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, 2006
Commission File Number: 0-30031
MAIN STREET TRUST, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Illinois 37-1338484
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(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
100 West University, Champaign, Illinois 61820
-----------------------------------------------
(Address of principal executive offices) (Zip Code)
(217) 351-6500
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
------ ------
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer X Non-accelerated filer
---- ---- ----
Indicate by check mark whether the registrant is a shell company (as defined in
Exchange Act Rule 12b-2). Yes X No
------ -----
Indicate the number of shares outstanding of the registrant's common stock, as
of May 2, 2006:
Main Street Trust, Inc. Common Stock 10,135,027
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1
Table of Contents
PAGE
(a) 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 .............................................. 28
Item 4. Controls and Procedures .................................. 28
(b) PART II. OTHER INFORMATION
Item 1. Legal Proceedings ........................................ 28
Item 1.A. Risk Factors ........................................... 28
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds .......................................... 28
Item 3. Defaults Upon Senior Securities .......................... 28
Item 4. Submission of Matters to a Vote of Security Holders ...... 29
Item 5. Other Information ........................................ 29
Item 6. Exhibits ................................................. 29
SIGNATURES ................................................................ 29
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 2006 and December 31, 2005
(Unaudited, in thousands, except share data)
March 31, December 31,
2006 2005
--------------------------
ASSETS
Cash and due from banks .......................................................... $ 41,595 $ 52,007
Federal funds sold and interest bearing deposits ................................. 11,758 42,059
--------------------------
Cash and cash equivalents .............................................. 53,353 94,066
--------------------------
Investments in debt and equity securities:
Available-for-sale, at fair value .............................................. 368,318 $ 343,087
Held-to-maturity, at cost (fair value of $83,455 and $75,665
at March 31, 2006 and December 31, 2005, respectively) ....................... 84,834 76,542
Non-marketable equity securities ............................................... 24,593 24,994
--------------------------
Total investments in debt and equity securities ........................ 477,745 444,623
--------------------------
Loans, net of allowance for loan losses of $13,599 and $13,472
at March 31, 2006 and December 31, 2005, respectively .......................... 961,564 1,002,927
Mortgage loans held for sale ..................................................... 1,696 1,661
Premises and equipment ........................................................... 22,841 23,047
Goodwill ......................................................................... 20,736 20,736
Core deposit intangibles ......................................................... 4,351 4,569
Accrued interest receivable ...................................................... 10,915 8,461
Other assets ..................................................................... 28,168 25,047
--------------------------
Total assets ........................................................... $ 1,581,369 $ 1,625,137
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing ......................................................... $ 219,356 $ 240,823
Interest bearing ............................................................. 1,033,369 1,035,149
--------------------------
Total deposits ......................................................... 1,252,725 1,275,972
--------------------------
Federal funds purchased, repurchase agreements and notes payable ............... 115,346 118,452
Federal Home Loan Bank advances and other borrowings ........................... 47,766 67,386
Accrued interest payable ....................................................... 4,510 4,657
Other liabilities .............................................................. 15,913 14,901
--------------------------
Total liabilities ...................................................... 1,436,260 1,481,368
--------------------------
Commitments and financial instruments (See Note 5)
Shareholders' equity:
Preferred stock, no par value; 2,000,000 shares authorized .................... -- --
Common stock, $0.01 par value; 15,000,000 shares authorized;
11,219,319 shares issued .................................................... 112 112
Paid in capital ................................................................ 55,346 55,189
Retained earnings .............................................................. 122,569 120,238
Accumulated other comprehensive loss ........................................... (2,318) (1,597)
--------------------------
175,709 173,942
Less: treasury stock, at cost, 1,086,444 and 1,072,644 shares
at March 31, 2006 and December 31, 2005, respectively ........................ (30,600) (30,173)
--------------------------
Total shareholders' equity ............................................. 145,109 143,769
--------------------------
Total liabilities and shareholders' equity ............................. $ 1,581,369 $ 1,625,137
==========================
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, 2006 and 2005
(Unaudited, in thousands, except share data)
2006 2005
-------------------------
Interest income:
Loans and fees on loans ............................................. $ 16,795 $ 11,405
Investments in debt and equity securities:
Taxable ........................................................... 4,106 2,364
Tax-exempt ........................................................ 330 401
Federal funds sold and interest bearing deposits .................... 297 221
-------------------------
Total interest income ....................................... 21,528 14,391
-------------------------
Interest expense:
Deposits ............................................................ 7,418 3,600
Federal funds purchased, repurchase agreements and notes payable .... 1,151 507
Federal Home Loan Bank advances and other borrowings ................ 681 386
-------------------------
Total interest expense ...................................... 9,250 4,493
-------------------------
Net interest income ......................................... 12,278 9,898
Provision for loan losses ............................................. 450 330
-------------------------
Net interest income after provision for loan losses ......... 11,828 9,568
-------------------------
Non-interest income:
Trust and brokerage fees ............................................ 1,915 1,842
Remittance processing ............................................... 1,765 1,707
Service charges on deposit accounts ................................. 685 526
Securities transactions, net ........................................ 267 190
Gain on sales of mortgage loans, net ................................ 126 137
Other ............................................................... 761 613
-------------------------
Total non-interest income ................................... 5,519 5,015
-------------------------
Non-interest expense:
Salaries and employee benefits ...................................... 5,921 4,947
Occupancy ........................................................... 792 662
Equipment ........................................................... 615 606
Data processing ..................................................... 738 551
Office supplies ..................................................... 296 298
Service charges from correspondent banks ............................ 64 110
Amortization of core deposit intangibles ............................ 218 --
Other ............................................................... 1,401 1,275
-------------------------
Total non-interest expense .................................. 10,045 8,449
-------------------------
Income before income taxes .................................. 7,302 6,134
Income taxes .......................................................... 2,612 2,201
-------------------------
Net income .................................................. $ 4,690 $ 3,933
=========================
Per share data:
Basic earnings per share ............................................ $ 0.46 $ 0.42
Weighted average shares of common stock outstanding ................. 10,141,775 9,453,196
Diluted earnings per share .......................................... $ 0.46 $ 0.41
Weighted average shares of common stock and dilutive potential
common shares outstanding ......................................... 10,264,692 9,554,697
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, 2006 and 2005
(Unaudited, in thousands)
2006 2005
------------------
Net income .................................................................... $ 4,690 $ 3,933
------------------
Other comprehensive (loss), before tax:
Unrealized (losses) on securities:
Unrealized holding (losses) arising during period, net of tax of
($373) and ($988), for March 31, 2006 and 2005, respectively .............. (561) (1,482)
Less: reclassification adjustment for (gains) included in net income, net of
tax of ($107) and ($76), for March 31, 2006 and 2005, respectively ........ (160) (114)
------------------
Other comprehensive loss .................................................... (721) (1,596)
------------------
Comprehensive income ........................................................ $ 3,969 $ 2,337
==================
See accompanying notes to unaudited consolidated financial statements.
5
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2006 and 2005
(Unaudited, in thousands)
2006 2005
--------------------
Cash flows from operating activities:
Net income .......................................................... $ 4,690 $ 3,933
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ..................................... 639 594
Amortization of bond discounts and premiums, net .................. 137 455
Amortization of core deposit intangibles .......................... 218 --
Provision for loan losses ......................................... 450 330
Securities transactions, net ...................................... (267) (190)
Federal Home Loan Bank stock dividend ............................. -- (58)
Undistributed gain from non-marketable equity securities .......... 226 26
Gain on sales of mortgage loans, net .............................. (126) (137)
Proceeds from sales of mortgage loans originated for sale ......... 11,580 9,749
Mortgage loans originated for sale ................................ (11,489) (9,184)
Stock based compensation expense .................................. 157 --
Other, net ........................................................ (3,672) 2,260
--------------------
Net cash provided by operating activities ................... 2,543 7,778
--------------------
Cash flows from investing activities:
Net decrease (increase) in loans .................................... 40,358 (3,173)
Proceeds from maturities and calls of investments in debt securities:
Held-to-maturity .................................................. 1,683 1,589
Available-for-sale ................................................ 1,670 27,925
Proceeds from sales of investments:
Available-for-sale ................................................ 2,493 3,931
Purchases of investments in debt and equity securities:
Held-to-maturity .................................................. (11,116) (4,257)
Available-for-sale ................................................ (31,916) (15)
Other equity securities ........................................... (500) --
Principal paydowns from mortgage-backed securities:
Held-to-maturity .................................................. 1,055 1,407
Available-for-sale ................................................ 1,537 2,890
Return of principal on other equity securities ...................... 675 --
Purchases of premises and equipment ................................. (433) (416)
--------------------
Net cash provided by investing activities ................... 5,506 29,881
--------------------
Cash flows from financing activities:
Net (decrease) in deposits .......................................... (23,247) (16,126)
Net (decrease) increase in federal funds purchased,
repurchase agreements, and notes payable .......................... (3,106) 11,918
Payments on Federal Home Loan Bank and other borrowings ............. (19,620) (2,311)
Cash dividends paid ................................................. (2,334) (2,079)
MSTI stock transactions, net ........................................ (455) 276
--------------------
Net cash (used in) financing activities ..................... (48,762) (8,322)
--------------------
Net increase (decrease) in cash and cash equivalents ........ (40,713) 29,337
Cash and cash equivalents at beginning of year ........................ 94,066 64,928
--------------------
Cash and cash equivalents at end of period ............................ $ 53,353 $ 94,265
====================
Cash paid during the year for:
Interest $ 9,397 $ 4,205
Income taxes 575 110
Real estate acquired through or in lieu of foreclosure 555 --
Dividends declared not paid 2,331 2,081
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, 2005, and schedules in the Main Street Trust, Inc.'s
Form 10-K filed on March 16, 2006.
In the opinion of management, the consolidated financial statements of Main
Street Trust, Inc. and its subsidiaries, as of March 31, 2006 and for the
three-month periods ended March 31, 2006 and 2005, include all adjustments
necessary for a fair presentation of the results of those periods. All such
adjustments, outside of those related to the business combination discussed in
Note 2, are of a normal recurring nature.
Results of operations for the three-month period ended March 31, 2006 are not
necessarily indicative of the results which may be expected for the year ended
December 31, 2006.
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 2005 consolidated financial statements have been
reclassified to conform with the 2006 presentation. Such reclassifications have
no effect on previously reported net income or shareholders' equity.
Note 2. Company Information/Business Combination
Main Street Trust, Inc. (the "Company"), an Illinois corporation, is a bank
holding company registered under the Bank Holding Company Act of 1956, as
amended. The Company was incorporated on August 12, 1999, and is the parent
company of Main Street Bank & Trust (the "Bank") and FirsTech, Inc. 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 1, 2005, the Company acquired all of the outstanding stock of Citizens
First Financial Corp. ("Citizens"), which was the parent company of Citizens
Savings Bank, based in Bloomington, Illinois. The transaction has been accounted
for as a purchase. Assets and liabilities related to the acquisition of Citizens
are reported as of the April 2005 acquisition date. Results of operations of
Citizens since the acquisition date have been included in the Company's
consolidated financial statements. The Company merged Citizens Savings Bank into
Main Street Bank & Trust as of the close of business on October 7, 2005. The
Citizens acquisition purchase price of approximately $56.841 million was
allocated based upon the fair value of the assets and liabilities acquired. The
Citizens excess purchase price has been allocated to goodwill and identifiable
intangible assets. $20.736 million was allocated to goodwill. $5.222 million was
allocated to core deposit intangibles at acquisition and is being amortized over
a period of six years.
Pro forma unaudited operating results for the three months ended March 31, 2005
giving effect to the Citizens acquisition as if it had occurred prior to January
1, 2005 are as follows:
2005
(in thousands, except
per share data)
---------------------
Interest Income $ 18,559
Interest Expense 6,088
Net Income 3,922
Basic EPS 0.38
Diluted EPS 0.38
These unaudited pro forma results have been prepared for comparative purposes
only and include certain adjustments, such as additional amortization expense on
revalued purchased assets and implied interest on additional borrowings to fund
the acquisition. In addition, 2005 merger related expenses were reallocated to a
period prior to the pro forma dates presented. All adjustments were tax
effected. They do not purport to be indicative of the results of operations that
actually would have resulted had the combination occurred prior to January 1,
2005 or of future results of operations of the consolidated entities.
7
The FASB has issued FASB Staff Position (FSP) FAS 123-R-3, "Transition Election
Related to Accounting for the Tax Effects of Share-Based Payment Awards." This
FSP provides a practical exception when a company transitions to the accounting
requirements in FASB Statement No. 123 (Revised 2004), Share-Based Payment.
Statement 123R requires a company to calculate the pool of excess tax benefits
available to absorb tax deficiencies recognized subsequent to adopting Statement
123R (termed the "APIC Pool"), assuming the company has been following the
recognition provisions prescribed by FASB Statement No. 123, Accounting for
Stock-Based Compensation. The FASB learned that several companies do not have
the necessary historical information to calculate the APIC pool as envisioned by
Statement 123R and accordingly, the FASB decided to allow a practical exception
as documented in this FSP. The guidance in this FSP is effective immediately and
includes transition guidance. The Company believes it has the necessary
information to calculate the APIC pool and does not anticipate utilizing this
exception.
Note 3. Income per Share
Net income per common share has been computed as follows:
Three Months Ended
March 31,
--------------------------
2006 2005
--------------------------
Net Income ....................................... $ 4,690,000 $ 3,933,000
==========================
Shares:
Weighted average common shares outstanding ..... 10,141,775 9,453,196
Dilutive effect of outstanding options,
as determined by the application of
the treasury stock method .................... 122,917 101,501
--------------------------
Weighted average common shares outstanding,
as adjusted .................................. 10,264,692 9,554,697
==========================
Basic earnings per share ......................... $ 0.46 $ 0.42
--------------------------
Diluted earnings per share ....................... $ 0.46 $ 0.41
--------------------------
Note 4: Stock Option Plans
At March 31, 2006, the Company has one share-based compensation plan. Prior to
January 1, 2006, the Company accounted for that plan under the recognition and
measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations, as permitted by FASB Statement No. 123,
Accounting for Stock Stock-Based Compensation. No stock-based compensation cost
was recognized in the Statement of Income for the period ended March 31, 2005,
as all options granted under the plan had an exercise price equal to the market
value of the underlying common stock on the date of grant. Effective January 1,
2006, the Company adopted the fair value recognition provisions of FASB
Statement No. 123(R), Share-Based Payment, using the modified-prospective-
transition method. Under that transition method, compensation cost recognized in
2006 includes: (a) compensation cost for all share-based payments granted prior
to, but not yet vested as of January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of Statement 123, and (b)
compensation cost for all share-based payments granted subsequent to January 1,
2006, based on the grant-date fair value estimated in accordance with the
provisions of Statement 123(R). Results for prior periods have not been
restated.
As a result of adopting Statement 123(R) on January 1, 2006, the Company's
income before income taxes and net income for the period ended March 31, 2006,
were $157,000 and $94,000 lower, respectively, than if it had continued to
account for share-based compensation under APB Opinion No. 25. Basic and diluted
earnings per share for the period ended March 31, 2006 would have been $0.47 and
$0.47, respectively, if the Company had not adopted Statement 123(R), compared
to reported basic and diluted earnings per share of $0.46 and $0.46,
respectively.
Prior to the adoption of Statement 123(R), the Company presented all tax
benefits of deductions resulting from the exercise of stock options as operating
cash flows in the Statement of Cash Flows. Statement 123(R) requires the cash
flows resulting from the tax benefits resulting from tax deductions in excess of
the compensation cost recognized for those options (excess tax benefits) to be
classified as financing cash flows. For the three months ended March 31, 2006,
there was no excess tax benefit classified as a financing cash inflow that would
have been classified as an operating cash flow if the Company had not adopted
Statement 123(R).
8
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of Statement
123 to options granted under the Company's stock option plans in all periods
presented. For purposes of this pro forma disclosure, the value of the options
is estimated using a Black-Scholes option-pricing formula and amortized over the
options' vesting periods.
Three Months Ended
-----------------------
March 31,
2005
(in thousands except
per share data)
-----------------------
Net income on common stock:
As reported .......................................... $ 3,933
Deduct total stock-based compensation expense
determined under the fair value method for all
awards, net of related tax effects ................... (91)
---------
Pro forma .................................... $ 3,842
=========
Basic earnings per share:
As reported .......................................... $ 0.42
Pro forma ............................................ 0.41
Diluted earnings per share:
As reported .......................................... $ 0.41
Pro forma ............................................ 0.40
The Main Street Trust, Inc. 2000 Stock Incentive Plan (the "Plan"), which is
shareholder-approved, permits the grant of options for up to 2,205,000 shares of
the Company's common stock. The Board of Directors, or a committee appointed by
the Board, may issue options that constitute incentive stock options to officers
and employees and nonqualified options to directors, officers, employees,
consultants and advisors of the Company and its related corporations (provided
that such consultants and advisors render bona fide services not in connection
with the offer and sale of securities in a capital-raising transaction).
Restricted stock and stock appreciation rights ("SARs") may also be granted.
SARs may be granted separately or in tandem with or by reference to an option
granted prior to or simultaneously with the grant of such rights, to such
eligible directors, officers, employees, consultants and advisors as may be
selected by the Board of Directors. The Plan is intended to provide a means
whereby directors, officers, employees, consultants and advisors of the Company
and its related corporations may sustain a sense of proprietorship and personal
involvement in the continued development and financial success of the Company
and its related corporations, and to encourage them to remain with and devote
their best efforts to the business of the Company and its related corporations,
thereby advancing the interests of the Company and its shareholders. Grants
under the Plan to date have been nonqualified options granted to directors and
officers. Options granted under the Plan have an exercise price equal to market
value of the underlying common stock on the grant date. Existing director
options granted prior to 2003 are fully vested and exercisable on the date
granted while director options granted in or after 2003 vest ratably over a
one-year period from the date granted. Existing officer options vest ratably
over a three-year period from the date granted. All outstanding options have a
10 year contractual life. Dividends are not paid on unexercised options. In the
event of a change of control, options and SARs become immediately and fully
exercisable.
The Company uses the Black-Scholes option pricing model to estimate the fair
value of stock-based awards with the following weighted-average assumptions for
the indicated periods:
Three Months Ended
March 31,
2006 2005
-----------------------------
Number of options granted ...................... 150,500 136,500
Risk-free interest rate ........................ 4.59% - 4.65% 3.98% - 4.08%
Expected life, in years ........................ 6.50 - 8.00 7.00 - 8.00
Expected volatility ............................ 14.28% 15.42%
Expected dividend yield ........................ 3.06% 2.97%
9
Expected volatilities are based on historical volatility of the Company's stock.
The Company uses historical data to estimate option exercises and terminations
(turnover percentage) within the valuation model. The expected term of options
granted is derived from the output of the options valuation model which uses
historical data and represents the period of time that options granted are
expected to be outstanding. Expected turnover percentage and expected term are
estimated separately for directors and officers. The risk-free rate for periods
within the contractual life of the option is based on the U.S. Treasury Strips
as of the grant date.
A summary of option activity under the Plan as of March 31, 2006, and changes
since January 1, 2006 is presented below:
Weighted-
Weighted- Average Aggregate
Average Remaining Intrinsic
Exercise Contractual Value
Options Shares Price Life ($000)
-------------------------------------------------------------------------------------------------------------
Outstanding as of January 1, 2006 767,413 $ 23.46
Granted 150,500 30.10
Exercised (5,200) 17.71
Forfeited or expired (965) 30.10
-----------------------------------------------------------
Outstanding at March 31, 2006 911,748 24.58 6.8 $ 5,037
===========================================================
Vested at March 31, 2006 682,772 22.76 6.0 $ 5,011
===========================================================
Exercisable as of March 31, 2006 682,772 22.76 6.0 $ 5,011
===========================================================
The weighted-average grant-date fair value of options granted during the first
three months of 2006 and 2005 was $4.79 and $4.72, respectively. The total
intrinsic value of options exercised during the first three months of 2006 and
2005, was $63,000 and $123,000, respectively. The fair value of nonvested shares
is determined based on the market price of the Company's shares on the grant
date.
A summary of the status of the Company's nonvested shares as of March 31, 2006,
and changes since January 1, 2006 is presented below:
Weighted-
Average
Grant-Date
Nonvested shares Shares Fair Value
-------------------------------------------------------------------------------
Nonvested at January 1, 2006 ........................... 112,950 $ 4.83
Granted ................................................ 150,500 4.79
Vested ................................................. (33,509) 4.78
Forfeited .............................................. (965) 4.69
------------------
Nonvested at March 31, 2006 ............................ 228,976 4.81
==================
As of March 31, 2006, there was $1.034 million of total unrecognized
compensation cost related to nonvested stock option compensation arrangements
granted under the Plan. That cost is expected to be recognized over a
weighted-average period of 2.0 years. The total fair value of shares vested
during the three month periods ended March 31, 2006 and 2005, was $4.78 and
$4.59, respectively.
Note 5. Commitments and Financial Instruments
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of amounts recognized in the
consolidated balance sheets. The contractual amounts of those instruments
reflect the extent of involvement the Company has in particular classes of
financial instruments.
10
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. Management
does not anticipate any significant losses as a result of these transactions.
The following table summarizes these financial instruments and commitments (in
thousands) at March 31, 2006 and 2005:
March 31,
2006 2005
---------------------
Financial instruments whose contract amounts
represent credit risk:
Commitments ........................................ $343,247 $267,522
Standby letters of credit .......................... 35,047 28,148
The acquisition of Citizens resulted in an additional $21.351 million in
commitments and $549,000 in additional standby letters of credit at April 1,
2005.
The majority of commitments are agreements to extend credit to a customer as
long as there is no violation of any condition established in the contract.
Commitments, principally variable interest rates, generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. For commitments to extend credit, the Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based
on management's credit evaluation. Collateral held varies, but may include
accounts receivable; inventory; property, plant and equipment; and
income-producing commercial properties. Also included in commitments at March
31, 2006 was $1.830 million to purchase other equity securities.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements and,
generally, have terms of one year or less. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Bank may hold collateral, which include accounts
receivables, inventory, property and equipment, and income producing properties,
supporting those commitments, if deemed necessary. In the event the customer
does not perform in accordance with the terms of the agreement with the third
party, the Bank would be required to fund the commitment. The maximum potential
amount of future payments the Bank could be required to make is represented by
the contractual amount shown in the summary above. If the commitment is funded,
the Bank would be entitled to seek recovery from the customer. At March 31, 2006
and 2005, no amounts had been recorded as liabilities for the Bank'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 decreased $43.768 million, or 2.7%, to $1.581 billion at March 31,
2006 compared to $1.625 billion at December 31, 2005. Decreases in loans,
federal funds sold and interest bearing deposits, cash and due from banks,
non-marketable equity securities, core deposit intangibles and premises and
equipment were partially offset by increases in both investments in debt and
equity securities available for sale and held to maturity, other assets, accrued
interest receivable and mortgage loans held for sale.
Cash and due from banks decreased $10.412 million, or 20.0%, to $41.595 million
at March 31, 2006 compared to $52.007 million at December 31, 2005.
Federal funds sold and interest bearing deposits decreased $30.301 million, or
72.0%, to $11.758 million at March 31, 2006 compared to $42.059 million at
December 31, 2005. Federal funds sold and interest bearing deposits fluctuate
with loan demand, deposit volume and investment opportunities.
11
Total investments in debt and equity securities increased $33.122 million, or
7.4%, to $477.745 million at March 31, 2006 compared to $444.623 million at
December 31, 2005. Included in the change were increases of $25.231 million, or
7.4%, in investments in securities available for sale and $8.292 million, or
10.8%, in securities held to maturity, offset somewhat by a decrease of
$401,000, or 1.6% in non-marketable equity securities. Investments fluctuate
with loan demand, deposit volume and investment opportunities.
Loans, net of allowance for loan losses, decreased $41.363 million, or 4.1%, to
$961.564 million at March 31, 2006 compared to $1.003 billion at December 31,
2005. Included in the change were decreases of $27.526 million, or 8.6%, in
commercial, financial and agricultural loans; $7.054 million, or 1.5%, in
commercial real estate loans; $4.348 million, or 5.0%, in installment and
consumer loans; and $2.308 million, or 1.6%, in residential real estate loans.
Management attributes most of the decrease in commercial, financial and
agricultural loans to normal first quarter seasonality. Included in the $7.054
million decrease in commercial real estate loans was $15.826 million related to
the expected payoff of one commercial project that was refinanced through a real
estate conduit. Included in the $4.348 million decrease in installment and
consumer loans was a $2.323 million decrease in indirect loans as the company
had been unwilling to meet some of the underwriting and pricing available on
these types of loans. As of March 31, 2006, the Company had an indirect loan
portfolio of $14.923 million compared to $17.246 million at December 31, 2005.
The $2.308 million decrease in residential real estate loans was attributed to a
slow down in the residential real estate market as well as movement from
adjustable rate loans that the Company keeps on its balance sheet to long term
fixed loans that the Company sells in the secondary market. Although the
Company's loan portfolio balance decreased during the first quarter of 2006 and
competition remains strong, management believes that the loan portfolio balance
will increase during the second quarter of 2006.
Mortgage loans held for sale increased $35,000, or 2.1%, to $1.696 million at
March 31, 2006 compared to $1.661 million at December 31, 2005.
Premises and equipment decreased $206,000, or 0.9%, to $22.841 million at March
31, 2006 compared to $23.047 million at December 31, 2005. The decrease included
depreciation and amortization expense of $639,000 offset somewhat by purchases
of $433,000.
Core deposit intangibles, due to the acquisition of Citizens, decreased
$218,000, or 4.8%, to $4.351 million at March 31, 2006 compared to $4.569
million at December 31, 2005 due to amortization.
Other assets increased $3.121 million, or 12.5%, to $28.168 million at March 31,
2006 compared to $25.047 million at December 31, 2005 primarily due to an
increase in receivables of approximately $2.457 million due to the sale of
investment securities which settled April 3, 2006 and an increase of
approximately $497,000 in other real estate owned.
Total liabilities decreased $45.108 million, or 3.0%, to $1.436 billion at March
31, 2006 compared to $1.481 billion at December 31, 2005. There were decreases
in all categories of liabilities except other liabilities.
Total deposits decreased $23.247 million, or 1.8%, to $1.253 billion at March
31, 2006 from $1.276 billion at December 31, 2005. Non-interest bearing deposits
decreased $21.467 million, or 8.9%, to $219.356 million at March 31, 2006 from
$240.823 million at December 31, 2005. This was mainly due to a $15.752 million
decrease in the balance of one account between December 31, 2005 and March 31,
2006, as well as normal first quarter seasonality decreases. Interest "earing
deposits decreased $1.780 million, or 0.2%, to $1.033 billion at March 31, 2006
from $1.035 billion at December 31, 2005.
Federal funds purchased, repurchase agreements and notes payable decreased
$3.106 million, or 2.6%, to $115.346 million at March 31, 2006 from $118.452
million at December 31, 2005. Included in this change were decreases of $2.606
million in repurchase agreements and $500,000 in federal funds purchased.
Federal Home Loan Bank advances and other borrowings decreased $19.620 million,
or 29.1%, to $47.766 million at March 31, 2006 compared to $67.386 million at
December 31, 2005 primarily due to $18.000 million of matured FHLB advances and
repayment of a $1.500 million line of credit from a correspondent bank.
12
Investment Securities
The carrying value of investments in debt and equity securities was as follows
for March 31, 2006 and December 31, 2005:
Carrying Value of Securities(1)
(in thousands)
March 31, December 31,
2006 2005
-----------------------
Available-for-sale:
Federal agencies ................................... $343,065 $312,484
Mortgage-backed securities ......................... 11,979 13,657
State and municipal ................................ 12,646 13,834
Marketable equity securities ....................... 628 3,112
---------------------
Total available-for-sale ................... $368,318 $343,087
=====================
Held-to-maturity:
Federal agencies ................................... $ 38,590 $ 38,650
Mortgage-backed securities ......................... 26,556 17,091
State and municipal ................................ 19,688 20,801
---------------------
Total held-to-maturity ..................... $ 84,834 $ 76,542
=====================
Non-marketable equity securities:
Federal Home Loan Bank stock ....................... $ 21,450 $ 21,450
Other equity investments ........................... 3,143 3,544
---------------------
Total non-marketable equity securities ..... $ 24,593 $ 24,994
=====================
Total investment securities ................ $477,745 $444,623
=====================
(1) Investment securities available-for-sale and non-marketable other
equity investments are carried at fair value. Investment securities
held-to-maturity and Federal Home Loan Bank stock are carried at
amortized cost.
13
The following table shows the maturities and weighted-average yields of
investment securities at March 31, 2006. All securities are shown at th%ir
contractual maturity.
Maturities and Weighted Average Yields of Debt Securities
(dollars in thousands)
------------------------------------------------------------------------------------------------
March 31, 2006
------------------------------------------------------------------------------------------------
1 year or less 1 to 5 years 5 to 10 years Over 10 years Total
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------------------------------------------------------------------------------------------------
Securities available-
for-sale:
Federal agencies .............. $136,151 3.61% $206,914 3.65% $ -- -- $ -- -- $343,065 3.63%
Mortgage-backed
securities(1) ............... $ 1,682 3.61% $ 5,689 5.05% $ 4,561 3.98% $ 47 5.86% $ 11,979 4.45%
State and municipal (TE)(2) ... $ 3,272 4.81% $ 6,633 6.48% $ 2,267 7.62% $ 474 7.76% $ 12,646 6.30%
Marketable equity
securities(3) ............... $ -- -- $ -- -- $ -- -- $ -- -- $ 628 --
------------------------------------------------------------------------------------------------
Total ................. $141,105 $219,236 $ 6,828 $ 521 $368,318
------------------------------------------------------------------------------------------------
Average Yield (TE)(2) ........... 3.64% 3.77% 5.19% 7.59% 3.75%
================================================================================================
Securities held-
to-maturity:
Federal agencies .............. $ 17,516 2.79% $ 16,849 2.99% $ 4,225 4.07% $ -- -- $ 38,590 3.02%
Mortgage-backed
securities(1) ............... $ 390 2.93% $ 23,168 4.85% $ 205 3.56% $ 2,793 5.75% $ 26,556 4.91%
State and municipal (TE)(2) ... $ 9,336 5.12% $ 9,997 6.17% $ 195 7.31% $ 160 7.95% $ 19,688 5.70%
------------------------------------------------------------------------------------------------
Total ................. $ 27,242 $ 50,014 $ 4,625 $ 2,953 $ 84,834
------------------------------------------------------------------------------------------------
Average Yield (TE)(2) ........... 3.59% 4.49% 4.18% 5.87% 4.23%
================================================================================================
Non-marketable equity
securities(3):
Federal Home Loan Bank stock .. $ -- -- $ -- -- $ -- -- $ -- -- $ 21,450 --
Other equity investments ...... $ -- -- $ -- -- $ -- -- $ -- -- $ 3,143 --
------------------------------------------------------------------------------------------------
Total ................. $ -- -- $ -- -- $ -- -- $ -- -- $ 24,593 --
================================================================================================
(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 prepayments prior to maturity.
(2) The average yield has been tax equivalized (TE) on state and municipal
tax-exempt securities.
(3) Due to the nature of these securities, they do not have a stated
maturity date or rate.
14
Continuous gross unrealized losses of investments in debt and equity securities
(in thousands) which are classified as temporary were as follows:
Continuous unrealized Continuous unrealized
losses existing for losses existing greater
less than 12 months than 12 months Total
-------------------------------------------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
-------------------------------------------------------------------
Available-for-Sale:
Federal agencies ................. $203,536 $ 1,307 $139,029 $ 2,902 $342,565 $ 4,209
Mortgage-backed securities ....... 2,416 21 6,854 212 9,270 233
State and municipal .............. -- -- 3,190 64 3,190 64
-------------------------------------------------------------------
Total temporarily impaired
securities ............... $205,952 $ 1,328 $149,073 $ 3,178 $355,025 $ 4,506
===================================================================
Held-to-Maturity:
Federal agencies ................. $ 488 $ 12 $ 37,118 $ 972 $ 37,606 $ 984
Mortgage-backed securities ....... 22,244 385 3,239 102 25,483 487
State and municipal .............. 1,770 16 6,061 67 7,831 83
-------------------------------------------------------------------
Total temporarily impaired
securities ............... $ 24,502 $ 413 $ 46,418 $ 1,141 $ 70,920 $ 1,554
===================================================================
Management evaluates securities for other-than-temporary impairment on at least
a quarterly basis, and more frequently when economic or market concerns warrant
such evaluation. In estimating other-than-temporary impairment losses,
management considers (1) the length of time and the extent to which the fair
value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of the Company to retain
its investment in the issuer for the period of time sufficient to allow for any
anticipated recovery in fair value. Effective for the period ended December 31,
2005, the Company modified its policy for evaluating investments for
other-than-temporary impairment. Under its new policy, investments, other than
debt security investments where the impairment is deemed to be due solely to
interest rate movements, are assumed to be impaired and the impairment
recognized through earnings no later than twelve months from the date the
security was first impaired, unless there is "overwhelming evidence to the
contrary." Under the policy, "overwhelming evidence to the contrary" is a rare
instance, but might include, among other things, an announced sale soon after a
reporting period where the price would cause an impairment to reverse. Further,
under certain circumstances, including a bankruptcy, catastrophic event or other
circumstances which cause the Company to determine, after analyzing the specific
facts, that the decline in the fair value is other than temporary, the Company
would recognize an other than temporary impairment write-down upon such
occurrence or determination, and not wait twelve months from the time of the
impairment.
For the period ended March 31, 2006, the $3.178 million continuous unrealized
loss greater than 12 months on available-for-sale securities was made up of
forty three debt securities and was believed to be a temporary loss. Marketable
equity securities available-for-sale had no continuous unrealized loss greater
than 12 months. The $1.141 million continuous unrealized loss greater than 12
months on held-to-maturity securities was made up of forty one debt securities
and was believed to be a temporary loss.
Unrealized losses on debt securities are generally due to changes in interest
rates and, as such, are considered by the Company to be temporary. Because of
the nature of U.S. Agency securities, most of which are single pay at maturity,
and because the Company has the ability to hold these investments until the
market value recovers, which may be maturity, the Company does not consider
these investments to be other than temporarily impaired. Because the Company
believes the decline in market value of mortgage-backed securities is
attributable to changes in interest rates and not credit quality and because the
Company has the ability to hold these investments until the market value
recovers, the Company does not consider these investments to be other than
temporarily impaired.
15
Loans
The following table presents the amounts and percentages of loans at March 31,
2006 and December 31, 2005 according to the categories of commercial, financial
and agricultural; commercial real estate; residential real estate; and
installment and consumer loans.
Amount of Loans Outstanding
(dollars in thousands)
March 31, 2006 December 31, 2005
-------------------------------------------------
Amount Percentage Amount Percentage
-------------------------------------------------
Commercial, financial and agricultural $ 292,335 29.98% $ 319,861 31.47%
Real Estate - Commercial ............. 462,452 47.42% 469,506 46.19%
Real Estate - Residential ............ 137,996 14.15% 140,304 13.81%
Installment and consumer ............. 82,380 8.45% 86,728 8.53%
-------------------------------------------------
Total loans ................ $ 975,163 100.00% $1,016,399 100.00%
=================================================
The balance of loans outstanding as of March 31, 2006 by maturity is shown in
the following table:
Maturity of Loans Outstanding
(dollars in thousands)
March 31, 2006
1 year 1 to 5 Over 5
or less years years Total
----------------------------------------------
Commercial, financial and agricultural $176,664 $ 86,605 $ 29,066 $ 292,335
Real Estate - Commercial ............. 151,389 203,807 107,256 462,452
Real Estate - Residential ............ 13,446 36,297 88,253 137,996
Installment and consumer ............. 22,844 36,021 23,515 82,380
---------------------------------------------
Total ...................... $364,343 $362,730 $248,090 $975,163
=============================================
Percentage of total loans outstanding 37.36% 37.20% 25.44% 100.00%
=============================================
Capital
Total shareholders' equity increased $1.340 million from December 31, 2005 to
March 31, 2006. Treasury stock transactions were $455,000 primarily due to
purchases of treasury stock under the Company's stock repurchase plan offset
somewhat by the exercise of stock options. Additional paid in capital increased
$157,000 due to the implementation of the new Financial Accounting Standard
Board (FASB) Statement No.123(R) at January 1, 2006. The change in shareholders'
equity is summarized as follows:
Shareholders' Equity (in thousands)
Shareholders' equity, December 31, 2005 .................... $ 143,769
Net income ................................................. 4,690
Treasury stock transactions, net ........................... (455)
Additional paid in capital ................................. 157
Cash dividends declared .................................... (2,331)
Other comprehensive income ................................. (721)
---------
Shareholders' equity, March 31, 2006 ....................... $ 145,109
=========
On March 28, 2006, the Board of Directors of the Company declared a quarterly
cash dividend of $0.23 per share of the Company's common stock. The dividend of
$2.331 million was paid on April 21, 2006, to holders of record on April 7,
2006.
16
The Company and its subsidiary bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's and its subsidiary bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, banks must meet specific guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Company's and its
subsidiary bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and its subsidiary bank to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier 1 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,
2006, that the Company and its subsidiary bank exceeded all capital adequacy
requirements to which they are subject.
As of March 31, 2006, the most recent notifications from primary regulatory
agencies categorized the Company's subsidiary bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, banks must maintain minimum total capital to risk-weighted assets,
Tier I capital to risk-weighted assets, and Tier I capital to average assets
ratios as set forth in the table. There are no conditions or events since that
notification that management believes have changed the Company's subsidiary
bank's categories.
The Company's and the Bank's 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, 2006:
Total capital
(to risk-weighted assets)
Consolidated ............ $ 137,784 12.4% $ 88,819 8.0% N/A
Main Street Bank & Trust $ 129,003 11.8% $ 87,809 8.0% $109,762 10.0%
Tier I capital
(to risk-weighted assets)
Consolidated ............ $ 124,053 11.2% $ 44,409 4.0% N/A
Main Street Bank & Trust $ 115,326 10.5% $ 43,905 4.0% $ 65,857 6.0%
Tier I capital
(to average assets)
Consolidated ............ $ 124,053 7.9% $ 62,857 4.0% N/A
Main Street Bank & Trust $ 115,326 7.4% $ 62,295 4.0% $ 77,868 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.
17
The following table presents the Company's interest rate sensitivity at various
intervals at March 31, 2006:
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 ... $ 11,758 $ -- $ -- $ -- $ -- $ 11,758
Debt and equity securities (1) 42,273 15,170 17,480 64,198 338,624 477,745
Loans (2) ..................... 325,492 45,211 45,538 101,219 459,399 976,859
-------------------------------------------------------------------------------
Total earning assets .. $ 379,523 $ 60,381 $ 63,018 $ 165,417 $ 798,023 $1,466,362
-------------------------------------------------------------------------------
Interest bearing liabilities:
Savings and interest bearing
demand deposits ............. $ 54,492 $ 1,692 $ 2,538 $ 5,075 $ 192,874 $ 256,671
Money market savings
deposits .................... 307,695 -- -- -- -- 307,695
Time deposits ................. 23,227 42,623 76,849 197,207 129,097 469,003
Federal funds purchased,
repurchase agreements,
and notes payable ........... 85,898 11,340 7,118 10,990 -- 115,346
FHLB advances and
other borrowings ............ 9,075 21,000 8,075 4,616 5,000 47,766
-------------------------------------------------------------------------------
Total interest bearing
liabilities ........... $ 480,387 $ 76,655 $ 94,580 $ 217,888 $ 326,971 $1,196,481
-------------------------------------------------------------------------------
Net asset (liability) funding gap (100,864) (16,274) (31,562) (52,471) 471,052 269,881
-------------------------------------------------------------------------------
Repricing gap ................... 0.79 0.79 0.67 0.76 2.44 1.23
Cumulative repricing gap ........ 0.79 0.79 0.77 0.77 1.23 1.23
(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 of each product type included
in this category. "Non-core deposits" are the difference between the current
balance and core deposits. The time frames include a percentage, based upon
industry-accepted assumptions and Company analysis, of the core deposits, as
follows:
1-30 Days 31-90 Days 91-180 Days 181-365 Days Over 1 Year
-------------------------------------------------------------
Savings and interest-bearing
demand deposits ..................... 0.45% 0.85% 1.25% 2.45% 95.00%
At March 31, 2006, the Company was somewhat liability sensitive due to the
levels of savings and interest bearing demand deposits, time deposits and
federal funds purchased, repurchase agreements and notes payable. As such, the
effect of an increase in the interest rate for all interest earning assets and
interest bearing liabilities of 100 basis points would decrease annualized net
interest income by approximately $1.009 million in 30 days and $1.171 million in
90 days, assuming no management intervention. A decrease in interest rates would
have the opposite effect for the same time periods. The Company's Asset and
Liability Management Policy states that the cumulative ratio of rate-sensitive
assets ("RSA") to rate-sensitive liabilities ("RSL") for the 12-month period
should fall within the range of 0.75-1.25. As of March 31, 2006, the Company's
RSA/RSL was 0.77, which was within the established guidelines.
18
In addition to managing interest rate sensitivity and liquidity through the use
of gap reports, the Company has provided for emergency liquidity situations with
informal agreements with correspondent banks that permit the Company to borrow
federal funds on an unsecured basis. Additionally, at March 31, 2006, the
Company had a $15 million unsecured line of credit with a correspondent bank,
all of which was available at that date. The Company also has sufficient
capacity to permit it to borrow funds from the Federal Home Loan Bank on a
secured basis (refer to the Liquidity and Cash Flows section that follows for
additional information).
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, 2006 and December 31,
2005 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
-------------------------------------------
December 31, 2005 ................ 8.9% 4.7% (4.7%) (9.4%)
March 31, 2006 ................... 6.0% 3.1% (3.4%) (6.5%)
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 requires cash to fund loan growth and deposit withdrawals. Cash
flows fluctuate with changes in economic conditions, current interest rate
trends and as a result of management strategies and programs. In general, funds
provided by customer deposits, federal funds purchased, repurchase agreements
and notes payable, and maturities, calls and paydowns of investment securities
are used to fund loans and purchase investment securities. Available funds are
used to fund demand for loans that meet the Company's credit quality guidelines,
with the remaining funds used to purchase investment securities and/or federal
funds sold. The Company monitors the demand for cash and initiates programs and
policies as considered necessary to meet funding gaps.
19
The Company was able to adequately fund loan demand and meet liquidity during
the first quarter of 2006. A review of the consolidated statement of cash flows
in the accompanying financial statements shows that the Company's cash and cash
equivalents decreased $40.713 million from December 31, 2005 to March 31, 2006.
The decrease in 2006 resulted from cash used in financing activities, offset
somewhat by cash provided by investing and operating activities. There were
differences in sources and uses of cash during 2006 compared to 2005. Cash used
in financing activities during 2006 was $48.605 million compared to $8.322
million during the same period in 2005, primarily due to more cash used by
deposits, more payments on Federal Home Loan Bank advances and other borrowings
and cash used versus cash provided by federal funds purchased, repurchase
agreements and notes payable during the first three months of 2006 compared to
the same period in 2005. Cash used by deposits of $23.247 million in 2006 was
mainly the result of a decrease in non-interest bearing demand deposits of
$21.467 million. Cash used by Federal Home Loan Bank advances and other
borrowings of $19.620 million during the first quarter of 2006 was mainly the
result of the maturities of $18.000 million of Federal Home Loan Bank advances
during the first quarter of 2006. Cash of $3.106 million was used by federal
funds purchased, repurchase agreements and notes payable during the first three
months of 2006 compared to $11.918 million of cash provided during the same
period in 2005.
Less cash was provided by investing activities during the first quarter of 2006
compared to the same period in 2005, primarily due to differences in investments
in debt and equity securities and activity in the loan portfolio. Cash used by
investment activities during the first quarter of 2006 was $34.419 million
compared to cash provided of $33.470 million during the same period in 2005. In
2006, cash used to purchase d%bt and equity securities of $43.532 million was
somewhat offset by proceeds of $9.113 million from maturities, calls and sales
of debt and equity securities, principal paydowns on mortgage-backed securities
and return of principal on other equity securities. During the same period in
2005, proceeds of $37.742 million from maturities, calls and sales of debt and
equity securities and principal paydowns on mortgage-backed securities were
offset somewhat by cash used to purchase debt and equity securities of $4.272
million. Also contributing to the difference in investing activities were
changes in the loan portfolio during these two periods. Cash provided by loans
during the first three months of 2006 was $40.358 million due to a decrease in
gross loans, compared to cash used to fund loan growth of $3.173 million during
the same period in 2005. Less cash was provided by operating activities in 2006
compared to 2005.
The Company's future short-term cash requirements are expected to be provided by
maturities and sales of investments, sales of loans and deposits. Cash required
to meet longer-term liquidity requirements will mostly depend on future goals
and strategies of management, the competitive environment, economic factors and
changes in the needs of customers. If current sources of liquidity cannot
provide needed cash in the future, the Company can obtain long-term funds from
several sources, including, but not limited to, utilizing the Company's $15
million line of credit from a correspondent bank, FHLB advances and brokered
CDs. To meet short-term liquidity needs, the Company is able to borrow funds on
a temporary basis from the Federal Reserve Bank, the FHLB and correspondent
banks. With sound capital levels, the Company continues to have several options
for longer-term cash needs, such as for future expansion and acquisitions.
Management is not aware of any current recommendations by the Company's primary
regulators which if implemented would have a material effect on the Company's
liquidity, capital resources or operations.
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, and is described in more detail below.
20
Provision and Allowance for Loan Losses
The provision for loan losses is based on management's evaluation of the loan
portfolio in light of national and local economic conditions, changes in the
composition and volume of the loan portfolio, changes in the volume of past due
and nonaccrual loans, and other relevant factors. The allowance for loan losses,
which is reported as a deduction from loans, is available for loan charge-offs.
The allowance is increased by the provision charged to expense and is reduced by
loan charge-offs net of loan recoveries. The allowance is allocated between the
commercial, financial and agricultural; commercial real estate; residential real
estate; and installment and consumer loan portfolios according to the historical
losses experienced in each of these portfolios as well as the current level of
watch list loans and nonperforming loans for each portfolio. Loans for which
borrower cash flow and the estimated liquidation value of collateral are
inadequate to repay the total outstanding balance are evaluated separately and
assigned a specific allocation. The unallocated portion of the allowance is
determined by economic conditions and other factors mentioned above. The balance
of the allowance for loan losses was $13.599 million at March 31, 2006 compared
to $13.472 million at December 31, 2005, an increase of $127,000. Net
charge-offs were $323,000 and the provision totaled $450,000 during the first
three months of 2006 compared to net charge-offs of $25,000 and the provision
totaled $330,000 for the first three months of 2005. The allowance for loan
losses as a percentage of gross loans, including loans held-for-sale, was 1.39%
at March 31, 2006, compared to 1.32% at December 31, 2005. Gross loans,
including loans held-for-sale, decreased 4.0% to $976.859 million at March 31,
2006 from $1.018 billion at December 31, 2005.
One measure of the adequacy of the allowance for loan losses is the ratio of the
allowance to nonperforming loans. The allowance for loan losses as a percentage
of nonperforming loans was 176.1% at March 31, 2006 compared to 449.1% at
December 31, 2005. Nonperforming loans increased from $3.000 million at December
31, 2005 to $7.723 million at March 31, 2006. The $4.723 million increase in
nonperforming loans during the first three months of 2006 resulted from a $3.843
million increase in nonaccrual loans and an increase of $880,000 in loans past
due 90 days or more. The increase in nonaccrual loans included the addition of
three commercial real estate loans to a real estate developer that totaled
$4.282 million. Increases in commercial, financial and agricultural loans and
retail mortgage loans made up the bulk of the remaining increase in nonaccrual
and 90-day delinquencies. Management believes that nonperforming and potential
problem loans are appropriately identified and monitored based on the extensive
loan analysis performed by the credit administration department, the internal
loan committees and the board of directors. Historically, there have not been a
significant amount of loans charged off which had not been previously identified
as problem loans by the credit administration department or the loan committees.
The following table summarizes changes in the allowance for loan losses by loan
categories for each period and additions to the allowance for loan losses, which
have been charged to operations.
Allowance for Loan Losses
(dollars in thousands)
March 31, 2006 March 31, 2005
---------------------------------
Allowance for loan losses at beginning of year ..... $ 13,472 $ 9,650
Charge-offs during period:
Commercial, financial and agricultural ........... $ (165) $ --
Commercial real estate ........................... (67) --
Residential real estate .......................... (71) --
Installment and consumer ......................... (105) (135)
---------------------------------
Total .................................... $ (408) $ (135)
---------------------------------
Recoveries of loans previously charged off:
Commercial, financial and agricultural ........... $ 1 $ 6
Commercial real estate ........................... -- 5
Residential real estate .......................... -- --
Installment and consumer ......................... 84 99
---------------------------------
Total .................................... $ 85 $ 110
---------------------------------
Net (charge-offs) recoveries ............. $ (323) $ (25)
Provision for loan losses .......................... 450 330
---------------------------------
Allowance for loan losses at end of quarter ........ $ 13,599 $ 9,955
=================================
Ratio of net charge-offs to
average net loans ................................ (0.03)% (0.01)%
=================================
21
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, 2006 December 31, 2005
-------------------------------------
Allocated:
Commercial, financial and agricultural ........... $ 4,039 $ 4,433
Commercial real estate ........................... 7,422 5,991
Residential real estate .......................... 411 424
Installment and consumer ......................... 1,349 1,447
-------------------------
Total allocated allowance ................ $13,221 $12,295
Unallocated allowances ............................. 378 1,177
-------------------------
Total .................................... 13,599 13,472
=========================
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, 2006 December 31, 2005
-------------------------------------
Nonaccrual loans(1) .............................. $6,077 $2,234
Loans past due 90 days or more ................... $1,646 $ 766
Restructured loans ............................... $ 295 $ 324
(1) Includes $1.024 million at March 31, 2006 and $975,000 at December 31,
2005 of real estate and consumer loans which management does not
consider impaired as defined by the Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan"
(SFAS 114).
Other Nonperforming Assets (dollars in thousands)
-------------------------------------------------------------------------------------------
March 31, 2006 December 31, 2005
-------------------------------------
Other real estate owned .......................... $685 $188
Nonperforming other assets ....................... $119 $ 36
Results of Operations
Results of Operations for the Three Months Ended March 31, 2006
Net income for the first three months of 2006 was $4.690 million, a $757,000, or
19.2%, increase from $3.933 million for the same period in 2005. Basic earnings
per share increased $0.04, or 9.5%, to $0.46 per share in the first three months
of 2006 from $0.42 per share in the first three months of 2005. Diluted earnings
per share increased $0.05, or 12.2%, to $0.46 per share in the first three
months of 2006 from $0.41 per share in the first three months of 2005. The
purchase of Citizens on April 1, 2005 contributed to the increases in net income
and earnings per share during the first three months of 2006 compared to the
same period in 2005.
22
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,
2006 2005
-------------------------------------------------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
-------------------------------------------------------------------------
Assets
Taxable investment securities(1) ......... $ 436,872 $ 4,106 3.81% $ 304,567 $ 2,364 3.15%
Tax-exempt investment securities(1) (TE) . 32,820 508 6.28% 41,648 617 6.01%
Federal funds sold and interest bearing
deposits(2) ............................ 20,024 297 6.02% 29,179 221 3.07%
Loans (3), (4) (TE) ...................... 977,086 16,800 6.97% 761,692 11,408 6.07%
------------------------------------------------------------------------
Total interest earning assets
and interest income (TE) ....... $1,466,802 $ 21,711 6.00% $1,137,086 $ 14,610 5.21%
------------------------------------------------------------------------
Cash and due from banks .................. $ 46,121 $ 38,699
Premises and equipment ................... 23,040 17,079
Other assets ............................. 59,149 25,307
------------------------------------------------------------------------
Total assets ............................. $1,595,112 $1,218,171
========================================================================
Liabilities and Shareholders' Equity
Interest bearing demand deposits ......... $ 72,027 $ 110 0.62% $ 66,440 $ 90 0.55%
Savings .................................. 488,648 3,216 2.67% 368,260 1,045 1.15%
Time deposits ............................ 466,913 4,092 3.55% 342,642 2,465 2.92%
Federal funds purchased, repurchase
agreements, and notes payable .......... 122,966 1,151 3.80% 103,396 507 1.99%
FHLB advances and other borrowings ....... 58,245 681 4.74% 28,530 386 5.49%
------------------------------------------------------------------------
Total interest bearing
liabilities and interest expense $1,208,799 $ 9,250 3.10% $ 909,268 $ 4,493 2.00%
------------------------------------------------------------------------
Non-interest bearing demand deposits ..... $ 149,487 $ 116,182
Non-interest bearing savings deposits .... 72,878 64,894
Other liabilities ........................ 19,071 13,188
------------------------------------------------------------------------
Total liabilities .............. $1,450,235 $1,103,532
Shareholders' equity ..................... 144,877 114,639
------------------------------------------------------------------------
Total liabilities and
shareholders' equity ........... $1,595,112 $1,218,171
========================================================================
Interest spread (average rate earned
minus average rate paid) (TE) .......... 2.90% 3.21%
========================================================================
Net interest income (TE) ................. $ 12,461 $ 10,117
========================================================================
Net yield on interest
earnings assets (TE) ................... 3.45% 3.61%
========================================================================
Notes to Consolidated Average Balance Sheet and Interest Rates Tables:
(1) Investments in debt securities are included at carrying value. Income
from taxable investment securities included net losses on venture
capital funds of approximately $226,000 and $26,000 in 2006 and 2005,
respectively. Due to the nature of venture capital investments, future
results cannot be predicted based on past performance.
(2) Federal funds sold and interest bearing deposits included
approximately $65,000 in 2006 and $35,000 in 2005 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 $383,000 and $243,000 in 2006 and 2005,
respectively, were included in total loan income.
23
Net interest income, the most significant component of the Company's earnings,
is the difference between interest received or accrued on the Company's earning
assets - primarily loans and investments - and interest paid or accrued on
deposits and borrowings. In order to compare the interest generated from
different types of earning assets, the interest income on certain tax-exempt
investment securities and loans is increased for analysis purposes to reflect
the income tax savings provided by the tax-exempt assets. The adjustment to
interest income for tax-exempt investment securities and loans was calculated
based on the federal income tax statutory rate of 35%. The following table
presents, on a tax equivalent (TE) basis, an analysis of changes in net interest
income resulting from changes in average volumes of earning assets and interest
bearing liabilities and average rates earned and paid. The change in interest
due to the combined rate/volume variance has been allocated to rate and volume
changes in proportion to the absolute dollar amounts of change in each.
Analysis of Volume and Rate Changes
(in thousands)
Three Months Ended March 31, 2006
Increase
(Decrease)
from
Previous Due to Due to
Year Volume Rate
-----------------------------
Interest Income
Taxable investment securities ................. $ 1,742 $ 1,173 $ 569
Tax-exempt investment securities (TE) ......... (109) (136) 27
Federal funds sold and interest bearing deposits 76 (86) 162
Loans (TE) .................................... 5,392 3,539 1,853
-----------------------------
Total interest income (TE) ............ $ 7,101 $ 4,490 $ 2,611
-----------------------------
Interest Expense
Interest bearing demand and savings deposits .. $ 2,191 $ 407 $ 1,784
Time deposits ................................. 1,627 1,016 611
Federal funds purchased,
repurchase agreements and notes payable ..... 644 111 533
FHLB advances and other borrowings ............ 295 354 (59)
-----------------------------
Total interest expense ................ $ 4,757 $ 1,888 $ 2,869
-----------------------------
Net Interest Income (TE) ........................ $ 2,344 $ 2,602 $ (258)
=============================
Net interest income on a tax equivalent basis was $2.344 million, or 23.2%,
higher for the first three months of 2006 compared to the same period of 2005.
Total tax-equivalent interest income was $7.101 million, or 48.6%, higher in
2006 compared to 2005, and interest expense increased $4.757 million, or 105.9%.
The increase in tax-equivalent interest income and interest expense was due to
both increases in average volume and higher rates.
The increase in total tax-equivalent interest income was due to an increase in
interest income from loans, taxable investment securities, and federal funds
sold and interest bearing deposits, offset slightly by a decrease in interest
income from tax-exempt investment securities. The increases in interest income
from loans and taxable investment securities were due to increases in volume
coupled with higher rates. The increase in interest income on federal funds sold
and interest earning deposits was due to higher rates, offset somewhat by a
decrease in volume. The decrease in interest income from tax-exempt investment
securities was primarily due to lower volume.
The increase in total interest expense was due to an increase in interest
expense from all categories of interest bearing liabilities. The increases in
interest expense from interest bearing demand and savings deposits and federal
funds purchased, repurchase agreements and notes payable were primarily due to
higher rates. The increase in interest expense on time deposits was primarily
due to higher volume. The increase in interest expense from FHLB advances and
other borrowings was due to higher volume, offset somewhat by lower rates.
The provision for loan losses recorded was $450,000 during the first three
months of 2006 compared to $330,000 during the same period in 2005. 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.
24
The following table summarizes selected categories of non-interest income and
non-interest expense for the three months ended March 31, 2006 and 2005. The
acquisition of Citizens on April 1, 2005, has been accounted for as a purchase.
Results of operations of Citizens since the acquisition date have been included
in the Company's consolidated financial statements. Effective January 1, 2006,
the Company adopted the fair value recognition provisions of FASB Statement No.
123(R), Share-Based Payment, using the modified-prospective-transition method.
(Refer to Note 4, Stock Option Plans, for additional information). As a result,
the Company recognized an additional $157,000 in stock option expense in the
first quarter of 2006, with $113,000 being allocated to salaries and benefits
expense and $44,000 being allocated to other non-interest expense.
Non-interest Income and Expense
for the Three Months Ended
March 31, 2006 and 2005
(in thousands)
----------------------------------------------------------------------------------------
Non-interest Income 03/31/2006 03/31/2005 $ change % change
----------------------------------------------------------------------------------------
Trust and brokerage fees ................. $ 1,915 $ 1,842 $ 73 4.0%
Remittance processing income ............. 1,765 1,707 58 3.4%
Service charges on deposit accounts (1) .. 685 526 159 30.2%
Securities transactions, net (2) ......... 267 190 77 40.5%
Gain on sales of mortgage loans, net (3).. 126 137 (11) (8.0%)
Other (4) ................................ 761 613 148 24.1%
-------------------------------------------
Total non-interest income $ 5,519 $ 5,015 $ 504 10.0%
===========================================
----------------------------------------------------------------------------------------
Non-interest Expense 03/31/2006 03/31/2005 $ change % change
----------------------------------------------------------------------------------------
Salaries and employee benefits (5) ....... $ 5,921 $ 4,947 $ 974 19.7%
Occupancy (6) ............................ 792 662 130 19.6%
Equipment ................................ 615 606 9 1.5%
Data processing (7) ...................... 738 551 187 33.9%
Office supplies .......................... 296 298 (2) (0.7%)
Service charges from correspondent
banks (8)............................... 64 110 (46) (41.8%)
Amortization of core deposit
intangibles (9) ........................ 218 -- 218 --
Other (10) ............................... 1,401 1,275 126 9.9%
-------------------------------------------
Total non-interest expense $ 10,045 $ 8,449 $ 1,596 18.9%
===========================================
(1) Service charges on deposit accounts in 2006 included $184,000
generated at the Company's new Bloomington locations.
(2) During the first quarter of 2006, the Company sold a number of equity
securities in order to reposition its investment portfolio and
realized approximately $267,000 in net gains from those sales.
(3) Mortgage loans funded at the Company's comparable reporting bank
locations (excluding Bloomington) decreased $711,000, or 7.3%, from
$9.749 million in 2005 to $9.038 million in 2006, primarily due to the
changing rate environment.
(4) The increase in other non-interest income included approximately
$58,000 attributable to operating the Company's new Bloomington
locations, and a $47,000, or 117.6%, increase in key man life
insurance income.
(5) In 2006, salaries and benefits included $693,000 directly attributable
to additional employees as a result of operating the Company's new
Bloomington locations and $113,000 of stock option expense as a result
of adopting FASB Statement No. 123(R) effective January 1, 2006.
(6) In 2006, occupancy expense included $124,000 attributable to the
expenses of operating the Company's new Bloomington locations.
(7) The increase in data processing expense in 2006 included a $76,000, or
23.1%, increase in computer processing expense and a $49,000, or 45.5%
increase, in internet processing expense, due, in part, to operating
the Company's new Bloomington locations. Also contributing to the
increase in data processing expense in 2006 was an increase of
$60,000, or 81.6%, in data processing expense attributable to the
Company's Wealth Management Group. This increase was due to increased
trading volume, and the costs associated with conversion to a new
system.
25
(8) The decrease in service charges from correspondent banks was primarily
due to a change in the Company's cash letter processing vendor in
November 2005 which resulted in a decrease in fees as well as higher
earnings credits due to the rising rate environment.
(9) Amortization of core deposit intangibles was attributable to the
acquisition of Citizen's.
(10) Included in other non-interest expense in 2006 was $83,000 directly
attributable to operating the Company's new Bloomington locations and
$44,000 of stock option expense as a result of adopting FASB Statement
No. 123(R) effective January 1, 2006.
Income tax expense increased $411,000, or 18.7%, during the first three months
of 2006 compared to the same period in 2005. The effective tax rate decreased to
35.8% during the first three months of 2006 from 35.9% during the same period in
2005.
Business Segment Information
The Company currently operates in two industry segments. The primary business
involves providing banking services in central Illinois to both business and
individual customers. These services include demand, savings, time and
individual retirement accounts; commercial, commercial real estate, consumer
(including automobile loans and personal lines of credit), agricultural, and
residential real estate lending; safe deposit and night depository services;
purchases of installment obligations from retailers, primarily without recourse;
farm management; farm realty services; full service trust department that offers
a wide range of services such as investment management, acting as trustee,
serving as guardian, executor or agent, comprehensive financial planning,
miscellaneous consulting, and brokerage services offered through a third-party
arrangement with Raymond James Financial Services. 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 and companies such as MasterCard RPPS.
Company information is provided for informational purposes only, since it is not
considered a separate segment for reporting purposes.
The following table quantifies the Company's business segment information for
the three-months ended March 31, 2006 and 2005:
As of and for the Banking Remittance
Three Months Ended: Services Services Company Eliminations Total
--------------------------------------------------------------------------------------------------
March 31, 2006
Total interest income ....... $ 21,693 $ 6 $ (160) $ (11) $ 21,528
Total interest expense ...... 9,173 -- 88 (11) 9,250
Provision for loan losses ... 450 -- -- -- 450
Total non-interest income ... 3,775 1,824 238 (318) 5,519
Total non-interest expense .. 8,805 1,156 402 (318) 10,045
Income before income tax .... 7,040 674 (412) -- 7,302
Income tax expense .......... 2,498 283 (169) -- 2,612
Net income .................. 4,542 391 (243) -- 4,690
Goodwill .................... 20,736 -- -- -- 20,736
Total assets ................ 1,567,533 4,043 155,015 (145,222) 1,581,369
Depreciation and amortization 560 66 13 -- 639
March 31, 2005
Total interest income ....... $ 14,391 $ 4 $ 24 $ (28) $ 14,391
Total interest expense ...... 4,512 -- 9 (28) 4,493
Provision for loan losses ... 330 -- -- -- 330
Total non-interest income ... 3,340 1,737 202 (264) 5,015
Total non-interest expense .. 7,285 1,115 313 (264) 8,449
Income before income tax .... 5,604 626 (96) -- 6,134
Income tax expense .......... 1,980 264 (43) -- 2,201
Net income .................. 3,624 362 (53) -- 3,933
Goodwill .................... -- -- -- -- --
Total assets ................ 1,212,406 2,388 118,579 (108,735) 1,224,638
Depreciation and amortization 467 114 13 -- 594
26
Recent Regulatory Developments
On February 8, 2006, President Bush signed the Federal Deposit Insurance Reform
Act of 2005 ("FDIRA") into law as part of the Deficit Reduction Act of 2005 and
on February 15, 2006, President Bush signed into law the technical and
conforming amendments designed to implement FDIRA. FDIRA provides for
legislative reforms to modernize the federal deposit insurance system.
Among other things, FDIRA: (i) merges the BIF and the SAIF of the FDIC into a
new Deposit Insurance Fund (the "DIF"); (ii) allows the FDIC, after March 31,
2010, to increase deposit insurance coverage by an adjustment for inflation and
requires the FDIC's Board of Directors, not later than April 1, 2010 and every
five years thereafter, to consider whether such an increase is warranted; (iii)
increases the deposit insurance limit for certain employee benefit plan deposits
from $100,000 to $250,000, subject to adjustments for inflation after March 31,
2010, and provides for pass-through insurance coverage for such deposits; (iv)
increases the deposit insurance limit for certain retirement account deposits
from $100,000 to $250,000, subject to adjustments for inflation after March 31,
2010; (v) allows the FDIC's Board of Directors to set deposit insurance premium
assessments in any amount the Board of Directors deems necessary or appropriate,
after taking into account various factors specified in FDIRA; (vi) replaces the
fixed designated reserve ratio of 1.25% with a reserve ratio range of
1.15%-1.50%, with the specific reserve ratio to be determined annually by the
FDIC by regulation; (vii) permits the FDIC to revise the risk-based assessment
system by regulation; (viii) requires the FDIC, at the end of any year in which
the reserve ratio of the DIF exceeds 1.5% of estimated insured deposits, to
declare a dividend payable to insured depository institutions in an amount equal
to 100% of the amount held by the DIF in excess of the amount necessary to
maintain the DIF's reserve ratio at 1.5% of estimated insured deposits or to
declare a dividend equal to 50% of the amount in excess of the amount necessary
to maintain the reserve ratio at 1.35% if the reserve ratio is between
1.35%-1.5% of estimated insured deposits; and (ix) provides a one-time credit
based upon the assessment base of the institution on December 31, 1996 to each
insured depository institution that was in existence as of December 31, 1996 and
paid a deposit insurance assessment prior to that date (or a successor to any
such institution).
The merger of the BIF and SAIF took effect March 31, 2006, while the remaining
provisions are not effective until the FDIC issues final regulations. FDIRA
requires the FDIC to issue final regulations no later than 270 days after
enactment: (i) designating a reserve ratio; (ii) implementing increases in
deposit insurance coverage; (iii) implementing the dividend requirement; (iv)
implementing the one-time assessment credit; and (v) providing for assessments
in accordance with FDIRA.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
This document (including information incorporated by reference) contains, and
future oral and written statements of the Company and its management may
contain, forward-looking statements, within the meaning of such term in the
Private Securities Litigation Reform Act of 1995, with respect to the financial
condition, results of operations, plans, objectives, future performance and
business of the Company. Forward-looking statements, which may be based upon
beliefs, expectations and assumptions of the Company's management and on
information currently available to management, are generally identifiable by the
use of words such as "believe," "expect," "anticipate," "plan," "intend,"
"estimate," "may," "will," "would," "could," "should" or other similar
expressions. Additionally, all statements in this document, including
forward-looking statements, speak only as of the date they are made, and the
Company undertakes no obligation to update any statement in light of new
information or future events.
The Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. The factors, which could have a material
adverse effect on the operations and future prospects of the Company and its
subsidiaries are detailed in the "Risk Factors" section included under Item 1A.
of Part I of the Company's Form 10-K for 2005. In addition to the risk factors
described in that section, there are other factors that may impact any public
company, including ours, which could have a material adverse effect on the
operations and future prospects of the Company and its subsidiaries. These
additional factors include, but are not limited to, the following:
o The economic impact of past and any future terrorist attacks, acts of
war or threats thereof and the response of the United States to any
such threats and attacks.
o The costs, effects and outcomes of existing or future litigation.
o Changes in accounting policies and practices, as may be adopted by
state and federal regulatory agencies, the Financial Accounting
Standards Board, the Securities and Exchange Commission and the Public
Company Accounting Oversight Board.
o The ability of the Company to manage the risks associated with the
foregoing as well as anticipated.
27
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
See the "Interest Rate Sensitivity" section above.
Item 4. Controls and Procedures
An evaluation was performed under the supervision and with the participation of
the Company's management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
promulgated under the Securities and Exchange Act of 1934, as amended) as of
March 31, 2006. 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 disclosure controls or
its internal controls over financial reporting that occurred during the quarter
ended March 31, 2006 that have materially affected, or are reasonably likely to
materially affect the disclosure controls or the Company's internal control over
financial reporting.
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 1.A. Risk Factors
There have been no material changes in the risk factors applicable to the
Company from those disclosed in Part I, Item 1.A. "Risk Factors," in the
Company's 2005 Annual Report on Form 10-K. Please refer to that section of the
Company's 10-K for disclosures regarding the risks and uncertainties related to
the Company's business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
--------------------------------------------------------------------------------------------
(c) Total (d) Maximum
Number of Number
Shares of Shares
Purchased as that May
Part of Yet Be
(a) Total Publicly Purchased
Number of (b) Average Announced Under the
Shares Price Paid per Plans or Plans or
Period Purchased Share Programs (1) Programs (1)
--------------------------------------------------------------------------------------------
January 1 -
January 31, 2006 ............ -- $ -- -- 167,600
February 1 -
February 28, 2006 ........... 12,000 $ 29.85 12,000 155,600
March 1 -
March 31, 2006 .............. 7,000 $ 30.75 7,000 148,600
-------------------------------------------------------
Total ....................... 19,000 $ 30.18 19,000 148,600
=======================================================
(1) On October 27, 2003, the Company announced that its Board of Directors
had reinstated the Stock Repurchase Program allowing the purchase of
up to 500,000 shares of the Company's outstanding stock. The program
will expire when the Company repurchases all of the shares covered.
Item 3. Defaults Upon Senior Securities
None
28
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
31.1 Certification of Chief Executive Officer Pursuant to Rule
13-a-14(a)/15d-14(a)
31.2 Certification of Chief Financial Officer Pursuant to Rule
13-a-14(a)/15d-14(a)
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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 duty
authorized.
MAIN STREET TRUST, INC.
Date: May 10, 2006
-------------------------------------------
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
29