UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2003
Commission File Number: 0-30031
MAIN STREET TRUST, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Illinois 37-1338484
--------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
100 West University, Champaign, Illinois 61820
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
(217) 351-6500
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by "X" whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [ X ] No [ ]
Indicate by "X" whether the registrant is an accelerated filer (as defined by
Rule 12b-2 of the Exchange Act). Yes [ X ] No [ ]
Indicate the number of shares outstanding of the registrant's common stock, as
of May 2, 2003
Main Street Trust, Inc. Common Stock 10,500,949
1
Table of Contents
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 23
Item 4. Controls and Procedures 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 2003 and December 31, 2002
(Unaudited, in thousands, except share data)
March 31, December 31,
2003 2002
---------------------------
ASSETS
Cash and due from banks ..................................................... $ 58,443 $ 59,744
Federal funds sold and interest bearing deposits ............................ 30,971 43,002
--------------------------
Cash and cash equivalents ................................................. 89,414 102,746
--------------------------
Investments in debt and equity securities:
Available-for-sale, at fair value ......................................... 259,880 240,616
Held-to-maturity, at cost (fair value of $87,657 and $70,489
at March 31, 2003 and December 31, 2002, respectively) .................. 86,190 68,563
Non-marketable equity securities .......................................... 7,177 7,031
--------------------------
Total investments in debt and equity securities ..................... 353,247 316,210
--------------------------
Loans, net of allowance for loan losses of $9,622 and $9,259
at March 31, 2003 and December 31, 2002, respectively ..................... 634,422 664,142
Mortgage loans held for sale ................................................ 4,086 2,972
Premises and equipment ...................................................... 17,940 18,349
Accrued interest receivable ................................................. 7,245 7,315
Other assets ................................................................ 11,656 10,994
--------------------------
Total assets ........................................................ $ 1,118,010 $ 1,122,728
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing .................................................... $ 155,607 $ 163,903
Interest bearing ........................................................ 692,369 704,683
--------------------------
Total deposits ...................................................... 847,976 868,586
--------------------------
Federal funds purchased, repurchase agreements and notes payable .......... 94,248 80,651
Federal Home Loan Bank advances and other borrowings ...................... 27,765 27,806
Accrued interest payable .................................................. 1,939 2,252
Other liabilities ......................................................... 8,950 8,963
--------------------------
Total liabilities ................................................... 980,878 988,258
--------------------------
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 at March 31, 2003 and December 31, 2002 ................... 112 112
Paid in capital ........................................................... 55,340 55,337
Retained earnings ......................................................... 95,403 92,853
Accumulated other comprehensive income .................................... 3,062 3,776
--------------------------
153,917 152,078
Less: treasury stock, at cost, 718,720 and 755,047 shares at March 31, 2003
and December 31, 2002, respectively ..................................... (16,785) (17,608)
--------------------------
Total shareholders' equity .......................................... 137,132 134,470
--------------------------
Total liabilities and shareholders' equity .......................... $ 1,118,010 $ 1,122,728
==========================
See accompanying notes to unaudited consolidated financial statements.
3
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Three Months Ended March 31, 2003 and 2002
(Unaudited, in thousands, except share data)
2003 2002
----------------------------
Interest income:
Loans and fees on loans ........................................ $ 11,054 $ 12,187
Investments in debt and equity securities
Taxable ...................................................... 2,823 3,325
Tax-exempt ................................................... 587 600
Federal funds sold and interest bearing deposits ............... 102 95
----------------------------
Total interest income .................................... 14,566 16,207
----------------------------
Interest expense:
Deposits ....................................................... 3,873 5,007
Federal funds purchased, repurchase agreements and notes payable 267 326
Federal Home Loan Bank advances and other borrowings ........... 380 494
----------------------------
Total interest expense ................................... 4,520 5,827
----------------------------
Net interest income ...................................... 10,046 10,380
Provision for loan losses ........................................ 330 330
----------------------------
Net interest income after provision for loan losses ...... 9,716 10,050
----------------------------
Non-interest income:
Remittance processing .......................................... 1,766 1,949
Trust and brokerage fees ....................................... 1,462 1,453
Service charges on deposit accounts ............................ 580 554
Securities transactions, net ................................... (43) 70
Gain on sales of mortgage loans, net ........................... 544 219
Other .......................................................... 527 508
----------------------------
Total non-interest income ................................ 4,836 4,753
----------------------------
Non-interest expense:
Salaries and employee benefits ................................. 4,649 4,755
Occupancy ...................................................... 623 552
Equipment ...................................................... 649 688
Data processing ................................................ 529 563
Office supplies ................................................ 303 341
Service charges from correspondent banks ....................... 229 236
Other .......................................................... 1,082 1,062
----------------------------
Total non-interest expense ............................... 8,064 8,197
----------------------------
Income before income taxes ............................... 6,488 6,606
Income taxes ..................................................... 2,190 2,196
----------------------------
Net income ............................................... $ 4,298 $ 4,410
============================
Per share data:
Basic earnings per share ....................................... $ 0.41 $ 0.40
Weighted average shares of common stock outstanding ............ 10,479,172 11,097,242
Diluted earnings per share ..................................... $ 0.41 $ 0.40
Weighted average shares of common stock and dilutive potential
common shares outstanding .................................... 10,582,223 11,147,974
See accompanying notes to unaudited consolidated financial statements.
4
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Three Months Ended March 31, 2003 and 2002
(Unaudited, in thousands)
2003 2002
------------------
Net income ......................................................................... $ 4,298 $ 4,410
------------------
Other comprehensive income (loss), before tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period, net of tax of
($493) and ($693), for March 31, 2003 and 2002, respectively ................. (740) (1,309)
Less: reclassification adjustment for gains (losses) included in net
income, net of tax of $17 and ($24), for March 31, 2003 and 2002,
respectively ................................................................. 26 (46)
------------------
Other comprehensive income (loss) .................................................. (714) (1,355)
------------------
Comprehensive income ............................................................... $ 3,584 $ 3,055
==================
See accompanying notes to unaudited consolidated financial statements.
5
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Three Months Ending March 31, 2003 and 2002
(Unaudited, in thousands)
2003 2002
----------------------
Cash flows from operating activities:
Net income .......................................................... $ 4,298 $ 4,410
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ..................................... 646 660
Amortization of bond discounts and premiums, net .................. 462 283
Provision for loan losses ......................................... 330 330
Securities transactions, net ...................................... 43 (70)
Gain on sales of mortgage loans, net .............................. (544) (219)
Federal Home Loan Bank stock dividend ............................. (71) (41)
Loss on disposal of premises and equipment ........................ 2 --
Proceeds from sales of mortgage loans originated for sale ......... 50,059 26,810
Mortgage loans originated for sale ................................ (50,629) (20,613)
Other, net ........................................................ (434) 332
---------------------
Net cash provided by operating activities ..................... 4,162 11,882
---------------------
Cash flows from investing activities:
Net decrease in loans ............................................... 29,380 2,142
Proceeds from maturities and calls of investments in debt securities:
Held-to-maturity .................................................. 3,541 863
Available-for-sale ................................................ 55,615 20,615
Proceeds from sales of investments:
Available-for-sale ................................................ 11,085 28,889
Purchases of investments in debt and equity securities:
Held-to-maturity .................................................. (24,468) (500)
Available-for-sale ................................................ (94,005) (45,664)
Other equity securities ........................................... (330) --
Principal paydowns from mortgage-backed securities:
Held-to-maturity .................................................. 3,154 4,795
Available-for-sale ................................................ 6,632 1,974
Return of principal on other equity securities ...................... 115 --
Purchases of premises and equipment ................................. (240) (391)
Proceeds from sales of premises and equipment ....................... 1 --
----------------------
Net cash (used in ) provided by investing activities .......... (9,520) 12,723
----------------------
Cash flows from financing activities:
Net decrease in deposits ............................................ (20,610) (46,433)
Net increase (decrease) in federal funds purchased,
repurchase agreements, and notes payable .......................... 13,597 (3,730)
Advances from Federal Home Loan Bank and other borrowings ........... -- 5,000
Payments on Federal Home Loan Bank and other borrowings ............. (41) (5,040)
Cash dividends paid ................................................. (1,570) (1,452)
Issuance of new shares of common stock, net ......................... -- 886
Treasury stock transactions, net .................................... 650 2,177
----------------------
Net cash used in financing activities ......................... (7,974) (48,592)
----------------------
Net decrease in cash and cash equivalents ..................... (13,332) (23,987)
Cash and cash equivalents at beginning of year ........................ 102,746 95,379
----------------------
Cash and cash equivalents at end of period ............................ $ 89,414 $ 71,392
======================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest .......................................................... $ 4,833 $ 6,542
Income taxes ...................................................... 400 220
Real estate acquired through or in lieu of foreclosure .............. 10 --
Dividends declared not paid ......................................... 1,575 1,454
See accompanying notes to unaudited consolidated financial statements.
6
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements for Main Street
Trust, Inc. have been prepared in accordance with the instructions to Form 10-Q
and therefore do not include all information and footnotes necessary for fair
presentation of financial position, results of operations, and cash flows in
conformity with accounting principles generally accepted in the United States of
America. These financial statements should be read in conjunction with the
audited consolidated financial statements and related notes as of and for the
year ended December 31, 2002, and schedules included in Main Street Trust,
Inc.'s Form 10-K filed on March 21, 2003.
In the opinion of management, the consolidated financial statements of Main
Street Trust, Inc. and its subsidiaries, as of March 31, 2003 and for the
three-month periods ended March 31, 2003 and 2002, include all adjustments
necessary for a fair presentation of the results of those periods. All such
adjustments are of a normal recurring nature.
Results of operations for the three-month period ended March 31, 2003 are not
necessarily indicative of the results which may be expected for the year ended
December 31, 2003.
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash and due from banks and federal funds sold and interest
bearing deposits. Generally, federal funds are sold for one-day periods.
Certain amounts in the 2002 consolidated financial statements have been
reclassified to conform with the 2003 presentation. Such reclassifications have
no effect on previously reported net income or shareholders' equity.
Note 2. Company Information/Business Combination
Main Street Trust, Inc. (the "Company"), an Illinois corporation, is a bank
holding company registered under the Bank Holding Company Act of 1956, as
amended (the "BHCA"). The Company was incorporated on August 12, 1999, and is
the parent company of BankIllinois, The First National Bank of Decatur and
FirsTech, Inc.
On March 23, 2000, the Company acquired all of the outstanding stock of
BankIllinois, The First National Bank of Decatur, First Trust Bank of
Shelbyville and FirsTech, Inc. following the merger of BankIllinois Financial
Corporation and First Decatur Bancshares, Inc. into the Company. The merger,
which was accounted for as a pooling of interests, was completed on March 23,
2000. The Company subsequently merged the Company's former banking subsidiary,
First Trust Bank of Shelbyville, into BankIllinois effective June 19, 2002.
On June 14, 2001, the Company was certified by the Board of Governors of the
Federal Reserve System as a financial holding company. This designation allows
the Company to engage in a wider range of nonbanking activities, including
greater authority to engage in securities and insurance activities. However, the
Company has no current plans to do so.
The Company completed a tender offer on June 7, 2002 with 711,832 shares,
representing approximately 6.3% of the total shares outstanding, repurchased at
a cost, including expenses, of $16.556 million.
7
Note 3. Income per Share
Net income per common share has been computed as follows:
Three Months Ended
-------------------------
March 31,
2003 2002
-------------------------
Net Income ............................................... $ 4,298,000 $ 4,410,000
=========================
Shares:
Weighted average common shares outstanding ............. 10,479,172 11,097,242
Dilutive effect of outstanding options, as determined by
the application of the treasury stock method ......... 103,051 50,732
-------------------------
Weighted average common shares oustanding,
as adjusted .......................................... 10,582,223 11,147,974
=========================
Basic earnings per share ................................. $ 0.41 $ 0.40
=========================
Diluted earnings per share ............................... $ 0.41 $ 0.40
=========================
Note 4. Stock Option Plans
The Company has four stock-based compensation plans which have been in existence
for all periods presented. As permitted under accounting principles generally
accepted in the United States of America, grants of options under the plans are
accounted for under the recognition and measurement principles of APB Opinion
No. 25 Accounting for Stock Issued to Employees, and related interpretations.
Because options granted under the plans had an exercise price equal to market
value of the underlying common stock on the grant date, no stock-based employee
compensation cost is included in determining net income. The following table
illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.
March 31,
---------------
2003 2002
---------------
Net income on common stock:
As reported ............................................ $4,298 $4,410
Deduct total stock-based compensation expense
determined under the fair value method for all
awards, net of related tax effects ..................... (45) (170)
---------------
Pro forma ............................................ $4,253 $4,240
===============
Basic earnings per share:
As reported ............................................ $ 0.41 $ 0.40
Pro forma .............................................. 0.41 0.38
Diluted earnings per share:
As reported ............................................ $ 0.41 $ 0.40
Pro forma .............................................. 0.40 0.38
The fair value of the stock options granted has been estimated using the
Black-Scholes option - pricing model with the following weighted average
assumptions. The Black-Scholes option-pricing model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions.
In addition, such models require the use of subjective assumptions, including
expected stock price volatility. In management's opinion, such valuation models
may not necessarily provide the best single measure of option value.
March 31,
-------------------------
2003 2002
-------------------------
Number of options granted .......................... 129,000 158,000
Risk-free interest rate ........................... 3.64% 5.20%
Expected life, in years ........................... 8.00 8.00
Expected volatility ................................. 13.35% 10.34%
Expected dividend yield ............................. 2.42% 2.80%
8
Note 5. Commitments and Financial Instruments
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of amounts recognized in the
consolidated balance sheets. The contractual amounts of those instruments
reflect the extent of involvement the Company has in particular classes of
financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. Management
does not anticipate any significant losses as a result of these transactions.
The following table summarizes these financial instruments and commitments (in
thousands) at March 31, 2003 and 2002:
March 31,
-------------------
2003 2002
-------------------
Financial instruments whose contract amounts represent
credit risk:
Commitments ............................................ $202,678 $168,540
Standby letters of credit .............................. 8,640 3,191
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 $1.420
million to purchase other equity securities.
Standby letters of credit are conditional commitments issued by the Banks to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements and,
generally, have terms of one year or less. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Banks may hold collateral, which include accounts
receivables, inventory, property and equipment, and income producing properties,
supporting those commitments, if deemed necessary. In the event the customer
does not perform in accordance with the terms of the agreement with the third
party, the Banks would be required to fund the commitment. The maximum potential
amount of future payments the Banks could be required to make is represented by
the contractual amount shown in the summary above. If the commitment is funded,
the banks would be entitled to seek recovery from the customer. At March 31,
2003 and 2002, no amounts have been recorded as liabilities for the Banks'
potential obligations under these guarantees.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition
Assets and Liabilities
Total assets decreased $4.718 million, or 0.4%, to $1.118 billion at March 31,
2003 compared to $1.123 billion at December 31, 2002. Decreases in cash and due
from banks, federal funds sold and interest bearing deposits, loans, premises
and equipment, and accrued interest receivable were partially offset by
increases in all categories of investment securities, mortgage loans held for
sale and other assets.
Cash and due from banks decreased $1.301 million, or 2.2%, to $58.443 million at
March 31, 2003 compared to $59.744 million at December 31, 2002, primarily due
to a smaller dollar amount of deposit items in process of collection at March
31, 2003 compared to December 31, 2002.
Federal funds sold and interest bearing deposits decreased $12.031 million, or
28.0%, to $30.971 million at March 31, 2003 compared to $43.002 million at
December 31, 2002. Federal funds sold and interest bearing deposits fluctuate
with loan demand, deposit volume and investment opportunities.
Total investments in debt and equity securities increased $37.037 million, or
11.7%, to $353.247 million at March 31, 2003 compared to $316.210 million at
December 31, 2002. There were increases in all categories of investment
securities as investments in securities available-for-sale increased $19.264
million, or 8.0%, investments in securities held-to-maturity increased $17.627
million, or 25.7%, and non-marketable equity securities increased $0.146
million, or 2.1%, at March 31, 2003 compared to December 31, 2002. Investments
fluctuate with loan demand, deposit volume and investment opportunities..
Mortgage loans held for sale increased $1.114 million, or 37.5%, to $4.086
million at March 31, 2003 compared to $2.972 million at December 31, 2002.
Loans, net of allowance for loan losses, decreased $29.720 million, or 4.5%, to
$634.422 million at March 31, 2003 from $664.142 million at December 31, 2002.
There were decreases in all loan categories. Commercial, financial and
agricultural loans decreased $10.024 million, or 4.3%, primarily as a result of
the slowdown of the economy. Real estate loans decreased $10.635 million, or
3.1%. The decrease in real estate loans included a decrease of $10.540 million
in residential real estate caused by long-term fixed rate loans being refinanced
and subsequently sold on the secondary market and a decrease of $0.095 million
in commercial real estate. Installment and consumer loans decreased $8.698
million, or 9.1%, due to alternative funding sources available to consumers,
such as special financing offered by the auto manufacturers' captive financing
companies.
Premises and equipment decreased $0.409 million, or 2.2%, from $18.349 million
at December 31, 2002 to $17.940 million at March 31, 2003. The decrease included
depreciation expense of $0.646 million offset somewhat by purchases of $0.240
million.
Total liabilities decreased $7.380 million, or 0.7%, to $980.878 million at
March 31, 2003 from $988.258 million at December 31, 2002. Decreases in total
deposits, Federal Home Loan Bank advances and other borrowings, accrued interest
payable and other liabilities were somewhat offset by an increase in federal
funds purchased, repurchase agreements and notes payable.
Total deposits decreased $20.610 million, or 2.4%, to $847.976 million at March
31, 2003 from $868.586 at December 31, 2002. Decreases in deposits included
$12.314 million, or 1.7%, in interest bearing deposits and $8.296 million, or
5.1%, in non-interest bearing deposits. Despite the decrease from year-end,
total deposits were $10.300 million, or 1.2%, higher than the March 31, 2002
balance of $837.676 million.
Federal funds purchased, repurchase agreements and notes payable increased
$13.597 million, or 16.9%, to $94.248 million at March 31, 2003 compared to
$80.651 million at December 31, 2002. Included in this change were increases of
$9.897 million in repurchase agreements and $3.700 million in federal funds
purchased.
Federal Home Loan Bank advances and other borrowings decreased $0.041 million,
or 0.1%, to $27.765 million at March 31, 2003 compared to $27.806 million at
December 31, 2002.
10
Investment Securities
The carrying value of investments in debt and equity securities was as follows
for March 31, 2003 and December 31, 2002:
Carrying Value of Securities
(in thousands)
March 31, December 31,
2003 2002
-----------------------
Available-for-sale:
U.S. Treasury .................................. $ 2,546 $ 3,066
Federal agencies ............................... 212,896 185,469
Mortgage-backed securities ..................... 24,117 30,884
State and municipal ............................ 15,677 16,168
Corporate and other obligations ................ 1,004 1,008
Marketable equity securities ................... 3,640 4,021
-----------------------
Total available-for-sale ................. $259,880 $240,616
=======================
Held-to-maturity:
Federal agencies ............................... $ 4,865 $ 1,750
Mortgage-backed securities ..................... 37,730 23,595
State and municipal ............................ 43,595 43,218
-----------------------
Total held-to-maturity ................... $ 86,190 $ 68,563
=======================
Non-marketable equity securities:
FHLB and FRB stock1 ............................ $ 4,034 $ 3,963
Other equity investments ....................... 3,143 3,068
-----------------------
Total .................................... $ 7,177 $ 7,031
=======================
Total investment securities .............. $353,247 $316,210
=======================
1 FHLB and FRB are commonly used acronyms for Federal Home Loan Bank and
Federal Reserve Bank, respectively.
The following table shows the maturities and weighted-average yields of
investment securities at March 31, 2003. All securities are shown at their
contractual maturity.
Maturities and Weighted Average Yields of Debt Securities
(dollars in thousands)
-----------------------------------------------------------------------------------------------
March 31, 2003
-----------------------------------------------------------------------------------------------
1 year 1 to 5 5 to 10 Over 10
or less years years years Total
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
-----------------------------------------------------------------------------------------------
Securities available-
for-sale:
U.S. Treasury .................. $ 2,546 3.58% $ -- -- $ -- -- $ -- -- $ 2,546 3.58%
Federal agencies ............... $ 37,487 4.04% $172,180 3.85% $ 3,229 4.10% $ -- -- $212,896 3.89%
Mortgage-backed
securities1 .................. $ 4,406 2.76% $ 19,126 5.61% $ 503 7.16% $ 82 7.86% $ 24,117 5.13%
State and municipal ............ $ 761 4.74% $ 8,712 4.55% $ 4,907 5.01% $ 1,297 5.10% $ 15,677 4.75%
Corporate and other obligations $ 1,004 4.26% $ -- -- $ -- -- $ -- -- $ 1,004 4.26%
Marketable equity
securities2 .................. $ -- -- $ -- -- $ -- -- $ -- -- $ 3,640 --
-----------------------------------------------------------------------------------------------
Total .................... $ 46,204 $200,018 $ 8,639 $ 1,379 $259,880
-----------------------------------------------------------------------------------------------
3.91% 4.05% 4.80% 5.26% 4.05%
===============================================================================================
Securities held-
to-maturity:
Federal agencies ............... $ -- -- $ 565 2.63% $ 4,300 4.58% $ -- -- $ 4,865 4.36%
Mortgage-backed
securities1 .................. $ 18,590 2.17% $ 17,012 3.36% $ 88 5.38% $ 2,040 5.71% $ 37,730 2.91%
State and municipal ............ $ 10,840 3.62% $ 29,705 3.98% $ 3,050 4.84% $ -- -- $ 43,595 3.95%
-----------------------------------------------------------------------------------------------
Total .................... $ 29,430 $ 47,282 $ 7,438 $ 2,040 $ 86,190
===============================================================================================
2.70% 3.74% 4.70% 5.71% 3.52%
===============================================================================================
Non-marketable equity securities2:
FHLB and FRB stock ............. $ -- -- $ -- -- $ -- -- $ -- -- $ 4,034 --
Other equity investments ....... $ -- -- $ -- -- $ -- -- $ -- -- $ 3,143 --
-----------------------------------------------------------------------------------------------
Total .................... $ -- -- $ -- -- $ -- -- $ -- -- $ 7,177 --
===============================================================================================
11
1 Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties and certain securities require principal
repayments prior to maturity.
2 Due to the nature of these securities, they do not have a stated maturity
date or rate.
Loans
The following tables present the amounts and percentages of loans at March 31,
2003 and December 31, 2002 according to the categories of commercial, financial
and agricultural; real estate; and installment and consumer loans.
Amount of Loans Outstanding
(dollars in thousands)
----------------------------------------
March 31, 2003 December 31, 2002
----------------------------------------
Amount Percentage Amount Percentage
----------------------------------------
Commercial, financial and agricultural $224,021 34.78% $234,045 34.75%
Real estate .......................... 333,192 51.73% 343,827 51.06%
Installment and consumer1 ............ 86,831 13.49% 95,529 14.19%
----------------------------------------
Total loans .................. $644,044 100.00% $673,401 100.00%
========================================
1 Net of unearned discount
The balance of loans outstanding as of March 31, 2003 by maturity is shown in
the following table:
Maturity of Loans Outstanding
(dollars in thousands)
---------------------------------------------
March 31, 2003
---------------------------------------------
1 year 1 to 5 Over 5
or less years years Total
--------------------------------------------
Commercial, financial and agricultural $116,650 $ 85,966 $ 21,405 $ 224,021
Real estate .......................... 54,969 138,709 139,514 333,192
Installment and consumer1 ............ 30,491 48,908 7,432 86,831
--------------------------------------------
Total ........................ $202,110 $273,583 $168,351 $644,044
============================================
Percentage of total loans outstanding 31.38% 42.48% 26.14% 100.00%
============================================
1 Net of unearned discount
Capital
Total shareholders' equity increased $2.662 million from December 31, 2002 to
March 31, 2003. Treasury stock transactions were $0.650 million, primarily due
to stock option exercises. The change in shareholders' equity is summarized as
follows:
Shareholders' Equity (in thousands)
Shareholders' equity, December 31, 2002 .................... $ 134,470
Net income ............................................... 4,298
Treasury stock transactions, net ......................... 650
Stock appreciation rights ................................ 3
Cash dividends declared .................................. (1,575)
Other comprehensive income ............................... (714)
----------
Shareholders' equity, March 31, 2003 ....................... $ 137,132
==========
12
On March 18, 2003, the Board of Directors of the Company declared a quarterly
cash dividend of $0.15 per share of the Company's common stock. The dividend of
$1.575 million was paid on April 25, 2003 to holders of record on April 7, 2003.
The Company and its subsidiary banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's and its subsidiary banks' financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, banks must meet specific guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Company's and its
subsidiary banks' capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and its subsidiary banks to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of March 31,
2003, that the Company and its subsidiary banks exceeded all capital adequacy
requirements to which they are subject.
As of March 31, 2003, the most recent notifications from primary regulatory
agencies categorized all the Company's subsidiary banks as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, banks must maintain minimum total capital to risk-weighted
assets, Tier I capital to risk-weighted assets, and Tier I capital to average
assets ratios as set forth in the table. There are no conditions or events since
that notification that management believes have changed any of the Company's
subsidiary banks' categories.
The Company's and the Banks' actual capital amounts and ratios are presented in
the following table (in thousands):
To be well
For capital capitalized under
adequacy prompt corrective
Actual purposes: action provisions:
-----------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------
As of March 31, 2003:
Total capital
(to risk-weighted assets)
Consolidated ................ $142,010 18.9% $60,207 8.0% N/A
BankIllinois ................. $ 74,222 15.9% $37,272 8.0% $46,591 10.0%
First National Bank of Decatur $ 48,088 17.5% $21,935 8.0% $27,419 10.0%
Tier I capital
(to risk-weighted assets)
Consolidated ................. $132,600 17.6% $30,103 4.0% N/A
BankIllinois ................. $ 68,327 14.7% $18,636 4.0% $27,954 6.0%
First National Bank of Decatur $ 44,656 16.3% $10,967 4.0% $16,451 6.0%
Tier I capital
(to average assets)
Consolidated ................. $132,600 12.0% $44,165 4.0% N/A
BankIllinois ................. $ 68,327 10.2% $26,848 4.0% $33,561 5.0%
First National Bank of Decatur $ 44,656 10.4% $17,129 4.0% $21,411 5.0%
Interest Rate Sensitivity
The concept of interest rate sensitivity attempts to gauge exposure of the
Company's net interest income to adverse changes in market driven interest rates
by measuring the amount of interest-sensitive assets and interest-sensitive
liabilities maturing or subject to repricing within a specified time period.
Liquidity represents the ability of the Company to meet the day-to-day demands
of deposit customers balanced by its investments of these deposits. The Company
must also be prepared to fulfill the needs of credit customers for loans with
various types of maturities and other financing arrangements. The Company
monitors its interest rate sensitivity and liquidity through the use of static
gap reports which measure the difference between assets and liabilities maturing
or repricing within specified time periods as well as financial
forecasting/budgeting/reporting software packages.
13
The following table presents the Company's interest rate sensitivity at various
intervals at March 31, 2003:
Rate Sensitivity of Earning Assets and Interest Bearing Liabilities
(dollars in thousands)
-----------------------------------------------------------------------------
1-30 31-90 91-180 181-365 Over
Days Days Days Days 1 year Total
-----------------------------------------------------------------------------
Interest earning assets:
Federal funds sold and
interest bearing deposits ............ $ 30,971 $ -- $ -- $ -- $ -- $ 30,971
Debt and equity securities 1 ........... 31,994 29,406 16,350 37,315 238,182 353,247
Loans 2 ................................ 203,074 21,525 36,212 54,550 332,769 648,130
------------------------------------------------------------------------------
Total earning assets ............. $ 266,039 $ 50,931 $ 52,562 $ 91,865 $ 570,951 $1,032,348
------------------------------------------------------------------------------
Interest bearing liabilities:
Savings and interest bearing
demand deposits ...................... $ 42,471 $ 1,454 $ 2,181 $ 4,362 $ 165,730 $ 216,198
Money market savings
deposits ............................. 143,918 -- -- -- -- 143,918
Time deposits .......................... 28,746 38,443 55,656 101,629 107,779 332,253
Federal funds purchased,
repurchase agreements,
and notes payable .................... 91,283 525 2,250 190 -- 94,248
FHLB advances and
other borrowings ..................... 5,000 10,000 -- 115 12,650 27,765
------------------------------------------------------------------------------
Total interest bearing liabilities $ 311,418 $ 50,422 $ 60,087 $ 106,296 $ 286,159 $ 814,382
------------------------------------------------------------------------------
Net asset (liability) funding gap ........ (45,379) 509 (7,525) (14,431) 284,792 217,966
------------------------------------------------------------------------------
Repricing gap ............................ 0.85 1.01 0.87 0.86 2.00 1.27
Cumulative repricing gap ................. 0.85 0.88 0.88 0.87 1.27 1.27
==============================================================================
1 Debt and equity securities include securities available-for-sale,
securities held-to-maturity, and non-marketable equity securities.
2 Loans are gross and include mortgage loans held-for-sale.
Included in the 1-30 day category of savings and interest-bearing demand
deposits are non-core deposits plus a percentage, based upon industry-accepted
assumptions and Company analysis, of the core deposits. "Core deposits" are the
lowest average balance of the prior twelve months for each product type included
in this category. "Non-core deposits" are the difference between the current
balance and core deposits. The time frames include a percentage, based upon
industry-accepted assumptions and Company analysis, of the core deposits, as
follows:
1-30 Days 31-90 Days 91-180 Days 181-365 Days Over 1 Year
--------------------------------------------------------------
Savings and interest-bearing
demand deposits .............. 0.45% 0.85% 1.25% 2.45% 95.00%
At March 31, 2003, the Company was liability-sensitive due to the levels of
savings and interest bearing demand deposits, short-term time deposits, and
short-term borrowings. As such, the effect of a decrease in the interest rate
for all interest earning assets and interest bearing liabilities of 100 basis
points would increase annualized net interest income by approximately $454,000
in the 1-30 days category and $449,000 in the 1-90 days category assuming no
management intervention. An increase in interest rates would have the opposite
effect for the same time periods. The Company's Asset and Liability Management
Policy states that the cumulative ratio of rate-sensitive assets ("RSA") to
rate-sensitive liabilities ("RSL") for the 12-month period should fall within
the range of 0.75-1.25. As of March 31, 2003, the Company's RSA/RSL was 0.87,
which was within the established guidelines.
In addition to managing interest rate sensitivity and liquidity through the use
of gap reports, the Company has provided for emergency liquidity situations with
informal agreements with correspondent banks which permit the Company to borrow
federal funds on an unsecured basis. Additionally, the Company can borrow
approximately $48.421 million from the Federal Home Loan Bank on a secured
basis.
14
The Company uses financial forecasting/budgeting/reporting software packages to
perform interest rate sensitivity analysis for all product categories. The
Company's primary focus of its analysis is on the effect of interest rate
increases and decreases on net interest income. Management believes that this
analysis reflects the potential effects on current earnings of interest rate
changes. Call criteria and prepayment assumptions are taken into consideration
for investments in debt and equity securities. All of the Company's financial
instruments are analyzed by a software database which includes each of the
different product categories which are tied to key rates such as prime, Treasury
Bills, or the federal funds rate. The relationships of each of the different
products to the key rate that the product is tied to is proportional. The
software reprices the products based on current offering rates. The software
performs interest rate sensitivity analysis by performing rate shocks of plus or
minus 200 basis points in 100 basis point increments.
The following table shows projected results at March 31, 2003 and December 31,
2002 of the impact on net interest income from an immediate change in interest
rates. The results are shown as a percentage change in net interest income over
the next twelve months.
Basis Point Change
---------------------------------------------
+200 +100 -100 -200
---------------------------------------------
March 31, 2003 ................. 8.0% 4.0% (4.1%) (8.3%)
December 31, 2002 .............. 7.6% 3.8% (3.9%) (7.8%)
The foregoing computations are based on numerous assumptions, including relative
levels of market interest rates, prepayments and deposit mix. The computed
estimates should not be relied upon as a projection of actual results. Despite
the limitations on preciseness inherent in these computations, management
believes that the information provided is reasonably indicative of the effect of
changes in interest rate levels on the net earning capacity of the Company's
current mix of interest earning assets and interest bearing liabilities.
Management continues to use the results of these computations, along with the
results of its computer model projections, in order to enhance earnings
potential while positioning the Company to minimize the effect of a prolonged
shift in interest rates that would adversely affect future results of
operations.
At the present time, the most significant market risk affecting the Company is
interest rate risk. Other market risks such as foreign currency exchange risk
and commodity price risk do not occur in the normal business of the Company. The
Company also is not currently using trading activities or derivative instruments
to control interest rate risk.
Liquidity and Cash Flows
The Company was able to meet liquidity needs during the first three months of
2003. A review of the consolidated statements of cash flows included in the
accompanying financial statements shows that the Company's cash and cash
equivalents decreased $13.332 million from December 31, 2002 to March 31, 2003.
This decrease came from cash used in investing and financing activities offset
somewhat by cash provided by operating activities.
There were differences in the sources and uses of cash during the first three
months of 2003 compared to the first three months of 2002. Cash was used in
investing activities during 2003 compared to cash provided by investing
activities during 2002. During the first three months of 2003, net cash used in
investing activities involving the Company's investment portfolio was $38.661
million compared to cash provided during the first three months of 2002 of
$10.972 million. During the first three months of 2003, the Company's investment
portfolio grew versus the first three months of 2002 when the Company's
investment portfolio was reduced. The size of the Company's investment portfolio
varies in response to volume of loans and deposits as well as investment
opportunities. Somewhat offsetting this difference was more cash provided by
loans during the first three months of 2003 compared to the same period of 2002
due to a larger decrease in net loans. Less cash was used in financing
activities during the first three months of 2003 compared to the first three
months of 2002. This was mainly due to changes in deposit and federal funds
purchased, repurchase agreements, and notes payable volumes. There was a larger
decrease in deposits during the first three months of 2002 compared to the same
period of 2003. The decrease in 2002 included the maturity of a large short-term
time deposit. Also, during the first three months of 2003, cash was provided by
an increase in federal funds purchased, repurchase agreements, and notes payable
compared to cash used by a decrease during the same period of 2002. Less cash
was provided by operating activities during the first three months of 2003
compared to the same period of 2002, primarily from net loans originated for
sale. Proceeds from sales were higher than originated loans during the first
three months of 2002, whereas during the first three months of 2003, proceeds
and originations were fairly equal.
15
Critical Accounting Policies
The preparation of financial statements in conformity with accounting standards
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and the related disclosures of contingent
assets and liabilities. Actual results could differ from those estimates under
different assumptions and conditions. The Company believes that it has one
critical accounting policy, allowance for loan losses, that is subject to
estimates and judgements used in the preparation of its consolidated financial
statements.
Provision and Allowance for Loan Losses
The provision for loan losses is based on management's evaluation of the loan
portfolio in light of national and local economic conditions, changes in the
composition and volume of the loan portfolio, changes in the volume of past due
and nonaccrual loans, and other relevant factors. The allowance for loan losses,
which is reported as a deduction from loans, is available for loan charge-offs.
The allowance is increased by the provision charged to expense and is reduced by
loan charge-offs net of loan recoveries. The allowance is allocated between the
commercial, residential real estate and consumer loan portfolios according to
the historical losses experienced in each of these portfolios as well as the
current level of watch list loans and nonperforming loans for each portfolio.
Loans for which borrower cash flow and the estimated liquidation value of
collateral are inadequate to repay the total outstanding balance are evaluated
separately and assigned a specific allocation. The unallocated portion of the
allowance is determined by economic conditions and other factors mentioned
above. The balance of the allowance for loan losses was $9.622 million at March
31, 2003 compared to $9.259 million at December 31, 2002, as net recoveries were
$33,000 and provisions totaled $330,000 during the first three months of 2003.
The allowance for loan losses as a percentage of gross loans, including loans
held-for-sale, was 1.48% at March 31, 2003, compared to 1.37% at December 31,
2002. Gross loans, including loans held-for-sale, decreased 4.2% to $648.130
million at March 31, 2003 from $676.373 million at December 31, 2002.
The allowance for loan losses as a percentage of nonperforming loans was 459.3%
at March 31, 2003 compared to 416.9% at December 31, 2002. Nonperforming loans
decreased from $2.221 million at December 31, 2002 to $2.095 million at March
31, 2003. The $126,000 decrease in nonperforming loans during the first three
months resulted from a $349,000 decrease in loans past due 90 days or more,
offset somewhat by a $223,000 increase in nonaccrual loans. The increase in
nonaccruals consisted primarily of consumer loans as a result of a more
aggressive approach toward placing 90-day consumer loan delinquencies on
nonaccrual status. Management believes that nonperforming and potential problem
loans are appropriately identified and monitored based on the extensive loan
analysis performed by the credit administration department, the internal loan
committees and the board of directors. Historically, there have not been a
significant amount of loans charged off which had not been previously identified
as problem loans by the credit administration department or the loan committees.
16
The following table summarizes changes in the allowance for loan losses by loan
categories for each period and additions to the allowance for loan losses which
have been charged to operations.
Allowance for Loan Losses
(dollars in thousands)
March 31,
-----------------------
2003 2002
-----------------------
Allowance for loan losses at
beginning of year ................................ $ 9,259 $ 9,259
-----------------------
Charge-offs during period:
Commercial, financial and agricultural ........... $ -- $ (16)
Real estate ...................................... (9) --
Installment and consumer ......................... (115) (278)
-----------------------
Total ...................................... $ (124) $ (294)
-----------------------
Recoveries of loans previously charged off:
Commercial, financial and agricultural ........... $ 95 $ 88
Residential real estate .......................... 11 24
Installment and consumer ......................... 51 50
-----------------------
Total ...................................... $ 157 $ 162
-----------------------
Net (charge-offs) recoveries ............... $ 33 $ (132)
Provision for loan losses .......................... 330 330
-----------------------
Allowance for loan losses at end of quarter ........ $ 9,622 $ 9,457
=======================
Ratio of net (charge-offs) recoveries to
average net loans ................................ 0.01% (0.02)%
=======================
The following table shows the allocation of the allowance for loan losses
allocated to each category.
Allocation of the Allowance for Loan Losses
(in thousands)
March 31, December 31,
2003 2002
-----------------------
Allocated:
Commercial, financial and agricultural ............. $5,467 $5,732
Residential real estate ............................ 218 345
Installment and consumer ........................... 1,688 1,763
-----------------------
Total allocated allowance .................... $7,373 $7,840
Unallocated allowances ............................... 2,249 1,419
-----------------------
Total ................................................ 9,622 9,259
=======================
The following table presents the aggregate amount of loans considered to be
nonperforming for the periods indicated. Nonperforming loans include loans
accounted for on a nonaccrual basis, accruing loans contractually past due 90
days or more as to interest or principal payments and loans which are troubled
debt restructurings as defined in Statement of Financial Accounting Standards
No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings."
Nonperforming Loans (dollars in thousands)
March 31, 2003 December 31, 2002
----------------------------------
Nonaccrual loans1 ........................ $1,615 $1,392
=======================
Loans past due 90 days or more ........... $ 480 $ 829
=======================
Renegotiated loans ....................... $ 20 $ 20
=======================
1 Includes $0.945 million at March 31, 2003 and $0.628 million at December
31, 2002 of real estate and consumer loans which management does not
consider impaired as defined by the Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS
114).
17
Other Nonperforming Assets (dollars in thousands)
March 31, 2003 December 31, 2002
-----------------------------------
Other real estate owned ................. $ 60 $ 58
=======================
Nonperforming other assets .............. $184 $ 94
=======================
Results of Operations
Results of Operations For the Three Months Ended March 31, 2003
Net income for the first three months of 2003 was $4.298 million, a $112,000, or
2.5%, decrease from $4.410 million for the same period in 2002. Basic and
diluted earnings per share increased $0.01, or 2.5%, to $0.41 per share in the
first quarter of 2003 from $0.40 per share in the first quarter of 2002 due, in
part, to 5.1% fewer average diluted shares outstanding after completion of the
June 2002 tender offer.
18
The following schedule "Consolidated Average Balance Sheet and Interest Rates"
provides details of average balances, interest income or interest expense, and
the average rates for the Company's major asset and liability categories.
Consolidated Average Balance Sheet and Interest Rates
(dollars in thousands)
--------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31,
--------------------------------------------------------------------------------------------------------------------
2003 2002
--------------------------------------------------------------------------------------------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
--------------------------------------------------------------------------------------------------------------------
Assets
Taxable investment securities1 ......... $ 275,639 $ 2,823 4.15% $ 273,909 $ 3,325 4.92%
Tax-exempt investment securities1 (TE) . 56,876 903 6.44% 55,487 909 6.64%
Federal funds sold and interest bearing
deposits2 ............................ 32,105 102 1.29% 20,539 95 1.88%
Loans3,4 (TE) .......................... 658,378 11,058 6.81% 673,475 12,191 7.34%
-------------------------------------------------------------------------
Total interest earning assets
and interest income (TE) ....... $1,022,998 $ 14,886 5.90% $1,023,410 $ 16,520 6.55%
-------------------------------------------------------------------------
Cash and due from banks ................ $ 49,495 $ 48,993
Premises and equipment ................. 18,203 19,136
Other assets ........................... 16,960 18,650
-------------------------------------------------------------------------
Total assets ................... $1,107,656 $1,110,189
=========================================================================
Liabilities and Shareholders' Equity
Interest bearing demand deposits ....... $ 82,942 $ 169 0.83% $ 106,084 $ 337 1.29%
Savings ................................ 278,185 711 1.04% 251,182 934 1.51%
Time deposits .......................... 337,391 2,993 3.60% 338,388 3,736 4.48%
Federal funds purchased, repurchase
agreements, and notes payable ........ 85,878 267 1.26% 72,304 326 1.83%
FHLB advances and other borrowings ..... 27,793 380 5.54% 35,268 494 5.68%
-------------------------------------------------------------------------
Total interest bearing
liabilities and interest expense $ 812,189 $ 4,520 2.26% $ 803,226 $ 5,827 2.94%
-------------------------------------------------------------------------
Noninterest bearing demand deposits .... $ 89,858 $ 105,026
Noninterest bearing savings deposits ... 60,151 51,961
Other liabilities ...................... 9,716 9,744
-------------------------------------------------------------------------
Total liabilities .............. $ 971,914 $ 969,957
Shareholders' equity ................... 135,742 140,232
-------------------------------------------------------------------------
Total liabilities and
shareholders' equity ........... $1,107,656 $1,110,189
=========================================================================
Interest spread (average rate earned
minus average rate paid) (TE) ........ 3.64% 3.60%
=========================================================================
Net interest income (TE) ............... $ 10,366 $ 10,693
=========================================================================
Net yield on interest
earnings assets (TE) ................. 4.11% 4.24%
=========================================================================
See next page for Notes 1 - 4.
Notes to Consolidated Average Balance Sheet and Interest Rate Tables:
1 Investments in debt securities are included at carrying value.
2 Federal funds sold and interest bearing deposits include approximately
$14,000 and $17,000 in 2003 and 2002, respectively, of interest income from
third party processing of cashier checks.
3 Loans are net of allowance for loan losses and include mortgage loans held
for sale. Nonaccrual loans are included in the total.
4 Loan fees of approximately $498,000 and $250,000 in 2003 and 2002,
respectively, are included in total loan income.
19
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% in 2003 and 34% in 2002.
The following table presents, on a tax equivalent (TE) basis, an analysis of
changes in net interest income resulting from changes in average volumes of
earning assets and interest bearing liabilities and average rates earned and
paid. The change in interest due to the combined rate/volume variance has been
allocated to rate and volume changes in proportion to the absolute dollar
amounts of change in each.
Analysis of Volume and Rate Changes
(in thousands)
Three Months Ended March 31, 2003
---------------------------------
Increase
(Decrease)
from
Previous Due to Due to
Year Volume Rate
-----------------------------
Interest Income
Taxable investment securities .................. $ (502) $ 144 $ (646)
Tax-exempt investment securities (TE) .......... (6) 99 (105)
Federal funds sold and interest earning deposits 7 160 (153)
Loans (TE) ..................................... (1,133) (268) (865)
-----------------------------
Total interest income (TE) ............... $(1,634) $ 135 $(1,769)
-----------------------------
Interest Expense
Interest bearing demand and savings deposits ... $ (391) $ 95 $ (486)
Time deposits .................................. (743) (11) (732)
Federal funds purchased,
repurchase agreements and notes payable ...... (59) 287 (346)
FHLB advances and other borrowings ............. (114) (102) (12)
-----------------------------
Total interest expense ................... $(1,307) $ 269 $(1,576)
-----------------------------
Net Interest Income (TE) ......................... $ (327) $ (134) $ (193)
=============================
Net interest income on a tax equivalent basis was $327,000, or 3.1%, lower for
the first three months of 2003 compared to 2002. Total tax-equivalent interest
income was $1.634 million, or 9.9%, lower in 2003 compared to 2002, and interest
expense decreased $1.307 million, or 22.4%. The decrease in tax-equivalent
interest income was mainly due to lower rates, offset slightly by an increase in
average balances. The decrease in interest expense was due to lower rates offset
somewhat by an increase in average balances.
The decrease in total tax-equivalent interest income was due to a decrease in
interest income from loans and taxable investment securities. The decrease in
interest income from loans was due to lower rates and lower average balances.
The decrease in interest income from taxable investment securities was due to
lower rates offset somewhat by an increase in average balances.
The decrease in total interest expense was due to decreases in interest expense
from all categories of interest bearing liabilities. Interest expense on time
deposits decreased primarily due to lower rates and interest expense on FHLB
advances and other borrowings decreased primarily due to lower average balances.
Interest expense on interest bearing demand and savings deposits and federal
funds purchased, repurchase agreements and notes payable decreased primarily due
to lower rates, offset somewhat by an increase in average balances.
The provision for loan losses recorded was $330,000 during the first three
months of both 2003 and 2002. The provision during both periods was based on
management's analysis of the loan portfolio, as discussed in the provision for
loan losses section above.
20
Total non-interest income increased $83,000, or 1.7%, during the first three
months of 2003 compared to the first three months of 2002. Included in this
increase was an increase of $325,000, or 148.4%, in gains on sales of mortgage
loans held-for-sale during the first three months of 2003 compared to the same
period in 2002. This increase reflected a $23.249 million, or 86.7%, increase in
funded mortgage loans held-for-sale during the first quarter of 2003 compared to
the first quarter of 2002. This increase was reflective of lower mortgage
interest rates during the first three months of 2003 compared to the same period
in 2002. Service charges on deposit accounts increased $26,000, or 4.7%, during
the first three months of 2003 compared to the same period in 2002. Other
non-interest income increased $19,000, or 3.7%, and trust and brokerage fees
increased $9,000, or 0.6%, in the first quarter of 2003 compared to the first
quarter of 2002. Somewhat offsetting these increases was a decrease of $183,000,
or 9.4%, in remittance processing income in the first three months of 2003
compared to the same period in 2002. This was due to a significant reduction of
volume at the Company's remittance processing subsidiary, FirsTech, associated
with the donations processed for a charitable organization as well as a gradual
volume reduction in electronic payments processed for a large telecommunications
company since 2002 as a result of their conversion to an internal processing
platform. Income from securities transactions decreased $113,000, or 161.4%, in
the first quarter of 2003 compared to the first quarter of 2002. This decrease
included recognition of loss on non-marketable equity securities, offset
somewhat by a gain on the sale of one available-for-sale government agency
security.
Total non-interest expense decreased $133,000, or 1.6%, during the first three
months of 2003 compared to the same period in 2002. Of this decrease, salaries
and employee benefits decreased $106,000, or 2.2%, during the first quarter of
2003 compared to the first quarter of 2002. Equipment expense decreased $39,000,
or 5.7%, during the first three months of 2003 compared to the same period in
2002. Data processing expense decreased $34,000, or 6.0%, in the first quarter
of 2003 compared to the first quarter of 2002. Salaries and benefits, equipment
and data processing expense decreased largely due to efficiencies gained from
restructuring and the merger of BankIllinois and First Trust Bank of Shelbyville
in June 2002. Office supplies decreased $38,000, or 11.1%, in the first quarter
of 2003 compared to the first quarter of 2002. This decrease was due, in part,
to a $27,000 decrease at Firstech as a result of reduced volume with one large
client, and favorable discounts from renegotiated supply contracts. Service
charges from correspondent banks decreased $7,000, or 3.0%, in the first three
months of 2003 compared to the same period in 2002. Somewhat offsetting these
decreases was an increase in occupancy expense of $71,000, or 12.9%, during the
first quarter of 2003 compared to the first quarter of 2002. This was primarily
due to increases in snow and ice removal related expenses and utilities due to
the harsher winter in the first quarter of 2003 compared to the same period in
2002. Other non-interest expense increased $20,000, or 1.9%, during the first
three months of 2003 compared to the same period in 2002.
Income tax expense decreased $6,000, or 0.3%, during the first three months of
2003 compared to the first three months of 2002. The effective tax rate
increased to 33.8% during the first quarter of 2003 from 33.2% during the first
quarter of 2002.
Business Segment Information
The Company currently operates in two industry segments. The primary business
involves providing banking services to central Illinois. The Banks offer a full
range of financial services to business and individual customers. These services
include demand, savings, time and individual retirement accounts; commercial,
consumer (including automobile loans and personal lines of credit),
agricultural, and real estate lending; safe deposit and night depository
services; farm management; full service trust departments that offer a wide
range of services such as investment management, acting as trustee, serving as
guardian, executor or agent and miscellaneous consulting; discount brokerage
services and purchases of installment obligations from retailers, primarily
without recourse. The other industry segment involves retail payment processing.
FirsTech provides the following services to electric, water and gas utilities,
telecommunication companies, cable television firms and charitable
organizations: retail lockbox processing of payments delivered by mail on behalf
of the biller; processing of payments delivered by customers to pay agents such
as grocery stores, convenience stores and currency exchanges; and concentration
of payments delivered by the Automated Clearing House network, money management
software such as Quicken and through networks such as Visa e-Pay and MasterCard
RPS.
21
Company information is provided for informational purposes only, since it is not
considered a separate segment for reporting purposes. Effective January 1, 2003,
certain administrative, audit, compliance, accounting, finance, property
management, human resources, courier, information systems and other support
services previously included in the budgets of the Banks were moved to the
Company. During this process, approximately 80 full time equivalent employees
were moved from the Banks to the Company. The net expenses of these functions
are now allocated to the subsidiaries by charging a monthly management fee.
Banking Remittance
Services Services Company Eliminations Total
----------------------------------------------------------------
March 31, 2003
Total interest income ....... $ 14,416 $ 18 $ 155 $ (23) $ 14,566
Total interest expense ...... 4,543 -- -- (23) 4,520
Provision for loan losses ... 330 -- -- -- 330
Total non-interest income ... 3,226 1,787 1,101 (1,278) 4,836
Total non-interest expense .. 6,641 1,251 1,450 (1,278) 8,064
Income before income tax .... 6,128 554 (194) -- 6,488
Income tax expense .......... 2,038 222 (70) -- 2,190
Net income .................. 4,090 332 (124) -- 4,298
Total assets ................ 1,103,743 7,101 140,933 (133,767) 1,118,010
Depreciation and amortization 449 100 97 -- 646
March 31, 2002
Total interest income ....... $ 16,194 $ 24 $ 43 24 $ (54) $ 16,207
Total interest expense ...... 5,881 -- -- (54) 5,827
Provision for loan losses ... 330 -- -- -- 330
Total non-interest income ... 2,909 1,980 27 (163) 4,753
Total non-interest expense .. 6,865 1,331 164 (163) 8,197
Income before income tax .... 6,027 673 (94) -- 6,606
Income tax expense .......... 1,965 269 (38) -- 2,196
Net income .................. 4,062 404 (56) -- 4,410
Total assets ................ 1,095,135 7,790 142,862 (139,520) 1,106,267
Depreciation and amortization 526 126 8 -- 660
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
or threats thereof, and the response of the United States to any such
threats and attacks.
o The effects of, and changes in, federal, state and local laws, regulations
and policies affecting banking, securities, insurance and monetary and
financial matters.
o The effects of changes in interest rates (including the effects of changes
in the rate of prepayments of the Company's assets) and the policies of the
Board of Governors of the Federal Reserve System.
22
o The ability of the Company to compete with other financial institutions as
effectively as the Company currently intends due to increases in
competitive pressures in the financial services sector.
o The inability of the Company to obtain new customers and to retain existing
customers.
o The timely development and acceptance of products and services, including
products and services offered through alternative delivery channels such as
the Internet.
o Technological changes implemented by the Company and by other parties,
including third party vendors, which may be more difficult or more
expensive than anticipated or which may have unforeseen consequences to the
Company and its customers.
o The ability of the Company to develop and maintain secure and reliable
electronic systems.
o The ability of the Company to retain key executives and employees and the
difficulty that the Company may experience in replacing key executives and
employees in an effective manner.
o Consumer spending and saving habits which may change in a manner that
affects the Company's business adversely.
o Business combinations and the integration of acquired businesses which may
be more difficult or expensive than expected.
o The costs, effects and outcomes of existing or future litigation.
o Changes in accounting policies and practices, as may be adopted by state
and federal regulatory agencies and the Financial Accounting Standards
Board.
o The ability of the Company to manage the risks associated with the
foregoing as well as anticipated.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements.
Additional information concerning the Company and its business, including other
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
See the "Interest Rate Sensitivity" section above.
Item 4. Controls and Procedures
Based upon an evaluation within the 90 days prior to the filing date of this
report, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the Company's internal controls
subsequent to the date of the evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the Company or its
subsidiaries is a party other than ordinary routine litigation incidental to
their respective businesses.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
None
b. Reports
On April 25, 2003, Main Street Trust, Inc. file a report on Form 8-K
pursant to Item 12 regarding the issuance of a letter to the
shareholders and a press release announcing its earnings for the
quarter ended March 31, 2003.
24
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MAIN STREET TRUST, INC.
Date: May 6, 2003
By: /s/ David B. White
-------------------------------
David B. White
Executive Vice President
and Chief Financial Officer
By: /s/ Van A. Dukeman
-------------------------------
Van A. Dukeman
President and Chief Executive
Officer
25
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Van A. Dukeman, Chief Executive Officer of the Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Main Street Trust,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within the 90 days prior to the filing
date of this quarterly report (the "Evaluation Date");
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function);
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to date of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 6, 2003
/s/ Van A. Dukeman
--------------------------
Van A. Dukeman
Chief Executive Officer
26
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, David B. White, Chief Financial Officer of the Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Main Street Trust,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within the 90 days prior to the filing
date of this quarterly report (the "Evaluation Date");
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function);
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to date of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 6, 2003
/s/ David B. White
---------------------------
David B. White
Chief Financial Officer
27