... 50 30
----------------------
Total ...................................... $ 162 $ 137
----------------------
Net (charge-offs) recoveries ............... $ (132) $ (91)
Provision for loan losses .......................... 330 235
----------------------
Allowance for loan losses at end of quarter ........ $ 9,457 $ 9,023
======================
Ratio of net (charge-offs) recoveries to
average net loans ................................ -0.02% -0.01%
----------------------
The following table shows the allocation of the allowance for loan losses
allocated to each category.
Allocation of the Allowance for Loan Losses
(in thousands)
March 31, 2002 December 31, 2001
----------------------------------
Allocated:
Commercial, financial and agricultural .. $5,486 $5,487
Residential real estate ................. 384 419
Installment and consumer ................ 1,951 2,000
-----------------------
Total allocated allowance ......... $7,821 $7,906
Unallocated allowances .................... 1,636 1,353
-----------------------
Total ..................................... 9,457 9,259
=======================
The following table presents the aggregate amount of loans considered to be
nonperforming for the periods indicated. Nonperforming loans include loans
accounted for on a nonaccrual basis, accruing loans contractually past due 90
days or more as to interest or principal payments and loans which are troubled
debt restructurings as defined in Statement of Financial Accounting Standards
No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings."
Nonperforming Loans (dollars in thousands)
March 31, 2002 December 31, 2001
----------------------------------
Nonaccrual loans1 ....................... $4,050 $3,341
Loans past due 90 days or more .......... $ 649 $1,774
Renegotiated loans ...................... $ 63 $ 67
1 Includes $3.886 million at March 31, 2002 and $3.216 million at December
31, 2001 of real estate and consumer loans which management does not
consider impaired as defined by the Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS
114).
16
Results of Operations
Results of Operations For the Three Months Ended March 31, 2002
Net income for the first three months of 2002 was $4.410 million, a $742,000, or
20.2%, increase from $3.668 million for the same period in 2001. Basic and
diluted earnings per share increased $0.07, or 21.2%, to $0.40 per share in the
first quarter of 2002 from $0.33 per share in the first quarter of 2001.
Operating earnings for the three months ended March 31, 2002 were $4.410 million
compared to $3.883 million for the same period in 2001, an increase of $527,000,
or 13.6%. Basic and diluted operating earnings per share increased 14.3%, to
$0.40, in the first quarter of 2002 from $0.35 in the first quarter of 2001. The
difference between operating and net earnings in the first quarter of 2001 was
due to merger and restructuring related expenses, net of tax, of $215,000. The
2001 merger and restructuring expenses consisted of $50,000 of data processing
expense and $276,000 of termination of employment contracts, offset by $111,000
of tax benefit.
The following schedule "Consolidated Average Balance Sheet and Interest Rates"
provides details of average balances, interest income or interest expense, and
the average rates for the Company's major asset and liability categories.
Consolidated Average Balance Sheet and Interest Rates
(dollars in thousands)
Three Months Ended March 31,
2002 2001
--------------------------------------------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
--------------------------------------------------------------------
Assets
Taxable investment securities1 ......... $ 273,909 $ 3,325 4.86% $ 247,313 $ 3,682 5.96%
Tax-exempt investment securities1 (TE) . 55,487 909 6.55% 48,111 823 6.84%
Federal funds sold and interest earning
deposits2 ............................ 20,539 95 1.85% 46,174 660 5.72%
Loans3,4 (TE) .......................... 673,475 12,191 7.24% 657,788 14,247 8.66%
--------------------------------------------------------------------
Total interest earning assets
and interest income (TE) ....... $1,023,410 $ 16,520 6.46% $ 999,386 $ 19,412 7.77%
--------------------------------------------------------------------
Cash and due from banks ................ $ 48,993 $ 55,702
Premises and equipment ................. 19,136 20,842
Other assets ........................... 18,650 19,388
--------------------------------------------------------------------
Total assets ................... $1,110,189 $1,095,318
====================================================================
Liabilities and Shareholders' Equity
Interest bearing demand deposits ....... $ 106,084 $ 150 0.57% $ 114,774 $ 685 2.39%
Savings ................................ 251,182 1,121 1.79% 225,441 2,167 3.84%
Time deposits .......................... 338,388 3,736 4.42% 361,949 5,334 5.89%
Federal funds purchased, repurchase
agreements, and notes payable ........ 72,304 326 1.80% 70,621 779 4.41%
FHLB advances and other borrowings ..... 35,268 494 5.60% 39,073 614 6.29%
--------------------------------------------------------------------
Total interest bearing
liabilities and interest expense $ 803,226 $ 5,827 2.90% $ 811,858 $ 9,579 4.72%
--------------------------------------------------------------------
Noninterest bearing demand deposits .... $ 105,026 $ 102,601
Noninterest bearing savings deposits ... 51,961 37,819
Other liabilities ...................... 9,744 15,959
--------------------------------------------------------------------
Total liabilities .............. $ 969,957 $ 968,237
Shareholders' equity ................... 140,232 127,081
--------------------------------------------------------------------
Total liabilities and
stockholders' equity ........... $1,110,189 $1,095,318
====================================================================
Interest spread (average rate earned
minus average rate paid) (TE) ........ 3.56% 3.05%
====================================================================
Net interest income (TE) ............... $ 10,693 $ 9,833
====================================================================
Net yield on interest
earnings assets (TE) ................. 4.18% 3.94%
====================================================================
See next page for Notes 1 - 4.
17
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 earning deposits include approximately
$19,000 and $35,000 in 2002 and 2001, 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 $250,000 and $175,000 in 2002 and 2001,
respectively, are included in total loan income.
Net interest income, the most significant component of the Company's earnings,
is the difference between interest received or accrued on the Company's earning
assets - primarily loans and investments - and interest paid or accrued on
deposits and borrowings. In order to compare the interest generated from
different types of earning assets, the interest income on certain tax-exempt
investment securities and loans is increased for analysis purposes to reflect
the income tax savings provided by 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 34%. The following table
presents, on a tax equivalent (TE) basis, an analysis of changes in net interest
income resulting from changes in average volumes of earning assets and interest
bearing liabilities and average rates earned and paid. The change in interest
due to the combined rate/volume variance has been allocated to rate and volume
changes in proportion to the absolute dollar amounts of change in each.
Analysis of Volume and Rate Changes
(in thousands)
Three Months Ended March 31, 2002
Increase
(Decrease)
from
Previous Due to Due to
Year Volume Rate
-------------------------------
Interest Income
Taxable investment securities .................. $ (357) $ 1,870 $(2,227)
Tax-exempt investment securities (TE) .......... 86 285 (199)
Federal funds sold and interest earning deposits (565) (255) (310)
Loans (TE) ..................................... (2,056) 2,114 (4,170)
------------------------------
Total interest income (TE) ............... $(2,892) $ 4,014 $(6,906)
------------------------------
Interest Expense
Interest bearing demand and savings deposits1 .. $(1,581) $ 926 $(2,507)
Time deposits .................................. (1,598) (329) (1,269)
Federal funds purchased,
repurchase agreements and notes payable ...... (453) 125 (578)
FHLB advances and other borrowings ............. (120) (57) (63)
------------------------------
Total interest expense ................... $(3,752) $ 665 $(4,417)
------------------------------
Net Interest Income (TE) ......................... $ 860 $ 3,349 $(2,489)
==============================
1 Due to deposit reclassifications described above, interest bearing demand
and savings deposits are included in the same line for comparability.
18
Net interest income on a tax equivalent basis was $860,000, or 8.7%, higher for
the first three months of 2002 compared to 2001. Total tax-equivalent interest
income was $2.892 million, or 14.9%, lower in 2002 compared to 2001, and
interest expense decreased $3.752 million, or 39.2%. The decrease in
tax-equivalent interest income was mainly due to lower rates, offset somewhat by
an increase in average balances. The decrease in interest expense was due
primarily to lower rates.
The decrease in total tax-equivalent interest income was mainly due to a
decrease in interest income from loans, federal funds sold and interest-earning
deposits and taxable investment securities, offset somewhat by an increase in
interest income from tax-exempt investment securities. The decrease in interest
income from loans was due to lower rates, offset somewhat by an increase in
average balances. The decrease in interest income from federal funds sold and
interest earning deposits was due to a combination of lower rates and lower
average balances. The decrease in interest income from taxable investment
securities was due to lower rates, offset somewhat by an increase in average
balances. The increase in interest income from tax-exempt investment securities
was due to an increase in average balances, offset somewhat by lower rates.
The decrease in total interest expense was due to decreases in interest expense
from all categories of interest bearing liabilities. Interest expense on time
deposits decreased due to lower rates as well as a decrease in average balances.
Interest expense on interest bearing demand and savings deposits and federal
funds purchased, repurchase agreements and notes payable decreased primarily due
to lower rates, offset slightly by an increase in average balances. The decrease
in interest expense on FHLB advances and other borrowings was a combination of
lower rates and lower average balances.
The provision for loan losses recorded was $330,000 during the first three
months of 2002. This was $95,000, or 40.4%, higher than the $235,000 recorded
during the first three months of 2001. 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.
Total non-interest income increased $637,000, or 15.6%, during the first three
months of 2002 compared to the first three months of 2001. Included in this
increase was an increase of $289,000, or 17.4%, in income from remittance
processing. This increase was primarily due to increased volume coupled with
restructured pricing for some customers. Income from trust and brokerage fees
increased $176,000, or 13.8%, during the first quarter of 2002 compared to the
first quarter of 2001. This was mainly due to an increase in total assets under
management upon which fees are based. Total assets under management increased
$380.0 million, or 33.4%, at March 31, 2002 compared to March 31, 2001. Service
charges on deposit accounts increased $70,000, or 14.5%, during the first
quarter of 2002 compared to the same period in 2001. Gains on sales of mortgage
loans held-for-sale increased $64,000, or 41.3%, during the first three months
of 2002 compared to the same period in 2001. This increase reflected a $10.992
million, or 69.5%, increase in funded mortgage loans held-for-sale during the
first quarter of 2002 compared to the first quarter of 2001. This increase was
reflective of lower mortgage interest rates during the first three months of
2002 compared to the same period in 2001. Other income increased $45,000, or
10.4%, during the first three months of 2002 compared to the same period in
2001. Somewhat offsetting these increases was a $7,000, or 9.1%, decrease in
income from securities transactions during the first three months of 2002
compared to the same period in 2001.
Total non-interest expense increased $102,000, or 1.3%, during the first three
months of 2002 compared to the same period in 2001. Of this increase, salaries
and employee benefits increased $239,000, or 5.3%, during the first quarter of
2002 compared to the first quarter of 2001. Data processing expense increased
$99,000, or 21.3%, in the first quarter of 2002 compared to the first quarter of
2001. As a result of a computer system conversion at the Company's Decatur bank
in 2001, computer processing expense increased due to a change from in-house
data processing to third party service bureau data processing. Also contributing
to the overall increase in non-interest expense was an increase in service
charges from correspondent banks of $34,000, or 16.8%, in the first three months
of 2002 compared to the same period in 2001. Somewhat offsetting these increases
was a decrease in other non-interest expense of $87,000, or 7.8%, during the
first quarter of 2002 compared to the first quarter of 2001. Equipment expense
decreased $73,000, or 9.6%, during the first three months of 2002 compared to
the same period in 2001. This decrease was primarily due to conversion to third
party service bureau data processing from in-house data processing. Occupancy
expense decreased $62,000, or 10.1%, during the first three months of 2002
compared to the same period in 2001. This was mainly due to lower utilities and
maintenance expenses because of the mild winter in 2002. Office supplies
decreased $48,000, or 12.3%, in the first quarter of 2002 compared to the first
quarter of 2001. Included in office supplies expense in 2001 were additional
printing and mailing expense to announce a computer system conversion, and
additional supplies purchased as a result of the conversion.
19
Income tax expense increased $536,000, or 32.3%, during the first three months
of 2002 compared to the first three months of 2001. The effective tax rate
increased to 33.2% during the first quarter of 2002 from 31.2% during the first
quarter of 2001. The difference in the effective tax rate was that the 2001
expense was offset by a State net operating loss carry forward.
Business Segment Information
The Company currently operates in two industry segments. The primary business
involves providing banking services to central Illinois. The Company's
subsidiary banks offer a full range of financial services to business and
individual customers. These services include demand, savings, time and
individual retirement accounts; commercial, consumer (including automobile loans
and personal lines of credit), agricultural, and real estate lending; safe
deposit and night depository services; farm management; full service trust
departments that offer a wide range of services such as investment management,
acting as trustee, serving as guardian, executor or agent and miscellaneous
consulting; discount brokerage services and purchases of installment obligations
from retailers, primarily without recourse. The other industry segment involves
retail payment processing. FirsTech provides the following services to electric,
water and gas utilities, telecommunication companies, cable television firms and
charitable organizations:
o retail lockbox processing of payments delivered by mail on behalf of the
biller
o processing of payments delivered by customers to pay agents such as grocery
stores, convenience stores and currency exchanges
o 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
The Company operates primarily to manage its investment in the subsidiaries.
Company information is provided for informational purposes only, since it is not
considered a separate segment for reporting purposes.
Banking Remittance
Services Services Company Eliminations Total
--------------------------------------------------------------------------------------------------
March 31, 2002
Total interest income ....... $ 16,194 $ 24 $ 43 $ (54) $ 16,207
Total interest expense ...... 5,881 -- -- (54) 5,827
Provision for loan losses ... 330 -- -- -- 330
Total non-interest income ... 2,880 1,980 27 (163) 4,724
Total non-interest expense .. 6,836 1,331 164 (163) 8,168
Income before income tax .... 6,027 673 (94) -- 6,606
Income tax expense .......... 1,965 269 (38) -- 2,196
Net income .................. 4,062 404 (56) -- 4,410
Total assets ................ 1,095,135 7,790 142,862 (139,520) 1,106,267
Depreciation and amortization 532 126 8 -- 666
March 31, 2001
Total interest income ....... $ 19,123 $ 37 $ 27 $ (66) $ 19,121
Total interest expense ...... 9,645 -- -- (66) 9,579
Provision for loan losses ... 235 -- -- -- 235
Total non-interest income ... 2,446 1,777 4,011 (4,147) 4,087
Total non-interest expense .. 6,427 1,332 513 (206) 8,066
Income before income tax .... 5,262 482 3,525 (3,941) 5,328
Income tax expense .......... 1,638 165 (143) -- 1,660
Net income .................. 3,624 317 3,668 (3,941) 3,668
Total assets ................ 1,085,406 6,454 133,917 (129,817) 1,095,960
Depreciation and amortization 584 123 6 -- 713
20
Recent Regulatory Developments
On October 26, 2001, President Bush signed into law the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001 (the "USA PATRIOT Act"). Among its other
provisions, the USA PATRIOT Act requires each financial institution: (i) to
establish an anti-money laundering program; (ii) to establish due diligence
policies, procedures and controls with respect to its private banking accounts
and correspondent banking accounts involving foreign individuals and certain
foreign banks; and (iii) to avoid establishing, maintaining, administering, or
managing correspondent accounts in the United States for, or on behalf of,
foreign banks that do not have a physical presence in any country. The USA
PATRIOT Act also requires the Secretary of the Treasury to prescribe, by
regulations to be issued jointly with the federal banking regulators and certain
other agencies, minimum standards that financial institutions must follow to
verify the identity of customers, both foreign and domestic, when a customer
opens an account. In addition, the USA PATRIOT Act contains a provision
encouraging cooperation among financial institutions, regulatory authorities and
law enforcement authorities with respect to individuals, entities and
organizations suspected of engaging in terrorist acts or money laundering
activities.
During the first quarter of 2002, the Financial Crime Enforcement Network
(FinCEN), a bureau of the Department of the Treasury, issued proposed and
interim regulations as mandated by the USA PATRIOT Act that would: (i) prohibit
certain financial institutions from providing correspondent accounts to foreign
shell banks; (ii) require such financial institutions to take reasonable steps
to ensure that correspondent accounts provided to foreign banks are not being
used to indirectly provide banking services to foreign shell banks; (iii)
require certain financial institutions that provide correspondent accounts to
foreign banks to maintain records of the ownership of such foreign banks and
their agents in the United States; (iv) require the termination of correspondent
accounts of foreign banks that fail to turn over their account records in
response to a lawful request from the Secretary of the Treasury or the Attorney
General; and (v) encourage information sharing among financial institutions and
federal law enforcement agencies to identify, prevent, deter and report money
laundering and terrorist activity. To date, it has not been possible to predict
the impact the USA PATRIOT ACT and its implementing regulations may have on the
Company or its subsidiary banks in the future.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
This document (including information incorporated by reference) contains, and
future oral and written statements of the Company and its management may
contain, forward-looking statements, within the meaning of such term in the
Private Securities Litigation Reform Act of 1995, with respect to the financial
condition, results of operations, plans, objectives, future performance and
business of the Company. Forward-looking statements, which may be based upon
beliefs, expectations and assumptions of the Company's management and on
information currently available to management, are generally identifiable by the
use of words such as "believe", "expect", "anticipate", "plan", "intend",
"estimate", "may", "will", "would", "could", "should" or other similar
expressions. Additionally, all statements in this document, including
forward-looking statements, speak only as of the date they are made, and the
Company undertakes no obligation to update any statement in light of new
information or future events.
The Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
effect on the operations and future prospects of the Company and its
subsidiaries include, but are not limited to, the following:
o The strength of the United States economy in general and the strength of
the local economies in which the Company conducts its operations which may
be less favorable than expected and may result in, among other things, a
deterioration in the credit quality and value of the Company's assets.
o The economic impact of the terrorist attacks that occurred on September
11th, as well as any future threats and attacks, 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.
21
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 increase 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
See the "Interest Rate Sensitivity" section above.
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
None
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
None
b. Reports
None
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MAIN STREET TRUST, INC.
Date: May 14, 2002
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
23