UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
Commission File Number: 33-90342
MAIN STREET TRUST, INC.
(Exact name of Registrant as specified in its charter)
Illinois 37-1338484
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(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
100 West University, Champaign, Illinois 61820
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(Address of principal executive offices) (Zip Code)
(217) 351-6500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Exchange Class On Which Registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [X]
1
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
As of March 1, 2005, the Registrant had issued and outstanding 9,455,669 shares
of the Registrant's Common Stock.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, based on the last reported price on June 30,
2004, the last business day of the registrant's most recently completed second
fiscal quarter, was approximately $185,416,624*.
* Based on the last reported price ($30.90) of an actual transaction in
Registrant's Common Stock on June 30, 2004, and reports of beneficial
ownership filed by directors and executive officers of Registrant and by
beneficial owners of more than 5% of the outstanding shares of Common Stock
of Registrant; however, such determination of shares owned by affiliates
does not constitute an admission of affiliate status or beneficial interest
in shares of Registrant's Common Sock.
Documents Incorporated By Reference
Part III of Form 10-K - Portions of Proxy Statement for annual meeting of
shareholders to be held May 11, 2005.
2
MAIN STREET TRUST, INC.
Form 10-K Annual Report
Table of Contents
Part I
Item 1. Description of Business...................................... 4
A. General
B. Business of the Company and Subsidiaries
C. Competition
D. Monetary Policy and Economic Conditions
E. Supervision and Regulation
F. Employees
G. Internet Website
Item 2. Properties................................................... 10
Item 3. Legal Proceedings............................................ 10
Item 4. Submission of Matters to a Vote of Security Holders.......... 10
Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters ................................................... 11
Item 6. Selected Consolidated Financial Data......................... 12
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 12
Item 7a. Quantitative and Qualitative Disclosures about Market Risk... 32
Item 8. Financial Statements and Supplementary Data.................. 32
Item 9. Changes in and Disagreements with Accountants
On Accounting and Financial Disclosure..................... 62
Item 9a. Controls and Procedures...................................... 62
Item 9b. Other Information............................................ 64
Part III
Item 10. Directors and Executive Officers of the Registrant........... 64
Item 11. Executive Compensation....................................... 65
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Shareholder Matters............. 65
Item 13. Certain Relationships and Related Transactions............... 65
Item 14. Principal Accountants Fees and Services...................... 65
Part IV
Item 15. Exhibits and Financial Statement Schedules................... 66
3
PART 1
Item 1. Description of Business
A. General
MAIN STREET TRUST, INC. (the "Company"), an Illinois corporation, is a bank
holding company registered under the Bank Holding Company Act of 1956, as
amended (the "BHCA"). The Company was incorporated on August 12, 1999, and is
the parent company of Main Street Bank & Trust, and FirsTech, Inc.
On March 23, 2000, the Company acquired all of the outstanding stock of
BankIllinois, The First National Bank of Decatur, First Trust Bank of
Shelbyville and FirsTech, Inc. following the merger of BankIllinois Financial
Corporation and First Decatur Bancshares, Inc. into the Company. The merger,
which was accounted for as a pooling of interests, was completed on March 23,
2000. The Company subsequently merged the Company's former banking subsidiary,
First Trust Bank of Shelbyville, into BankIllinois effective June 19, 2002. On
November 10, 2004, the Company merged The First National Bank of Decatur into
BankIllinois and renamed the bank Main Street Bank & Trust.
B. Business of the Company and Subsidiaries
General
The Company conducts the business of banking and offers trust services through
Main Street Bank & Trust ("the Bank"), and retail payment processing through
FirsTech, Inc., its wholly owned subsidiaries. As of December 31, 2004, the
Company had consolidated total assets of $1.228 billion, shareholders' equity of
$113.975 million and trust assets under administration of approximately $1.765
billion. Substantially all of the income of the Company is currently derived
from dividends and management fees received from the subsidiaries. The amount of
these dividends is directly related to the earnings of the subsidiaries and is
subject to various regulatory restrictions. See "Supervision and Regulation".
Banking Segment
The Bank conducts a general banking business embracing most of the services,
both consumer and commercial, which banks may lawfully provide, including the
following principal services: the acceptance of deposits to demand, savings,
time and individual retirement accounts and the servicing of such accounts;
commercial, consumer and real estate lending, including installment loans and
personal lines of credit; safe deposit operations; and additional services
tailored to the needs of individual customers, such as the sale of traveler's
checks, cashier's checks and other specialized services. The Company offers
personalized financial planning services through Raymond James, which services
include a broad spectrum of investment products, including stocks, bonds, mutual
funds and tax advantaged investments. In addition, the Wealth Management
division offers a wide range of services such as investment management, acting
as trustee, serving as guardian, executor or agent, farm management, 401K
administration and miscellaneous consulting.
Commercial lending at the Bank covers such categories as agriculture,
manufacturing, capital, inventory, construction, real estate development and
commercial mortgages. Commercial lending, particularly loans to small and medium
sized businesses, accounts for a major portion of the Bank's loan portfolios.
The Bank's retail banking division makes loans to consumers for various
purposes, including home equity and automobile loans. The consumer mortgage loan
department, which is part of the retail banking division, specializes in real
estate loans to individuals. The Bank also purchases installment obligations
from retailers, primarily without recourse.
The Bank's principal sources of income are interest and fees on loans and
investments and service fees. Its principal expenses are interest paid on
deposits and general operating expenses. The Bank's primary service area is
Central Illinois.
Remittance Services Segment
FirsTech, Inc. provides the following services to electric, water and gas
utilities, telecommunication companies, cable television firms and charitable
organizations: retail lockbox processing of payments delivered by mail on behalf
of the biller; processing of payments delivered by customers to pay agents such
as grocery stores, convenience stores and currency exchanges; and concentration
of payments delivered by the Automated Clearing House network, money management
software such as Quicken and through networks such as Visa e-Pay and Mastercard
RPS. For the years ended December 31, 2004, 2003 and 2002, FirsTech accounted
for $7.3 million (10%), $7.3 million (10%), and $7.5 million (9%), respectively,
of the consolidated total revenues of the Company and accounted for $2.3 million
(10%), $2.3 million (9%) and $2.4 million (9%), respectively, of the
consolidated income before income tax of the Company. See Note 1 to the
Consolidated Financial Statements for an analysis of segment operations.
4
In 2003, FirsTech introduced a new remittance processing product called Internet
Agent. A portion of the additional income generated by the Internet Agent
product was partially offset by decreases in mechanical collection, lockbox
processing and electronic payment income. FirsTech has continued to experience
success in the expansion of the Internet Agent product among new and existing
customers, and management believes it is at the forefront of technology compared
to similar products within the payment industry.
Over the past three years, FirsTech's sources of processing revenue has shifted
toward the processing of payments to paying agents. FirsTech's retail lockbox
processing for organizations provided approximately 30%, 41% and 41% of the
total revenue of FirsTech in 2004, 2003 and 2002, respectively. FirsTech
processes payments delivered by customers to pay agents. Many businesses and
merchants such as grocery stores and convenience stores located throughout the
United States serve as agents of utilities in collecting customer payments. In
2004, 2003 and 2002, the remittance collection business for these companies
accounted for approximately 69%, 55% and 54%, respectively, of the total revenue
of FirsTech.
FirsTech competes in the retail payment processing business with companies that
range from large national companies to small, local businesses. In addition,
many companies do their own remittance processing rather than out-source the
work to an independent processor such as FirsTech. The principal methods of
competition in the remittance processing industry are pricing of services, use
of technology and quality of service.
C. Competition
The Company faces strong competition both in originating loans and in attracting
deposits. Competition in originating real estate loans comes primarily from
other commercial banks, savings institutions and mortgage bankers making loans
secured by real estate located in the Company's market area. Commercial banks
and finance companies, including finance company affiliates of automobile
manufacturers, provide vigorous competition in consumer lending. In addition to
competition from the local market, the Company faces competition from large
national organizations, such as financial organizations and insurance companies,
for large commercial real estate loans. The Company competes for real estate and
other loans primarily on the basis of the interest rates and loan fees it
charges, the types of loans it originates and the quality of services it
provides to borrowers.
The Company faces substantial competition in attracting deposits from other
commercial banks, savings institutions, money market and mutual funds, credit
unions, insurance agencies, brokerage firms, and other investment vehicles. The
ability of the Company to attract and retain deposits depends on its ability to
provide investment opportunities that satisfy the requirements of investors as
to rate of return, liquidity, risk and other factors. The Company attracts a
significant amount of deposits through its branch offices, primarily from the
communities in which those branch offices are located; therefore, competition
for those deposits is principally from other commercial banks, savings
institutions, and credit unions located in the same communities. The Company
competes for these deposits by offering a variety of deposit accounts at
competitive rates, convenient business hours, internet banking, and convenient
branch locations with interbranch deposit and withdrawal privileges at each.
Under the Gramm-Leach-Bliley Act, which was enacted in 2000, securities firms
and insurance companies that elect to become financial holding companies may
acquire banks and other financial institutions. Although the Company has seen no
significant impact from this change, it has the potential to change the
competitive environment in which the Company and the Bank conduct business. The
financial services industry is also likely to become more competitive as further
technological advances enable more companies to provide financial services.
These technological advances may diminish the importance of depository
institutions and other financial intermediaries in the transfer of funds between
parties.
D. Monetary Policy and Economic Conditions
The earnings of commercial banks and bank holding companies are affected not
only by general economic conditions, but also by the policies of various
governmental regulatory agencies. In particular, the Federal Reserve regulates
money and credit conditions and interest rates in order to influence general
economic conditions and interest rates, primarily through open market operations
in U.S. government securities, varying the discount rate on member banks and
nonmember bank borrowings and setting reserve requirements against bank
deposits. Such Federal Reserve policies and acts have a significant influence on
overall growth and distribution of bank loans, investments, deposits and related
interest rates. The Company cannot accurately predict the effect, if any, such
policies and acts may have in the future on its business or earnings.
5
E. Supervision and Regulation
General
Financial institutions, their holding companies and their affiliates are
extensively regulated under federal and state law. As a result, the growth and
earnings performance of the Company may be affected not only by management
decisions and general economic conditions, but also by the requirements of
federal and state statutes and by the regulations and policies of various bank
regulatory authorities, including the Illinois Department of Financial and
Professional Regulation (the "DFPR"), the Board of Governors of the Federal
Reserve System (the "Federal Reserve") and the Federal Deposit Insurance
Corporation (the "FDIC"). Furthermore, taxation laws administered by the
Internal Revenue Service and state taxing authorities and securities laws
administered by the Securities and Exchange Commission (the "SEC") and state
securities authorities have an impact on the business of the Company. The effect
of these statutes, regulations and regulatory policies may be significant, and
cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions regulate, among other things, the scope of business, the kinds and
amounts of investments, reserve requirements, capital levels relative to
operations, the nature and amount of collateral for loans, the establishment of
branches, mergers and consolidations and the payment of dividends. This system
of supervision and regulation establishes a comprehensive framework for the
respective operations of the Company and its subsidiaries and is intended
primarily for the protection of the FDIC-insured deposits and depositors of the
Bank, rather than shareholders.
The following is a summary of the material elements of the regulatory framework
that applies to the Company and its subsidiaries. It does not describe all of
the statutes, regulations and regulatory policies that apply, nor does it
restate all of the requirements of those that are described. As such, the
following is qualified in its entirety by reference to applicable law. Any
change in statutes, regulations or regulatory policies may have a material
effect on the business of the Company and its subsidiaries.
The Company
General. The Company, as the sole shareholder of the Bank, is a bank holding
company. As a bank holding company, the Company is registered with, and is
subject to regulation by, the Federal Reserve under the Bank Holding Company Act
of 1956, as amended (the "BHCA"). In accordance with Federal Reserve policy, the
Company is expected to act as a source of financial strength to the Bank and to
commit resources to support the Bank in circumstances where the Company might
not otherwise do so. Under the BHCA, the Company is subject to periodic
examination by the Federal Reserve. The Company is also required to file with
the Federal Reserve periodic reports of the Company's operations and such
additional information regarding the Company and its subsidiaries as the Federal
Reserve may require.
Acquisitions, Activities and Change in Control. The primary purpose of a bank
holding company is to control and manage banks. The BHCA generally requires the
prior approval of the Federal Reserve for any merger involving a bank holding
company or any acquisition by a bank holding company of another bank or bank
holding company. Subject to certain conditions (including deposit concentration
limits established by the BHCA), the Federal Reserve may allow a bank holding
company to acquire banks located in any state of the United States. In approving
interstate acquisitions, the Federal Reserve is required to give effect to
applicable state law limitations on the aggregate amount of deposits that may be
held by the acquiring bank holding company and its insured depository
institution affiliates in the state in which the target bank is located
(provided that those limits do not discriminate against out-of-state depository
institutions or their holding companies) and state laws that require that the
target bank have been in existence for a minimum period of time (not to exceed
five years) before being acquired by an out-of-state bank holding company.
The BHCA generally prohibits a bank holding company from acquiring direct or
indirect ownership or control of more than 5% of the voting shares of any
company that is not a bank and from engaging in any business other than that of
banking, managing and controlling banks or furnishing services to banks and
their subsidiaries. This general prohibition is subject to a number of
exceptions. The principal exception allows bank holding companies to engage in,
and to own shares of companies engaged in, certain businesses found by the
Federal Reserve to be "so closely related to banking... as to be a proper
incident thereto." This authority would permit the Company to engage in a
variety of banking-related businesses, including the operation of a thrift,
consumer finance, equipment leasing, the operation of a computer service bureau
(including software development), and mortgage banking and brokerage. The BHCA
generally does not place territorial restrictions on the domestic activities of
non-bank subsidiaries of bank holding companies.
6
Additionally, bank holding companies that meet certain eligibility requirements
prescribed by the BHCA and elect to operate as financial holding companies may
engage in, or own shares in companies engaged in, a wider range of nonbanking
activities, including securities and insurance underwriting and sales, merchant
banking and any other activity that the Federal Reserve, in consultation with
the Secretary of the Treasury, determines by regulation or order is financial in
nature, incidental to any such financial activity or complementary to any such
financial activity and does not pose a substantial risk to the safety or
soundness of depository institutions or the financial system generally. The
Company has elected (and the Federal Reserve has accepted the Company's
election) to operate as a financial holding company.
Federal law also prohibits any person or company from acquiring "control" of an
FDIC-insured depository institution or its holding company without prior notice
to the appropriate federal bank regulator. "Control" is conclusively presumed to
exist upon the acquisition of 25% or more of the outstanding voting securities
of a bank or bank holding company, but may arise under certain circumstances at
10% ownership.
Capital Requirements. Bank holding companies are required to maintain minimum
levels of capital in accordance with Federal Reserve capital adequacy
guidelines. If capital levels fall below the minimum required levels, a bank
holding company, among other things, may be denied approval to acquire or
establish additional banks or non-bank businesses.
The Federal Reserve's capital guidelines establish the following minimum
regulatory capital requirements for bank holding companies: (i) a risk-based
requirement expressed as a percentage of total assets weighted according to
risk; and (ii) a leverage requirement expressed as a percentage of total assets.
The risk-based requirement consists of a minimum ratio of total capital to total
risk-weighted assets of 8% and a minimum ratio of Tier 1 capital to total
risk-weighted assets of 4%. The leverage requirement consists of a minimum ratio
of Tier 1 capital to total assets of 3% for the most highly rated companies,
with a minimum requirement of 4% for all others. For purposes of these capital
standards, Tier 1 capital consists primarily of permanent stockholders' equity
less intangible assets (other than certain loan servicing rights and purchased
credit card relationships). Total capital consists primarily of Tier 1 capital
plus certain other debt and equity instruments that do not qualify as Tier 1
capital and a portion of the company's allowance for loan and lease losses.
The risk-based and leverage standards described above are minimum requirements.
Higher capital levels will be required if warranted by the particular
circumstances or risk profiles of individual banking organizations. For example,
the Federal Reserve's capital guidelines contemplate that additional capital may
be required to take adequate account of, among other things, interest rate risk,
or the risks posed by concentrations of credit, nontraditional activities or
securities trading activities. Further, any banking organization experiencing or
anticipating significant growth would be expected to maintain capital ratios,
including tangible capital positions (i.e., Tier 1 capital less all intangible
assets), well above the minimum levels. As of December 31, 2004, the Company had
regulatory capital in excess of the Federal Reserve's minimum requirements.
Dividend Payments. The Company's ability to pay dividends to its shareholders
may be affected by both general corporate law considerations and policies of the
Federal Reserve applicable to bank holding companies. As an Illinois
corporation, the Company is subject to the limitations of the Illinois Business
Corporation Act, as amended, which prohibit the Company from paying a dividend
if, after giving effect to the dividend: (i) the Company would be insolvent; or
(ii) the net assets of the Company would be less than zero; or (iii) the net
assets of the Company would be less than the maximum amount then payable to
shareholders of the company who would have preferential distribution rights if
the Company were liquidated. Additionally, policies of the Federal Reserve
caution that a bank holding company should not pay cash dividends that exceed
its net income or that can only be funded in ways that weaken the bank holding
company's financial health, such as by borrowing. The Federal Reserve also
possesses enforcement powers over bank holding companies and their non-bank
subsidiaries to prevent or remedy actions that represent unsafe or unsound
practices or violations of applicable statutes and regulations. Among these
powers is the ability to proscribe the payment of dividends by banks and bank
holding companies.
Federal Securities Regulation. The Company's common stock is registered with the
SEC under the Securities Act of 1933, as amended, and the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). Consequently, the Company is
subject to the information, proxy solicitation, insider trading and other
restrictions and requirements of the SEC under the Exchange Act.
7
The Bank
General. The Bank is an Illinois-chartered bank, the deposit accounts of which
are insured by the FDIC's Bank Insurance Fund ("BIF"). As an Illinois-chartered
FDIC-insured bank, the Bank is subject to the examination, supervision,
reporting and enforcement requirements of the DFPR, the chartering authority for
Illinois Banks, and the FDIC, designated by federal law as the primary federal
regulator of insured state banks that, like the Bank, are not members of the
Federal Reserve System ("non-member banks'). The Bank is a member of the Federal
Home Loan Bank System, which provides a central credit facility primarily for
member institutions.
Deposit Insurance. As an FDIC-insured institution, the Bank is required to pay
deposit insurance premium assessments to the FDIC. The FDIC has adopted a
risk-based assessment system under which all insured depository institutions are
placed into one of nine categories and assessed insurance premiums based upon
their respective levels of capital and results of supervisory evaluations.
Institutions classified as well-capitalized (as defined by the FDIC) and
considered healthy pay the lowest premium while institutions that are less than
adequately capitalized (as defined by the FDIC) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
During the year ended December 31, 2004, BIF assessments ranged from 0% of
deposits to 0.27% of deposits. For the semi-annual assessment period beginning
January 1, 2005, BIF assessment rates will continue to range from 0% of deposits
to 0.27% of deposits.
FICO Assessments. Since 1987, a portion of the deposit insurance assessments
paid by members of the FDIC's Savings Association Insurance Fund ("SAIF") has
been used to cover interest payments due on the outstanding obligations of the
Financing Corporation ("FICO"). FICO was created in 1987 to finance the
recapitalization of the Federal Savings and Loan Insurance Corporation, the
SAIF's predecessor insurance fund. As a result of federal legislation enacted in
1996, beginning as of January 1, 1997, both SAIF members and BIF members became
subject to assessments to cover the interest payments on outstanding FICO
obligations until the final maturity of such obligations in 2019. These FICO
assessments are in addition to amounts assessed by the FDIC for deposit
insurance. During the year ended December 31, 2004, the FICO assessment rate for
BIF and SAIF members was approximately 0.02% of deposits.
Supervisory Assessments. All Illinois banks and national banks are required to
pay supervisory assessments to the DFPR to fund its operations. The amount of
the assessment paid by an Illinois bank to the DFPR is calculated on the basis
of the institution's total assets, including consolidated subsidiaries, as
reported to the DFPR. The First National Bank of Decatur was a national bank and
paid supervisory assessments to the OCC prior to the merger with BankIllinois.
In the case of a national bank, the amount of the assessment paid to the OCC is
calculated using a formula that takes into account the bank's size and its
supervisory condition (as determined by the corporate rating assigned to the
bank as a result of its most recent OCC examination). During the year ended
December 31, 2004, the Bank paid supervisory assessments to the DFPR totaling
$115,000 and to the OCC totaling $110,000.
Capital Requirements. Banks are generally required to maintain capital levels in
excess of other businesses. The federal bank regulatory agencies have
established the following minimum capital standards for insured state banks,
such as the Bank: (i) a leverage requirement consisting of a minimum ratio of
Tier 1 capital to total assets of 3% for the most highly-rated banks with a
minimum requirement of at least 4% for all others; and (ii) a risk-based capital
requirement consisting of a minimum ratio of total capital to total
risk-weighted assets of 8% and a minimum ratio of Tier 1 capital to total
risk-weighted assets of 4%. For purposes of these capital standards, the
components of Tier 1 capital and total capital are the same as those for bank
holding companies discussed above.
The capital requirements described above are minimum requirements. Higher
capital levels will be required if warranted by the particular circumstances or
risk profiles of individual institutions. For example, regulations of the FDIC
provide that additional capital may be required to take adequate account of,
among other things, interest rate risk or the risks posed by concentrations of
credit, nontraditional activities or securities trading activities.
Further, federal law and regulations provide various incentives for financial
institutions to maintain regulatory capital at levels in excess of minimum
regulatory requirements. For example, a financial institution that is
"well-capitalized" may qualify for exemptions from prior notice or application
requirements otherwise applicable to certain types of activities and may qualify
for expedited processing of other required notices or applications.
Additionally, one of the criteria that determines a bank holding company's
eligibility to operate as a financial holding company is a requirement that all
of its financial institution subsidiaries be "well-capitalized". Under the
regulations of the FDIC, in order to be "well-capitalized", a financial
institution must maintain a ratio of total capital to total risk-weighted assets
of 10% or greater, a ratio of Tier 1 capital to total risk-weighted assets of 6%
or greater and a ratio of Tier 1 capital to total assets of 5% or greater.
8
Federal law also provides the federal banking regulators with broad power to
take prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "adequately capitalized", "undercapitalized",
"significantly undercapitalized", or "critically undercapitalized", in each case
as defined by regulation. Depending upon the capital category to which an
institution is assigned, the regulators' corrective powers include: (i)
requiring the institution to submit a capital restoration plan; (ii) limiting
the institution's asset growth and restricting its activities; (iii) requiring
the institution to issue additional capital stock (including additional voting
stock) or to be acquired; (iv) restricting transactions between the institution
and its affiliates; (v) restricting the interest rate the institution may pay on
deposits; (vi) ordering a new election of directors of the institution; (vii)
requiring that senior executive officers or directors be dismissed; (viii)
prohibiting the institution from accepting deposits from correspondent banks;
(ix) requiring the institution to divest certain subsidiaries; (x) prohibiting
the payment of principal or interest on subordinated debt; and (xi) ultimately,
appointing a receiver for the institution.
As of December 31, 2004: (i) the Bank was not subject to a directive from the
FDIC to increase its capital to an amount in excess of the minimum regulatory
capital requirements; (ii) the Bank exceeded its minimum regulatory capital
requirements under FDIC capital adequacy guidelines; and (iii) the Bank was
"well-capitalized", as defined by applicable regulations.
Dividend Payments. The primary source of funds for the Company is dividends from
the Bank. Under the Illinois Banking Act, the Bank generally may not pay
dividends in excess of its net profits.
The payment of dividends by any financial institution or its holding company is
affected by the requirement to maintain adequate capital pursuant to applicable
capital adequacy guidelines and regulations, and a financial institution
generally is prohibited from paying any dividends if, following payment thereof,
the institution would be undercapitalized. As described above, the Bank exceeded
its minimum capital requirements under applicable guidelines as of December 31,
2004. As of December 31, 2004, approximately $58.838 million was available to be
paid as dividends by the Bank. Notwithstanding the availability of funds for
dividends, however, the FDIC may prohibit the payment of dividends if it
determines such payment would constitute an unsafe or unsound practice.
Insider Transactions. The Bank is subject to certain restrictions imposed by
federal law on extensions of credit to the Company and its subsidiaries, on
investments in the stock or other securities of the Company and its subsidiaries
and the acceptance of the stock or other securities of the Company or its
subsidiaries as collateral for loans made by the Bank. Certain limitations and
reporting requirements are also placed on extensions of credit by the Bank to
its directors and officers, to directors and officers of the Company and its
subsidiaries, to principal shareholders of the Company and to "related
interests" of such directors, officers and principal shareholders. In addition,
federal law and regulations may affect the terms upon which any person who is a
director or officer of the Company or one of its subsidiaries or a principal
shareholder of the Company may obtain credit from banks with which the Bank
maintains correspondent relationships.
Safety and Soundness Standards. The federal banking agencies have adopted
guidelines that establish operational and managerial standards to promote the
safety and soundness of federally insured depository institutions. The
guidelines set forth standards for internal controls, information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, asset quality and
earnings.
In general, the safety and soundness guidelines prescribe the goals to be
achieved in each area, and each institution is responsible for establishing its
own procedures to achieve those goals. If an institution fails to comply with
any of the standards set forth in the guidelines, the institution's primary
federal regulator may require the institution to submit a plan for achieving and
maintaining compliance. If an institution fails to submit an acceptable
compliance plan, or fails in any material respect to implement a compliance plan
that has been accepted by its primary federal regulator, the regulator is
required to issue an order directing the institution to cure the deficiency.
Until the deficiency cited in the regulator's order is cured, the regulator may
restrict the institution's rate of growth, require the institution to increase
its capital, restrict the rates the institution pays on deposits or require the
institution to take any action the regulator deems appropriate under the
circumstances. Noncompliance with the standards established by the safety and
soundness guidelines may also constitute grounds for other enforcement action by
the federal banking regulators, including cease and desist orders and civil
money penalty assessments.
Branching Authority. Illinois banks have the authority under Illinois law to
establish branches anywhere in the State of Illinois, subject to receipt of all
required regulatory approvals.
9
Federal law permits state and national banks to merge with banks in other states
subject to: (i) regulatory approval; (ii) federal and state deposit
concentration limits; and (iii) state law limitations requiring the merging bank
to have been in existence for a minimum period of time (not to exceed five
years) prior to the merger. The establishment of new interstate branches or the
acquisition of individual branches of a bank in another state (rather than the
acquisition of an out-of-state bank in its entirety) is permitted only in those
states that authorize such expansion.
State Bank Investments and Activities. The Bank generally is permitted to make
investments and engage in activities directly or through subsidiaries as
authorized by Illinois law. However, under federal law and FDIC regulations,
FDIC-insured state banks are prohibited, subject to certain exceptions, from
making or retaining equity investments of a type, or in an amount, that are not
permissible for a national bank. Federal law and FDIC regulations also prohibit
FDIC-insured state banks and their subsidiaries, subject to certain exceptions,
from engaging as principal in any activity that is not permitted for a national
bank unless the bank meets, and continues to meet, its minimum regulatory
capital requirements and the FDIC determines the activity would not pose a
significant risk to the deposit insurance fund of which the bank is a member.
These restrictions have not had, and are not currently expected to have, a
material impact on the operations of the Bank.
Federal Reserve System. Federal Reserve regulations, as presently in effect,
require depository institutions to maintain non-interest earning reserves
against their transactions accounts (primarily NOW and regular checking
accounts), as follows: for transaction accounts aggregating $47.6 million or
less, the reserve requirement is 3% of total transaction accounts; and for
transaction accounts aggregating in excess of $47.6 million, the reserve
requirement is $1.218 million plus 10% of the aggregate amount of total
transaction accounts in excess of $47.6 million. The first $7.0 million of
otherwise reservable balances are exempted from the reserve requirements. These
reserve requirements are subject to annual adjustment by the Federal Reserve.
The Bank is in compliance with the foregoing requirements.
F. Employees
The Company had a total of 445 employees at December 31, 2004, consisting of 345
full-time employees and 100 part-time. The Company places a high priority on
staff development, which involves extensive training, including customer service
training. New employees are selected on the basis of both technical skills and
consumer service capabilities. None of the Company's employees are covered by a
collective bargaining agreement with the Company or its subsidiaries. The
Company offers a variety of employee benefits, and management considers its
employee relations to be excellent.
G. Internet Website
The Company maintains an internet site for its subsidiary bank at
www.mainstreettrust.com. The Company makes available free of charge on these
sites its annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and other reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after it
electronically files such material with, or furnishes it to, the Securities and
Exchange Commission.
Item 2. Properties
The Company and its subsidiaries conduct business in eighteen locations. The
Company and Main Street Bank & Trust' headquarters are located at 100 W.
University Ave. in Champaign, Illinois. The Company and/or its subsidiaries own
the land and buildings for eleven locations and lease seven locations, three of
which are located in supermarkets. The Company believes that its facilities are
adequate to serve its present needs.
Item 3. Legal Proceedings
In the course of business, the Company and its subsidiaries become involved in
various legal proceedings, claims and litigation arising out of the ordinary
course of business. As of the date of filing this report, there were no causes
of action which would have a material adverse effect on the consolidated
financial position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
There were no items submitted to a vote of security holders in the fourth
quarter of 2004.
10
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
The Company's common stock was held by approximately 700 shareholders of record
as of March 1, 2005 and is traded in the over-the-counter market.
The following table shows, for the periods indicated, the range of closing
prices per share of the Company's common stock in the over-the-counter market,
as reported to the Company by the brokers known to the Company to regularly
follow the market for the common stock. Certain other private transactions may
have occurred during the periods indicated of which the Company has no
knowledge. The following prices represent inter-dealer prices without retail
markups, markdowns or commissions.
Cash
High Low Dividends
---------------------------------
2003 First quarter ..................... $ 25.25 $ 24.25 $ 0.15
Second quarter .................... 30.00 24.75 0.15
Third quarter ..................... 31.00 27.75 0.20
Fourth quarter .................... 35.00 29.70 0.20
2004 First quarter ..................... $ 31.25 $ 30.60 $ 0.21
Second quarter .................... 32.00 30.25 0.21
Third quarter ..................... 32.00 30.30 0.21
Fourth quarter .................... 32.50 28.50 0.21
During the fourth quarter of 2004, the Company declared a $0.22 per share cash
dividend, which was paid on January 28, 2005. The ability of the Company to pay
dividends in the future will be primarily dependent upon its receipt of
dividends from the Bank. In determining cash dividends, the Board of Directors
considers the earnings, capital requirements, debt and dividend servicing
requirements, financial ratio guidelines it has established, the financial
condition of the Company and other relevant factors. The Bank's ability to pay
dividends to the Company and the Company's ability to pay dividends to its
shareholders are also subject to certain regulatory restrictions. See "Business
- Supervision and Regulation - The Company - Dividend Payments" and "Business -
Supervision and Regulation - The Bank - Dividend Payments" for a more detailed
description of these limitations.
On October 27, 2003, the Company announced that its Board of Directors had
reinstated the Stock Repurchase Program (the "Program"), allowing the purchase
of up to 500,000 shares of the Company's outstanding stock. No shares were
repurchased during the fourth quarter of 2004.
11
Item 6. Selected Consolidated Financial Data
The following table presents selected consolidated financial information for the
Company for each of the five years ended December 31, 2004. The selected
consolidated financial data should be read in conjunction with the Consolidated
Financial Statements of the Company, including the related notes, presented
elsewhere herein.
Year Ended December 31,
------------------------------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
(dollars in thousands, except per share data)
------------------------------------------------------------------------------------------------------------------------
Interest income ................................... $ 54,805 $ 55,686 $ 63,363 $ 73,195 $ 74,271
Interest expense .................................. 16,852 16,723 21,717 33,598 36,599
Net interest income ............................... 37,953 38,963 41,646 39,597 37,672
Provision for loan losses ......................... 1,100 1,470 1,450 2,670 804
-------------------------------------------------------------------
Net interest income after provision for loan losses 36,853 37,493 40,196 36,927 36,868
Non-interest income ............................... 19,847 20,294 18,866 17,266 16,316
Non-interest expense .............................. 33,879 32,341 33,161 30,286 34,769
Income tax expense ................................ 8,043 8,841 8,520 7,736 6,426
-------------------------------------------------------------------
Net income ................................... $ 14,778 $ 16,605 $ 17,381 $ 16,171 $ 11,989
-------------------------------------------------------------------
Basic earnings per share .......................... $ 1.56 $ 1.62 $ 1.61 $ 1.48 $ 1.08
-------------------------------------------------------------------
Diluted earnings per share ........................ $ 1.54 $ 1.60 $ 1.60 $ 1.45 $ 1.06
-------------------------------------------------------------------
Return on average total assets .................... 1.22% 1.47% 1.58% 1.47% 1.15%
Return on average shareholders' equity ............ 13.08% 12.67% 12.79% 12.32% 10.03%
Dividend payout ratio ............................. 54.49% 46.91% 33.54% 30.41% 37.04%
Cash dividends declared per common share .......... $ 0.85 $ 0.76 $ 0.54 $ 0.45 $ 0.40
-------------------------------------------------------------------
Total assets ...................................... $1,228,118 $1,154,174 $1,122,728 $1,151,511 $1,091,081
Investment in debt and equity securities .......... 358,726 370,726 316,210 335,422 303,187
Loans held for investment, net .................... 761,227 666,259 664,142 673,061 659,849
Deposits .......................................... 974,577 898,472 868,586 884,109 839,932
Borrowings ........................................ 126,782 132,978 108,457 120,102 110,636
Total shareholders' equity ........................ 113,975 111,450 134,470 135,993 125,402
Total shareholders' equity to total assets ........ 9.28% 9.66% 11.98% 11.81% 11.49%
Average shareholders' equity to average assets .... 9.34% 11.63% 12.35% 11.91% 11.45%
===================================================================
Item 7. Management's Discussion and Analysis of Financial Condition and Result
of Operations
The following discussion and analysis is designed to provide the reader with a
comprehensive review of the consolidated results of operations for 2004, 2003
and 2002 for the Company, including all subsidiaries, and an analysis of the
Company's financial condition at December 31, 2004 compared to December 31, 2003
and at December 31, 2003 compared to December 31, 2002. This discussion and
analysis should be read in conjunction with the consolidated financial
statements and related notes, which begin at page 30 of this report.
Overview
Net income declined slightly, from $16.605 million in 2003 to $14.778 million in
2004, due to the compression of the Bank's net interest margin, one-time
expenses associated with the merger and name change of our subsidiary banks, The
First National Bank of Decatur and BankIllinois, in the fourth quarter and a
decline in mortgage loan sales and related income. Interest rates remained at
unprecedented low levels during the first half of 2004 and they increased in the
second half of 2004 as a result of five rate hikes by the Federal Reserve.
However, the net interest margin showed a pattern of increases during the fourth
quarter of 2004, and should continue to increase in response to the continued
rising rate environment. Loan demand grew during 2004 and loan quality remained
strong, with non-performing loans as a percentage of gross loans at 0.29%,
compared to 0.15% in 2003 and 0.33% in 2002. Earnings were flat for the year
ended December 31, 2003 compared to 2002, with diluted earnings per share of
$1.60 in both 2003 and 2002. Interest rates were at unprecedented lows during
2003 and caused compression in our margins. Also affecting our margin was the
lack of loan growth during 2003. However, the economy continued to improve in
the fourth quarter of 2003, and loan demand, which showed growth late in the
fourth quarter of 2003 continued into 2004.
During the second quarter of 2002, the Company completed a tender offer in which
711,832 of its shares of common stock were acquired for an aggregate cost of
$16.556 million. The Company completed a second tender offer during the third
quarter of 2003 in which 1,074,140 of its shares of common stock were acquired
for an aggregate cost of $32.395 million.
12
On November 8, 2004, the Company announced its intent to acquire Citizens First
Financial, parent company of Citizens Savings Bank in Bloomington, Illinois for
a total cost of approximately $61.6 million of which 50% will be in the form of
cash and 50% will be in the form of common stock of the Company. As of September
30, 2004, Citizens First Financial had consolidated assets of $327.103 million,
consolidated total deposits of $231.416 million and consolidated stockholders'
equity of $34.213 million. The acquisition is expected to close in the second
quarter of 2005, pending approval from Citizen's shareholders and all applicable
regulatory agencies.
Segment Operations
FirsTech, Inc. operates as a separate segment of the Company. Results of
Firstech's operations are included as non-interest income and non-interest
expense of the Company.
Critical Accounting Policies
The Company's significant accounting policies are more fully described in Note 1
to the Company's consolidated financial statements located in Item 8 of this
Annual Report on form 10-K. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues, and expenses and the related
disclosures of contingent assets and liabilities. Actual results could differ
from those estimates under different assumptions or conditions. The Company
believes that it has one critical accounting policy that is subject to estimates
and judgements used in the preparation of its consolidated financial statements.
Allowance for Loan Losses. The allowance for loan losses is a material estimate
that is particularly susceptible to significant changes in the near term. The
allowance for loan losses is increased by provisions charged to operations and
is reduced by loan charge-offs less recoveries. Management utilizes an approach,
which provides for general and specific valuation allowances, that is based on
current economic conditions, past losses, collection experience, risk
characteristics of the portfolio, assessment of collateral values by obtaining
independent appraisals for significant properties, and such other factors which,
in management's judgment, deserve current recognition in estimating loan losses,
to determine the appropriate level of the allowance for loan losses.
The allowance for loan losses related to impaired loans that are identified for
evaluation is based on discounted cash flow using the loan's initial effective
interest rate or the fair value, less selling costs, of the collateral for
collateral dependent loans. Loans are categorized as "impaired" when, based on
current information or events, it is probable that the Company will be unable to
collect all amounts due, including principal and interest, in accordance with
the contractual terms of the loan agreement. The Company reviews all non-accrual
and substantially delinquent loans, as well as problem loans identified by
management, for impairment as defined above. A specific reserve amount will be
established for impaired loans in which the present value of the expected cash
flows to be generated is less than the amount of the loan recorded on the
Company's books. As an alternative to discounting, the Company may use the "fair
value" of any collateral supporting a collateral-dependent loan in reviewing the
necessity for establishing a specific loan loss reserve amount. Specific
reserves will be established for accounts having a collateral deficiency
estimated to be $50,000 or more. The Company's general reserve is maintained at
an adequate level to cover accounts having a collateral deficiency of less than
$50,000. Loans evaluated as groups or homogeneous pools of loans will be
excluded from this analysis.
The Company utilizes its data processing system to identify loan payments not
made by their contractual due date and to calculate the number of days each loan
exceeds the contractual due date. The accrual of interest on any loan is
discontinued when, in the opinion of management, there is reasonable doubt as to
the collectibility of interest or principal. Management believes the allowance
for loan losses is adequate to absorb probable credit losses inherent in the
loan portfolio. However, there can be no assurance that the allowance for loan
losses will be adequate to cover all losses. While management uses available
information to recognize loan losses, future additions to the allowance for loan
losses may be necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the adequacy of the allowance for loan losses. Such agencies
may require the Company to recognize additions to the allowance for loan losses
based on their judgments of information available to them at the time of their
examination.
Results of Operations
The Company had earnings of $14.778 million in 2004 compared to $16.605 million
in 2003 and $17.381 million in 2002. The Company had a return on average assets
of 1.22%, 1.47% and 1.58% in 2004, 2003 and 2002, respectively. Basic earnings
per share were $1.56, $1.62 and $1.61 in 2004, 2003 and 2002, respectively.
Diluted earnings per share were $1.54, $1.60 and $1.60 in 2004, 2003 and 2002,
respectively. Management believes that a strong balance sheet and earnings are
critical to success.
13
Net Interest Income
Interest rates and fees charged on loans are affected primarily by the market
demand for loans and the supply of money available for lending purposes. These
factors are affected by, among other things, general economic conditions and the
policies of the Federal government, including the Board of Governors of the
Federal Reserve, legislative tax policies and governmental budgetary matters.
Net interest income, the most significant component of the Company's earnings,
is the difference between interest received or accrued on the Company's earning
assets--primarily loans and investments--and interest paid or accrued on
deposits and borrowings. In order to compare the interest generated from
different types of earning assets, the interest income on certain tax-exempt
investment securities and loans is increased for analysis purposes to reflect
the income tax savings provided by these tax-exempt assets. The adjustment to
interest income for tax-exempt investment securities and loans was calculated
based on the federal income tax statutory rate of 35%. The adjustment to net
interest income for the tax effect of tax-exempt assets is shown in the
following schedule.
Net Interest Income on a Tax Equivalent Basis
(in thousands)
--------------------------------------------------------------------------------
2004 2003 2002
--------------------------------------------------------------------------------
Total interest income ................ $54,805 $55,686 $63,363
Total interest expense ............... 16,852 16,723 21,717
-----------------------------------
Net interest income ............... 37,953 38,963 41,646
Tax equivalent adjustment:
Tax-exempt investments ............ 993 1,222 1,279
Tax-exempt loans .................. 12 16 19
-----------------------------------
Total adjustment ............. 1,005 1,238 1,298
-----------------------------------
Net interest income (TE) ............. $38,958 $40,201 $42,944
===================================
14
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)
------------------------------------------------------------------------------------------------------------------------------------
2004 2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------------------------------------------------------------------------------------------------------------------------------------
Assets
Taxable investment securities1 ...... $ 327,064 $10,793 3.30% $ 305,146 $11,502 3.77% $ 262,275 $12,471 4.75%
Tax-exempt investment
securities1 (TE) ................. 46,214 2,837 6.14% 55,601 3,492 6.28% 55,134 3,654 6.63%
Federal funds sold and interest
bearing deposits2 ................ 37,910 600 1.58% 36,786 447 1.22% 25,602 437 1.71%
Loans3,4 (TE) ....................... 711,986 41,580 5.84% 645,543 41,483 6.43% 673,423 48,099 7.14%
--------------------------------------------------------------------------------------------
Total interest earning assets
and interest income (TE) ...... $1,123,174 $55,810 4.97% $1,043,076 $56,924 5.46% $1,016,434 $64,661 6.36%
--------------------------------------------------------------------------------------------
Cash and due from banks ............. $ 44,965 $ 45,872 $ 46,771
Premises and equipment .............. 17,184 17,864 18,928
Other assets ........................ 23,944 19,848 18,149
--------------------------------------------------------------------------------------------
Total assets ..................... $1,209,267 $1,126,660 $1,100,282
============================================================================================
Liabilities and Shareholders' Equity
Interest bearing demand deposits .... $ 93,315 $ 635 0.68% $ 87,351 $ 641 0.73% $ 90,916 $ 944 1.04%
Savings ............................. 345,624 3,432 0.99% 284,641 2,586 0.91% 261,063 3,689 1.41%
Time deposits ....................... 352,596 9,905 2.81% 337,737 10,843 3.21% 350,353 14,081 4.02%
Federal funds purchased, repurchase
agreements and notes payable ..... 97,503 1,271 1.30% 95,029 1,094 1.15% 68,615 1,169 1.70%
FHLB advances & other
borrowings ....................... 29,925 1,609 5.38% 28,492 1,559 5.47% 32,889 1,834 5.58%
--------------------------------------------------------------------------------------------
Total interest bearing liabilities
and interest expense .......... $ 918,963 $16,852 1.83% $ 833,250 $16,723 2.01% $ 803,836 $21,717 2.70%
--------------------------------------------------------------------------------------------
Non-interest bearing demand
deposits ......................... 100,913 89,935 93,590
Non-interest bearing savings
deposits ......................... 66,163 62,056 56,204
Other liabilities ................... 10,260 10,339 10,738
--------------------------------------------------------------------------------------------
Total liabilities ................ $1,096,299 $ 995,580 $ 964,368
Shareholders' equity ................ 112,968 131,080 135,914
--------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity .......... $1,209,267 $1,126,660 $ 1,100,282
--------------------------------------------------------------------------------------------
Interest spread (average
rate earned minus
average rate paid) (TE) .......... 3.14% 3.45% 3.66%
============================================================================================
Net interest income (TE) ............ $38,958 $40,201 $42,944
============================================================================================
Net yield on interest
earnings assets (TE) ............. 3.47% 3.85% 4.22%
============================================================================================
Notes: see next page for notes 1-4.
Notes to Consolidated Average Balance Sheet and Interest Rates Table:
1 Investments in debt securities are included at carrying value.
2 Federal funds sold and interest earning deposits include approximately
$66,000, $71,000 and $61,000 in 2004, 2003 and 2002, respectively, of
interest income from third party processing of cashier checks.
3 Loans are net of allowance of loan losses and include mortgage loans held
for sale. Nonaccrual loans are included in the total.
4 Loan fees of approximately $1.410 million, $1.706 million, and $1.269
million in 2004, 2003 and 2002, respectively, are included in total loan
income.
15
The following table presents, on a fully taxable equivalent basis, an analysis
of changes in net interest income resulting from changes in average volumes of
earning assets and interest bearing liabilities and average rates earned and
paid. The change in interest due to the combined rate/volume variance has been
allocated to rate and volume changes in proportion to the absolute dollar
amounts of change in each.
Analysis of Volume and Rate Changes
(in thousands)
------------------------------------------------------------------------------------------------------
2004 2003
------------------------------------------------------------------------------------------------------
Increase Increase
(Decrease) (Decrease)
from from
Previous Due to Due to Previous Due to Due to
Year Volume Rate Year Volume Rate
------------------------------------------------------------------------------------------------------
Interest Income
Taxable investment securities ..... $ (709) $ 788 $(1,497) $ (969) $ 1,862 $(2,831)
Tax-exempt investment securities .. (655) (578) (77) (162) 16 (178)
Federal funds sold and interest
bearing deposits ................ 153 14 139 10 158 (148)
Loans ............................. 97 4,063 (3,966) (6,616) (1,933) (4,683)
--------------------------------------------------------------
Total interest income ....... $(1,114) $ 4,287 $(5,401) $(7,737) $ 103 $(7,840)
--------------------------------------------------------------
Interest Expense
Interest bearing demand
and savings deposits ............ $ 840 $ 609 $ 231 $(1,406) $ 250 $(1,656)
Time deposits ..................... (938) 461 (1,399) (3,238) (492) (2,746)
Federal funds purchased, repurchase
agreements and notes payable .... 177 29 148 (75) 371 (446)
Federal Home Loan Bank advances
and other borrowings ............ 50 77 (27) (275) (241) (34)
--------------------------------------------------------------
Total interest expense ...... $ 129 $ 1,176 $(1,047) $(4,994) $ (112) $(4,882)
--------------------------------------------------------------
Net Interest Income (TE) ............ $(1,243) $ 3,111 $(4,354) $(2,743) $ 215 $(2,958)
==============================================================
Total average earning assets increased from $1.043 billion in 2003 to $1.123
billion in 2004, but generated lower interest income mainly as a result of
reduced interest rates in 2004 compared to 2003. Average loans increased $66.443
million, resulting in an increase in interest income of $97,000, of which $4.063
million was due to volume, offset somewhat by $3.966 million due to a decrease
in interest rates. Average taxable investment securities increased $21.918
million, but generated $709,000 less interest income, of which $1.497 million
was due to lower rates, offset somewhat by $788,000 due to an increase in
volume. Average federal funds sold and interest-bearing deposits increased
$1.124 million and generated $153,000 more interest income, mainly due to an
increase in rates. Somewhat offsetting these increases in average balances was a
decrease in average tax-exempt investment securities of $9.387 million,
resulting in a decrease in interest income of $655,000, of which $578,000 was
due to lower volume and $77,000 was attributable to a decrease in rates.
Total average earning assets increased from $1.016 billion in 2002 to $1.043
billion in 2003, but generated lower interest income mainly as a result of
reduced interest rates in 2003 compared to 2002. Average taxable investment
securities increased $42.871 million, but generated $969,000 less interest
income, of which $2.831 million was due to lower rates, offset somewhat by
$1.862 million due to an increase in volume. Average federal funds sold and
interest-bearing deposits increased $11.184 million and generated $10,000 more
interest income. Average tax-exempt investment securities increased $467,000 in
2003, but generated $162,000 less interest income, of which $178,000 was due to
a decrease in rates, offset slightly by $16,000 due to higher volume. Somewhat
offsetting these increases in average balances was a decrease in average loans
of $27.880 million, resulting in a decrease in interest income of $6.616
million, of which $4.683 million was due to lower rates and $1.933 million was
attributable to a decrease in volume.
16
The negative trend in net interest income in 2003 compared to 2002 has shown a
reversal in 2004 compared to 2003, especially in the fourth quarter of 2004,
during which period a year-to-year increase in net interest income was reported.
The following table summarizes the quarterly increase (decrease) in total
interest income, total interest expense and net interest income in 2004 and 2003
compared to the same periods the prior year:
----------------------------------------------------------------------
Total Total Net
Interest Interest Interest
Income (TE) Expense Income (TE)
----------------------------------------------------------------------
2003 First quarter .......... $(1,634) $(1,307) $ (327)
Second quarter ......... (2,012) (1,258) (754)
Third quarter .......... (2,207) (1,391) (816)
Fourth quarter ......... (1,884) (1,038) (846)
--------------------------------
Year-to-date ........... $(7,737) $(4,994) $(2,743)
===============================
2004 First quarter .......... $(1,232) $ (638) $ (594)
Second quarter ......... (824) (264) (560)
Third quarter .......... (83) 376 (459)
Fourth quarter ......... 1,025 655 370
-------------------------------
Year-to-date ........... $(1,114) $ 129 $(1,243)
===============================
The Company establishes interest rates on loans and deposits based on market
rates - such as the 91-day Treasury Bill rate and the prime rate - and interest
rates offered by other financial institutions in the local community. The level
of risk and the value of collateral are also evaluated when determining loan
rates. Rates were generally lower in 2004 compared to 2003. The average rate
earned on loans decreased 59 basis points from 6.43% in 2003 to 5.84% in 2004.
The yield on tax-exempt investment securities decreased 14 basis points from
6.28% in 2003 to 6.14% in 2004. The yield on taxable investment securities
decreased 47 basis points from 3.77% in 2003 to 3.30% in 2004. Somewhat
offsetting these lower yields was an increase in the yield on federal funds sold
and interest-bearing deposits of 36 basis points from 1.22% in 2003 to 1.58% in
2004. Contributing to this yield increase was a higher average balance during
the last half of 2004 compared to the first half, coupled with rising rates as a
result of the five interest rate hikes initiated by the Federal Reserve between
June and December 2004.
The total actual balance of loans at December 31, 2004 was higher than at
December 31, 2003. Commercial, financial and agricultural loans increased
$64.862 million from 2003 to 2004 primarily as a result of the Company's
emphasis on business development, the favorable rate environment and the
relative improvement in the economy in 2004, particularly in the last half. Real
estate loans increased $23.297 million from 2003 to 2004, due to an $11.755
million increase in commercial real estate loans, and an increase of $11.542
million in residential real estate loans due to attractive adjustable rate
mortgage rates. Installment and consumer loans increased $6.673 million from
2003 to 2004. This was primarily due to an $18.405 million increase in home
equity loans as a result of the Company's increased focus on marketing this
product in 2004, including promotional rates, offset somewhat by an $11.732
million decrease in indirect and other consumer loans, mainly due to the
availability of alternative funding sources to consumers, such as special
financing offered by the automobile manufacturers' captive financing companies.
Average rates on total interest bearing liabilities decreased 18 basis points,
from 2.01% in 2003 to 1.83% in 2004, but interest expense increased $129,000 in
2004 compared to 2003 due to an increase in volume, offset somewhat by a
decrease in rates. The overall increase in interest expense was caused by an
increase in interest expense on interest bearing demand and savings deposits,
federal funds purchased, repurchase agreements and notes payable and Federal
Home Loan Bank advances and other borrowings, offset somewhat by a decrease in
interest expense on time deposits. The average rate paid on time deposits
decreased 40 basis points, from 3.21% in 2003 to 2.81% in 2004. This resulted in
a decrease of $938,000 in interest expense, of which $1.399 million was due to
lower rates, offset somewhat by a $461,000 increase in volume. The average rate
paid on Federal Home Loan Bank advances and other borrowings decreased 9 basis
points, from 5.47% in 2003 to 5.38% in 2004. However, interest expense increased
a total of $50,000, comprised of $77,000 due to higher volume, which was offset
somewhat by $27,000 due to a decrease in rates. The average rate paid on federal
funds purchased, repurchase agreements and notes payable increased 15 basis
points from 1.15% in 2003 to 1.30% in 2004. This resulted in an increase in
interest expense of $177,000 of which $148,000 was due to higher rates and
$29,000 was due to an increase in volume. The average rate paid on interest
bearing demand and savings deposits increased 6 basis points, from 0.87% in 2003
to 0.93% in 2004. This resulted in an increase in interest expense of $840,000
in 2004, of which $609,000 was attributable to increased volume and $231,000 was
due to higher rates.
17
Average rates on total interest bearing liabilities decreased 69 basis points,
from 2.70% in 2002 to 2.01% in 2003, resulting in a decrease in interest expense
of $4.994 million in 2003 compared to 2002 due to the low rate environment
throughout 2003. The overall decrease in interest expense was caused by a
decrease in interest expense on all categories of interest bearing liabilities.
The average rate paid on time deposits decreased 81 basis points, from 4.02% in
2002 to 3.21% in 2003. This resulted in a decrease of $3.238 million in interest
expense, of which $2.746 million was due to lower rates and $492,000 was due to
a decrease in volume. The average rate paid on federal funds purchased,
repurchase agreements and notes payable decreased 55 basis points from 1.70% in
2002 to 1.15% in 2003. This resulted in a decrease in interest expense of
$75,000 of which $446,000 was due to lower rates, offset somewhat by a $371,000
increase in volume. The average rate paid on interest bearing demand and savings
deposits decreased 45 basis points, from 1.32% in 2002 to 0.87% in 2003. This
resulted in a decrease in interest expense of $1.406 million in 2003, of which
$1.656 million was attributable to lower rates, offset slightly by a $250,000
increase in volume. The average rate paid on Federal Home Loan Bank advances and
other borrowings decreased 11 basis points, from 5.58% in 2002 to 5.47% in 2003.
This resulted in a decrease in interest expense of $275,000, of which $34,000
was due to lower rates and $241,000 was due to a decrease in volume.
Provision for Loan Losses
The quality of the Company's loan portfolio is of prime importance to the
Company's management and its board of directors, as loans are the largest
component of the Company's assets. The Company maintains an independent credit
administration function, which performs reviews of all large credit
relationships and all loans that present indications of additional credit risk.
Net charge-offs increased to $1.236 million in 2004 from $943,000 in 2003. The
Company charged off $1.692 million in loans during 2004 compared to $1.640
million in 2003. This was due to increases in charge-offs for commercial,
financial and agricultural loans and residential real estate loans of $140,000
and $6,000, respectively, in 2004 compared to 2003. The increase in charge-offs
for commercial, financial and agricultural loans was primarily the result of
charge-offs on one loan. These increases were offset somewhat by a decrease in
charge-offs for installment and consumer loans of $94,000. Recoveries of
previously charged off loans decreased from $697,000 in 2003 to $456,000 in
2004, with the largest decrease in the area of commercial, financial and
agricultural loans, which decreased $238,000 from 2003 to 2004. The provision
for loan losses decreased $370,000 from $1.470 million in 2003 to $1.100 million
in 2004. Loan quality continued to be manageable as the ratio of net charge-offs
to average net loans increased slightly to 0.17% in 2004 from 0.15% in 2003. The
Company continues to emphasize credit analysis and early detection of problem
loans.
Non-Interest Income and Expense
The following table summarizes selected categories of non-interest income and
non-interest expense for the years ended December 31 2004, 2003 and 2002.
--------------------------------------------------------------------------------
Noninterest Income and Expense
for the Year Ended: December 31,
--------------------------------------------------------------------------------
Non-interest Income (in thousands) 2004 2003 2002
--------------------------------------------------------------------------------
Remittance processing .................. $ 7,201 $ 7,211 $ 7,277
Trust and brokerage fees 1 ............. 6,492 5,783 5,929
Service charges on deposit accounts .... 2,419 2,545 2,373
Securities transactions, net 2 ......... 133 (12) 211
Gain on sales of mortgage loans, net 3 . 997 2,536 1,368
Other 4 ................................ 2,605 2,231 1,708
-------------------------------
Total non-interest income ...... $ 19,847 $ 20,294 $ 18,866
===============================
--------------------------------------------------------------------------------
Non-interest Expense (in thousands) .... 2004 2003 2002
--------------------------------------------------------------------------------
Salaries and employee benefits ......... $ 18,889 $ 18,245 $ 18,721
Occupancy .............................. 2,669 2,489 2,376
Equipment 5 ............................ 2,512 2,389 2,779
Data processing 6 ...................... 2,283 2,108 2,300
Office supplies ........................ 1,247 1,266 1,261
Service charges from correspondent banks 781 931 932
Other 7 ................................ 5,498 4,913 4,792
-------------------------------
Total non-interest expense ..... $ 33,879 $ 32,341 $ 33,161
===============================
1 Trust and brokerage fees increased $709,000, or 12.3%, in 2004 compared to
2003. This increase was the result of strong investment performance for
existing clients and obtaining new investment accounts. Assets under
management increased $251 million to $1.765 billion at December 31, 2004
compared to $1.514 billion at December 31, 2003.
18
2 Income from securities transactions increased $145,000 in 2004 compared to
2003. This increase was due to a gain on the sale of one security. In 2003,
income from securities transactions decreased $223,000, or 105.7%, compared
to 2002. In 2002, income from securities transactions included gains from
some securities sold to reposition the portfolio in the low rate
environment.
3 Gains on sales of mortgage loans decreased $1.539 million, or 60.7%, in
2004 compared to 2003. This decrease was due to a decrease of approximately
$132.328 million, or 63.3%, in mortgage loans funded in 2004 compared to
2003, primarily as a result of a decrease in refinancings. In 2003, gain on
sales of mortgage loans increased $1.168 million, or 85.4% compared to
2002. This gain resulted from a $70.294 million, or 50.6%, increase in
mortgage loans funded in 2003 compared to 2002 mainly as a result of the
high volume of refinancings due to the low rate environment.
4 Other non-interest income increased $374,000, or 16.8%, in 2004 compared to
2003. Included in other non-interest income in 2004 was a $291,000 gain on
the sale of two parking lots. Other non-interest income increased $523,000,
or 30.6%, in 2003 compared to 2002. In 2002, other non-interest income
included a write-down of approximately $300,000 in the value of mortgage
servicing rights as a result of the sharp rise in prepayment speeds.
5 Equipment expense increased $123,000, or 5.1%, in 2004 compared to 2003. In
August 2003, FirsTech introduced a new remittance processing product called
Internet Agent. The increase in equipment expense in 2004 included
additional costs associated with this product. In 2003, equipment expense
decreased $390,000, or 14.0%, compared to 2002. This decrease was largely
due to efficiencies gained from restructuring and the merger of two of the
Company's subsidiary banks, BankIllinois and the First Trust Bank of
Shelbyville, in June 2002.
6 Data processing expense increased $175,000, or 8.3%, in 2004 compared to
2003. In 2004, data processing expense included additional costs related to
the merger of BankIllinois and The First National Bank of Decatur. In 2003,
data processing expense decreased $192,000, or 8.3%, compared to 2002.
Contributing to data processing expense in 2002 were additional costs
associated with conversion to a new system and software upgrade at
FirsTech, and costs to merge BankIllinois and the First Trust Bank of
Shelbyville.
7 Other non-interest expense increased $585,000, or 11.9%, in 2004 compared
to 2003. Included in other non-interest expense in 2004 were approximately
$413,000 of additional marketing research and agency fees, primarily
related to the merger of BankIllinois and The First National Bank of
Decatur for purposes of marketing, promotion and branding the new entity,
Main Street Bank & Trust direct loan promotional costs relating to the
increase in home equity loans and additional costs related to
Sarbanes-Oxley compliance.
Income Tax Expense
Income tax expense decreased $798,000, or 9.0%, from $8.841 million in 2003 to
$8.043 million in 2004. This was mainly due to a decrease in taxable income. In
2003, income tax expense increased $321,000, or 3.8%, from $8.520 million in
2002. The Company's effective tax rate was 35.2%, 34.7% and 32.9% for the years
ended December 31, 2004, 2003 and 2002, respectively.
The tax effects of temporary differences, which gave rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2004 and 2003, are shown in note 10 in the Notes to Consolidated Financial
Statements.
Financial Condition
Total assets increased $73.944 million, or 6.4%, from $1.154 billion at December
31, 2003 to $1.228 billion at December 31, 2004. Increases in federal funds sold
and interest bearing deposits, investments in debt and equity securities
available-for-sale, non-marketable equity securities, loans, mortgage loans held
for sale, accrued interest receivable and other assets were somewhat offset by
decreases in cash and due from banks, investments in debt and equity securities
held-to-maturity, and premises and equipment.
Cash and due from banks decreased $12.766 million, or 27.8%, at December 31,
2004 compared to December 31, 2003. This was primarily due to a smaller dollar
amount of deposit items in process of collection at December 31, 2004 compared
to December 31, 2003.
19
Federal funds sold and interest bearing deposits increased $1.791 million, or
6.0%, at December 31, 2004 compared to December 31, 2003. Federal funds sold and
interest bearing deposits fluctuate with loan demand, deposit volume and
investment opportunities.
Total investments in debt and equity securities decreased $12.000 million, or
3.2%, at December 31, 2004 compared to December 31, 2003 primarily due to a
decrease in investments in debt and equity securities held to maturity of
$15.892 million, or 16.4%, offset somewhat by increases in investments in debt
and equity securities available-for-sale of $3.666 million, or 1.4% and
investments in non-marketable equity securities of $226,000, or 2.9%.
Investments fluctuate with loan demand, deposit volume and investment
opportunities.
Loans, net of loan allowance, increased $94.968 million, or 14.3%, at December
31, 2004 compared to December 31, 2003. Commercial, financial and agricultural
loans increased $64.862 million from 2003 to 2004 primarily as a result of the
Company's emphasis on business development, the favorable rate environment and
the relative improvement in the economy in 2004. Real estate loans increased
$23.297 million from 2003 to 2004, due to increases in both commercial and
residential real estate loans. Commercial real estate loans increased $11.755
million. Residential real estate loans increased $11.542 million during 2004 due
to attractive adjustable rate mortgage rates after decreasing in 2003 due to
long-term fixed rate loans being refinanced and subsequently sold on the
secondary market. Installment and consumer loans increased $6.673 million from
2003 to 2004 primarily due to an increase in home equity loans of $18.405
million as a result of the Company's increased focus on marketing this product,
which included promotional rates. Somewhat offsetting this increase was a
decrease of $11.582 million in indirect consumer loans due to increased
competition from alternative funding sources available to consumers, such as
special financing offered by the auto manufacturers' captive financing
companies.
Mortgage loans held-for-sale increased $373,000, or 59.0%, at December 31, 2004
compared to December 31, 2003. This was reflective of an increase in demand at
the end of 2004 as compared to 2003.
The increase in year-end assets was primarily the result of funds provided by an
increase in total deposits of $76.105 million, or 8.5%, at December 31, 2004
compared to December 31, 2003. This was due to the increase in non-interest
bearing deposits of $10.733 million, or 6.6%, and the increase in interest
bearing deposits of $65.372 million, or 8.9%. Somewhat offsetting these
increases was a decrease of $6.098 million, or 5.9%, in federal funds purchased,
repurchase agreements and notes payable, and a decrease of $98,000, or 0.3%, in
Federal Home Loan Bank advances and other borrowings at December 31, 2004
compared to December 31, 2003.
Average assets were $82.607 million, or 7.3%, higher in 2004 than 2003. Included
in the increase in average assets were increases in net loans of $66.443
million, or 10.3%, taxable investment securities of $21.918 million, or 7.2%,
other assets of $4.096 million, or 20.6%, and federal funds sold and interest
bearing deposits of $1.124 million, or 3.1%. These increases were somewhat
offset by average decreases of $9.387 million, or 16.9%, in tax-exempt
investment securities, a decrease of $907,000, or 2.0%, in cash and due from
banks, and a decrease of $680,000, or 3.8%, in premises and equipment.
Shifts in funding sources occurred as total average deposits increased $96.891
million, or 11.2%, total average federal funds purchased, repurchase agreements
and notes payable increased $2.474 million, or 2.6%, and average Federal Home
Loan Bank advances and other borrowings increased $1.433 million, or 5.0%, in
2004 from 2003. Included in the increase in average deposits was a shift in the
average deposit mix in 2004 versus 2003. There were increases in all categories
of deposits. Average savings increased $60.983 million, or 21.4%, average time
deposits increased $14.859 million, or 4.4%, average non-interest bearing demand
deposits increased $10.978 million, or 12.2%, average interest bearing demand
deposits increased $5.964 million, or 6.8%, and average non-interest bearing
savings increased $4.107 million, or 6.6%.
20
Investment Securities
The carrying value of investments in debt and equity securities was as follows:
Carrying Value of Securities1
(in thousands)
--------------------------------------------------------------------------------
December 31, 2004 2003 2002
--------------------------------------------------------------------------------
Securities available-for-sale:
U.S. Treasury ......................... $ -- $ -- $ 3,066
Federal agencies ...................... 218,994 220,199 185,469
Mortgage-backed securities ............ 27,713 23,007 30,884
State and municipal ................... 16,715 17,317 16,168
Corporate and other obligations ....... -- -- 1,008
Marketable equity securities .......... 6,158 5,391 4,021
----------------------------------
Total ........................... $269,580 $265,914 $240,616
==================================
Securities held-to-maturity:
Federal agencies ...................... $ 40,931 $ 10,704 $ 1,750
Mortgage-backed securities ............ 14,992 50,029 23,595
State and municipal ................... 25,241 36,323 43,218
----------------------------------
Total ........................... $ 81,164 $ 97,056 $ 68,563
==================================
Non-marketable equity securities:
FHLB and FRB stock2 ................... $ 4,279 $ 4,259 $ 3,963
Other equity investments .............. 3,703 3,497 3,068
----------------------------------
Total ........................... $ 7,982 $ 7,756 $ 7,031
==================================
Total securities ................ $358,726 $370,726 $316,210
==================================
1 Investment securities available-for-sale are carried at fair value.
Investment securities held-to-maturity are carried at amortized cost.
2 FHLB and FRB are commonly used acronyms for Federal Home Loan Bank and
Federal Reserve Bank, respectively. All FRB stock was redeemed after the
merger in November 2004.
The unrealized gain on securities available-for-sale, net of tax effect,
decreased $2.159 million to a loss of $218,000 at December 31, 2004 from a gain
of $1.941 million at December 31, 2003.
The following table shows the maturities and weighted-average yields of
investment securities at December 31, 2004.
Maturities and Weighted Average Yields of Debt Securities
(dollars in thousands)
---------------------------------------------------------------------------------------------------------------------------------
December 31, 2004
---------------------------------------------------------------------------------------------------------------------------------
1 Year 1 to 5 5 to 10 Over
or Less Years Years 10 Years Total
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
---------------------------------------------------------------------------------------------------------------------------------
Securities available-for-sale:
Federal agencies .............. $105,600 3.31% $112,402 2.84% $ 992 2.61% $ -- -- $218,994 3.06%
Mortgage-backed securities1 ... 15,171 3.02% 12,307 4.82% 201 7.11% 33 3.56% 27,713 3.85%
State and municipal (TE)2 ..... 2,502 4.87% 9,624 5.78% 3,792 7.67% 797 7.78% 16,715 6.17%
Marketable equity securities3 . -- -- -- -- -- -- -- -- 6,158 --
--------------------------------------------------------------------------------------------
Total ................... $123,273 $134,333 $4,985 $ 830 $269,580
============================================================================================
Average Yield (TE)2 ............. 3.30% 3.23% 6.64% 7.60% 3.34%
============================================================================================
Securities held-to-maturity:
Federal agencies .............. $ 5,765 2.43% $ 30,092 2.88% $5,074 4.10% $ -- -- $ 40,931 2.97%
Mortgage-backed securities1 ... 8,072 2.09% 6,414 3.13% 135 3.39% 371 6.26% 14,992 2.65%
State and municipal (TE)2 ..... 8,019 5.78% 16,697 6.09% 180 7.07% 345 7.95% 25,241 6.03%
--------------------------------------------------------------------------------------------
Total ................... $ 21,856 $ 53,203 $5,389 $ 716 $ 81,164
============================================================================================
Average Yield (TE)2 ............. 3.36% 3.90% 4.19% 7.08% 3.80%
============================================================================================
Non-marketable equity securities3
FHLB stock .................... $ -- -- $ -- -- $ -- -- $ -- -- $ 4,279 --
Other equity investments ...... -- -- -- -- -- -- -- -- 3,703 --
--------------------------------------------------------------------------------------------
Total ................... $ -- -- $ -- -- $ -- -- $ -- -- $ 7,982 --
============================================================================================
21
1 Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties and certain securities require principal
repayments prior to maturity.
2 The average yield has been tax equivalized (TE) on state and municipal
tax-exempt securities.
3 Due to the nature of these securities, they do not have a stated maturity
date or rate.
Loans
The following tables present the amounts and percentages of loans at December 31
for the years indicated according to the categories of commercial, financial and
agricultural; real estate; and installment and consumer loans.
Amount of Loans Outstanding
(dollars in thousands)
----------------------------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
----------------------------------------------------------------------------------------------------------------------
Commercial, financial and agricultural ..... $ 314,657 $ 249,795 $ 234,045 $ 246,042 $ 219,541
Real estate ................................ 372,294 348,997 343,827 316,693 319,412
Installment and consumer ................... 83,926 77,253 95,529 119,585 129,775
-----------------------------------------------------------------------
Total loans ........................ $ 770,877 $ 676,045 $ 673,401 $ 682,320 $ 668,728
=======================================================================
Percentage of Loans Outstanding
----------------------------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
----------------------------------------------------------------------------------------------------------------------
Commercial, financial and agricultural ..... 40.82% 36.95% 34.75% 36.06% 32.83%
Real estate ................................ 48.29% 51.62% 51.06% 46.41% 47.76%
Installment and consumer ................... 10.89% 11.43% 14.19% 17.53% 19.41%
-----------------------------------------------------------------------
Total .............................. 100.00% 100.00% 100.00% 100.00% 100.00%
=======================================================================
The Company's loan portfolio totaled approximately $770.877 million at December
31, 2004, representing 62.8% of total assets at that date. Total loans increased
$94.832 million, or 14.0%, from December 31, 2003 to December 31, 2004 with
increases in commercial, financial and agricultural loans, real estate loans and
installment and consumer loans of $64.862 million, $23.297 million and $6.673
million, respectively.
Total loans increased $2.644 million, or 0.4%, from December 31, 2002 to
December 31, 2003, with increases in commercial, financial and agricultural
loans and real estate loans of $15.750 million and $5.170 million, respectively,
offset somewhat by a decrease in installment and consumer loans of $18.276
million.
The balance of loans outstanding as of December 31, 2004 by maturities is shown
in the following table:
Maturity of Loans Outstanding
(dollars in thousands)
-------------------------------------------------------------------------------------
December 31, 2004
-------------------------------------------------------------------------------------
1 Year 1-5 Over 5
or Less Years Years Total
-------------------------------------------------------------------------------------
Commercial, financial and agricultural $188,762 $ 96,323 $ 29,572 $314,657
Real estate .......................... 71,558 180,591 120,145 $372,294
Installment and consumer ............. 23,360 42,799 17,767 $ 83,926
--------------------------------------------
Total ........................ $283,680 $319,713 $167,484 $770,877
============================================
Percentage of total loans outstanding 36.80% 41.47% 21.73% 100.00%
============================================
22
As of December 31, 2004, commercial, financial and agricultural loans with
maturities of greater than one year were comprised of $43.238 million in
fixed-rate loans and $82.657 million in floating-rate loans. Real estate loans
with maturities greater than one year at December 31, 2004 included $97.217
million in fixed-rate loans and $203.519 million in floating-rate loans.
Allowance for Loan Losses and Loan Quality
The following table summarizes changes in the allowance for loan losses by loan
categories for each period and additions to the allowance for loan losses, which
have been charged to operations.
Allowance for Loan Losses
(dollars in thousands)
-----------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
-----------------------------------------------------------------------------------------------------
Allowance for loan losses at
beginning of year ....................... $ 9,786 $ 9,259 $ 9,259 $ 8,879 $ 8,682
-------------------------------------------------------
Charge-offs during period:
Commercial, financial and agricultural .. $ (288) $ (148) $ (103) $(1,165) $ (99)
Residential real estate ................. (48) (42) (125) (27) (34)
Installment and consumer ................ (1,356) (1,450) (1,699) (1,481) (1,119)
-------------------------------------------------------
Total ............................. $(1,692) $(1,640) $(1,927) $(2,673) $(1,252)
-------------------------------------------------------
Recoveries of loans previously charged off:
Commercial, financial and agricultural .. $ 214 $ 452 $ 245 $ 179 $ 463
Residential real estate ................. 15 46 31 37 9
Installment and consumer ................ 227 199 201 167 173
-------------------------------------------------------
Total ............................. $ 456 $ 697 $ 477 $ 383 $ 645
-------------------------------------------------------
Net charge-offs ................... $(1,236) $ (943) $(1,450) $(2,290) $ (607)
Provision for loan losses ................. 1,100 1,470 1,450 2,670 804
-------------------------------------------------------
Allowance for loan losses at end of year .. $ 9,650 $ 9,786 $ 9,259 $ 9,259 $ 8,879
=======================================================
Ratio of net charge-offs to
average net loans ....................... 0.17% 0.15% 0.22% 0.34% 0.10%
=======================================================
Management reviews criteria such as the customer's historic loan payment
performance, financial statements, financial ratios, cash flow, net worth,
collateral and guaranties, as well as local and national economic factors, in
determining whether loans should be written off as uncollectible. The Company
records a loss if it is probable that a loss will occur and the amount can be
reasonably estimated.
The Company's risk of loan loss is dependent on many factors: economic
conditions, the extent and values of underlying collateral, significant
concentrations of loans within the portfolio, the ability and willingness of
borrowers to perform according to loan terms and management's competence and
judgment in overseeing lending, collecting and loan-monitoring activities. The
risk of loss from commercial, financial and agricultural loans is significantly
impacted by economic factors and how these factors affect the particular
industries involved.
An analysis of the allowance for loan loss adequacy is performed on a quarterly
basis by the Company's credit administration department. This analysis is
reported to executive management and discussed at a quarterly meeting where
specific allocations for problem credits, charge-offs and monthly provisions for
loan losses are reviewed and revised, as necessary. The results are reported to
the board of directors. The analysis includes assessment of the allowance for
loan loss adequacy based on historic loan losses and current quality grades of
specific credits reviewed, credit concentrations, current delinquent and
nonperforming loans, current economic conditions, peer group information and
results of recent audits or regulatory examinations. Charged off commercial,
financial and agricultural loans in 2001 included two agricultural credits
totaling $847,000. The level of charge-offs of installment and consumer loans in
all years reported was reflective of the significant growth of the indirect loan
portfolio in 1999 and 2000.
23
The following table shows the allocation of the allowance for loan losses to
each loan category.
Allocation of the Allowance for Loan Losses
(in thousands)
-------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
-------------------------------------------------------------------------------------
Allocated:
Commercial, financial and agricultural $6,926 $5,973 $5,732 $5,487 $3,426
Residential real estate .............. 198 153 345 419 855
Installment and consumer ............. 1,605 2,428 1,763 2,000 1,649
------------------------------------------
Total allocated allowance ...... $8,729 $8,554 $7,840 $7,906 $5,930
Unallocated allowances ................. 921 1,232 1,419 1,353 2,949
------------------------------------------
Total .......................... $9,650 $9,786 $9,259 $9,259 $8,879
==========================================
The allocated portion of the allowance for loan losses increased $175,000 from
$8.554 million at December 31, 2003 to $8.729 million at December 31, 2004. Of
this increase, the allowance for commercial, financial and agricultural loans
increased $953,000 from $5.973 million at December 31, 2003 to $6.926 million at
December 31, 2004 which was reflective of the increase in commercial, financial
and agricultural loans in 2004 compared to 2003. The allowance for residential
real estate loans increased $45,000 from $153,000 to $198,000 during the same
period. Somewhat offsetting these increases was a decrease in the allowance for
installment and consumer loans of $823,000 from $2.428 million at December 31,
2003 to $1.605 million at December 31, 2004. This decrease was primarily
attributable to the decrease in indirect consumer loans in 2004 compared to
2003. The portion of the allowance for loan losses that was unallocated
decreased by $311,000 to $921,000 at December 31, 2004 from $1.232 million a
year earlier. The unallocated amount is determined based on management's
judgment, which considers, in addition to the other factors previously
discussed, the risk of error in the specific allocation.
Management believes that nonperforming loans, which include nonaccrual loans and
loans past due 90-days or more, and potential problem loans, which include loans
to borrowers with negative earnings trends and questionable collateral coverage,
are appropriately identified and monitored based on the extensive loan analysis
performed by the credit administration department, the internal loan committees
and the board of directors. Historically, there has not been a significant
amount of loans charged off which had not been previously identified as problem
loans by the credit administration department or the loan committees.
The following table presents the aggregate amount of loans considered to be
nonperforming for the periods indicated. Nonperforming loans include loans
accounted for on a nonaccrual basis, accruing loans contractually past due 90
days or more as to interest or principal payments and loans which are troubled
debt restructurings as defined in Statement of Financial Accounting Standards
No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings."
Nonperforming Loans
(in thousands)
--------------------------------------------------------------------------------
2004 2003 2002 2001 2000
--------------------------------------------------------------------------------
Nonaccrual loans1 ................. $1,689 $ 399 $1,392 $3,341 $ 602
==========================================
Loans past due 90 days or more .... $ 547 $ 621 $ 829 $1,774 $ 846
==========================================
Restructured loans2 ............... $ 497 $ 18 $ 20 $ 67 $ 88
==========================================
1 Includes $509,000, $269,000, $628,000, $3.216 million and $505,000 at
December 31, 2004, 2003, 2002, 2001 and 2000, respectively, of loans which
management does not consider impaired as defined by the Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for
Impairments of a Loan" (SFAS 114).
Other Nonperforming Assets
(in thousands)
--------------------------------------------------------------------------------
2004 2003 2002 2001 2000
--------------------------------------------------------------------------------
Other real estate owed ............ $ -- $ -- $ 58 $ -- $ 7
========================================
Nonperforming other assets ........ $ 33 $ 55 $ 94 $153 $192
========================================
24
There were no other interest earning assets that would be required to be
disclosed as being nonperforming if such other assets were loans.
At December 31, 2004, the Company had approximately $4.977 million in potential
problem loans, excluding nonperforming loans. Potential problem loans are those
loans identified by management as being worthy of special attention, and
although currently performing, may have some underlying weaknesses. None of
these potential problem loans were considered impaired as defined in SFAS 114.
The $4.977 million of potential problem loans have either had timely payments or
are adequately secured and loss of principal or interest is determined to be
unlikely.
Loans over 90 days past due, which are not well secured and in the process of
collection, are placed on nonaccrual status. There were $1.689 million of
nonaccrual loans at December 31, 2004 compared to $399,000 at December 31, 2003.
Included in nonaccrual loans at December 31, 2004 was $770,000 attributable to
one commercial loan. As of December 31, 2004, a specific valuation allowance of
$300,000 had been assigned to this loan, and the remaining balance was
considered adequately collateralized. Loans past due 90 days or more but still
accruing interest decreased by $74,000 in 2004 to a balance of $547,000 at
December 31, 2004, from $621,000 at December 31, 2003. These loans are well
secured and in the process of collection.
The following table categorizes nonaccrual loans as of December 31, 2004 based
on levels of performance and also details the allocation of interest collected
during the period in 2004 in which the loans were on nonaccrual. Substantial
performance, yet contractually past due, includes borrowers making sizable
periodic payments relative to the required periodic payments due. A borrower
that is not making substantial payments but is making periodic payments would be
included in the limited performance category.
Nonaccrual and Related Interest Payments
(in thousands)
----------------------------------------------------------------------------------------------------
Cash Interest Payments Applied As:
----------------------------------------------------------------------------------------------------
At December 31, 2004
-------------------- Recovery of Reduction
Book Contractual Interest Prior Partial of
Balance Balance Income Charge-offs Principal
----------------------------------------------------------------------------------------------------
Not contractually past due ........... $ 208 $ 209 $ 21 $ -- $ 1
Contractually past due with:
Substantial performance ............ 114 114 5 -- --
Limited performance ................ 1,266 1,288 3 -- --
No performance ..................... 101 103 -- -- 2
-----------------------------------------------------------
Total ................................ $1,689 $1,714 $ 29 $ -- $ 3
===========================================================
The difference between the book balance and the contractual balance represents
charge-offs made since the loans were funded.
Management believes that the allowance for loan losses at December 31, 2004 was
adequate to absorb credit losses in the total loan portfolio and that the
policies and procedures in place to identify potential problem loans are being
effectively implemented. However, there can be no assurance that the allowance
for loan losses will be adequate to cover all losses.
Premises and Equipment
Total premises and equipment decreased $535,000 in 2004 from 2003. This decrease
was primarily due to depreciation expense of $2.544 million and proceeds from
sale of property of $623,000, offset somewhat by purchases of $2.396 million and
a $236,000 gain on disposal of premises and equipment.
Other Assets
Other assets increased $1.973 million in 2004 from 2003. This increase included
increases in cash value life insurance and deferred tax assets offset somewhat
by a decrease in current taxes receivable.
25
Deposits
The following table shows the average balance and weighted average rate of
deposits at December 31 for the years indicated:
Average Balance and Weighted Average Rate of Deposits
(dollars in thousands)
-------------------------------------------------------------------------------------------------
2004 2003 2002
-------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
-------------------------------------------------------------------------------------------------
Demand
Non-interest bearing .... $100,913 -- $ 89,935 -- $ 93,590 --
Interest bearing ........ 93,315 0.68% 87,351 0.73% 90,916 1.04%
Savings
Non-interest bearing .... 66,163 -- 62,056 -- 56,204 --
Interest bearing ........ 345,624 0.99% 284,641 0.91% 261,063 1.41%
Time
$100,000 and more ....... 111,317 2.64% 113,604 3.22% 121,591 3.89%
Under $100,000 .......... 241,279 2.89% 224,133 3.21% 228,762 4.09%
------------------------------------------------------------------
Totals ............ $958,611 $861,720 $852,126
==================================================================
In analyzing its deposit activity, management has noted that average total
deposits increased $96.891 million, or 11.2%, during 2004. Included in this
increase were shifts in the average deposit mix in 2004 versus 2003. There were
increases in average interest bearing savings deposits of $60.983 million, or
21.4%, average non-interest bearing savings deposits of $4.107 million, or 6.6%,
average time deposits under $100,000 of $17.146 million, or 7.6%, non-interest
bearing demand deposits of $10.978 million, or 12.2%, and interest bearing
demand deposits of $5.964 million, or 6.8%. Slightly offsetting these increases
was a decrease in average time deposits $100,000 and over of $2.287 million, or
2.0%.
The table below sets forth the maturity of time deposits greater than $100,000
at December 31, 2004:
Maturity of Time Deposits of $100,000 or More
(in thousands)
---------------------------------------------------------------------------------------------------------
Total Time
State of Illinois Brokered Deposits of
Maturity at December 31, 2004: Time Deposits CDs CDs IRAs $100,000 or More
---------------------------------------------------------------------------------------------------------
3 months or less ............. $ 3,575 $ -- $ 26,345 $ 822 $ 30,742
3 to 6 months ................ 3,000 5,000 13,486 384 21,870
6 to 12 months ............... 2,000 -- 26,725 995 29,720
Over 12 months ............... 2,175 -- 19,638 2,980 24,793
-----------------------------------------------------------------------
Total ................ $ 10,750 $ 5,000 $ 86,194 $ 5,181 $107,125
=======================================================================
Federal Funds Purchased, Repurchase Agreements and Notes Payable
This category includes federal funds purchased, which are generally overnight
transactions, securities sold under repurchase agreements, which mature from one
day to three years from the date of sale and U.S. Treasury demand notes. The
table in note 7 in the Notes to Consolidated Financial Statements shows the
balances of federal funds purchased, repurchase agreements and notes payable at
December 31, 2004 and 2003, the average balance for the years ended December 31,
2004, 2003 and 2002, and the maximum month-end value during each year.
Fair Values of Financial Instruments
The estimated fair values of financial instruments for which no listed market
exists and the fair values of investment securities, which are based on listed
market quotes at December 31, 2004 and 2003, are disclosed in note 16 in the
Notes to Consolidated Financial Statements.
Capital
Total shareholders' equity increased $2.525 million from $111.450 million at
December 31, 2003 to $113.975 million at December 31, 2004. Net income of
$14.778 million was offset somewhat by cash dividends declared of $8.056
million, a decrease in accumulated other comprehensive income of $2.159 million,
a decrease of $1.956 million as a result of net treasury stock transactions, and
a decrease of $82,000 in stock appreciation rights.
26
Financial institutions are required by regulatory agencies to maintain minimum
levels of capital based on asset size and risk characteristics. Currently, the
Company and the Bank are required by their primary regulators to maintain
adequate capital based on two measurements: the total assets leverage ratio and
the risk-weighted assets ratio.
Based on Federal Reserve guidelines, a bank holding company generally is
required to maintain a leverage ratio of 3% plus an additional cushion of at
least 100 to 200 basis points. The Company's total assets leverage ratio at both
December 31, 2004 and 2003 was 9.2% and 9.6%, respectively. The leverage ratio
for the Bank was disclosed in note 18 in the Notes to the Consolidated Financial
Statements and is well above the regulatory minimum.
The minimum risk-weighted assets ratio for bank holding companies is 8%. The
Company's total risk-weighted assets ratio at both December 31, 2004 and 2003
was 13.3% and 14.5%, respectively - significantly higher than the regulatory
minimum. The Bank's total risk-weighted assets ratio is disclosed in note 18 in
the Notes to the Consolidated Financial Statements and is significantly higher
than the regulatory minimum.
Inflation and Changing Prices
Changes in interest rates and a bank's ability to react to interest rate
fluctuations have a much greater impact on a bank's balance sheet and net income
than inflation. A review of net interest income, liquidity and rate sensitivity
should assist in the understanding of how well the Company is positioned to
react to changes in interest rates.
Liquidity and Cash Flows
The Company requires cash to fund loan growth and deposit withdrawals. Cash
flows fluctuate with changes in economic conditions, current interest rate
trends and as a result of management strategies and programs. The Company
monitors the demand for cash and initiates programs and policies as considered
necessary to meet funding gaps.
The Company was able to adequately fund loan demand and meet liquidity needs in
2004. A review of the consolidated statement of cash flows in the accompanying
financial statements shows that the Company's cash and cash equivalents
decreased $10.975 million from December 31, 2003 to December 31, 2004. The
decrease in 2004 resulted from cash used in investing activities, offset
somewhat by cash provided by operating and financing activities. There were
differences in sources and uses of cash during 2004 compared to 2003. More cash
was used by investing activities in 2004 compared to 2003. Funding of new loans
increased in 2004 compared to 2003 as net loans increased $96.108 million in
2004 compared to $3.647 million in 2003. The increased use of funds by loans was
slightly offset by cash provided by net investing activities in 2004. Cash was
provided in 2004 by net investing activities as security purchases were less
than maturities, calls, sales, principal paydowns, return of principal and
proceeds from redemption of securities. In 2003, investing activities resulted
in a use of funds as purchases were more than maturities, calls, sales,
principal paydowns, and return of principal. Principal paydowns from
mortgage-backed securities were higher in 2004 compared to 2003, reflective of
the ongoing low interest rate environment. Slightly less cash was provided by
operating activities in 2004 compared to 2003. More cash was provided by
financing activities in 2004 compared to 2003. This was mainly due to a larger
increase in deposits in 2004 compared to 2003 and using less cash in 2004 for
treasury stock transactions compared to 2003 which included funding a tender
offer. These financing sources of funds were somewhat offset by a use of funds
in 2004 due to a decrease in federal funds purchased, repurchase agreements and
notes payable compared to a source of funds in 2003 when federal funds
purchased, repurchase agreements and notes payable increased.
The Company's future short-term cash requirements are expected to continue 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. The acquisition of Citizens First
Financial Corporation ("Citizens") will be funded by issuing Company stock for
half of the outstanding Citizens shares and cash for the balance. The Company
anticipates borrowing approximately $6 million, to be repaid over a 3-year
period, to fund a portion of the acquisition cost of Citizens. 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 $10 million line of credit from a third party lender,
FHLB borrowings and Brokered CDs. To meet short-term liquidity needs, the
Company is able to borrow funds on a temporary basis from the Federal Reserve
Bank, the FHLB and correspondent banks. With sound capital levels, the Company
continues to have several options for longer-term cash needs, such as for future
expansion and acquisitions.
27
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.
The following table summarizes significant obligations and other commitments at
December 31, 2004 (in thousands):
Short and Long-Term Operating
Years Ended December 31, Time Deposits Borrowings1 Leases Total
----------------------------------------------------------------------------------------------------
2005 $ 240,676 $ 93 $ 238 $ 241,007
2006 49,792 7,220 212 57,224
2007 32,938 2,546 148 35,632
2008 15,719 20,023 5 35,747
2009 10,379 -- 2 10,381
Thereafter 5 -- -- 5
----------------------------------------------------------------------------------------------------
Total $ 349,509 $ 29,882 $ 605 $ 379,996
====================================================================================================
Commitments to extend credit:
Commitments $ 239,074
Standby letters of credit 33,897
----------------------------------------------------------------------------------------------------
1 Fixed rate callable FHLB advances are included in the period of their
modified duration rather than in the period in which they are due. Short
and long-term borrowings include fixed rate callable advances of $15
million maturing in fiscal year 2008.
Interest Rate Sensitivity
The concept of interest sensitivity attempts to gauge exposure of the Company's
net interest income to adverse changes in market driven interest rates by
measuring the amount of interest-sensitive assets and interest-sensitive
liabilities maturing or subject to repricing within a specified time period.
Liquidity represents the ability of the Company to meet the day-to-day demands
of deposit customers balanced by its investments of these deposits. The Company
must also be prepared to fulfill the needs of credit customers for loans with
various types of maturities and other financing arrangements. One way the
Company monitors its interest rate sensitivity and liquidity is through the use
of static gap reports, which measure the difference between assets and
liabilities maturing or repricing within specified time periods.
The following table shows the Company's interest rate sensitivity position at
various intervals at December 31, 2004:
Rate Sensitivity of Earning Assets and Interest Bearing Liabilities
(in thousands)
----------------------------------------------------------------------------------------------------------------------------------
1 - 30 31 - 90 91 - 180 181 - 365 Over
Days Days Days Days 1 Year Total
----------------------------------------------------------------------------------------------------------------------------------
Interest earning assets:
Federal funds sold and interest bearing deposits $ 31,795 $ -- $ -- $ -- $ -- $ 31,795
Debt and equity securities1 .................... 16,587 27,958 27,067 49,320 237,794 358,726
Loans2 ......................................... 319,218 36,615 33,625 64,226 318,198 771,882
-----------------------------------------------------------------------------
Total interest earning assets ............ $ 367,600 $ 64,573 $ 60,692 $ 113,546 $ 555,992 $1,162,403
-----------------------------------------------------------------------------
Interest bearing liabilities:
Savings and interest bearing demand deposits ... $ 82,168 $ 1,470 $ 2,205 $ 4,409 $ 167,572 $ 257,824
Money market savings deposits .................. 194,336 -- -- -- -- 194,336
Time deposits .................................. 37,889 44,223 57,554 101,010 108,833 349,509
Federal funds purchased, repurchase agreements
and notes payable ............................ 87,423 1,009 1,104 7,364 -- 96,900
FHLB Advances and other borrowings ............. 7,268 10,092 -- -- 12,522 29,882
-----------------------------------------------------------------------------
Total interest bearing liabilities ....... $ 409,084 $ 56,794 $ 60,863 $ 112,783 $ 288,927 $ 928,451
=============================================================================
Net asset (liability) funding gap ................ $ (41,484) $ 7,779 $ (171) $ 763 $ 267,065 $ 233,952
-----------------------------------------------------------------------------
Repricing gap .................................... 0.90 1.14 1.00 1.01 1.92 1.25
Cumulative repricing gap ......................... 0.90 0.93 0.94 0.95 1.25 1.25
=============================================================================
1 Debt and equity securities include securities available-for-sale.
2 Loans include mortgage loans held-for-sale.
28
Included in the 1-30 day category of savings and interest bearing demand
deposits is non-core deposits plus a percentage, based upon industry-accepted
assumptions, of the core deposits. "Core deposits" are the lowest average
balance of the prior twelve months for each product type included in this
category. "Non-core deposits" are the difference between the current balance and
core deposits. The time frames include a percentage, based upon
industry-accepted assumptions, of the core deposits as follows:
1-30 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 December 31, 2004, the Company tended to be slightly liability sensitive due
to the levels of savings and interest bearing demand deposits, time deposits,
federal funds purchased, repurchase agreements and notes payable. As such, the
effect of a decrease in the prime rate of 100 basis points would increase net
interest income by approximately $415,000 in 30 days and $337,000 in 90 days
assuming no management intervention. A rise in interest rates would have the
opposite effect for the same periods. The Company's Asset and Liability
Management Policy states that the cumulative ratio of rate-sensitive assets
("RSA") to rate-sensitive liabilities "(RSL") for the 12-month period shall fall
within the range of 0.75-1.25. As of December 31, 2004, the Company's RSA/RSL
was 0.95, which was within the established guidelines.
In addition to managing interest sensitivity and liquidity through the use of
gap reports, the Company has provided for emergency liquidity situations with
informal agreements with correspondent banks, which permit the Company to borrow
federal funds on an unsecured basis. The Company has a $10 million unsecured
line of credit with a correspondent bank. Additionally, the Company can borrow
approximately $55.278 million from the Federal Home Loan Bank on a secured
basis.
The Company uses financial forecasting/budgeting/reporting software packages to
perform interest rate sensitivity analysis for all product categories. The
Company's primary focus of its analysis is on the effect of interest rate
increases and decreases on net interest income. Management believes that this
analysis reflects the potential effects on current earnings of interest rate
changes. Call criteria and prepayment assumptions are taken into consideration
for investments in debt and equity securities. All of the Company's financial
instruments are analyzed by a software database, which includes each of the
different product categories, which are tied to key rates such as prime,
Treasury Bills, or the federal funds rate. The relationships of each of the
different products to the key rate that the product is tied to is proportional.
The software reprices the products based on current offering rates. The software
performs interest rate sensitivity analysis by performing rate shocks of plus or
minus 200 basis points in 100 basis point increments.
The following table shows projected results at December 31, 2004 and December
31, 2003 of the impact on net interest income from an immediate change in
interest rates. The results are shown as a percentage change in net interest
income over the next twelve months.
+200 +100 -100 -200
--------------------------------------------------------------------------------
December 31, 2004 ............. 10.3% 5.1% (5.1%) (10.3%)
December 31, 2003 ............. 11.7% 5.9% (5.9%) (11.7%)
The foregoing computations are based on numerous assumptions, including relative
levels of market interest rates, prepayments and deposit mix. The computed
estimates should not be relied upon as a projection of actual results. Despite
the limitations on preciseness inherent in these computations, management
believes that the information provided is reasonably indicative of the effect of
changes in interest rate levels on the net earning capacity of the Company's
current mix of interest earning assets and interest bearing liabilities.
Management continues to use the results of these computations, along with the
results of its computer model projections, in order to maximize current earnings
while positioning the Company to minimize the effect of a prolonged shift in
interest rates that would adversely affect future results of operations.
At the present time, the most significant market risk affecting the Company is
interest rate risk. Other market risks such as foreign currency exchange risk
and commodity price risk do not occur in the normal business of the Company. The
Company also is not currently using trading activities or derivative instruments
to control interest rate risk.
29
Emerging Accounting Standards
In December 2003, the American Institute of Certified Public Accountants
released Statement of Position 03-3, Accounting for Certain Loans or Debt
Securities Acquired in a Transfer (SOP 03-3). SOP 03-3 addresses accounting for
differences between contractual cash flows and cash flows expected to be
collected from an investor's initial investment in loans or debt securities
acquired in a transfer if those differences are attributable to credit quality.
SOP 03-3 is effective for loans acquired in fiscal years beginning after
December 15, 2004. The adoption of SOP 03-3 is not expected to have a material
impact on the Company's financial statements.
In March 2004, the Financial Accounting Standards Board (FASB) released Emerging
Issues Task Force (EITF) 03-1, The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments (EITF 03-1). The EITF 03-1 provides
guidance for determining when an investment is impaired and whether the
impairment is other than temporary as well as guidance for quantifying the
impairment.
On September 30, 2004, the Financial Accounting Standards Board ("FASB") issued
FASB Staff Position ("FSP") Emerging Issues Task Force ("EITF") Issue 03-1-1
delaying the effective date of paragraphs 10-20 of EITF 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Applications to Certain Investments",
which provides guidance for determining the meaning of "other-than-temporarily
impaired" and its application to certain debt and equity securities within the
scope of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", and investments accounted for under the cost method. The guidance
requires that investments which have declined in value due to credit concerns or
solely due to changes in interest rates must be recorded as
other-than-temporarily impaired unless the Company can assert and demonstrate
its intention to hold the security for a period of time sufficient to allow for
a recovery of fair value up to or beyond the cost of the investment which might
mean maturity. The delay of the effective date of EITF 03-1 will be superceded
concurrent with the final issuance of proposed FSP Issue 03-1-a. Proposed FSP
03-1-a is intended to provide implementation guidance with respect to all
securities analyzed for impairment under paragraphs 10-20 of EITF 03-1.
Management continues to closely monitor and evaluate how the provisions of EITF
03-1 and proposed FSP Issue 03-1-a will affect the Company.
In March 2004, the Securities and Exchange Commission released Staff Accounting
Bulletin No. 105, Application of Accounting Principles to Loan Commitments (SAB
105). SAB 105 provides general guidance that must be applied when an entity
determines the fair value of a loan commitment accounted for as a derivative.
SAB 105 is effective for commitments to originate mortgage loans to be held for
sale that are entered into after March 31, 2004. The adoption of SAB 105 did not
have a material impact on the Company's financial statements.
In December 2004, the Financial Accounting Standards Board ("FASB") published
FASB Statement No. 123 (revised 2004), "Share-Based Payment" ("FAS 123(R)" or
the "Statement"). FAS 123(R) requires that the compensation cost relating to
share-based payment transactions, including grants of employee stock options, be
recognized in the financial statements. That cost will be measured based on the
fair value of the equity or liability instruments issued. FAS 123(R) permits
entities to use any option-pricing model that meets the fair value objective in
the Statement. Modifications of share-based payments will be treated as
replacement awards with the cost of the incremental value recorded in the
financial statements.
The Statement is effective at the beginning of the third quarter of 2005. As of
the effective date, the Company will apply the Statement using a modified
version of prospective application. Under that transition method, compensation
cost is recognized for (1) all awards granted after the required effective date
and to awards modified, cancelled , or repurchased after that date and (2) the
portion of prior awards for which the requisite service has not yet been
rendered, based on the grant-date fair value of those awards calculated for pro
forma disclosures under SFAS 123.
The impact of this Statement on the Company in 2005 and beyond will depend upon
various factors, among them our future compensation strategy. The pro forma
compensation costs presented in Note 1 in the Notes to Consolidated Financial
Statements and in prior filings for the Company have been calculated using a
Black-Scholes option pricing model and may not be indicative of amounts which
should be expected in future periods.
30
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
This document (including information incorporated by reference) contains, and
future oral and written statements of the Company and its management may
contain, forward-looking statements, within the meaning of such term in the
Private Securities Litigation Reform Act of 1995, with respect to the financial
condition, results of operations, plans, objectives, future performance and
business of the Company. Forward-looking statements, which may be based upon
beliefs, expectations and assumptions of the Company's management and on
information currently available to management, are generally identifiable by the
use of words such as "believe", "expect", "anticipate", "plan", "intend",
"estimate", "may", "will", "would", "could", "should", or other similar
expressions. Additionally, all statements in this document, including
forward-looking statements, speak only as of the date they are made, and the
Company undertakes no obligation to update any statement in light of new
information or future events.
The Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
effect on the operations and future prospects of the Company and its
subsidiaries include, but are not limited to, the following:
o The strength of the United States economy in general and the strength of
the local economies in which the Company conducts its operations which may
be less favorable then expected and may result in, among other things, a
deterioration in the credit quality and value of the Company's assets.
o The economic impact of past and any future terrorist attacks, acts of war
and threats thereof, and the response of the United States to any such
threats and attacks.
o The effects of, and changes in, federal, state and local laws, regulations
and policies affecting banking, securities, insurance and monetary and
financial matters.
o The effects of changes in interest rates (including the effects of changes
in the rate of prepayments of the Company's assets) and the policies of the
Board of Governors of the Federal Reserve System.
o The ability of the Company to compete with other financial institutions as
effectively as the Company currently intends due to increases in
competitive pressures in the financial services sector.
o The inability of the Company to obtain new customers and to retain existing
customers.
o The timely development and acceptance of products and services, including
products and services offered through alternative delivery channels such as
the Internet.
o Technological changes implemented by the Company and by other parties,
including third party vendors, which may be more difficult or more
expensive than anticipated or which may have unforeseen consequences to the
Company and its customers.
o The ability of the Company to develop and maintain secure and reliable
electronic systems.
o The ability of the Company to retain key executives and employees and the
difficulty that the Company may experience in replacing key executives and
employees in an effective manner.
o Consumer spending and saving habits which may change in a manner that
affects the Company's business adversely.
o Business combinations and the integration of acquired businesses which may
be more difficult or expensive than expected.
o The costs, effects and outcomes of existing or future litigation.
o Changes in accounting policies and practices, as may be adopted by state
and federal regulatory agencies, the Financial Accounting Standards Board
or the Public Company Accounting Oversight Board.
o The ability of the Company to manage the risks associated with the
foregoing as well as anticipated.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements.
Additional information concerning the Company and its business, including other
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission.
31
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
See the "Interest Rate Sensitivity" section contained in Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Item 8. Financial Statements and Supplementary Data
The financial statements begin on page 33.
32
MAIN STREET TRUST, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2004, 2003 and 2002
33
MAIN STREET TRUST, INC.
AND SUBSIDIARIES
TABLE OF CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 35
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets 36
Consolidated Statements of Income 37
Consolidated Statements of Changes in Shareholders' Equity 38
Consolidated Statements of Cash Flows 39
Notes to Consolidated Financial Statements 40-61
34
Report of Independent Registered Public Accounting Firm
The Board of Directors
Main Street Trust, Inc.
Champaign, Illinois
We have audited the accompanying consolidated balance sheets of Main Street
Trust, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2004. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Main
Street Trust, Inc. and subsidiaries as of December 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.
We also have audited, in accordance with standards of the Public Accounting
Oversight Board (United States), the effectiveness of Main Street Trust, Inc.
and subsidiaries' internal control over financial reporting as of December 31,
2004 based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) and our report dated February 11, 2005 expressed an unqualified opinion.
/s/ McGladrey & Pullen
Champaign, Illinois
February 11, 2005
35
MAIN STREET TRUST, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2004 and 2003
(in thousands, except share data)
2004 2003
---------------------------------------------------------------------------------------------
Assets
Cash and due from banks ........................................ $ 33,133 $ 45,899
Federal funds sold and interest bearing deposits ............... 31,795 30,004
--------------------------
Cash and cash equivalents .............................. 64,928 75,903
--------------------------
Investments in debt and equity securities:
Available-for-sale, at fair value ............................ 269,580 265,914
Held-to-maturity, at cost (fair value of $81,099 and $96,628
at December 31, 2004 and 2003, respectively) ............... 81,164 97,056
Non-marketable equity securities ............................. 7,982 7,756
--------------------------
Total investments in debt and equity securities ........ 358,726 370,726
--------------------------
Loans, net of allowance for loan losses of $9,650 and $9,786
at December 31, 2004 and 2003, respectively .................. 761,227 666,259
Mortgage loans held for sale ................................... 1,005 632
Premises and equipment ......................................... 17,087 17,622
Accrued interest receivable .................................... 6,570 6,430
Other assets ................................................... 18,575 16,602
--------------------------
Total assets ........................................... $ 1,228,118 $ 1,154,174
==========================
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Non-interest bearing ....................................... $ 172,908 $ 162,175
Interest bearing ........................................... 801,669 736,297
--------------------------
Total deposits ......................................... 974,577 898,472
Federal funds purchased, repurchase agreements and notes payable 96,900 102,998
Federal Home Loan Bank advances and other borrowings ........... 29,882 29,980
Accrued interest payable ....................................... 2,601 1,669
Other liabilities .............................................. 10,183 9,605
--------------------------
Total liabilities ...................................... 1,114,143 1,042,724
--------------------------
Commitments and Contingencies (Note 16 and 17)
Shareholders' equity:
Preferred stock, no par value; 2,000,000 shares authorized .. -- --
Common stock, $0.01 par value; 15,000,000 shares authorized;
11,219,319 shares issued ................................... 112 112
Paid in capital .............................................. 55,189 55,271
Retained earnings ............................................ 108,071 101,521
Accumulated other comprehensive income (loss) ................ (218) 1,941
--------------------------
163,154 158,845
Less: treasury stock, at cost, 1,770,329 and 1,718,950 shares
at December 31, 2004 and 2003, respectively ................. (49,179) (47,395)
--------------------------
Total shareholders' equity ............................. 113,975 111,450
--------------------------
Total liabilities and shareholders' equity ............. $ 1,228,118 $ 1,154,174
==========================
See accompanying notes to consolidated financial statements.
36
MAIN STREET TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended December 31, 2004, 2003 and 2002
(in thousands, except share and per share data)
2004 2003 2002
----------------------------------------------------------------------------------------------------------------
Interest income:
Loans and fees on loans ........................................ $ 41,568 $ 41,467 $ 48,080
Investments in debt and equity securities
Taxable ...................................................... 10,793 11,502 12,471
Tax-exempt ................................................... 1,844 2,270 2,375
Federal funds sold and interest bearing deposits ............... 600 447 437
-------------------------------------------
Total interest income .................................... 54,805 55,686 63,363
Interest expense:
Deposits ....................................................... 13,972 14,070 18,714
Federal funds purchased, repurchase agreements and notes payable 1,271 1,094 1,169
Federal Home Loan Bank advances and other borrowings ........... 1,609 1,559 1,834
-------------------------------------------
Total interest expense ................................... 16,852 16,723 21,717
-------------------------------------------
Net interest income ...................................... 37,953 38,963 41,646
Provision for loan losses ........................................ 1,100 1,470 1,450
-------------------------------------------
Net interest income after provision for loan losses ...... 36,853 37,493 40,196
Non-interest income:
Remittance processing .......................................... 7,201 7,211 7,277
Trust and brokerage fees ....................................... 6,492 5,783 5,929
Service charges on deposit accounts ............................ 2,419 2,545 2,373
Securities transactions, net ................................... 133 (12) 211
Gain on sales of mortgage loans, net ........................... 997 2,536 1,368
Other .......................................................... 2,605 2,231 1,708
-------------------------------------------
Total non-interest income ................................ 19,847 20,294 18,866
Non-interest expense:
Salaries and employee benefits ................................. 18,889 18,245 18,721
Occupancy ...................................................... 2,669 2,489 2,376
Equipment ...................................................... 2,512 2,389 2,779
Data processing ................................................ 2,283 2,108 2,300
Office supplies ................................................ 1,247 1,266 1,261
Service charges from correspondent banks ....................... 781 931 932
Other .......................................................... 5,498 4,913 4,792
-------------------------------------------
Total non-interest expense ............................... 33,879 32,341 33,161
Income before income taxes ............................... 22,821 25,446 25,901
Income taxes ..................................................... 8,043 8,841 8,520
-------------------------------------------
Net income ............................................... $ 14,778 $ 16,605 $ 17,381
===========================================
Per share data:
Basic earnings per share ....................................... $ 1.56 $ 1.62 $ 1.61
Weighted average shares of common stock outstanding ............ 9,481,034 10,242,929 10,792,092
Diluted earnings per share ..................................... $ 1.54 $ 1.60 $ 1.60
Weighted average shares of common stock and dilutive potential
common shares outstanding .................................... 9,594,148 10,359,836 10,878,823
Dividends declared per share ................................... $ 0.85 $ 0.76 $ 0.54
See accompanying notes to consolidated financial statements.
37
MAIN STREET TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
Years Ended December 31, 2004, 2003 and 2002
(in thousands, except share and per share data)
Accumulated
Other
Comprehensive
Common Stock Paid-in Retained Income Treasury Stock
Shares Amount Capital Earnings (Loss) Shares Amount Total
-----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 ..... 11,111,281 $ 111 $54,147 $ 83,810 $ 2,750 267,783 $ (4,825) $135,993
Comprehensive Income:
Net income ................... -- -- -- 17,381 -- -- -- 17,381
Net change in unrealized
gain (loss) on securities
available-for-sale, net of
taxes of $1,159 ............ -- -- -- -- 1,153 -- -- 1,153
Reclassification adjustment,
net of tax of ($84) ........ -- -- -- -- (127) -- -- (127)
--------
Comprehensive income ... 18,407
--------
Stock appreciation rights ...... -- -- (31) -- -- -- -- (31)
Cash dividends ($0.54 per share) -- -- -- (5,752) -- -- -- (5,752)
Issuance of new shares of common
stock ........................ 108,038 1 1,221 -- -- -- -- 1,222
Treasury stock transactions, net -- -- -- (2,586) -- 487,264 (12,783) (15,369)
------------------------------------------------------------------------------------------
Balance, December 31, 2002 ..... 11,219,319 112 55,337 92,853 3,776 755,047 (17,608) 134,470
Comprehensive Income:
Net income ................... -- -- -- 16,605 -- -- -- 16,605
Net change in unrealized
gain (loss) on securities
available-for-sale, net of
taxes of ($1,228) .......... -- -- -- -- (1,842) -- -- (1,842)
Reclassification adjustment,
net of tax of $5 ........... -- -- -- -- 7 -- -- 7
---------
Comprehensive income ... 14,770
---------
Stock appreciation rights ...... -- -- (66) -- -- -- -- (66)
Cash dividends ($0.76 per share) -- -- -- (7,567) -- -- -- (7,567)
Treasury stock transactions, net -- -- -- (370) -- 963,903 (29,787) (30,157)
------------------------------------------------------------------------------------------
Balance, December 31, 2003 ..... 11,219,319 112 55,271 101,521 1,941 1,718,950 (47,395) 111,450
Comprehensive Income:
Net income ................... -- -- -- 14,778 -- -- -- 14,778
Net change in unrealized
gain (loss) on securities
available-for-sale, net of
taxes of ($1,386) .......... -- -- -- -- (2,079) -- -- (2,079)
Reclassification adjustment,
net of tax of ($53) ........ -- -- -- -- (80) -- -- (80)
---------
Comprehensive income ... 12,619
---------
Stock appreciation rights ...... -- -- (82) -- -- -- -- (82)
Cash dividends ($0.85 per share) -- -- -- (8,056) -- -- -- (8,056)
Treasury stock transactions, net -- -- -- (172) -- 51,379 (1,784) (1,956)
------------------------------------------------------------------------------------------
Balance, December 31, 2004 ..... 11,219,319 $ 112 $55,189 $ 108,071 $ (218) 1,770,329 $(49,179) $ 113,975
==========================================================================================
See accompanying notes to consolidated financial statements.
38
MAIN STREET TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 2004, 2003 and 2002
(in thousands)
2004 2003 2002
-----------------------------------
Cash flows from operating activities:
Net income .......................................................... $ 14,778 $ 16,605 $ 17,381
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ..................................... 2,544 2,453 2,647
Amortization of bond premiums, net of accretion ................... 2,386 2,249 1,188
Provision for loan losses ......................................... 1,100 1,470 1,450
Deferred income taxes ............................................. 208 (637) (1,016)
Securities transactions, net ...................................... (133) 12 (211)
Federal Home Loan Bank stock dividend ............................. (250) (296) (187)
Undistributed earnings from non-marketable equity securities ...... (304) (172) --
Gain on sales of mortgage loans, net .............................. (997) (2,536) (1,368)
(Gain) loss on disposal of premises and equipment ................. (236) (2) 3
Proceeds from sales of mortgage loans originated for sale ......... 76,864 209,192 138,898
Mortgage loans originated for sale ................................ (76,240) (204,316) (131,727)
Other, net ........................................................ 503 (3,281) 1,309
-----------------------------------
Net cash provided by operating activities ..................... 20,223 20,741 28,367
-----------------------------------
Cash flows from investing activities:
Net (increase) decrease in loans .................................... (96,108) (3,647) 7,172
Proceeds from maturities and calls of investments in debt securities:
Held-to-maturity .................................................... 20,793 15,217 2,956
Available-for-sale .................................................. 192,975 163,034 116,835
Proceeds from sales of investments in debt and equity securities:
Available-for-sale .................................................. 3,223 11,085 44,732
Purchases of investments in debt and equity securities:
Held-to-maturity .................................................... (49,029) (63,526) (25,158)
Available-for-sale .................................................. (219,215) (222,498) (150,268)
Non-marketable equity securities .................................... (425) (830) (1,970)
Principal paydowns from mortgage-backed securities:
Held-to-maturity .................................................... 42,967 18,923 17,272
Available-for-sale .................................................. 14,660 18,738 16,012
Return of principal on non-marketable equity securities ............. 522 490 106
Proceeds from redemption of non-marketable equity securities ........ 231 -- --
Purchases of premises and equipment ................................. (2,396) (1,749) (1,811)
Proceeds from disposal of premises and equipment .................... 623 25 71
-----------------------------------
Net cash (used in) provided by investing activities ........... (91,179) (64,738) 25,949
-----------------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits ................................. 76,105 29,886 (15,523)
Net (decrease) increase in federal funds purchased,
repurchase agreements, and notes payable .......................... (6,098) 22,347 (4,556)
Advances from Federal Home Loan Bank advances and other borrowings .. -- 2,268 13,000
Payments on Federal Home Loan Bank advances and other borrowings .... (98) (94) (20,089)
Cash dividends paid ................................................. (7,972) (7,142) (5,634)
Issuance of new shares of common stock, net ......................... -- -- 1,222
Treasury stock transactions, net .................................... (1,956) (30,111) (15,369)
-----------------------------------
Net cash provided by (used in) financing activities ........... 59,981 17,154 (46,949)
-----------------------------------
Net (decrease) increase in cash and cash equivalents .......... (10,975) (26,843) 7,367
Cash and cash equivalents at beginning of year ........................ 75,903 102,746 95,379
-----------------------------------
Cash and cash equivalents at end of period ............................ $ 64,928 $ 75,903 $ 102,746
===================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest .......................................................... $ 15,920 $ 17,306 $ 22,855
Income taxes ...................................................... 6,780 8,937 9,061
Real estate acquired through or in lieu of foreclosure .............. 40 60 297
Dividends declared not paid ......................................... 2,079 1,995 1,570
See accompanying notes to consolidated financial statements.
39
MAIN STREET TRUST, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
(a) Nature of Operations
Through Main Street Bank & Trust (the "Bank"), Main Street Trust, Inc. (the
"Company") provides a full range of banking services to individual and
corporate customers located within Champaign, Decatur, Peoria and
Shelbyville, Illinois, and the surrounding communities. In addition, the
Company provides retail payment processing services through FirsTech, Inc.
The subsidiaries are subject to competition from other financial
institutions and nonfinancial institutions providing financial products and
similar payment processing services. Additionally, the Company is subject
to the regulations of certain regulatory agencies and undergo periodic
examinations by those regulatory agencies.
(b) Use of Estimates
The consolidated financial statements of the company have been prepared in
conformity with accounting principles generally accepted in the United
States of America and conform to predominant practices within the banking
industry. The preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions,
including the determination of the allowance for loan losses and the
valuation of real estate acquired in connection with foreclosure or in
satisfaction of loans, that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
(c) Principles of Consolidation
The consolidated financial statements include the accounts of Main Street
Trust, Inc. and its wholly owned subsidiaries, Main Street Bank and Trust,
and FirsTech, Inc., a retail payment processing company. On November 10,
2004, the Company merged The First National Bank of Decatur into
BankIllinois and renamed the bank Main Street Bank & Trust. During 2002,
First Trust Bank of Shelbyville, previously a bank subsidiary, was merged
into BankIllinois. Significant intercompany accounts and transactions have
been eliminated in consolidation.
Property held in fiduciary or agency capacities for its customers is not
included in the accompanying consolidated balance sheets, since such items
are not assets of the Company.
(d) Segment Information
The Company currently operates in two industry segments. The primary
business involves providing banking services to central Illinois. The Bank
offers a full range of financial services to business and individual
customers. These services include demand, savings, time and individual
retirement accounts; commercial, consumer (including automobile loans and
personal lines of credit), agricultural, and real estate lending; safe
deposit and night depository services; farm management; full service trust
departments that offer a wide range of services such as investment
management, acting as trustee, serving as guardian, executor or agent and
miscellaneous consulting; discount brokerage services and purchases of
installment obligations from retailers, primarily without recourse. The
other industry segment involves retail payment processing. FirsTech
provides the following services to electric, water and gas utilities,
telecommunication companies, cable television firms and charitable
organizations: retail lockbox processing of payments delivered by mail on
behalf of the biller; processing of payments delivered by customers to pay
agents such as grocery stores, convenience stores and currency exchanges;
and concentration of payments delivered by the Automated Clearing House
network, money management software such as Quicken and through networks
such as Visa e-Pay and MasterCard RPS.
Company information is provided for informational purposes only, since it
is not considered a separate segment for reporting purposes. Effective
January 1, 2003, certain administrative, audit, compliance, accounting,
finance, property management, human resources, courier, information systems
and other support services previously included in the budgets of the Banks
were moved to the Company. During this process, approximately 80 full time
equivalent employees were moved from the Banks to the Company. The net
expenses of these functions are allocated to the subsidiaries by charging a
monthly management fee.
40
The following is a summary of selected data for the various business
segments as of and for the year ending December 31:
Banking Remittance
Services Services Company Eliminations Total
------------------------------------------------------------------------------------------------------
2004
Total interest income ........... $ 54,383 $ 23 $ 497 $ (98) $ 54,805
Total interest expense .......... 16,876 -- 74 (98) 16,852
Provision for loan losses ....... 1,100 -- -- -- 1,100
Total non-interest income ....... 12,779 7,283 4,697 (4,912) 19,847
Total non-interest expense ...... 27,120 5,012 6,659 (4,912) 33,879
Income before income tax ........ 22,066 2,294 (1,539) -- 22,821
Income tax expense .............. 7,709 963 (629) -- 8,043
Net income ...................... 14,357 1,331 (910) -- 14,778
Total assets .................... 1,209,207 3,936 121,348 (106,373) 1,228,118
Depreciation and amortization ... 1,535 623 386 -- 2,544
2003
Total interest income ........... $ 55,288 $ 46 $ 466 $ (114) $ 55,686
Total interest expense .......... 16,816 -- 21 (114) 16,723
Provision for loan losses ....... 1,470 -- -- -- 1,470
Total non-interest income ....... 13,314 7,294 4,653 (4,967) 20,294
Total non-interest expense ...... 26,486 5,014 5,808 (4,967) 32,341
Income before income tax ........ 23,830 2,326 (710) -- 25,446
Income tax expense .............. 8,185 942 (286) -- 8,841
Net income ...................... 15,645 1,384 (424) -- 16,605
Total assets .................... 1,136,418 3,740 118,241 (104,225) 1,154,174
Depreciation and amortization ... 1,542 429 482 -- 2,453
2002
Total interest income ........... $ 63,207 $ 88 $ 210 $ (142) $ 63,363
Total interest expense .......... 21,843 -- 16 (142) 21,717
Provision for loan losses ....... 1,450 -- -- -- 1,450
Total non-interest income ....... 12,259 7,396 (60) (729) 18,866
Total non-interest expense ...... 27,298 5,051 1,541 (729) 33,161
Income before income tax ........ 24,875 2,433 (1,407) -- 25,901
Income tax expense .............. 8,110 974 (564) -- 8,520
Net income ...................... 16,765 1,459 (843) -- 17,381
Total assets .................... 1,110,691 6,774 137,243 (131,980) 1,122,728
Depreciation and amortization ... 2,105 512 30 -- 2,647
(e) Comprehensive Income
Accounting principles generally require that recognized revenue, expenses,
gains, and losses be included in net income. Although certain changes in
assets and liabilities, such as unrealized gains and losses on
available-for-sale securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income.
(f) Investments in Debt and Equity Securities
Debt securities classified as held-to-maturity are those securities which
the Company has the ability and intent to hold until maturity. These
securities are carried at amortized cost, in which the amortization of
premiums and accretion of discounts, which are recognized as adjustments to
interest income, are recorded using methods which approximate the interest
method. These methods consider the timing and amount of prepayments of
underlying mortgages in estimating future cash flows on individual
mortgage-related securities. Unrealized holding gains and losses for
held-to-maturity securities are excluded from earnings and shareholders'
equity.
Debt and equity securities classified as available-for-sale are those
securities that the Company intends to hold for an indefinite period of
time but not necessarily to maturity. Any decision to sell a security
classified as available-for-sale would be based on various factors,
including significant movements in interest rates, changes in the maturity
mix of the Company's assets and liabilities, liquidity needs, regulatory
capital considerations, and other similar factors. Securities
available-for-sale are carried at fair value. The difference between fair
value and cost, adjusted for amortization of premium and accretion of
discounts, results in an unrealized gain or loss. Unrealized gains or
losses are reported as accumulated other comprehensive income (loss), net
of the related deferred tax effect. Gains or losses from the sale of
securities are determined using the specific identification method.
Premiums and discounts are recognized in interest income using methods,
which approximate the interest method over their amortization periods.
Amortization period is defined as call date if the security was purchased
at a premium or maturity date if purchased at a discount.
41
Declines in the fair value of held-to-maturity and available-for-sale
securities below their cost that are deemed to be other than temporary are
reflected in earnings as realized losses. In estimating
other-than-temporary impairment losses, management considers (1) the length
of time and the extent to which the fair value has been less than cost, (2)
the financial condition and near-term prospects of the issuer, and (3) the
intent and ability of the Company to retain its investment in the issuer
for a period of time sufficient to allow for any anticipated recovery in
fair value.
Non-marketable equity securities include investment in venture capital
funds which are reported on the equity method as well as Federal Reserve
Bank stock and the Bank's required investment in the capital stock of the
Federal Home Loan Bank which are carried at cost which approximates fair
value.
(g) Loans
Loans are stated at the principal amount outstanding, net of the allowance
for loan losses. Interest is credited to income as earned, based upon the
principal amount outstanding.
The accrual of interest on loans is discontinued when, in the opinion of
management, the borrower is unable to meet payments as they become due.
Interest accrued in the current year is reversed against interest income,
and prior years' interest is charged to the allowance for loan losses.
Interest income on impaired loans is recognized to the extent interest
payments are received and the principal is considered fully collectible.
Mortgage loans held for sale are carried at the lower of aggregate cost or
estimated market value. Gains or losses on sales of loans held for sale are
computed using the specific-identification method and are reflected in
income at the time of sale.
Loan origination fees and certain direct origination costs are being
amortized as an adjustment of the yield over the contractual life of the
related loan, adjusted for prepayments, using the interest method.
(h) Mortgage Servicing Rights
The fair market value of servicing rights on mortgage loans that are sold
with servicing retained is capitalized. The capitalized servicing rights
are amortized against income based on the estimated lives of the loans.
Capitalized servicing rights are evaluated for impairment based on the fair
value of the servicing rights and any impairment is reflected in income.
(i) Allowance for Loan Losses
The allowance for loan losses is increased by provisions charged to
operations and is reduced by loan charge-offs less recoveries. Management
utilizes an approach, which provides for general and specific valuation
allowances, that is based on current economic conditions, past losses,
collection experience, risk characteristics of the portfolio, assessment of
collateral values by obtaining independent appraisals for significant
properties, and such other factors which, in management's judgment, deserve
current recognition in estimating loan losses, to determine the appropriate
level of the allowance for loan losses.
The allowance for loan losses related to impaired loans that are identified
for evaluation is based on discounted cash flow using the loan's initial
effective interest rate or the fair value, less selling costs, of the
collateral for collateral dependent loans.
Loans are categorized as "impaired" when, based on current information or
events, it is probable that the Company will be unable to collect all
amounts due, including principal and interest, in accordance with the
contractual terms of the loan agreement. The Company reviews all
non-accrual and substantially delinquent loans, as well as problem loans
identified by management, for impairment as defined above. A specific
reserve amount will be established for impaired loans in which the present
value of the expected cash flows to be generated is less than the amount of
the loan recorded on the Company's books. As an alternative to discounting,
the Company may use the "fair value" of any collateral supporting a
collateral-dependent loan in reviewing the necessity for establishing a
specific loan loss reserve amount. Specific reserves will be established
for accounts having a collateral deficiency estimated to be $50,000 or
more. The Company's general reserve is maintained at an adequate level to
cover accounts having a collateral deficiency of less than $50,000. Loans
evaluated as groups or homogeneous pools of loans will be excluded from
this analysis.
42
The Company utilizes their data processing system to identify loan payments
not made by their contractual due date and calculate the number of days
each loan exceeds the contractual due dates. The accrual of interest on any
loan is discontinued when, in the opinion of management, there is
reasonable doubt as to the collectibility of interest or principal.
Management believes the allowance for loan losses is adequate to absorb
probable credit losses inherent in the loan portfolio. While management
uses available information to recognize loan losses, future additions to
the allowance for loan losses may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part
of their examination process, periodically review the adequacy of the
allowance for loan losses. Such agencies may require the Company to
recognize additions to the allowance for loan losses based on their
judgments of information available to them at the time of their
examination.
(j) Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization applicable to furniture and
equipment and buildings and leasehold improvements is charged to the
related occupancy or equipment expense using straight-line and accelerated
methods over the estimated useful lives of the assets. Estimated lives are
3 to 39 years for buildings and leasehold improvements and 3 to 7 years for
furniture and equipment.
(k) Other Real Estate
Other real estate, included in other assets in the accompanying
consolidated balance sheets, is initially recorded at fair value, if it
will be held and used, or at its fair value less costs to sell if it will
be disposed of. If, subsequent to foreclosure, the fair value is less than
the carrying amount, the carrying value is reduced through a charge to
income. Expenses incurred in maintaining the properties are charged to
operations. The Company had no other real estate owned at December 31, 2004
and December 31, 2003.
(l) Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
(m) Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted
average number of common stock shares outstanding. Diluted earnings per
share is computed by dividing net income by the weighted average number of
common stock and dilutive potential common shares outstanding. Options to
purchase shares of the Company's common stock and stock appreciation rights
are the only dilutive potential common shares. The weighted average number
of dilutive potential common shares is calculated using the treasury stock
method.
Earnings per share has been computed as follows:
2004 2003 2002
-------------------------------------------------------------------------------------------------
Net Income ............................................ $14,778,000 $16,605,000 $17,381,000
Shares:
Weighted average common shares outstanding .......... 9,481,034 10,242,929 10,792,092
Dilutive effect of outstanding options, as determined
by the application of the treasury stock method ... 113,114 116,907 86,731
---------------------------------------
Weighted average common shares outstanding,
as adjusted ....................................... 9,594,148 10,359,836 10,878,823
=======================================
Basic earnings per share .............................. $ 1.56 $ 1.62 $ 1.61
=======================================
Diluted earnings per share ............................ $ 1.54 $ 1.60 $ 1.60
=======================================
43
(n) Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash and due from banks and federal funds sold and
interest bearing deposits. Generally, federal funds are sold for one-day
periods. Cash flows from loans, deposits, and federal funds purchased,
repurchase agreements and notes payable are reported net.
(o) Reclassification
Certain amounts in the 2002 and 2003 consolidated financial statements have
been reclassified to conform with the 2004 presentation. Such
reclassifications had no effect on previously reported net income or
shareholders' equity.
(p) Emerging Accounting Standards
In December 2003, the American Institute of Certified Public Accountants
released Statement of Position 03-3, Accounting for Certain Loans or Debt
Securities Acquired in a Transfer (SOP 03-3). SOP 03-3 addresses accounting
for differences between contractual cash flows and cash flows expected to
be collected from an investor's initial investment in loans or debt
securities acquired in a transfer if those differences are attributable to
credit quality. SOP 03-3 is effective for loans acquired in fiscal years
beginning after December 15, 2004. The adoption of SOP 03-3 is not expected
to have a material impact on the Company's financial statements.
In March 2004, the Financial Accounting Standards Board (FASB) released
Emerging Issues Task Force (EITF) 03-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments (EITF 03-1). The EITF
03-1 provides guidance for determining when an investment is impaired and
whether the impairment is other than temporary as well as guidance for
quantifying the impairment.
On September 30, 2004, the Financial Accounting Standards Board ("FASB")
issued FASB Staff Position ("FSP") Emerging Issues Task Force ("EITF")
Issue 03-1-1 delaying the effective date of paragraphs 10-20 of EITF 03-1,
"The Meaning of Other-Than-Temporary Impairment and Its Applications to
Certain Investments", which provides guidance for determining the meaning
of "other-than-temporarily impaired" and its application to certain debt
and equity securities within the scope of SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", and investments
accounted for under the cost method. The guidance requires that investments
which have declined in value due to credit concerns or solely due to
changes in interest rates must be recorded as other-than-temporarily
impaired unless the Company can assert and demonstrate its intention to
hold the security for a period of time sufficient to allow for a recovery
of fair value up to or beyond the cost of the investment which might mean
maturity. The delay of the effective date of EITF 03-1 will be superceded
concurrent with the final issuance of proposed FSP Issue 03-1-a. Proposed
FSP 03-1-a is intended to provide implementation guidance with respect to
all securities analyzed for impairment under paragraphs 10-20 of EITF 03-1.
Management continues to closely monitor and evaluate how the provisions of
EITF 03-1 and proposed FSP Issue 03-1-a will affect the Company.
In March 2004, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 105, Application of Accounting Principles to Loan
Commitments (SAB 105). SAB 105 provides general guidance that must be
applied when an entity determines the fair value of a loan commitment
accounted for as a derivative. SAB 105 is effective for commitments to
originate mortgage loans to be held for sale that are entered into after
March 31, 2004. The adoption of SAB 105 did not have a material impact on
the Company's financial statements.
In December 2004, the Financial Accounting Standards Board ("FASB")
published FASB Statement No. 123 (revised 2004), "Share-Based Payment"
("FAS 123(R)" or the "Statement"). FAS 123(R) requires that the
compensation cost relating to share-based payment transactions, including
grants of employee stock options, be recognized in the financial
statements. That cost will be measured based on the fair value of the
equity or liability instruments issued. FAS 123(R) permits entities to use
any option-pricing model that meets the fair value objective in the
Statement. Modifications of share-based payments will be treated as
replacement awards with the cost of the incremental value recorded in the
financial statements.
44
The Statement is effective at the beginning of the third quarter of 2005.
As of the effective date, the Company will apply the Statement using a
modified version of prospective application. Under that transition method,
compensation cost is recognized for (1) all awards granted after the
required effective date and to awards modified, cancelled , or repurchased
after that date and (2) the portion of prior awards for which the requisite
service has not yet been rendered, based on the grant-date fair value of
those awards calculated for pro forma disclosures under SFAS 123.
The impact of this Statement on the Company in 2005 and beyond will depend
upon various factors, among them our future compensation strategy. The pro
forma compensation costs presented (in (q) in the table below) and in prior
filings for the Company have been calculated using a Black-Scholes option
pricing model and may not be indicative of amounts which should be expected
in future periods.
(q) Stock Option Plans
The Company has five stock-based compensation plans which are more fully
described in Note 12. As permitted under accounting principles generally
accepted in the United States of America, grants of options under the plans
are accounted for under the recognition and measurement principles of APB
Opinion No 25, Accounting for Stock Issued to Employees, and related
interpretations. Because options granted under the plans had an exercise
price equal to market value of the underlying common stock on the grant
date, no stock-based employee compensation cost is included in determining
net income. The following table illustrates the effect on net income (in
thousands) and earnings per share if the Company had applied the fair value
recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation.
2004 2003 2002
-----------------------------------------------------------------------------------------
Net income on common stock:
As reported .................................. $ 14,778 $ 16,605 $ 17,381
Deduct total stock-based compensation expense
determined under the fair value method for all
awards, net of related tax effects ........... (366) (263) (290)
--------------------------------------
Pro forma .............................. $ 14,412 $ 16,342 $ 17,091
======================================
Basic earnings per share:
As reported .................................. $ 1.56 $ 1.62 $ 1.61
Pro forma .................................... 1.52 1.60 1.58
Diluted earnings per share:
As reported .................................. $ 1.54 $ 1.60 $ 1.60
Pro forma .................................... 1.50 1.58 1.57
The fair value of the stock options granted has been estimated using the
Black-Scholes option-pricing model with the following weighted average
assumptions. The Black-Scholes option-pricing model was developed for use
in estimating the fair value of traded options, which have no vesting
restrictions. In addition, such models require the use of subjective
assumptions, including expected stock price volatility. In management's
opinion, such valuation models may not necessarily provide the best single
measure of option value.
2004 2003 2002
--------------------------------------------------------------------------------
Number of options granted ...... 140,500 135,000 158,000
Risk-free interest rate ........ 3.94% 3.64% 5.20%
Expected life, in years ........ 8.00 8.00 8.00
Expected volatility ............ 15.95% 13.35% 10.34%
Expected dividend yield ........ 2.75% 2.42% 2.80%
2. Cash and Due from Banks
The compensating balances held at correspondent banks were $20.845 million and
$35.630 million at December 31, 2004 and 2003, respectively. The Bank maintains
such compensating balances with correspondent banks to offset charges for
services rendered by those banks. In addition, the Bank was required by the
Federal Reserve Bank to maintain reserves in the form of cash on hand or
balances at the Federal Reserve Bank. The balance of reserves held was $6.341
million and $10.369 million at December 31, 2004 and 2003, respectively.
45
3. Investments in Debt and Equity Securities
The amortized cost and fair values of investments in debt and equity securities
(in thousands) were as follows:
Available-for-Sale
------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------------------------------------------------
December 31, 2004
U.S. Treasury and other
government agencies ......................... $220,718 $ 326 $ 2,050 $218,994
Mortgage-backed securities .................... 27,731 309 327 27,713
Obligations of state and political subdivisions 16,037 698 20 16,715
Other ......................................... 5,457 1,524 823 6,158
-------------------------------------------
$269,943 $ 2,857 $ 3,220 $269,580
===========================================
December 31, 2003
U.S. Treasury and other
government agencies ......................... $217,773 $ 2,917 $ 491 $220,199
Mortgage-backed securities .................... 23,196 518 707 23,007
Obligations of state and political subdivisions 16,319 999 1 17,317
Other ......................................... 5,391 981 981 5,391
-------------------------------------------
$262,679 $ 5,415 $ 2,180 $265,914
===========================================
Held-to-Maturity
-------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------
December 31, 2004
U.S. Treasury and other
government agencies ......................... $40,931 $ -- $ 625 $ 40,306
Mortgage-backed securities .................... 14,992 37 223 14,806
Obligations of state and political subdivisions 25,241 761 15 25,987
-------------------------------------------
$81,164 $ 798 $ 863 $ 81,099
===========================================
December 31, 2003
U.S. Treasury and other
government agencies ......................... $10,704 $ 3 $ 154 $ 10,553
Mortgage-backed securities .................... 50,029 81 1,789 48,321
Obligations of state and political subdivisions 36,323 1,433 2 37,754
-------------------------------------------
$97,056 $ 1,517 $ 1,945 $ 96,628
===========================================
46
Unrealized losses and fair value, aggregated by investment category and length
of time that individual securities have been in a continuous unrealized loss
position, as of December 31, 2004, are summarized as follows:
Continuous Unrealized Continuous Unrealized
Losses Existing for Less Losses Existing Greater
Than 12 Months Than 12 Months Total
------------------------ ----------------------- -----------------------
Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
---------------------------------------------------------------------------
Available-for-Sale:
U.S. Treasury and other
government agencies .......... $153,851 $ 1,591 $ 18,537 $ 459 $172,388 $ 2,050
Mortgage-backed securities ..... 9,016 58 7,862 269 16,878 327
Obligations of state and
political subdivisions ....... 3,575 20 -- -- 3,575 20
-----------------------------------------------------------------------
Subtotal, debt securities $166,442 $ 1,669 $ 26,399 $ 728 $192,841 $ 2,397
Other ............................ 764 74 1,056 749 1,820 823
-----------------------------------------------------------------------
Total temporarily impaired
securities ............... $167,206 $ 1,743 $ 27,455 $ 1,477 $194,661 $ 3,220
=======================================================================
Held-to-Maturity:
U.S. Treasury and other
government agencies .......... $ 37,098 $ 506 $ 2,506 $ 119 $ 39,604 $ 625
Mortgage-backed securities ..... 6,069 71 6,963 152 13,032 223
Obligations of state and
political subdivisions ....... 2,195 15 -- -- 2,195 15
-----------------------------------------------------------------------
Total temporarily impaired
securities ............... $ 45,362 $ 592 $ 9,469 $ 271 $ 54,831 $ 863
=======================================================================
Management evaluates securities for other-than-temporary impairment at least on
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 a period of time sufficient to allow for any
anticipated recovery in fair value.
The $1.477 million continuous unrealized loss greater than 12 months on
available for sale securities was made up of four debt securities and seven
other securities which are common stocks and is believed to be a temporary loss.
Common stocks represented $749,000 of the continuous unrealized loss on
available-for-sale securities, which was a reduction of $232,000 from the loss
on common stock of $981,000 on December 31, 2003. Management believes the market
value of these securities will continue to improve as the economy continues to
recover. The $271,000 continuous unrealized loss greater than 12 months on
held-to-maturity securities was made up of four debt securities and is 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.
47
Unrealized losses and fair value, aggregated by investment category and length
of time that individual securities have been in a continuous unrealized loss
position, as of December 31, 2003, are summarized as follows:
Continuous Unrealized Continuous Unrealized
Losses Existing for Less Losses Existing Greater
Than 12 Months Than 12 Months Total
------------------------ ----------------------- -----------------------
Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
---------------------------------------------------------------------------
Available-for-Sale:
U.S. Treasury and other
government agencies .......... $56,784 $ 491 $ -- $ -- $56,784 $ 491
Mortgage-backed securities ..... 9,854 707 -- -- 9,854 707
Obligations of state and
political subdivisions ....... 1,114 1 -- -- 1,114 1
--------------------------------------------------------------------------
Subtotal, debt securities $67,752 $ 1,199 $ -- $ -- $67,752 $ 1,199
Other ............................ -- -- 1,433 981 1,433 981
--------------------------------------------------------------------------
Total temporarily impaired
securities ............... $67,752 $ 1,199 $ 1,433 $ 981 $69,185 $ 2,180
==========================================================================
Held-to-Maturity:
U.S. Treasury and other
government agencies .......... $ 8,094 $ 154 $ -- $ -- $ 8,094 $ 154
Mortgage-backed securities ..... 38,654 1,789 -- -- 38,654 1,789
Obligations of state and
political subdivisions ....... 346 2 -- -- 346 2
--------------------------------------------------------------------------
Total temporarily impaired
securities ............... $47,094 $ 1,945 $ -- $ -- $47,094 $ 1,945
==========================================================================
The $981,000 continuous unrealized loss greater than 12 months on other
securities was made up of 10 stocks and is believed to be a temporary loss. The
loss on these stocks at December 31, 2002 was $1.331 million compared to
$981,000 at December 31, 2003, an improvement of $350,000.
A summary of non-marketable equity securities (in thousands) at December 31,
2004 and 2003 is as follows:
2004 2003
--------------------
Federal Home Loan Bank Stock, at cost .............. $4,279 $4,028
Federal Reserve Bank Stock, at cost ................ -- 231
Other investments, at fair value ................... 3,703 3,497
--------------------
$7,982 $7,756
====================
Realized gains and (losses) (in thousands) on sales and maturities for the years
ended December 31, 2004, 2003 and 2002 were as follows:
2004 2003 2002
----------------------------------
Gross gains ............................. $ 380 $ 173 $ 1,016
Gross (losses) .......................... (247) (185) (805)
----------------------------------
Net gains (losses) ...................... $ 133 $ (12) $ 211
==================================
Applicable income taxes (benefit) ....... $ 53 $ (5) $ 84
==================================
Investments in debt and equity securities with a carrying value of $280.851
million and $244.099 million were pledged at December 31, 2004 and 2003,
respectively, to secure public deposits, repurchase agreements, and for other
purposes as required or permitted by law.
48
The amortized cost and fair value of investments in debt and marketable equity
securities (in thousands) at December 31, 2004, by amortization date, are shown
below. Amortization date is defined as call date if the security was purchased
at a premium or maturity date if purchased at a discount. Borrowers may have the
right to call or prepay obligations with or without call or prepayment penalties
and certain securities require principal repayments prior to maturity.
Therefore, these securities and equity securities with no stated maturities are
not included in the following maturity summary.
Available-for-Sale Held-to-Maturity
-------------------- --------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------------------------------------------
Due in one year or less .............. $108,390 $108,102 $ 13,784 $ 13,784
Due after one year through five years 123,103 122,026 46,789 47,000
Due after five years through ten years 4,525 4,784 5,254 5,095
Due after ten years .................. 737 797 345 414
------------------------------------------
$236,755 $235,709 $ 66,172 $ 66,293
Mortgage-backed securities ........... 27,731 27,713 14,992 14,806
Marketable equity securities ......... 5,457 6,158 -- --
------------------------------------------
Total ...................... $269,943 $269,580 $ 81,164 $ 81,099
==========================================
4. Loans
A summary of loans (in thousands), by classification, at December 31, 2004 and
2003 is as follows:
2004 2003
-----------------------
Commercial, financial, and agricultural .......... $314,657 $249,795
Real estate ...................................... 372,294 348,997
Installment and consumer ......................... 83,926 77,253
-----------------------
$770,877 $676,045
Less:
Allowance for loan losses ...................... 9,650 9,786
-----------------------
$761,227 $666,259
=======================
The Company makes commercial, financial, and agricultural; real estate; and
installment and consumer loans to customers located in central Illinois and the
surrounding communities. As such, the Company is susceptible to changes in the
economic environment in central Illinois.
During 2004, 2003 and 2002, the Company sold approximately $76.864 million,
$209.192 million and $138.898 million, respectively, of residential mortgage
loans in the secondary market with servicing released on approximately $28.860
million, $50.595 million and $49.040 million, respectively. Capitalized mortgage
servicing rights totaled $992,000 and $949,000 at December 31, 2004 and 2003,
respectively. The fair values of these rights were $1.378 million and $1.120
million at December 31, 2004 and 2003, respectively. An independent evaluation
was performed on the loan portfolio to assess the fair value of the servicing
rights in each year reported.
Mortgage loans serviced for others are not included in the accompanying
consolidated financial statements. The unpaid balances of these loans consisted
of the following (in thousands) at December 31, 2004, 2003 and 2002:
2004 2003 2002
--------------------------------
Fannie Mae ................................. $196,174 $191,505 $137,888
Freddie Mac ................................ 9,564 10,287 6,250
Illinois Housing Development Authority ..... 939 1,219 1,655
49
In the normal course of business, loans are made to directors, executive
officers, and principal shareholders of the Company and to parties which the
Company or its directors, executive officers, and shareholders have the ability
to significantly influence its management or operating policies (related
parties). The terms of these loans, including interest rates and collateral, are
similar to those prevailing for comparable transactions with other customers and
do not involve more than a normal risk of collectibility. Activity associated
with loans (in thousands) made to related parties during 2004 was as follows:
2004
---------
Balance, January 1 ..................................... $ 38,593
New loans .............................................. 42,270
Repayments ............................................. (40,455)
--------
Balance, December 31 ................................... $ 40,408
========
At December 31, 2004, one to four family real estate mortgage loans of
approximately $84.661 million were pledged to secure advances from the Federal
Home Loan Bank.
Activity in the allowance for loan losses (in thousands) for 2004, 2003 and 2002
was as follows:
2004 2003 2002
------------------------------
Balance, beginning of year .................... $ 9,786 $ 9,259 $ 9,259
Provision charged to expense .................. 1,100 1,470 1,450
Loans charged off ............................. (1,692) (1,640) (1,927)
Recoveries on loans previously charged off .... 456 697 477
------------------------------
Balance, end of year .......................... $ 9,650 $ 9,786 $ 9,259
==============================
The following table presents summary data on nonaccrual and other impaired loans
(in thousands) at December 31, 2004, 2003 and 2002:
2004 2003 2002
------------------------
Impaired loans on nonaccrual ........................ $1,126 $ 130 $ 764
Impaired loans continuing to accrue interest ........ 1,005 288 --
------------------------
Total impaired loans ................................ $2,131 $ 418 $ 764
========================
Other non-accrual loans not classified
as impaired ...................................... $ 563 $ 269 $ 628
========================
Loans contractually past due 90 days or
more, still accruing interest and not classified
as impaired ...................................... $ 547 $ 590 $ 829
========================
Allowance for loan losses on impaired loans ......... $ 491 $ 63 $ 115
========================
Impaired loans for which there is no related
allowance for loan losses ........................ $ 863 $ -- $ --
========================
Average recorded investment in impaired
loans ............................................ $2,336 $ 847 $ 515
========================
Interest income recognized from impaired
loans ............................................ $ 68 $ 13 $ --
========================
Cash basis interest income recognized from
impaired loans ................................... $ 16 $ 10 $ 6
========================
5. Premises and Equipment
A summary of premises and equipment (in thousands) at December 31, 2004 and 2003
is as follows:
2004 2003
-------------------
Land ................................................... $ 4,488 $ 4,818
Furniture and equipment ................................ 14,715 14,951
Buildings and leasehold improvements ................... 24,431 23,947
-------------------
$43,634 $43,716
Less: accumulated depreciation and amortization ........ 26,547 26,094
-------------------
$17,087 $17,622
===================
50
The Company leases various operating facilities and equipment under
noncancellable operating lease arrangements. These leases expire at various
dates through July 2009 and have renewal options to extend the lease terms for
various dates. The rental expense for these operating leases was $222,000,
$218,000 and $240,000 in 2004, 2003 and 2002, respectively.
Minimum annual rental payments required under the operating leases (in
thousands), which have initial or remaining terms in excess of one year at
December 31, 2004 are as follows:
2005 $ 238
2006 212
2007 148
2008 5
2009 2
-----------
$ 605
===========
6. Deposits
The aggregate amount of time certificate of deposits in denominations of
$100,000 or more was $107.125 million and $113.917 million at December 31, 2004
and 2003, respectively. As of December 31, 2004, the scheduled maturities of
time deposits (in thousands) were as follows:
2005 $ 240,676
2006 49,792
2007 32,938
2008 15,719
2009 10,379
Thereafter 5
---------
$ 349,509
=========
7. Federal Funds Purchased, Repurchase Agreements, and Notes Payable
A summary of short-term borrowings (in thousands) at December 31, 2004 and 2003
is as follows:
2004 2003
---------------------
Federal funds purchased .............................. $ 3,300 $ 1,550
U.S. Treasury demand notes ........................... -- 1,000
Securities sold under agreements to repurchase ....... 93,600 100,448
---------------------
$ 96,900 $102,998
=====================
Information relating to short-term borrowings (dollars in thousands) is as
follows:
2004 2003 2002
-------------------------------------
Federal funds purchased:
Average daily balance ....................... $ 3,515 $ 5,004 $ 4,599
Maximum balance at month-end ................ $ 5,575 $ 7,550 $ 21,300
Weighted average interest rate at year-end .. 1.75% 0.56% 0.50%
Weighted average interest rate for the year . 0.94% 0.81% 1.70%
Securities sold under agreements to repurchase:
Average daily balance ....................... $ 93,246 $ 89,261 $ 62,298
Maximum balance at month-end ................ $112,052 $ 100,448 $ 75,951
Weighted average interest rate at year-end .. 1.65% 1.06% 1.36%
Weighted average interest rate for the year . 1.32% 1.17% 1.71%
U.S. Treasury demand notes:
Average daily balance ....................... $ 728 $ 764 $ 1,459
Maximum balance at month-end ................ $ 1,000 $ 1,000 $ 4,437
Weighted average interest rate at year-end .. -- 0.72% 1.14%
Weighted average interest rate for the year . 0.90% 0.91% 1.58%
The securities underlying the agreements to repurchase are under the control of
the Bank.
51
8. Federal Home Loan Bank Advances and Other Borrowings
A summary of Federal Home Loan Bank (FHLB) advances and other borrowings
(dollars in thousands) at December 31, 2004 and 2003 is as follows:
December 31
------------------------------------------------------
2004 2003
------------------------------------------ -------
Weighted
FHLB Other Average
Advances Borrowings Total Rate Total
------------------------------------------------------
Maturing in year ending:
2004 .................... $ -- $ -- $ -- -- $ 23
2005 .................... -- 93 93 4.07% 93
2006 .................... 5,000 2,221 7,221 5.19% 7,221
2007 .................... 2,522 23 2,545 6.81% 2,620
2008 .................... 20,000 23 20,023 5.23% 20,023
------------------------------------------------------
$27,522 $ 2,360 $29,882 5.35% $29,980
======================================================
The terms of a security agreement with the FHLB require the Bank to pledge as
collateral for advances both qualifying first mortgage loans in an amount equal
to at least 167% of these advances and all stock of the FHLB. Advances are
subject to restrictions or penalties in the event of prepayment. The Bank had a
total remaining borrowing capacity with the FHLB of approximately $55.278
million at December 31, 2004 at a rate equal to the FHLB current advance rates.
The other borrowings include $2.269 million to finance an investment in a
low-income housing development and $93,000 for the purchase of land. Principal
of $70,000 is due August 22, 2005 with the remaining balance due August 22, 2006
on the low-income housing development investment. Interest is based on the
one-month LIBOR rate plus 1.70%. The loan rate at December 31, 2004 was 4.10%.
The land was originally purchased in 1999 at a cost of $266,000, with principal
of $23,000 and annual interest due March 8th of each year until the balance has
been paid in full. Interest is based on the prime rate at March 8th of each
year. The rate at December 31, 2004 was 4.00%.
9. Line of Credit
The Company has an unsecured line of credit of $10.000 million from a third
party lender. As of December 31, 2004, the entire line was available.
10. Income Taxes
Federal income tax expense (in thousands) for 2004, 2003 and 2002 is summarized
as follows:
2004 2003 2002
-----------------------------------------
Federal ...................... $ 7,029 $ 8,480 $ 8,707
State ........................ 806 998 829
----------------------------------------
Current ...................... 7,835 9,478 9,536
Deferred ..................... 208 (637) (1,016)
----------------------------------------
Total ................ $ 8,043 $ 8,841 $ 8,520
========================================
Actual income tax expense (in thousands) for 2004, 2003 and 2002 differ from the
"expected" income taxes (computed by applying the maximum U.S. federal corporate
income tax rate of 35% to earnings before income taxes) as follows:
2004 2003 2002
---------------------------------
Computed "expected" income taxes ........ $ 7,987 $ 8,906 $ 9,066
Tax-exempt interest income, net of
disallowed interest expense ........... (607) (744) (764)
State tax, net of federal benefit ....... 524 649 539
Other, net .............................. 139 30 (321)
---------------------------------
$ 8,043 $ 8,841 $ 8,520
=================================
52
The tax effects of temporary differences (in thousands) that give rise to
significant portions of the deferred tax assets and deferred tax liabilities,
included in other assets, at December 31, 2004 and 2003 are as follows:
2004 2003
-------------------
Deferred tax assets:
Unrealized holding loss on available-for-sale securities $ 145 $ --
Allowance for loan losses .............................. 3,835 3,889
Deferred compensation .................................. 1,622 1,564
Stock appreciation rights .............................. -- 36
Other employee benefits ................................ 310 279
Phantom stock .......................................... 253 282
Other .................................................. 271 111
------------------
Total deferred tax assets ........................ $ 6,436 $ 6,161
------------------
Deferred tax liabilities:
Unrealized holding gain on available-for-sale securities $ -- $(1,294)
Premises and equipment ................................. (373) (658)
Mortgage servicing rights .............................. (348) (201)
Deferred loan fees ..................................... (369) (197)
Discount accretion ..................................... (56) (61)
FHLB Stock Dividend .................................... (459) (372)
Prepaid Expenses ....................................... (222) --
------------------
Total deferred tax liabilities ................... $(1,827) $(2,783)
------------------
Net deferred tax assets .......................... $ 4,609 $ 3,378
==================
11. Retirement Plans
The Company has established a profit sharing plan and a 401(k) plan for
substantially all employees who meet the eligibility requirements. During 2004,
the 401(k) plan allowed for participant contributions up to the maximum amount
allowed by IRS regulations, of which, the first 6% of gross salary was available
for the Company's 50% match. Prior to 2003, the 401(k) plan allowed for
participant contributions of up to 15% of gross salary, the first 6% of which
was available for the Company's 50% match. The profit sharing plan is
non-contributory. All contributions to the profit sharing plan are at the
discretion of the Company. Contributions by the Company totaled $927,000,
$887,000 and $926,000 for 2004, 2003 and 2002, respectively.
Certain key officers and directors participate in various deferred compensation
or supplemental retirement agreements with the Company. The Company accrues the
liability for these agreements based on the present value of the amount the
employee or director is currently eligible to receive. The Company recorded
expenses of $277,000, $288,000 and $281,000 in 2004, 2003 and 2002,
respectively, related to these agreements. At December 31, 2004 and 2003, the
Company had a recorded liability in the amount of approximately $3.769 million
and $3.915 million, respectively for these plans.
Additionally, in connection with the merger of BankIllinois Financial
Corporation and First Decatur Bancshares, Inc., the Company assumed the
outstanding liability for a deferred compensation plan for nonemployee directors
of the Company which allowed participating directors to defer directors' fees in
a fixed income fund or, alternatively, in the form of "phantom stock units." For
directors that elected to receive phantom stock, a deferred compensation
account, included in other liabilities on the consolidated balance sheet, was
credited with phantom stock units. After the merger, no additional contributions
were allowed to these plans, however, phantom stock units continue to be
increased by any dividends or stock splits declared by the Company. At December
31, 2004 and 2003, $305,000 and $312,000 had been deferred for the phantom stock
plan, which represented 21,977 and 23,205 phantom stock units. At December 31,
2004 and 2003, the Company had a recorded liability in the amount of $651,000
and $730,000, respectively for these plans.
The Company has purchased life insurance policies, which are reported as other
assets, to cover the aforementioned liabilities with recorded values in 2004 and
2003 of approximately $5.852 million and $5.499 million, respectively.
53
12. Stock Options and Related Plans
In 2000, after the merger of BankIllinois Financial Corporation and First
Decatur Bancshares, Inc. to form the Company, the Company established a stock
incentive plan, which provides for the granting of options of the Company's
common stock to certain directors, officers and employees. This plan provides
for the granting of both qualified and non-qualified options. Existing director
options granted prior to 2003 are fully vested and exercisable on the date
granted while director options granted in or after 2003 vest, and thus become
exercisable, ratably over a one-year period from the date granted. Existing
officer and employee options vest, and thus become exercisable, ratably over a
three-year period from the date granted. Under the 2000 incentive plan, the
Company has outstanding options of 661,465 shares and 1,450,282 shares remain
eligible for grant. This is the Company's only existing stock incentive plan
under which new grants may be made.
Additionally, in connection with the merger, the Company assumed all of the
outstanding options under First Decatur Bancshares, Inc.'s and BankIllinois
Financial Corporation's stock option and incentive plans. There were four plans
in place at the time of the merger. All of the options granted under these prior
plans fully vested at the time of the merger and no additional shares were
available for new grants after the merger. One of the plans included the
granting of options in tandem with stock appreciation rights ("SAR's"). As of
December 31, 2004, there were no options or SAR's outstanding under these four
assumed plans.
The following is a summary of the changes in options outstanding under the stock
incentive and stock option plans:
2004 2003 2002
-------------------------------------------------------------------------------------
Grant Grant Grant
Price Price Price
Shares Range Shares Range Shares Range
-------------------------------------------------------------------------------------------------------------------------
Options outstanding,
beginning of year ............ 581,780 $ 6.92 - $24.85 589,250 $ 6.92 - $19.76 868,998 $ 5.36 - $19.76
Granted ........................ 140,500 $30.60 - $30.60 135,000 $24.80 - $24.85 158,000 $18.60 - $18.60
Exercised ...................... (58,921) $ 6.92 - $24.80 (142,470) $ 6.92 - $24.80 (428,553) $ 5.36 - $19.76
Options forfeited .............. (1,894) $18.60 - $30.60 -- -- (9,195) $17.50 - $18.60
-------------------------------------------------------------------------------------
Options outstanding, end of year 661,465 $17.50 - $30.60 581,780 $ 6.92 - $24.85 589,250 $ 6.92 - $19.76
=====================================================================================
Options exercisable, end of year 547,769 $17.50 - $30.60 467,769 $ 6.92 - $24.85 493,893 $ 6.92 - $19.76
=====================================================================================
Weighted average fair value
of options granted ........... $ 5.39 $ 3.96 $ 3.36
=====================================================================================
Options Outstanding Options Exercisable
------------------------------------------------------------------- ----------------------------
Weighted
Outstanding Average Weighted Exercisable Weighted
Range as of Remaining Average as of Average
of December 31, Contractual Exercise December 31, Exercise
Exercise price 2004 Life Price 2004 Price
------------------------------------------------------------------- ----------------------------
$17.50 - $17.50 137,816 6.2 $ 17.50 137,816 $ 17.50
$18.37 - $18.60 251,304 6.4 18.50 245,789 18.50
$24.80 - $24.85 132,845 8.2 24.80 96,911 24.80
$30.60 - $30.60 139,500 9.1 30.60 67,253 30.60
---------------------------------------------------------------------------
661,465 7.3 $ 22.11 547,769 $ 20.85
===========================================================================
13. Dividend Restrictions
Federal and state banking regulations place certain restrictions on dividends
paid and loans or advances made by the Bank to the Company. Without prior
approval, the Bank is restricted by Illinois law and regulations of the Illinois
Department of Financial and Professional Regulation and the Federal Deposit
Insurance Corporation as to the maximum amount of dividends it can pay to its
parent to the balance of the retained earnings account, as adjusted (as
defined). At December 31, 2004, the Bank had available retained earnings of
approximately $58.838 million for the payment of dividends without obtaining
prior regulatory approval. In addition, dividends paid by the Bank to the
Company would be prohibited if the effect thereof would cause the Bank's capital
to be reduced below applicable minimum capital requirements.
54
14. Condensed Financial Information of Parent Company
Following are the condensed balance sheets as of December 31, 2004 and 2003 and
the related condensed statements of income and cash flows for the years ended
December 31, 2004, 2003 and 2002 for Main Street Trust, Inc.:
Condensed Balance Sheets
------------------------
(in thousands)
2004 2003
--------------------------------------------------------------------------------
Assets:
Cash ........................................... $ 9,208 $ 10,841
Investment in Bank ............................. 91,182 88,370
Investment in FirsTech ......................... 3,739 3,408
Investment in other securities ................. 9,571 8,655
Other assets ................................... 7,648 6,967
-----------------------
$121,348 $118,241
=======================
Liabilities and shareholders' equity:
Dividend payable ............................... $ 2,079 $ 1,995
Other borrowings ............................... 2,268 2,268
Other liabilities .............................. 3,026 2,528
Shareholders' equity ........................... 113,975 111,450
-----------------------
$121,348 $118,241
=======================
55
Condensed Statements of Income
------------------------------
(in thousands)
2004 2003 2002
--------------------------------------------------------------------------------------
Revenue:
Dividends received from subsidiaries ............ $ 10,000 $ 47,400 $ 20,000
Interest income on deposits ..................... 102 77 54
Income on securities ............................ 395 389 152
Securities transactions, net .................... (1) (106) (193)
Other ........................................... 4,698 4,759 136
--------------------------------
Total revenue ............................. 15,194 52,519 20,149
--------------------------------
Expenses:
Salary and benefits ............................. 4,433 4,066 --
Other ........................................... 2,300 1,763 1,556
--------------------------------
Total expenses ............................ 6,733 5,829 1,556
--------------------------------
Income before applicable income tax benefit
and equity in undistributed income
of subsidiaries ........................... 8,461 46,690 18,593
Applicable income tax benefit ..................... (629) (286) (564)
Equity in undistributed income of subsidiaries .... 5,688 (30,371) (1,776)
--------------------------------
Net income ................................ $ 14,778 $ 16,605 $ 17,381
================================
56
Condensed Statements of Cash Flows
----------------------------------
(in thousands)
2004 2003 2002
-------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income ..................................... $ 14,778 $ 16,605 $ 17,381
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed income of subsidiaries (5,688) 30,371 1,776
Depreciation ................................. 386 482 30
Other, net ................................... (509) (2,043) (812)
--------------------------------
Net cash provided by operating activities: 8,967 45,415 18,375
--------------------------------
Cash flows from investing activities:
Equity securities transactions, net ............ (273) (462) (1,687)
Purchases of premises and equipment ............ (316) (1,348) --
--------------------------------
Net cash used in investing activities .... (589) (1,810) (1,687)
--------------------------------
Cash flows from financing activities:
Stock transactions, net ........................ (1,956) (30,111) (15,369)
Proceeds from other borrowings, net ............ -- 2,268 --
Cash dividends paid ............................ (7,972) (7,142) (5,634)
Issuance of new shares of common stock ......... -- -- 1,222
Other, net ..................................... (83) (66) (31)
--------------------------------
Net cash used in financing activities .... (10,011) (35,051) (19,812)
--------------------------------
Cash at beginning of year ........................ 10,841 2,287 5,411
--------------------------------
Cash at end of year .............................. $ 9,208 $ 10,841 $ 2,287
================================
57
15. Quarterly Results of Operations (Unaudited) (in thousands, except per share
data)
Year Ended December 31, 2004
Three Months Ended
--------------------------------------------------
December 31 September 30 June 30 March 31
-------------------------------------------------------------------------------------------
Interest income ........................ $14,498 $13,663 $13,263 $13,381
Interest expense ....................... 4,568 4,384 4,018 3,882
-----------------------------------------------
Net interest income ............ 9,930 9,279 9,245 9,499
Provision for losses on loans .......... 110 330 330 330
-----------------------------------------------
Net interest income after
provision for losses
on loans ....................... 9,820 8,949 8,915 9,169
Non-interest income .................... 4,570 4,958 5,172 5,147
Non-interest expense ................... 8,922 8,442 8,318 8,197
-----------------------------------------------
Income before income taxes ..... 5,468 5,465 5,769 6,119
Income taxes ........................... 1,906 1,910 2,051 2,176
-----------------------------------------------
Net income ..................... $ 3,562 $ 3,555 $ 3,718 $ 3,943
===============================================
Basic earnings per share ............... $ 0.38 $ 0.38 $ 0.39 $ 0.41
===============================================
Diluted earnings per share ............. $ 0.37 $ 0.37 $ 0.39 $ 0.41
===============================================
Year Ended December 31, 2003
Three Months Ended
-------------------------------------------------
December 31 September 30 June 30 March 31
------------------------------------------------------------------------------------------
Interest income ........................ $13,406 $13,686 $14,028 $14,566
Interest expense ....................... 3,913 4,008 4,282 4,520
----------------------------------------------
Net interest income ............ 9,493 9,678 9,746 10,046
Provision for losses on loans .......... 480 330 330 330
----------------------------------------------
Net interest income after
provision for losses
on loans ....................... 9,013 9,348 9,416 9,716
Non-interest income .................... 5,104 5,420 4,934 4,836
Non-interest expense ................... 7,906 8,250 8,121 8,064
----------------------------------------------
Income before income taxes ..... 6,211 6,518 6,229 6,488
Income taxes ........................... 2,301 2,253 2,097 2,190
----------------------------------------------
Net income ..................... $ 3,910 $ 4,265 $ 4,132 $ 4,298
==============================================
Basic earnings per share ............... $ 0.41 $ 0.41 $ 0.39 $ 0.41
==============================================
Diluted earnings per share ............. $ 0.40 $ 0.40 $ 0.39 $ 0.41
==============================================
16. Disclosures About Commitments and Financial Instruments
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of amounts recognized in the
consolidated balance sheets. The contractual amounts of those instruments
reflect the extent of involvement the Company has in particular classes of
financial instruments.
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.
58
The following table summarizes these financial instruments and commitments (in
thousands) at December 31, 2004 and 2003:
2004 2003
--------------------------------------------------------------------------------
Financial instruments whose contract amounts
represent credit risk:
Commitments ........................................ $239,074 $237,615
Standby letters of credit .......................... 33,897 20,192
The majority of commitments are agreements to extend credit to a customer as
long as there is no violation of any condition established in the contract.
Commitments, principally variable interest rates, generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. For commitments to extend credit, the Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based
on management's credit evaluation. Collateral held varies, but may include
accounts receivable; inventory; property, plant and equipment; and
income-producing commercial properties. Also included in commitments is $3.015
million to purchase other equity securities.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements and,
generally, have terms of one year or less. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Bank may hold collateral, which include accounts
receivables, inventory, property and equipment, and income producing properties,
supporting those commitments, if deemed necessary. In the event the customer
does not perform in accordance with the terms of the agreement with the third
party, the Bank would be required to fund the commitment. The maximum potential
amount of future payments the Bank could be required to make is represented by
the contractual amount shown in the summary above. If the commitment is funded,
the Bank would be entitled to seek recovery from the customer. At December 31,
2004 and 2003, no amounts have been recorded as liabilities for the Bank's
potential obligations under these guarantees.
Following is a summary of the carrying amounts and fair values of the Company's
financial instruments at December 31, 2004 and 2003:
2004 2003
------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------------------------------------------------------------------------------
Assets:
Cash and cash equivalents ..................... $ 64,928 $ 64,928 $ 75,903 $ 75,903
Investments in debt and equity securities ..... 358,726 358,661 370,726 370,298
Mortgage loans held for sale .................. 1,005 1,005 632 632
Loans ......................................... 761,227 761,763 666,259 676,584
Accrued interest receivable ................... 6,570 6,570 6,430 6,430
Liabilities:
Deposits ...................................... $974,577 $963,413 $898,472 $902,653
Federal funds purchased, repurchase agreements,
and notes payable ......................... 96,900 96,855 102,998 103,028
FHLB advances and other borrowings ............ 29,882 30,650 29,980 31,133
Accrued interest payable ...................... 2,601 2,601 1,669 1,669
Management's fair value estimates, methods, and assumptions are set forth below
for the Company's financial instruments.
Cash and Cash Equivalents
The carrying value of cash and cash equivalents approximates fair value due to
the relatively short period of time between the origination of the instrument
and its expected realization.
Investments in Debt and Equity Securities
The fair value of investments in debt and equity securities is estimated based
on bid prices received from securities dealers.
Mortgage Loans Held For Sale
Fair values of mortgage loans held for sale are based on commitments on hand
from investors or prevailing market prices.
59
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, commercial
real estate, residential mortgage, and consumer. Each loan category is further
segmented into fixed and adjustable rate interest terms and by performing and
nonperforming categories. The fair value of performing loans is calculated by
discounting scheduled cash flows through the estimated maturity using estimated
market discount rates equal to rates at which loans, similar in type, would be
originated at December 31, 2004 and 2003. Estimated maturities are based upon
the average remaining contractual lives for each loan classification. Fair value
for nonperforming loans is based on the use of discounted cash flow techniques.
Accrued Interest Receivable
The carrying value of accrued interest receivable approximates fair value due to
the relatively short period of time between the origination of the instrument
and its expected realization.
Deposit Liabilities
The fair value of deposits with no stated maturity, such as non-interest bearing
and interest bearing demand deposits and savings deposits is the amount payable
on demand. The fair value of time deposits is based on the discounted value of
contractual cash flows. The discount rate is estimated using rates currently
offered for deposits of similar remaining maturities. The fair value estimates
do not include the benefit that results from the low-cost funding provided by
the deposit liabilities compared to the cost of borrowing funds in the market
nor the benefit derived from the customer relationship inherent in existing
deposits.
Federal Funds Purchased, Repurchase Agreements, and Notes Payable
The carrying values of federal funds purchased, daily repurchase agreements and
notes payable, approximate fair value due to the relatively short period of time
between the origination of the instruments and their expected realization. The
fair value of term repurchase agreements is based on the discounted value of
contractual cash flows. The discount rate is estimated using rates currently
offered for comparable instruments of similar remaining maturities.
Federal Home Loan Bank Advances and Other Borrowings
The fair value of FHLB advances is based on the discounted value of contractual
cash flows. The discount rate is estimated using rates on current FHLB advances
with similar remaining maturities.
Accrued Interest Payable
The carrying value of accrued interest payable approximates fair value due to
the relatively short period of time between the origination of the instrument
and its expected realization.
Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments to extend credit is generally estimated using the
fees currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates. The
fair value of letters of credit is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise settle the
obligations with the counterparties. The estimated fair value of commitments to
extend credit and standby letters of credit approximates the balances of such
commitments.
17. Litigation
The Company and its subsidiaries are involved in various legal proceedings,
claims and litigation arising out of the ordinary course of business.
It is the opinion of management that the disposition or ultimate resolution of
any other claims and lawsuits arising out of the ordinary course of business
will not have a material adverse effect on the consolidated financial position
of the Company.
60
18. Regulatory Capital
The Company and its subsidiary bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's and its subsidiary bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, banks must meet specific capital guidelines that
involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Company's and its subsidiary bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and its subsidiary bank to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2004, that the Company and its subsidiary bank exceeded all capital adequacy
requirements to which they are subject.
As of December 31, 2004, the most recent notifications from primary regulatory
agencies categorized the Company's subsidiary bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, banks must maintain minimum total capital to risk-weighted assets,
Tier I capital to risk-weighted assets, and Tier I capital to average assets
ratios as set forth in the table. There are no conditions or events since that
notification that management believes have changed any of the Company's
subsidiary bank's categories.
The Company's and the Bank's actual capital amounts and ratios as of December
31, 2004 and 2003 are presented in the following tables:
To be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes: Action Provisions:
------------------ -------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------------------------------------------------------
As of December 31, 2004:
Total capital
(to risk-weighted assets)
Consolidated ..................... $123,656 13.3% $ 74,513 8.0% N/A
Main Street Bank & Trust ......... $101,381 11.1% $ 73,008 8.0% $ 91,260 10.0%
Tier I capital
(to risk-weighted assets)
Consolidated ..................... $113,691 12.2% $ 37,257 4.0% N/A
Main Street Bank & Trust ......... $ 91,607 10.0% $ 36,504 4.0% $ 54,756 6.0%
Tier I capital
(to average assets)
Consolidated ..................... $113,691 9.2% $ 49,595 4.0% N/A
Main Street Bank & Trust ......... $ 91,607 7.5% $ 48,865 4.0% $ 61,801 5.0%
As of December 31, 2003:
Total capital
(to risk-weighted assets)
Consolidated ..................... $118,821 14.5% $ 65,654 8.0% N/A
BankIllinois ..................... $ 60,520 11.9% $ 40,801 8.0% $ 51,001 10.0%
The First National Bank of Decatur $ 35,333 12.1% $ 23,430 8.0% $ 29,288 10.0%
Tier I capital
(to risk-weighted assets)
Consolidated ..................... $109,035 13.3% $ 32,827 4.0% N/A
BankIllinois ..................... $ 54,460 10.7% $ 20,401 4.0% $ 30,601 6.0%
The First National Bank of Decatur $ 31,670 10.8% $ 11,715 4.0% $ 17,573 6.0%
Tier I capital
(to average assets)
Consolidated ..................... $109,035 9.6% $ 45,336 4.0% N/A
BankIllinois ..................... $ 54,460 7.9% $ 27,638 4.0% $ 34,547 5.0%
The First National Bank of Decatur $ 31,670 7.4% $ 17,215 4.0% $ 21,519 5.0%
19. Bank Acquisition
On November 8, 2004, the Company announced its intent to acquire Citizens First
Financial, parent company of Citizens Savings Bank in Bloomington, Illinois for
a total cost of approximately $61.6 million of which 50% will be in the form of
cash and 50% will be in the form of common stock of the Company. As of September
30, 2004, Citizens First Financial had consolidated assets of $327.103 million,
consolidated total deposits of $231.416 million and consolidated stockholders'
equity of $34.213 million. The acquisition is expected to close in the second
quarter of 2005, pending approval from Citizen's shareholders and all applicable
regulatory agencies.
61
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure
None.
Item 9a. Controls and Procedures
A. Disclosure Controls
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
December 31, 2004. Based on that evaluation, the Company's management, including
the Chief Executive Officer and Chief Financial Officer, concluded that the
Company's disclosure controls and procedures were effective. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls.
B. Management's Report on Internal Control Over Financial Reporting
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined in Rule 13a -
15(f) under the Securities Exchange Act of 1934. The Company's internal control
over financial reporting is a process designed under the supervision of the
Company's principal executive and principal financial officers to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of the Company's financial statements for external reporting
purposes in accordance with U.S. generally accepted accounting principles.
As of December 31, 2004, management assessed the effectiveness of the Company's
internal control over financial reporting based on the framework established in
"Internal Control - Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on this evaluation,
management has determined that the Company's internal control over financial
reporting was effective as of December 31, 2004.
McGladrey & Pullen, LLP, the independent registered public accounting firm that
audited the consolidated financial statements of the Company included in this
Annual Report on Form 10-K, has issued an attestation report on management's
assessment of the effectiveness of the Company's internal control over financial
reporting as of December 31, 2004. The report, which expresses unqualified
opinions on management's assessment and on the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004, is included
in this Form 10-K.
62
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Main Street Trust, Inc.
Champaign, Illinois
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that Main
Street Trust, Inc. maintained effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Main Street Trust, Inc.'s
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A Company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America. A
Company's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States of
America, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company's assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Main Street Trust, Inc. maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also in our opinion, Main
Street Trust, Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2004, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Main Street Trust, Inc. and subsidiaries as of December 31, 2004 and 2003 and
the related consolidated statements of income, changes in shareholders' equity,
and cash flows for each of the three years in the period ended December 31, 2004
and our report dated February 11, 2005, expressed an unqualified opinion.
/s/ McGladrey & Pullen, LLP
Champaign, Illinois
February 11, 2005
63
Item 9b. Other Information
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information in the Company's 2005 Proxy Statement under the caption
"Election of Directors" and under the caption "Security Ownership of Certain
Beneficial Owners and Management" is incorporated by reference. The information
regarding executive officers not provided in the 2005 Proxy Statement is noted
below.
Executive Officers
The term of office for the executive officers of the Company is from the date of
election until the next annual organizational meeting of the Board of Directors.
In addition to the information provided in the 2005 Proxy Statement, the names
and ages of the executive officers of the Company as of December 31, 2004, as
well as the offices of the Company and the Subsidiaries held by these officers
on that date, and principal occupations for the past five years are set forth
below.
Name Position with Main Street, its subsidiaries
(Age) and occupation for the last five years
-----------------------------------------------------------------------------------------
Paul C. Donohue Executive Vice President of Sales & Marketing for Main
(Age 41) Street and Main Street Bank & Trust; General Manager,
WSMH-TV, Flint, MI (2003-2004); Station Manager,
WICD-TV, Champaign, IL (2001-2003); General Manager, WETM-TV,
Elmira, NY (2000-2001)
Donna R. Greene Executive Vice President of Main Street and President
(Age 51) of Main Street Bank & Trust Wealth Management; Senior Vice
President and Certified Financial Planner with First Busey
Securities, Inc. (1998-2004)
Leanne C. Heacock Executive Vice President, Management Information Systems,
(Age 39) Main Street and Main Street Bank & Trust and Director of
FirsTech; Executive Vice President, Management Information
Systems, BankIllinois and The First National Bank of Decatur
(2001-2002); Executive Vice President, Management Information
Systems, BankIllinois (1999-2001)
Robert F. Plecki, Jr. Executive Vice President of Main Street and
(Age 44) President of Main Street Bank & Trust, Champaign Region;
President and Director of BankIllinois (2001-2004); Executive
Vice President, Retail Banking, BankIllinois (1998-2001)
Christopher M. Shroyer Executive Vice President of Main Street and
(Age 39) President of Main Street Bank & Trust, Decatur Region;
President, Chief Executive Officer and Director of The First
National Bank of Decatur (2001-2004); Executive Vice President,
Lending, The First National Bank of Decatur (2000-2001); Senior
Vice President, Lending, The First National Bank of Decatur
(1999-2000)
David B. White Executive Vice President and Chief Financial
(Age 53) Officer of Main Street and Main Street Bank & Trust and Director
of FirsTech; Executive Vice President and Chief Financial Officer
of BankIllinois Financial and BankIllinois (1993-2000)
Phillip C. Wise Executive Vice President of Main Street and Main Street
(Age 66) Bank & Trust and Chairman of FirsTech; Director and Executive
Vice President of Main Street and Chairman of the
Board of The First National Bank of Decatur (2001-2004);
Director and Executive Vice President of Main Street and Director
and President of The First National Bank of Decatur (2000-2001);
Director and President of First Decatur Bancshares and The First
National Bank of Decatur (1999-2000)
64
Section 16(a) Beneficial Ownership Compliance
Section 16(a) of the Securities Exchange Act requires that the directors,
executive officers and persons who own more than 10% of our common stock file
reports of ownership and changes in ownership with the Securities and Exchange
Commission. These persons are also required to furnish us with copies of all
Section 16(a) forms they file. Based solely on our review of the copies of such
forms furnished to us and representations made by any reporting person
concerning whether a Form 5 was required to be filed for 2004, we are not aware
of any failures to comply with the filing requirements of Section 16(a) during
2004 except for Mr. Shapland, who filed a Form 4 one day late reporting the
exercise of 4,630 shares.
Item 11. Executive Compensation
The information in the 2005 Proxy Statement under the caption "Executive
Compensation" is incorporated by reference.
Item 12. Security Ownership Of Certain Beneficial Owners And Management
The information in the 2005 Proxy Statement under the caption "Security
Ownership of Certain Beneficial Owners and Management" is incorporated by
reference.
Equity Compensation Plan Information
The table below sets forth the following information as of December 31, 2004 for
(i) all compensation plans previously approved by our shareholders and (ii) all
compensation plans not previously approved by our shareholders:
(a) the number of securities to be issued upon the exercise of outstanding
options, warrants and rights;
(b) the weighted-average exercise price of such outstanding options, warrants
and rights;
(c) other than securities to be issued upon the exercise of such outstanding
options, warrants and rights, the number of securities remaining available
for future issuance under the plans.
------------------------------------------------------------------------------------------------------------------------------------
EQUITY COMPENSATION PLAN INFORMATION
------------------------------------------------------------------------------------------------------------------------------------
Number of Securities to Be
Issued Upon Exercise of Weighted-Average Exercise Number of Securities Remaining
Plan Category Outstanding Options Price of Outstanding Options Available for Future Issuance
------------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved
by security holders............... 661,465(1) $22.11 1,450,282
----------------------------------------------------------------------------------------------
Equity compensation plans not
approved by security holders...... -- -- --
----------------------------------------------------------------------------------------------
Total............................. 661,465(1) $22.11 1,450,282
==============================================================================================
(1) Does not include options assumed by the Company in 2000 in connection with
the merger of First Decatur Bancshares, Inc. and BankIllinois Financial
Corporation with and into the Company. At the time of the merger, there
were options issued under the Central Illinois Financial Corporation Stock
Option Plan, BankIllinois Financial Co. 1994 Stock Incentive Plan,
BankIllinois Financial Corporation 1996 Stock Incentive Plan and the First
Decatur Bancshares, Inc. Employee Stock Option Plan, each of which was
approved by stockholders of the respective company at the time of their
adoption. All of the options granted under these plans fully vested at the
time of the merger and no additional options were available for grant after
the merger. As of December 31, 2004, there were no options outstanding
under the prior plans.
Item 13. Certain Relationships And Related Transactions
The information in the 2005 Proxy Statement under the caption "Transactions with
Management" is incorporated by reference.
Item 14. Principal Accountant Fees and Services
The information in the 2005 Proxy Statement under the caption "Independent
Registered Public Accounting Firm" is incorporated by reference.
65
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Index to Financial Statements
See page 34.
(a)(2) Financial Statement Schedules
N/A
(a)(3) Schedule of Exhibits
The Exhibit Index which immediately follows the signature page to this
Form 10-K is incorporated by reference.
(b) Exhibits
The exhibits required to be filed with this Form 10-K are included with
this Form 10-K and are located immediately following the Exhibit Index to
this Form 10-K.
66
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on March 15, 2005.
By: /s/ Van A. Dukeman By: /s/ David B. White
--------------------------- ----------------------------
Van A. Dukeman David B. White
President, CEO and Director Executive Vice President and
Principal Financial and
Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on March 15, 2005.
/s/ Gregory B. Lykins
----------------------------------
Gregory B. Lykins Chairman and Director
/s/ Van A. Dukeman
----------------------------------
Van A. Dukeman President, CEO and Director
/s/ David J. Downey
----------------------------------
David J. Downey Director
/s/ Larry D. Haab
----------------------------------
Larry D. Haab Director
/s/ Frederic L. Kenney
----------------------------------
Frederic L. Kenney Director
/s/ August C. Meyer, Jr.
----------------------------------
August C. Meyer, Jr. Director
/s/ Gene A. Salmon
----------------------------------
Gene A. Salmon Director
/s/ George T. Shapland
----------------------------------
George T. Shapland Director
/s/ Thomas G. Sloan
----------------------------------
Thomas G. Sloan Director
/s/ H. Gale Zacheis
----------------------------------
H. Gale Zacheis Director
67
MAIN STREET TRUST, INC.
EXHIBIT INDEX
TO
ANNUAL REPORT ON FORM 10-K
Incorporated
Exhibit No. Description Herein by Filed
Reference To Herewith
--------------------------------------------------------------------------------------------------
3.1 Amended and Restated Exhibit 3.1 to the Form S-4 filed
Articles of Incorporation with the Commission on November 30,
1999 (SEC File No. 33-91759)
3.2 Bylaws Exhibit 3.2 to the Form S-4 filed
with the Commission on November 30,
1999 (SEC File No. 33-91759)
4.1 Specimen common stock Exhibit 4.1 to the Form 10-K filed
certificate with the Commission on March 30,
2001 (SEC File No.000-30031)
4.2 Second Amended and Exhibit 4.2 to the Form 10-K filed
Restated Shareholders' with the Commission on March 30,
Agreement, dated as of 2001 (SEC File No. 000-30031)
November 1, 2000
10.1 Employment Agreement by Exhibit 10.1 to the Form 10-K filed
and between the Company with the Commission on March 29,
and Gregory B. Lykins 2002 (SEC File No. 000-30031)
10.2 Employment Agreement by Exhibit 10.2 to the Form 10-K filed
and between the Company with the Commission on March 29,
and Van A. Dukeman 2002 (SEC File No. 000-30031)
10.3 Employment Agreement by Exhibit 10.5 to the Registration
and between the Company Statement on Form S-4 filed with
and David B. White the Commission on March 15, 1996,
as amended (SEC File No. 33-90342)
10.4 Employment Agreement by Exhibit 10.4 to the Form 10-K filed
and between the Company, with the Commission on March 29,
FirsTech, Inc. and Phillip 2002 (SEC File No. 000-30031)
C. Wise
10.5 Employment Agreement by Exhibit 10.5 to the Form 10-K filed
and between The First with the Commission on March 24,
National Bank of Decatur 2003 (SEC File No. 000-30031)
and Chris Shroyer
10.6 Employment Agreement by Exhibit 10.6 to the Form 10-K filed
and between the Company with the Commission on March 15,
and Robert F. Plecki 2004 (SEC File No. 000-30031)
10.7 Employment Agreement by X
and between the Company
and Paul E. Donohue
10.8 Employment Agreement by X
and between the Company
and Donna R. Greene
10.9 Main Street Trust, Inc. Exhibit 10.1 to the Form S-8 filed
2000 Stock Incentive Plan with the Commission on November 29,
2000 (SEC File No. 333-50890)
10.10 Main Street Trust, Inc. X
2000 Stock Incentive Plan
Director Stock Option
Agreement
10.11 Main Street Trust, Inc. X
2000 Stock Incentive Plan
Employee Stock Option
Agreement
68
10.12 Main Street Trust, Inc. X
Summary of Director
Compensation
21.1 Subsidiaries of the X
Registrant
23.1 Consent of McGladrey & X
Pullen, LLP
31.1 Certification of Chief X
Executive Officer Pursuant
to Rule 13a-14(a)/15d-14(a)
31.2 Certification of Chief X
Financial Officer Pursuant
to Rule 13a-14(a)/15d-14(a)
32.1 Certification of Chief X
Executive Officer Pursuant
to 18 U.S.C. Section 1350,
as adopted Pursuant to
Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief X
Executive Officer Pursuant
to 18 U.S.C. Section 1350,
as adopted Pursuant to
Section 906 of the
Sarbanes-Oxley Act of 2002
69