UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2005
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
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(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 by "X" whether the registrant is a shell company (as defined by Rule
12b-2 of the Exchange Act).
Yes[ ] No[X]
Indicate the number of shares outstanding of the registrant's common stock, as
of November 2, 2005.
Main Street Trust, Inc. Common Stock 10,222,987
1
Table of Contents
PAGE
(a) PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 3
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosure about Market Risk 36
Item 4. Controls and Procedures 36
(b) PART II. OTHER INFORMATION
Item 1. Legal Proceedings 36
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds 36
Item 3. Defaults Upon Senior Securities 37
Item 4. Submission of Matters to a Vote of Security Holders 37
Item 5. Other Information 37
Item 6. Exhibits 37
SIGNATURES 38
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------------------------
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2005 and December 31, 2004
(Unaudited, in thousands, except share data)
September 30, December 31,
2005 2004
--------------------------
ASSETS
Cash and due from banks $ 42,520 $ 33,133
Federal funds sold and interest bearing deposits 70,325 31,795
--------------------------
Cash and cash equivalents 112,845 64,928
--------------------------
Investments in debt and equity securities:
Available-for-sale, at fair value 228,915 269,580
Held-to-maturity, at cost (fair value of $80,082 and $81,099
at September 30, 2005 and December 31, 2004, respectively) 80,803 81,164
Non-marketable equity securities 24,858 7,982
--------------------------
Total investments in debt and equity securities 334,576 358,726
--------------------------
Loans, net of allowance for loan losses of $13,688 and $9,650
at September 30, 2005 and December 31, 2004, respectively 1,000,825 761,227
Mortgage loans held for sale 1,973 1,005
Premises and equipment 22,364 17,087
Goodwill 20,832 -
Core deposit intangibles 4,786 -
Accrued interest receivable 9,157 6,570
Other assets 26,061 18,575
--------------------------
Total assets $ 1,533,419 $ 1,228,118
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 211,943 $ 172,908
Interest bearing 969,883 801,669
---------------------------
Total deposits 1,181,826 974,577
---------------------------
Federal funds purchased, repurchase agreements and notes payable 117,130 96,900
Federal Home Loan Bank advances and other borrowings 71,482 29,882
Accrued interest payable 3,727 2,601
Other liabilities 15,025 10,183
---------------------------
Total liabilities 1,389,190 1,114,143
---------------------------
Commitments and contingencies (See Note 5)
Shareholders' equity:
Preferred stock, no par value; 2,000,000 shares authorized - -
Common stock, $0.01 par value; 15,000,000 shares authorized;
11,219,319 shares issued 112 112
Paid in capital 55,189 55,189
Retained earnings 118,075 108,071
Accumulated other comprehensive loss (1,410) (218)
--------------------------
171,966 163,154
Less: treasury stock, at cost, 990,777 and 1,770,329 shares
at September 30, 2005 and December 31, 2004, respectively (27,737) (49,179)
--------------------------
Total shareholders' equity 144,229 113,975
--------------------------
Total liabilities and shareholders' equity $ 1,533,419 $ 1,228,118
===========================
See accompanying notes to unaudited consolidated financial statements.
3
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Nine Months Ended September 30, 2005 and 2004
(Unaudited, in thousands, except share data)
2005 2004
----------------------
Interest income:
Loans and fees on loans $ 43,961 30,571
Investments in debt and equity securities
Taxable 9,269 7,973
Tax-exempt 1,156 1,424
Federal funds sold and interest bearing deposits 1,252 339
----------------------
Total interest income 55,638 40,307
----------------------
Interest expense:
Deposits 14,871 10,189
Federal funds purchased, repurchase agreements and
notes payable 2,128 893
Federal Home Loan Bank advances and other borrowings 1,985 1,202
----------------------
Total interest expense 18,984 12,284
----------------------
Net interest income 36,654 28,023
Provision for loan losses 1,080 990
----------------------
Net interest income after provision for loan losses 35,574 27,033
----------------------
Non-interest income:
Remittance processing 5,144 5,635
Trust and brokerage fees 5,805 4,831
Service charges on deposit accounts 2,129 1,820
Securities transactions, net (450) 139
Gain on sales of mortgage loans, net 726 777
Other 2,017 2,075
--------------------
Total non-interest income 15,371 15,277
--------------------
Non-interest expense:
Salaries and employee benefits 17,325 13,978
Occupancy 2,293 1,968
Equipment 1,955 1,886
Data processing 1,669 1,633
Office supplies 906 887
Service charges from correspondent banks 389 652
Amortization of core deposit intangibles 435 -
Other 4,342 3,953
--------------------
Total non-interest expense 29,314 24,957
--------------------
Income before income taxes 21,631 17,353
Income taxes 7,820 6,137
-----------------------
Net income $ 13,811 $ 11,216
=======================
Per share data:
Basic earnings per share $ 1.38 $ 1.18
Weighted average shares of common stock outstanding 10,014,234 9,491,827
Diluted earnings per share $ 1.37 1.17
Weighted average shares of common stock and dilutive
potential common shares outstanding 10,111,588 9,607,752
See accompanying notes to unaudited consolidated financial statements.
4
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Nine Months Ended September 30, 2005 and 2004
(Unaudited, in thousands)
2005 2004
----------------------
Net income $ 13,811 $ 11,216
----------------------
Other comprehensive income (loss), before tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period,
net of tax of ($975) and ($1,083), for September 30, 2005
and 2004, respectively (1,462) (1,625)
Less: reclassification adjustment for gains (losses)
included in net income, net of tax of $180 and ($56),
for September 30, 2005 and 2004, respectively 270 (83)
----------------------
Other comprehensive loss (1,192) (1,708)
----------------------
Comprehensive income $ 12,619 $ 9,508
======================
See accompanying notes to unaudited consolidated financial statements.
5
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Three Months Ended September 30, 2005 and 2004
(Unaudited, in thousands, except share data)
2005 2004
-----------------------
Interest income:
Loans and fees on loans $ 16,643 $ 10,507
Investments in debt and equity securities
Taxable 3,664 2,560
Tax-exempt 370 445
Federal funds sold and interest bearing deposits 439 151
-----------------------
Total interest income 21,116 13,663
-----------------------
Intererest expense:
Deposits 5,868 3,643
Federal funds purchased, repurchase
agreements and notes payable 870 336
Federal Home Loan Bank advances and other borrowings 812 405
-----------------------
Total interest expense 7,550 4,384
-----------------------
Net interest income 13,566 9,279
Provision for loan losses 450 330
-----------------------
Net interest income after provision for loan losses 13,116 8,949
-----------------------
Non-interest income:
Remittance processing 1,741 1,820
Trust and brokerage fees 2,153 1,544
Service charges on deposit accounts 820 619
Securities transactions, net (485) 133
Gain on sales of mortgage loans, net 329 229
Other 740 613
-----------------------
Total non-interest income 5,298 4,958
-----------------------
Non-interest expense:
Salaries and employee benefits 6,097 4,727
Occupancy 824 685
Equipment 674 606
Data processing 566 546
Office supplies 319 270
Service charges from correspondent banks 134 194
Amortization of core deposit intangibles 217 -
Other 1,480 1,414
-----------------------
Total non-interest expense 10,311 8,442
-----------------------
Income before income taxes 8,103 5,465
Income taxes 2,952 1,910
-----------------------
Net income $ 5,151 $ 3,555
=======================
Per share data:
Basic earnings per share $ 0.50 $ 0.38
Weighted average shares of common stock outstanding 10,248,453 9,460,495
Diluted earnings per share $ 0.50 $ 0.37
Weighted average shares of common stock
and dilutive potential common shares outstanding 10,341,647 9,573,370
See accompanying notes to unaudited consolidated financial statements.
6
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Three Months Ended September 30, 2005 and 2004
(Unaudited, in thousands)
2005 2004
----------------------
Net income $ 5,151 $ 3,555
Other comprehensive income (loss), before tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period,
net of tax of ($497) and $418, for September 30, 2005
and 2004, respectively (745) 625
Less: reclassification adjustment for gains (losses)
included in net income, net of tax of $194 and ($54),
for September 30, 2005 and 2004, respective 291 (79)
----------------------
Other comprehensive income (loss) (454) 546
======================
Comprehensive income $ 4,697 $ 4,101
See accompanying notes to unaudited consolidated financial statements.
7
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Nine Months Ending September 30, 2005 and 2004
(Unaudited, in thousands)
2005 2004
--------------------
Cash flows from operating activities:
Net income $ 13,811 $ 11,216
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,901 1,914
Amortization of bond discounts and premiums, net 952 1,879
Amortization of core deposit intangibles 435 -
Provision for loan losses 1,080 990
Securities transactions, net 450 (139)
Federal Home Loan Bank stock dividend (597) (187)
Undistributed gain from non-marketable equity securities (1,585) (36)
Gain on sales of mortgage loans, net (726) (777)
Loss (gain) on disposal of premises and equipment 9 (286)
Proceeds from sales of mortgage loans originated
for sale 55,397 59,411
Mortgage loans originated for sale (55,357) (58,912)
Other, net (287) (1,154)
--------------------
Net cash provided by operating activities 15,483 13,919
--------------------
Cash flows from investing activities:
Net increase in loans (12,564) (61,081)
Proceeds from maturities and calls of investments
in debt securities:
Held-to-maturity 5,532 9,988
Available-for-sale 127,750 171,845
Proceeds from sales of investments:
Available-for-sale 56,245 3,223
Purchases of investments in debt and equity securities:
Held-to-maturity (13,779) (45,789)
Available-for-sale (133,367) (192,532)
Other equity securities (685) (175)
Principal paydowns from mortgage-backed securities:
Held-to-maturity 8,032 40,797
Available-for-sale 11,655 10,304
Return of principal on other equity securities 1,800 522
Purchases of premises and equipment (1,197) (1,694)
Proceeds from sales of premises and equipment 3 623
Acquisition of Citizens First Financial Corporation, net
of cash and cash equivalents acquired (6,385) -
--------------------
Net cash provided by (used in) investing activities 43,040 (63,969)
--------------------
Cash flows from financing activities:
Net (decrease) increase in deposits (24,840) 91,563
Net increase (decrease) in federal funds purchased,
repurchase agreements, and notes payable 20,230 (8,304)
Advances from Federal Home Loan Bank and other borrowings 34,500 -
Payments on Federal Home Loan Bank and other borrowings (30,499) (78)
Cash dividends paid (6,421) (5,988)
MSTI stock transactions, net (3,576) (1,971)
--------------------
Net cash (used in) provided by financing activities (10,606) 75,222
--------------------
Net increase in cash and cash equivalents 47,917 25,172
Cash and cash equivalents at beginning of year 64,928 75,903
--------------------
Cash and cash equivalents at end of period $ 112,845 $ 101,075
====================
See accompanying notes to unaudited consolidated financial statements.
8
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Supplemental Disclosure of Cash Flow Information
For the Nine Months Ending September 30, 2005 and 2004
(Unaudited, in thousands)
2005 2004
------------------------
Cash paid during the year for:
Interest $ 18,051 $ 11,649
Income taxes 7,145 5,131
Real estate acquired through or in lieu of foreclosure - 40
Dividends declared not paid 2,250 1,984
Acquisition of Citizens First Financial Corporation:
Stock issued 27,804
Cash paid 28,416
Capitalized expenses 621
---------
Total cost of acquisition 56,841
=========
Assets acquired:
Cash and due from banks 6,022
Federal funds sold and interest bearing deposits 16,630
---------
Cash and cash equivalents 22,652
Investments in debt and equity securities:
Available-for-sale, at fair value 23,865
Non-marketable equity securities 16,374
Loans, net of allowance for loan losses 228,114
Mortgage loans held for sale 282
Premises and Equipment 5,993
Accrued interest receivable 1,571
Goodwill 20,832
Core deposit intangibles 5,222
Other assets 6,288
Liabilities assumed:
Deposits (232,089)
Federal Home Loan Bank advances and other borrowings (37,599)
Accrued interest payable (193)
Other liabilities (4,471)
----------
Net assets acquired 56,841
==========
See accompanying notes to unaudited consolidated financial statements.
9
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, 2004, and schedules in the Main Street Trust, Inc.'s
Form 10-K filed on March 15, 2005.
In the opinion of management, the consolidated financial statements of Main
Street Trust, Inc. and its subsidiaries, as of September 30, 2005 and for the
three-month and nine-month periods ended September 30, 2005 and 2004, include
all adjustments necessary for a fair presentation of the results of those
periods. All such adjustments, outside of those related to the business
combination discussed in Note 2, are of a normal recurring nature.
Results of operations for the three-month and nine-month periods ended
September 30, 2005 are not necessarily indicative of the results which may be
expected for the year ended December 31, 2005.
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 2004 consolidated financial statements have been
reclassified to conform with the 2005 presentation. Such reclassifications have
no effect on previously reported net income or shareholders'equity.
Note 2. Company Information/Business Combination
-------------------------------------------------
Main Street Trust, Inc. (the "Company"), an Illinois corporation, is a bank
holding company registered under the Bank Holding Company Act of 1956, as
amended. The Company was incorporated on August 12, 1999, and is the parent
company of Main Street Bank & Trust and FirsTech, Inc. On June 14, 2001, the
Company was certified by the Board of Governors of the Federal Reserve System as
a financial holding company. This designation allows the Company to engage in a
wider range of nonbanking activities, including greater authority to engage in
securities and insurance activities. However, the Company has no current plans
to do so.
On 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 BankIllinois and The First National Bank
of Decatur into BankIllinois and renamed the bank Main Street Bank & Trust.
On April 1, 2005, the Company acquired all of the outstanding stock of
Citizens First Financial Corp. ("Citizens"), which was the parent company of
Citizens Savings Bank, based in Bloomington, Illinois. The transaction has been
accounted for as a purchase. Assets and liabilities related to the acquisition
of Citizens are reported as of the April 2005 acquisition date. Results of
operations of Citizens since the acquisition date have been included in the
Company's consolidated financial statements. The Company merged Citizens Savings
Bank into Main Street Bank & Trust as of the close of business on October 7,
2005. The Citizens acquisition purchase price of approximately $56.841 million
was allocated based upon the fair value of the assets and liabilities acquired.
The Citizens excess purchase price has been allocated to goodwill and
identifiable intangible assets in accordance with current accounting literature,
to the extent that supportable documentation was available at September 30,
2005. Such amounts are subject to minor adjustments in the near term as
additional analysis is performed or obtained from third party sources. $5.222
million was allocated to core deposit intangibles at acquisition and is being
amortized over a period of six years.
10
Proforma unaudited operating results for the nine months ended September
30, 2005 and 2004, giving effect to the Citizens acquisition as if it had
occurred as of January 1, 2004 are as follows:
2005 2004
----------------------------
(in thousands, except
per share data)
Interest Income $ 59,806 $ 54,001
Interest Expense 20,579 17,716
Net Income 13,800 12,954
Basic EPS 1.38 1.25
Diluted EPS 1.36 1.23
These unaudited proforma results have been prepared for comparative
purposes only and include certain adjustments, such as additional amortization
expense on revalued purchased assets and implied interest on additional
borrowings to fund the acquisition. In addition, 2005 merger related expenses
were reallocated to a period prior to the pro forma dates presented. All
adjustments were tax effected. They do not purport to be indicative of the
results of operations that actually would have resulted had the combination
occurred on January 1, 2004 or of future results of operations of the
consolidated entities.
Note 3. Income per Share
-------------------------
Net income per common share has been computed as follows:
Nine Months Ended Three Months Ended
September 30, September 30,
-----------------------------------------------------
2005 2004 2005 2004
-----------------------------------------------------
Net Income $ 13,811,000 $ 11,216,000 $ 5,151,000 $3,555,000
=====================================================
Shares:
Weighted average common shares outstanding 10,014,234 9,491,827 10,248,453 9,460,495
Dilutive effect of outstanding options,
as determined by the application of
the treasury stock method 97,354 115,925 93,194 112,875
-----------------------------------------------------
Weighted average common shares oustanding,
as adjusted 10,111,588 9,607,752 10,341,647 9,573,370
=====================================================
Basic earnings per share $ 1.38 $ 1.18 $ 0.50 $ 0.38
=====================================================
Diluted earnings per share $ 1.37 $ 1.17 $ 0.50 $ 0.37
=====================================================
11
Note 4: Stock Option Plans
---------------------------
The Company has established a stock incentive plan, which provides for the
granting of options of the Company's common stock to certain directors, officers
and employees. As permitted under accounting principles generally accepted in
the United States of America, grants of options under the plans are accounted
for under the recognition and measurement principles of APB Opinion No. 25
Accounting for Stock Issued to Employees, and related interpretations. Because
options granted under the plans had an exercise price equal to market value of
the underlying common stock on the grant date, no stock-based employee
compensation cost is included in determining net income. The following table
illustrates the effect on net income (in thousands, except per share data and
earnings per share) if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation,
to stock-based employee compensation.
Nine Months Ended Three Months Ended
-------------------------------------------
September 30, September 30,
-------------------------------------------
2005 2004 2005 2004
-------------------------------------------
Net income on common stock:
As reported $ 13,811 $ 11,216 $ 5,151 $ 3,555
Deduct total stock-based compensation expense
determined under the fair value method for all
awards, net of related tax effects (274) (280) (92) (86)
Pro forma $ 13,537 $ 10,936 $ 5,059 $ 3,469
=============================================
Basic earnings per share:
As reported $ 1.38 $ 1.18 $ 0.50 $ 0.38
Pro forma 1.35 1.15 0.49 0.37
Diluted earnings per share:
As reported $ 1.37 $ 1.17 $ 0.50 $ 0.37
Pro forma 1.34 1.14 0.49 0.36
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 the traded options, which have no vesting
restrictions. In addition, such models require the use of subjective
assumptions, including expected stock price volatility. In management's opinion,
such valuation models may not necessarily provide the best single measure of
option value.
Nine Months Ended
September 30,
2005 2004
-----------------------------
Number of options granted 137,500 140,500
Risk-free interest rate 3.83% - 4.08% 3.94%
Expected life, in years 7.00 - 8.00 8.00
Expected volatility 15.05% - 15.42% 15.95%
Expected dividend yield 2.97% - 3.06% 2.75%
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.
12
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. Management
does not anticipate any significant losses as a result of these transactions.
The following table summarizes these financial instruments and commitments
(in thousands) at September 30, 2005 and 2004:
September 30,
2005 2004
-------------------------------
Financial instruments whose contract amounts
represent credit risk:
Commitments $ 272,011 $ 285,407
Standby letters of credit 29,685 22,896
The acquisition of Citizens resulted in an additional $21.351 million in
commitments and $549,000 in additional standby letters of credit at April 1,
2005.
The majority of commitments are agreements to extend credit to a customer
as long as there is no violation of any condition established in the contract.
Commitments, principally variable interest rates, generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. For commitments to extend credit, the Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based
on management's credit evaluation. Collateral held varies, but may include
accounts receivable; inventory; property, plant and equipment; and
income-producing commercial properties. Also included in commitments at
September 30, 2005 was $2.330 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 Bank would be entitled to seek recovery from the customer. At September 30,
2005 and 2004, no amounts had been recorded as liabilities for the Banks'
potential obligations under these guarantees.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations
-------------
Financial Condition
-------------------
Assets and Liabilities
----------------------
Total assets increased $305.301 million, or 24.9%, to $1.533 billion at
September 30, 2005 compared to $1.228 billion at December 31, 2004. Increases in
loans, federal funds sold and interest bearing deposits, goodwill,
non-marketable equity securities, cash and due from banks, other assets,
premises and equipment, core deposit intangibles, accrued interest receivable
and mortgage loans held for sale were partially offset by decreases in
investments in debt and equity securities available for sale and investments in
debt and equity securities held to maturity. Most of the change in total assets
was attributable to the acquisition of Citizens. On April 1, 2005, Citizens
total assets were $331.193 million.
Cash and due from banks increased $9.387 million, or 28.3%, to $42.520
million at September 30, 2005 compared to $33.133 million at December 31, 2004.
The Citizens acquisition contributed $6.022 million to the increase in cash and
due from banks.
Federal funds sold and interest bearing deposits increased $38.530 million,
or 121.2%, to $70.325 million at September 30, 2005 compared to $31.795 million
at December 31, 2004. The Citizens acquisition contributed $16.630 million.
Federal funds sold and interest bearing deposits fluctuate with loan demand,
deposit volume and investment opportunities.
Total investments in debt and equity securities decreased $24.150 million,
or 6.7%, to $334.576 million at September 30, 2005 compared to $358.726 million
at December 31, 2004. Included in the change were decreases of $40.665 million,
or 15.1%, in investments in securities available for sale and $361,000, or 0.4%,
in securities held to maturity offset somewhat by an increase of $16.876
million, or 211.4%, in non-marketable equity securities. Included in the
increase in non-marketable equity securities was $16.374 million of FHLB Stock
owned by Citizens on April 1, 2005. The Citizens acquisition contributed $23.865
million of investments in securities available for sale. Investments fluctuate
with loan demand, deposit volume and investment opportunities.
Loans, net of allowance for loan losses, increased $239.598 million, or
31.5%, to $1.001 billion at September 30, 2005 from $761.227 million at December
31, 2004. The Citizens acquisition contributed $228.114 million to the increase
in loans.
Mortgage loans held for sale increased $968,000, or 96.3%, to $1.973
million at September 30, 2005 compared to $1.005 million at December 31, 2004.
The Citizens acquisition contributed $282,000 to the increase.
Premises and equipment increased $5.277 million, or 30.9%, from $17.087
million at December 31, 2004 to $22.364 million at September 30, 2005. The
increase included the acquisition of Citizens which contributed $5.993 million
and purchases of $1.197 million offset somewhat by depreciation and amortization
expense of $1.901 million, loss on disposal of property of $9,000 and proceeds
from sale of property of $3,000.
Total liabilities increased $275.047 million, or 24.7%, to $1.389 billion
at September 30, 2005 from $1.114 billion at December 31, 2004. There were
increases in all categories of liabilities as the acquisition of Citizens
contributed $274.352 million to total liabilities.
Total deposits increased $207.249 million, or 21.3%, to $1.182 billion at
September 30, 2005 from $974.577 million at December 31, 2004. Interest bearing
deposits increased $168.214 million, or 21.0%, to $969.883 million at September
30, 2005 from $801.669 million at December 31, 2004. Non-interest bearing
deposits increased $39.035 million, or 22.6%, to $211.943 million at September
30, 2005 from $172.908 million at December 31, 2004. At the time of acquisition,
Citizens added $203.593 million of interest bearing deposits and $28.496 million
of non-interest bearing deposits. The Company expected interest bearing deposits
to decrease during the first quarter of 2005 due to an outflow of short-term
deposits attributable to the Company's Wealth Management division which had
grown approximately $43 million during the second half of 2004.
Federal funds purchased, repurchase agreements and notes payable increased
$20.230 million, or 20.9%, to $117.130 million at September 30, 2005 from
$96.900 million at December 31, 2004. Included in this change was an increase of
$20.555 million in repurchase agreements, offset slightly by a decrease of
$325,000 in federal funds purchased.
Federal Home Loan Bank advances and other borrowings increased $41.600
million, or 139.2%, to $71.482 million at September 30, 2005 compared to $29.882
million at December 31, 2004. The increase included $37.599 million from the
acquisition of Citizens.
14
Investment Securities
---------------------
The carrying value of investments in debt and equity securities was as
follows for September 30, 2005 and December 31, 2004:
Carrying Value of Securities1
(in thousands)
--------------------------------------------------------------------------------
September 30, 2005 December 31, 2004
--------------------------------------------------------------------------------
Available-for-sale:
Federal agencies $ 194,444 $ 218,994
Mortgage-backed securities 16,829 27,713
State and municipal 14,547 16,715
Marketable equity securities 3,095 6,158
---------- ---------
Total available-for-sale $ 228,915 $ 269,580
Held-to-maturity:
Federal agencies $ 38,710 $ 40,931
Mortgage-backed securities 17,249 14,992
State and municipal 24,844 25,241
---------- ---------
Total held-to-maturity $ 80,803 $ 81,164
================================================================================
Non-marketable equity securities:
Federal Home Loan Bank stock $ 21,250 $ 4,279
Other equity investments 3,608 3,703
---------- ---------
Total non-marketable equity securities $ 24,858 $ 7,982
================================================================================
Total investment securities $ 334,576 $ 358,726
===============================================================================
1Investment securities available-for-sale are carried at fair value. Investment
securities held-to-maturity are carried at amortized cost.
15
The following table shows the maturities and weighted-average yields of
investment securities at September 30, 2005. All securities are shown at their
contractual maturity.
Maturities and Weighted Average Yields of Debt Securities
(dollars in thousands)
------------------------------------------------------------------------------------------------------------------------------
September 30, 2005
------------------------------------------------------------------------------------------------------------------------------
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:
Federal agencies $61,379 2.50% $131,606 3.22% $ 1,459 4.72% $ - - $194,444 3.00%
Mortgage-backed
securities1 $ 9,284 3.66% $ 6,847 4.88% $ 681 6.33% $ 17 4.54% $ 16,829 4.27%
State and municipal (TE)2 $ 1,767 6.33% $ 8,612 5.67% $ 3,689 7.68% $ 479 7.76% $ 14,547 6.33%
Marketable equity
securities3 $ - - $ - - $ - - $ - - $ 3,095 -
------------------------------------------------------------------------------------------------------------------------------
Total $72,430 $147,065 $ 5,829 $ 496 $228,915
------------------------------------------------------------------------------------------------------------------------------
Average Yield 2.75% 3.44% 6.78% 7.65% 3.31%
==============================================================================================================================
Securities held-
to-maturity:
Federal agencies $11,145 2.63% $ 22,840 3.04% $ 4,725 3.85% $ - - - $ 38,710 3.02%
Mortgage-backed
securities1 $ 5,675 3.05% $ 11,177 4.58% $ 87 5.06% $ 310 5.99% $ 17,249 4.10%
State and municipal (TE)2 $ 7,870 5.34% $ 16,619 5.58% $ 195 7.31% $ 160 7.95% $ 24,844 5.53%
------------------------------------------------------------------------------------------------------------------------------
Total $24,690 $ 50,636 $ 5,007 $ 470 $ 80,803
------------------------------------------------------------------------------------------------------------------------------
Average Yield (TE)2 3.59% 4.21% 4.00% 6.66% 4.02%
==============================================================================================================================
Non-marketable equity securities3:
Federal Home Loan Bank stock $ - - $ - - $ - - $ - $ 21,250 -
Other equity investments $ - - $ - - $ - - $ - - $ 3,608 -
-------------------------------------------------------------------------------------- ---------------------------------------
Total $ - - $ - - $ - - $ - - $ 24,858 -
==============================================================================================================================
1Expected maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties and certain securities require principal prepayments prior
to maturity.
2The average yield has been tax equivalized (TE) on state and municipal
tax-exempt securities.
3Due to the nature of these securities, they do not have a stated maturity date
or rate.
16
Continuous gross unrealized losses of investments in debt and equity
securities (in thousands) which are classified as temporary were as follows:
Continuous unrealized Continuous unrealized
losses existing for less losses existing greater
than 12 months than 12 months Total
-------------------------------------------------------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
-------------------------------------------------------------------------------
Available-for-Sale:
Federal agencies $ 36,870 $ (309) $ 138,401 $ (2,712) $ 175,271 $ (3,021)
Mortgage-backed securities 21,005 (143) 8,212 (158) 29,217 (301)
State and municipal 2,439 (41) 1,097 (10) 3,536 (51)
-------------------------- ----------------------- ------------------------
Subtotal, debt securities $ 60,314 $ (493) $ 147,710 $ (2,880) $ 208,024 $ (3,373)
Other equity securities 599 (108) 331 (289) 930 (397)
-------------------------- ----------------------- ------------------------
Total temporarily impaired
securities $ 60,913 $ (601) $ 148,041 $ (3,169) $ 208,954 $ (3,770)
========================== ======================== =======================
Held-to-Maturity:
Federal agencies $ 1,566 $ (26) $ 36,310 $ (807) $ 37,876 $ (833)
Mortgage-backed securities 10,677 (120) 5,617 (59) 16,294 (179)
State and municipal 8,048 (49) 1,379 (10) 9,427 (59)
-------------------------- ----------------------- ------------------------
Total temporarily impaired
securities $ 20,291 $ (195) $ 43,306 $ (876) $ 63,597 $ (1,071)
========================== ======================== ========================
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 $3.169 million continuous unrealized loss greater than 12 months on
available-for-sale securities at September 30, 2005 was made up of thirty-seven
debt securities and four other securities which are common stocks and was
believed to be a temporary loss. Common stocks represented $289,000 of the
continuous unrealized loss on available-for-sale securities. Management has
analyzed these securities to determine whether an other than temporary loss
existed and considered several factors, including, but not limited to, the
length of time and the extent to which the market value of the security has been
less than cost, the financial condition and near-term prospects of the issuer
and 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 market
value. The $876,000 continuous unrealized loss greater than 12 months on
held-to-maturity securities was made up of twenty-one debt securities and was
believed to be a temporary loss. Unrealized losses on debt securities are
generally due to changes in interest rates and, as such, are considered, by the
Company, to be temporary. Because of the nature of U.S. Agency securities, most
of which are single pay at maturity, and because the Company has the ability to
hold these investments until a recovery of market value, which may be maturity,
the Company does not consider these investments to be other than temporarily
impaired. Because the Company believes the decline in market value of
mortgage-backed securities is attributable to changes in interest rates and not
credit quality and because the Company has the ability to hold these investments
until recovery of market value, the Company did not consider these investments
to be other than temporarily impaired.
17
Loans
-----
The following table presents the amounts and percentages of loans at
September 30, 2005 and December 31, 2004 according to the categories of
commercial, financial and agricultural; commercial real estate; residential real
estate; and installment and consumer loans.
Amount of Loans Outstanding
(dollars in thousands)
----------------------------------------------------------------------------------------------------------
September 30, 2005 December 30, 2004
----------------------------------------------------------------------------------------------------------
Amount Percentage Amount Percentage
----------------------------------------------------------------------------------------------------------
Commercial, financial and agricultural $ 319,928 31.54% $ 314,657 40.82%
Real estate - commercial 465,390 45.87% 309,830 40.19%
Real estate - residential 140,898 13.89% 62,464 8.10%
Installment and consumer 88,297 8.70% 83,926 10.89%
---------------------------------------------------------------------------------------------------------
Total loans $ 1,014,513 100.00% $ 770,877 100.00%
==========================================================================================================
The shift in the loan mix from December 31, 2004 to September 30, 2005 was
primarily attributable to the acquisition of Citizens.
The balance of loans outstanding as of September 30, 2005 by maturity is
shown in the following table:
Maturity of Loans Outstanding
(dollars in thousands)
--------------------------------------------------------------------------------------------------
September 30, 2005
--------------------------------------------------------------------------------------------------
1 year 1 to 5 Over 5
or less years years Total
Commercial, financial and agricultural $ 175,035 $ 92,770 $ 52,123 $ 319,928
Real estate - commercial 122,297 183,515 159,578 $ 465,390
Real estate - residential 35,170 48,328 57,400 $ 140,898
Installment and consumer 14,452 50,169 23,676 $ 88,297
--------------------------------------------------------------------------------------------------
Total $ 346,954 $ 374,782 $ 292,777 $1,014,513
==================================================================================================
Percentage of total loans outstanding 34.20% 36.94% 28.86% 100.00%
==================================================================================================
Capital
-------
Total shareholders' equity increased $30.254 million from December 31, 2004
to September 30, 2005. Treasury stock transactions were $24.227 million
primarily due to the issuance of treasury stock for the acquisition of Citizens
First Financial Corporation, offset somewhat by the purchase of stock under the
Company's stock repurchase plan. The change in shareholders' equity is
summarized as follows:
Shareholders' Equity (in thousands)
--------------------------------------------------------------------------------
Shareholders' equity, December 31, 2004 $ 113,975
Net income 13,811
Treasury stock transactions, net 24,227
Cash dividends declared (6,592)
Other comprehensive income (1,192)
--------------------------------------------------------------------------------
Shareholders' equity, September 30, 2005 $ 144,229
================================================================================
On September 20, 2005, the Board of Directors of the Company declared a
quarterly cash dividend of $0.22 per share of the Company's common stock. The
dividend of $2.250 million was paid on October 21, 2005, to holders of record on
October 7, 2005.
18
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 1 capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of September
30, 2005, that the Company and its subsidiary banks exceeded all capital
adequacy requirements to which they are subject.
As of September 30, 2005, the most recent notifications from primary
regulatory agencies categorized 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. Citizens Savings Bank was merged into
Main Street Bank & Trust on October 7, 2005.
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
Actual adequacy prompt corrective
purposes: action provisions:
----------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------------------------------------------------------
As of September 30, 2005:
Total capital
(to risk-weighted assets)
Consolidated $135,569 12.1% $89,959 8.0% N/A
Main Street Bank & Trust $ 97,025 10.6% $73,424 8.0% $91,780 10.0%
Citizens Savings Bank $ 32,524 16.9% $15,414 8.0% $19,268 10.0%
Tier I capital
(to risk-weighted assets)
Consolidated $121,678 10.8% $44,980 4.0% N/A
Main Street Bank & Trust $ 86,775 9.5% $36,712 4.0% $55,068 6.0%
Citizens Savings Bank $ 30,102 15.6% $7,707 4.0% $11,561 6.0%
Tier I capital
(to average assets)
Consolidated $121,678 8.1% $60,442 4.0% N/A
Main Street Bank & Trust $ 86,775 7.2% $48,329 4.0% $60,412 5.0%
Citizens Savings Bank $ 30,102 10.3% $11,711 4.0% $14,639 5.0%
19
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.
The following table presents the Company's interest rate sensitivity at
various intervals at September 30, 2005:
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 $ 70,325 $ - $ - $ - $ - $ 70,325
Debt and equity securities 1 30,692 27,076 5,863 49,880 221,065 334,576
Loans 2 350,972 61,627 51,530 87,822 464,535 1,016,486
------------------------------------------------------------------------------------------------------------------------
Total earning assets $451,989 $ 88,703 $ 57,393 $137,702 $685,600 $1,421,387
------------------------------------------------------------------------------------------------------------------------
Interest bearing liabilities:
Savings and interest bearing
demand deposits $ 51,830 $ 1,803 $ 2,580 $ 5,161 $196,131 $ 257,505
Money market savings
deposits 248,353 - - - - 248,353
Time deposits 42,679 71,489 89,730 103,879 156,248 464,025
Federal funds purchased,
repurchase agreements,
and notes payable 91,941 3,140 11,775 10,274 - 117,130
FHLB advances and
other borrowings 14,575 21,000 18,144 8,225 9,538 71,482
-------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities $449,378 $ 97,432 $122,229 $127,539 $361,917 $1,158,495
-------------------------------------------------------------------------------------------------------------------------
Net asset (liability) funding gap 2,611 (8,729) (64,836) 10,163 323,683 262,892
-------------------------------------------------------------------------------------------------------------------------
Repricing gap 1.01 0.91 0.47 1.08 1.89 1.23
Cumulative repricing gap 1.01 0.99 0.89 0.92 1.23 1.23
-------------------------------------------------------------------------------------------------------------------------
1Debt and equity securities include securities available-for-sale, securities
held-to-maturity, non-marketable equity securities.
2Loans are gross and include mortgage loans held-for-sale.
Included in the 1-30 day category of savings and interest-bearing demand
deposits are non-core deposits plus a percentage, based upon industry-accepted
assumptions and Company analysis, of the core deposits. "Core deposits" are the
lowest average balance of the prior twelve months of each product type included
in this category. "Non-core deposits" are the difference between the current
balance and core deposits. The time frames include a percentage, based upon
industry-accepted assumptions and Company analysis, of the core deposits, as
follows:
1-30 Days 31-90 Days 91-180 Days 181-365 Days Over 1 Year
--------- ---------- ----------- ----------- -----------
Savings and interest-bearing
demand deposits 0.45% 0.85% 1.25% 2.45% 95.00%
20
At September 30, 2005, the Company was slightly asset sensitive in the 1-30
days category, but somewhat liability sensitive in the 1- 90 days category. As
such, the effect of an increase in the interest rate for all interest earning
assets and interest bearing liabilities of 100 basis points would increase
annualized net interest income by approximately $26,000 in the 1-30 days
category, but would decrease annualized net interest income by approximately
$61,000 in the 1-90 days category assuming no management intervention. A
decrease in interest rates would have the opposite effect for the same time
periods. The Company's Asset and Liability Management Policy states that the
cumulative ratio of rate-sensitive assets ("RSA") to rate-sensitive liabilities
("RSL") for the 12-month period should fall within the range of 0.75-1.25. As of
September 30, 2005, the Company's RSA/RSL was 0.92, 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 that permit the Company to
borrow federal funds on an unsecured basis. Additionally, at September 30, 2005
the Company had a $15 million unsecured line of credit with a correspondent
bank, of which $3.5 million was outstanding and due in 2006. The Company also
has sufficient capacity to permit it to borrow funds from the Federal Home Loan
Bank on a secured basis (refer to the Liquidity and Cash Flows section that
follows for additional information).
The Company uses financial forecasting/budgeting/reporting software
packages to perform interest rate sensitivity analysis for all product
categories. The Company's primary focus of its analysis is on the effect of
interest rate increases and decreases on net interest income. Management
believes that this analysis reflects the potential effects on current earnings
of interest rate changes. Call criteria and prepayment assumptions are taken
into consideration for investments in debt and equity securities. All of the
Company's financial instruments are analyzed by a software database which
includes each of the different product categories which are tied to key rates
such as prime, Treasury Bills, or the federal funds rate. The relationships of
each of the different products to the key rate that the product is tied to is
proportional. The software reprices the products based on current offering
rates. The software performs interest rate sensitivity analysis by performing
rate shocks of plus or minus 200 basis points in 100 basis point increments.
The following table shows projected results at September 30, 2005 and
December 31, 2004 of the impact on net interest income from an immediate change
in interest rates. The results are shown as a percentage change in net interest
income over the next twelve months.
Basis Point Change
-------------------------------------------------------------
+200 +100 -100 -200
-------------------------------------------------------------
September 30, 2005 10.5% 5.2% (5.5%) (11.2%)
December 31, 2004 10.3% 5.1% (5.1%) (10.3%)
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.
21
Liquidity and Cash Flows
------------------------
The Company was able to meet liquidity needs during the first nine months
of 2005. A review of the consolidated statement of cash flows included in the
accompanying financial statements shows that the Company's cash and cash
equivalents increased $47.917 million from December 31, 2004 to September 30,
2005.
In general, funds provided by customer deposits, federal funds purchased,
repurchase agreements and notes payable, and maturities, calls and paydowns of
investment securities are used to fund loans and purchase investment securities.
Available funds are used to fund demand for loans that meet the Company's credit
quality guidelines, with the remaining funds used to purchase investment
securities and/or federal funds sold.
The increase in cash and cash equivalents came from cash provided by
investing and operating activities, offset somewhat by cash used in financing
activities. There were differences in sources and uses of cash during the first
nine months of 2005 compared to the first nine months of 2004. Cash provided by
investing activities during the first nine months of 2005 was $43.040 million
compared to cash used of $63.969 million during the same period in 2004,
primarily due to differences in investments in debt and equity securities and
volume of loan growth. Cash provided by investing activities during the first
nine months of 2005 was $63.183 million compared to cash used of $1.817 million
during the same period in 2004. In 2005, proceeds of $211.014 million from
maturities, calls and sales of debt and equity securities, principal paydowns on
mortgage-backed securities and return of equity on other equity securities were
offset somewhat by cash used to purchase debt and equity securities of $147.831
million. In 2004, purchases of debt and equity securities were $238.496 million
compared to proceeds of $236.679 million from maturities, calls and sales of
debt and equity securities, principal paydowns on mortgage-backed securities and
return of principal on other equity securities. Also contributing to the
difference in investing activities was the difference in loan growth during
these two periods. Cash used to fund loan growth during the first nine months of
2005 was $12.564 million compared to $61.081 million during the same period in
2004. In addition, $6.385 million was used to fund the acquisition of Citizens
in 2005. Cash was provided by operating activities during the first nine months
of both 2005 and 2004.
Cash used by financing activities during the first nine months of 2005 was
$10.606 million compared to cash provided of $75.222 million during the same
period in 2004, primarily due to a decrease in deposits at the Company's Main
Street Bank & Trust subsidiary during the first nine months of 2005 compared to
an increase during the same period in 2004. The Company expected deposits to
decrease during the first half of 2005 due to a planned outflow of short-term
deposits attributable to the Company's Wealth Management division which had
grown approximately $43 million during the second half of 2004. The decrease in
deposits was offset somewhat by an increase in federal funds purchased,
repurchase agreements and notes payable during the first nine months of 2005 of
$20.230 million, mainly as a result of an increase in repurchase agreements
compared to a decrease of $8.304 million in federal funds purchased, repurchase
agreements and notes payable during the same period in 2004 primarily due to a
decrease in repurchase agreements. Cash provided by Federal Home Loan Bank
advances and other borrowings of $34.500 million during the first nine months of
2005 was used mainly as a source of working capital and $30.499 million was
repaid during the year. During the first nine months of 2004, there were no
Federal Home Loan Bank advances and other borrowings and $78,000 in payments.
On April 1, 2005, the Company borrowed $6 million, to be repaid within 3
years, to fund a portion of the Citizens acquisition cost. In addition, the
Company negotiated an increase of its $10 million line of credit from a third
party lender to $15 million and immediately advanced $4 million. As of September
30, 2005, the Company had $3.5 million outstanding on its $15 million line of
credit which is due in 2006. The Company's future short-term cash requirements
are expected to be provided by maturities and sales of investments, sales of
loans and deposits. 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 remaining $11.5 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.
22
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, financial and agricultural; commercial real
estate; residential real estate; and installment and consumer loan portfolios
according to the historical losses experienced in each of these portfolios as
well as the current level of watch list loans and nonperforming loans for each
portfolio. Loans for which borrower cash flow and the estimated liquidation
value of collateral are inadequate to repay the total outstanding balance are
evaluated separately and assigned a specific allocation. The unallocated portion
of the allowance is determined by economic conditions and other factors
mentioned above. The balance of the allowance for loan losses was $13.688
million at September 30, 2005 compared to $9.650 million at December 31, 2004,
an increase of $4.038 million. Of this increase, $3.434 million was attributable
to the acquisition of Citizens. Net charge-offs were $476,000 and provisions
totaled $1.080 million during the first nine months of 2005. The allowance for
loan losses as a percentage of gross loans, including loans held-for-sale, was
1.35% at September 30, 2005, compared to 1.25% at December 31, 2004. Gross
loans, including loans held-for-sale, increased 31.7% to $1.016 billion at
September 30, 2005 from $771.882 million at December 31, 2004. Of this increase,
$231.830 million was attributable to the acquisition of Citizens.
One measure of the adequacy of the allowance for loan losses is the ratio
of the allowance to nonperforming loans. The allowance for loan losses as a
percentage of nonperforming loans was 298.3% at September 30, 2005 compared to
431.6% at December 31, 2004. Nonperforming loans increased from $2.236 million
at December 31, 2004 to $4.589 million at September 30, 2005. The $2.353 million
increase in nonperforming loans during the first nine months of 2005 resulted
from a $1.740 million increase in nonaccrual loans and an increase of $613,000
in loans past due 90 days or more. Of these increases, the acquisition of
Citizens resulted in an additional $446,000 in nonaccrual loans. Other increases
in nonaccruals included the addition of two commercial credits that totaled
$892,000. Increases in retail mortgage loan and home equity lines of credit made
up the bulk of the remaining increase in nonaccrual and 90-day delinquencies.
Management believes that nonperforming and potential problem loans are
appropriately identified and monitored based on the extensive loan analysis
performed by the credit administration department, the internal loan committees
and the board of directors. Historically, there have not been a significant
amount of loans charged off which had not been previously identified as problem
loans by the credit administration department or the loan committees.
The following table summarizes changes in the allowance for loan losses by
loan categories for each period and additions to the allowance for loan losses,
which have been charged to operations.
23
Allowance for Loan Losses
(dollars in thousands)
----------------------------------------------------------------------------------------------------------
September 30, 2005 September 30, 2004
----------------------------------------------------------------------------------------------------------
Allowance for loan losses at beginning of year $ 9,650 $ 9,786
Allocation for loan losses attributable to acquisition of Citizens 3,434 -
----------------------------------------------------------------------------------------------------------
Charge-offs during period:
Commercial, financial and agricultural $ (161) $ (279)
Commercial real estate - -
Residential real estate (2) -
Installment and consumer (547) (856)
----------------------------------------------------------------------------------------------------------
Total $ (710) $ (1,135)
----------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial, financial and agricultural $ 17 $ 157
Commercial real estate 5 -
Residential real estate - 15
Installment and consumer 212 150
----------------------------------------------------------------------------------------------------------
Total $ 234 $ 322
----------------------------------------------------------------------------------------------------------
Net (charge-offs) recoveries $ (476) $ (813)
Provision for loan losses 1,080 990
----------------------------------------------------------------------------------------------------------
Allowance for loan losses at end of quarter $ 13,688 $ 9,963
==========================================================================================================
Ratio of net charge-offs to
average net loans (0.05)% (0.12)%
==========================================================================================================
The following table shows the allocation of the allowance for loan losses
allocated to each category.
Allocation of the Allowance for Loan Losses
(in thousands)
-------------------------------------------------------------------------------
September 30, 2005 December 31, 2004
-------------------------------------------------------------------------------
Allocated:
Commercial, financial and agricultural $ 5,388 $ 5,289
Commercial real estate 5,137 1,637
Residential real estate 437 198
Installment and consumer 1,512 1,605
-------------------------------------------------------------------------------
Total allocated allowance $ 12,474 $ 8,729
Unallocated allowance 1,214 921
-------------------------------------------------------------------------------
Total 13,688 9,650
===============================================================================
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)
--------------------------------------------------------------------------------
September 30, 2005 December 31, 2004
================================================================================
Nonaccrual loans1 $ 3,429 $ 1,689
================================================================================
Loans past due 90 days or more $ 1,160 $ 547
================================================================================
Restructured loans $ 369 $ 497
================================================================================
1Includes $1.100 million at September 30, 2005 and $509,000 at December 31, 2004
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 Impairments of a Loan" (SFAS 114).
Other Nonperforming Assets (dollars in thousands)
--------------------------------------------------------------------------------
September 30, 2005 December 31, 2004
================================================================================
Other real estate owned $ 40 $ -
================================================================================
Nonperforming other assets $ 50 $ 33
================================================================================
24
Results of Operations
---------------------
Results of Operations for the Nine Months Ended September 30, 2005
------------------------------------------------------------------
Net income for the first nine months of 2005 was $13.811 million, a $2.595
million, or 23.1%, increase from $11.216 million for the same period in 2004.
This increase included $1.318 million of net income generated by Citizens since
the acquisition. Basic earnings per share increased $0.20, or 16.9%, to $1.38
per share in the first nine months of 2005 from $1.18 per share in the first
nine months of 2004. Diluted earnings per share increased $0.20, or 17.1%, to
$1.37 per share in the first nine months of 2005 from $1.17 per share in the
first nine months of 2004.
25
The following schedule "Consolidated Average Balance Sheet and Interest
Rates" provides details of average balances, interest income or interest
expense, and the average rates for the Company's major asset and liability
categories.
Consolidated Average Balance Sheet and Interest Rates
(dollars in thousands)
--------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30,
--------------------------------------------------------------------------------------------------------------------
2005 2004
--------------------------------------------------------------------------------------------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
--------------------------------------------------------------------------------------------------------------------
Assets
Taxable investment securities1 $ 318,483 $ 9,269 3.89% $ 328,765 $ 7,973 3.24%
Tax-exempt investment securities1 (TE) 39,948 1,778 5.95% 47,467 2,191 6.17%
Federal funds sold and interest bearing
deposits2 42,069 1,252 3.98% 33,754 339 1.34%
Loans3,4 (TE) 922,896 43,972 6.37% 702,101 30,579 5.82%
--------------------------------------------------------------------------------------------------------------------
Total interest earning assets
and interest income (TE) $ 1,323,396 $ 56,271 5.68% $1,112,087 $41,082 4.93%
--------------------------------------------------------------------------------------------------------------------
Cash and due from banks $ 44,024 $ 46,102
Premises and equipment 20,685 17,196
Other assets 46,980 23,664
--------------------------------------------------------------------------------------------------------------------
Total assets $ 1,435,085 $1,199,049
====================================================================================================================
Liabilities and Shareholders' Equity
Interest bearing demand deposits $ 75,254 $ 374 0.66% $ 96,018 $ 497 0.69%
Savings 408,827 4,652 1.52% 333,124 2,342 0.94%
Time deposits 429,171 9,845 3.07% 352,729 7,350 2.78%
Federal funds purchased, repurchase
agreements, and notes payable 113,738 2,128 2.50% 98,827 893 1.21%
FHLB advances and other borrowings 57,292 1,985 4.63% 29,936 1,202 5.36%
--------------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities and interest expense $ 1,084,282 $ 18,984 2.34% $ 910,634 $12,284 1.80%
--------------------------------------------------------------------------------------------------------------------
Noninterest bearing demand deposits $ 131,058 $ 100,120
Noninterest bearing savings deposits 71,095 65,430
Other liabilities 14,584 10,113
--------------------------------------------------------------------------------------------------------------------
Total liabilities $ 1,301,019 $1,086,297
Shareholders' equity 134,066 112,752
--------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 1,435,085 $1,199,049
====================================================================================================================
Interest spread (average rate earned
minus average rate paid) (TE) 3.34% 3.13%
====================================================================================================================
Net interest income (TE) $ 37,287 $28,798
====================================================================================================================
Net yield on interest
earnings assets (TE) 3.77% 3.46%
====================================================================================================================
See next page for Notes 1-4.
26
Notes to Consolidated Average Balance Sheet and Interest Rates Tables:
1Investments in debt securities are included at carrying value. Income from
venture capital funds of approximately $1.586 million and $36,000 in 2005 and
2004, respectively, is included in interest income from taxable investment
securities. Due to the nature of venture capital investments, future results
cannot be predicted based on past performance.
2Federal funds sold and interest bearing deposits included approximately
$149,000 in 2005 and $45,000 in 2004 of interest income from third party
processing of cashier checks.
3Loans are net of allowance for loan losses and include mortgage loans
held-for-sale. Nonaccrual loans are included in the total.
4Loan fees of approximately $1.000 million and $1.082 million in 2005 and 2004,
respectively, are included in total loan income.
Net interest income, the most significant component of the Company's
earnings, is the difference between interest received or accrued on the
Company's earning assets - primarily loans and investments - and interest paid
or accrued on deposits and borrowings. In order to compare the interest
generated from different types of earning assets, the interest income on certain
tax-exempt investment securities and loans is increased for analysis purposes to
reflect the income tax savings provided by the tax-exempt assets. The adjustment
to interest income for tax-exempt investment securities and loans was calculated
based on the federal income tax statutory rate of 35%. The following table
presents, on a tax equivalent (TE) basis, an analysis of changes in net interest
income resulting from changes in average volumes of earning assets and interest
bearing liabilities and average rates earned and paid. The change in interest
due to the combined rate/volume variance has been allocated to rate and volume
changes in proportion to the absolute dollar amounts of change in each.
Analysis of Volume and Rate Changes
(in thousands)
-----------------------------------------------------------------------------------------
Nine Months Ended September 30, 2005
-----------------------------------------------------------------------------------------
Increase
(Decrease)
from
Previous Due to Due to
Year Volume Rate
-----------------------------------------------------------------------------------------
Interest Income
Taxable investment securities $ 1,296 $ (402) $ 1,698
Tax-exempt investment securities (TE) (413) (339) (74)
Federal funds sold and bearing earning deposits 913 102 811
Loans (TE) 13,393 10,287 3,106
-----------------------------------------------------------------------------------------
Total interest income (TE) $ 15,189 $ 9,648 $ 5,541
-----------------------------------------------------------------------------------------
Interest Expense
Interest bearing demand and savings deposits $ 2,187 $ 400 $ 1,787
Time deposits 2,495 1,697 798
Federal funds purchased,
repurchase agreements and notes payable 1,235 152 1,083
FHLB advances and other borrowings 783 1,062 (279)
-----------------------------------------------------------------------------------------
Total interest expense $ 6,700 $ 3,311 $ 3,389
-----------------------------------------------------------------------------------------
Net Interest Income (TE) $ 8,489 $ 6,337 $ 2,152
=========================================================================================
27
Net interest income on a tax equivalent basis was $8.489 million, or 29.5%,
higher for the first nine months of 2005 compared to the same period of 2004.
Total tax-equivalent interest income was $15.189 million, or 37.0%, higher in
2005 compared to 2004, and interest expense increased $6.700 million, or 54.5%.
The increase in tax-equivalent interest income and interest expense was due to
increases in average volume and higher rates.
The increase in total tax-equivalent interest income was due to an increase
in interest income from loans, taxable investment securities, and federal funds
sold and interest bearing deposits, offset somewhat by a decrease in interest
income from tax-exempt investment securities. The increase in interest income
from loans was due to an increase in volume coupled with higher rates. The
increase in interest income from taxable investment securities was due to higher
rates, offset somewhat by lower volume. The increase in interest income on
federal funds sold and interest earning deposits was primarily due to higher
rates. The decrease in interest income from tax-exempt investment securities was
primarily due to lower volume.
The increase in total interest expense was due to an increase in interest
expense from all categories of interest bearing liabilities. The increases in
interest expense from interest bearing demand and savings deposits and federal
funds purchased, repurchase agreements and notes payable were primarily due to
higher rates. The increase in interest expense on time deposits was primarily
due to higher volume. The increase in interest expense from FHLB advances and
other borrowings was due to higher volume, offset somewhat by lower rates.
The provision for loan losses recorded was $1.080 million during the first
nine months of 2005 compared to $990,000 during the same period in 2004. 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.
Noninterest Income and Expense
for the Nine Months Ended
September 30, 2005 and 2004
(in thousands)
-----------------------------------------------------------------------------------------------------
Non-interest Income 09/30/2005 09/30/2004 $ change % change
-----------------------------------------------------------------------------------------------------
Remittance processing 1 $ 5,144 $ 5,635 $ (491) (8.7%)
Trust and brokerage fees 2 5,805 4,831 974 20.2%
Service charges on deposit accounts 3 2,129 1,820 309 17.0%
Securities transactions, net 4 (450) 139 (589) (423.7%)
Gain on sales of mortgage loans, net 726 777 (51) (6.6%)
Other 2,017 2,075 (58) (2.8%)
------------- ------------- ----------- ------------
Total non-interest income $15,371 $ 15,277 $ 94 0.6%
============== ============== ============ ============
----------------------------------------------------------------------------------------------------
Non-interest Expense 09/30/2005 09/30/2004 $ change % change
----------------------------------------------------------------------------------------------------
Salaries and employee benefits 5 $17,325 $ 13,978 $3,347 23.9%
Occupancy 6 2,293 1,968 325 16.5%
Equipment 1,955 1,886 69 3.7%
Data processing 1,669 1,633 36 2.2%
Office supplies 906 887 19 2.1%
Service charges from correspondent banks 7 389 652 (263) (40.3%)
Amortization of core deposit intangibles 8 435 - 435
Other 9 4,342 3,953 389 9.8%
------------- ------------ ------------ ------------
Total non-interest expense $29,314 $ 24,957 $4,357 17.5%
============== ============= ============ ============
1 The decrease in remittance processing income was primarily due to a $839,000,
or 45.1%, decrease in income from lockbox fees, offset somewhat by a $376,000,
or 10.0%, increase in electronic processing income at the Company's remittance
processing subsidiary, FirsTech. The decrease in lockbox fees was mainly due to
the loss of two major accounts in the fourth quarter of 2004. This decrease was
offset somewhat by an increase in electronic processing revenue from new and
existing Internet Agent customers. These changes continue to demonstrate the
Company's shift toward electronic processing from traditional lockbox services.
2 The increase in trust and brokerage fees included a $377,000, or 255.8%,
increase in farm realty income, a $285,000, or 120.5%, increase in estate fees
and an $88,000, or 31.9%, increase in brokerage income. The increase in farm
realty income included approximately $238,000 in commissions attributable to the
sale of several properties in the third quarter of 2005. The increase in estate
fees was primarily due to one estate that began producing revenue during the
first quarter of 2005. The increase in brokerage income was due to prospecting
new customers and the timing of revenue from new customers prospected in prior
periods.
28
3 The increase in income from service charges on deposit accounts was due to
$513,000 generated by the Citizens accounts, offset somewhat by a $204,000, or
11.2%, decrease at Main Street Bank & Trust.
4 The decrease in income from securities transactions, net, was primarily due to
a $566,000 net loss recognized on one venture fund, offset somewhat by a net
gain of $103,000 on the sale of equity securities during the first nine months
of 2005.
5 In 2005, salaries and benefits included $2.135 million attributable to
additional employees as a result of the acquisition of Citizens and $307,000 in
additional salaries and benefits expense attributable to the new branch in
Peoria, Illinois that became fully operational in the fourth quarter of 2004.
6 In 2005, occupancy expense included $312,000 attributable to the expenses of
operating Citizens.
7 The decrease in service charges from correspondent banks was largely due to
the loss of two lockbox accounts as described in footnote 1, which resulted in a
significant decrease in the number of checks cleared in the first nine months of
2005 compared to the same period in 2004.
8 Amortization of core deposit intangibles was attributable to the acquisition
of Citizens.
9 Included in other non-interest expense in 2005 compared to 2004 was $448,000
attributable to Citizens.
Income tax expense increased $1.683, or 27.4%, during the first nine
months of 2005 compared to the same period in 2004. The effective tax rate
increased to 36.2% during the first nine months of 2005 from 35.4% during the
same period in 2004.
Results of Operations For the Three Months Ended September 30, 2005
-------------------------------------------------------------------
Net income for the third quarter of 2005 was $5.151 million, a $1.596
million, or 44.9%, increase from $3.555 million for the same period in 2004.
Basic earnings per share increased $0.12, or 31.6%, to $0.50 per share during
the third quarter of 2005 from $0.38 per share during the same period in 2004.
Diluted earnings per share increased $0.13, or 35.1%, to $0.50 during the third
quarter of 2005 from $0.37 per share during the same period in 2004.
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.
29
Consolidated Average Balance Sheet and Interest Rates
(dollars in thousands)
------------------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30,
------------------------------------------------------------------------------------------------------------------------------
2005 2004
------------------------------------------------------------------------------------------------------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
------------------------------------------------------------------------------------------------------------------------------
Assets
Taxable investment securities1 $ 321,759 $ 3,664 4.52% $ 337,101 $ 2,560 3.02%
Tax-exempt investment securities1 (TE) 38,274 569 5.90% 44,479 685 6.13%
Federal funds sold and interest bearing
deposits2 40,413 439 4.31% 36,234 151 1.66%
Loans3,4 (TE) 1,007,078 16,648 6.56% 722,047 10,509 5.79%
------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets
and interest income (TE) $ 1,407,524 $21,320 6.01% $ 1,139,861 $13,905 4.85%
------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks $ 48,848 $ 46,108
Premises and equipment 22,483 16,982
Other assets 58,708 25,654
------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,537,563 $1,228,605
==============================================================================================================================
Liabilities and Shareholders' Equity
Interest bearing demand deposits $ 75,062 $ 169 0.89% $ 102,280 $ 192 0.75%
Savings 425,355 1,912 1.78% 359,472 942 1.04%
Time deposits 472,397 3,787 3.18% 356,431 2,509 2.80%
Federal funds purchased, repurchase
agreements, and notes payable 117,852 870 2.93% 92,687 336 1.44%
FHLB advances and other borrowings 71,828 812 4.49% 29,912 405 5.39%
------------------------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities and interest expense $ 1,162,494 $ 7,550 2.58% $ 940,782 $ 4,384 1.85%
------------------------------------------------------------------------------------------------------------------------------
Noninterest bearing demand deposits $ 137,956 $ 100,028
Noninterest bearing savings deposits 76,923 65,052
Other liabilities 16,364 10,357
------------------------------------------------------------------------------------------------------------------------------
Total liabilities $ 1,393,737 $ 1,116,219
Shareholders' equity 143,826 112,386
------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 1,537,563 $ 1,228,605
==============================================================================================================================
Interest spread (average rate earned
minus average rate paid) (TE) 3.43% 3.00%
==============================================================================================================================
Net interest income (TE) $13,770 $ 9,521
===============================================================================================================================
Net yield on interest
earnings assets (TE) 3.88% 3.32%
==============================================================================================================================
See next page for Notes 1-4.
Notes to Consolidated Average Balance Sheet and Interest Rate Tables:
1Investments in debt securities are included at carrying value. Income from
venture capital funds of approximately $1.045 million and $26,000 in 2005 and
2004, respectively, is included in interest income from taxable investment
securities. Due to the nature of venture capital investments, future results
cannot be predicted based on past performance.
2Federal funds sold and interest bearing deposits included approximately $66,000
and $15,000 in 2005 and 2004, respectively, of interest income from third party
processing of cashier checks.
3Loans are net of allowance for loan losses and include mortgage loans
held-for-sale. Nonaccrual loans are included in the total.
30
4Loan fees of approximately $339,000 and $383,000 in 2005 and 2004,
respectively, are included in total loan income.
Net interest income, the most significant component of the Company's
earnings, is the difference between interest received or accrued on the
Company's earning assets - primarily loans and investments - and interest paid
or accrued on deposits and borrowings. In order to compare the interest
generated from different types of earning assets, the interest income on certain
tax-exempt investment securities and loans is increased for analysis purposes to
reflect the income tax savings provided by the tax-exempt assets. The adjustment
to interest income for tax-exempt investment securities and loans was calculated
based on the federal income tax statutory rate of 35%. The following table
presents, on a tax equivalent (TE) basis, an analysis of changes in net interest
income resulting from changes in average volumes of earning assets and interest
bearing liabilities and average rates earned and paid. The change in interest
due to the combined rate/volume variance has been allocated to rate and volume
changes in proportion to the absolute dollar amounts of change in each.
Analysis of Volume and Rate Changes
(in thousands)
-------------------------------------------------------------------------------
Three Months Ended September 30, 2005
-------------------------------------------------------------------------------
Increase
(Decrease)
from
Previous Due to Due to
Year Volume Rate
--------------------------------------------------------------------------------
Interest Income
Taxable investment securities $ 1,104 $ (757) $ 1,861
Tax-exempt investment securities (TE) (116) (91) (25)
Federal funds sold and interest earning deposits 288 19 269
Loans (TE) 6,139 4,595 1,544
--------------------------------------------------------------------------------
Total interest income (TE) $ 7,415 $ 3,766 $ 3,649
--------------------------------------------------------------------------------
Interest Expense
Interest bearing demand and savings deposits $ 947 $ 100 $ 847
Time deposits 1,278 902 376
Federal funds purchased,
repurchase agreements and notes payable 534 111 423
FHLB advances and other borrowings 407 846 (439)
--------------------------------------------------------------------------------
Total interest expense $ 3,166 $ 1,959 $ 1,207
--------------------------------------------------------------------------------
Net Interest Income (TE) $ 4,249 $ 1,807 $ 2,442
================================================================================
Net interest income on a tax equivalent basis was $4.249 million, or 44.6%,
higher for the third quarter of 2005 compared to the third quarter of 2004.
Total tax-equivalent interest income was $7.415 million, or 53.3%, higher in
2005 compared to 2004, while interest expense increased $3.166 million, or
72.2%. The increase in interest income and interest expense was due to an
increase in both rates and volume.
The increase in total tax equivalent interest income was due to increases
in interest income from loans, taxable investment securities and federal funds
sold and interest earning deposits, offset slightly by a decrease in interest
income from tax-exempt investment securities. The increase in interest income
from loans was primarily due to an increase in volume. The increase in interest
income from federal funds sold and interest earning deposits was primarily due
to an increase in rates during the third quarter of 2005 compared to the same
period in 2004. The increase in interest income from taxable investment
securities was due to an increase in rates, offset somewhat by a decrease in
volume. The decrease in interest income from tax-exempt investment securities
was due to decreases in both rates and volume.
31
The increase in total interest expense was due to increases in interest
expense on all categories of interest bearing liabilities. The increases in
interest expense on time deposits was primarily due to an increase in volume.
The increase in interest expense from interest bearing demand and savings
deposits, and federal funds purchased, repurchase agreements and notes payable
was primarily due to an increase in rates during the third quarter of 2005
compared to the same period in 2004. The increase in interest expense from FHLB
advances and other borrowings was due to an increase in volume, offset slightly
by lower rates.
The provision for loan losses recorded was $450,000 in the third quarter of
2005 compared to $330,000 in the third quarter of 2004, an increase of 36.4%.
The provision during both periods was based on management's analysis of the loan
portfolio, as discussed in the provision and allowance for loan losses section
above.
Noninterest Income and Expense
for the Three Months Ended
September 30, 2005 and 2004
(in thousands)
----------------------------------------------------------------------------------------------------
Non-interest Income 09/30/2005 09/30/2004 $ change % change
----------------------------------------------------------------------------------------------------
Remittance processing $ 1,741 $ 1,820 $ (79) (4.3%)
Trust and brokerage fees 1 2,153 1,544 609 39.4%
Service charges on deposit accounts 2 820 619 201 32.5%
Securities transactions, net 3 (485) 133 (618) (464.7%)
Gain on sales of mortgage loans, net 4 329 229 100 43.7%
Other 5 740 613 127 20.7%
---------- -------------- ------------ ------------
Total non-interest income $ 5,298 $ 4,958 $ 340 6.9%
----------------------------------------------===========-==============--============--============
Non-interest Expense 09/30/2005 09/30/2004 $ change % change
----------------------------------------------------------------------------------------------------
Salaries and employee benefits 6 $ 6,097 $ 4,727 $ 1,370 29.0%
Occupancy 7 824 685 139 20.3%
Equipment 8 674 606 68 11.2%
Data processing 566 546 20 3.7%
Office supplies 9 319 270 49 18.1%
Service charges from correspondent banks 10 134 194 (60) (30.9%)
Amortization of core deposit intangibles 11 217 - 217
Other 1,480 1,414 66 4.7%
---------- -------------- ------------ ------------
Total non-interest expense $ 10,311 $ 8,442 $ 1,869 22.1%
----------------------------------------------===========-==============--============--============
1 The increase in trust and brokerage fees was mainly due to a $379,000, or
2,587.1%, increase in farm realty fees, a $93,000, or 126.0% increase in estate
fees, and a $52,000, or 145.9% increase in income from employee benefits
administration. Included in the increase in farm realty income was approximately
$238,000 in commissions from the sale of several properties in the third quarter
of 2005. The increase in estate fees was primarily due to one estate that began
producing revenue during the first quarter of 2005.
2 The increase in income from service charges on deposit accounts was due to
$259,000 as a result of the Citizens acquisition, offset somewhat by a $58,000,
or 9.4%, decrease at Main Street Bank & Trust.
3 The decrease in securities transactions, net, was due to a $395,000 loss
recognized on one venture fund and a net loss of $91,000 on the sale of several
equity securities in the third quarter of 2005.
4 The increase in gains on sales of mortgage loans reflected a $10.897 million,
or 70.7%, increase in funded mortgages held-for-sale, from $15.423 million in
the third quarter of 2004 to $26.320 million in the third quarter of 2005. The
volume of funded mortgage loans increased mainly due to more demand for
refinancings in the third quarter of 2005 compared to the same period in 2004.
5 The increase in other non-interest income in the third quarter of 2005
included $81,000 attributable to the acquisition of Citizens and income of
approximately $58,000 in proceeds from two life insurance policies.
32
6 The increase in salaries and benefits in the third quarter of 2005 included
$1.055 million attributable to additional employees as a result of the
acquisition of Citizens.
7 The increase in occupancy expense in the third quarter of 2005 included
$173,000 attributable to the expense of operating Citizens.
8 Equipment expense in the third quarter of 2005 included $87,000 attributable
to the expense of operating Citizens.
9 Office supplies expense in the third quarter of 2005 included $74,000
attributable to the expense of operating Citizens.
10 The decrease in service charges from correspondent banks in the third quarter
of 2005 was largely due to the loss of two lockbox accounts as described in
footnote 1, which resulted in a significant decrease in the number of checks
cleared in the third quarter of 2005 compared to the same period in 2004.
11 Amortization of core deposit intangibles was attributable to the acquisition
of Citizens.
Income tax expense increased $1.042 million, or 54.6%, during the third
quarter of 2005 compared to the same period in 2004. The effective tax rate
increased to 36.4% during the third quarter of 2005 from 34.9% in the third
quarter of 2004.
Business Segment Information
----------------------------
The Company currently operates in two industry segments. The primary
business involves providing banking services in central Illinois to both
business and individual customers. These services include demand, savings, time
and individual retirement accounts; commercial, commercial real estate, consumer
(including automobile loans and personal lines of credit), agricultural, and
residential real estate lending; safe deposit and night depository services;
purchases of installment obligations from retailers, primarily without recourse;
farm management; full service trust department that offers a wide range of
services such as investment management, acting as trustee, serving as guardian,
executor or agent, miscellaneous consulting, and brokerage services offered
through a third-party arrangement with Raymond James Financial Services. The
other industry segment involves retail payment processing. FirsTech provides the
following services to electric, water and gas utilities, telecommunication
companies, cable television firms and charitable organizations: retail lockbox
processing of payments delivered by mail on behalf of the biller; processing of
payments delivered by customers to pay agents such as grocery stores,
convenience stores and currency exchanges; and concentration of payments
delivered by the Automated Clearing House network, 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. During 2004,
certain administrative, audit, compliance, accounting, finance, property
management, human resources, sales management and marketing, courier,
information systems and other support services were performed by the Company.
The net expenses of these functions were allocated to the subsidiaries by
charging a monthly management fee. Effective January 1, 2005, these functions
were moved to the Banking Services Segment. During this process, approximately
77 full time equivalent employees were moved from the Company to Main Street
Bank & Trust. The net expenses of these functions are allocated to the Company
and FirsTech by charging a monthly management fee.
33
The following table quantifies the Company's business segment information
for the nine-months ended September 30, 2005 and 2004:
As of and for the Banking Remittance
Nine Months Ended: Services Services Company Eliminations Total
-----------------------------------------------------------------------------------------------------------
September 30, 2005
Total interest income $ 53,846 $ 10 $ 1,821 $ (39) $ 55,638
Total interest expense 18,813 - 210 (39) 18,984
Provision for loan losses 1,080 - - - 1,080
Total non-interest income 11,372 5,253 (456) (798) 15,371
Total non-interest expense 25,988 3,194 930 (798) 29,314
Income before income tax 19,337 2,069 225 - 21,631
Income tax expense 6,871 870 79 - 7,820
Net income 12,466 1,199 146 - 13,811
Total assets 1,517,540 3,296 157,292 (144,709) 1,533,419
Depreciation and amortization 1,573 288 40 - 1,901
September 30, 2004
Total interest income $ 40,196 $ 15 $ 172 $ (76) $ 40,307
Total interest expense 12,309 - 51 (76) 12,284
Provision for loan losses 990 - - - 990
Total non-interest income 9,732 5,696 3,529 (3,680) 15,277
Total non-interest expense 20,009 3,905 4,723 (3,680) 24,957
Income before income tax 16,620 1,806 (1,073) - 17,353
Income tax expense 5,810 759 (432) - 6,137
Net income 10,810 1,047 (641) - 11,216
Total assets 1,221,464 4,730 119,906 (106,502) 1,239,598
Depreciation and amortization 1,142 471 301 - 1,914
Emerging Accounting Standards
In December 2004, the Financial Accounting Standards Board published
Statement No. 123 (revised 2004), Share-Based Payment ("FAS 123(R)"). FAS 123(R)
requires that the compensation cost relating to share-based payment
transactions, including grants of employee stock options and shares under
employee stock purchase plans, be recognized in 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 objectives in the Statement. The Statement was originally
effective at the beginning of the Company's third quarter in 2005, however, in
April 2005 the adoption of a new rule, by the Securities and Exchange
Commission, changed the dates for compliance with this standard. The Company
will now be required to implement Statement No. 123(R) beginning January 1,
2006.
As of the effective date, the Company will have the option of applying the
Statement using the modified prospective application or a modified retrospective
application. Under the prospective method, compensation cost would be recognized
for (1) all awards granted after the required effective date and for 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. Under the retrospective application method, compensation cost would be
recognized as in (1) above and (2) for prior periods would be restated
consistent with the pro forma disclosures required for those periods by SFAS
123. The valuation model and amortization assumption we have used continues to
be available, but we have not yet completed our assessment of the alternatives.
The impact of this Statement on the Company after the effective date and
beyond will depend upon various factors, among them being the future
compensation strategy. The SFAS 123 pro forma compensation costs presented in
Note 4 to the financial statements have been calculated using the Black-Scholes
option-pricing model and may not be indicative of amounts which should be
expected in future periods.
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.
34
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 on the operations and future prospects of the Company and its
subsidiaries include, but are not limited to, the following:
o The strength of the United States economy in general and the strength of
the local economies in which the Company conducts its operations which may
be less favorable than expected and may result in, among other things, a
deterioration in the credit quality and value of the Company's assets.
o The economic impact of past and any future terrorist attacks, acts of war
or threats thereof, and the response of the United States to any such
threats and attacks.
o The effects of, and changes in, federal, state and local laws, regulations
and policies affecting banking, securities, insurance and monetary and
financial matters.
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 Compan'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.
35
Item 3. Quantitative and Qualitative Disclosures about Market Risk
-------------------------------------------------------------------
See the "Interest Rate Sensitivity" section above.
Item 4. Controls and Procedures
--------------------------------
An evaluation was performed under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
promulgated under the Securities and Exchange Act of 1934, as amended) as of
September 30, 2005. Based on that evaluation, the Company's management,
including the Chief Executive Officer and Chief Financial Officer, concluded
that the Company's disclosure controls and procedures were effective. There have
been no significant changes in the Company's disclosure controls or its internal
controls over financial reporting, or in other factors that could significantly
affect the disclosure controls or the Company's internal control over financial
reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
--------------------------
There are no material pending legal proceedings to which the Company or its
subsidiaries is a party other than ordinary routine litigation incidental to
their respective businesses.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
--------------------------------------------------------------------
Issuer Purchases of Equity Securities
-----------------------------------------------------------------------------------------
(c) Total (d) Maximum
Number of Number
Shares of Shares
Purchased as that May
Part of Yet Be
(a) Total Publicly Purchased
Number of (b) Average Announced Under the
Shares Price Paid per Plans or Plans or
Period Purchased Share Programs 1 Programs 1
------------------------------------------------------------------------------------------
July 1 -
July 31, 2005 19,100 $ 28.71 19,100 278,600
August 1 -
August 31, 2005 21,555 $ 29.02 21,555 257,045
September 1 -
September 30, 2005 6,733 $ 29.03 6,733 250,312
-------------------------------------------------------------------------------------------
Total 47,388 $ 28.89 47,388 250,312
---------------------============================---=================--====================
1 On October 27, 2003, the Company announced that its Board of Directors had
reinstated the Stock Repurchase Program allowing the purchase of up to 500,000
shares of the Company's outstanding stock. The program will expire when the
Company repurchases all of the shares covered.
36
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
-----------------
31.1 Certification of Chief Executive Officer Pursuant to Rule
13-a-14(a)/15d-14(a)
31.2 Certification of Chief Financial Officer Pursuant to Rule
13-a-14(a)/15d-14(a)
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
37
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duty
authorized.
MAIN STREET TRUST, INC.
Date: November 8, 2005
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
38