UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 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 the number of shares outstanding of the registrant's common stock, as
of May 2, 2005
Main Street Trust, Inc. Common Stock 10,357,907
Table of Contents
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 25
Item 4. Controls and Procedures 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits 25
SIGNATURES 26
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 2005 and December 31, 2004
(Unaudited, in thousands, except share data)
March 31, December 31,
2005 2004
---------------------------
ASSETS
Cash and due from banks .......................................... $ 33,655 $ 33,133
Federal funds sold and interest bearing deposits ................. 60,610 31,795
--------------------------
Cash and cash equivalents ...................................... 94,265 64,928
-------------------------
Investments in debt and equity securities:
Available-for-sale, at fair value .............................. 232,121 269,580
Held-to-maturity, at cost (fair value of $81,410 and $81,099
at March 31, 2005 and December 31, 2004, respectively) ....... 82,227 81,164
Non-marketable equity securities ............................... 8,014 7,982
--------------------------
Total investments in debt and equity securities .............. 322,362 358,726
--------------------------
Loans, net of allowance for loan losses of $9,955 and $9,650
at March 31, 2005 and December 31, 2004, respectively .......... 764,070 761,227
Mortgage loans held for sale ..................................... 577 1,005
Premises and equipment ........................................... 16,909 17,087
Accrued interest receivable ...................................... 6,853 6,570
Other assets ..................................................... 19,602 18,575
--------------------------
Total assets ............................................. $ 1,224,638 $ 1,228,118
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing ......................................... $ 186,500 $ 172,908
Interest bearing ............................................. 771,951 801,669
--------------------------
Total deposits ........................................... 958,451 974,577
--------------------------
Federal funds purchased, repurchase agreements and notes payable 108,818 96,900
Federal Home Loan Bank advances and other borrowings ........... 27,571 29,882
Accrued interest payable ....................................... 2,889 2,601
Other liabilities .............................................. 12,402 10,183
--------------------------
Total liabilities ........................................ 1,110,131 1,114,143
--------------------------
Commitments and contingencies (See notes 2 and 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 .............................................. 109,871 108,071
Accumulated other comprehensive loss ........................... (1,814) (218)
--------------------------
163,358 163,154
Less: treasury stock, at cost, 1,758,449 and 1,770,329 shares
at March 31, 2005 and December 31, 2004, respectively ........ (48,851) (49,179)
--------------------------
Total shareholders' equity ............................... 114,507 113,975
--------------------------
Total liabilities and shareholders' equity ............... $ 1,224,638 $ 1,228,118
==========================
See accompanying notes to unaudited consolidated financial statements.
3
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Three Months Ended March 31, 2005 and 2004
(Unaudited, in thousands, except share data)
2005 2004
-----------------------
Interest income:
Loans and fees on loans ........................................ $ 11,405 $ 10,051
Investments in debt and equity securities:
Taxable ...................................................... 2,364 2,714
Tax-exempt ................................................... 401 503
Federal funds sold and interest bearing deposits ............... 221 113
-----------------------
Total interest income .................................... 14,391 13,381
-----------------------
Interest expense:
Deposits ....................................................... 3,600 3,202
Federal funds purchased, repurchase agreements and notes payable 507 281
Federal Home Loan Bank advances and other borrowings ........... 386 399
-----------------------
Total interest expense ................................... 4,493 3,882
----------------------
Net interest income ...................................... 9,898 9,499
Provision for loan losses ........................................ 330 330
----------------------
Net interest income after provision for loan losses ...... 9,568 9,169
-----------------------
Non-interest income:
Remittance processing .......................................... 1,707 1,892
Trust and brokerage fees ....................................... 1,842 1,662
Service charges on deposit accounts ............................ 526 579
Securities transactions, net ................................... 190 8
Gain on sales of mortgage loans, net ........................... 137 203
Other .......................................................... 613 803
-----------------------
Total non-interest income ................................ 5,015 5,147
-----------------------
Non-interest expense:
Salaries and employee benefits ................................. 4,947 4,708
Occupancy ...................................................... 662 645
Equipment ...................................................... 606 633
Data processing ................................................ 551 532
Office supplies ................................................ 298 305
Service charges from correspondent banks ....................... 110 225
Other .......................................................... 1,275 1,149
-----------------------
Total non-interest expense ............................... 8,449 8,197
-----------------------
Income before income taxes ............................... 6,134 6,119
Income taxes ..................................................... 2,201 2,176
-----------------------
Net income ............................................... $ 3,933 $ 3,943
=======================
Per share data:
Basic earnings per share ....................................... $ 0.42 $ 0.41
Weighted average shares of common stock outstanding ............ 9,453,196 9,509,487
Diluted earnings per share ..................................... $ 0.41 $ 0.41
Weighted average shares of common stock and dilutive potential
common shares outstanding .................................... 9,554,697 9,630,341
See accompanying notes to unaudited consolidated financial statements.
4
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Three Months Ended March 31, 2005 and 2004
(Unaudited, in thousands)
2005 2004
------------------
Net income ............................................................................. $ 3,933 $ 3,943
------------------
Other comprehensive income (loss), before tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period, net of tax of
($988) and $405 for March 31, 2005 and 2004, respectively ........................ (1,482) 609
Less: reclassification adjustment for gains (losses) included in net income, net of
tax of ($76) and ($3), for March 31, 2005 and 2004, respectively ................. (114) (5)
------------------
Other comprehensive income (loss) .................................................. (1,596) 604
------------------
Comprehensive income ............................................................... $ 2,337 $ 4,547
===================
See accompanying notes to unaudited consolidated financial statements.
5
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Three Months Ending March 31, 2005 and 2004
(Unaudited, in thousands)
2005 2004
--------------------
Cash flows from operating activities:
Net income .......................................................... $ 3,933 $ 3,943
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ..................................... 594 648
Amortization of bond discounts and premiums, net .................. 455 468
Provision for loan losses ......................................... 330 330
Securities transactions, net ...................................... (190) (8)
Federal Home Loan Bank stock dividend ............................. (58) (65)
Undistributed loss from non-marketable equity securities .......... 26 67
Gain on sales of mortgage loans, net .............................. (137) (203)
Loss (Gain) on disposal of premises and equipment ................. 1 (293)
Proceeds from sales of mortgage loans originated for sale ......... 9,749 16,834
Mortgage loans originated for sale ................................ (9,184) (18,146)
Other, net ........................................................ 2,260 216
--------------------
Net cash provided by operating activities ..................... 7,779 3,791
--------------------
Cash flows from investing activities:
Net (increase) in loans ............................................. (3,173) (25,313)
Proceeds from maturities and calls of investments in debt securities:
Held-to-maturity .................................................. 1,589 5,270
Available-for-sale ................................................ 27,925 46,210
Proceeds from sales of investments:
Available-for-sale ................................................ 3,931 88
Purchases of investments in debt and equity securities:
Held-to-maturity .................................................. (4,257) (33,750)
Available-for-sale ................................................ (15) (48,887)
Principal paydowns from mortgage-backed securities:
Held-to-maturity .................................................. 1,407 8,707
Available-for-sale ................................................ 2,890 2,106
Purchases of premises and equipment ................................. (418) (460)
Proceeds from sales of premises and equipment ....................... 1 623
--------------------
Net cash provided by (used in) investing activities ........... 29,880 (45,406)
--------------------
Cash flows from financing activities:
Net increase (decrease) in deposits ................................. (16,126) 11,749
Net increase in federal funds purchased,
repurchase agreements, and notes payable .......................... 11,918 13,154
Payments on Federal Home Loan Bank advances and other borrowings .... (2,311) (41)
Cash dividends paid ................................................. (2,079) (1,996)
MSTI stock transactions, net ........................................ 276 848
--------------------
Net cash (used in) provided by financing activities ........... (8,322) 23,714
--------------------
Net increase (decrease) in cash and cash equivalents .......... 29,337 (17,901)
Cash and cash equivalents at beginning of year ........................ 64,928 75,903
--------------------
Cash and cash equivalents at end of period ............................ $ 94,265 $ 58,002
====================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest .......................................................... $ 4,205 $ 3,778
Income taxes ...................................................... 110 200
Dividends declared not paid ......................................... 2,081 2,002
See accompanying notes to unaudited consolidated financial statements.
6
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements for Main Street
Trust, Inc. have been prepared in accordance with the instructions to Form 10-Q
and therefore do not include all information and footnotes necessary for fair
presentation of financial position, results of operations, and cash flows in
conformity with accounting principles generally accepted in the United States of
America. These financial statements should be read in conjunction with the
audited consolidated financial statements and related notes as of and for the
year ended December 31, 2004, and schedules included in 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 March 31, 2005 and for the
three-month periods ended March 31, 2005 and 2004, include all adjustments
necessary for a fair presentation of the results of those periods. All such
adjustments are of a normal recurring nature.
Results of operations for the three-month period ended March 31, 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 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 June 14, 2001, the Company was certified by the Board of Governors of the
Federal Reserve System as a financial holding company. This designation allows
the Company to engage in a wider range of nonbanking activities, including
greater authority to engage in securities and insurance activities. However, the
Company has no current plans to do so.
On April 1, 2005, the Company acquired all of the outstanding stock of Citizens
First Financial Corp. ("Citizens"), which was the parent company of Citizens
Savings Bank, based in Bloomington, Illinois. As a result of the transaction,
Citizen's former stockholders will be entitled to receive, in exchange for each
share of Citizens common stock that they owned, either $35.00 in cash or 1.1051
shares of common stock of the Company. Citizens stockholders that owned fewer
than 100 shares of Citizens common stock of record at the effective time of the
merger will automatically receive cash in exchange for their shares. Citizens
stockholders that owned 100 or more shares of Citizens common stock of record at
the effective time of the merger will have the opportunity to elect to receive
their consideration entirely in cash, entirely in the Company's common stock, or
in a combination of cash and common stock, subject to allocation and proration
procedures that are intended to ensure that on an aggregate basis 50% of the
Citizens shares outstanding at the effective time of the merger are converted
into cash and the remaining 50% are converted into the Company's common stock,
and subject also to a requirement that no stockholder may elect to receive stock
with respect to fewer than 100 shares of Citizens common stock. To the Company's
knowledge, approximately 1,623,450 shares of Citizens commons stock were
outstanding at the effective time of the merger. As of December 31, 2004,
Citizens had consolidated assets of $328.266 million, consolidated deposits of
$231.009 million and consolidated stockholders' equity of $36.047 million. The
Company plans to merge Citizens Savings Bank into Main Street Bank & Trust
during the fourth quarter of this year.
7
Note 3. Income per Share
Net income per common share has been computed as follows:
Three Months Ended
-----------------------
March 31,
2005 2004
-----------------------
Net Income ............................................... $3,933,000 $3,943,000
=======================
Shares:
Weighted average common shares outstanding ............. 9,453,196 9,509,487
Dilutive effect of outstanding options, as determined by
the application of the treasury stock method ......... 101,501 120,854
-----------------------
Weighted average common shares oustanding,
as adjusted .......................................... 9,554,697 9,630,341
=======================
Basic earnings per share ................................. $ 0.42 $ 0.41
=======================
Diluted earnings per share ............................... $ 0.41 $ 0.41
=======================
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.
March 31,
------------------------
2005 2004
------------------------
Net income on common stock:
As reported ...................................... $ 3,933 $ 3,943
Deduct total stock-based compensation expense
determined under the fair value method for all
awards, net of related tax effects ............... (91) (95)
------------------------
Pro forma .................................. $ 3,842 $ 3,848
========================
Basic earnings per share:
As reported ...................................... $ 0.42 $ 0.41
Pro forma ........................................ 0.41 0.40
Diluted earnings per share:
As reported ...................................... $ 0.41 $ 0.41
Pro forma ........................................ 0.40 0.40
The fair value of the stock options granted has been estimated using the
Black-Scholes option - pricing model with the following weighted average
assumptions. The Black-Scholes option-pricing model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions.
In addition, such models require the use of subjective assumptions, including
expected stock price volatility. In management's opinion, such valuation models
may not necessarily provide the best single measure of option value.
March 31,
---------------------------------
2005 2004
---------------------------------
Number of options granted .............. 136,500 140,500
Risk-free interest rate ................ 3.98% - 4.08% 3.94%
Expected life, in years ................ 7.00 - 8.00 8.00
Expected volatility .................... 15.42% 15.95%
Expected dividend yield ................ 2.97% 2.75%
8
Note 5. Commitments and Financial Instruments
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of amounts recognized in the
consolidated balance sheets. The contractual amounts of those instruments
reflect the extent of involvement the Company has in particular classes of
financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. Management
does not anticipate any significant losses as a result of these transactions.
The following table summarizes these financial instruments and commitments (in
thousands) at March 31, 2005 and 2004:
March 31,
---------------------
2005 2004
---------------------
Financial instruments whose contract amounts
represent credit risk:
Commitments ........................................ $267,522 $251,729
Standby letters of credit .......................... 28,148 18,419
The majority of commitments are agreements to extend credit to a customer as
long as there is no violation of any condition established in the contract.
Commitments, principally variable interest rates, generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. For commitments to extend credit, the Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based
on management's credit evaluation. Collateral held varies, but may include
accounts receivable; inventory; property, plant and equipment; and
income-producing commercial properties. Also included in commitments is $3.015
million to purchase other equity securities.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements and,
generally, have terms of one year or less. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Bank may hold collateral, which include accounts
receivables, inventory, property and equipment, and income producing properties,
supporting those commitments, if deemed necessary. In the event the customer
does not perform in accordance with the terms of the agreement with the third
party, the Bank would be required to fund the commitment. The maximum potential
amount of future payments the Bank could be required to make is represented by
the contractual amount shown in the summary above. If the commitment is funded,
the Bank would be entitled to seek recovery from the customer. At March 31, 2005
and 2004, no amounts have been recorded as liabilities for the Bank's potential
obligations under these guarantees.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition
Assets and Liabilities
Total assets decreased $3.480 million, or 0.3%, to $1.225 billion at March 31,
2005 compared to $1.228 billion at December 31, 2004. Increases in federal funds
sold and interest bearing deposits, loans, investments in debt and equity
securities held to maturity, other assets, cash and due from banks, accrued
interest receivable and non-marketable equity securities were partially offset
by decreases in investments in debt and equity securities available for sale,
mortgage loans held for sale, and premises and equipment.
Cash and due from banks increased $522,000, or 1.6%, to $33.655 million at March
31, 2005 compared to $33.133 million at December 31, 2004.
Federal funds sold and interest bearing deposits increased $28.815 million, or
90.6%, to $60.610 million at March 31, 2005 compared to $31.795 million at
December 31, 2004. Approximately $20 million of this increase was attributable
to positioning for the expected acquisition of Citizens. Federal funds sold and
interest bearing deposits can also fluctuate with loan demand, deposit volume
and investment opportunities.
9
Total investments in debt and equity securities decreased $36.364 million, or
10.1%, to $322.362 million at March 31, 2005 compared to $358.726 million at
December 31, 2004. This was primarily due to a decrease in investments in
securities available for sale of $37.459 million, or 13.9%, offset slightly by
increases in investments in securities held to maturity of $1.063 million, or
1.3%, and non-marketable equity securities of $32,000, or 0.4%. In many cases,
proceeds from maturities and calls of investments in debt securities in the
first quarter of 2005 were redirected into shorter-term investing options, such
as federal funds sold, to position the Company for the expected acquisition of
Citizens. Investments can also fluctuate with loan demand, deposit volume and
investment opportunities.
Loans, net of allowance for loan losses, increased $2.843 million, or 0.4%, to
$764.070 million at March 31, 2005 from $761.227 million at December 31, 2004.
Included in this increase were shifts in the loan mix during the first quarter
of 2005 compared to the same period of 2004. There were increases in commercial
real estate loans of $11.033 million, or 3.6%, and residential real estate loans
of $2.259 million, or 3.6%. These increases were offset somewhat by decreases in
commercial, financial and agricultural loans of $8.272 million, or 2.6%, and
installment and consumer loans of $1.872 million, or 2.2%.
Mortgage loans held for sale decreased $428,000, or 42.6%, to $577,000 at March
31, 2005 compared to $1.005 million at December 31, 2004.
Premises and equipment decreased $178,000, or 1.0%, from $17.087 million at
December 31, 2004 to $16.909 million at March 31, 2005. The decrease included
depreciation and amortization expense of $594,000, proceeds from sale of
property of $1,000, and a loss on disposal of property of $1,000 offset somewhat
by purchases of $418,000.
Total liabilities decreased $4.012 million, or 0.4%, to $1.110 billion at March
31, 2005 from $1.114 billion at December 31, 2004. Decreases in interest bearing
deposits and Federal Home Loan Bank advances and other borrowings were somewhat
offset by increases in non-interest bearing deposits, federal funds purchased,
repurchase agreements and notes payable, other liabilities and accrued interest
payable.
Total deposits decreased $16.126 million, or 1.7%, to $958.451 million at March
31, 2005 from $974.577 million at December 31, 2004. Interest bearing deposits
decreased $29.718 million, or 3.7%, and were somewhat offset by an increase of
$13.592 million, or 7.8%, in 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
$11.918 million, or 12.3%, to $108.818 million at March 31, 2005 compared to
$96.900 million at December 31, 2004. Included in this change were increases of
$11.193 million in repurchase agreements and $725,000 in federal funds
purchased.
Federal Home Loan Bank advances and other borrowings decreased $2.311 million,
or 7.7%, to $27.571 million at March 31, 2005 compared to $29.882 million at
December 31, 2004.
10
Investment Securities
The carrying value of investments in debt and equity securities was as follows
for March 31, 2005 and December 31, 2004:
Carrying Value of Securities(1)
(in thousands)
March 31, December 31,
2005 2004
------------------------
Available-for-sale:
Federal agencies ................................ $188,200 $218,994
Mortgage-backed securities ...................... 24,567 27,713
State and municipal ............................. 16,394 16,715
Marketable equity securities .................... 2,960 6,158
---------------------
Total available-for-sale .................. $232,121 $269,580
=====================
Held-to-maturity:
Federal agencies ................................ $ 40,643 $ 40,931
Mortgage-backed securities ...................... 14,515 14,992
State and municipal ............................. 27,069 25,241
---------------------
Total held-to-maturity .................... $ 82,227 $ 81,164
=====================
Non-marketable equity securities:
Federal Home Loan Bank stock .................... $ 4,337 $ 4,279
Other equity investments ........................ 3,677 3,703
---------------------
Total non-marketable equity securities .... $ 8,014 $ 7,982
=====================
Total investment securities ............... $322,362 $358,726
=====================
(1) Investment securities available-for-sale are carried at fair value.
Investment securities held-to-maturity are carried at amortized cost.
The following table shows the maturities and weighted-average yields of
investment securities at March 31, 2005. All securities are shown at their
contractual maturity.
Maturities and Weighted Average Yields of Debt Securities
(dollars in thousands)
-------------------------------------------------------------------------------------------------
March 31, 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 ............. $52,051 3.49% $136,149 2.84% $ -- -- $ -- -- $188,200 3.02%
Mortgage-backed
securities(1) .............. $14,018 2.78% $ 10,424 4.61% $ 92 5.59% $ 33 3.55% $ 24,567 3.57%
State and municipal (TE)(2) .. $ 3,084 5.43% $ 9,129 5.72% $3,708 7.68% $ 473 7.76% $ 16,394 6.17%
Marketable equity
securities(3) .............. $ -- -- $ -- -- $ -- -- $ -- -- $ 2,960 --
-------------------------------------------------------------------------------------------------
Total .................. $69,153 $155,702 $3,800 $ 506 $232,121
-------------------------------------------------------------------------------------------------
Average Yield (TE)(2) .......... 3.43% 3.13% 7.63% 7.48% 3.30%
=================================================================================================
Securities held-
to-maturity:
Federal agencies ............. $ 5,035 2.48% $ 30,034 2.88% $5,574 3.92% $ -- -- $ 40,643 2.97%
Mortgage-backed
securities(1) .............. $ 8,185 1.23% $ 5,754 3.47% $ 133 3.41% $ 443 6.45% $ 14,515 2.30%
State and municipal (TE)(2) .. $ 9,196 5.26% $ 17,348 5.64% $ 180 7.07% $ 345 7.95% $ 27,069 5.55%
-------------------------------------------------------------------------------------------------
Total ................. $22,416 $ 53,136 $5,887 $ 788 $ 82,227
=================================================================================================
Average Yield (TE)(2) .......... 3.17% 3.84% 4.00% 7.11% 3.70%
=================================================================================================
Non-marketable equity
securities(3):
FHLB stock ................... $ -- -- $ -- -- $ -- -- $ -- -- $ 4,337 --
Other equity investments ..... $ -- -- $ -- -- $ -- -- $ -- -- $ 3,677 --
-------------------------------------------------------------------------------------------------
Total .................. $ -- -- $ -- -- $ -- -- $ -- -- $ 8,014 --
=================================================================================================
11
(1) Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties and certain securities require principal
repayments prior to maturity.
(2) The average yield has been tax equivalized (TE) on state and municipal
tax-exempt securities.
(3) Due to the nature of these securities, they do not have a stated maturity
date or rate.
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 ............... $ 52,660 $ 663 $109,873 $ 3,005 $162,533 $ 3,668
Mortgage-backed securities ..... 9,303 78 7,196 283 16,499 361
Obligations of state and
political subdivisions ....... 3,537 55 -- -- 3,537 55
----------------------------------------------------------------------
Subtotal, debt securities $ 65,500 $ 796 $117,069 $ 3,288 $182,569 $ 4,084
Other ............................ 525 120 534 356 1,059 476
----------------------------------------------------------------------
Total temporarily impaired
securities ............... $ 66,025 $ 916 $117,603 $ 3,644 $183,628 $ 4,560
======================================================================
Held-to-Maturity:
Federal agencies ............... $ 5,478 $ 116 $ 34,097 $ 952 $ 39,575 $ 1,068
Mortgage-backed securities ..... 2,805 40 10,568 154 13,373 194
Obligations of state and
political subdivisions ....... 8,977 51 361 6 9,338 57
----------------------------------------------------------------------
Total temporarily impaired
securities ............... $ 17,260 $ 207 $ 45,026 $ 1,112 $ 62,286 $ 1,319
======================================================================
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 $3.644 million continuous unrealized loss greater than 12 months on
available for sale securities was made up of twenty-one debt securities and
seven other securities which were common stocks and was believed to be a
temporary loss. Common stocks represented $356,000 of the continuous unrealized
loss on available for sale securities which was a decrease of $393,000 from the
loss on common stocks of $749,000 at December 31, 2004. The $1.112 million
continuous unrealized loss greater than 12 months on held to maturity securities
was made up of nineteen debt securities and was believed to be a temporary loss.
Management believes the market value of these securities will continue to
improve as the economy continues to recover. Unrealized losses on debt
securities are generally due to changes in interest rates and, as such, are
considered, by the Company, to be temporary.
12
Loans
The following tables present the amounts and percentages of loans at March 31,
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)
-----------------------------------------------
March 31, 2005 December 31, 2004
-----------------------------------------------
Amount Percentage Amount Percentage
----------------------------------------------------------------------------------------
Commercial, financial and agricultural $306,385 39.58% $314,657 40.82%
Real estate- commercial .............. 320,864 41.46% 309,830 40.19%
Real estate- residential ............. 64,722 8.36% 62,464 8.10%
Installment and consumer ............. 82,054 10.60% 83,926 10.89%
---------------------------------------------
Total loans .................. $774,025 100.00% $770,877 100.00%
=============================================
The balance of loans outstanding as of March 31, 2005 by maturity is shown in
the following table:
Maturity of Loans Outstanding
(dollars in thousands)
--------------------------------------------
March 31, 2005
--------------------------------------------
1 year 1 to 5 Over 5
or less years years Total
-------------------------------------------------------------------------------------
Commercial, financial and agricultural $187,376 $ 78,253 $ 40,756 $306,385
Real estate- commercial .............. 82,330 130,329 108,205 320,864
Real estate- residential ............. 8,007 17,243 39,472 64,722
Installment and consumer ............. 10,023 50,463 21,568 82,054
--------------------------------------------
Total ................................ $287,736 $276,288 $210,001 $774,025
============================================
Percentage of total loans outstanding 37.17% 35.70% 27.13% 100.00%
============================================
Capital
Total shareholders' equity increased $532,000 from December 31, 2004 to March
31, 2005. Treasury stock transactions, net, were $276,000, which included
$328,000 attributable to the issuance of treasury stock less a $52,000 effect on
treasury stock as a result of stock option exercises. The change in
shareholders' equity is summarized as follows:
Shareholders' Equity (in thousands)
--------------------------------------------------------------------------------
Shareholders' equity, December 31, 2004 ..................... $ 113,975
Net income ................................................ 3,933
Treasury stock transactions, net .......................... 276
Stock appreciation rights ................................. --
Cash dividends declared ................................... (2,081)
Other comprehensive income ................................ (1,596)
----------
Shareholders' equity, March 31, 2005 ........................ $ 114,507
==========
On March 15, 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
$2.081 million was paid on April 22, 2005 to holders of record on March 31,
2005.
13
The Company and its subsidiary bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's and its subsidiary bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, banks must meet specific guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Company's and its
subsidiary bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and its subsidiary bank to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of March 31,
2005, that the Company and its subsidiary bank exceeded all capital adequacy
requirements to which they are subject.
As of March 31, 2005, the most recent notifications from primary regulatory
agencies categorized the Company's subsidiary bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, banks must maintain minimum total capital to risk-weighted assets,
Tier I capital to risk-weighted assets, and Tier I capital to average assets
ratios as set forth in the table. There are no conditions or events since that
notification that management believes have changed any of the Company's
subsidiary bank's categories.
The Company's and the Bank's actual capital amounts and ratios are presented in
the following table (in thousands):
To be well
For capital capitalized under
adequacy prompt corrective
Actual purposes: action provisions:
-------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------
As of March 31, 2005:
Total capital
(to risk-weighted assets)
Consolidated ............. $126,124 13.9% $72,750 8.0% N/A
Main Street Bank & Trust $ 93,303 10.4% $71,645 8.0% $89,556 10.0%
Tier I capital
(to risk-weighted assets)
Consolidated ............ $116,062 12.8% $36,375 4.0% N/A
Main Street Bank & Trust $ 83,238 9.3% $35,822 4.0% $53,734 6.0%
Tier I capital
(to average assets)
Consolidated ............ $116,062 9.6% $48,616 4.0% N/A
Main Street Bank & Trust $ 83,238 6.9% $48,052 4.0% $60,065 5.0%
Interest Rate Sensitivity
The concept of interest rate sensitivity attempts to gauge exposure of the
Company's net interest income to adverse changes in market driven interest rates
by measuring the amount of interest-sensitive assets and interest-sensitive
liabilities maturing or subject to repricing within a specified time period.
Liquidity represents the ability of the Company to meet the day-to-day demands
of deposit customers balanced by its investments of these deposits. The Company
must also be prepared to fulfill the needs of credit customers for loans with
various types of maturities and other financing arrangements. The Company
monitors its interest rate sensitivity and liquidity through the use of static
gap reports which measure the difference between assets and liabilities maturing
or repricing within specified time periods as well as financial
forecasting/budgeting/reporting software packages.
14
The following table presents the Company's interest rate sensitivity at various
intervals at March 31, 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 ............ $ 60,610 $ -- $ -- $ -- $ -- $ 60,610
Debt and equity securities (1) ......... 14,350 13,611 17,122 36,314 240,965 322,362
Loans (2) .............................. 304,545 43,982 52,763 61,767 311,545 774,602
----------------------------------------------------------------------------
Total earning assets ............. $ 379,505 $ 57,593 $ 69,885 $ 98,081 $ 552,510 $1,157,574
----------------------------------------------------------------------------
Interest bearing liabilities:
Savings and interest bearing
demand deposits ...................... $ 49,119 $ 1,504 $ 2,256 $ 4,513 $ 171,519 $ 228,911
Money market savings
deposits ............................. 198,047 -- -- -- -- 198,047
Time deposits .......................... 20,230 44,993 52,496 114,931 112,343 344,993
Federal funds purchased,
repurchase agreements,
and notes payable .................... 88,534 104 7,870 12,310 -- 108,818
FHLB advances and
other borrowings ...................... 5,000 10,000 -- 5,069 7,502 27,571
----------------------------------------------------------------------------
Total interest bearing liabilities $ 360,930 $ 56,601 $ 62,622 $ 136,823 $ 291,364 $ 908,340
----------------------------------------------------------------------------
Net asset (liability) funding gap ........ 18,575 992 7,263 (38,742) 261,146 249,234
----------------------------------------------------------------------------
Repricing gap ............................ 1.05 1.02 1.12 0.72 1.90 1.27
Cumulative repricing gap ................. 1.05 1.05 1.06 0.98 1.27 1.27
============================================================================
(1) Debt and equity securities include securities available-for-sale,
securities held-to-maturity, and non-marketable equity securities.
(2) Loans are gross and include mortgage loans held-for-sale.
Included in the 1-30 day category of savings and interest-bearing demand
deposits are non-core deposits plus a percentage, based upon industry-accepted
assumptions and Company analysis, of the core deposits. "Core deposits" are the
lowest average balance of the prior twelve months for each product type included
in this category. "Non-core deposits" are the difference between the current
balance and core deposits. The time frames include a percentage, based upon
industry-accepted assumptions and Company analysis, of the core deposits, as
follows:
1-30 Days 31-90 Days 91-180 Days 181-365 Days Over 1 Year
-------------------------------------------------------------------
Savings and interest-bearing
demand deposits ............. 0.45% 0.85% 1.25% 2.45% 95.00%
At March 31, 2005, the Company was slightly asset sensitive in the 1-30 days
category as well as in the 1-90 day category. As such, the effect of a decrease
in the interest rate for all interest earning assets and interest bearing
liabilities of 100 basis points would decrease annualized net interest income by
approximately $186,000 in the 1-30 days category and $196,000 in the 1-90 days
category assuming no management intervention. An increase in interest rates
would have the opposite effect for the same time periods. The Company's Asset
and Liability Management Policy states that the cumulative ratio of
rate-sensitive assets ("RSA") to rate-sensitive liabilities ("RSL") for the
12-month period should fall within the range of 0.75-1.25. As of March 31, 2005,
the Company's RSA/RSL was 0.98, 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 March 31, 2005, the
Company had a $10 million unsecured line of credit with a correspondent bank,
and can borrow approximately $56 million from the Federal Home Loan Bank on a
secured basis (refer to the Liquidity and Cash Flows section that follows for
additional information).
15
The Company uses financial forecasting/budgeting/reporting software packages to
perform interest rate sensitivity analysis for all product categories. The
Company's primary focus of its analysis is on the effect of interest rate
increases and decreases on net interest income. Management believes that this
analysis reflects the potential effects on current earnings of interest rate
changes. Call criteria and prepayment assumptions are taken into consideration
for investments in debt and equity securities. All of the Company's financial
instruments are analyzed by a software database which includes each of the
different product categories which are tied to key rates such as prime, Treasury
Bills, or the federal funds rate. The relationships of each of the different
products to the key rate that the product is tied to is proportional. The
software reprices the products based on current offering rates. The software
performs interest rate sensitivity analysis by performing rate shocks of plus or
minus 200 basis points in 100 basis point increments.
The following table shows projected results at March 31, 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
-----------------------------------------------------
March 31, 2005 ....... 10.4% 5.3% (5.3%) (10.6%)
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.
Liquidity and Cash Flows
The Company was able to meet liquidity needs during the first three 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 $29.337 million from December 31, 2004 to March 31, 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.
16
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 the sources and uses of cash during the first three
months of 2005 compared to the first three months of 2004. Cash was provided by
investing activities during the first three months of 2005 compared to cash used
during the same period in 2004 primarily due to cash provided by net investing
activities in 2005 compared to cash used by net investing activities during the
same period in 2004. In 2005, proceeds of $37.742 million from maturities, calls
and sales of debt and equity securities and principal paydowns on
mortgage-backed securities were slightly offset by cash used to purchase debt
and equity securities of $4.272 million. In 2004, purchases of debt and equity
securities were $82.637 million compared to proceeds of $62.381 million from
maturities, calls and sales of debt and equity securities and principal paydowns
on mortgage-backed 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 quarter of 2005 was $3.173 million compared
to $25.313 million during the same period in 2004. More cash was provided by
operating activities during the first three months of 2005 compared to the same
period in 2004. Cash was used by financing activities during the first three
months of 2005 compared to cash provided during the same period in 2004,
primarily due to a decrease in deposits during the first three months of 2005
compared to an increase during the same period in 2004. The Company expected
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. Also,
cash used for payments on Federal Home Loan Bank advances and other borrowings
was $2.311 million during the first three months of 2005 compared to $41,000
during the same period of 2004.
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, 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 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.
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 $9.955 million at March 31, 2005 compared
to $9.650 million at December 31, 2004, as net charge-offs were $25,000 and
provisions totaled $330,000 during the first three months of 2005. The allowance
for loan losses as a percentage of gross loans, including loans held-for-sale,
was 1.29% at March 31, 2005, compared to 1.25% at December 31, 2004. Gross
loans, including loans held-for-sale, increased 0.4% to $774.602 million at
March 31, 2005 from $771.882 million at December 31, 2004.
17
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 401.9% at March 31, 2005 compared to 431.6% at
December 31, 2004. Nonperforming loans increased from $2.236 million at December
31, 2004 to $2.477 million at March 31, 2005. The $241,000 increase in
nonperforming loans during the first three months of 2005 resulted from a
$53,000 increase in nonaccrual loans and an increase of $188,000 in loans past
due 90 days or more. Management believes that nonperforming and potential
problem loans are appropriately identified and monitored based on the extensive
loan analysis performed by the credit administration department, the internal
loan committees and the board of directors. Historically, there have not been a
significant amount of loans charged off which had not been previously identified
as problem loans by the credit administration department or the loan committees.
The following table summarizes changes in the allowance for loan losses by loan
categories for each period and additions to the allowance for loan losses, which
have been charged to operations.
Allowance for Loan Losses
(dollars in thousands)
-------------------------
March 31,
---------------------
2005 2004
------------------------------------------------------------------------------
Allowance for loan losses at
beginning of year ................................ $ 9,650 $ 9,786
---------------------
Charge-offs during period:
Commercial, financial and agricultural ........... $ -- $ --
Real estate- commercial .......................... -- --
Real estate- residential ......................... -- --
Installment and consumer ......................... (135) (265)
---------------------
Total ...................................... $ (135) $ (265)
---------------------
Recoveries of loans previously charged off:
Commercial, financial and agricultural ........... $ 6 $ 53
Real estate- commercial .......................... 5 --
Real estate- residential ......................... -- --
Installment and consumer ......................... 99 47
---------------------
Total ...................................... $ 110 $ 100
---------------------
Net charge-offs ............................ $ (25) $ (165)
Provision for loan losses .......................... 330 330
---------------------
Allowance for loan losses at end of quarter ........ $ 9,955 $ 9,951
=====================
Ratio of net charge-offs to average net loans ...... (0.01)% (0.02)%
=====================
The following table shows the allocation of the allowance for loan losses
allocated to each loan category.
Allocation of the Allowance
for Loan Losses
---------------------------
(in thousands)
------------------------
March 31, December 31,
2005 2004
--------------------------------------------------------------------------------
Allocated:
Commercial, financial and agricultural .......... $4,052 $5,289
Real estate- commercial ......................... 3,324 1,637
Real estate- residential ........................ 200 198
Installment and consumer ........................ 1,488 1,605
-------------------
Total allocated allowance ................. $9,064 $8,729
Unallocated allowances ............................ 891 921
-------------------
Total ..................................... $9,955 $9,650
===================
18
The following table presents the aggregate amount of loans considered to be
nonperforming for the periods indicated. Nonperforming loans include loans
accounted for on a nonaccrual basis, accruing loans contractually past due 90
days or more as to interest or principal payments and loans which are troubled
debt restructurings as defined in Statement of Financial Accounting Standards
No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings."
Nonperforming Loans
(dollars in thousands)
-----------------------
March 31, December 31,
2005 2004
-----------------------
Nonaccrual loans(1) .............................. $1,742 $1,689
=====================
Loans past due 90 days or more ................... $ 735 $ 547
=====================
Restructured loans ............................... $ 458 $ 497
=====================
(1) Includes $453,000 at March 31, 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 Impairment of a Loan" (SFAS 114).
Other Nonperforming Assets
(dollars in thousands)
------------------------------------
March 31, 2005 December 31, 2004
------------------------------------
Other real estate owned $ -- $ --
------------------------------
Nonperforming other assets $ 140 $ 33
==============================
Results of Operations
Results of Operations For the Three Months Ended March 31, 2005
Net income for the first three months of 2005 was $3.933 million, a $10,000, or
0.3%, decrease from $3.943 million for the same period in 2004. Basic earnings
per share increased $0.01, or 2.4%, to $0.42 per share in the first quarter of
2005 from $0.41 per share during the same period in 2004. Diluted earnings per
share remained stable at $0.41 per share in the first quarters of 2005 and 2004.
19
The following schedule "Consolidated Average Balance Sheet and Interest Rates"
provides details of average balances, interest income or interest expense, and
the average rates for the Company's major asset and liability categories.
Consolidated Average Balance Sheet and Interest Rates
(dollars in thousands)
---------------------------------------------------------------------
Three Months Ended March 31,
---------------------------------------------------------------------
2005 2004
---------------------------------------------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
----------------------------------------------------------------------------------------------------------------
Assets
Taxable investment securities(1) ....... $ 304,567 $ 2,364 3.15% $ 307,326 $ 2,714 3.55%
Tax-exempt investment securities(1) (TE) 41,648 617 6.01% 50,135 774 6.21%
Federal funds sold and interest bearing
deposits(2) .......................... 29,179 221 3.07% 40,568 113 1.12%
Loans3,4 (TE) .......................... 761,692 11,408 6.07% 686,628 10,053 5.89%
---------------------------------------------------------------------
Total interest earning assets
and interest income (TE) ....... $1,137,086 $ 14,610 5.21% $1,084,657 $ 13,654 5.06%
---------------------------------------------------------------------
Cash and due from banks ................ $ 38,699 $ 47,782
Premises and equipment ................. 17,079 17,518
Other assets ........................... 25,307 21,242
---------------------------------------------------------------------
Total assets ................... $1,218,171 $1,171,199
=====================================================================
Liabilities and Shareholders' Equity
Interest bearing demand deposits ....... $ 66,440 $ 90 0.55% $ 93,191 $ 151 0.65%
Savings ................................ 368,260 1,045 1.15% 304,141 638 0.84%
Time deposits .......................... 342,642 2,465 2.92% 347,281 2,413 2.79%
Federal funds purchased, repurchase
agreements, and notes payable ........ 103,396 507 1.99% 107,838 281 1.05%
FHLB advances and other borrowings ..... 28,530 386 5.49% 29,966 399 5.36%
---------------------------------------------------------------------
Total interest bearing
liabilities and interest expense $ 909,268 $ 4,493 2.00% $ 882,417 $ 3,882 1.77%
---------------------------------------------------------------------
Noninterest bearing demand deposits .... $ 116,182 $ 99,744
Noninterest bearing savings deposits ... 64,894 66,153
Other liabilities ...................... 13,188 9,824
---------------------------------------------------------------------
Total liabilities .............. $1,103,532 $1,058,138
Shareholders' equity ................... 114,639 113,061
---------------------------------------------------------------------
Total liabilities and
shareholders' equity ........... $1,218,171 $1,171,199
=====================================================================
Interest spread (average rate earned
minus average rate paid) (TE) ........ 3.21% 3.29%
=====================================================================
Net interest income (TE) ............... $ 10,117 $ 9,772
=====================================================================
Net yield on interest
earnings assets (TE) ................. 3.61% 3.62%
=====================================================================
See next page for Notes 1 - 4.
Notes to Consolidated Average Balance Sheet and Interest Rate Tables:
(1) Investments in debt securities are included at carrying value.
(2) Federal funds sold and interest bearing deposits included approximately
$35,000 and $20,000 in 2005 and 2004, respectively, of interest income from
third party processing of cashier checks.
20
(3) Loans are net of allowance for loan losses and include mortgage loans held
for sale. Nonaccrual loans are included in the total.
(4) Loan fees of approximately $243,000 and $296,000 in 2005 and 2004,
respectively, were included in total loan income.
Net interest income, the most significant component of the Company's earnings,
is the difference between interest received or accrued on the Company's earning
assets - primarily loans and investments - and interest paid or accrued on
deposits and borrowings. In order to compare the interest generated from
different types of earning assets, the interest income on certain tax-exempt
investment securities and loans is increased for analysis purposes to reflect
the income tax savings provided by these tax-exempt assets. The adjustment to
interest income for tax-exempt investment securities and loans was calculated
based on the federal income tax statutory rate of 35%. The following table
presents, on a tax equivalent (TE) basis, an analysis of changes in net interest
income resulting from changes in average volumes of earning assets and interest
bearing liabilities and average rates earned and paid. The change in interest
due to the combined rate/volume variance has been allocated to rate and volume
changes in proportion to the absolute dollar amounts of change in each.
Analysis of Volume
and Rate Changes
(in thousands)
---------------------------------
Three Months Ended March 31, 2005
---------------------------------
Increase
(Decrease)
from
Previous Due to Due to
Year Volume Rate
----------------------------------------------------------------------------------
Interest Income
Taxable investment securities .................. $ (350) $ (26) $ (324)
Tax-exempt investment securities (TE) .......... (157) (132) (25)
Federal funds sold and interest earning deposits 108 (39) 147
Loans (TE) ..................................... 1,355 1,052 303
-----------------------------
Total interest income (TE) ............... $ 956 $ 855 $ 101
-----------------------------
Interest Expense
Interest bearing demand and savings deposits ... $ 346 $ 77 $ 269
Time deposits .................................. 52 (37) 89
Federal funds purchased,
repurchase agreements and notes payable ...... 226 (12) 238
FHLB advances and other borrowings ............. (13) (21) 8
-----------------------------
Total interest expense ................... $ 611 $ 7 $ 604
-----------------------------
Net Interest Income (TE) ......................... $ 345 $ 848 $ (503)
=============================
Net interest income on a tax equivalent basis was $345,000, or 3.5%, higher for
the first three months of 2005 compared to 2004. Total tax-equivalent interest
income was $956,000, or 7.0%, higher in 2005 compared to 2004 and interest
expense increased $611,000, or 15.7%. The increase in tax-equivalent interest
income was due to both higher volume and rates, while the increase in interest
expense was mainly due to higher rates.
The increase in total tax-equivalent interest income was primarily due to an
increase in interest income from loans and federal funds sold and interest
earning deposits, offset somewhat by decreases in interest income from taxable
and tax-exempt investment securities. The increases in interest income from
loans was due to increases in both average balances and rates, while the
increase in interest income from federal funds sold and interest earning
deposits was due to an increase in rates, offset somewhat by a decrease in
average balances. The decrease in interest income from taxable and tax-exempt
investment securities was due to both lower rates and lower average balances.
The increase in total interest expense was due to increases in interest expense
from interest bearing demand and savings deposits, federal funds purchased,
repurchase agreements and notes payable, and time deposits, offset slightly by a
decrease in interest expense from FHLB advances and other borrowings. Interest
expense on interest bearing demand and savings deposits increased due to
increases in both rates and average balances. Interest expense on both federal
funds purchased, repurchase agreements and notes payable, and time deposits
increased due to an increase in rates, offset somewhat by a decrease in average
balances. FHLB advances and other borrowings decreased due to lower average
balances, offset somewhat by higher rates.
21
The provision for loan losses recorded was $330,000 during the first three
months of both 2005 and 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.
The following table quantifies non-interest income and expense for the three
months ended March 31, 2005 and 2004:
Noninterest Income and
Expense for the Three Months
Ended March 31,
---------------------------------------
Noninterest Income (in thousands) 2005 2004 $ change % change
--------------------------------------------------------------------------------------
Remittance processing (1) .................. $1,707 $1,892 $ (185) (9.8%)
Trust and brokerage fees (2) ............... 1,842 1,662 180 10.8%
Service charges on deposit accounts ........ 526 579 (53) (9.2%)
Securities transactions, net (3) ........... 190 8 182 2275.0%
Gain on sales of mortgage loans, net (4) ... 137 203 (66) (32.5%)
Other (5) .................................. 613 803 (190) (23.7%)
---------------------------------------
Total non-interest income .......... $5,015 $5,147 $ (132) (2.6%)
=======================================
Noninterest Expense (in thousands)
--------------------------------------------------------------------------------------
Salaries and employee benefits ............. $4,947 $4,708 $ 239 5.1%
Occupancy .................................. 662 645 17 2.6%
Equipment .................................. 606 633 (27) (4.3%)
Data processing ............................ 551 532 19 3.6%
Office supplies ............................ 298 305 (7) (2.3%)
Service charges from correspondent banks (6) 110 225 (115) (51.1%)
Other (7) .................................. 1,275 1,149 126 11.0%
--------------------------------------
Total non-interest expense ......... $8,449 $8,197 $ 252 3.1%
======================================
(1) The decrease in remittance processing income was mainly due to a $330,000,
or 44.9%, decrease in income from lockbox fees, offset somewhat by a
$167,000, or 14.5%, increase in electronic processing income at the
Company's remittance processing subsidiary, FirsTech. The decrease in
lockbox fees was due to the loss of two major accounts in the fourth
quarter of 2004. This decrease was somewhat offset by an increase in
electronic processing revenue from new and existing Internet Agent
customers. These changes in revenue volume continue to demonstrate the
Company's shift toward electronic processing from traditional lockbox
services.
(2) The increase in trust and brokerage fees was mainly due to a $122,000, or
182.4%, increase in estate fees and a $42,000, or 47.8%, increase in
brokerage fee income. 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 fee income was due to prospecting new customers and
the timing of revenue from new customers prospected in prior periods.
(3) The increase in securities transactions, net was the result of a gain on
the sale of shares of one common stock in the first quarter of 2005.
(4) The decrease in gains on sales of mortgage loans reflected a $7.085
million, or 42.1%, decrease in funded mortgage loans held-for sale, from
$16.834 million in the first quarter of 2004 to $9.749 million in the first
quarter of 2005. The volume of funded mortgage loans decreased mainly due
to a decline in demand for refinancing.
(5) In 2004, other non-interest income included a gain of $291,000 on the sale
of two parking lots.
(6) The decrease in service charges from correspondent banks was primarily 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 quarter of 2005 compared to the same period in 2004.
(7) Included in other non-interest expense in 2005 compared to 2004 were
additional marketing research/agency fees of approximately $98,000
attributable to a re-branding campaign promoting Main Street Bank & Trust
after the merger of the Company's bank subsidiaries in November 2004.
Income tax expense increased $25,000, or 1.1%, during the first three months of
2005 compared to the same period in 2004. The effective tax rate increased to
35.9% during the first quarter of 2005 from 35.6% during the first quarter of
2004.
22
Business Segment Information
The Company currently operates in two industry segments. The primary business
involves providing banking services to central Illinois. The Bank offers a full
range of financial services to business and individual customers. These services
include demand, savings, time and individual retirement accounts; commercial,
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 the Bank. The net expenses
of these functions are allocated to the Company and FirsTech by charging a
monthly management fee.
The following table quantifies the Company's business segment information for
the three-months ended March 31, 2005 and 2004:
Banking Remittance
Services Services Company Eliminations Total
--------------------------------------------------------------------------------------------------
March 31, 2005
Total interest income ....... $ 14,391 $ 4 $ 24 $ (28) $ 14,391
Total interest expense ...... 4,512 -- 9 (28) 4,493
Provision for loan losses ... 330 -- -- -- 330
Total non-interest income ... 3,340 1,737 202 (264) 5,015
Total non-interest expense .. 7,285 1,115 313 (264) 8,449
Income before income tax .... 5,604 626 (96) -- 6,134
Income tax expense .......... 1,980 264 (43) -- 2,201
Net income .................. 3,624 362 (53) -- 3,933
Total assets ................ 1,212,406 2,388 118,579 (108,735) 1,224,638
Depreciation and amortization 467 114 13 -- 594
March 31, 2004
Total interest income ....... $ 13,421 $ 4 $ (17) $ (27) $ 13,381
Total interest expense ...... 3,892 -- 17 (27) 3,882
Provision for loan losses ... 330 -- -- -- 330
Total non-interest income ... 3,282 1,912 1,180 (1,227) 5,147
Total non-interest expense .. 6,576 1,316 1,532 (1,227) 8,197
Income before income tax .... 5,905 600 (386) -- 6,119
Income tax expense .......... 2,079 252 (155) -- 2,176
Net income .................. 3,826 348 (231) -- 3,943
Total assets ................ 1,163,592 3,940 121,659 (106,589) 1,182,602
Depreciation and amortization 384 149 115 -- 648
Emerging Accounting Standards
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment,
("FAS 123(R)"), which replaces SFAS No. 123 and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees." This Statement requires companies to
expense the estimated fair value of stock options and similar equity instruments
issued to employees. Currently, companies are required to calculate the
estimated fair value of these share-based payments and can elect to either
include the estimated cost in earnings or disclose the pro forma effect in the
footnotes to their financial statements. We have chosen to disclose the pro
forma effect. The fair value concepts were not changed significantly in FAS
123(R); however, in adopting this Standard, companies must choose among
alternative valuation models and amortization assumptions. The valuation model
and amortization assumption we have used continues to be available, but we have
not yet completed our assessment of the alternatives.
23
On April 14, 2005 the U.S. Securities and Exchange Commission (the "SEC")
announced a deferral of the effective date of FAS 123(R) for calendar year
companies until the beginning of 2006.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
This document (including information incorporated by reference) contains, and
future oral and written statements of the Company and its management may
contain, forward-looking statements, within the meaning of such term in the
Private Securities Litigation Reform Act of 1995, with respect to the financial
condition, results of operations, plans, objectives, future performance and
business of the Company. Forward-looking statements, which may be based upon
beliefs, expectations and assumptions of the Company's management and on
information currently available to management, are generally identifiable by the
use of words such as "believe", "expect", "anticipate", "plan", "intend",
"estimate", "may", "will", "would", "could", "should", or other similar
expressions. Additionally, all statements in this document, including
forward-looking statements, speak only as of the date they are made, and the
Company undertakes no obligation to update any statement in light of new
information or future events.
The Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
effect on the operations and future prospects of the Company and its
subsidiaries include, but are not limited to, the following:
o The strength of the United States economy in general and the strength of
the local economies in which the Company conducts its operations which may
be less favorable than expected and may result in, among other things, a
deterioration in the credit quality and value of the Company's assets.
o The economic impact of 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 Company's business adversely.
o Business combinations and the integration of acquired businesses which may
be more difficult or expensive than expected.
o The costs, effects and outcomes of existing or future litigation.
o Changes in accounting policies and practices, as may be adopted by state
and federal regulatory agencies, the Financial Accounting Standards Board
or the Public Company Accounting Oversight Board.
o The ability of the Company to manage the risks associated with the
foregoing as well as anticipated.
24
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements.
Additional information concerning the Company and its business, including other
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
See the "Interest Rate Sensitivity" section above.
Item 4. Controls and Procedures
An evaluation was performed under the supervision and with the participation of
the Company's management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
promulgated under the Securities and Exchange Act of 1934, as amended) as of
March 31, 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 controls 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
On October 27, 2003, the Company announced that its Board of Directors had
reinstated the Stock Repurchase Program (the "Program"), allowing the purchase
of up to 500,000 shares of the Company's outstanding common stock. No shares
were repurchased during the first quarter of 2005. The maximum number of shares
that may yet be purchased under the Program was 389,700 at March 31, 2005.
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
10.1 Credit Agreement dated as of March 31, 2005 between JPMorgan
Chase Bank, N.A. and Main Street Trust, Inc.
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.
25
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MAIN STREET TRUST, INC.
Date: May 9, 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
26
30