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, 2006
Commission File Number: 0-30031
MAIN STREET TRUST, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Illinois 37-1338484
--------------------------------- --------------------------------
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
100 West University, Champaign, Illinois 61820
-----------------------------------------------
(Address of principal executive offices) (Zip Code)
(217) 351-6500
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer X Non-accelerated filer
----- ----- -----
Indicate by check mark whether the registrant is a shell company (as defined in
Exchange Act Rule 12b-2).
Yes No X
----- -----
Indicate the number of shares outstanding of the registrant's common stock, as
of November 2, 2006:
Main Street Trust, Inc. Common Stock 10,046,079
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1
Table of Contents
PAGE
(a) PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 36
Item 4. Controls and Procedures 36
(b) PART II. OTHER INFORMATION
Item 1. Legal Proceedings 36
Item 1.A. Risk Factors 36
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 37
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, 2006 and December 31, 2005
(Unaudited, in thousands, except share data)
September 30, December 31,
2006 2005
--------------------------
ASSETS
Cash and due from banks ........................................ $ 53,431 $ 52,007
Federal funds sold and interest bearing deposits ............... 5,878 42,059
--------------------------
Cash and cash equivalents ............................ 59,309 94,066
--------------------------
Investments in debt and equity securities:
Available-for-sale, at fair value ............................ 338,822 343,087
Held-to-maturity, at cost (fair value of $74,440 and $75,665
at September 30, 2006 and December 31, 2005, respectively) . 75,412 76,542
Non-marketable equity securities ............................. 16,988 24,994
--------------------------
Total investments in debt and equity securities ...... 431,222 444,623
--------------------------
Loans, net of allowance for loan losses of $14,233 and $13,472
at September 30, 2006 and December 31, 2005, respectively .... 980,499 1,002,927
Mortgage loans held for sale ................................... 1,912 1,661
Premises and equipment ......................................... 22,402 23,047
Goodwill ....................................................... 20,736 20,736
Core deposit intangibles ....................................... 3,916 4,569
Accrued interest receivable .................................... 11,359 8,461
Other assets ................................................... 26,795 25,047
--------------------------
Total assets ......................................... $ 1,558,150 $ 1,625,137
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing ....................................... $ 214,217 $ 240,823
Interest bearing ........................................... 1,036,930 1,035,149
--------------------------
Total deposits ....................................... 1,251,147 1,275,972
--------------------------
Federal funds purchased, repurchase agreements and notes payable 110,956 118,452
Federal Home Loan Bank advances and other borrowings ........... 29,574 67,386
Accrued interest payable ....................................... 4,893 4,657
Other liabilities .............................................. 13,377 14,901
--------------------------
Total liabilities .................................... 1,409,947 1,481,368
--------------------------
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 .............................................. 55,909 55,189
Retained earnings ............................................ 126,979 120,238
Accumulated other comprehensive loss ......................... (1,389) (1,597)
--------------------------
181,611 173,942
Less: treasury stock, at cost, 1,173,240 and 1,072,644 shares
at September 30, 2006 and December 31, 2005, respectively .. (33,408) (30,173)
--------------------------
Total shareholders' equity ........................... 148,203 143,769
--------------------------
Total liabilities and shareholders' equity ........... $ 1,558,150 $ 1,625,137
==========================
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, 2006 and 2005
(Unaudited, in thousands, except share data)
2006 2005
---------------------------
Interest income:
Loans and fees on loans ........................................ $ 52,207 $ 43,961
Investments in debt and equity securities:
Taxable ...................................................... 13,321 9,269
Tax-exempt ................................................... 906 1,156
Federal funds sold and interest bearing deposits ............... 965 1,252
---------------------------
Total interest income .................................. 67,399 55,638
---------------------------
Interest expense:
Deposits ....................................................... 24,389 14,871
Federal funds purchased, repurchase agreements and notes payable 4,064 2,128
Federal Home Loan Bank advances and other borrowings ........... 1,746 1,985
---------------------------
Total interest expense ................................. 30,199 18,984
---------------------------
Net interest income .................................... 37,200 36,654
Provision for loan losses ........................................ 1,350 1,080
---------------------------
Net interest income after provision for loan losses .... 35,850 35,574
---------------------------
Non-interest income:
Remittance processing .......................................... 5,366 5,144
Trust and brokerage fees ....................................... 5,944 5,805
Service charges on deposit accounts ............................ 2,061 2,129
Securities transactions, net ................................... 279 (450)
Gain on sales of mortgage loans, net ........................... 442 726
Other .......................................................... 2,420 2,017
---------------------------
Total non-interest income .............................. 16,512 15,371
---------------------------
Non-interest expense:
Salaries and employee benefits ................................. 17,693 17,325
Occupancy ...................................................... 2,322 2,293
Equipment ...................................................... 1,862 1,955
Data processing ................................................ 2,278 1,669
Office supplies ................................................ 892 906
Service charges from correspondent banks ....................... 214 389
Amortization of core deposit intangibles ....................... 653 435
Other .......................................................... 4,855 4,342
---------------------------
Total non-interest expense ............................. 30,769 29,314
---------------------------
Income before income taxes ............................. 21,593 21,631
Income taxes ..................................................... 7,425 7,820
---------------------------
Net income ............................................. $ 14,168 $ 13,811
===========================
Per share data:
Basic earnings per share ....................................... $ 1.40 $ 1.38
Weighted average shares of common stock outstanding ............ 10,114,614 10,014,234
Diluted earnings per share ..................................... $ 1.39 $ 1.37
Weighted average shares of common stock and dilutive potential
common shares outstanding .................................... 10,224,308 10,111,588
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, 2006 and 2005
(Unaudited, in thousands)
2006 2005
--------------------
Net income ................................................. $ 14,168 $ 13,811
--------------------
Other comprehensive income (loss), before tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during
period, net of tax of $251 and ($975), for
September 30, 2006 and 2005, respectively ............ 375 (1,462)
Less: reclassification adjustment for gains (losses)
included in net income, net of tax of ($112) and $180,
for September 30, 2006 and 2005, respectively ........ (167) 270
--------------------
Other comprehensive income (loss), before tax: ......... 208 (1,192)
--------------------
Comprehensive income ............................. $ 14,376 $ 12,619
====================
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, 2006 and 2005
(Unaudited, in thousands, except share data)
2006 2005
---------------------------
Interest income:
Loans and fees on loans ................................... $ 18,056 $ 16,643
Investments in debt and equity securities
Taxable ................................................. 4,635 3,664
Tax-exempt .............................................. 284 370
Federal funds sold and interest bearing deposits .......... 268 439
---------------------------
Total interest income ............................. 23,243 21,116
---------------------------
Interest expense:
Deposits .................................................. 8,769 5,868
Federal funds purchased, repurchase agreements and
notes payable ........................................... 1,467 870
Federal Home Loan Bank advances and other borrowings ...... 484 812
---------------------------
Total interest expense ............................ 10,720 7,550
---------------------------
Net interest income ............................... 12,523 13,566
Provision for loan losses ................................... 450 450
---------------------------
Net interest income after provision for loan losses 12,073 13,116
---------------------------
Non-interest income:
Remittance processing ..................................... 1,863 1,741
Trust and brokerage fees .................................. 2,042 2,153
Service charges on deposit accounts ....................... 670 820
Securities transactions, net .............................. -- (485)
Gain on sales of mortgage loans, net ...................... 166 329
Other ..................................................... 747 740
---------------------------
Total non-interest income ......................... 5,488 5,298
---------------------------
Non-interest expense:
Salaries and employee benefits ............................ 6,008 6,097
Occupancy ................................................. 747 824
Equipment ................................................. 619 674
Data processing ........................................... 821 566
Office supplies ........................................... 295 319
Service charges from correspondent banks .................. 68 134
Amortization of core deposit intangibles .................. 218 217
Other ..................................................... 1,646 1,480
---------------------------
Total non-interest expense ........................ 10,422 10,311
---------------------------
Income before income taxes ........................ 7,139 8,103
Income taxes ................................................ 2,460 2,952
---------------------------
Net income ........................................ $ 4,679 $ 5,151
===========================
Per share data:
Basic earnings per share .................................. $ 0.46 $ 0.50
Weighted average shares of common stock outstanding ....... 10,076,548 10,248,453
Diluted earnings per share ................................ $ 0.46 $ 0.50
Weighted average shares of common stock and dilutive
potential common shares outstanding ..................... 10,189,861 10,341,647
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, 2006 and 2005
(Unaudited, in thousands)
2006 2005
-----------------
Net income ................................................... $ 4,679 $ 5,151
-----------------
Other comprehensive income (loss), before tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period,
net of tax of $978 and ($497) for September 30, 2006 and
2005, respectively ..................................... 1,465 (745)
Less: reclassification adjustment for gains (losses)
included in net income, net of tax of $0 and $194,
for September 30, 2006 and 2005, respectively .......... -- 291
-----------------
Other comprehensive income (loss) ........................ 1,465 (454)
-----------------
Comprehensive income ............................... $ 6,144 $ 4,697
=================
See accompanying notes to unaudited consolidated financial statements.
7
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2006 and 2005
(Unaudited, in thousands)
2006 2005
----------------------
Cash flows from operating activities:
Net income .......................................................... $ 14,168 $ 13,811
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization - fixed assets ...................... 1,930 1,901
Amortization of bond premiums and accretion of discounts, net ..... 413 952
Amortization of core deposit intangibles .......................... 653 435
Provision for loan losses ......................................... 1,350 1,080
Securities transactions, net ...................................... (279) 450
Federal Home Loan Bank stock dividend ............................. -- (597)
Undistributed loss (gain) from non-marketable equity securities ... (111) (1,585)
Gain on sales of mortgage loans, net .............................. (442) (726)
Proceeds from sales of mortgage loans originated for sale ......... 38,642 55,397
Mortgage loans originated for sale ................................ (38,451) (55,357)
Stock based compensation plan expense ............................. 483 --
Excess tax benefit- stock based compensation plan ................. (238) --
Other, net:
Increase in accrued interest receivable ......................... (2,898) (1,016)
Increase in other assets ........................................ (947) (403)
(Decrease) increase in other liabilities ........................ (1,501) 199
Increase in accrued interest payable ............................ 236 933
----------------------
Net cash provided by operating activities ................... 13,008 15,474
----------------------
Cash flows from investing activities:
Net decrease (increase) in loans .................................... 20,374 (12,564)
Proceeds from maturities and calls of investments in debt securities:
Held-to-maturity .................................................. 15,068 5,532
Available-for-sale ................................................ 45,765 127,750
Proceeds from sales of investments:
Available-for-sale ................................................ 3,495 56,245
Purchases of investments in debt and equity securities:
Held-to-maturity .................................................. (17,967) (13,779)
Available-for-sale ................................................ (48,360) (133,367)
Other equity securities ........................................... (850) (685)
Principal paydowns from mortgage-backed securities:
Held-to-maturity .................................................. 3,778 8,032
Available-for-sale ................................................ 3,830 11,655
Return of principal on other equity securities ...................... 1,570 1,800
Proceeds from redemption of non-marketable equity securities ........ 7,397 --
Purchases of premises and equipment ................................. (1,285) (1,185)
Acquisition of Citizens First Financial Corporation ................. -- (6,385)
----------------------
Net cash provided by investing activities ................... 32,815 43,049
----------------------
Cash flows from financing activities:
Net decrease in deposits ............................................ (24,825) (24,840)
Net (decrease) increase in federal funds purchased,
repurchase agreements, and notes payable .......................... (7,496) 20,230
Advances from Federal Home Loan Bank and other borrowings ........... 1,000 34,500
Payments on Federal Home Loan Bank and other borrowings ............. (38,812) (30,499)
Cash dividends paid ................................................. (6,987) (6,421)
Excess tax benefit- stock based compensation plan ................... 238 --
MSTI stock transactions, net ........................................ (3,698) (3,576)
----------------------
Net cash used by financing activities ....................... (80,580) (10,606)
----------------------
Net decrease in cash and cash equivalents ................... (34,757) 47,917
Cash and cash equivalents at beginning of year ........................ 94,066 64,928
----------------------
Cash and cash equivalents at end of period ............................ $ 59,309 $ 112,845
======================
See accompanying notes to unaudited consolidated financial statements.
8
Supplemental disclosure of cash flow information:
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2006 and 2005
(Unaudited, in thousands)
2006 2005
-----------------------
Cash paid during the year for:
Interest ............................................. $ 29,963 $ 18,051
Income taxes ......................................... 9,919 7,145
Real estate acquired through or in lieu of foreclosure 704 --
Dividends declared not paid ............................ 2,311 2,250
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 ............................................. -- 20,736
Core deposit intangibles ............................. -- 5,222
Other assets ......................................... -- 6,174
Liabilities assumed:
Deposits ........................................... -- (232,089)
Federal Home Loan Bank advances and other borrowings -- (37,599)
Accrued interest payable ........................... -- (193)
Other liabilities .................................... -- (4,261)
-----------------------
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, 2005, and schedules in the Main Street Trust, Inc.'s
Form 10-K filed on March 16, 2006.
In the opinion of management, the consolidated financial statements of Main
Street Trust, Inc. and its subsidiaries, as of September 30, 2006 and for the
three-month and nine-month periods ended September 30, 2006 and 2005, include
all adjustments necessary for a fair presentation of the results of those
periods. All such adjustments, outside of those related to the business
combination discussed in Note 2, are of a normal recurring nature.
Results of operations for the three-month and nine-month periods ended September
30, 2006 are not necessarily indicative of the results which may be expected for
the year ending December 31, 2006.
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash and due from banks and federal funds sold and interest
bearing deposits. Generally, federal funds are sold for one-day periods.
Certain amounts in the 2005 consolidated financial statements have been
reclassified to conform with the 2006 presentation. Such reclassifications have
no effect on previously reported net income or shareholders' equity.
Note 2. Company Information/Business Combination
Main Street Trust, Inc. (the "Company"), an Illinois corporation, is a bank
holding company registered under the Bank Holding Company Act of 1956, as
amended. The Company was incorporated on August 12, 1999, and is the parent
company of Main Street Bank & Trust (the "Bank") and FirsTech, Inc. On June 14,
2001, the Company was certified by the Board of Governors of the Federal Reserve
System as a financial holding company. This designation allows the Company to
engage in a wider range of nonbanking activities, including greater authority to
engage in securities and insurance activities.
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
the Bank as of the close of business on October 7, 2005. The Citizens
acquisition purchase price of approximately $56.841 million was allocated based
upon the fair value of the assets and liabilities acquired. The Citizens excess
purchase price has been allocated to goodwill and identifiable intangible
assets. $20.736 million was allocated to goodwill. $5.222 million was allocated
to core deposit intangibles at acquisition and is being amortized over a period
of six years.
Pro forma unaudited operating results for the nine months ended September 30,
2005, giving effect to the Citizens acquisition as if it had occurred as of
January 1, 2005 are as follows:
2005
(in thousands, except
per share data)
---------------------
Interest Income .......... $59,806
Interest Expense ......... 20,579
Net Income ............... 13,800
Basic EPS ................ 1.38
Diluted EPS .............. 1.36
These unaudited pro forma results have been prepared for comparative purposes
only and include certain adjustments, such as additional amortization expense on
revalued purchased assets and implied interest on additional borrowings to fund
the acquisition. In addition, 2005 merger related expenses were reallocated to a
period prior to the pro forma dates presented. All adjustments were tax
affected. They do not purport to be indicative of the results of operations that
actually would have resulted had the combination occurred on January 1, 2005 or
of future results of operations of the consolidated entities.
10
On September 21, 2006, the Company announced its intent to merge with First
Busey Corporation in Urbana, Illinois. The combined company will operate under
the name First Busey Corporation and will list its common stock on the Nasdaq
Global Select Market and trade under the symbol BUSE. Under terms of the
agreement, Main Street shareholders will receive shares of First Busey common
stock, using a fixed exchange ratio of 1.55 shares of First Busey common stock
for each share of Main Street common stock. The merger is subject to regulatory
approval, as well as approval by First Busey and Main Street shareholders and
other customary conditions. The transaction is expected to be completed during
the first half of 2007. The combined company, First Busey Corporation, will have
total assets of approximately $4.1 billion. Following the merger of the two
holding companies, it will be their intent to merge their Illinois-based banking
subsidiaries, Busey Bank and Main Street Bank & Trust. The two banks will be
merged under Busey Bank's state charter, and the bank name will remain Busey
Bank. The merged bank will have total assets of approximately $3.6 billion and
total deposits exceeding $2.7 billion. Wealth management assets under care for
the combined organization will be approximately $4.5 billion.
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,
-----------------------------------------------------
2006 2005 2006 2005
-----------------------------------------------------
Net Income .................................... $14,168,000 $13,811,000 $ 4,679,000 $ 5,151,000
=====================================================
Shares
Weighted average common shares outstanding 10,114,614 10,014,234 10,076,548 10,248,453
Dilutive effect of outstanding options,
as determined by the application of the
treasury stock method ................... 109,694 97,354 113,313 93,194
-----------------------------------------------------
Weighted average common shares outstanding,
as adjusted ............................. 10,224,308 10,111,588 10,189,861 10,341,647
=====================================================
Basic earnings per share .................... $ 1.40 $ 1.38 $ 0.46 $ 0.50
=====================================================
Diluted earnings per share .................. $ 1.39 $ 1.37 $ 0.46 $ 0.50
=====================================================
Note 4. Stock Option Plans
At September 30, 2006, the Company had one share-based compensation plan. Prior
to January 1, 2006, the Company accounted for that plan under the recognition
and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations, as permitted by FASB Statement No. 123,
Accounting for Stock-Based Compensation. No stock-based compensation cost was
recognized in the Statement of Income for the period ended September 30, 2005,
as all options granted under the plan had an exercise price equal to the market
value of the underlying common stock on the date of grant. Effective January 1,
2006, the Company adopted the fair value recognition provisions of FASB
Statement No. 123(R), Share-Based Payment, using the modified-prospective-
transition method. Under that transition method, compensation cost recognized in
2006 includes: (a) compensation cost for all share-based payments granted prior
to, but not yet vested as of January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of Statement 123, and (b)
compensation cost for all share-based payments granted subsequent to January 1,
2006, based on the grant-date fair value estimated in accordance with the
provisions of Statement 123(R). Results for prior periods have not been
restated.
As a result of adopting Statement 123(R) on January 1, 2006, the Company's
income before income taxes and net income for the nine months ended September
30, 2006, were $483,000 and $290,000 lower, respectively, than if it had
continued to account for share-based compensation under APB Opinion No. 25.
Basic and diluted earnings per share for the nine months ended September 30,
2006 would have been $1.43 and $1.41, respectively, if the Company had not
adopted Statement 123(R), compared to reported basic and diluted earnings per
share of $1.40 and $1.39, respectively.
Prior to adoption of Statement 123(R), the Company presented all tax benefits of
deductions resulting from the exercise of stock options as operating cash flows
in the Statement of Cash Flows. Statement 123(R) requires the cash flows
resulting from the tax benefits resulting from tax deductions in excess of the
compensation cost recognized for those options (excess tax benefits) to be
classified as financing cash flows. The $238,000 excess tax benefit classified
as a financing cash inflow would have been classified as an operating cash
inflow if the Company had not adopted Statement 123(R).
11
The following table illustrates the effect on net income (in thousands) and
earnings per share if the Company had applied the fair value recognition
provisions of Statement 123 to options granted under the Company's stock option
plan in all periods presented. For purposes of this pro forma disclosure, the
value of the options is estimated using a Black-Scholes option-pricing formula
and amortized over the options' vesting periods.
Nine Months Three Months
Ended Ended
-----------------------------
September 30, September 30,
2005 2005
-----------------------------
Net income on common stock:
As reported .................................. $ 13,811 $ 5,151
Deduct total stock-based compensation expense
determined under the fair value method for all
awards, net of related tax effects ........... (274) (92)
--------------------------
Pro forma ............................ $ 13,537 $ 5,059
==========================
Basic earnings per share:
As reported .................................. $ 1.38 $ 0.50
Pro forma .................................... 1.35 0.49
Diluted earnings per share:
As reported .................................. $ 1.37 $ 0.50
Pro forma .................................... 1.34 0.49
The Main Street Trust, Inc. 2000 Stock Incentive Plan (the "Plan"), which is
shareholder-approved, permits the grant of options for up to 2,205,000 shares of
the Company's common stock. The Board of Directors, or a committee appointed by
the Board, may issue options that constitute incentive stock options to officers
and employees and nonqualified options to directors, officers, employees,
consultants and advisors of the Company and its related corporations (provided
that such consultants and advisors render bona fide services not in connection
with the offer and sale of securities in a capital-raising transaction).
Restricted stock and stock appreciation rights ("SARs") may also be granted.
SARs may be granted separately or in tandem with or by reference to an option
granted prior to or simultaneously with the grant of such rights, to such
eligible directors, officers, employees, consultants and advisors as may be
selected by the Board of Directors. The Plan is intended to provide a means
whereby directors, officers, employees, consultants and advisors of the Company
and its related corporations may sustain a sense of proprietorship and personal
involvement in the continued development and financial success of the Company
and its related corporations, and to encourage them to remain with and devote
their best efforts to the business of the Company and its related corporations,
thereby advancing the interests of the Company and its shareholders. Grants
under the Plan to date have been nonqualified options granted to directors and
officers. Options granted under the Plan have an exercise price equal to market
value of the underlying common stock on the grant date. Existing director
options granted prior to 2003 are fully vested and exercisable on the date
granted while director options granted in or after 2003 vest ratably over a
one-year period from the date granted. Existing officer options vest ratably
over a three-year period from the date granted. All outstanding options have a
10 year contractual life. Dividends are not paid on unexercised options. In the
event of a change of control, options and SARs become immediately and fully
exercisable.
The Company uses the Black-Scholes option pricing model to estimate the fair
value of stock-based awards with the following weighted-average assumptions for
the indicated periods:
Nine Months Ended
September 30,
2006 2005
---------------------------------
Number of options granted .............. 150,500 137,500
Risk-free interest rate ................ 4.59% - 4.65% 3.83% - 4.08%
Expected life, in years ................ 6.50 - 8.00 7.00 - 8.00
Expected volatility .................... 14.28% 15.05% - 15.42%
Expected dividend yield ................ 3.06% 2.97% - 3.06%
12
Expected volatilities are based on historical volatility of the Company's stock.
The Company uses historical data to estimate option exercises and terminations
(turnover percentage) within the valuation model. The expected term of options
granted is derived from the output of the options valuation model which uses
historical data and represents the period of time that options granted are
expected to be outstanding. Expected turnover percentage and expected term are
estimated separately for directors and officers. The risk-free rate for periods
within the contractual life of the option is based on the U.S. Treasury Strips
as of the grant date.
A summary of option activity under the Plan as of September 30, 2006, and
changes since January 1, 2006 is presented below:
Weighted-
Weighted- Average Aggregate
Average Remaining Intrinsic
Exercise Contractual Value
Shares Price Life ($000)
-----------------------------------------------
Outstanding as of January 1, 2006 ....... 767,413 $ 23.46
Granted ................................. 150,500 30.10
Exercised ............................... 62,177 20.80
Forfeited or expired .................... 5,214 30.02
-----------------------------------------------
Outstanding at September 30, 2006 ....... 850,522 24.80 6.6 $ 8,205
===============================================
Vested at September 30, 2006 ............ 692,010 23.61 6.1 $ 7,499
===============================================
Exercisable at September 30, 2006 ....... 692,010 23.61 6.1 $ 7,499
===============================================
The weighted-average grant-date fair value of options granted during the first
nine months of 2006 and 2005 was $4.79 and $4.71, respectively. The total
intrinsic value of options exercised during the first nine months of 2006 and
2005 was $595,000 and $235,000, respectively. The fair value of nonvested shares
is determined based on the market price of the Company's shares on the grant
date.
A summary of the status of the Company's nonvested shares as of September 30,
2006 and changes since January 1, 2006 is presented below:
Weighted-
Average
Grant-Date
Nonvested Shares Shares Fair Value
-------------------------------------------------------------------------------------
Nonvested at January 1, 2006 ..................... 112,950 $ 4.83
Granted .......................................... 150,500 4.79
Vested ........................................... 100,754 4.89
Forfeited ........................................ 4,184 4.74
------------------------
Nonvested at September 30, 2006 .................. 158,512 $ 4.76
========================
As of September 30, 2006, there was $710,000 of total unrecognized compensation
cost related to nonvested stock option compensation arrangements granted under
the Plan. That cost is expected to be recognized over a weighted-average period
of 1.7 years. The weighted average grant date fair value of shares vested during
the nine month periods ended September 30, 2006 and 2005 was $4.89 and $4.69,
respectively.
Note 5. Commitments and Financial Instruments
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of amounts recognized in the
consolidated balance sheets. The contractual amounts of those instruments
reflect the extent of involvement the Company has in particular classes of
financial instruments.
13
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, 2006 and 2005:
September 30,
2006 2005
---------------------
Financial instruments whose contract amounts
represent credit risk:
Commitments ........................................ $326,764 $272,011
Standby letters of credit .......................... 29,289 29,685
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, 2006 is $4.230 million to purchase other equity securities and
$1.962 million for construction of new branches.
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 September 30,
2006 and 2005, no amounts had been recorded as liabilities for the Bank's
potential obligations under these guarantees.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Condition
Assets and Liabilities
Total assets decreased $66.987 million, or 4.1%, to $1.558 billion at September
30, 2006 compared to $1.625 billion at December 31, 2005. Decreases in federal
funds sold and interest bearing deposits, loans, investments in debt and equity
securities, core deposit intangibles and premises and equipment were partially
offset by increases in accrued interest receivable, other assets, cash and due
from banks, and mortgage loans held for sale.
Cash and due from banks increased $1.424 million, or 2.7%, to $53.431 million at
September 30, 2006 compared to $52.007 million at December 31, 2005.
Federal funds sold and interest bearing deposits decreased $36.181 million, or
86.0%, to $5.878 million at September 30, 2006 compared to $42.059 million at
December 31, 2005. Federal funds sold and interest bearing deposits fluctuate
with loan demand, deposit volume and investment opportunities. During 2006, the
Company used available funds to reduce Federal Home Loan Bank advances and other
borrowings.
14
Total investments in debt and equity securities decreased $13.401 million, or
3.0%, to $431.222 million at September 30, 2006 compared to $444.623 million at
December 31, 2005. Included in the change were decreases of $8.006 million, or
32.0%, in investments in non-marketable equity securities, $4.265 million, or
1.2%, in investments in securities available-for-sale and $1.130 million, or
1.5%, in securities held-to-maturity. In response to the FHLB's decision to
allow redemption of excess capital stock owned by member banks, the Company sold
$7.397 million of FHLB stock, which was classified as non-marketable equity
securities, during the second quarter of 2006. The Company will evaluate the
feasibility of any redemption the FHLB may offer in the future. Investments
fluctuate with loan demand, deposit volume, and investment opportunities.
Loans, net of allowance for loan losses, decreased $22.428 million, or 2.2%, to
$980.499 million at September 30, 2006 compared to $1.003 billion at December
31, 2005. Included in the changes were decreases of $12.593 million, or 3.9%, in
commercial, financial and agricultural loans; $8.206 million, or 5.8%, in
residential real estate loans; and $7.337 million, or 8.5%, in installment and
consumer loans, offset somewhat by an increase of $6.469 million, or 1.4%, in
commercial real estate loans. Management attributes the decrease in loans to the
Company's unwillingness to meet some of the underwriting and pricing available
in the market. Included in the $6.469 million increase in commercial real estate
loans was a $15.826 million decrease related to one commercial project that was
refinanced through a real estate conduit during the first quarter of 2006.
Additionally, the Company has seen a slowdown in the residential real estate
market during the first nine months of 2006 compared to the same period in 2005.
Mortgage loans held for sale increased $251,000, or 15.1%, to $1.912 million at
September 30, 2006 compared to $1.661 million at December 31, 2005.
Premises and equipment decreased $645,000, or 2.8%, to $22.402 million at
September 30, 2006 compared to $23.047 million at December 31, 2005. The
decrease included depreciation and amortization expense on fixed assets of
$1.930 million offset somewhat by purchases of $1.285 million.
Core deposit intangibles decreased $653,000, or 14.3%, to $3.916 million at
September 30, 2006 compared to $4.569 million at December 31, 2005 due to
amortization related to the acquisition of Citizens in 2005.
Total liabilities decreased $71.421 million, or 4.8%, to $1.410 billion at
September 30, 2006 compared to $1.481 billion at December 31, 2005. There were
decreases in all categories of liabilities, except interest bearing deposits and
accrued interest payable.
Total deposits decreased $24.825 million, or 1.9%, to $1.251 billion at
September 30, 2006 from $1.276 billion at December 31, 2005. Non-interest
bearing deposits decreased $26.606 million, or 11.0%, to $214.217 million at
September 30, 2006 from $240.823 million at December 31, 2005. The decrease of
$26.606 million in non-interest bearing deposits included a $16.453 million
decrease in the balance of one account between December 31, 2005 and September
30, 2006. Interest bearing deposits increased $1.781 million, or 0.2%, to $1.037
billion at September 30, 2006 from $1.035 billion at December 31, 2005.
Federal funds purchased, repurchase agreements and notes payable decreased
$7.496 million, or 6.3%, to $110.956 million at September 30, 2006 from $118.452
million at December 31, 2005. This change was primarily due to decreases of
$4.396 million in repurchase agreements and $3.100 million in federal funds
purchased.
Federal Home Loan Bank advances and other borrowings decreased $37.812 million,
or 56.1%, to $29.574 million at September 30, 2006 compared to $67.386 million
at December 31, 2005 primarily due to $34.000 million of matured FHLB advances
and a net decrease of $3.500 million on a line of credit from a correspondent
bank.
15
Investment Securities
The carrying value of investments in debt and equity securities was as follows
for September 30, 2006 and December 31, 2005:
Carrying Value of Securities(1)
(in thousands)
September 30, December 31,
2006 2005
--------------------------
Available-for-sale:
Federal agencies ................................... $313,976 $312,484
Mortgage-backed securities ......................... 9,689 13,657
State and municipal ................................ 12,190 13,834
Marketable equity securities ....................... 2,967 3,112
----------------------
Total available-for-sale ................... $338,822 $343,087
======================
Held-to-maturity:
Federal agencies ................................... $ 27,597 $ 38,650
Mortgage-backed securities ......................... 30,534 17,091
State and municipal ................................ 17,281 20,801
----------------------
Total held-to-maturity ..................... $ 75,412 $ 76,542
======================
Non-marketable equity securities:
Federal Home Loan Bank stock ....................... $ 14,053 $ 21,450
Other equity investments ........................... 2,935 3,544
----------------------
Total non-marketable equity securities ..... $ 16,988 $ 24,994
======================
Total investment securities ................ $431,222 $444,623
======================
(1) Investment securities available-for-sale and non-marketable other
equity investments are carried at fair value. Investment securities
held-to-maturity and Federal Home Loan Bank stock are carried at
amortized cost.
16
The following table shows the maturities and weighted-average yields of
investment securities at September 30, 2006. All securities are shown at their
contractual maturity.
Maturities and Weighted Average Yields of Debt Securities
(dollars in thousands)
September 30, 2006
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 ................. $110,260 3.48% $203,716 3.99% $ -- -- $ -- -- $313,976 3.81%
Mortgage-backed securities(1) .... $ 2,087 3.85% $ 3,478 5.69% $ 4,007 5.11% $ 117 7.73% $ 9,689 5.08%
State and municipal (TE)(2) ...... $ 4,027 5.39% $ 7,496 6.64% $ 667 7.62% $ -- -- $ 12,190 6.28%
Marketable equity securities(3) .. $ -- $ -- -- $ -- -- $ -- -- $ 2,967 --
--------------------------------------------------------------------------------------------
Total ..................... $116,374 $214,690 $ 4,674 $ 117 $338,822
--------------------------------------------------------------------------------------------
Average Yield (TE) (2) ............. 3.56% 4.11% 5.47% 7.73% 3.94%
============================================================================================
Securities held-to-maturity:
Federal agencies ................. $ 6,425 3.07% $ 16,947 3.01% $ 4,225 4.07% $ -- -- $ 27,597 3.19%
Mortgage-backed securities(1) .... $ 1,939 2.94% $ 28,056 5.31% $ 481 5.17% $ 58 6.47% $ 30,534 5.16%
State and municipal (TE)(2) ...... $ 10,165 5.42% $ 6,796 5.76% $ 200 7.53% $ 120 7.95% $ 17,281 5.60%
--------------------------------------------------------------------------------------------
Total ..................... $ 18,529 $ 51,799 $ 4,906 $ 178 $ 75,412
--------------------------------------------------------------------------------------------
Average Yield (TE)(2) ............... 4.35% 4.62% 4.31% 7.47% 4.54%
============================================================================================
Non-marketable equity securities(3):
Federal Home Loan Bank stock ...... $ -- -- $ -- -- $ -- -- $ -- -- $ 14,053 --
Other equity investments .......... $ -- -- $ -- -- $ -- -- $ -- -- $ 2,935 --
--------------------------------------------------------------------------------------------
Total .................... $ -- -- $ -- -- $ -- -- $ -- -- $ 16,988 --
============================================================================================
(1) Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties and certain securities require
principal prepayments prior to maturity.
(2) The average yield is presented on a tax equivalized basis 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 losses existing greater
less than 12 months than 12 months Total
-------------------------------------------------------------------------
Fair Value Unrealized Fair Value Unrealized Fair Value Unrealized
Losses Losses Losses
-------------------------------------------------------------------------
Available-for-Sale:
Federal agencies ................. $142,349 $ 478 $160,637 $ 2,097 $302,986 $ 2,575
Mortgage-backed securities ....... 1,676 9 5,554 169 7,230 178
State and municipal .............. -- -- 3,201 49 3,201 49
-------------------------------------------------------------------------
Subtotal, debt securities ........ $144,025 $ 487 $169,392 $ 2,315 $313,417 $ 2,802
Other ............................ 1,022 289 -- $ -- 1,022 289
-------------------------------------------------------------------------
Total temporarily impaired
securities ............... $145,047 $ 776 $169,392 $ 2,315 $314,439 $ 3,091
=========================================================================
Held-to-Maturity:
Federal agencies ................. $ -- $ -- $ 26,868 $ 631 $ 26,868 $ 631
Mortgage-backed securities ....... 17,087 203 9,806 228 26,893 431
State and municipal .............. 634 1 7,161 47 7,795 48
-------------------------------------------------------------------------
Total temporarily impaired
securities ............... $ 17,721 $ 204 $ 43,835 $ 906 $ 61,556 $ 1,110
=========================================================================
17
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. Effective for the period ended December 31,
2005, the Company modified its policy for evaluating investments for
other-than-temporary impairment. Under its new policy, investments, other than
debt security investments where the impairment is deemed to be due solely to
interest rate movements, are assumed to be impaired and the impairment
recognized through earnings no later than twelve months from the date the
security was first impaired, unless there is "overwhelming evidence to the
contrary." Under the policy, "overwhelming evidence to the contrary" is a rare
instance, but might include, among other things, an announced sale soon after a
reporting period where the price would cause an impairment to reverse. Further,
under certain circumstances, including a bankruptcy, catastrophic event or other
circumstances which cause the Company to determine, after analyzing the specific
facts, that the decline in the fair value is other than temporary, the Company
would recognize an other than temporary impairment write-down upon such
occurrence or determination, and not wait twelve months from the time of the
impairment.
For the period ended September 30, 2006, the $2.315 million continuous
unrealized loss greater than 12 months on available-for-sale securities was made
up of 46 debt securities and was believed to be a temporary loss. None of the
marketable equity securities available-for-sale had a continuous unrealized loss
greater than 12 months. The $906,000 continuous unrealized loss greater than 12
months on held-to-maturity securities was made up of 47 debt securities and was
believed to be a temporary loss.
Unrealized losses on debt securities are generally due to changes in interest
rates and, as such, are considered by the Company to be temporary. Because of
the nature of U.S. Agency securities, most of which are single pay at maturity,
and because the Company has the ability to hold these investments until the
market value recovers, which may be maturity, the Company does not consider
these investments to be other than temporarily impaired. Because the Company
believes the decline in market value of mortgage-backed securities is
attributable to changes in interest rates and not credit quality and because the
Company has the ability to hold these investments until the market value
recovers, the Company does not consider these investments to be other than
temporarily impaired.
Loans
The following table presents the amounts and percentages of loans at September
30, 2006 and December 31, 2005 according to the categories of commercial,
financial and agricultural; commercial real estate; residential real estate; and
installment and consumer loans.
Amount of Loans Outstanding
(dollars in thousands)
September 30, 2006 December 31, 2005
----------------------------------------------------
Amount Percentage Amount Percentage
----------------------------------------------------
Commercial, financial and agricultural $ 307,268 30.89% $ 319,861 31.47%
Real Estate - Commercial ............. 475,975 47.85% 469,506 46.19%
Real Estate - Residential ............ 132,098 13.28% 140,304 13.81%
Installment and consumer ............. 79,391 7.98% 86,728 8.53%
---------------------------------------------------
Total loans ................ $ 994,732 100.00% $1,016,399 100.00%
===================================================
18
The balance of loans outstanding as of September 30, 2006 by maturity is shown
in the following table:
Maturity of Loans Outstanding
(dollars in thousands)
June 30, 2006
1 year 1 to 5 Over 5
or less years years Total
--------------------------------------------
Commercial, financial and agricultural $184,651 $ 86,135 $ 36,482 $307,268
Real Estate - Commercial ............. 132,640 225,387 117,948 475,975
Real Estate - Residential ............ 10,915 32,260 88,923 132,098
Installment and consumer ............. 19,642 35,211 24,538 79,391
--------------------------------------------
Total ...................... $347,848 $378,993 $267,891 $994,732
============================================
Percentage of total loans outstanding 34.97% 38.10% 26.93% 100.00%
============================================
Capital
Total shareholders' equity increased $4.434 million from December 31, 2005 to
September 30, 2006. Treasury stock transactions were $3.698 million, primarily
due to purchases of treasury stock under the Company's stock repurchase plan
offset somewhat by the exercise of stock options. Additional paid in capital
increased $720,000 as a result of applying the guidance of the new Financial
Accounting Standard Board Statement (FASB) No. 123(R) which was adopted on
January 1, 2006. The change in shareholders' equity is summarized as follows:
Shareholders' Equity (in thousands)
Shareholders' equity, December 31, 2005 ...... $ 143,769
Net income ................................. 14,168
Treasury stock transactions, net ........... (3,698)
Additional paid in capital transactions, net 720
Cash dividends declared .................... (6,964)
Other comprehensive income ................. 208
---------
Shareholders' equity, September 30, 2006 ..... $ 148,203
=========
On September 20, 2006, the Board of Directors of the Company declared a
quarterly cash dividend of $0.23 per share of the Company's common stock. The
dividend of $2.311 million was paid on October 20, 2006, to holders of record on
October 6, 2006.
The Company and the 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 the 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 the 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 the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of September
30, 2006, that the Company and the Bank exceeded all capital adequacy
requirements to which they are subject.
19
As of September 30, 2006, the most recent notifications from primary regulatory
agencies categorized the Bank as "well capitalized" under the regulatory
framework for prompt corrective action. To be categorized as "well capitalized",
banks must maintain minimum total capital to risk-weighted assets, Tier I
capital to risk-weighted assets, and Tier I capital to average assets ratios as
set forth in the table. There are no conditions or events since that
notification that management believes have changed the 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
Actual adequacy prompt corrective
purposes: action provisions:
---------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------------------------------
As of September 30, 2006:
Total capital
(to risk-weighted assets)
Consolidated ............ $140,429 12.3% $ 91,181 8.0% N/A
Main Street Bank & Trust $130,361 11.8% $ 89,927 8.0% $112,409 10.0%
Tier I capital
(to risk-weighted assets)
Consolidated ............. $126,129 11.1% $ 45,591 4.0% N/A
Main Street Bank & Trust $116,186 10.6% $ 44,964 4.0% $ 67,445 6.0%
Tier I capital
(to average assets)
Consolidated ............ $126,129 8.3% $ 60,942 4.0% N/A
Main Street Bank & Trust $116,186 7.5% $ 60,680 4.0% $ 75,850 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.
20
The following table presents the Company's interest rate sensitivity at various
intervals at September 30, 2006:
Rate Sensitivity of Earning Assets and Interest Bearing Liabilities
(dollars in thousands)
1-30 31-90 91-180 181-365 Over
Days Days Days Days 1 year Total
------------------------------------------------------------------------------
Interest bearing assets:
Federal funds sold and
interest bearing deposits .............. $ 5,878 $ -- $ -- $ -- $ -- $ 5,878
Debt and equity securities (1) ........... 27,827 28,170 26,616 63,003 285,606 431,222
Loans (2) ................................ 305,697 52,376 48,520 92,140 497,911 996,644
------------------------------------------------------------------------------
Total interest bearing assets .... $ 339,402 $ 80,546 $ 75,136 $ 155,143 $ 783,517 $1,433,744
------------------------------------------------------------------------------
Interest bearing liabilities:
Savings and interest bearing
demand deposits ........................ $ 59,241 $ 1,556 $ 2,334 $ 4,669 $ 177,453 $ 245,253
Money market savings
deposits ............................... 299,185 -- -- -- -- 299,185
Time deposits ............................ 55,399 78,874 113,472 101,281 143,466 492,492
Federal funds purchased,
repurchase agreements,
and notes payable ...................... 99,333 3,060 6,136 2,427 -- 110,956
FHLB advances and
other borrowings ....................... 6,075 16,000 2,499 -- 5,000 29,574
------------------------------------------------------------------------------
Total interest bearing liabilities $ 519,233 $ 99,490 $ 124,441 $ 108,377 $ 325,919 $1,177,460
------------------------------------------------------------------------------
Net asset (liability) funding gap .......... (179,831) (18,944) (49,305) 46,766 457,598 256,284
------------------------------------------------------------------------------
Repricing gap .............................. 0.65 0.81 0.60 1.43 2.40 1.22
Cumulative repricing gap ................... 0.65 0.68 0.67 0.76 1.22 1.22
------------------------------------------------------------------------------
(1) Debt and equity securities include securities available-for-sale,
securities held-to-maturity, non-marketable equity securities.
(2) Loans are gross and include mortgage loans held-for-sale.
Included in the 1-30 day category of savings and interest-bearing demand
deposits are non-core deposits plus a percentage, based upon industry-accepted
assumptions and Company analysis, of the core deposits. "Core deposits" are the
lowest average balance of the prior twelve months of each product type included
in this category. "Non-core deposits" are the difference between the current
balance and core deposits. The time frames include a percentage, based upon
industry-accepted assumptions and Company analysis, of the core deposits, as
follows:
1-30 31-90 91-180 181-365 Over
Days Days Days Days 1 year
----------------------------------------------------------------
Savings and interest-bearing
demand deposits .......... 0.45% 0.85% 1.25% 2.45% 95.00%
At September 30, 2006, the Company was somewhat liability sensitive due to the
levels of savings and interest bearing demand deposits, time deposits and
federal funds purchased, repurchase agreements and notes payable. As such, the
effect of an increase in the interest rate for all interest bearing assets and
liabilities of 100 basis points would decrease annualized net interest income by
approximately $1.798 million in the 1-30 days category and $1.988 million 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,
2006, the Company's RSA/RSL was 0.76, which was within the established
guidelines.
21
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, 2006, the
Company had a $15 million unsecured line of credit with a correspondent bank,
all of which was available at that date. The Company also has sufficient
capacity to permit it to borrow funds from the Federal Home Loan Bank on a
secured basis (refer to the Liquidity and Cash Flows section that follows for
additional information).
The Company uses financial forecasting/budgeting/reporting software packages to
perform interest rate sensitivity analysis for all product categories. The
Company's primary focus of its analysis is on the effect of interest rate
increases and decreases on net interest income. Management believes that this
analysis reflects the potential effects on current earnings of interest rate
changes. Call criteria and prepayment assumptions are taken into consideration
for investments in debt and equity securities. All of the Company's financial
instruments are analyzed by a software database which includes each of the
different product categories which are tied to key rates such as prime, Treasury
Bills, or the federal funds rate. The relationships of each of the different
products to the key rate that the product is tied to is proportional. The
software reprices the products based on current offering rates. The software
performs interest rate sensitivity analysis by performing rate shocks of plus or
minus 200 basis points in 100 basis point increments.
The following table shows projected results at September 30, 2006 and December
31, 2005 of the impact on net interest income from an immediate change in
interest rates. The results are shown as a percentage change in net interest
income over the next twelve months.
Basis Point Change
--------------------------------------------------------
+200 +100 -100 -200
--------------------------------------------------------
September 30, 2006 ............ 4.2% 2.1% (2.2%) (4.5%)
December 31, 2005 ............ 8.9% 4.7% (4.7%) (9.4%)
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 bearing 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.
22
Liquidity and Cash Flows
The Company requires cash to fund loan growth and deposit withdrawals. Cash
flows fluctuate with changes in economic conditions, current interest rate
trends and as a result of management strategies and programs. In general, funds
provided by customer deposits, federal funds purchased, repurchase agreements
and notes payable, and maturities, calls and paydowns of investment securities
are used to fund loans and purchase investment securities. Available funds are
used to fund demand for loans that meet the Company's credit quality guidelines,
with the remaining funds used to purchase investment securities and/or federal
funds sold. The Company monitors the demand for cash and initiates programs and
policies as considered necessary to meet funding gaps.
The Company was able to meet liquidity needs during the first nine months of
2006. A review of the consolidated statement of cash flows in the accompanying
financial statements shows that the Company's cash and cash equivalents
decreased $34.757 million from December 31, 2005 to September 30, 2006. The
decrease in 2006 resulted from cash used in financing activities, offset
somewhat by cash provided by investing and operating activities. There were
differences in sources and uses of cash during 2006 compared to 2005.
Cash used in financing activities during 2006 was $80.580 million compared to
$10.606 million during the same period in 2005, primarily due to less cash
provided by Federal Home Loan Bank advances and other borrowings, more payments
on Federal Home Loan Bank and other borrowings and cash used by federal funds
purchased, repurchase agreements and notes payable during the first nine months
of 2006 compared to cash provided during the same period in 2005. Federal Home
Loan Bank advances and other borrowings were $1.000 million during the first
nine months of 2006 compared to $34.500 million during the same period in 2005
which was used mainly as a source of working capital (of which $20.000 million
was repaid in July 2005). Cash used by Federal Home Loan Bank advances and other
borrowings was $38.812 million during the first nine months of 2006 compared to
$30.499 million during the same period in 2005. $34.000 million of the $38.812
million in 2006 was due to maturities and calls of Federal Home Loan Bank
advances. Cash used during the first nine months of 2006 for federal funds
purchased, repurchase agreements and notes payable was $7.496 million compared
to cash provided of $20.230 million during the same period in 2005, which was
primarily the result of an increase in repurchase agreements.
Less cash was provided by investing activities during the first nine months of
2006 compared to the same period in 2005, primarily due to differences in the
loan portfolio and investments in debt and equity securities. Cash provided by
net loan repayments during the first nine months of 2006 was $20.374 million due
to a decrease in gross loans, compared to cash used to fund loan growth of
$12.564 million during the same period in 2005. The decrease in loans during the
first nine months of 2006 was attributable to the Company's unwillingness to
meet some of the underwriting and pricing available in the market. Cash provided
by investment activities during the first nine months of 2006 was $13.726
million compared to cash provided of $63.183 million during the same period in
2005. In 2006, proceeds of $80.903 million from maturities, calls and sales of
debt and equity securities, principal paydowns on mortgage-backed securities,
return of principal on other equity securities and proceeds from redemption of
non-marketable equity securities were somewhat offset by $67.177 million of cash
used to purchase debt and equity securities. Included in the 2006 investment
proceeds was $7.397 million due to the redemption of excess FHLB stock. During
the same period 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 principal on other equity securities were offset
somewhat by cash used to purchase debt and equity securities of $147.831
million. In addition, $6.385 million was used to fund the acquisition of
Citizens in 2005. Cash provided by operating activities during the first nine
months of 2006 was $13.008 million compared to $15.474 million during the same
period in 2005.
The Company's future short-term cash requirements are expected to be provided by
maturities and sales of investments, sales of loans and deposit growth. Cash
required to meet longer-term liquidity requirements will mostly depend on future
goals and strategies of management, the competitive environment, economic
factors and changes in the needs of customers. If current sources of liquidity
cannot provide needed cash in the future, the Company can obtain long-term funds
from several sources, including, but not limited to, utilizing the Company's $15
million line of credit from a correspondent bank, FHLB advances and brokered
CDs. To meet short-term liquidity needs, the Company is able to borrow funds on
a temporary basis from the Federal Reserve Bank, the FHLB and correspondent
banks. With sound capital levels, the Company continues to have several options
for longer-term cash needs, such as for future expansion and acquisitions.
Management is not aware of any current recommendations by the Company's primary
regulators which if implemented would have a material effect on the Company's
liquidity, capital resources or operations.
23
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 judgments 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 $14.233 million at September 30, 2006
compared to $13.472 million at December 31, 2005, an increase of $761,000. Net
charge-offs were $589,000 and the provision totaled $1.350 million during the
first nine months of 2006. The allowance for loan losses as a percentage of
gross loans, including loans held-for-sale, was 1.43% at September 30, 2006,
compared to 1.32% at December 31, 2005. Gross loans, including loans
held-for-sale, decreased 2.1% to $996.644 million at September 30, 2006 from
$1.018 billion at December 31, 2005.
One measure of the adequacy of the allowance for loan losses is the ratio of the
allowance to nonperforming loans. The allowance for loan losses as a percentage
of nonperforming loans was 167.9% at September 30, 2006 compared to 449.1% at
December 31, 2005. Nonperforming loans increased from $3.000 million at December
31, 2005 to $8.479 million at September 30, 2006. The $5.479 million increase in
nonperforming loans during the first nine months of 2006 resulted from a $4.004
million increase in nonaccrual loans and an increase of $1.475 million in loans
past due 90 days or more. The increase in nonaccrual loans included the addition
in the first quarter of three commercial real estate loans to a real estate
developer that totaled $4.134 million at September 30, 2006. The increase in
90-day delinquencies was primarily due to an $820,000 increase in residential
real estate loans and a $501,000 increase in commercial real estate 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 and the internal
loan committees with oversight by 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. Management believes the allowance for loan losses is at
a level commensurate with the overall risk exposure of the loan portfolio.
However, certain borrowers may experience difficulty and the level of
non-performing loans, charge-offs, and delinquencies could rise and require
further increases in the provision for loan losses.
24
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)
September 30,
2006 2005
-----------------------
Allowance for loan losses at beginning of year .................. $ 13,472 $ 9,650
Allowance for loan losses attributable to acquisition of Citizens -- 3,434
-----------------------
Charge-offs during period:
Commercial, financial and agricultural ........................ $ (531) $ (161)
Commercial real estate ........................................ (158) --
Residential real estate ....................................... (88) (2)
Installment and consumer ...................................... (262) (547)
-----------------------
Total ................................................. $ (1,039) $ (710)
-----------------------
Recoveries of loans previously charged off:
Commercial, financial and agricultural ........................ $ 5 $ 17
Commercial real estate ........................................ -- 5
Residential real estate ....................................... 16 --
Installment and consumer ...................................... 429 212
-----------------------
Total ................................................. $ 450 $ 234
-----------------------
Net (charge-offs) recoveries .......................... $ (589) $ (476)
Provision for loan losses ....................................... 1,350 1,080
-----------------------
Allowance for loan losses at end of quarter ..................... $ 14,233 $ 13,688
=======================
Ratio of net charge-offs to
average net loans ............................................... (0.06)% (0.05)%
=======================
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, December 31,
2006 2005
---------------------------
Allocated:
Commercial, financial and agricultural $ 4,161 $ 4,433
Commercial real estate ............... 7,808 5,991
Residential real estate .............. 447 424
Installment and consumer ............. 1,278 1,447
--------------------------
Total allocated allowance .... $ 13,694 $ 12,295
Unallocated allowances ................. 539 1,177
--------------------------
Total ........................ $ 14,233 $ 13,472
==========================
25
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, December 31,
2006 2005
---------------------------
Nonaccrual loans(1) .......... $ 6,238 $ 2,234
Loans past due 90 days or more $ 2,241 $ 766
Restructured loans ........... $ 251 $ 324
(1) Includes $1.032 million at September 30, 2006 and $975,000 at December
31, 2005 of real estate and consumer loans which management does not
consider impaired as defined by the Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairments of a Loan"
(SFAS 114).
Other Nonperforming Assets (dollars in thousands)
September 30, December 31,
2006 2005
---------------------------
Other real estate owned ......... $ 219 $ 188
Nonperforming other assets ...... $ 12 $ 36
Results of Operations
Results of Operations for the Nine Months Ended September 30, 2006
Net income for the first nine months of 2006 was $14.168 million, a $357,000, or
2.6%, increase from $13.811 million for the same period in 2005. Basic earnings
per share increased $0.02, or 1.4%, to $1.40 per share in the first nine months
of 2006 from $1.38 per share in the first nine months of 2005. Diluted earnings
per share increased $0.02, or 1.5%, to $1.39 per share in the first nine months
of 2006 from $1.37 per share in the first nine months of 2005.
26
The following schedule "Consolidated Average Balance Sheet and Interest Rates"
provides details of average balances, interest income and 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,
2006 2005
-------------------------------------------------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
-------------------------------------------------------------------------
Assets
Taxable investment securities(1) ......... $ 429,148 $ 13,321 4.15% $ 318,483 $ 9,269 3.89%
Tax-exempt investment securities(1) (TE) . 30,737 1,394 6.06% 39,948 1,778 5.95%
Federal funds sold and interest bearing
deposits(2) ............................ 19,047 965 6.77% 42,069 1,252 3.98%
Loans (3),(4) (TE) ....................... 971,424 52,222 7.19% 922,896 43,972 6.37%
-------------------------------------------------------------------------
Total interest bearing assets
and interest income (TE) ....... $1,450,356 $ 67,902 6.26% $1,323,396 $ 56,271 5.68%
-------------------------------------------------------------------------
Cash and due from banks .................. $ 44,828 $ 44,024
Premises and equipment ................... 22,845 20,685
Other assets ............................. 59,595 46,980
-------------------------------------------------------------------------
Total assets ................... $1,577,624 $1,435,085
=========================================================================
Liabilities and Shareholders' Equity
Interest bearing demand deposits ......... $ 70,676 $ 348 0.66% $ 75,254 $ 374 0.66%
Savings .................................. 480,300 10,537 2.93% 408,827 4,652 1.52%
Time deposits ............................ 471,797 13,504 3.83% 429,171 9,845 3.07%
Federal funds purchased, repurchase
agreements, and notes payable .......... 126,664 4,064 4.29% 113,738 2,128 2.50%
FHLB advances and other borrowings ....... 46,423 1,746 5.03% 57,292 1,985 4.63%
-------------------------------------------------------------------------
Total interest bearing
liabilities and interest expense $1,195,860 $ 30,199 3.38% $1,084,282 $ 18,984 2.34%
-------------------------------------------------------------------------
Noninterest bearing demand deposits ...... $ 144,087 $ 131,058
Noninterest bearing savings deposits ..... 73,937 71,095
Other liabilities ........................ 17,780 14,584
-------------------------------------------------------------------------
Total liabilities .............. $1,431,664 $1,301,019
Shareholders' equity ..................... 145,960 134,066
-------------------------------------------------------------------------
Total liabilities and
shareholders' equity ........... $1,577,624 $1,435,085
=========================================================================
Interest spread (average rate earned
minus average rate paid) (TE) .......... 2.88% 3.34%
=========================================================================
Net interest income (TE) ................. $ 37,703 $ 37,287
=========================================================================
Net yield on interest
earnings assets (TE) ................... 3.48% 3.77%
=========================================================================
See next page for Notes 1-4.
Notes to Consolidated Average Balance Sheet and Interest Rates Tables:
(1) Investments in debt securities are included at carrying value. Income
from taxable investment securities included net gains on venture
capital funds of approximately $111,000 and $1.586 million in 2006 and
2005, respectively. Due to the nature of venture capital investments,
future results cannot be predicted based on past performance.
(2) Federal funds sold and interest bearing deposits included
approximately $217,000 in 2006 and $149,000 in 2005 of interest income
from third party processing of cashier checks.
(3) Loans are net of allowance for loan losses and include mortgage loans
held-for-sale. Nonaccrual loans are included in the total.
(4) Loan fees of approximately $1.253 million and $1.000 million in 2006
and 2005, respectively, are included in total loan income.
27
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. This 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, 2006
Increase
(Decrease)
from
Previous Due to Due to
Year Volume Rate
------------------------------------
Interest Income
Taxable investment securities .................. $ 4,052 $ 3,400 $ 652
Tax-exempt investment securities (TE) .......... (384) (417) 33
Federal funds sold and interest bearing deposits (287) (896) 609
Loans (TE) ..................................... 8,250 2,398 5,852
------------------------------------
Total interest income (TE) ............. $ 11,631 $ 4,485 $ 7,146
------------------------------------
Interest Expense
Interest bearing demand and savings deposits ... $ 5,859 $ 778 $ 5,081
Time deposits .................................. 3,659 1,047 2,612
Federal funds purchased,
repurchase agreements and notes payable ...... 1,936 265 1,671
FHLB advances and other borrowings ............. (239) (399) 160
------------------------------------
Total interest expense ................. $ 11,215 $ 1,691 $ 9,524
------------------------------------
Net Interest Income (TE) ......................... $ 416 $ 2,794 $ (2,378)
====================================
Net interest income on a tax-equivalent basis was $416,000, or 1.1%, higher for
the first nine months of 2006 compared to the same period of 2005. Total
tax-equivalent interest income was $11.631 million, or 20.7%, higher in 2006
compared to 2005, and interest expense increased $11.215 million, or 59.1%. The
increase in tax-equivalent interest income and interest expense was due to both
increases in average volume and higher rates.
The increase in total tax-equivalent interest income was due to an increase in
interest income from loans and taxable investment securities, offset somewhat by
decreases in interest income from tax-exempt investment securities and federal
funds sold and interest bearing deposits. The increase in interest income from
loans and taxable investment securities was due to increases in volume coupled
with higher rates. The decrease in interest income from tax-exempt investment
securities and federal fund sold and interest bearing deposits was due to a
decrease in volume, offset somewhat by higher rates.
The increase in total interest expense was due to an increase in interest
expense from interest bearing demand and savings deposits, time deposits and
federal funds purchased, repurchase agreements and notes payable, offset
slightly by a decrease in interest expense from FHLB advances and other
borrowings. The increase in interest expense from interest bearing demand and
savings deposits, time deposits and federal funds purchased, repurchase
agreements and notes payable was due to higher rates coupled with increases in
volume. The decrease in interest expense from FHLB advances and other borrowings
was due a decrease in volume offset somewhat by an increase in rates.
The provision for loan losses recorded was $1.350 million during the first nine
months of 2006 compared to $1.080 million during the same period of 2005. The
provision during both periods was based on management's analysis of the loan
portfolio, as discussed in the provision for loan losses section above.
28
The following table summarizes selected categories of non-interest income and
non-interest expense for the nine months ended September 30, 2006 and 2005. The
acquisition of Citizens on April 1, 2005, has been accounted for as a purchase
and the results of operations of Citizens since the acquisition date have been
included in the Company's consolidated financial statements. Effective January
1, 2006, the Company adopted the fair value recognition provisions of FASB
Statement No. 123(R), Share-Based Payment, using the
modified-prospective-transition method. (Refer to Note 4, Stock Option Plans,
for additional information.) As a result, the Company recognized an additional
$483,000 in stock option expense in the first nine months of 2006, with $350,000
being allocated to salaries and benefits expense and $133,000 attributable to
non-employee options being allocated to other non-interest expense.
Noninterest Income and Expense
for the Nine Months Ended
September 30, 2006 and 2005
(in thousands)
---------------------------------------------------------------------------------------------------
Non-interest Income 09/30/2006 09/30/2005 $ change % change
---------------------------------------------------------------------------------------------------
Remittance processing (1) .................. $ 5,366 $ 5,144 $ 222 4.3%
Trust and brokerage fees ................... 5,944 5,805 139 2.4%
Service charges on deposit accounts ........ 2,061 2,129 (68) (3.2%)
Securities transactions, net (2) ........... 279 (450) 729 162.0%
Gain on sales of mortgage loans, net (3) ... 442 726 (284) (39.1%)
Other (4) .................................. 2,420 2,017 403 20.0%
----------------------------------------------------
Total non-interest income . $ 16,512 $ 15,371 $ 1,141 7.4%
====================================================
---------------------------------------------------------------------------------------------------
Non-interest Expense ....................... 09/30/2006 09/30/2005 $ change % change
---------------------------------------------------------------------------------------------------
Salaries and employee benefits (5) ......... $ 17,693 $ 17,325 $ 368 2.1%
Occupancy .................................. 2,322 2,293 29 1.3%
Equipment .................................. 1,862 1,955 (93) (4.8%)
Data processing (6) ........................ 2,278 1,669 609 36.5%
Office supplies ............................ 892 906 (14) (1.5%)
Service charges from correspondent banks (7) 214 389 (175) (45.0%)
Amortization of core deposit intangibles (8) 653 435 218 50.1%
Other (9) .................................. 4,855 4,342 513 11.8%
----------------------------------------------------
Total non-interest expense . $ 30,769 $ 29,314 $ 1,455 5.0%
====================================================
(1) Included in the increase in remittance processing income was $60,000
in revenue from a new online bill payment product introduced at the
end of the second quarter of 2006 by the Company's remittance
processing subsidiary, FirsTech. The remainder of the increase was
attributable to a $350,000 increase in Internet Agent revenue, offset
somewhat by decreases in lockbox revenue, mechanical processing
revenue and currency exchange income.
(2) During the first quarter of 2006, the Company sold a number of equity
securities in order to reposition its investment portfolio in the
rising rate environment, and, in so doing, realized approximately
$267,000 in net gains from those sales. 2005 included a net loss of
$566,000 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.
(3) The decrease in gains on sales of mortgage loans reflected a $16.755
million, or 30.2%, decrease in funded mortgage loans held-for-sale,
from $55.397 million in the first nine months of 2005 to $38.642
million in the first nine months of 2006. The volume of funded
mortgage loans decreased mainly due to a slowdown in the residential
real estate market in the first nine months of 2006 compared to the
same period in 2005.
(4) The increase in other non-interest income included an increase of
approximately $106,000 in Freddie Mac servicing fees due, in part, to
operating the Company's new Bloomington locations. Also contributing
to the increase in other non-interest income was an increase of
$82,000 in letter of credit fees, of which approximately $41,000 was
due to the timing of one customer's annual renewal.
29
(5) Included in salaries and benefits expense in 2006 was $350,000 of
stock option expense as a result of adopting FASB Statement No. 123
(R) effective January 1, 2006.
(6) The increase in data processing expense in 2006 included a $215,000,
or 22.2%, increase in computer processing expense and a $137,000, or
40.3% increase, in internet processing expense, due, in part, to
increased volume attributable to operating the Company's new
Bloomington locations. Also contributing to the increase in data
processing expense in 2006 was an increase of $209,000, or 93.5%, in
data processing expense attributable to the Company's Wealth
Management Group. This increase was mainly due to increased trading
volume and the implementation costs associated with the conversion to
a new third party system.
(7) The decrease in service charges from correspondent banks was primarily
due to a change in the Company's cash letter processing vendor in
November 2005 which resulted in a decrease in fees as well as higher
earnings credits due to the rising rate environment.
(8) In the first quarter of 2006, amortization of core deposit intangibles
included $218,000 attributable to the acquisition of Citizens compared
to none for the first quarter of 2005.
(9) Other non-interest expense in 2006 included a $270,000 loss from a
low-income housing investment and $133,000 of stock option expense as
a result of adopting FASB Statement No. 123(R) effective January 1,
2006.
Income tax expense decreased $395,000, or 5.1%, during the first nine months of
2006 compared to the same period in 2005. The effective tax rate decreased to
34.4% during the first nine months of 2006 from 36.2% during the same period in
2005. This decrease was partly due to a $205,000 tax credit resulting from the
loss from a low-income housing project investment described in footnote 9 above.
Results of Operations For the Three Months Ended September 30, 2006
Net income for the third quarter of 2006 was $4.679 million, a $472,000, or
9.2%, decrease from $5.151 million for the same period in 2005. Both basic and
diluted earnings per share decreased $0.04, or 8.0%, to $0.46 per share during
the third quarter of 2006 from $0.50 per share during the same period in 2005.
30
The following schedule "Consolidated Average Balance Sheet and Interest Rates"
provides details of average balances, interest income and 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 Septemer 30,
2006 2005
----------------------------------------------------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
----------------------------------------------------------------------------
Assets
Taxable investment securities(1) ......... $ 413,068 $ 4,635 4.45% $ 321,759 $ 3,664 4.52%
Tax-exempt investment securities(1) (TE) . 29,319 436 5.90% 38,274 569 5.90%
Federal funds sold and interest bearing
deposits(2) ............................ 13,291 268 8.00% 40,413 439 4.31%
Loans (3), (4) (TE) ...................... 968,092 18,061 7.40% 1,007,078 16,648 6.56%
----------------------------------------------------------------------------
Total interest bearing assets
and interest income (TE) ....... $1,423,770 $ 23,400 6.52% $1,407,524 $ 21,320 6.01%
----------------------------------------------------------------------------
Cash and due from banks .................. $ 45,024 $ 48,848
Premises and equipment ................... 22,663 22,483
Other assets ............................. 59,891 58,708
----------------------------------------------------------------------------
Total assets ................... $1,551,348 $1,537,563
============================================================================
Liabilities and Shareholders' Equity
Interest bearing demand deposits ......... $ 68,362 $ 120 0.70% $ 75,062 $ 169 0.89%
Savings .................................. 463,462 3,673 3.14% 425,355 1,912 1.78%
Time deposits ............................ 481,615 4,976 4.10% 472,397 3,787 3.18%
Federal funds purchased, repurchase
agreements, and notes payable .......... 122,100 1,467 4.77% 117,852 870 2.93%
FHLB advances and other borrowings ....... 35,929 484 5.34% 71,828 812 4.49%
----------------------------------------------------------------------------
Total interest bearing
liabilities and interest expense $1,171,468 $ 10,720 3.63% $1,162,494 $ 7,550 2.58%
----------------------------------------------------------------------------
Noninterest bearing demand deposits ...... $ 141,357 $ 137,956
Noninterest bearing savings deposits ..... 74,917 76,923
Other liabilities ........................ 16,726 16,364
----------------------------------------------------------------------------
Total liabilities .............. $1,404,468 $1,393,737
Shareholders' equity ..................... 146,880 143,826
----------------------------------------------------------------------------
Total liabilities and
shareholders' equity ........... $1,551,348 $1,537,563
============================================================================
Interest spread (average rate earned
minus average rate paid) (TE) .......... 2.89% 3.43%
============================================================================
Net interest income (TE) ................. $ 12,680 $ 13,770
============================================================================
Net yield on interest
earnings assets (TE) ................... 3.53% 3.88%
============================================================================
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. Income
from taxable investment securities included net gains on venture
capital funds of approximately $232,000 and $1.045 million in 2006 and
2005, respectively. Due to the nature of venture capital investments,
future results cannot be predicted based on past performance.
(2) Federal funds sold and interest bearing deposits included
approximately $63,000 in 2006 and $66,000 in 2005 of interest income
from third party processing of cashier checks.
(3) Loans are net of allowance for loan losses and include mortgage loans
held-for-sale. Nonaccrual loans are included in the total.
(4) Loan fees of approximately $411,000 and $339,000 in 2006 and 2005,
respectively, are included in total loan income.
31
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. This 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, 2006
Increase
(Decrease)
from
Previous Due to Due to
Year Volume Rate
------------------------------------
Interest Income
Taxable investment securities .................. $ 971 $ 1,025 $ (54)
Tax-exempt investment securities (TE) .......... (133) (133) --
Federal funds sold and interest bearing deposits (171) (405) 234
Loans (TE) ..................................... 1,413 (664) 2,077
------------------------------------
Total interest income (TE) ............. $ 2,080 $ (177) $ 2,257
------------------------------------
Interest Expense
Interest bearing demand and savings deposits ... $ 1,712 $ 142 $ 1,570
Time deposits .................................. 1,189 75 1,114
Federal funds purchased,
repurchase agreements and notes payable ...... 597 32 565
FHLB advances and other borrowings ............. (328) (462) 134
------------------------------------
Total interest expense ................. $ 3,170 $ (213) $ 3,383
------------------------------------
Net Interest Income (TE) ......................... $ (1,090) $ 36 $(1,126)
====================================
Net interest income on a tax-equivalent basis was $1.090 million, or 7.9%, lower
for the third quarter of 2006 compared to the third quarter of 2005. Total
tax-equivalent interest income was $2.080 million, or 9.8%, higher in 2006
compared to 2005, while interest expense increased $3.170 million, or 42.0%. The
increase in tax-equivalent interest income was due to an increase in rates
offset slightly by a decrease in volume. The increase in interest expense was
due to an increase in rates offset somewhat by a decrease in volume.
The increase in total tax-equivalent interest income was due to increases in
interest income from loans and taxable investment securities, offset slightly by
decreases in interest income from federal funds sold and interest bearing
deposits and tax-exempt investment securities. The increase in interest income
from loans was due to an increase in rates, offset somewhat by a decrease in
volume. The increase in interest income from taxable investment securities was
due to an increase in volume, offset slightly by a decrease in rates. The
decreases in interest income from federal funds sold and interest bearing
deposits was due to a decrease in volume offset somewhat by an increase in
rates. The decrease in interest income from tax-exempt investment securities was
due to a decrease in volume during the third quarter of 2006 compared to the
same period in 2005.
The increase in total interest expense was due to increases in interest expense
on interest bearing demand and savings deposits, time deposits and federal funds
purchased, repurchase agreements and notes payable, offset somewhat by a
decrease in interest expense on FHLB advances and other borrowings. The
increases in interest expense on interest bearing demand and savings deposits,
time deposits and federal funds purchased, repurchase agreements and notes
payable were primarily due to increases in rates coupled with increases in
volume during the third quarter of 2006 compared to the same period in 2005. The
decrease in interest expense from FHLB advances and other borrowings was due to
a decrease in volume, offset somewhat by an increase in rates.
The provision for loan losses recorded was $450,000 in both the third quarter of
2006 and 2005. 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.
32
The following table summarizes selected categories of non-interest income and
non-interest expense for the three months ended September 30, 2006 and 2005.
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of FASB Statement No. 123(R), Share-Based Payment, using the
modified-prospective-transition method. (Refer to Note 4, Stock Option Plans,
for additional information.) As a result, the Company recognized an additional
$163,000 in stock option expense in the third quarter of 2006, with $118,000
being allocated to salaries and benefits expense and $45,000 attributable to
non-employee options being allocated to other non-interest expense.
Noninterest Income and Expense
for the Three Months Ended
September 30, 2006 and 2005
(in thousands)
---------------------------------------------------------------------------------------------------
Non-interest Income 09/30/2006 09/30/2005 $ change % change
---------------------------------------------------------------------------------------------------
Remittance processing (1) .................. $ 1,863 $ 1,741 $ 122 7.0%
Trust and brokerage fees (2) ............... 2,042 2,153 (111) (5.2%)
Service charges on deposit accounts ........ 670 820 (150) (18.3%)
Securities transactions, net (3) ........... -- (485) 485 100.0%
Gain on sales of mortgage loans, net (4) ... 166 329 (163) (49.5%)
Other ...................................... 747 740 7 0.9%
---------------------------------------------------
Total non-interest income . $ 5,488 $ 5,298 $ 190 3.6%
==================================================
---------------------------------------------------------------------------------------------------
Non-interest Expense 09/30/2006 09/30/2005 $ change % change
---------------------------------------------------------------------------------------------------
Salaries and employee benefits (5) ......... $ 6,008 $ 6,097 $ (89) (1.5%)
Occupancy .................................. 747 824 (77) (9.3%)
Equipment .................................. 619 674 (55) (8.2%)
Data processing (6) ........................ 821 566 255 45.1%
Office supplies ............................ 295 319 (24) (7.5%)
Service charges from correspondent banks (7) 68 134 (66) (49.3%)
Amortization of core deposit intangibles ... 218 217 1 0.5%
Other (8) .................................. 1,646 1,480 166 11.2%
---------------------------------------------------
Total non-interest expense . $ 10,422 $ 10,311 $ 111 1.1%
==================================================
(1) Included in the increase in remittance processing income was $60,000
in revenue from a new online bill payment product introduced at the
end of the second quarter of 2006 by the Company's remittance
processing subsidiary, FirsTech. The remainder of the increase was
attributable to a $130,000 increase in Internet Agent revenue, offset
somewhat by decreases in lockbox revenue, mechanical processing
revenue and currency exchange income.
(2) Included in trust and brokerage fees during the third quarter of 2005
was $238,000 in farm realty commissions attributable to the sale of
two properties.
(3) Included in securities transactions, net in 2005 was a $395,000 loss
recognized on one venture capital fund and a net loss $90,000 on the
sale of several equity securities in the third quarter of 2005.
(4) The decrease in gains on sales of mortgage loans reflected a $11.864
million, or 45.1%, decrease in funded mortgage loans held-for-sale,
from $26.320 million in the third quarter of 2005 to $14.456 million
in the third quarter of 2006. The volume of funded mortgage loans
decreased mainly due to a slowdown in the residential real estate
market in the third quarter of 2006 compared to the same period in
2005.
(5) The decrease in salaries and benefits was due, in part, to improved
efficiencies realized after the acquisition of Citizens.
(6) The increase in data processing expense in 2006 included a $69,000, or
21.1%, increase in computer processing expense and a $43,000, or 37.1%
increase, in internet processing expense, due, in part, to operating
the Company's new Bloomington locations. Also contributing to the
increase in data processing expense in 2006 was an increase of
$118,000, or 155.0%, in data processing expense attributable to the
Company's Wealth Management Group. This increase was due to increased
trading volume, and the implementation costs associated with
conversion to a new third party system.
33
(7) The decrease in service charges from correspondent banks was primarily
due to a change in the Company's cash letter processing vendor in
November 2005 which resulted in a decrease in fees as well as higher
earnings credits due to the rising rate environment.
(8) The increase in other non-interest expense in 2006 included an
$82,000, or 36.4%, increase in marketing expense and $45,000 of stock
option expense as a result of adopting FASB Statement No. 123(R)
effective January 1, 2006.
Income tax expense decreased $492,000, or 16.7%, during the third quarter of
2006 compared to the same period in 2005. The effective tax rate decreased to
34.5% during the third quarter of 2006 from 36.4% in the third quarter of 2005.
Business Segment Information
The Company currently operates in two industry segments. The primary business
involves providing banking services to central Illinois to both business and
individual customers. These services include demand, savings, time and
individual retirement accounts; commercial, commercial real estate, consumer
(including automobile loans and personal lines of credit), agricultural, and
residential real estate lending; safe deposit and night depository services;
purchases of installment obligations from retailers, primarily without recourse;
farm management; farm realty service; full service trust department that offers
a wide range of services such as investment management, acting as trustee,
serving as guardian, executor or agent, comprehensive financial planning,
miscellaneous consulting, and brokerage services offered through a third-party
arrangement with Raymond James Financial Services. The other industry segment
involves retail payment processing. FirsTech provides the following services to
electric, water and gas utilities, telecommunication companies, cable television
firms and charitable organizations: retail lockbox processing of payments
delivered by mail on behalf of the biller; processing of payments delivered by
customers to pay agents such as grocery stores, convenience stores and currency
exchanges; and concentration of payments delivered by the Automated Clearing
House network and companies such as MasterCard RPPS.
Company information is provided for informational purposes only, since it is not
considered a separate segment for reporting purposes.
The following table quantifies the Company's business segment information for
the nine-months ended September 30, 2006 and 2005:
As of and for the Banking Remittance
Nine Months Ended: Services Services Company Eliminations Total
---------------------------------------------------------------------------------------------------------------
September 30, 2006
Total interest income .................... $ 67,113 $ 20 $ 315 $ (49) $ 67,399
Total interest expense ................... 29,988 -- 260 (49) 30,199
Provision for loan losses ................ 1,350 -- -- -- 1,350
Total non-interest income ................ 11,548 5,678 250 (964) 16,512
Total non-interest expense ............... 27,002 3,326 1,405 (964) 30,769
Income before income tax ................. 20,321 2,372 (1,100) -- 21,593
Income tax expense ....................... 7,180 996 (751) -- 7,425
Net income ............................... 13,141 1,376 (349) -- 14,168
Goodwill ................................. 20,736 -- -- -- 20,736
Total assets ............................. 1,544,837 5,158 155,769 (147,614) 1,558,150
Depreciation & amortization - fixed assets 1,660 229 41 -- 1,930
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
Goodwill ................................. 20,736 -- -- -- 20,736
Total assets ............................. 1,517,540 3,296 157,292 (144,709) 1,533,419
Depreciation & amortization - fixed assets 1,573 288 40 -- 1,901
34
Emerging Accounting Standards
The FASB has issued FASB Staff Position (FSP) FAS 123-R-3, "Transition Election
Related to Accounting for the Tax Effects of Share-Based Payments Awards." This
FSP provides a practical exception when a company transitions to the accounting
requirements in FASB Statement No. 123 (Revised 2004), Share-Based Payment.
Statement 123R requires a company to calculate the pool of excess tax benefits
available to absorb tax deficiencies recognized subsequent to adopting Statement
123R (termed the "APIC Pool"), assuming the Company has been following the
recognition provisions prescribed by FASB Statement No. 123, Accounting for
Stock-Based Compensation. The FASB learned that several companies do not have
the necessary historical information to calculate the APIC pool as envisioned by
Statement 123R and accordingly, the FASB decided to allow a practical exception
as documented in this FSP. The guidance in this FSP is effective immediately and
includes transition guidance. The Company believes it has the necessary
information to calculate the APIC pool and does not anticipate utilizing this
exception.
In July, 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" (FIN 48). FIN 48 clarifies the accounting and
reporting for income taxes recognized in accordance with SFAS No. 109,
"Accounting for Income Taxes." This interpretation prescribes a comprehensive
model for the financial statement recognition, measurement, presentation and
disclosure of uncertain tax positions taken or expected to be taken in income
tax returns. The Company is currently evaluating the impact of FIN 48. The
Company will adopt FIN 48 in the first quarter of 2007.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." This
Statement defines fair value, establishes a framework for measuring fair value,
and expands disclosures about fair value measurements. It clarifies that fair
value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants in the market in
which the reporting entity transacts. The Statement does not require any new
fair value measurements, but rather, it provides enhanced guidance to other
pronouncements that require or permit assets or liabilities to be measured at
fair value. This Statement is effective for fiscal years beginning after
November 15, 2007, with earlier adoption permitted. The Company does not expect
that the adoption of this Statement will have a material impact on its financial
position, results of operations and cash flows.
Recent Regulatory Developments
The Financial Services Regulatory Relief Act of 2006 (the "Regulatory Relief
Act") was signed into law on October 13, 2006. The stated purpose of the
Regulatory Relief Act is to provide regulatory relief and improve productivity
for insured depository institutions. Among other things, the Regulatory Relief
Act: (i) requires the Securities and Exchange Commission and the Board of
Governors of the Federal Reserve System (the "Federal Reserve"), in consultation
with the other federal banking regulators, to jointly promulgate regulations to
implement the bank broker-dealer exceptions enacted in the Gramm-Leach-Bliley
Act, and makes savings associations subject to the same broker-dealer
registration requirements as banks; (ii) authorizes the Federal Reserve to pay
interest on reserve balances maintained at the Federal Reserve Banks; (iii)
authorizes the Federal Reserve to lower the reserve requirement for transaction
accounts to 0%; (iv) enhances the authority of a national bank or state member
bank to make community development investments and increases (from 10% to 15%)
the maximum amount of unimpaired capital and surplus that a national bank or
member bank may invest in investments designed to promote the public welfare;
(v) increases the asset threshold (from $250 million to $500 million) for
well-capitalized and well-managed banks eligible for 18-month (rather than
12-month) examinations; (vi) enhances the power of the federal banking agencies
to enforce conditions imposed in writing in connection with the approval of
applications and written agreements; (vii) clarifies the jurisdiction of the
various state regulators over banks with branches in more than one state; and
(viii) directs the Comptroller General to conduct studies on the currency
transaction report filing system to determine whether and to what extent the
filing rules for currency transaction reports are burdensome and whether such
requirements should be modified to reduce such perceived burdens.
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.
35
The Company's ability to predict results or the actual effect of future
plans or strategies is inherently uncertain. The factors which could have a
material adverse effect on the Company's operations and future prospects are
detailed in the "Risk Factors" section included in item 1a. of Part I of the
Company's Form 10-K. Additional 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 Unexpected results of the proposed merger with First Busey
Corporation.
o The economic impact of past and any future terrorist attacks, acts of
war or threats thereof and the response of the United States to any
such threats and attacks.
o The costs, effects and outcomes of existing or future litigation.
o Changes in accounting policies and practices, as may be adopted by
state and federal regulatory agencies, the Financial Accounting
Standards Board, the Securities and Exchange Commission and the Public
Company Accounting Oversight Board.
o The ability of the Company to manage the risks associated with the
foregoing as well as anticipated.
In addition to the risk factors described above, there are other factors that
may impact any public company, including ours, which could have a material
adverse effect on the operations and future prospects of the Company and its
subsidiaries. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
See the "Interest Rate Sensitivity" section above.
Item 4. Controls and Procedures
As required by Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act
of 1934, management has evaluated, with the participation of our Chief Executive
Officer and Chief Financial Officer, the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this report.
Based on their evaluation, management concluded our disclosure controls and
procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e))
were effective as of September 30, 2006 to ensure that information required to
be disclosed by us in reports that we file or submit under the Securities
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms and were
effective as of September 30, 2006. These disclosure controls and procedures
include controls and procedures designed to ensure that information required to
be disclosed by us in the reports that we file or submit under the Securities
Exchange Act is accumulated and communicated to management, including our Chief
Executive Officer and Chief Financial Officer, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
There have been no significant changes in the Company's internal controls over
financial reporting, that occurred during the quarter ended September 30, 2006
that have materially affected, or are reasonably likely to materially affect the
Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the Company or its
subsidiaries is a party other than ordinary routine litigation incidental to
their respective businesses.
Item 1.A. Risk Factors
There have been no material changes in the risk factors applicable to the
Company from those disclosed in Part I, Item 1.A., "Risk Factors," in the
Company's 2005 Annual Report on Form 10-K. Please refer to that section of the
Company's 10-K for disclosures regarding the risks and uncertainties related to
the Company's business.
36
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, 2006 .... 17,000 $ 30.75 17,000 70,718
August 1 -
August 31, 2006 .. 65,855 $ 30.87 65,855 4,863
September 1 -
September 30, 2006 -- $ -- -- 4,863
-----------------------------------------------------
Total ............ 82,855 $ 30.85 82,855 4,863
=====================================================
(1) On October 27, 2003, the Company announced that its Board of Directors
had reinstated the Stock Repurchase Program allowing the purchase of
up to 500,000 shares of the Company's outstanding stock. The program
will expire when the Company repurchases all of the shares covered.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
10.1 Agreement and Plan of Merger between Main Street Trust, Inc. and
First Busey Corporation dated September 20, 2006 (previously
filed as Exhibit 10.1 to the Company's Form 8-K filed on
September 21, 2006 and incorporated by reference herein)
10.2 Letter agreement between Main Street Trust, Inc. and Gregory B.
Lykins, dated September 20, 2006 (previously filed as Exhibit
99.1 to the Company's Form 8-K filed on September 21, 2006 and
incorporated by reference herein)
10.3 Letter agreement between Main Street Trust, Inc. and Van A.
Dukeman, dated September 20, 2006 (previously filed as Exhibit
99.2 to the Company's Form 8-K filed on September 21, 2006 and
incorporated by reference herein)
10.4 Letter agreement between Main Street Trust, Inc. and David B.
White, dated September 20, 2006 (previously filed as Exhibit 99.3
to the Company's Form 8-K filed on September 21, 2006 and
incorporated by reference herein)
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, 2006
By: /s/ David B. White
----------------------------------------
David B. White, Executive Vice President
And Chief Financial Officer
By: /s/ Van A. Dukeman
----------------------------------------
Van A. Dukeman, President
And Chief Executive Officer
38