UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
Commission File Number: 33-90342
MAIN STREET TRUST, INC.
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(Exact name of Registrant as specified in its charter)
Illinois 37-1338484
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(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
100 West University, Champaign, Illinois 61820
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(Address of principal executive offices) (Zip Code)
(217) 351-6500
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section
12(b) of the Act:
Name of Each Exchange
Title of Exchange Class On Which Registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The index to exhibits is located on page 68 of 68 total sequentially numbered
pages.
1
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ X ] No [ ]
As of March 17, 2003, the Registrant had issued and outstanding 10,499,599
shares of the Registrant's Common Stock. The aggregate market value of the
voting and non-voting common equity held by non-affiliates of the registrant,
based on the last reported price on June 28, 2002, the last business day of the
registrant's most recently completed second fiscal quarter, was approximately
$159,630,562*.
* Based on the last reported price ($22.75) of an actual transaction in
Registrant's Common Stock on June 28, 2002, and reports of beneficial
ownership filed by directors and executive officers of Registrant and by
beneficial owners of more than 5% of the outstanding shares of Common Stock
of Registrant; however, such determination of shares owned by affiliates
does not constitute an admission of affiliate status or beneficial interest
in shares of Registrant's Common Stock.
Documents Incorporated By Reference
Part III of Form 10-K - Portions of Proxy Statement for annual meeting of
shareholders to be held May 6, 2003.
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MAIN STREET TRUST, INC.
Form 10-K Annual Report
Table of Contents
Part I
Item 1. Description of Business..............................................4
A. General
B. Business of the Company and Subsidiary
C. Competition
D. Monetary Policy and Economic Conditions
E. Regulation and Supervision
F. Employees
G. Internet Website
Item 2. Properties..........................................................12
Item 3. Legal Proceedings...................................................12
Item 4. Submission of Matters to a Vote of Security Holders.................12
Part II
Item 5. Market for Registrant's Common Equity and
Related Shareholder Matters.......................................12
Item 6. Selected Consolidated Financial Data................................13
Item 7. Management's Discussion and Analysis
Financial Condition and Results of Operations.....................13
Item 7a. Quantitative and Qualitative Disclosures about Market Risk..........35
Item 8. Financial Statements and Supplementary Data.........................35
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ...........................61
Part III
Item 10. Directors and Executive Officers of the Registrant..................62
Item 11. Executive Compensation..............................................62
Item 12. Security Ownership of Certain Beneficial Owners
and Management and related shareholder matters....................62
Item 13. Certain Relationships and Related Transactions......................63
Item 14. Controls and Procedures.............................................63
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.......................................................64
3
PART I
Item 1. Description of Business
A. General
MAIN STREET TRUST, INC. (the "Company"), an Illinois corporation, is a bank
holding company registered under the Bank Holding Company Act of 1956, as
amended (the "BHCA"). The Company was incorporated on August 12, 1999, and is
the parent company of BankIllinois, The First National Bank of Decatur and
FirsTech, Inc.
On March 23, 2000, the Company acquired all of the outstanding stock of
BankIllinois, The First National Bank of Decatur, First Trust Bank of
Shelbyville and FirsTech, Inc. following the merger of BankIllinois Financial
Corporation and First Decatur Bancshares, Inc. into the Company. The merger,
which was accounted for as a pooling of interests, was completed on March 23,
2000. Accordingly, prior period consolidated financial data has been restated as
though the prior entities had been consolidated for all periods presented. The
Company subsequently merged the Company's former banking subsidiary, First Trust
Bank of Shelbyville, into BankIllinois effective June 19, 2002.
B. Business of the Company and Subsidiaries
General
The Company conducts the business of banking and offers trust services through
BankIllinois and The First National Bank of Decatur (the "Banks"), and retail
payment processing through FirsTech, Inc., its wholly owned subsidiaries. As of
December 31, 2002, the Company had consolidated total assets of $1.123 billion,
shareholders' equity of $134.470 million and trust assets under administration
of approximately $1.415 billion. Substantially all of the income of the Company
is currently derived from dividends received from the Banks. The amount of these
dividends is directly related to the earnings of the Banks and is subject to
various regulatory restrictions. See "Regulation and Supervision."
Banking Segment
The Banks conduct a general banking business embracing most of the services,
both consumer and commercial, which banks may lawfully provide, including the
following principal services: the acceptance of deposits to demand, savings,
time and individual retirement accounts and the servicing of such accounts;
commercial, consumer and real estate lending, including installment loans and
personal lines of credit; safe deposit operations; and additional services
tailored to the needs of individual customers, such as the sale of traveler's
checks, cashier's checks and other specialized services. The Company offers
personalized financial planning services through the PrimeVest Investment Center
and through Raymond James, which services include a broad spectrum of investment
products, including stocks, bonds, mutual funds and tax advantaged investments.
In addition, the trust & investments division offers a wide range of services
such as investment management, acting as trustee, serving as guardian, executor
or agent, farm management, 401K administration and miscellaneous consulting.
Commercial lending at the Banks covers such categories as agriculture,
manufacturing, capital, inventory, construction, real estate development and
commercial mortgages. Commercial lending, particularly loans to small and medium
sized businesses, accounts for a major portion of the Banks' loan portfolios.
The Banks' retail banking divisions make loans to consumers for various
purposes, including home equity and automobile loans. The consumer mortgage loan
departments, which are part of the retail banking divisions, specialize in real
estate loans to individuals. The Banks also purchase installment obligations
from retailers, primarily without recourse.
The Banks' principal sources of income are interest and fees on loans and
investments and service fees. Their principal expenses are interest paid on
deposits and general operating expenses. The Banks' primary service area is
Central Illinois.
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Remittance Services Segment
FirsTech, Inc. provides the following services to electric, water and gas
utilities, telecommunication companies, cable television firms and charitable
organizations: retail lockbox processing of payments delivered by mail on behalf
of the biller; processing of payments delivered by customers to pay agents such
as grocery stores, convenience stores and currency exchanges; and concentration
of payments delivered by the Automated Clearing House network, money management
software such as Quicken and through networks such as Visa e-Pay and Mastercard
RPS. For the years ended December 31, 2002, 2001 and 2000, FirsTech, Inc.
accounted for $7.5 million (9%), $7.7 million (9%), and $7.6 million (8%),
respectively, of the consolidated total revenues of the Company and accounted
for $2.4 million (9%), $2.1 million (9%), and $1.7 million (9%), respectively,
of the consolidated income before income tax of the Company. See Note 2 to the
Consolidated Financial Statements for an analysis of segment operations.
FirsTech, Inc. provides retail lockbox processing for organizations. In 2002,
2001 and 2000, remittance processing for these companies accounted for
approximately 41%, 42% and 52%, respectively, of the total revenue of FirsTech,
Inc.
FirsTech, Inc. processes payments delivered by customers to pay agents. Many
businesses and merchants such as grocery stores and convenience stores located
throughout the United States serve as agents of utilities in collecting customer
payments. In 2002, 2001 and 2000, the remittance collection business for these
companies accounted for approximately 54%, 53% and 41%, respectively, of the
total revenue of FirsTech, Inc.
FirsTech, Inc. competes in the retail payment processing business with companies
that range from large national companies to small, local businesses. In
addition, many companies do their own remittance processing rather than
out-source the work to an independent processor such as FirsTech, Inc. The
principal methods of competition in the remittance processing industry are
pricing of services, use of technology and quality of service.
C. Competition
The Company faces strong competition both in originating loans and in attracting
deposits. Competition in originating real estate loans comes primarily from
other commercial banks, savings institutions and mortgage bankers making loans
secured by real estate located in the Company's market area. Commercial banks
and finance companies, including finance company affiliates of automobile
manufacturers, provide vigorous competition in consumer lending. The Company
competes for real estate and other loans principally on the basis of the
interest rates and loan fees it charges, the types of loans it originates and
the quality of services it provides to borrowers.
The Company faces substantial competition in attracting deposits from other
commercial banks, savings institutions, money market and mutual funds, credit
unions and other investment vehicles. The ability of the Company to attract and
retain deposits depends on its ability to provide investment opportunities that
satisfy the requirements of investors as to rate of return, liquidity, risk and
other factors. The Company attracts a significant amount of deposits through its
branch offices, primarily from the communities in which those branch offices are
located; therefore, competition for those deposits is principally from other
commercial banks and savings institutions located in the same communities. The
Company competes for these deposits by offering a variety of deposit accounts at
competitive rates, convenient business hours and convenient branch locations
with interbranch deposit and withdrawal privileges at each.
Under the Gramm-Leach-Bliley Act which was enacted in 2000, securities firms and
insurance companies that elect to become financial holding companies may acquire
banks and other financial institutions. This may significantly change the
competitive environment in which the Company and the Banks conduct business. The
financial services industry is also likely to become more competitive as further
technological advances enable more companies to provide financial services.
These technological advances may diminish the importance of depository
institutions and other financial intermediaries in the transfer of funds between
parties.
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D. Monetary Policy and Economic Conditions
The earnings of commercial banks and bank holding companies are affected not
only by general economic conditions, but also by the policies of various
governmental regulatory agencies. In particular, the Federal Reserve regulates
money and credit conditions and interest rates in order to influence general
economic conditions and interest rates, primarily through open market operations
in U. S. government securities, varying the discount rate on member banks and
nonmember bank borrowings and setting reserve requirements against bank
deposits. Such Federal Reserve policies and acts have a significant influence on
overall growth and distribution of bank loans, investments, deposits and related
interest rates. The Company cannot accurately predict the effect, if any, such
policies and acts may have in the future on its business or earnings.
E. Supervision and Regulation
General
Financial institutions, their holding companies and their affiliates are
extensively regulated under federal and state law. As a result, the growth and
earnings performance of the Company may be affected not only by management
decisions and general economic conditions, but also by the requirements of
federal and state statutes and by the regulations and policies of various bank
regulatory authorities, including the Illinois Commissioner of Banks and Real
Estate (the "Commissioner"), the Office of the Comptroller of the Currency (the
"OCC"), the Board of Governors of the Federal Reserve System (the "Federal
Reserve") and the Federal Deposit Insurance Corporation (the "FDIC").
Furthermore, taxation laws administered by the Internal Revenue Service and
state taxing authorities and securities laws administered by the Securities and
Exchange Commission (the "SEC") and state securities authorities have an impact
on the business of the Company. The effect of these statutes, regulations and
regulatory policies may be significant, and cannot be predicted with a high
degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions regulate, among other things, the scope of business, the kinds and
amounts of investments, reserve requirements, capital levels relative to
operations, the nature and amount of collateral for loans, the establishment of
branches, mergers and consolidations and the payment of dividends. This system
of supervision and regulation establishes a comprehensive framework for the
respective operations of the Company and its subsidiaries and is intended
primarily for the protection of the FDIC insured deposits and depositors of the
Bank Subsidiaries, rather than shareholders.
The following is a summary of the material elements of the regulatory framework
that applies to the Company and its subsidiaries. It does not describe all of
the statutes, regulations and regulatory policies that apply, nor does it
restate all of the requirements of those that are described. As such, the
following is qualified in its entirety by reference to applicable law. Any
change in statutes, regulations or regulatory policies may have a material
effect on the business of the Company and its subsidiaries.
The Company
General. The Company, as the sole shareholder of the Bank Subsidiaries, is a
bank holding company. As a bank holding company, the Company is registered with,
and is subject to regulation by, the Federal Reserve under the Bank Holding
Company Act of 1956, as amended (the "BHCA"). In accordance with Federal Reserve
policy, the Company is expected to act as a source of financial strength to the
Bank Subsidiaries and to commit resources to support the Bank Subsidiaries in
circumstances where the Company might not otherwise do so. Under the BHCA, the
Company is subject to periodic examination by the Federal Reserve. The Company
is also required to file with the Federal Reserve periodic reports of the
Company's operations and such additional information regarding the Company and
its subsidiaries as the Federal Reserve may require.
6
Acquisitions, Activities and Change in Control. The primary purpose of a bank
holding company is to control and manage banks. The BHCA generally requires the
prior approval of the Federal Reserve for any merger involving a bank holding
company or any acquisition by a bank holding company of another bank or bank
holding company acquisition involving a bank holding company. Subject to certain
conditions (including deposit concentration limits established by the BHCA), the
Federal Reserve may allow a bank holding company to acquire banks located in any
state of the United States. In approving interstate acquisitions, the Federal
Reserve is required to give effect to applicable state law limitations on the
aggregate amount of deposits that may be held by the acquiring bank holding
company and its insured depository institution affiliates in the state in which
the target bank is located (provided that those limits do not discriminate
against out-of-state depository institutions or their holding companies) and
state laws that require that the target bank have been in existence for a
minimum period of time (not to exceed five years) before being acquired by an
out-of-state bank holding company.
The BHCA generally prohibits the Company from acquiring direct or indirect
ownership or control of more than 5% of the voting shares of any company that is
not a bank and from engaging in any business other than that of banking,
managing and controlling banks or furnishing services to banks and their
subsidiaries. This general prohibition is subject to a number of exceptions. The
principal exception allows bank holding companies to engage in, and to own
shares of companies engaged in, certain businesses found by the Federal Reserve
to be "so closely related to banking ... as to be a proper incident thereto."
This authority would permit the Company to engage in a variety of
banking-related businesses, including the operation of a thrift, consumer
finance, equipment leasing, the operation of a computer service bureau
(including software development), and mortgage banking and brokerage. The BHCA
generally does not place territorial restrictions on the domestic activities of
non-bank subsidiaries of bank holding companies.
Additionally, bank holding companies that meet certain eligibility requirements
prescribed by the BHCA and elect to operate as financial holding companies may
engage in, or own shares in companies engaged in, a wider range of nonbanking
activities, including securities and insurance underwriting and sales, merchant
banking and any other activity that the Federal Reserve, in consultation with
the Secretary of the Treasury, determines by regulation or order is financial in
nature, incidental to any such financial activity or complementary to any such
financial activity and does not pose a substantial risk to the safety or
soundness of depository institutions or the financial system generally. The
Company has received approval to operate as a financial holding company.
Federal law also prohibits any person or company from acquiring "control" of an
FDIC-insured depository institution or its holding company without prior notice
to the appropriate federal bank regulator. "Control" is conclusively presumed to
exist upon the acquisition of 25% or more of the outstanding voting securities
of a bank or bank holding company, but may arise under certain circumstances at
10% ownership.
Capital Requirements. Bank holding companies are required to maintain minimum
levels of capital in accordance with Federal Reserve capital adequacy
guidelines. If capital levels fall below the minimum required levels, a bank
holding company, among other things, may be denied approval to acquire or
establish additional banks or non-bank businesses.
The Federal Reserve's capital guidelines establish the following minimum
regulatory capital requirements for bank holding companies: (i) a risk-based
requirement expressed as a percentage of total assets weighted according to
risk; and (ii) a leverage requirement expressed as a percentage of total assets.
The risk-based requirement consists of a minimum ratio of total capital to total
risk-weighted assets of 8%, and a minimum ratio of Tier 1 capital to total
risk-weighted assets of 4%. The leverage requirement consists of a minimum ratio
of Tier 1 capital to total assets of 3% for the most highly rated companies,
with a minimum requirement of 4% for all others. For purposes of these capital
standards, Tier 1 capital consists primarily of permanent shareholders' equity
less intangible assets (other than certain loan servicing rights and purchased
credit card relationships). Total capital consists primarily of Tier 1 capital
plus certain other debt and equity instruments that do not qualify as Tier 1
capital and a portion of the company's allowance for loan losses.
7
The risk-based and leverage standards described above are minimum requirements.
Higher capital levels will be required if warranted by the particular
circumstances or risk profiles of individual banking organizations. For example,
the Federal Reserve's capital guidelines contemplate that additional capital may
be required to take adequate account of, among other things, interest rate risk,
or the risks posed by concentrations of credit, nontraditional activities or
securities trading activities. Further, any banking organization experiencing or
anticipating significant growth would be expected to maintain capital ratios,
including tangible capital positions (i.e., Tier 1 capital less all intangible
assets), well above the minimum levels. As of December 31, 2002, the Company had
regulatory capital in excess of the Federal Reserve's minimum requirements.
Dividend Payments. The Company's ability to pay dividends to its shareholders
may be affected by both general corporate law considerations and policies of the
Federal Reserve applicable to bank holding companies. As an Illinois
corporation, the Company is subject to the limitations of the Illinois Business
Corporation Act, as amended, which prohibits the Company from paying a dividend
if, after giving effect to the dividend: (i) the Company would be insolvent; or
(ii) the net assets of the Company would be less than zero; or (iii) the net
assets of the Company would be less than the maximum amount then payable to
shareholders of the company who would have preferential distribution rights if
the Company were liquidated. Additionally, policies of the Federal Reserve
caution that a bank holding company should not pay cash dividends that exceed
its net income or that can only be funded in ways that weaken the bank holding
company's financial health, such as by borrowing. The Federal Reserve also
possesses enforcement powers over bank holding companies and their non-bank
subsidiaries to prevent or remedy actions that represent unsafe or unsound
practices or violations of applicable statutes and regulations. Among these
powers is the ability to proscribe the payment of dividends by banks and bank
holding companies.
Federal Securities Regulation. The Company's common stock is registered with the
SEC under the Securities Act of 1933, as amended, and the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). Consequently, the Company is
subject to the information, proxy solicitation, insider trading and other
restrictions and requirements of the SEC under the Exchange Act.
The Bank Subsidiaries
General. BankIllinois is an Illinois-chartered bank, the deposit accounts of
which are insured by the FDIC's Bank Insurance Fund ("BIF"). As an
Illinois-chartered FDIC-insured bank, BankIllinois is subject to the
examination, supervision, reporting and enforcement requirements of the
Commissioner, the chartering authority for Illinois banks, and the FDIC,
designated by federal law as the primary federal regulator of insured state
banks that, like BankIllinois, are not members of the Federal Reserve System.
BankIllinois is a member of the Federal Home Loan Bank System, which provides a
central credit facility primarily for member institutions.
The First National Bank of Decatur ("Decatur") is a national bank, chartered by
the OCC under the National Bank Act. The deposit accounts of Decatur are insured
by the BIF, and Decatur is a member of the Federal Reserve System and the
Federal Home Loan Bank System. Decatur is subject to the examination,
supervision, reporting and enforcement requirements of the OCC, the chartering
authority for national banks. The FDIC, as administrator of the BIF, also has
regulatory authority over Decatur.
Deposit Insurance. As FDIC-insured institutions, the Banks are required to pay
deposit insurance premium assessments to the FDIC. The FDIC has adopted a
risk-based assessment system under which all insured depository institutions are
placed into one of nine categories and assessed insurance premiums based upon
their respective levels of capital and results of supervisory evaluations.
Institutions classified as well-capitalized (as defined by the FDIC) and
considered healthy pay the lowest premium while institutions that are less than
adequately capitalized (as defined by the FDIC) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
8
During the year ended December 31, 2002, BIF assessments ranged from 0% of
deposits to 0.27% of deposits. For the semi-annual assessment period beginning
January 1, 2003, BIF assessment rates will continue to range from 0% of deposits
to 0.27% of deposits.
FICO Assessments. Since 1987, a portion of the deposit insurance assessments
paid by members of the FDIC's Savings Association Insurance Fund ("SAIF") has
been used to cover interest payments due on the outstanding obligations of the
Financing Corporation ("FICO"). FICO was created in 1987 to finance the
recapitalization of the Federal Savings and Loan Insurance Corporation, the
SAIF's predecessor insurance fund. As a result of federal legislation enacted in
1996, beginning as of January 1, 1997, both SAIF members and BIF members became
subject to assessments to cover the interest payments on outstanding FICO
obligations until the final maturity of such obligations in 2019. These FICO
assessments are in addition to amounts assessed by the FDIC for deposit
insurance. During the year ended December 31, 2002 the FICO assessment rate for
BIF and SAIF members was approximately 0.02% of deposits.
Supervisory Assessments. All Illinois banks and national banks are required to
pay supervisory assessments to the Commissioner and the OCC, respectively, to
fund the operations of such agencies. The amount of the assessment paid by an
Illinois bank to the Commissioner is calculated on the basis of the
institution's total assets, including consolidated subsidiaries, as reported to
the Commissioner. In the case of a national bank, the amount of the assessment
paid to the OCC is calculated using a formula that takes into account the bank's
size and its supervisory condition (as determined by the composite rating
assigned to the bank as a result of its most recent OCC examination). During the
year ended December 31, 2002, BankIllinois paid supervisory assessments to the
Commissioner totaling $104,000 and Decatur paid supervisory assessments to the
OCC totaling $107,000.
Capital Requirements. Banks are generally required to maintain capital levels in
excess of other businesses. The federal bank regulatory agencies have
established the following minimum capital standards for insured state and
national banks, such as the Bank Subsidiaries: (i) a leverage requirement
consisting of a minimum ratio of Tier 1 capital to total assets of 3% for the
most highly-rated banks with a minimum requirement of at least 4% for all
others; and (ii) a risk-based capital requirement consisting of a minimum ratio
of total capital to total risk-weighted assets of 8%, and a minimum ratio of
Tier 1 capital to total risk-weighted assets of 4%. For purposes of these
capital standards, the components of Tier 1 capital and total capital are the
same as those for bank holding companies discussed above.
The capital requirements described above are minimum requirements. Higher
capital levels will be required if warranted by the particular circumstances or
risk profiles of individual institutions. For example, the regulations of the
FDIC and the OCC provide that additional capital may be required to take
adequate account of, among other things, interest rate risk or the risks posed
by concentrations of credit, nontraditional activities or securities trading
activities.
Further, federal law and regulations provide various incentives to financial
institutions to maintain regulatory capital at levels in excess of minimum
regulatory requirements. For example, a financial institution that is
"well-capitalized" may qualify for exemptions from prior notice or application
requirements otherwise applicable to certain types of activities and may qualify
for expedited processing of other required notices or applications.
Additionally, one of the criteria which determines a bank holding company's
eligibility to operate as a financial holding company is a requirement that all
of its financial institution subsidiaries be "well-capitalized". Under the
regulations of the FDIC and the OCC, in order to be "well-capitalized", a
financial institution must maintain a ratio of total capital to total
risk-weighted assets of 10% or greater, a ratio of Tier 1 capital to total
risk-weighted assets of 6% or greater and a ratio of Tier 1 capital to total
assets of 5% or greater.
9
Federal law also provides the federal banking regulators with broad power to
take prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "adequately capitalized", "undercapitalized",
"significantly undercapitalized", or "critically undercapitalized", in each case
as defined by regulation. Depending upon the capital category to which an
institution is assigned, the regulators' corrective powers include: (i)
requiring the institution to submit a capital restoration plan; (ii) limiting
the institution's asset growth and restricting its activities; (iii) requiring
the institution to issue additional capital stock (including additional voting
stock) or to be acquired; (iv) restricting transactions between the institution
and its affiliates; (v) restricting the interest rate the institution may pay on
deposits; (vi) ordering a new election of directors of the institution; (vii)
requiring that senior executive officers or directors be dismissed; (viii)
prohibiting the institution from accepting deposits from correspondent banks;
(ix) requiring the institution to divest certain subsidiaries; (x) prohibiting
the payment of principal or interest on subordinated debt; and (xi) ultimately,
appointing a receiver for the institution.
As of December 31, 2002: (i) none of the Bank Subsidiaries were subject to a
directive from the FDIC (in the case of BankIllinois) or the OCC (in the case of
Decatur) to increase its capital to an amount in excess of the minimum
regulatory capital requirements; (ii) each of the Bank Subsidiaries exceeded its
minimum regulatory capital requirements under applicable capital adequacy
guidelines; and (iii) each of the Bank Subsidiaries was well-capitalized", as
defined by applicable regulations.
Liability of Commonly Controlled Institutions. Institutions insured by the FDIC
may be liable for any loss incurred by, or reasonably expected to be incurred
by, the FDIC in connection with the default of commonly controlled FDIC-insured
depository institutions or any assistance provided by the FDIC to commonly
controlled FDIC insured depository institutions in danger of default. Because
the Company controls each of the Bank Subsidiaries, the Bank Subsidiaries are
commonly controlled.
Dividend Payments. The primary source of funds for the Company is dividends from
the Banks. Under the Illinois Banking Act, BankIllinois generally may not pay
dividends in excess of their net profits. Under the National Bank Act, Decatur
may pay dividends out of its undivided profits in such amounts and at such times
as its board of directors deemed prudent. Without prior OCC approval, Decatur
may not pay dividends in any calendar year that, in the aggregate, exceed its
year-to-date net income plus its retained net income for the two preceding
years.
The payment of dividends by any financial institution or its holding company is
affected by the requirements to maintain adequate capital pursuant to applicable
capital adequacy guidelines and regulations, and a financial institution
generally is prohibited from paying any dividends if, following payment thereof,
the institution would be undercapitalized. As described above, each of the Bank
Subsidiaries exceeded its minimum capital requirements under applicable
guidelines as of December 31, 2002. As of December 31, 2002, approximately
$51,808,000 was available to be paid as dividends by the Bank Subsidiaries.
Notwithstanding the availability of funds for dividends, however, the FDIC (in
the case of BankIllinois) and the OCC (in the case of Decatur) may prohibit the
payment of any dividends by the Bank Subsidiaries if the agency determines such
payment would constitute an unsafe or unsound practice.
Insider Transactions. The Bank Subsidiaries are subject to certain restrictions
imposed by federal law on extensions of credit to the Company and its
subsidiaries, on investments in the stock or other securities of the Company and
its subsidiaries and the acceptance of the stock or other securities of the
Company or its subsidiaries as collateral for loans made by the Bank
Subsidiaries. Certain limitations and reporting requirements are also placed on
extensions of credit by the Bank Subsidiaries to their directors and officers,
to directors and officers of the Company and its subsidiaries, to principal
shareholders of the Company, and to "related interests" of such directors,
officers and principal shareholders. In addition, federal law and regulations
may affect the terms upon which any person who is a director or officer of the
Company or one of its subsidiaries or a principal shareholder of the Company may
obtain credit from banks with which the Bank Subsidiaries maintain correspondent
relationships.
Safety and Soundness Standards. The federal banking agencies have adopted
guidelines that establish operational and managerial standards to promote the
safety and soundness of federally insured depository institutions. The
guidelines set forth standards for internal controls, information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, asset quality and
earnings.
10
In general, the safety and soundness guidelines prescribe the goals to be
achieved in each area, and each institution is responsible for establishing its
own procedures to achieve those goals. If an institution fails to comply with
any of the standards set forth in the guidelines, the institution's primary
federal regulator may require the institution to submit a plan for achieving and
maintaining compliance. If an institution fails to submit an acceptable
compliance plan, or fails in any material respect to implement a compliance plan
that has been accepted by its primary federal regulator, the regulator is
required to issue an order directing the institution to cure the deficiency.
Until the deficiency cited in the regulator's order is cured, the regulator may
restrict the institution's rate of growth, require the institution to increase
its capital, restrict the rates the institution pays on deposits or require the
institution to take any action the regulator deems appropriate under the
circumstances. Noncompliance with the standards established by the safety and
soundness guidelines may also constitute grounds for other enforcement action by
the federal banking regulators, including cease and desist orders and civil
money penalty assessments.
Branching Authority. Illinois banks, such as BankIllinois, have the authority
under Illinois law to establish branches anywhere in the State of Illinois,
subject to receipt of all required regulatory approvals. National banks
headquartered in Illinois, such as Decatur, have the same branching rights in
Illinois as banks chartered under Illinois law, subject to OCC approval.
State and national banks are allowed to establish interstate branch networks
through acquisitions of other banks, subject to certain conditions, including
certain limitations on the aggregate amount of deposits that may be held by the
surviving bank and all of its insured depository institution affiliates. The
establishment of new interstate branches or the acquisition of individual
branches of a bank in another state (rather than the acquisition of an
out-of-state bank in its entirety) is allowed only if specifically authorized by
state law. Illinois law permits interstate mergers subject to certain
conditions, including a condition requiring an Illinois bank involved in an
interstate merger to have been in existence and continuous operation for more
than five years.
State Bank Investments and Activities. BankIllinois generally is permitted to
make investments and engage in activities directly or through subsidiaries as
authorized by Illinois law. However, under federal law and FDIC regulations,
FDIC insured state banks are prohibited, subject to certain exceptions, from
making or retaining equity investments of a type, or in an amount, that are not
permissible for a national bank. Federal law and FDIC regulations also prohibit
FDIC insured state banks and their subsidiaries, subject to certain exceptions,
from engaging as principal in any activity that is not permitted for a national
bank unless the bank meets, and continues to meet, its minimum regulatory
capital requirements and the FDIC determines the activity would not pose a
significant risk to the deposit insurance fund of which the bank is a member.
These restrictions have not had, and are not currently expected to have, a
material impact on the operations of BankIllinois.
Financial Subsidiaries. Under Federal law and OCC regulations, national banks
are authorized to engage, through "financial subsidiaries", in any activity that
is permissible for a financial holding company and any activity that the
Secretary of the Treasury, in consultation with the Federal Reserve, determines
is financial in nature or incidental to any such financial activity, except (i)
insurance underwriting, (ii) real estate development or real estate investment
activities (unless otherwise permitted by law), (iii) insurance company
portfolio investments and (iv) merchant banking. The authority of a national
bank to invest in a financial subsidiary is subject to a number of conditions,
including, among other things, requirements that the bank must be well-managed
and well-capitalized (after deducting from capital the bank's outstanding
investments in financial subsidiaries). Federal law also provides that state
banks may invest in financial subsidiaries (assuming they have the requisite
investment authority under applicable state law) subject to substantially the
same conditions that apply to national bank investments in financial
subsidiaries. None of the Bank Subsidiaries has applied for or received approval
to establish any financial subsidiaries.
Federal Reserve System. Federal Reserve regulations, as presently in effect,
require depository institutions to maintain non-interest earning reserves
against their transaction accounts (primarily NOW and regular checking
accounts), as follows: for transaction accounts aggregating $42.1 million or
less, the reserve requirement is 3% of total transaction accounts; and for
transaction accounts aggregating in excess of $42.1 million, the reserve
requirement is $1.083 million plus 10% of the aggregate amount of total
transaction accounts in excess of $42.1 million. The first $6.0 million of
otherwise reservable balances are exempted from the reserve requirements. These
reserve requirements are subject to annual adjustment by the Federal Reserve.
The Bank Subsidiaries are in compliance with the foregoing requirements.
11
F. Employees
The Company had a total of 439 employees at December 31, 2002, consisting of 330
full-time employees and 109 part-time. The Company places a high priority on
staff development, which involves extensive training, including customer service
training. New employees are selected on the basis of both technical skills and
customer service capabilities. None of the Company's employees are covered by a
collective bargaining agreement with the Company or its subsidiaries. The
Company offers a variety of employee benefits, and management considers its
employee relations to be excellent.
G. Internet Website
The Company maintains internet sites for its subsidiary banks at
www.bankillinois.com and www.1stdecatur.com. The Company makes available free of
charge on these sites its annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and other reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable
after it electronically files such material with, or furnishes it to, the
Securities and Exchange Commission.
Item 2. Properties
The Company and its subsidiaries conduct business in seventeen locations. The
Company and BankIllinois' headquarters are located at 100 W. University Ave. in
Champaign, Illinois. The Company and/or its subsidiaries own the land and
buildings for eleven locations and lease six locations, three of which are
located in supermarkets.
All of the Banks own their main banking facilities. The Company believes that
its facilities are adequate to serve its present needs.
Item 3. Legal Proceedings
In the course of business, the Company and its subsidiaries become involved in
various legal proceedings, claims and litigation arising out of the ordinary
course of business. As of the date of filing this report, there were no causes
of action which would have a material adverse effect on the consolidated
financial position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
There were no items submitted to a vote of security holders in the fourth
quarter of 2002.
PART II
Item 5. Market For Registrant's Common Equity And Related Shareholder Matters
The Company's common stock was held by approximately 700 shareholders of record
as of March 17, 2003 and is traded in the over-the-counter market.
The following table shows, for the periods indicated, the range of prices per
share of the Company's common stock in the over-the-counter market, as reported
to the Company by the brokers known to the Company to regularly follow the
market for the common stock. Certain other private transactions may have
occurred during the periods indicated of which the Company has no knowledge. The
following prices represent inter-dealer prices without retail markups, markdowns
or commissions, and have not been adjusted to reflect the 5% stock dividends
paid by the Company in the third quarter of 2001.
Cash
High Low Dividends
---------------------------------
2001 First quarter .......... $ 18.88 $ 16.63 $ 0.10
Second quarter ......... 19.25 18.33 0.11
Third quarter .......... 19.25 17.50 0.11
Fourth quarter ......... 18.70 17.55 0.11
2002 First quarter .......... $ 18.95 $ 17.85 $ 0.13
Second quarter ......... 24.00 18.70 0.13
Third quarter .......... 24.30 22.60 0.13
Fourth quarter ......... 24.95 24.00 0.13
During the fourth quarter of 2002, the Company declared a $0.15 per share cash
dividend, which was paid on January 24, 2003. The ability of the Company to pay
dividends in the future will be primarily dependent upon its receipt of
dividends from the Banks. In determining cash dividends, the Board of Directors
considers the earnings, capital requirements, debt and dividend servicing
requirements, financial ratio guidelines it has established, the financial
condition of the Company and other relevant factors. The Banks' ability to pay
dividends to the Company and the Company's ability to pay dividends to its
shareholders are also subject to certain regulatory restrictions. See "Business
- Supervision and Regulation - The Company - Dividend Payments" and "Business -
Supervision and Regulation - The Bank Subsidiaries - Dividend Payments" for a
more detailed description of these limitations.
12
Item 6. Selected Consolidated Financial Data
The following table presents selected consolidated financial information for the
Company for each of the five years ended December 31, 2002. The selected
consolidated financial data should be read in conjunction with the Consolidated
Financial Statements of the Company, including the related notes, presented
elsewhere herein.
Year Ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
(dollars in thousands, except per share data)
------------------------------------------------------------------------------------------------------------------------------------
Interest income ............................................... $ 63,363 $ 73,195 $ 74,271 $ 67,070 $ 65,710
Interest expense .............................................. 21,717 33,598 36,599 31,713 31,862
------------------------------------------------------------------------------------------------------------------------------------
Net interest income ........................................... 41,646 39,597 37,672 35,357 33,848
Provision for loan losses ..................................... 1,450 2,670 804 573 809
------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses ........... 40,196 36,927 36,868 34,784 33,039
Non-interest income ........................................... 18,866 17,266 16,316 17,991 14,682
Non-interest expense .......................................... 33,161 30,286 34,769 35,922 30,719
Income tax expense ............................................ 8,520 7,736 6,426 5,165 5,318
------------------------------------------------------------------------------------------------------------------------------------
Net income ............................................... $ 17,381 $ 16,171 $ 11,989 $ 11,688 $ 11,684
------------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share ...................................... $ 1.61 $ 1.48 $ 1.08 $ 1.05 $ 1.02
------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share .................................... $ 1.60 $ 1.45 $ 1.06 $ 1.03 $ 1.00
------------------------------------------------------------------------------------------------------------------------------------
Return on average total assets ................................ 1.58% 1.47% 1.15% 1.16% 1.23%
Return on average shareholders' equity ........................ 12.79% 12.32% 10.03% 10.10% 10.29%
Cash dividends declared per common share1 ..................... $ 0.54 $ 0.45 $ 0.40 $ 0.29 $ 0.28
------------------------------------------------------------------------------------------------------------------------------------
Total assets .................................................. $1,122,728 $1,151,511 $1,091,081 $1,035,746 $ 979,019
Investment in debt and equity securities ...................... 316,210 335,422 303,187 300,040 354,346
Loans held for investment, net ................................ 664,142 673,061 659,849 601,594 502,118
Deposits ...................................................... 868,586 884,109 839,932 795,075 765,666
Borrowings .................................................... 108,457 120,102 110,636 111,198 88,145
Total shareholders' equity .................................... 134,470 135,993 125,402 116,081 112,586
Total shareholders' equity to total assets .................... 11.98% 11.81% 11.49% 11.21% 11.73%
Average shareholders' equity to average assets ................ 12.35% 11.91% 11.45% 11.46% 11.95%
====================================================================================================================================
1 Prior to the merger of BankIllinois Financial Corporation and First Decatur
Bancshares in March 2000, both companies paid cash dividends each year.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis is designed to provide the reader with a
comprehensive review of the consolidated results of operations for 2002, 2001
and 2000 for the Company, including all subsidiaries, and an analysis of the
Company's financial condition at December 31, 2002 compared to December 31, 2001
and at December 31, 2001 compared to December 31, 2000. This discussion and
analysis should be read in conjunction with the consolidated financial
statements and related notes, which begin at page 38 of this report.
13
Overview
The years ended December 31, 2002, 2001 and 2000 were years of transition for
the Company involving fundamental reorganization of the consolidated
organization. During the first quarter of 2000, the Company was formed as a
result of the "merger of equals" of two strong financial services companies.
Despite being in this post-merger transitional period, and facing a worsening
economic environment and sagging consumer confidence, the Company posted record
results during 2001 and 2002. Each of the last three years had non-recurring
items. Non-recurring items during 2001 and 2000, many of which were merger
related, had significant effects on the Company's reported results.
Merger and related non-recurring restructuring expenses incurred in 2002
consisted of $529,000 of termination of employment contracts, $40,000 of
professional fees and $38,000 of data processing expenses, offset by $243,000 of
tax benefit. The resulting effect of these items on basic and diluted earnings
per share was a decrease of $0.03 for the year 2002. Merger and related
non-recurring restructuring expenses incurred in 2001 consisted of $70,000 of
data processing expense and $256,000 of termination of employment contracts,
offset by $111,000 of tax benefit. Also during 2001, a $2,500,000 reconciliation
liability expense, net of tax of $1,000,000, was reversed against non-interest
expense. The resulting effect of these items on basic and diluted earnings per
share for 2001, was an increase of approximately $0.12 and $0.11 respectively.
Costs incurred in 2000 associated with the merger and related non-recurring
restructuring consisted of $2,544,000 of professional fees, $1,036,000 of early
retirement and termination of employment contracts and $587,000 of expense
related to computer equipment write-down, offset by $639,000 of tax benefit. The
resulting effect of these costs on basic and diluted earnings per share was a
decrease of approximately $0.32 and $0.31 respectively, for 2000.
During the second quarter of 2002, the Company completed a tender offer in which
711,832 of its shares of common stock were acquired for an aggregate cost of
$16.556 million. Also in the second quarter of 2002, one of the Company's bank
subsidiaries, First Trust Bank of Shelbyville, was merged into BankIllinois.
Segment Operations
FirsTech, Inc. operates as a separate segment of the Company. Results of
FirsTech, Inc.'s operations are included as non-interest income and non-interest
expense of the Company.
Critical Accounting Policies
The Company's significant accounting policies are more fully described in Note 2
to the Company's consolidated financial statements located in Item 8 of this
Annual Report on form 10-K. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues, and expenses and the related
disclosures of contingent assets and liabilities. Actual results could differ
from those estimates under different assumptions or conditions. The Company
believes that it has one critical accounting policy that is subject to estimates
and judgements used in the preparation of its consolidated financial statements.
14
Allowance for Loan Losses. The allowance for loan losses is a material estimate
that is particularly susceptible to significant changes in the near term. The
allowance for loan losses is increased by provisions charged to operations and
is reduced by loan charge-offs less recoveries. Management utilizes an approach,
which provides for general and specific valuation allowances, that is based on
current economic conditions, past losses, collection experience, risk
characteristics of the portfolio, assessment of collateral values by obtaining
independent appraisals for significant properties, and such other factors which,
in management's judgment, deserve current recognition in estimating loan losses,
to determine the appropriate level of the allowance for loan losses.
The allowance for loan losses related to impaired loans that are identified for
evaluation is based on discounted cash flow using the loan's initial effective
interest rate or the fair value, less selling costs, of the collateral for
collateral dependent loans. Loans are categorized as "impaired" when, based on
current information or events, it is probable that the Company will be unable to
collect all amounts due, including principal and interest, in accordance with
the contractual terms of the loan agreement. The Company reviews all non-accrual
and substantially delinquent loans, as well as problem loans identified by
management, for impairment as defined above. A specific reserve amount will be
established for impaired loans in which the present value of the expected cash
flows to be generated is less than the amount of the loan recorded on the
Company's books. As an alternative to discounting, the Company may use the "fair
value" of any collateral supporting a collateral-dependent loan in reviewing the
necessity for establishing a specific loan loss reserve amount. Specific
reserves will be established for accounts having a collateral deficiency
estimated to be $50,000 or more. The Company's general reserve is maintained at
an adequate level to cover accounts having a collateral deficiency of less than
$50,000. Loans evaluated as groups or homogeneous pools of loans will be
excluded from this analysis.
The Company utilizes its data processing system to identify loan payments not
made by their contractual due dates and calculate the number of days each loan
exceeds the contractual due date. The accrual of interest on any loan is
discontinued when, in the opinion of management, there is reasonable doubt as to
the collectibility of interest or principal. Management believes the allowance
for loan losses is adequate to absorb probable credit losses inherent in the
loan portfolio. However, there can be no assurance that the allowance for loan
losses will be adequate to cover all losses. While management uses available
information to recognize loan losses, future additions to the allowance for loan
losses may be necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the adequacy of the allowance for loan losses. Such agencies
may require the Company to recognize additions to the allowance for loan losses
based on their judgments of information available to them at the time of their
examination.
15
Results of Operations
The Company had record earnings of $17,381,000 in 2002 compared to $16,171,000
in 2001 and $11,989,000 in 2000. The Company had a return on average assets of
1.58%, 1.47% and 1.15% in 2002, 2001 and 2000, respectively. The rates of return
in 2001 and 2000 were significantly affected by non-recurring events discussed
above. Basic earnings per share was $1.61, $1.48 and $1.08 in 2002, 2001 and
2000, respectively. Diluted earnings per share was $1.60, $1.45 and $1.06 in
2002, 2001 and 2000 respectively. Management believes that a strong balance
sheet and excellent profitability are critical to success, particularly when the
economy experiences a slowdown.
Net Interest Income
Interest rates and fees charged on loans are affected primarily by the market
demand for loans and the supply of money available for lending purposes. These
factors are affected by, among other things, general economic conditions and the
policies of the Federal government, including the Board of Governors of the
Federal Reserve System (the "Federal Reserve"), legislative tax policies and
governmental budgetary matters.
Net interest income, the most significant component of the Company's earnings,
is the difference between interest received or accrued on the Company's earning
assets--primarily loans and investments--and interest paid or accrued on
deposits and borrowings. In order to compare the interest generated from
different types of earning assets, the interest income on certain tax-exempt
investment securities and loans is increased for analysis purposes to reflect
the income tax savings provided by these tax-exempt assets. The adjustment to
interest income for tax-exempt investment securities and loans was calculated
based on the federal income tax statutory rate of 35%. The adjustment to net
interest income for the tax effect of tax-exempt assets is shown in the
following schedule.
Net Interest Income on a Tax Equivalent Basis
(in thousands)
-------------------------------------------------------------------------------
2002 2001 2000
-------------------------------------------------------------------------------
Total interest income ........................... $63,363 $73,195 $74,271
Total interest expense .......................... 21,717 33,598 36,599
-------------------------------------------------------------------------------
Net interest income ........................ 41,646 39,597 37,672
Tax equivalent adjustment:
Tax-exempt investments ..................... 1,279 1,210 1,046
Tax-exempt loans ........................... 19 59 52
-------------------------------------------------------------------------------
Total adjustment ...................... 1,298 1,269 1,098
-------------------------------------------------------------------------------
Net interest income (TE) ........................ $42,944 $40,866 $38,770
===============================================================================
16
The following schedule, "Consolidated Average Balance Sheet and Interest Rates",
provides details of average balances, interest income or interest expense, and
the average rates for the Company's major asset and liability categories.
Consolidated Average Balance Sheet and Interest Rates
(dollars in thousands)
------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
------------------------------------------------------------------------------------------------------------------------------------
Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------------------------------------------------------------------------------------------------------------------------------------
Assets
Taxable investment
securities1 ................... $ 262,275 $ 12,471 4.75% $ 250,890 $13,831 5.51% $ 259,980 $15,533 5.97%
Tax-exempt investment
securities1 (TE) ................. 55,134 3,654 6.63% 52,836 3,557 6.73% 44,630 3,077 6.89%
Federal funds sold and interest
bearing deposits2 ................ 25,602 437 1.71% 39,526 1,737 4.39% 22,688 1,553 6.85%
Loans 3,4 (TE) ..................... 673,423 48,099 7.14% 669,702 55,339 8.26% 623,652 55,206 8.85%
------------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets
and interest income (TE) .. $1,016,434 $ 64,661 6.36% $1,012,954 $74,464 7.35% $ 950,950 $75,369 7.93%
------------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks ............ $ 46,771 $ 49,282 $ 48,809
Premises and equipment ............. 18,928 20,336 21,641
Other assets ....................... 18,149 20,013 22,034
------------------------------------------------------------------------------------------------------------------------------------
Total assets .................. $1,100,282 $1,102,585 $1,043,434
====================================================================================================================================
Liabilities and Shareholders' Equity
Interest bearing demand
deposits ...................... $ 90,916 $ 944 1.04% $ 107,992 $ 2,229 2.06% $ 81,416 $ 2,112 2.59%
Savings ............................ 261,063 3,689 1.41% 229,493 6,743 2.94% 235,935 9,021 3.82%
Time deposits ...................... 350,353 14,081 4.02% 360,590 19,859 5.51% 344,305 19,531 5.67%
Federal funds purchased, repurchase
agreements and notes payable ..... 68,615 1,169 1.70% 74,918 2,550 3.40% 75,376 3,764 4.99%
FHLB advances & other borrowings ... 32,889 1,834 5.58% 38,980 2,217 5.69% 36,718 2,171 5.91%
------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities and interest
expense .................. $ 803,836 $ 21,717 2.70% $ 811,973 $ 33,598 4.14% $ 773,750 $36,599 4.73%
------------------------------------------------------------------------------------------------------------------------------------
Non-interest bearing
demand deposits .................. $ 93,590 $ 102,136 $ 88,059
Non-interest bearing savings
deposits ......................... 56,204 42,810 47,906
Other liabilities .................. 10,738 14,375 14,210
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities ............. $ 964,368 $ 971,294 $ 923,925
Shareholders' equity ............... 135,914 131,291 119,509
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity ..... $1,100,282 $1,102,585 $1,043,434
====================================================================================================================================
Interest spread (average
rate earned minus
average rate paid) (TE) ....... 3.66% 3.21% 3.20%
====================================================================================================================================
Net interest income (TE) ........... $ 42,944 $ 40,866 $ 38,770
====================================================================================================================================
Net yield on interest
earnings assets (TE) .......... 4.22% 4.03% 4.08%
====================================================================================================================================
Notes: see next page for notes 1-4.
17
Notes to Consolidated Average Balance Sheet and Interest Rates Table:
1 Investments in debt securities are included at carrying value.
2 Federal funds sold and interest earning deposits include approximately
$61,000, $114,000 and $154,000 in 2002, 2001 and 2000, respectively, of
interest income from third party processing of cashier checks.
3 Loans are net of allowance for loan losses and include mortgage loans held
for sale. Nonaccrual loans are included in the total.
4 Loan fees of approximately $1,269,000, $1,058,000, and $1,061,000 in 2002,
2001 and 2000, respectively, are included in total loan income.
The following table presents, on a fully taxable equivalent basis, an analysis
of changes in net interest income resulting from changes in average volumes of
earning assets and interest bearing liabilities and average rates earned and
paid. The change in interest due to the combined rate/volume variance has been
allocated to rate and volume changes in proportion to the absolute dollar
amounts of change in each.
Analysis of Volume and Rate Changes
(in thousands)
---------------------------------------------------------------------------------------------------------------------------
2002 2001
---------------------------------------------------------------------------------------------------------------------------
Increase Increase
(Decrease) (Decrease)
from from
Previous Due to Due to Previous Due to Due to
Year Volume Rate Year Volume Rate
---------------------------------------------------------------------------------------------------------------------------
Interest Income
Taxable investment securities .................... ($ 1,360) $ 606 ($ 1,966) ($ 1,702) ($ 530) ($ 1,172)
Tax-exempt investment securities ................. (97) 153 (56) 480 554 (74)
Federal funds sold and interest
bearing deposits ............................... (1,300) (475) (825) 184 874 (690)
Loans ............................................ (7,240) 306 (7,546) 133 3,933 (3,800)
---------------------------------------------------------------------------------------------------------------------------
Total interest income .................... ($ 9,803) $ 590 ($10,393) ($ 905) $ 4,831 ($ 5,736)
---------------------------------------------------------------------------------------------------------------------------
Interest Expense
Interest bearing demand
and savings deposits ........................... ($ 4,339) $ 370 ($ 4,709) ($ 2,161) $ 671 ($ 2,832)
Time deposits .................................... (5,778) (550) (5,228) 328 907 (579)
Federal funds purchased, repurchase agreements
and notes payable .............................. (1,381) (199) (1,182) (1,214) (23) (1,191)
Federal Home Loan Bank advances and other
borrowings ..................................... (383) (341) (42) 46 131 (85)
----------------------------------------------------------------------------------------------------------------------------
Total interest expense ................... ($11,881) ($ 720) ($11,161) ($ 3,001) $ 1,686 ($ 4,687)
---------------------------------------------------------------------------------------------------------------------------
Net Interest Income (TE) ........................... $ 2,078 $ 1,310 $ 768 $ 2,096 $ 3,145 ($ 1,049)
===========================================================================================================================
Total average earning assets increased from $1.013 billion in 2001 to $1.016
billion in 2002, but generated lower levels of interest income due to a
significant decrease in interest rates during 2002. Average taxable investment
securities increased $11.385 million, but generated $1,360,000 less interest
income, of which $1,966,000 was due to lower rates, offset somewhat by $606,000
due to an increase in volume. Average loans increased $3.721 million, but
generated $7,240,000 less interest income, of which $7,546,000 was due to lower
rates, offset slightly by a $306,000 increase attributable to an increase in
volume. Average tax-exempt investment securities increased $2.298 million in
2002, resulting in an increase of $97,000 in interest income. Of this increase,
$153,000 was due to an increase in volume, offset somewhat by $56,000 due to
lower rates. Somewhat offsetting these increases in average balances was a
decrease in average federal funds sold and interest-bearing deposits of $13.924
million, resulting in a decrease in interest income in this category of
$1,300,000. Of this decrease, $825,000 was due to lower rates and $475,000 was
due to a decrease in volume.
18
Total average earning assets increased from $950.950 million in 2000 to $1.013
billion in 2001, but generated lower levels of interest income due to a
significant decrease in interest rates during 2001. Average loans increased
$46.050 million, resulting in an increase of $133,000 in interest income, of
which $3,933,000 was due to an increase in volume, mostly offset by a $3,800,000
decrease attributable to lower rates. Average federal funds sold and
interest-bearing deposits increased $16.838 million in 2001, resulting in an
increase in interest income in this category of $184,000. Of this increase,
$874,000 was due to an increase in volume, offset substantially by $690,000 due
to lower rates. Average tax-exempt investment securities increased $8.206
million, resulting in an increase of $480,000 in interest income, of which
$554,000 was due to an increase in volume, offset slightly by $74,000 due to
lower rates. These increases in average balances were offset by a decrease in
average taxable investment securities of $9.090 million, resulting in a decrease
of $1,702,000 in interest income in this category, of which $530,000 was due to
lower volume and $1,172,000 was due to a decrease in rates.
The Company establishes interest rates on loans and deposits based on market
rates - such as the 91-day Treasury Bill rate and the prime rate - and interest
rates offered by other financial institutions in the local community. The level
of risk and the value of collateral also are evaluated when determining loan
rates. Rates were generally lower in 2002 compared to 2001. The average rate
earned on loans decreased 112 basis points from 8.26% in 2001 to 7.14% in 2002.
The yield on tax-exempt investment securities decreased 10 basis points from
6.73% in 2001 to 6.63% in 2002. The yield on taxable investment securities
decreased 76 basis points from 5.51% for the year ended December 31, 2002 to
4.75% for the year ended December 31, 2002. The yield on federal funds sold and
interest-bearing deposits decreased 268 basis points from 4.39% in 2001 to 1.71%
in 2002.
The total actual balance of loans at December 31, 2002 was lower than at
December 31, 2001. Installment and consumer loans decreased $24.056 million from
2001 to 2002. This was primarily caused by a $26.778 million decrease in
installment loans due to competition from special financing offered by the auto
manufacturers' captive financing companies. Commercial, financial and
agricultural loans decreased $11.997 million from 2001 to 2002 as a result of
the slowdown of the economy. Somewhat offsetting these decreases was an increase
of $27.134 million in real estate loans. Of this increase, $56.020 million was
attributable to commercial real estate loans, offset somewhat by a $28.886
million decrease in residential mortgage loans. The decrease in residential
mortgage loans was caused by a dramatic increase in refinancings to long-term
fixed rate loans, which were subsequently sold on the secondary market.
Average rates on total interest bearing liabilities decreased 144 basis points,
from 4.14% in 2001 to 2.70% in 2002, resulting in a decrease in interest expense
of $11,881,000 in 2002 compared to 2001, due to the low rate environment
throughout 2002. This was caused by a decrease in interest expense on all
categories of interest bearing liabilities. The average rates paid on federal
funds purchased, repurchase agreements and notes payable decreased 170 basis
points from 3.40% in 2001 to 1.70% in 2002. This resulted in a decrease in
interest expense of $1,381,000, of which $1,182,000 was due to rate decreases
and $199,000 was due to lower volume. The average rate paid on time deposits
decreased 149 basis points, from 5.51% in 2001 to 4.02% in 2002. This resulted
in a decrease of $5,778,000 in interest expense, of which $5,228,000 was due to
lower rates and $550,000 was due to a decrease in volume. The average rate paid
on interest bearing demand and savings deposits decreased 134 basis points, from
2.66% in 2001 to 1.32% in 2002. This resulted in a decrease in interest expense
of $4,339,000 in 2002, of which $4,709,000 was attributable to lower rates,
offset slightly by a $370,000 increase in volume. The average rate paid on
Federal Home Loan Bank advances and other borrowings decreased 11 basis points,
from 5.69% in 2001 to 5.58% in 2002. This resulted in a decrease in interest
expense of $383,000, of which $42,000 was due to lower rates and $341,000 was
due to a decrease in volume.
Interest expense decreased $3,001,000 in 2001 compared to 2000. This was mainly
caused by a decrease in interest expense on interest bearing demand and savings
deposits of $2,161,000 in 2001, of which $2,832,000 was due to a decrease in
rates, offset somewhat by $671,000 due to increased volume. The average rates
paid on federal funds purchased, repurchase agreements and notes payable
decreased 159 basis points from 4.99% in 2000 to 3.40% in 2001. This resulted in
a decrease in interest expense of $1,214,000, of which $1,191,000 was due to
rate decreases and $23,000 was due to lower volume. These decreases were offset
somewhat by an increase of $328,000 in interest expense on time deposits. Of
this increase, $907,000 was due to an increase in volume, offset somewhat by
$579,000 due to lower rates. Interest expense on Federal Home Loan Bank advances
and other borrowings increased $46,000, with $131,000 attributable to volume
increases, offset somewhat by $85,000 due to lower rates.
19
Provision for Loan Losses
The quality of the Company's loan portfolio is of prime importance to the
Company's management and its board of directors, as loans are the largest
component of the Company's assets. The Company maintains an independent credit
administration function, which performs reviews of all large loans and all loans
that present indications of additional credit risk.
Continued emphasis on loan quality was reflected in the ratio of net charge-offs
to average net loans of 0.22% in 2002, compared to 0.34% in 2001. Net
charge-offs decreased to $1,450,000 in 2002 from $2,290,000 in 2001. The Company
charged off $1,927,000 in loans during 2002 compared to $2,673,000 in 2001. This
was due to decreases in charge-offs for commercial, financial and agricultural
loans of $1,062,000 in 2002 compared to 2001. The decreased charge-offs were due
largely to charge-offs on two agriculture credits totaling $847,000 in 2001.
These decreases were offset somewhat by increases in charge-offs of installment
and consumer loans of $218,000 and in residential real estate loans of $98,000.
The increased charge-offs of installment and consumer loans were in the retail
lending area, particularly in indirect vehicle loans. Recoveries of previously
charged off loans increased from $383,000 in 2001 to $477,000 in 2002, with the
largest increase in the area of commercial, financial and agricultural loans
that increased $66,000 from 2001 to 2002. The provision for loan losses
decreased $1,220,000 from $2,670,000 in 2001 to $1,450,000 in 2002. This
decrease was mainly due to the reduction in net charge-offs. The Company
continues to emphasize credit analysis and early detection of problem loans.
Along with other financial institutions, management shares a concern for the
outlook of the economy in 2003. A slowdown in economic activity beginning in
2001 severely impacted several major industries as well as the economy as a
whole. Even though there are indications of emerging strength, it is not certain
that this strength is sustainable. In addition, consumer confidence may be
negatively impacted by the decline in equity prices. These events could still
adversely affect cash flows for both commercial and individual borrowers, as a
result of which, the Company could experience increases in problem assets,
delinquencies and losses on loans.
Non-interest Income
Non-interest income increased $1,600,000, or 9.3%, from 2001 to 2002. Included
in this increase was an increase of $702,000, or 13.4%, in income from trust and
brokerage fees from $5,227,000 in 2001 to $5,929,000 in 2002. This was primarily
the result of the adoption of a uniform trust fee schedule throughout the
Company in 2002 that resulted in the recognition of increased fees as well as a
$29,000,000 increase in assets under management in 2002 compared to 2001. Gains
on sales of mortgage loans held-for-sale increased $540,000, or 65.2%, from
$828,000 in 2001 to $1,368,000 in 2002. This increase resulted from a
$34,743,000, or 33.4%, increase in mortgage loans sold during 2002 compared to
2001 due to the low interest rate environment. Service charges on deposit
accounts increased $156,000, or 7.0%, in 2002 compared to 2001. Income from
securities transactions increased $101,000, or 91.8%, in 2002 compared to 2001.
This was the result of the sale of some securities to reposition the portfolio
in the low rate environment. Remittance processing income increased $90,000, or
1.3%, during 2002 compared to 2001. Other non-interest income increased $11,000,
or 0.6%, in 2002 compared to 2001.
Non-interest income increased $950,000, or 5.8%, from 2000 to 2001. Included in
this increase was an increase of $616,000, or 290.6%, from gains on sales of
mortgage loans held-for-sale. This increase resulted from a $78,618,000, or
307.9%, increase in mortgage loans sold during 2001 compared to 2000 due to the
falling interest rate environment. Remittance processing income increased
$582,000, or 8.8%, during 2001 compared to 2000. This increase was due to
increased volume coupled with restructured pricing for some customers. Service
charges on deposit accounts increased $130,000, or 6.2%, in 2001 compared to
2000. Also contributing to the increase in non-interest income was an $89,000,
or 423.8%, increase in income from securities transactions. This was the result
of the sale of some securities to reposition the portfolio in the changing rate
environment. Somewhat offsetting these increases was a decrease in other
non-interest income of $220,000, or 11.5%, from $1,917,000 in 2000 to $1,697,000
in 2001. Proceeds from a life insurance policy of approximately $81,000 along
with $22,000 in one-time fee income during 2000, contributed to this decrease.
Also, income from trust and brokerage fees decreased $247,000, or 4.5%, from
$5,474,000 in 2000 to $5,227,000 in 2001. This was due, in part, to the downturn
in the stock market during late 2000 and 2001. Market values were depressed
causing fee income, which is based on market valuation, to decline in this area.
20
Non-interest Expense
During 2002, non-interest expense increased $2,875,000, or 9.5%, to $33,161,000
in 2002 from $30,286,000 in 2001. The 2001 expense was a decrease of $4,483,000,
or 12.9%, compared to 2000 non-interest expense of $34,769,000. During 2001,
there were no merger related professional fees compared to $2,544,000 in 2000.
During 1999, the Company investigated reconciliation differences, which involved
the Company's subsidiary, FirsTech, Inc. in connection with its commercial
remittance processing services. After consultation with its professional
advisors, the Company's Board of Directors directed that a liability in the
amount of $2.5 million be recorded in the fourth quarter of 1999. Investigation
of these differences was completed during the fourth quarter of 2001. It was
determined that no liability existed and the $2.5 million liability was reversed
in non-interest expense in 2001. In 2002, there was no reconciliation liability
effect. During 2002, salaries and employee benefits expense increased $960,000,
or 5.4%, data processing expense increased $357,000, or 18.4%, occupancy expense
increased $79,000, or 3.4%, and service charges from correspondent banks
increased $47,000, or 5.3%. Somewhat offsetting these increases were decreases
in equipment expense of $626,000, or 18.4%, office supplies expense of $274,000,
or 17.9%, and other non-interest expense of $168,000, or 3.4%. During 2001,
salaries and employee benefits expense decreased $513,000, or 2.8%, equipment
expense decreased $247,000, or 6.8%, and service charges from correspondent
banks decreased $113,000, or 11.3%. Somewhat offsetting these decreases were
increases in other non-interest expense of $585,000, or 13.4%, data processing
expense of $473,000, or 32.2%, office supplies expense of $299,000, or 24.2%,
and occupancy expense of $77,000, or 3.5%.
Salaries and employee benefits increased $960,000, or 5.4%, from $17,761,000 in
2001 to $18,721,00 in 2002. Contributing to the increase in salaries and
employee benefits expense was an increase of $273,000 in salaries and benefits
related to organizational restructuring that resulted in termination of
employment contracts, and an increase of $288,000 in group health insurance
costs. Salaries and employee benefits in 2001 decreased $513,000, or 2.8%, from
$18,274,000 in 2000. Salaries and employee benefits in 2001 included $256,000 of
expenses related to the termination of employment contracts compared to
$1,034,000 in expenses in 2000 related to early retirement and termination of
employment contracts as a result of the merger.
Data processing expense increased $357,000, or 18.4%, from $1,943,000 in 2001 to
$2,300,000 in 2002. Contributing to this increase were a computer system
conversion at the Company's Decatur bank late in the first quarter of 2001 from
in-house data processing to third party service bureau data processing,
conversion to a new system and a software upgrade at the Company's remittance
processing subsidiary FirsTech, costs to merge First Trust Bank of Shelbyville
and BankIllinois computer records, as well as a continuation in development of
the Company's internet services during 2002 compared 2001. In 2001, data
processing expense increased $473,000, or 32.2%, from $1,470,000 in 2000.
Included in data processing expense were expenses associated with conversion to
third party service bureau data processing from in-house processing, and $70,000
in expenses related to computer system conversion and early contract termination
as a result of the computer system conversion.
Occupancy expense increased $79,000, or 3.4%, from $2,297,000 in 2001 to
$2,376,000 in 2002. In 2001, occupancy expense increased $77,000, or 3.5%, from
$2,220,000 in 2000.
Services charges from correspondent banks increased $47,000, or 5.3%, from
$885,000 in 2001 to $932,000 in 2002. This increase was mainly due to a
reduction in monthly earnings credits, which offset a portion of the charges,
due to the falling rate environment. Earnings credits are typically indexed to a
key government rate, like the monthly average 91-day Treasury bill rate. The
average 91-day T-bill rate dropped from 3.43% in 2001 to 1.64% in 2002. In 2001,
services charges from correspondent banks decreased $113,000, or 11.3%, from
$998,000 in 2000. The decrease in 2001 reflected a shift from lockbox payments
to mechanized payments at the Company's FirsTech subsidiary, which have lower
costs.
Equipment expense decreased $626,000, or 18.4%, from $3,405,000 in 2001 to
$2,779,000 in 2002. This decrease was due, in part, to conversion to third party
service bureau data processing from in-house data processing at the Company's
Decatur bank during 2001. In 2001, equipment expense decreased $247,000, or
6.8%, from $3,652,000 in 2000. This was primarily due to $587,000 in merger
related write-downs of computer equipment and software in 2000.
21
Office supplies expense decreased $274,000, or 17.9%, from $1,535,000 in 2001 to
$1,261,000 in 2002. In 2001, office supplies expense increased $299,000, or
24.2%, from $1,236,000 in 2000. Included in office supplies expense in 2001 were
additional printing and mailing expenses and additional supplies purchased to
support and announce a computer system conversion necessary to move the
Company's subsidiaries toward the same data processing system.
In 2002, other non-interest expense decreased $168,000, or 3.4%, from $4,960,000
in 2001 to $4,792,000 in 2002. In 2001, other non-interest expense increased
$585,000, or 13.4%, from $4,375,000 in 2000. Included in this change was
$461,000 in other real estate income in 2000 from the sale of a property that
had been previously written down.
Income Tax Expense
Income tax expense increased $784,000, or 10.1%, from $7,736,000 in 2001 to
$8,520,000 in 2002. This was mainly due to an increase in taxable income. In
2001, income tax expense increased $1,310,000, or 20.4%, from $6,426,000 in
2000. This was due to an increase in taxable income. The Company's effective tax
rate was 32.9%, 32.4% and 34.9% for the years ended December 31, 2002, 2001 and
2000, respectively. The effective tax rate was higher in 2000 due to
non-deductible merger related expenses.
The tax effects of temporary differences, which gave rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2002 and 2001, are shown in note 11 in the Notes to Consolidated Financial
Statements.
Financial Condition
Total assets decreased $28.783 million, or 2.5%, from $1.152 billion at December
31, 2001 to $1.123 billion at December 31, 2002. Decreases in cash and due from
banks, investments in debt and equity securities available-for-sale, loans,
mortgage loans held-for-sale, accrued interest receivable and premises and
equipment were somewhat offset by increases in federal funds sold and interest
earning deposits, investments in debt and equity securities held-to-maturity,
non-marketable equity securities and other assets.
Cash and due from banks decreased $28.151 million, or 32.0%, at December 31,
2002 compared to December 31, 2001, primarily due to the purchase of $16.556
million of the Company's common stock into treasury as a result of the second
quarter 2002 tender offer, and a smaller dollar amount of deposit items in
process of collection at December 31, 2002 compared to December 31, 2001.
Total investment in debt and equity securities decreased $19.212 million, or
5.7%, at December 31, 2002 compared to December 31, 2001. Investments in debt
and equity securities available-for-sale decreased $25.880 million, or 9.7%, at
December 31, 2002 compared to December 31, 2001. Somewhat offsetting this
decrease was an increase in investments in debt and equity securities
held-to-maturity of $4.745 million, or 7.4%, and an increase in investments in
non-marketable equity securities of $1.923 million, or 37.6%, at December 31,
2002 compared to December 31, 2001.
Loans, net of loan allowance, decreased $8.919 million, or 1.3%, at December 31,
2002 compared to December 31, 2001. Installment and consumer loans decreased
$24.056 million from 2001 to 2002. This was primarily caused by a $26.778
million decrease in installment loans due to competition from special financing
offered by the auto manufacturers' captive financing companies. Commercial,
financial and agricultural loans decreased $11.997 million from 2001 to 2002
primarily as a result of the slowdown of the economy. Somewhat offsetting these
decreases was an increase of $27.134 million in real estate loans. Of this
increase, $56.020 million was attributable to commercial real estate loans,
offset somewhat by a $28.886 million decrease in residential mortgage loans. The
decrease in residential mortgage loans was caused by a dramatic increase in
refinancings to long-term fixed rate loans, which were subsequently sold on the
secondary market.
Mortgage loans held-for-sale decreased $5.803 million, or 66.1%, at December 31,
2002 compared to December 31, 2001, accrued interest receivable decreased $1.575
million, or 17.7%, and premises and equipment decreased $0.910 million, or 4.7%,
at December 31, 2002 compared to December 31, 2001.
22
Federal funds sold and interest earning deposits increased $35.518 million, or
474.6%, at December 31, 2002 compared to December 31, 2001. Federal funds sold
and interest earning deposits fluctuate with loan demand, deposit volume and
investment opportunities. Other assets increased $0.269 million, or 2.5%, at
December 31, 2002 compared to December 31, 2001.
The decrease in year-end assets was a result of total deposits being $15.523
million, or 1.8%, lower at December 31, 2002 compared to December 31, 2001. This
was primarily due to the maturity of a large short-term deposit at the beginning
of 2002. Also, Federal Home Loan Bank advances and other borrowings were $7.089
million, or 20.3%, lower and federal funds purchased, repurchase agreements and
other notes were $4.556 million, or 5.3%, lower at December 31, 2002 than at
December 31, 2001.
Average assets were $2.303 million, or 0.2%, lower in 2002 than 2001. Included
in the decrease in average assets was a decrease of $13.924 million, or 35.2%,
in average federal funds sold and interest earning deposits, a decrease of
$2.511 million, or 5.1%, in cash and due from banks, a decrease of $1.864
million, or 9.3% in other assets, and a decrease of $1.408 million, or 6.9%, in
premises and equipment. These decreases were somewhat offset by increases of
$11.385 million, or 4.5%, in taxable investment securities, an increase of
$3.721 million, or 0.6%, in average net loans including mortgage loans
held-for-sale, and an increase of $2.298 million, or 4.3%, in tax-exempt
investment securities.
There were shifts in funding sources as total average deposits increased $9.105
million, or 1.1%, while average federal funds purchased, repurchase agreements
and other notes decreased $6.303 million, or 8.4%, and average Federal Home Loan
Bank advances and other borrowings decreased $6.091 million, or 15.6%, in 2002
from 2001. Included in the increase in average deposits was a shift in the
average deposit mix in 2002 versus 2001. Average interest bearing savings
increased $31.570 million, or 13.8%, and average non-interest bearing savings
increased $13.394 million, or 31.3%. Somewhat offsetting these increases were
decreases in average interest bearing demand deposits of $17.076 million, or
15.8%, average time deposits of $10.237 million, or 2.8%, and average
non-interest bearing demand deposits of $8.546 million, or 8.4%.
Investment Securities
The carrying value of investments in debt and equity securities was as follows:
Carrying Value of Securities1
(in thousands)
---------------------------------------------------------------------------------------------------------------------------
December 31, 2002 2001 2000
---------------------------------------------------------------------------------------------------------------------------
Securities available-for-sale:
U.S. Treasury ........................................................................ $ 3,066 $ 8,577 $ 23,812
Federal agencies ..................................................................... 185,469 191,325 156,322
Mortgage-backed securities ........................................................... 30,884 28,279 11,513
State and municipal .................................................................. 16,168 15,642 15,349
Corporate and other obligations ...................................................... 1,008 3,099 294
Marketable equity securities ......................................................... 4,021 19,574 6,396
---------------------------------------------------------------------------------------------------------------------------
Total .......................................................................... $240,616 $266,496 $213,686
===========================================================================================================================
Securities held-to-maturity:
Federal agencies ..................................................................... $ 1,750 $ 1,750 $ 29,428
Mortgage-backed securities ........................................................... 23,595 19,842 22,642
State and municipal .................................................................. 43,218 42,226 32,902
---------------------------------------------------------------------------------------------------------------------------
Total ........................................................................... $ 68,563 $ 63,818 $ 84,972
===========================================================================================================================
Non-marketable equity securities:
FHLB and FRB stock2 .................................................................. $ 3,963 $ 3,766 $ 3,526
Other equity investments ............................................................. 3,068 1,342 1,003
---------------------------------------------------------------------------------------------------------------------------
Total .......................................................................... $ 7,031 $ 5,108 $ 4,529
===========================================================================================================================
Total securities ............................................................... $316,210 $335,422 $303,187
===========================================================================================================================
1 Investment securities available-for-sale are carried at fair value.
Investment securities held-to-maturity are carried at amortized cost.
2 FHLB and FRB are commonly used acronyms for Federal Home Loan Bank and
Federal Reserve Bank, respectively.
23
The unrealized gain on securities available-for-sale, net of tax effect,
increased $1,026,000, to a gain of $3,776,000 at December 31, 2002 from a gain
of $2,750,000 at December 31, 2001.
The following table shows the maturities and weighted-average yields of
investment securities at December 31, 2002:
Maturities and Weighted Average Yields of Debt Securities
(dollars in thousands)
------------------------------------------------------------------------------------------------------------------------------------
December 31, 2002
------------------------------------------------------------------------------------------------------------------------------------
1 year 1 to 5 5 to 10 Over
or less years years 10 years Total
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------------------------------------------------------------------------------------------------------------------------------------
Securities available-for-sale:
U.S. Treasury ................... $ 3,066 3.94% $ -- -- $ -- -- $ -- -- $ 3,066 3.94%
Federal agencies ................ 44,977 4.80% 140,492 4.24% -- -- -- -- 185,469 4.38%
Mortgage-backed securities1 .... 9,263 3.28% 19,282 5.23% 2,257 8.07% 82 7.86% 30,884 4.86%
State and municipal ............ 769 4.74% 8,271 4.54% 5,335 4.99% 1,793 5.33% 16,168 4.79%
Other securities ............... 1,008 4.26% -- -- -- -- -- -- 1,008 4.26%
Marketable equity securities2 .. -- -- -- -- -- -- -- -- 4,021 --
------------------------------------------------------------------------------------------------------------------------------------
Total ...................... $ 59,083 $ 168,045 $ 7,592 $ 1,875 $240,616
====================================================================================================================================
Average Yield ...................... 4.51% 4.37% 5.90% 5.44% 4.46%
====================================================================================================================================
Securities held-to maturity:
Federal agencies ............... $ 1,750 6.03% $ -- -- $ -- -- $ -- -- $ 1,750 6.03%
Mortgage-backed securities1 .... 8,043 2.75% 11,400 4.38% 275 4.57% 3,877 5.78% 23,595 4.05%
State and municipal ............ 8,161 4.01% 30,729 4.02% 4,328 4.79% -- -- 43,218 4.10%
------------------------------------------------------------------------------------------------------------------------------------
Total ...................... $ 17,954 $ 42,129 $ 4,603 $ 3,877 $ 68,563
====================================================================================================================================
Average Yield ...................... 3.64% 4.12% 4.77% 5.78% 4.13%
====================================================================================================================================
Non-marketable equity securities2
FHLB and FRB stock ............. $ -- -- $ -- -- $ -- -- $ -- -- $ 3,963 --
Other equity investments ....... -- -- -- -- -- -- -- -- 3,068 --
------------------------------------------------------------------------------------------------------------------------------------
Total ...................... $ -- -- -- -- $ -- -- $ -- -- $ 7,031 --
====================================================================================================================================
1 Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties and certain securities require principal
repayments prior to maturity.
2 Due to the nature of these securities, they do not have a stated maturity
date or rate.
24
Loans
The following tables present the amounts and percentages of loans at December 31
for the years indicated according to the categories of commercial, financial and
agricultural; real estate; and installment and consumer loans.
Amount of Loans Outstanding
(dollars in thousands)
---------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
---------------------------------------------------------------------------------------------------------
Commercial, financial and agricultural ........... $234,045 $246,042 $219,541 $188,430 $168,862
Real estate ...................................... 343,827 316,693 319,412 293,761 240,529
Installment and consumer ......................... 95,529 119,585 129,775 128,085 101,580
---------------------------------------------------------------------------------------------------------
Total loans ................................. $673,401 $682,320 $668,728 $610,276 $510,971
=========================================================================================================
Percentage of Loans Outstanding
--------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
--------------------------------------------------------------------------------------------------
Commercial, financial and agricultural ...... 34.75% 36.06% 32.83% 30.88% 33.05%
Real estate ................................. 51.06% 46.41% 47.76% 48.13% 47.07%
Installment and consumer .................... 14.19% 17.53% 19.41% 20.99% 19.88%
--------------------------------------------------------------------------------------------------
Total .................................. 100.00% 100.00% 100.00% 100.00% 100.00%
==================================================================================================
The Company's loan portfolio totaled approximately $673.401 million at December
31, 2002, representing 60.0% of total assets at that date. Total loans decreased
$8.919 million, or 1.3%, from December 31, 2001 to December 31, 2002, with
decreases in installment and consumer loans and in commercial, financial and
agricultural loans of $24.056 million and $11.997 million, respectively, offset
somewhat by an increase in real estate loans of $27.134 million.
Total loans increased $13.592 million, or 2.0%, from December 31, 2000 to
December 31, 2001, with increases in commercial, financial and agricultural
loans of $26.501 million, offset somewhat by decreases in installment and
consumer loans and real estate loans of $10.190 million and $2.719 million,
respectively.
The balance of loans outstanding as of December 31, 2002 by maturities is shown
in the following table:
Maturity of Loans Outstanding
(dollars in thousands)
-----------------------------------------------------------------------------------------------------------------------
December 31, 2002
-----------------------------------------------------------------------------------------------------------------------
1 year 1-5 Over 5
or less years Years Total
-----------------------------------------------------------------------------------------------------------------------
Commercial, financial and agricultural ................................. $119,886 $ 96,823 $ 17,336 $234,045
Real estate ............................................................ 51,436 146,490 145,901 343,827
Installment and consumer ............................................... 33,689 54,141 7,699 95,529
-----------------------------------------------------------------------------------------------------------------------
Total ............................................................. $205,011 $297,454 $170,936 $673,401
=======================================================================================================================
Percentage of total loans outstanding .................................. 30.45% 44.17% 25.38% 100.00%
=======================================================================================================================
25
As of December 31, 2002, commercial, financial and agricultural loans with
maturities of greater than one year were comprised of $49.319 million in
fixed-rate loans and $64.840 million in floating-rate loans. Real estate loans
with maturities greater than one year at December 31, 2002 included $101.656
million in fixed-rate loans and $190.735 million in floating-rate loans.
Allowance for Loan Losses and Loan Quality
The following table summarizes changes in the allowance for loan losses by loan
categories for each period and additions to the allowance for loan losses, which
have been charged to operations.
Allowance for Loan Losses
(dollars in thousands)
-----------------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------
Allowance for loan losses at beginning of year ........... $ 9,259 $ 8,879 $ 8,682 $ 8,852 $ 8,837
-----------------------------------------------------------------------------------------------------------------
Charge-offs during period:
Commercial, financial and agricultural .............. $ (103) $(1,165) $ (99) $ (506) $ (200)
Residential real estate ............................. (125) (27) (34) -- (15)
Installment and consumer ............................ (1,699) (1,481) (1,119) (750) (933)
-----------------------------------------------------------------------------------------------------------------
Total .......................................... $(1,927) $(2,673) $(1,252) $(1,256) $(1,148)
-----------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial, financial and agricultural .............. $ 245 $ 179 $ 463 $ 268 $ 52
Residential real estate ............................. 31 37 9 53 14
Installment and consumer ............................ 201 167 173 192 288
-----------------------------------------------------------------------------------------------------------------
Total .......................................... $ 477 $ 383 $ 645 $ 513 $ 354
-----------------------------------------------------------------------------------------------------------------
Net charge-offs ........................... $(1,450) $(2,290) $ (607) $ (743) $ (794)
Provision for loan losses ................................ 1,450 2,670 804 573 809
-----------------------------------------------------------------------------------------------------------------
Allowance for loan losses at end of year ................. $ 9,259 $ 9,259 $ 8,879 $ 8,682 $ 8,852
=================================================================================================================
Ratio of net charge-offs to
average net loans ................................... 0.22% 0.34% 0.10% 0.14% 0.16%
=================================================================================================================
Management reviews criteria such as the customer's historic loan payment
performance, financial statements, financial ratios, cash flow, net worth,
collateral and guaranties, as well as local and national economic factors, in
determining whether loans should be written off as uncollectible. The Company
records a loss if it is probable that a loss will occur and the amount can be
reasonably estimated.
The Company's risk of loan loss is dependent on many factors: economic
conditions, the extent and values of underlying collateral, significant
concentrations of loans within the portfolio, the ability and willingness of
borrowers to perform according to loan terms and management's competence and
judgment in overseeing lending, collecting and loan-monitoring activities. The
risk of loss from commercial, financial and agricultural loans is significantly
impacted by economic factors and how these factors affect the particular
industries involved.
An analysis of the allowance for loan loss adequacy is performed on a quarterly
basis by the Company's credit administration department. This analysis is
reported to executive management and discussed at a quarterly meeting where
specific allocations for problem credits, charge-offs and monthly provisions for
loan losses are reviewed and revised, as necessary. The results are reported to
the boards of directors. The analysis includes assessment of the allowance for
loan loss adequacy based on historic loan losses and current quality grades of
specific credits reviewed, credit concentrations, current delinquent and
nonperforming loans, current economic conditions, peer group information and
results of recent audits or regulatory examinations. Charge-offs in commercial,
financial, and agricultural loans during 2002 decreased to $103,000 from
$1,165,000 in 2001, when two agricultural credits totaling $847,000 were charged
off. The level of charge-offs of installment and consumer loans in 2000, 2001,
and 2002 were reflective of the significant growth of the indirect loan
portfolio in 1999 and 2000.
26
The following table shows the allocation of the allowance for loan losses to
each loan category.
Allocation of the Allowance for Loan Losses
(in thousands)
-----------------------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
----------------------------------------------------------------------------------------------------------------------
Allocated:
Commercial, financial and agricultural ............................. $5,732 $5,487 $3,426 $3,476 $4,038
Residential real estate ............................................ 345 419 855 799 1,040
Installment and consumer ........................................... 1,763 2,000 1,649 1,289 1,332
----------------------------------------------------------------------------------------------------------------------
Total allocated allowance ..................................... $7,840 $7,906 $5,930 $5,564 $6,410
Unallocated allowances .................................................. 1,419 1,353 2,949 3,118 2,442
----------------------------------------------------------------------------------------------------------------------
Total ................................................................... $9,259 $9,259 $8,879 $8,682 $8,852
======================================================================================================================
The allocated portion of the allowance for loan losses decreased $66,000 from
$7,906,000 at December 31, 2001 to $7,840,000 at December 31, 2002. Of this
decrease, the allowance for installment and consumer loans decreased $237,000,
from $2,000,000 at December 31, 2001 to $1,763,000 at December 31, 2002 and the
allowance for residential real estate loans decreased $74,000 from $419,000 to
$345,000 during the same period as total loans in both retail categories
decreased during 2002. Somewhat offsetting these decreases was an increase in
the allowance for commercial, financial and agricultural loans of $245,000 from
$5,487,000 at December 31, 2001 to $5,732,000 at December 31, 2002 as commercial
real estate loans increased during 2002. The portion of the allowance for loan
losses which was unallocated increased by $66,000 to $1,419,000 at December 31,
2002 from $1,353,000 a year earlier. The unallocated amount is determined based
on management's judgment, which considers, in addition to the other factors
previously discussed, the risk of error in the specific allocation.
Management believes that nonperforming and potential problem loans are
appropriately identified and monitored based on the extensive loan analysis
performed by the credit administration department, the internal loan committees
and the boards of directors. Historically, there has not been a significant
amount of loans charged off which had not been previously identified as problem
loans by the credit administration department or the loan committees.
The following table presents the aggregate amount of loans considered to be
nonperforming for the periods indicated. Nonperforming loans include loans
accounted for on a nonaccrual basis, accruing loans contractually past due 90
days or more as to interest or principal payments and loans which are troubled
debt restructurings as defined in Statement of Financial Accounting Standards
No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings."
Nonperforming Loans
(in thousands)
--------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
--------------------------------------------------------------------------------------------
Nonaccrual loans1 ............................. $1,392 $3,341 $ 602 $ 112 $1,507
============================================================================================
Loans past due 90 days or more ................ $ 829 $1,774 $ 846 $ 440 $1,084
============================================================================================
Renegotiated loans ............................ $ 20 $ 67 $ 88 $ 104 $ 121
============================================================================================
1 Includes $628,000, $3,216,000, $505,000, $112,000 and $787,000 at December
31, 2002, 2001, 2000, 1999 and 1998, respectively, of loans which
management does not consider impaired as defined by the Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for
Impairment of a Loan" (SFAS 114).
Other Nonperforming Assets
(in thousands)
--------------------------------------------------------------------------------
2002 2001 2000 1999 1998
--------------------------------------------------------------------------------
Other real estate owned ........... $58 $ -- $ 7 $246 $276
================================================================================
Nonperforming other assets ........ $94 $153 $192 $132 $ 20
================================================================================
27
There were no other interest earning assets that would be required to be
disclosed as being nonperforming if such other assets were loans.
At December 31, 2002, the Company had approximately $7,393,000 in potential
problem loans, excluding nonperforming loans. Potential problem loans are those
loans identified by management as being worthy of special attention, and
although currently performing, may have some underlying weaknesses. None of
these potential problem loans were considered impaired as defined in SFAS 114.
The $7,393,000 of potential problem loans have either had timely payments or are
adequately secured and loss of principal or interest is determined to be
unlikely.
Loans over 90 days past due, which are not well secured and in the process of
collection, are placed on nonaccrual status. There were $1,392,000 of nonaccrual
loans at December 31, 2002 compared to $3,341,000 at December 31, 2001. The
decrease in nonaccrual loans was primarily due to the successful resolution of a
$1.8 million agricultural credit. Loans past due 90 days or more but still
accruing interest decreased by $945,000 in 2002 to a balance of $829,000 at
December 31, 2002, from $1,774,000 at December 31, 2001. These loans are well
secured and in the process of collection.
The following table categorizes nonaccrual loans as of December 31, 2002 based
on levels of performance and also details the allocation of interest collected
during the period in 2002 in which the loans were on nonaccrual. Substantial
performance, yet contractually past due, includes borrowers making sizable
periodic payments relative to the required periodic payments due. A borrower
that is not making substantial payments but is making some periodic payments
would be included in the limited performance category.
Nonaccrual and Related Interest Payments
(in thousands)
--------------------------------------------------------------------------------------------------------------
Cash Interest Payments Applied As:
--------------------------------------------------------------------------------------------------------------
At December 31, 2002 Recovery of Reduction
Book Contractual Interest Prior Partial Of
Balance Balance Income Charge-offs Principal
--------------------------------------------------------------------------------------------------------------
Contractually past due with:
Substantial performance .................. $ 111 $ 111 $ 6 $ -- $ --
Limited performance ...................... 37 57 -- -- --
No performance ........................... 1,244 1,311 -- -- --
--------------------------------------------------------------------------------------------------------------
Total ......................................... $1,392 $1,479 $ 6 $ -- $ --
===============================================================================================================
The difference between the book balance and the contractual balance represents
charge-offs made since the loans were funded.
Management believes that the allowance for loan losses at December 31, 2002 was
adequate to absorb credit losses in the total loan portfolio and that the
policies and procedures in place to identify potential problem loans are being
effectively implemented. However, there can be no assurance that the allowance
for loan losses will be adequate to cover all losses.
Premises and Equipment
Total premises and equipment decreased $0.910 million in 2002 from 2001. This
decrease was primarily due to depreciation expense of $2.647 million, proceeds
from sale of property of $71,000 and loss on disposal of property of $3,000.
These decreases were somewhat offset by $1.811 million of purchases.
Other Assets
Other assets increased $269,000 in 2002 from 2001. Included in this increase
were increases in cash value life insurance, current tax receivable and deferred
tax assets, offset somewhat by decreases in accounts receivable and servicing
rights.
28
Deposits
The following table shows the average balance and weighted average rate of
deposits at December 31 for the years indicated:
Average Balance and Weighted Average Rate of Deposits
(dollars in thousands)
--------------------------------------------------------------------------------------------------------
2002 2001 2000
--------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
--------------------------------------------------------------------------------------------------------
Demand
Non-interest bearing ............. $ 93,590 -- $102,136 -- $ 88,059 --
Interest bearing ................. 90,916 1.04% 107,992 2.06% 81,416 2.59%
Savings
Non-interest bearing ............. 56,204 -- 42,810 -- 47,906 --
Interest bearing ................. 261,063 1.41% 229,493 2.94% 235,935 3.82%
Time
$100,000 and more ................ 121,591 3.89% 110,966 4.73% 93,761 5.81%
Under $100,000 ................... 228,762 4.09% 249,624 5.85% 250,544 5.62%
--------------------------------------------------------------------------------------------------------
Totals ........................... $852,126 $843,021 $797,621
========================================================================================================
In analyzing its deposit activity, management has noted that average total
deposits increased $9.105 million, or 1.1%, during 2002. Included in this
increase were shifts in the average deposit mix in 2002 versus 2001. There were
increases in average interest bearing savings deposits of $31.570 million, or
13.8%, average non-interest bearing savings deposits of $13.394, or 31.3%, and
average time $100,000 and over of $10.625 million, or 9.6%. Somewhat offsetting
these increases were decreases in average time deposits under $100,000 of
$20.862 million, or 8.4%, average interest bearing demand deposits of $17.076
million, or $15.8%, and average non-interest bearing demand deposits of $8.546
million, or 8.4%.
The table below sets forth the maturity of deposits greater than $100,000 at
December 31, 2002:
Maturity of Time Deposits of $100,000 or More
(in thousands)
-------------------------------------------------------------------------------------------------------------
Total Time
State of Illinois Brokered Deposits of
Maturity at December 31, 2002 Time Deposits CDs CDs IRAs $100,000 or More
-------------------------------------------------------------------------------------------------------------
3 months or less ............................ $ 5,000 $ -- $ 25,775 $ 747 $ 31,522
3 to 6 months ............................... 5,000 -- 18,551 310 23,861
6 to 12 months .............................. -- 5,000 25,926 419 31,345
Over 12 months .............................. -- 12,000 15,334 4,111 31,445
-------------------------------------------------------------------------------------------------------------
Total .................................. $ 10,000 $ 17,000 $ 85,586 $ 5,587 $118,173
=============================================================================================================
Federal Funds Purchased, Repurchase Agreements and Notes Payable
This category includes federal funds purchased, which are generally overnight
transactions, securities sold under repurchase agreements, which mature from one
day to three years from the date of sale and U.S. Treasury demand notes. The
table in note 8 in the Notes to Consolidated Financial Statements shows the
balances of federal funds purchased, repurchase agreements and notes payable at
December 31, 2002 and 2001, the average balance for the years ended December 31,
2002, 2001 and 2000, and the maximum month-end value during each year.
Fair Values of Financial Instruments
The estimated fair values of financial instruments for which no listed market
exists and the fair values of investment securities, which are based on listed
market quotes at December 31, 2002 and 2001, are disclosed in note 17 in the
Notes to Consolidated Financial Statements.
29
Capital
Total shareholders' equity declined $1.523 million from $135.993 million at
December 31, 2001 to $134.470 million at December 31, 2002. Included in the
decrease were net treasury stock transactions of $15.369 million, primarily due
to the completion of the $16.556 million tender offer during the second quarter
of 2002, offset partially by the exercise of stock options by employees and
directors of the Company. Cash dividends declared of $5.752 million and a $0.031
million decrease from stock appreciation rights also contributed to the overall
decrease in capital. Increases in capital included net income of $17.381
million, issuance of new shares of common stock of $1.222 million (stock options
exercised prior to the completion of the tender offer were fulfilled using
existing treasury stock, if available, and through the issuance of new shares),
and an increase in accumulated other comprehensive income of $1.026 million.
Financial institutions are required by regulatory agencies to maintain minimum
levels of capital based on asset size and risk characteristics. Currently, the
Company and the Banks are required by their primary regulators to maintain
adequate capital based on two measurements: the total assets leverage ratio and
the risk-weighted assets ratio.
Based on Federal Reserve guidelines, a bank holding company generally is
required to maintain a leverage ratio of 3% plus an additional cushion of at
least 100 to 200 basis points. The Company's total assets leverage ratio at both
December 31, 2002 and 2001 was 11.8%. The leverage ratios for the individual
banks are disclosed in note 19 in the Notes to the Consolidated Financial
Statements. All are well above the regulatory minimum.
The minimum risk-weighted assets ratio for bank holding companies is 8%. The
Company's total risk-weighted assets ratio at both December 31, 2002 and 2001
was 18.0%, which is significantly higher than the regulatory minimum. The
individual banks' total risk-weighted assets ratio are disclosed in note 19 in
the Notes to Consolidated Financial Statements. All are significantly higher
than the regulatory minimum.
Inflation and Changing Prices
Changes in interest rates and a bank's ability to react to interest rate
fluctuations have a much greater impact on a bank's balance sheet and net income
than inflation. A review of net interest income (loss), liquidity and rate
sensitivity should assist in the understanding of how well the Company is
positioned to react to changes in interest rates.
Liquidity and Cash Flows
The Company requires cash to fund loan growth and deposit withdrawals. Cash
flows fluctuate with changes in economic conditions, current interest rate
trends and as a result of management strategies and programs. The Company
monitors the demand for cash and initiates programs and policies as considered
necessary to meet funding gaps.
The Company was able to adequately fund loan demand and meet liquidity needs in
2002. A review of the consolidated statement of cash flows in the accompanying
financial statements shows that the Company's cash and cash equivalents
increased $7.367 million from December 31, 2001 to December 31, 2002. The
increase in 2002 resulted from operating and investing activities, somewhat
offset by financing activities. There were differences in sources and uses of
cash during 2002 compared to 2001. More cash was provided by operating
activities in 2002 compared to 2001. This was mainly due to more funds provided
by sales of mortgage loans originated for sale than funds used for loans
originated for sale in 2002 compared to 2001 when more funds were used for loans
originated for sale than provided by proceeds from sales of loans originated for
sale. Cash was provided in the area of investing activities during 2002 compared
to cash used in 2001. Funding of new loans decreased in 2002 compared to 2001 as
net loans decreased $7.172 million in 2002 compared to a $15.882 million
increase in 2001. Principal paydowns from mortgage-backed securities were higher
in 2002 compared to 2001, reflective of the interest rate environment. Also,
there were less net purchases of investments in debt and equity securities
compared to proceeds from maturities, calls and sales of the same in 2002
compared to 2001. Cash was used in financing activities in 2002 compared to cash
provided in 2001. This was mainly due to decreases in deposits and federal funds
purchased, repurchase agreements and notes payable in 2002 compared to increases
in 2001. Also contributing to the use of funds in 2002 was the Company's stock
tender offer.
30
The Company's future short-term cash requirements are expected to continue to be
provided by investment maturities, sales of loans and deposits. Cash required to
meet longer-term liquidity requirements will mostly depend on future goals and
strategies of management, the competitive environment, economic factors and
changes in the needs of customers. No outside borrowing is anticipated. The
Company expects to maintain FHLB advances near the current level. If current
sources of liquidity cannot provide needed cash in the future, the Company can
obtain funds from several sources. The Company is able to borrow funds on a
temporary basis from the Federal Reserve Bank, the FHLB and correspondent banks
to meet short-term requirements. With no parent company debt and sound capital
levels, the Company has 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.
The following table summarizes significant obligations and other commitments at
December 31, 2002 (in thousands):
Short and long-term Operating
Years Ended December 31, Time Deposits borrowings1 leases Total
----------------------------------------------------------------------------------------------------------------------------------
2003 $ 233,120 $ 20,023 $ 207 $ 253,350
2004 56,484 23 193 56,700
2005 30,443 23 136 30,602
2006 9,933 5,023 129 15,085
2007 15,765 2,691 110 18,566
2008 and thereafter 0 23 2 25
----------------------------------------------------------------------------------------------------------------------------------
Total $ 345,745 $ 27,806 $ 777 $ 374,328
==================================================================================================================================
Commitments to extend credit:
Commitments $ 201,181
Standby letters of credit 11,563
----------------------------------------------------------------------------------------------------------------------------------
1 Fixed rate callable FHLB advances are included in the period of their
modified duration rather than in the period in which they are due. Short
and long-term borrowings include fixed rate callable advances of
$20,000,000 maturing in fiscal year 2008.
Interest Rate Sensitivity
The concept of interest sensitivity attempts to gauge exposure of the Company's
net interest income to adverse changes in market driven interest rates by
measuring the amount of interest-sensitive assets and interest-sensitive
liabilities maturing or subject to repricing within a specified time period.
Liquidity represents the ability of the Company to meet the day-to-day demands
of deposit customers balanced by its investments of these deposits. The Company
must also be prepared to fulfill the needs of credit customers for loans with
various types of maturities and other financing arrangements. One way the
Company monitors its interest rate sensitivity and liquidity is through the use
of static gap reports, which measure the difference between assets and
liabilities maturing or repricing within specified time periods.
31
The following table shows the Company's interest rate sensitivity position at
various intervals at December 31, 2002:
Rate Sensitivity of Earning Assets and Interest Bearing Liabilities
(in thousands)
------------------------------------------------------------------------------------------------------------------------------------
1 -30 31 - 90 91 -180 181 - 365 Over
Days Days Days Days 1 Year Total
------------------------------------------------------------------------------------------------------------------------------------
Interest earning assets:
Federal funds sold and interest bearing
deposits ................................... $ 43,002 $ -- $ -- $ -- $ -- $ 43,002
Debt and equity securities1 .................. 33,291 39,230 18,757 26,214 198,718 316,210
Loans2 ....................................... 201,856 24,514 28,080 58,686 363,237 676,373
------------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets ........... $ 278,149 $ 63,744 $ 46,837 $ 84,900 $ 561,955 $1,035,585
------------------------------------------------------------------------------------------------------------------------------------
Interest bearing liabilities:
Savings and interest bearing demand deposits . $ 39,777 $ 1,432 $ 2,148 $ 4,293 $ 163,091 $ 210,741
Money market savings deposits ................ 148,197 -- -- -- -- 148,197
Time deposits ................................ 24,815 44,271 60,187 103,847 112,625 345,745
Federal funds purchased, repurchase agreements
and notes payable .......................... 78,546 9 631 1,365 100 80,651
FHLB advances and other borrowings ........... 5,000 15,138 -- -- 7,668 27,806
------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities ...... $ 296,335 $ 60,850 $ 62,966 $ 109,505 $ 283,484 $ 813,140
====================================================================================================================================
Net asset (liability) funding gap ................. $ (18,186) $ 2,894 $ (16,129) $ (24,605) $ 278,471 $ 222,445
------------------------------------------------------------------------------------------------------------------------------------
Repricing gap ..................................... 0.94 1.05 0.74 0.78 1.98 1.27
Cumulative repricing gap .......................... 0.94 0.96 0.93 0.89 1.27 1.27
====================================================================================================================================
1 Debt and equity securities include securities available-for-sale.
2 Loans include mortgage loans held-for-sale.
Included in the 1-30 day category of savings and interest bearing demand
deposits is non-core deposits plus a percentage, based upon industry-accepted
assumptions, of the core deposits. "Core deposits" are the lowest average
balance of the prior twelve months for each product type included in this
category. "Non-core deposits" are the difference between the current balance and
core deposits. The time frames include a percentage, based upon
industry-accepted assumptions, of the core deposits, as follows:
1-30 Days 31-90 Days 91-180 Days 181-365 Days Over 1 Year
---------------------------------------------------------------------------------------------------------------------
Savings and interest bearing
demand deposits 0.45% 0.85% 1.25% 2.45% 95.00%
At December 31, 2002, the Company tended to be liability sensitive due to the
levels of savings and interest bearing demand deposits, time deposits, federal
funds purchased, repurchase agreements and notes payable. As such, the effect of
a decrease in the prime rate of 100 basis points would increase net interest
income by approximately $182,000 in 30 days and $153,000 in 90 days assuming no
management intervention. A rise in interest rates would have the opposite effect
for the same periods. The Company's Asset and Liability Management Policy states
that the cumulative ratio of rate-sensitive assets ("RSA") to rate-sensitive
liabilities ("RSL") for the 12-month period should fall within the range of
0.75-1.25. As of December 31, 2002, the Company's RSA/RSL was 0.89, which was
within the established guidelines.
32
In addition to managing interest sensitivity and liquidity through the use of
gap reports, the Company has provided for emergency liquidity situations with
informal agreements with correspondent banks, which permit the Company to borrow
federal funds on an unsecured basis. Additionally, the Company can borrow
approximately $46.982 million from the Federal Home Loan Bank on a secured
basis.
The Company uses financial forecasting/budgeting/reporting software packages to
perform interest rate sensitivity analysis for all product categories. The
Company's primary focus of its analysis is on the effect of interest rate
increases and decreases on net interest income. Management believes that this
analysis reflects the potential effects on current earnings of interest rate
changes. Call criteria and prepayment assumptions are taken into consideration
for investments in debt and equity securities. All of the Company's financial
instruments are analyzed by a software database, which includes each of the
different product categories, which are tied to key rates such as prime,
Treasury Bills, or the federal funds rate. The relationships of each of the
different products to the key rate that the product is tied to is proportional.
The software reprices the products based on current offering rates. The software
performs interest rate sensitivity analysis by performing rate shocks of plus or
minus 200 basis points in 100 basis point increments.
The following table shows projected results at December 31, 2002 and December
31, 2001 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
--------------------------------------------------------------------------
December 31, 2002 ............. 7.6% 3.8% (3.9%) (7.8%)
December 31, 2001 ............. 4.2% 2.1% (2.1%) (3.6%)
The foregoing computations are based on numerous assumptions, including relative
levels of market interest rates, prepayments and deposit mix. The computed
estimates should not be relied upon as a projection of actual results. Despite
the limitations on preciseness inherent in these computations, management
believes that the information provided is reasonably indicative of the effect of
changes in interest rate levels on the net earning capacity of the Company's
current mix of interest earning assets and interest bearing liabilities.
Management continues to use the results of these computations, along with the
results of its computer model projections, in order to maximize current earnings
while positioning the Company to minimize the effect of a prolonged shift in
interest rates that would adversely affect future results of operations.
At the present time, the most significant market risk affecting the Company is
interest rate risk. Other market risks such as foreign currency exchange risk
and commodity price risk do not occur in the normal business of the Company. The
Company also is not currently using trading activities or derivative instruments
to control interest rate risk.
New Accounting Rules and Regulations
In June 2001, Statement on Financial Accounting Standards No. 143, "Accounting
for Asset Retirement Obligations" was issued to address financial reporting and
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This Statement applies to all entities and to
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development or normal operations of a
long-lived asset, except for certain obligations of lessees. Statement No. 143
is effective for financial statements issued for fiscal years beginning after
June 15, 2002. Management does not believe the adoption of Statement No. 143
will have a significant impact on its financial statements.
The Financial Accounting Standards Board has issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" - an interpretation of FASB
Statement Nos. 5, 57, and 107 and rescission of FASB Interpretation No. 34. This
interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
measurement of the Interpretation are applicable on a prospective basis to
guarantees issued or modified after December 15, 2002. Implementation of these
provisions of the Interpretation is not expected to have a material effect on
the Company's consolidated financial statements. The disclosure requirements of
the Interpretation are effective for the financial statements of interim or
annual periods ending after December 15, 2002, and have been adopted in the
consolidated financial statements for December 31, 2002.
33
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
This document (including information incorporated by reference) contains, and
future oral and written statements of the Company and its management may
contain, forward-looking statements, within the meaning of such term in the
Private Securities Litigation Reform Act of 1995, with respect to the financial
condition, results of operations, plans, objectives, future performance and
business of the Company. Forward-looking statements, which may be based upon
beliefs, expectations and assumptions of the Company's management and on
information currently available to management, are generally identifiable by the
use of words such as "believe", "expect", "anticipate", "plan", "intend",
"estimate", "may", "will", "would", "could", "should", or other similar
expressions. Additionally, all statements in this document, including
forward-looking statements, speak only as of the date they are made, and the
Company undertakes no obligation to update any statement in light of new
information or future events.
The Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
effect on the operations and future prospects of the Company and its
subsidiaries include, but are not limited to, the following:
o The strength of the United States economy in general and the strength of
the local economies in which the Company conducts its operations which may
be less favorable then expected and may result in, among other things, a
deterioration in the credit quality and value of the Company's assets.
o The economic impact of past and any future terrorist attacks, acts of war
or threats thereof, and the response of the United States to any such
threats and attacks.
o The effects of, and changes in, federal, state and local laws, regulations
and policies affecting banking, securities, insurance and monetary and
financial matters.
o The effects of changes in interest rates (including the effects of changes
in the rate of prepayments of the Company's assets) and the policies of the
Board of Governors of the Federal Reserve System.
o The ability of the Company to compete with other financial institutions as
effectively as the Company currently intends due to increases in
competitive pressures in the financial services sector.
o The inability of the Company to obtain new customers and to retain existing
customers.
o The timely development and acceptance of products and services, including
products and services offered through alternative delivery channels such as
the Internet.
o Technological changes implemented by the Company and by other parties,
including third party vendors, which may be more difficult or more
expensive than anticipated or which may have unforeseen consequences to the
Company and its customers.
o The ability of the Company to develop and maintain secure and reliable
electronic systems.
o The ability of the Company to retain key executives and employees and the
difficulty that the Company may experience in replacing key executives and
employees in an effective manner.
o Consumer spending and saving habits which may change in a manner that
affects the Company's business adversely.
o Business combinations and the integration of acquired businesses which may
be more difficult to expensive than expected.
o The costs, effects and outcomes of existing or future litigation.
o Changes in accounting policies and practices, as may be adopted by state
and federal regulatory agencies and the Financial Accounting Standards
Board.
o The ability of the Company to manage the risks associated with the
foregoing as well as anticipated.
34
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements.
Additional information concerning the Company and its business, including other
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
See the "Interest Rate Sensitivity" section contained in Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Item 8. Financial Statements and Supplementary Data
The financial statements begin immediately after the following Section 906
Certification pages.
35
MAIN STREET TRUST, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2002, 2001 and 2000
36
MAIN STREET TRUST, INC.
AND SUBSIDIARIES
TABLE OF CONTENTS
INDEPENDENT AUDITOR'S REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets 2
Consolidated Statements of Income 3
Consolidated Statements of Changes in Shareholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-25
37
Independent Auditor's Report
The Board of Directors
Main Street Trust, Inc.
Champaign, Illinois
We have audited the accompanying consolidated balance sheets of Main Street
Trust, Inc. and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the years in the three year period ended December 31, 2002.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Main
Street Trust, Inc. and subsidiaries as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
/s/ McGladrey & Pullen, LLP
---------------------------
Champaign, Illinois
February 7, 2003
38
MAIN STREET TRUST, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2002 and 2001
(in thousands, except share data)
2002 2001
----------------------------
Assets
Cash and due from banks ....................................... $ 59,744 $ 87,895
Federal funds sold and interest bearing deposits .............. 43,002 7,484
----------------------------
Cash and cash equivalents ............................. 102,746 95,379
----------------------------
Investments in debt and equity securities:
Available-for-sale, at fair value ........................... 240,616 266,496
Held-to-maturity, at cost (fair value of $70,489 and
$64,727 at December 31, 2002 and 2001, respectively) ...... 68,563 63,818
Non-marketable equity securities ............................ 7,031 5,108
----------------------------
Total investments in debt and equity securities ....... 316,210 335,422
----------------------------
Loans, net of allowance for loan losses of $9,259 at
December 31, 2002 and 2001 .................................. 664,142 673,061
Mortgage loans held for sale .................................. 2,972 8,775
Premises and equipment ........................................ 18,349 19,259
Accrued interest receivable ................................... 7,315 8,890
Other assets .................................................. 10,994 10,725
----------------------------
Total assets .......................................... $ 1,122,728 $ 1,151,511
============================
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Non-interest bearing ...................................... $ 163,903 $ 158,807
Interest bearing .......................................... 704,683 725,302
----------------------------
Total deposits ........................................ 868,586 884,109
----------------------------
Federal funds purchased, repurchase agreements, and notes
payable ................................................... 80,651 85,207
Federal Home Loan Bank advances and other borrowings ........ 27,806 34,895
Accrued interest payable .................................... 2,252 3,390
Other liabilities ........................................... 8,963 7,917
----------------------------
Total liabilities ..................................... 988,258 1,015,518
----------------------------
Shareholders' equity:
Preferred stock, no par 2,000,000 shares authorized -- --
Common stock, $0.01 par value; 15,000,000 shares
authorized; 11,219,319 and 11,111,281 shares
issued at December 31, 2002 and 2001, respectively ........ 112 111
Paid in capital ............................................. 55,337 54,147
Retained earnings ........................................... 92,853 83,810
Accumulated other comprehensive income ...................... 3,776 2,750
-----------------------------
152,078 140,818
Less: treasury stock, at cost, 755,047 and 267,783 shares at
December 31, 2002 and 2001, respectively .................. (17,608) (4,825)
-----------------------------
Total shareholders' equity ............................ 134,470 135,993
----------------------------
Total liabilities and shareholders' equity ............ $ 1,122,728 $ 1,151,511
============================
See accompanying notes to consolidated financial statements.
39
MAIN STREET TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended December 31, 2002, 2001 and 2000
(in thousands, except share data)
2002 2001 2000
----------------------------------------
Interest income:
Loans and fees on loans ................................. $ 48,080 $ 55,280 $ 55,154
Investments in debt and equity securities:
Taxable ............................................... 12,471 13,831 15,533
Tax-exempt ............................................ 2,375 2,347 2,031
Federal funds sold and interest bearing deposits ........ 437 1,737 1,553
----------------------------------------
Total interest income ............................. 63,363 73,195 74,271
----------------------------------------
Interest expense:
Deposits ................................................ 18,714 28,831 30,664
Federal funds purchased, repurchase agreements,
and notes payable ..................................... 1,169 2,550 3,764
Federal Home Loan Bank advances and other borrowings .... 1,834 2,217 2,171
----------------------------------------
Total interest expense ............................ 21,717 33,598 36,599
----------------------------------------
Net interest income ............................... 41,646 39,597 37,672
Provision for loan losses ................................. 1,450 2,670 804
----------------------------------------
Net interest income after provision for loan losses 40,196 36,927 36,868
----------------------------------------
Non-interest income:
Remittance processing ................................... 7,277 7,187 6,605
Trust and brokerage fees ................................ 5,929 5,227 5,474
Service charges on deposit accounts ..................... 2,373 2,217 2,087
Securities transactions, net ............................ 211 110 21
Gain on sales of mortgage loans, net .................... 1,368 828 212
Other ................................................... 1,708 1,697 1,917
----------------------------------------
Total non-interest income ......................... 18,866 17,266 16,316
----------------------------------------
Non-interest expense:
Salaries and employee benefits .......................... 18,721 17,761 18,274
Occupancy ............................................... 2,376 2,297 2,220
Equipment ............................................... 2,779 3,405 3,652
Data processing fees .................................... 2,300 1,943 1,470
Office supplies ......................................... 1,261 1,535 1,236
Service charges from correspondent banks ................ 932 885 998
Merger related professional fees ........................ -- -- 2,544
Reconciliation liability ................................ -- (2,500) --
Other ................................................... 4,792 4,960 4,375
----------------------------------------
Total non-interest expense ........................ 33,161 30,286 34,769
----------------------------------------
Income before income taxes ........................ 25,901 23,907 18,415
Income taxes .............................................. 8,520 7,736 6,426
----------------------------------------
Net income ........................................ $ 17,381 16,171 11,989
========================================
Per share data:
Basic earnings per share ................................ $ 1.61 $ 1.48 $ 1.08
Weighted average shares of common stock outstanding ..... 10,792,092 10,930,736 11,077,959
Diluted earnings per share .............................. $ 1.60 $ 1.45 $ 1.06
Weighted average shares of common stock and dilutive
potential common shares outstanding ................... 10,878,823 11,138,290 11,300,674
See accompanying notes to consolidated financial statements.
40
MAIN STREET TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
Years Ended December 31, 2002, 2001 and 2000
(in thousands, except share data)
Accumulated
Other
Comprehensive
Common Stock Paid-in Retained Income Treasury Stock
Shares Amount Capital Earnings (Loss) Shares Amount Total
-----------------------------------------------------------------------------------------
Balance, December 31, 1999 ......... 11,107,684 $ 111 $54,226 $65,106 $(3,362) $ -- $ -- $116,081
Comprehensive Income:
Net income ....................... -- -- -- 11,989 -- -- -- 11,989
Net change in unrealized gain
(loss) on securities available-
for-sale, net of taxes of $2,051 -- -- -- -- 3,976 -- -- 3,976
Reclassification adjustment,
net of tax of $7 ............... -- -- -- -- (14) -- -- (14)
--------
Comprehensive income ....... 15,951
--------
Fractional shares of common stock
purchased following stock dividend
and merger ....................... (344) -- (11) -- -- -- -- (11)
Stock appreciation rights .......... -- -- (64) -- -- -- -- (64)
Cash dividends ($0.40 per share) ... -- -- -- (4,472) -- -- -- (4,472)
Treasury stock transactions, net ... 4,242 -- 71 (32) -- 117,786 (2,122) (2,083)
-----------------------------------------------------------------------------------------
Balance, December 31, 2000 ......... 11,111,582 111 54,222 72,591 600 117,786 (2,122) 125,402
---------
Comprehensive Income:
Net income ....................... -- -- -- 16,171 -- -- -- 16,171
Net change in unrealized gain
(loss) on securities avaialbe-
for-sale, net of taxes of
$1,172 ......................... -- -- -- -- 2,221 -- -- 2,221
Reclassification adjustment, net
of tax of ($39) ............... -- -- -- -- (71) -- -- (71)
---------
Comprehensive income ........ 18,321
---------
Fractional shares of common stock
purchased following stock dividend (301) -- (6) -- -- -- -- (6)
Stock appreciation rights ........ -- -- 23 -- -- -- -- 23
Cash dividends ($0.45 per share) . -- -- -- (4,945) -- -- -- (4,945)
Treasury stock transactions, net . -- -- (92) (7) -- 149,997 (2,703) (2,802)
-----------------------------------------------------------------------------------------
Balance, December 31, 2001 ....... 11,111,281 111 54,147 83,810 2,750 267,783 (4,825) 135,993
---------
Comprehensive Income:
Net income ....................... -- -- -- 17,381 -- -- -- 17,381
Net change in unrealized gain
(loss) on securities available-
for-sale, net of taxes of
$1,159 ......................... -- -- -- -- 1,153 -- -- 1,153
Reclassification adjustment,
net of tax of $(84) ............ -- -- -- -- (127) -- -- (127)
---------
Comprehensive income ....... 18,407
---------
Stock appreciation rights .......... -- -- (31) -- -- -- -- (31)
Cash dividends ($0.54 per share) . -- -- -- (5,752) -- -- -- (5,752)
Issuance of new shares of common
stock .......................... 108,038 1 1,221 -- -- -- -- 1,222
Treasury stock transactions, net . -- -- -- (2,586) -- 487,264 (12,783) (15,369)
-----------------------------------------------------------------------------------------
Balance, December 31, 2002 ....... 11,219,319 $ 112 $55,337 $92,853 $3,776 755,047 $(17,608) $134,470
=========================================================================================
See accompanying notes to consolidated financial statements.
41
MAIN STREET TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 2002, 2001 and 2000
(in thousands)
2002 2001 2000
-----------------------------------
Cash flows from operating activities:
Net income ............................................................. $ 17,381 $ 16,171 $ 11,989
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .......................................... 2,673 2,757 2,839
Amortization (accretion) of bond premiums, net ......................... 1,188 (78) 202
Provision for loan losses .............................................. 1,450 2,670 804
Deferred income taxes .................................................. (1,016) (1,643) (26)
Securities transactions, net ........................................... (211) (110) (21)
Federal Home Loan Bank stock dividend .................................. (187) (240) (169)
Gain on sales of mortgage loans, net ................................... (1,368) (828) (212)
Loss on disposal of premises and equipment ............................. 3 41 587
Proceeds from sales of mortgage loans originated for sale .............. 138,898 104,155 25,537
Mortgage loans originated for sale ..................................... (131,727) (110,012) (25,728)
Other, net ............................................................. 1,283 (2,377) 647
-----------------------------------
Net cash provided by operating activities ................ 28,367 10,506 16,449
-----------------------------------
Cash flows from investing activities:
Net decrease (increase) in loans ....................................... 7,172 (15,882) (59,066)
Proceeds from maturities and calls of investments in debt securities:
Held-to-maturity .................................................... 2,956 32,239 3,456
Available-for-sale .................................................. 116,835 140,054 38,727
Proceeds from sales of investments in debt and equity securities:
Available-for-sale .................................................. 44,732 29,567 9,619
Purchases of investments in debt and equity securities:
Held-to-maturity .................................................... (25,158) (21,744) (3,054)
Available-for-sale .................................................. (150,268) (223,994) (51,581)
Other equity securities ............................................. (1,970) (750) (1,099)
Principal paydowns from mortgage-backed securities:
Held-to-maturity .................................................... 17,272 9,948 4,503
Available-for-sale .................................................. 16,012 6,127 2,272
Return of principal on other equity securities ......................... 106 31 --
Purchases of premises and equipment .................................... (1,811) (1,192) (1,769)
Proceeds from sale of premises and equipment ........................... 71 35 --
-----------------------------------
Net cash provided by (used in) investing activities ..... 25,949 (45,561) (57,992)
-----------------------------------
Cash flows from financing activities:
Net (decrease) increase in deposits .................................... (15,523) 44,177 44,857
Net (decrease) increase in federal funds purchased, repurchase
agreements, and notes payable ........................................ (4,556) 15,549 (9,482)
Advances from Federal Home Loan Bank and other borrowings .............. 13,000 5,000 10,000
Payments on Federal Home Loan Bank and other borrowings ................ (20,089) (11,083) (1,080)
Cash dividends paid .................................................... (5,634) (4,540) (3,869)
Issuance of new shares of common stock, net ............................ 1,222 -- --
MSTI stock transactions, net ........................................... (15,369) (2,808) (2,094)
-----------------------------------
Net cash (used in) provided by financing activities ...... (46,949) 46,295 38,332
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ..... 7,367 11,240 (3,211)
Cash and cash equivalents at beginning of year ............................. 95,379 84,139 87,350
-----------------------------------
Cash and cash equivalents at end of year ................................... $ 102,746 $ 95,379 $ 84,139
===================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest .............................................................. $ 22,855 $ 34,792 $ 36,105
Income taxes .......................................................... 9,061 8,775 6,684
Real estate acquired through or in lieu of foreclosure ................ 297 -- 92
Dividends declared not paid ........................................... 1,570 1,452 1,047
See accompanying notes to consolidated financial statements.
42
MAIN STREET TRUST, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Organization
Main Street Trust, Inc. is a holding company whose subsidiaries BankIllinois,
The First National Bank of Decatur and FirsTech, Inc., (the "Company") provide a
full range of banking services to individual and corporate customers located
within Champaign, Decatur, and Shelbyville, Illinois, and the surrounding
communities. The subsidiaries are subject to competition from other financial
institutions and nonfinancial institutions providing financial products.
Additionally, the Company and its subsidiaries are subject to the regulations of
certain regulatory agencies and undergo periodic examinations by those
regulatory agencies.
2. Summary of Significant Accounting Policies
The consolidated financial statements of the Company have been prepared in
conformity with accounting principles generally accepted in the United States of
America and conform to predominant practices within the banking industry. The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions, including the
determination of the allowance for loan losses and the valuation of real estate
acquired in connection with foreclosure or in satisfaction of loans, that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The significant accounting policies used by the Company in the preparation of
the consolidated financial statements are summarized below:
(a) Principles of Consolidation and Financial Statement Presentation
The consolidated financial statements include the accounts of Main Street
Trust, Inc. and its wholly owned subsidiaries, BankIllinois, The First
National Bank of Decatur, (the "Banks") and FirsTech, Inc., a retail
payment processing company. During 2002, First Trust Bank of Shelbyville,
previously a bank subsidiary, was merged into BankIllinois. Significant
intercompany accounts and transactions have been eliminated in
consolidation.
Property held by the Trust & Investments Division in fiduciary or agency
capacities for its customers is not included in the accompanying
consolidated balance sheets, since such items are not assets of the
Company.
The Company currently operates in two industry segments. The primary
business involves providing banking services to central Illinois. The Banks
offer a full range of financial services to business and individual
customers. These services include demand, savings, time and individual
retirement accounts; commercial, consumer (including automobile loans and
personal lines of credit), agricultural, and real estate lending; safe
deposit and night depository services; farm management; full service trust
departments that offer a wide range of services such as investment
management, acting as trustee, serving as guardian, executor or agent and
miscellaneous consulting; discount brokerage services and purchases of
installment obligations from retailers, primarily without recourse. The
other industry segment involves retail payment processing. FirsTech
provides the following services to electric, water and gas utilities,
telecommunication companies, cable television firms and charitable
organizations: retail lockbox processing of payments delivered by mail on
behalf of the biller; processing of payments delivered by customers to pay
agents such as grocery stores, convenience stores and currency exchanges;
and concentration of payments delivered by the Automated Clearing House
network, money management software such as Quicken and through networks
such as Visa e-Pay and MasterCard RPS. The Company operates primarily to
manage its investment in the subsidiaries. Company information is provided
for informational purposes only, since it is not considered a separate
segment for reporting purposes.
43
The following is a summary of selected data for the various business
segments as of and for the year ending December 31:
Banking Remittance
Services Services Company Eliminations Total
---------------------------------------------------------------------
2002
-----------------------------
Total interest income ....... $ 63,207 $ 88 $ 210 $ (142) $ 63,363
Total interest expense ...... 21,843 -- 16 (142) 21,717
Provision for loan losses ... 1,450 -- -- -- 1,450
Total non-interest income ... 12,259 7,396 (60) (729) 18,866
Total non-interest expense .. 27,298 5,051 1,541 (729) 33,161
Income before income tax .... 24,875 2,433 (1,407) -- 25,901
Income tax expense .......... 8,110 974 (564) -- 8,520
Net income .................. 16,765 1,459 (843) -- 17,381
Total assets ................ 1,110,691 6,774 137,243 (131,980) 1,122,728
Depreciation and amortization 2,131 512 30 -- 2,673
2001
-----------------------------
Total interest income ....... $ 73,122 $ 135 $ 111 $ (173) $ 73,195
Total interest expense ...... 33,771 -- -- (173) 33,598
Provision for loan losses ... 2,670 -- -- -- 2,670
Total non-interest income ... 10,669 7,543 (148) (798) 17,266
Total non-interest expense .. 26,964 5,565 (1,445) (798) 30,286
Income before income tax .... 20,386 2,113 1,408 -- 23,907
Income tax expense .......... 6,355 790 591 -- 7,736
Net income .................. 14,031 1,323 817 -- 16,171
Total assets ................ 1,143,675 7,208 138,392 (137,764) 1,151,511
Depreciation and amortization 2,178 549 30 -- 2,757
2000
-----------------------------
Total interest income ....... $ 74,346 $ 137 $ 172 $ (384) $ 74,271
Total interest expense ...... 36,983 -- -- (384) 36,599
Provision for loan losses ... 804 -- -- -- 804
Total non-interest income ... 10,013 7,434 174 (1,305) 16,316
Total non-interest expense .. 25,397 5,849 4,828 (1,305) 34,769
Income before income tax .... 21,175 1,722 (4,482) -- 18,415
Income tax expense .......... 6,587 593 (754) -- 6,426
Net income .................. 14,588 1,129 (3,728) -- 11,989
Total assets ................ 1,081,001 6,606 129,942 (126,468) 1,091,081
Depreciation and amortization 2,292 523 24 -- 2,839
(b) Investments in Debt and Equity Securities
Debt securities classified as held-to-maturity are those securities which
the Company has the ability and intent to hold until maturity. These
securities are carried at amortized cost, in which the amortization of
premiums and accretion of discounts, which are recognized as adjustments to
interest income, are recorded using methods which approximate the interest
method. These methods consider the timing and amount of prepayments of
underlying mortgages in estimating future cash flows on individual
mortgage-related securities. Unrealized holding gains and losses for
held-to-maturity securities are excluded from earnings and shareholders'
equity.
Debt and equity securities classified as available-for-sale are those
securities that the Company intends to hold for an indefinite period of
time but not necessarily to maturity. Any decision to sell a security
classified as available-for-sale would be based on various factors,
including significant movements in interest rates, changes in the maturity
mix of the Company's assets and liabilities, liquidity needs, regulatory
capital considerations, and other similar factors. Securities
available-for-sale are carried at fair value. The difference between fair
value and cost, adjusted for amortization of premium and accretion of
discounts, results in an unrealized gain or loss. Unrealized gains or
losses are reported as accumulated other comprehensive income (loss), net
of the related deferred tax effect. Gains or losses from the sale of
securities are determined using the specific identification method.
Premiums and discounts are recognized in interest income using methods,
which approximate the interest method over their contractual lives.
44
A decline in the market value of any available-for-sale or held-to-maturity
security below cost that is deemed other than temporary is charged to
earnings and results in the establishment of a new cost basis for the
security.
Non-marketable equity securities include other investments which are
carried at fair value as well as Federal Reserve Bank stock and the Banks'
required investment in the capital stock of the Federal Home Loan Bank
which are carried at cost which approximates fair value.
(c) Loans
Loans are stated at the principal amount outstanding, net of the allowance
for loan losses. Interest is credited to income as earned, based upon the
principal amount outstanding.
The accrual of interest on loans is discontinued when, in the opinion of
management, the borrower is unable to meet payments as they become due.
Interest accrued in the current year is reversed against interest income,
and prior years' interest is charged to the allowance for loan losses.
Interest income on impaired loans is recognized to the extent interest
payments are received and the principal is considered fully collectible.
Mortgage loans held for sale are carried at the lower of aggregate cost or
estimated market value. Gains or losses on sales of loans held for sale are
computed using the specific-identification method and are reflected in
income at the time of sale.
The fair market value of servicing rights on mortgage loans that are sold
with servicing retained is capitalized. The capitalized servicing rights
are amortized against income based on the estimated lives of the loans.
Capitalized servicing rights are evaluated for impairment based on the fair
value of the servicing rights and any impairment is reflected in income.
(d) Allowance for Loan Losses
The allowance for loan losses is increased by provisions charged to
operations and is reduced by loan charge-offs less recoveries. Management
utilizes an approach, which provides for general and specific valuation
allowances, that is based on current economic conditions, past losses,
collection experience, risk characteristics of the portfolio, assessment of
collateral values by obtaining independent appraisals for significant
properties, and such other factors which, in management's judgment, deserve
current recognition in estimating loan losses, to determine the appropriate
level of the allowance for loan losses.
The allowance for loan losses related to impaired loans that are identified
for evaluation is based on discounted cash flow using the loan's initial
effective interest rate or the fair value, less selling costs, of the
collateral for collateral dependent loans.
Loans are categorized as "impaired" when, based on current information or
events, it is probable that the Company will be unable to collect all
amounts due, including principal and interest, in accordance with the
contractual terms of the loan agreement. The Company reviews all
non-accrual and substantially delinquent loans, as well as problem loans
identified by management, for impairment as defined above. A specific
reserve amount will be established for impaired loans in which the present
value of the expected cash flows to be generated is less than the amount of
the loan recorded on the Company's books. As an alternative to discounting,
the Company may use the "fair value" of any collateral supporting a
collateral-dependent loan in reviewing the necessity for establishing a
specific loan loss reserve amount. Specific reserves will be established
for accounts having a collateral deficiency estimated to be $50,000 or
more. The Company's general reserve is maintained at an adequate level to
cover accounts having a collateral deficiency of less than $50,000. Loans
evaluated as groups or homogeneous pools of loans will be excluded from
this analysis.
The Company utilizes their data processing system to identify loan payments
not made by their contractual due date and calculate the number of days
each loan exceeds the contractual due dates. The accrual of interest on any
loan is discontinued when, in the opinion of management, there is
reasonable doubt as to the collectibility of interest or principal.
45
Management believes the allowance for loan losses is adequate to absorb
probable credit losses inherent in the loan portfolio. While management
uses available information to recognize loan losses, future additions to
the allowance for loan losses may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part
of their examination process, periodically review the adequacy of the
allowance for loan losses. Such agencies may require the Company to
recognize additions to the allowance for loan losses based on their
judgments of information available to them at the time of their
examination.
(e) Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization applicable to furniture and
equipment and buildings and leasehold improvements is charged to the
related occupancy or equipment expense using straight-line and accelerated
methods over the estimated useful lives of the assets. Maintenance and
repairs are charged to operations as incurred.
(f) Other Real Estate
Other real estate, included in other assets in the accompanying
consolidated balance sheets, is initially recorded at fair value, if it
will be held and used, or at its fair value less costs to sell if it will
be disposed of. If, subsequent to foreclosure, the fair value is less than
the carrying amount, the difference is recorded as a valuation allowance
through a charge to income. Subsequent increases in fair value are recorded
through a reversal of the valuation allowance, but not below zero. Expenses
incurred in maintaining the properties are charged to operations. Other
real estate owned totaled $58,000 and $0 at December 31, 2002 and 2001,
respectively.
(g) Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
(h) Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted
average number of common stock shares outstanding. Diluted earnings per
share is computed by dividing net income by the weighted average number of
common stock and dilutive potential common shares outstanding. Options to
purchase shares of the Company's common stock and stock appreciation rights
are the only dilutive potential common shares. The weighted average number
of dilutive potential common shares is calculated using the treasury stock
method.
Earnings per share has been computed as follows:
2002 2001 2000
-----------------------------------------
Net income ............................................... $ 17,381,000 $16,171,000 $11,989,000
Shares:
Weighted average common shares outstanding .......... 10,792,092 10,930,736 11,077,959
Dilutive effect of outstanding options, as determined
by the application of the treasury stock method . 86,731 207,554 222,715
-----------------------------------------
Weighted average common shares outstanding,
as adjusted ..................................... 10,878,823 11,138,290 11,300,674
=========================================
Basic earnings per share ................................. $ 1.61 $ 1.48 $ 1.08
=========================================
Diluted earnings per share ............................... $ 1.60 $ 1.45 $ 1.06
=========================================
(i) Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash and due from banks and federal funds sold and
interest bearing deposits. Generally, federal funds are sold for one-day
periods.
46
(j) Reclassification
Certain amounts in the 2000 and 2001 consolidated financial statements have
been reclassified to conform with the 2002 presentation. Such
reclassifications have no effect on previously reported net income.
(k) Stock Option Plans
The Company has four stock-based compensation plans which have been in
existence for all periods presented, and which are more fully described in
Note 13. As permitted under accounting principles generally accepted in the
United States of America, grants of options under the plans are accounted
for under the recognition and measurement principles of APB Opinion No 25.
Accounting for Stock Issued to Employees, and related interpretations.
Because options granted under the plans had an exercise price equal to
market value of the underlying common stock on the grant date, no
stock-based employee compensation cost is included in determining net
income. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.
2002 2001 2000
------------------------------------
Net income on common stock:
As reported ....................... $ 17,381 $ 16,171 $ 11,989
Deduct total stock-based compensation expense
determined under the fair value method
for all awards, net of related tax effects (290) (293) (246)
------------------------------------
Pro forma ......................... $ 17,091 $ 15,878 $ 11,743
====================================
Basic earnings per share:
As reported ....................... $ 1.61 $ 1.48 $ 1.08
Pro forma ......................... 1.58 1.45 1.06
Diluted earnings per share:
As reported ....................... $ 1.60 $ 1.45 $ 1.06
Pro forma ......................... 1.57 1.43 1.04
The fair value of the stock options granted has been estimated using the
Black-Scholes option-pricing model with the following weighted average
assumptions. The Black-Scholes option-pricing model was developed for use
in estimating the fair value of traded options, which have no vesting
restrictions. In addition, such models require the use of subjective
assumptions, including expected stock price volatility. In management's
opinion, such valuation models may not necessarily provide the best single
measure of option value.
2002 2001 2000
---------------------------------------
Number of options granted ...... 158,000 169,050 133,383
Risk-free interest rate ........ 5.20% 5.05% 5.14%
Expected life, in years ........ 8.00 6.97 8.80
Expected volatility ............ 10.34% 14.10% 11.06%
Expected dividend yield ........ 2.80% 2.23% 2.39%
(l) Emerging Accounting Standards
In June 2001, Statement on Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations" was issued to address
financial reporting and obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. This
Statement applies to all entities and to legal obligations associated with
the retirement of long-lived assets that result from the acquisition,
construction, development or normal operations of a long-lived asset,
except for certain obligations of lessees. Statement No. 143 is effective
for financial statements issued for fiscal years beginning after June 15,
2002. Management does not believe the adoption of Statement No. 143 will
have a significant impact on its financial statements.
47
The Financial Accounting Standards Board has issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" - an
interpretation of FASB Statement Nos. 5, 57, and 107 and rescission of FASB
Interpretation No. 34. This interpretation elaborates on the disclosures to
be made by a guarantor in its interim and annual financial statements about
obligations under certain guarantees that it has issued. It also clarifies
that a guarantor is required to recognize, at the inception of a guarantee,
a liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and measurement of the Interpretation
are applicable on a prospective basis to guarantees issued or modified
after December 15, 2002. Implementation of these provisions of the
Interpretation is not expected to have a material effect on the Company's
consolidated financial statements. The disclosure requirements of the
Interpretation are effective for the financial statements of interim or
annual periods ending after December 15, 2002, and have been adopted in the
consolidated financial statements for December 31, 2002.
3. Cash and Due from Banks
The compensating balances held at correspondent banks were $47,424,000 and
$74,947,000 at December 31, 2002 and 2001, respectively. The Banks maintain such
compensating balances with correspondent banks to offset charges for services
rendered by those banks. In addition, the Banks were required by the Federal
Reserve Bank to maintain reserves in the form of cash on hand or balances at the
Federal Reserve Bank. The balance of reserves held was $8,312,000 and $9,472,000
at December 31, 2002 and 2001, respectively.
4. Investments in Debt and Equity Securities
The amortized cost and fair values of investments in debt and equity securities
(in thousands) were as follows:
Available-for-Sale
------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------
December 31, 2002
U.S. Treasury and other
government agencies ................................ $182,726 $ 5,815 $ 6 $188,535
Mortgage-backed securities .................................. 29,987 927 30 30,884
Obligations of states and political subdivisions ............ 15,248 922 2 16,168
Other ....................................................... 6,375 322 1,668 5,029
-----------------------------------------
$234,336 $ 7,986 $ 1,706 $240,616
=========================================
December 31, 2001
U.S. Treasury and other
government agencies ................................ $196,628 $ 3,500 $ 226 $199,902
Mortgage-backed securities .................................. 27,852 433 6 28,279
Obligations of states and political subdivisions ............ 15,380 293 31 15,642
Other ....................................................... 22,408 959 694 22,673
-----------------------------------------
$262,268 $ 5,185 $ 957 $266,496
=========================================
Held-to-Maturity
------------------------------------------
December 31, 2002
U.S. Treasury and other
government agencies ................................ $ 1,750 $ 4 $ -- $ 1,754
Obligations of states and political subdivisions ............ 43,218 1,787 1 45,004
Mortgage-backed securities .................................. 23,595 184 48 23,731
-----------------------------------------
$ 68,563 $ 1,975 $ 49 $ 70,489
=========================================
December 31, 2001
U.S. Treasury and other
government agencies ................................ $ 1,750 $ 66 $ -- $ 1,816
Obligations of states and political subdivisions ............ 42,226 735 51 42,910
Mortgage-backed securities .................................. 19,842 179 20 20,001
-----------------------------------------
$ 63,818 $ 980 $ 71 $ 64,727
=========================================
48
A summary of non-marketable equity securities (in thousands) at December 31,
2002 and 2001 is as follows:
2002 2001
--------------------
Federal Home Loan Bank Stock, at cost .............. $3,732 $3,535
Federal Reserve Bank Stock, at cost ................ 231 231
Other investments, at fair value ................... 3,068 1,342
------ ------
$7,031 $5,108
====== ======
Realized gains and losses (in thousands) on sales and maturities for the years
ended December 31, 2002, 2001 and 2000 were as follows:
2002 2001 2000
-------------------------------
Gross gains ............................ $ 1,016 $ 563 $ 320
Gross losses ........................... (805) (453) (299)
-------------------------------
Net gains .............................. $ 211 $ 110 $ 21
===============================
Applicable income taxes ................ $ 84 $ 39 $ 7
===============================
Investments in debt and equity securities with a carrying value of $212,414,000
and $217,369,000 were pledged at December 31, 2002 and 2001, respectively, to
secure public deposits, repurchase agreements, and for other purposes as
required or permitted by law.
The amortized cost and fair value of investments in debt and equity securities
(in thousands) at December 31, 2002, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties and certain securities require principal repayments prior to maturity.
Therefore, these securities and equity securities with no stated maturities are
not included in the following maturity summary.
Available-for-Sale Held-to-Maturity
-------------------- --------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------------------------------------------
Due in one year or less .............. $ 49,227 $ 49,819 $ 9,911 $ 10,023
Due after one year through five years 143,061 148,764 30,729 32,075
Due after five years through ten years 4,968 5,335 4,328 4,660
Due after ten years .................. 1,721 1,793 -- --
-----------------------------------------
$198,977 $205,711 $ 44,968 $ 46,758
Mortgage-backed securities ........... 29,987 30,884 23,595 23,731
Marketable equity securities ......... 5,372 4,021 -- --
Other equity securities .............. 7,018 7,031 -- --
-----------------------------------------
Total debt securities .. $241,354 $247,647 $ 68,563 $ 70,489
=========================================
5. Loans
A summary of loans (in thousands), by classification, at December 31, 2002 and
2001 is as follows:
2002 2001
-----------------------
Commercial, financial, and agricultural .......... $234,045 $246,042
Real estate ...................................... 343,827 316,693
Installment and consumer ......................... 95,529 119,585
-----------------------
$673,401 $682,320
Less:
Allowance for loan losses ..................... 9,259 9,259
-----------------------
$664,142 $673,061
=======================
49
The Company makes commercial, financial, and agricultural; real estate; and
installment and consumer loans to customers located in central Illinois and the
surrounding communities. As such, the Company is susceptible to changes in the
economic environment in central Illinois.
During 2002, 2001 and 2000, the Company sold approximately $138,898,000,
$104,155,000 and $25,537,000, respectively, of residential mortgage loans in the
secondary market, primarily to Fannie Mae and Bank of America. Gross gains of
approximately $1,385,000, $856,000 and $228,000, and gross losses of
approximately $17,000, $28,000 and $16,000, were realized on the sales during
2002, 2001 and 2000, respectively. Capitalized mortgage servicing rights totaled
$544,000 and $634,000 at December 31, 2002 and 2001, respectively.
Mortgage loans serviced for others are not included in the accompanying
consolidated financial statements. The unpaid balances of these loans consisted
of the following (in thousands) at December 31, 2002, 2001 and 2000:
2002 2001 2000
--------------------------------
Fannie Mae ................................. $137,888 $107,950 $111,060
Freddie Mac ................................ 6,250 4,216 1,051
Illinois Housing Development Authority ..... 1,655 2,288 2,759
In the normal course of business, loans are made to directors, executive
officers, and principal shareholders of the Company and to parties which the
Company or its directors, executive officers, and shareholders have the ability
to significantly influence its management or operating policies (related
parties). The terms of these loans, including interest rates and collateral, are
similar to those prevailing for comparable transactions with other customers and
do not involve more than a normal risk of collectibility. Activity associated
with loans (in thousands) made to related parties during 2002, including
beginning balances attributable to changes in relationship due to new directors,
executive officers and principal shareholders was as follows:
2002
--------
Balance, January 1 ............................................ $ 32,470
Balances added due to changes in relationship ................. 15,289
New loans ..................................................... 46,107
Repayments..................................................... (44,249)
--------
Balance, December 31 .......................................... $ 49,617
========
At December 31, 2002, one to four family real estate mortgage loans of
approximately $95,385,000 were pledged to secure advances from the Federal Home
Loan Bank, and approximately $29,098,000 of consumer loans were pledged to the
Federal Reserve Bank to secure potential future borrowings from the Fed Discount
Window.
Activity in the allowance for loan losses (in thousands) for 2002, 2001 and 2000
was as follows:
2002 2001 2000
------------------------------
Balance, beginning of year ..................... $ 9,259 $ 8,879 $ 8,682
Provision charged to expense ................... 1,450 2,670 804
Loans charged off .............................. (1,927) (2,673) (1,252)
Recoveries on loans previously charged off ..... 477 383 645
------------------------------
Balance, end of year ........................... $ 9,259 $ 9,259 $ 8,879
==============================
50
The following table presents summary data on nonaccrual and other impaired loans
(in thousands) at December 31, 2002, 2001 and 2000:
2002 2001 2000
--------------------------
Impaired loans on nonaccrual ............... $ 764 $ 125 $ 97
Impaired loans continuing to accrue interest -- -- --
--------------------------
Total impaired loans ....................... $ 764 $ 125 $ 97
==========================
Other non-accrual loans not classified
as impaired ............................ $ 628 $3,216 $ 505
==========================
Loans contractually past due 90 days or
more, still accruing interest and not
classified as impaired ................. $ 829 $1,774 $ 846
==========================
Allowance for loan losses on impaired loans $ 115 $ 19 $ 15
==========================
Impaired loans for which there is no related
allowance for loan losses .............. $ -- $ -- $ --
==========================
Average recorded investment in impaired
loans .................................. $ 515 $ 142 $ 19
==========================
Interest income recognized from impaired
loans .................................. $ -- $ -- $ --
==========================
Cash basis interest income recognized from
impaired loans ......................... $ 6 $ 5 $ --
==========================
6. Premises and Equipment
A summary of premises and equipment (in thousands) at December 31, 2002 and 2001
is as follows:
2002 2001
-------------------
Land ................................................... $ 4,788 $ 4,783
Furniture and equipment ................................ 14,889 14,119
Buildings and leasehold improvements ................... 23,388 22,669
-------------------
43,065 41,571
Less accumulated depreciation and amortization ......... 24,716 22,312
-------------------
$18,349 $19,259
===================
Depreciation and amortization expense was $2,647,000, $2,731,000 and $2,813,000
for 2002, 2001 and 2000, respectively.
The Company leases various operating facilities and equipment under
noncancellable operating lease arrangements. These leases expire at various
dates through March 2008 and have renewal options to extend the lease terms for
various dates. The rental expense for these operating leases was $240,000,
$239,000 and $202,000 in 2002, 2001 and 2000, respectively.
Minimum annual rental payments required under the operating leases (in
thousands), which have initial or remaining terms in excess of one year at
December 31, 2002 are as follows:
2003 $ 207
2004 193
2005 136
2006 129
2007 110
Thereafter 2
-------------
$ 777
=============
51
7. Deposits
The aggregate amount of time certificate of deposits in denominations of
$100,000 or more was $118,173,000 and $140,042,000 at December 31, 2002 and
2001, respectively. As of December 31, 2002, the scheduled maturities of time
deposits (in thousands) were as follows:
2003 $233,120
2004 56,484
2005 30,443
2006 9,933
2007 15,765
--------
$345,745
========
8. Federal Funds Purchased, Repurchase Agreements, and Notes Payable
A summary of short-term borrowings (in thousands) at December 31, 2002 and 2001
is as follows:
2002 2001
-------------------
Federal funds purchased ................................ $ 3,700 $ 5,725
U.S. Treasury demand notes ............................. 1,000 2,201
Securities sold under agreements to repurchase ......... 75,951 77,281
-------------------
$80,651 $85,207
===================
Information relating to short-term borrowings (dollars in thousands) is as
follows:
2002 2001 2000
--------------------------------------
Federal funds purchased:
Average daily balance ..................... $ 4,599 $ 4,629 $ 3,549
Maximum balance at month-end .............. $ 21,300 $ 12,090 $ 11,860
Weighted average interest rate at year-end 0.50% 1.29% 5.13%
Weighted average interest rate for the year 1.70% 4.36% 4.95%
Securities sold under agreements to
repurchase:
Average daily balance ..................... $ 62,298 $ 68,061 $ 64,173
Maximum balance at month-end .............. $ 75,951 $ 77,281 $ 80,787
Weighted average interest rate at year-end 1.36% 2.27% 5.32%
Weighted average interest rate for the year 1.71% 3.32% 5.28%
U.S. Treasury demand notes
Average daily balance ..................... $ 1,459 $ 2,228 $ 2,588
Maximum Balance at month-end .............. $ 4,437 $ 5,186 $ 5,330
Weighted average interest rate at year-end 1.14% 2.70% 6.28%
Weighted average interest rate for the year 1.58% 4.12% 6.29%
The securities underlying the agreements to repurchase are under the control of
the Banks.
9. Federal Home Loan Bank Advances and Other Borrowings
A summary of Federal Home Loan Bank (FHLB) advances and other borrowings
(dollars in thousands) at December 31, 2002 is as follows:
December 31
--------------------------------------------------------------------
2002 2001
------------------------------------------------------- --------
Weighted
FHLB Other Average
Advances Borrowings Total Rate Total
--------------------------------------------------------------------
Maturing in year ending:
2002 $ - $ - $ - - $ 7,023
2003 - 23 23 4.75% 23
2004 - 23 23 4.75% 23
2005 - 23 23 4.75% 23
2006 5,000 23 5,023 5.68% 5,023
2007 2,668 23 2,691 6.82% 2,757
2008 20,000 23 20,023 5.23% 20,023
--------------------------------------------------------------------
$ 27,668 $ 138 $ 27,806 5.46% $ 34,895
====================================================================
52
The terms of a security agreement with the FHLB require the Banks to pledge as
collateral for advances both qualifying first mortgage loans in an amount equal
to at least 167% of these advances and all stock of the FHLB. Advances are
subject to restrictions or penalties in the event of prepayment. The Banks had a
total remaining borrowing capacity with the FHLB of approximately $46,982,000 at
December 31, 2002 at a rate equal to the FHLB current advance rates.
The other borrowings were for the purchase of land at a cost of $266,000.
Principal of $23,000 and annual interest is due March 8th of each year until the
balance has been paid in full. Interest is based on the prime rate at March 8th
of each year. The rate at December 31, 2002 was 4.75%.
10. Line of Credit
The Company has an unsecured line of credit of $5,000,000 from a third party
lender. As of December 31, 2002, the entire line was available.
11. Income Taxes
Federal income tax expense (in thousands) for 2002, 2001 and 2000 is summarized
as follows:
2002 2001 2000
------------------------------------------
Current ..................... $ 9,536 $ 9,379 $ 6,452
Deferred .................... (1,016) (1,643) (26)
------------------------------------------
Total ....................... $ 8,520 $ 7,736 $ 6,426
==========================================
Actual income tax expense (in thousands) for 2002, 2001 and 2000 differ from the
"expected" income taxes (computed by applying the maximum U.S. federal corporate
income tax rate of 35% to earnings before income taxes) as follows:
2002 2001 2000
---------------------------------
Computed "expected" income taxes ......... $ 9,066 $ 8,367 $ 6,445
Tax-exempt interest income, net of
disallowed interest expense ........... (764) (718) (646)
Nondeductible merger expenses ............ -- -- 509
Other, net ............................... 218 87 118
---------------------------------
$ 8,520 $ 7,736 $ 6,426
=================================
The tax effects of temporary differences (in thousands) that give rise to
significant portions of the deferred tax assets and deferred tax liabilities at
December 31, 2002 and 2001 are as follows:
2002 2001
------------------
Deferred tax assets:
Allowance for loan losses .............................. $ 3,347 $ 3,102
Deferred compensation .................................. 1,611 1,631
Stock appreciation rights .............................. 73 85
Other employee benefits ................................ 115 133
Severance payable ...................................... -- 15
Phantom Stock .......................................... 225 49
Other .................................................. 144 --
------------------
Total deferred tax assets ........................ $ 5,515 $ 5,015
------------------
Deferred tax liabilities:
Unrealized holding gain on available-for-sale securities $(2,517) $(1,442)
Premises and equipment ................................. (852) (1,124)
Mortgage servicing rights .............................. (153) (229)
Deferred loan fees ..................................... (93) (104)
Discount accretion ..................................... (138) (161)
FHLB Stock Dividend .................................... (248) (176)
Other .................................................. -- (206)
------------------
Total deferred tax liabilities ................... $(4,001) $(3,442)
------------------
Net deferred tax assets .......................... $ 1,514 $ 1,573
==================
53
12. Retirement Plans
The Company has established a profit sharing plan and a 401(k) plan for
substantially all employees who meet the eligibility requirements. Through
December 31, 2002, the 401(k) plan allowed for participants' contributions of up
to 15% of gross salary, the first 6% of which was available for the Company's
50% match. The profit sharing plan is non-contributory. All contributions to the
profit sharing plan are at the discretion of the Company. Total contributions by
the Company totaled $926,000, $746,000 and $928,000 for 2002, 2001 and 2000,
respectively.
Certain key officers and directors participate in various deferred compensation
or supplemental retirement agreements with the Company. The Company accrues the
liability for these agreements based on the present value of the amount the
employee or director is currently eligible to receive. The Company recorded
expenses of $281,000, $281,000 and $280,000 in 2002, 2001 and 2000,
respectively, related to these agreements.
The Company has a deferred compensation plan for nonemployee directors of the
Company in which a participating director may defer directors' fees in a fixed
income fund or, alternatively, in the form of "phantom stock units." For
directors electing to receive phantom stock, a deferred compensation account,
included in other liabilities on the consolidated balance sheet, is credited
with phantom stock units. Phantom stock units shall also be increased by any
dividends or stock splits declared by the Company. At December 31, 2002 and
2001, $305,000 and $286,000 had been deferred from this plan, which represented
23,326 and 22,746 phantom stock units.
13. Stock Options and Related Plans
In 2000, after the merger, the Company established a stock incentive plan, which
provides for the granting of options of the Company's common stock to certain
directors, officers and employees. This plan provides for the granting of both
qualified and non-qualified options. Existing director options are fully vested
and exercisable on the date granted while existing officer and employee options
vest, and thus become exercisable, ratably over a three-year period from the
date granted. Under the 2000 incentive plan, the Company has outstanding options
of 441,522 shares and 1,763,478 remain eligible for grant. This is the Company's
only existing stock incentive plan.
Additionally, in connection with the merger, the Company assumed all of the
outstanding options under First Decatur Bancshares, Inc.'s and BankIllinois
Financial Corporation's stock option and incentive plans. There were four plans
in place at the time of the merger. All of the options granted under these prior
plans fully vested at the time of the merger and no additional options were
available for grant after the merger. One of the plans included the granting of
options in tandem with stock appreciation rights ("SAR's"). As of December 31,
2002, there were options outstanding for an aggregate of 147,728 shares of the
Company's common stock and 15,252 SAR's under the prior plans.
The following is a summary of the changes in options outstanding under the stock
incentive and stock option plans:
2002 2001 2000
-------------------------------------------------------------------------------------
Grant Grant Grant
Price Price Price
Shares Range Shares Range Shares Range
-------------------------------------------------------------------------------------
Options outstanding,
beginning of year ....... 868,998 $ 5.36 - $19.76 726,273 $ 5.36 - $19.76 604,810 $ 5.36 - $19.76
Granted ................... 158,000 $18.60 - $18.60 169,050 $17.50 - $17.50 133,383 $18.37 - $18.37
Exercised ................. (428,553) $ 5.36 - $19.76 (17,360) $ 5.36 - $12.05 (6,827) $ 5.36 - $16.86
Options forfeited ......... (9,195) $17.50 - $18.60 (8,965) $16.86 - $19.76 (5,093) $12.05 - $19.76
-------------------------------------------------------------------------------------
Options outstanding,
end of year ............. 589,250 $ 6.92 - $19.76 868,998 $ 5.36 - $19.76 726,273 $ 5.36 - $19.76
=====================================================================================
Options exercisable,
end of year ............. 493,893 $ 6.92 - $19.76 784,769 $ 5.36 - $19.76 687,778 $ 5.36 - $19.76
=====================================================================================
Weighted average fair value
of options granted ...... $ 3.36 $ 3.73 $ 2.20
======== ========= =========
54
Options Outstanding Options Exercisable
------------------------------------------------------------------ --------------------------
Weighted
Outstanding Average Weighted Exercisable Weighted
Range as of Remaining Average as of Average
of December 31, Contractual Exercise December 31, Exercise
Exercise price 2002 Life Price 2002 Price
------------------------------------------------------------------ -------------------------
$ 6.92 - $ 7.90 15,252 2.0 $ 6.92 15,252 $ 6.92
$ 7.90 - $ 9.88 21,147 1.0 9.24 21,147 9.24
$15.81 - $17.78 202,808 6.4 17.36 170,897 17.33
$17.78 - $19.76 350,043 7.0 18.73 286,597 18.77
-----------------------------------------------------------------------
589,250 6.4 $ 17.61 493,893 $ 17.50
=======================================================================
14. Dividend Restrictions
Without prior approval of the Comptroller of the Currency, The First National
Bank of Decatur is restricted by national banking laws as to the maximum amount
of dividends it can pay in any calendar year to The First National Bank of
Decatur's retained net profits (as defined) for that year and the two preceding
years. At December 31, 2002, The First National Bank of Decatur had available
retained earnings of approximately $8,179,000 for the payment of dividends
without obtaining prior regulatory approval.
Without prior approval, BankIllinois is restricted by Illinois law and
regulations of the Office of Banks and Real Estate, State of Illinois, and the
Federal Deposit Insurance Corporation as to the maximum amount of dividends it
can pay to its parent to the balance of the retained earnings account, as
adjusted (as defined). At December 31, 2002, BankIllinois had available retained
earnings of approximately $43,629,000 for the payment of dividends without
obtaining prior regulatory approval.
15. Condensed Financial Information of Parent Company
Following are the condensed balance sheets as of December 31, 2002 and 2001 and
the related condensed statements of income and cash flows for the years ended
December 31, 2002, 2001 and 2000 for Main Street Trust, Inc.:
Condensed Balance Sheets
------------------------
(in thousands)
2002 2001
------------------------
Assets:
Cash .......................................... $ 2,287 $ 5,411
Investment in banks ........................... 118,251 117,550
Investment in FirsTech ........................ 6,524 7,065
Investment in other securities ................ 6,875 6,708
Other assets .................................. 3,306 2,384
-----------------------
$137,243 $139,118
=======================
Liabilities and shareholders' equity:
Dividends payable ............................. $ 1,570 $ 1,452
Other liabilities ............................. 1,203 1,673
Shareholders' equity .......................... 134,470 135,993
-----------------------
$137,243 $139,118
=======================
55
Condensed Statements of Income
(in thousands)
2002 2001 2000
-----------------------------
Revenue:
Dividends received from subsidiaries ......... $20,000 $12,000 $ 5,359
Interest income on deposits .................. 54 39 87
Income on securities ......................... 152 72 85
Securities transactions, net ................. (193) (279) 42
Other ........................................ 136 131 132
-----------------------------
Total revenue ............................. 20,149 11,963 5,705
-----------------------------
Expenses:
Reconciliation liability ..................... -- (2,500) --
Merger related professional fees ............. -- -- 2,544
Other ........................................ 1,556 1,055 2,285
-----------------------------
Total expense ............................ 1,556 (1,445) 4,829
-----------------------------
Income before applicable income tax expense
(benefit) and equity in undistributed
income of subsidiaries .................... 18,593 13,408 876
Applicable income tax expense (benefit) .......... (564) 591 (754)
Equity in undistributed income of subsidiaries ... (1,776) 3,354 10,359
-----------------------------
Net income ................................ $17,381 $16,171 $11,989
=============================
Condensed Statements of Cash Flows
(in thousands)
2002 2001 2000
--------------------------------
Cash flows from operating activities:
Net income ....................................... $ 17,381 $ 16,171 $ 11,989
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed income of subsidiaries 1,776 (3,354) (10,359)
Depreciation ................................. 30 30 24
Other, net ................................... (812) (1,649) 964
--------------------------------
Net cash provided by operating activities 18,375 11,198 2,618
--------------------------------
Cash flows from investing activities:
Equity securities transactions, net .............. (1,687) (37) (2,508)
Other, net ....................................... -- (12) 27
--------------------------------
Net cash used in investing activities .... (1,687) (49) (2,481)
--------------------------------
Cash flows from financing activities:
Treasury stock transactions, net ................. (15,369) (2,802) (2,057)
Fractional shares purchased following stock
dividend and merger ............................ -- (6) (11)
Cash dividends paid .............................. (5,634) (4,540) (3,869)
Issuance of new shares of common stock ........... 1,222 -- --
Other, net ....................................... (31) 23 37
--------------------------------
Net cash used in financing activities
(19,812) (7,325) (5,900)
--------------------------------
Cash at beginning of year ............................ 5,411 1,587 7,350
--------------------------------
Cash at end of year .................................. $ 2,287 $ 5,411 $ 1,587
================================
56
16. Quarterly Results of Operations (Unaudited) (in thousands, except per share
data)
Year Ended December 31, 2002
Three Months Ended
----------------------------------------------
December 31 September 30 June 30 March 31
----------------------------------------------
Interest income ...................................... $15,265 $15,871 $16,020 $16,207
Interest expense ..................................... 4,951 5,399 5,540 5,827
-------------------------------------------
Net interest income ........................ 10,314 10,472 10,480 10,380
Provision for losses on loans ........................ 460 330 330 330
-------------------------------------------
Net interest income after
provision for losses
on loans .............................. 9,854 10,142 10,150 10,050
Non-interest income .................................. 4,709 4,638 4,765 4,754
Non-interest expense ................................. 7,912 8,091 8,960 8,198
-------------------------------------------
Income before income taxes ................. 6,651 6,689 5,955 6,606
Income taxes ......................................... 2,202 2,210 1,912 2,196
-------------------------------------------
Net income .................................. 4,449 4,479 4,043 4,410
===========================================
Basic earnings per share ............................. $ 0.42 $ 0.43 $ 0.36 $ 0.40
===========================================
Diluted earnings per share ........................... $ 0.42 $ 0.42 $ 0.36 $ 0.40
===========================================
Year Ended December 31, 2001
Three Months Ended
------------------------------------------------
December 31 September 30 June 30 March 31
------------------------------------------------
Interest income ............................................. $17,278 $18,040 $18,756 $19,121
Interest expense ............................................ 6,868 8,305 8,846 9,579
--------------------------------------------
Net interest income ............................... 10,410 9,735 9,910 9,542
Provision for losses on loans ............................... 1,825 235 375 235
--------------------------------------------
Net interest income after
provision for losses
on loans ..................................... 8,585 9,500 9,535 9,307
Non-interest income ......................................... 4,468 4,366 4,291 4,141
Non-interest expense ........................................ 6,376 7,838 7,952 8,120
--------------------------------------------
Income before income taxes ........................ 6,677 6,028 5,874 5,328
Income taxes ................................................ 2,282 1,984 1,810 1,660
--------------------------------------------
Net income ......................................... $ 4,395 $ 4,044 $ 4,064 $ 3,668
============================================
Basic earnings per share .................................... $ 0.40 $ 0.37 $ 0.37 $ 0.34
============================================
Diluted earnings per share .................................. $ 0.40 $ 0.36 $ 0.36 $ 0.33
============================================
57
17. Disclosures About Commitments and Financial Instruments
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of amounts recognized in the
consolidated balance sheets. The contractual amounts of those instruments
reflect the extent of involvement the Company has in particular classes of
financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. Management
does not anticipate any significant losses as a result of these transactions.
The following table summarizes these financial instruments and commitments (in
thousands) at December 31, 2002 and 2001:
2002 2001
---------------------
Financial instruments whose contract amounts
represent credit risk:
Commitments ........................................ $201,181 $173,705
Standby letters of credit .......................... 11,563 3,540
The majority of commitments are agreements to extend credit to a customer as
long as there is no violation of any condition established in the contract.
Commitments, principally variable interest rates, generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. For commitments to extend credit, the Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based
on management's credit evaluation. Collateral held varies, but may include
accounts receivable; inventory; property, plant and equipment; and
income-producing commercial properties. Also included in commitments is $1.75
million to purchase other equity securities.
Standby letters of credit are conditional commitments issued by the Banks to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements and,
generally, have terms of one year or less. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Banks may hold collateral, which include accounts
receivables, inventory, property and equipment, and income producing properties,
supporting those commitments, if deemed necessary. In the event the customer
does not perform in accordance with the terms of the agreement with the third
party, the Banks would be required to fund the commitment. The maximum potential
amount of future payments the Banks could be required to make is represented by
the contractual amount shown in the summary above. If the commitment is funded,
the banks would be entitled to seek recovery from the customer. At December 31,
2002 and 2001, no amounts have been recorded as liabilities for the Banks'
potential obligations under these guarantees.
Following is a summary of the carrying amounts and fair values of the Company's
financial instruments at December 31, 2002 and 2001:
2002 2001
------------------- ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-----------------------------------------
Assets:
Cash and cash equivalents ............... $102,746 $102,746 $ 95,379 $ 95,379
Investments in debt and equity securities 316,210 318,136 335,422 336,331
Mortgage loans held for sale ............ 2,972 2,972 8,775 8,775
Loans ................................... 664,142 685,675 673,061 705,391
Accrued interest receivable ............. 7,315 7,315 8,890 8,890
Cash surrender value of life insurance .. 5,026 5,026 4,611 4,611
Liabilities:
Deposits ................................ $868,586 $885,487 $884,109 $885,208
Federal funds purchased, repurchase
and notes payable .................. 80,651 80,692 85,207 83,076
FHLB advances and other borrowings ...... 27,806 28,963 34,895 39,337
Accrued interest payable ................ 2,252 2,252 3,390 3,390
58
Management's fair value estimates, methods, and assumptions are set forth below
for the Company's financial instruments.
Cash and Cash Equivalents
The carrying value of cash and cash equivalents approximates fair value due to
the relatively short period of time between the origination of the instrument
and its expected realization.
Investments in Debt and Equity Securities
The fair value of investments in debt and equity securities is estimated based
on bid prices received from securities dealers.
Mortgage Loans Held For Sale
Fair values of mortgage loans held for sale are based on commitments on hand
from investors or prevailing market prices.
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, commercial
real estate, residential mortgage, and consumer. Each loan category is further
segmented into fixed and adjustable rate interest terms and by performing and
nonperforming categories. The fair value of performing loans is calculated by
discounting scheduled cash flows through the estimated maturity using estimated
market discount rates equal to rates at which loans, similar in type, would be
originated at December 31, 2002 and 2001. Estimated maturities are based upon
the average remaining contractual lives for each loan classification. Fair value
for nonperforming loans is based on the use of discounted cash flow techniques.
Accrued Interest Receivable
The carrying value of accrued interest receivable approximates fair value due to
the relatively short period of time between the origination of the instrument
and its expected realization.
Cash Surrender Value of Life Insurance
Life insurance agreements reprice periodically with no significant change in
credit risk. Fair values approximate carrying value for these agreements.
Deposit Liabilities
The fair value of deposits with no stated maturity, such as non-interest bearing
and interest bearing demand deposits and savings deposits is the amount payable
on demand. The fair value of time deposits is based on the discounted value of
contractual cash flows. The discount rate is estimated using rates currently
offered for deposits of similar remaining maturities. The fair value estimates
do not include the benefit that results from the low-cost funding provided by
the deposit liabilities compared to the cost of borrowing funds in the market
nor the benefit derived from the customer relationship inherent in existing
deposits.
Federal Funds Purchased, Repurchase Agreements, and Notes Payable
The fair value of federal funds purchased, repurchase agreements, and notes
payable is based on the discounted value of contractual cash flows. The discount
rate is estimated using current rates on federal funds purchased, repurchase
agreements, and notes payable with similar remaining maturities.
Federal Home Loan Bank Advances and Other Borrowings
The fair value of FHLB advances is based on the discounted value of contractual
cash flows. The discount rate is estimated using rates on current FHLB advances
with similar remaining maturities.
Accrued Interest Payable
The carrying value of accrued interest payable approximates fair value due to
the relatively short period of time between the origination of the instrument
and its expected realization.
59
Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments to extend credit is generally estimated using the
fees currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates. The
fair value of letters of credit is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise settle the
obligations with the counterparties. The estimated fair value of commitments to
extend credit and standby letters of credit approximates the balances of such
commitments.
18. Litigation
The Company and its subsidiaries are involved in various legal proceedings,
claims and litigation arising out of the ordinary course of business.
It is the opinion of management that the disposition or ultimate resolution of
any other claims and lawsuits arising out of the ordinary course of business
will not have a material adverse effect on the consolidated financial position
of the Company.
19. Regulatory Capital
The Company and its subsidiary banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's and its subsidiary banks' financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, banks must meet specific capital guidelines that
involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Company's and its subsidiary banks' capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and its subsidiary banks to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2002, that the Company and its subsidiary banks exceeded all capital adequacy
requirements to which they are subject.
As of December 31, 2002, the most recent notifications from primary regulatory
agencies categorized all the Company's subsidiary banks as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, banks must maintain minimum total capital to risk-weighted
assets, Tier I capital to risk-weighted assets, and Tier I capital to average
assets ratios as set forth in the table. There are no conditions or events since
that notification that management believes have changed any of the Company's
subsidiary banks' categories.
60
The Company's and the Banks' actual capital amounts and ratios as of December
31, 2002 and 2001 are presented in the following tables:
To be well capitalized
For capital adequacy under prompt corrective
Actual purposes: action provisions:
----------------- -------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------
As of December 31, 2002:
Total capital
(to risk-weighted assets)
Consolidated ............................. $138,701 18.0% $ 61,660 8.0% N/A
BankIllinois ............................. $ 74,396 15.8% $ 37,685 8.0% $ 47,107 10.0%
The First National Bank of Decatur ...... $ 48,351 16.0% $ 24,213 8.0% $ 30,266 10.0%
Tier I capital
(to risk-weighted assets)
Consolidated ............................. $129,442 16.8% $ 30,830 4.0% N/A
BankIllinois ............................. $ 68,739 14.6% $ 18,843 4.0% $ 28,264 6.0%
The First National Bank of Decatur ....... $ 44,659 14.8% $ 12,106 4.0% $ 18,160 6.0%
Tier I capital
(to average assets)
Consolidated ............................. $129,442 11.8% $ 43,732 4.0% N/A
BankIllinois ............................. $ 68,739 10.5% $ 26,236 4.0% $ 32,795 5.0%
The First National Bank of Decatur ....... $ 44,659 10.3% $ 17,324 4.0% $ 21,655 5.0%
As of December 31, 2001:
Total capital
(to risk-weighted assets)
Consolidated ............................. $142,403 18.0% $ 63,212 8.0% N/A
BankIllinois ............................. $ 76,292 15.7% $ 38,825 8.0% $ 48,532 10.0%
The First National Bank of Decatur ....... $ 47,672 16.3% $ 23,363 8.0% $ 29,204 10.0%
Tier I capital
(to risk-weighted assets)
Consolidated ............................. $133,053 16.8% $ 31,606 4.0% N/A
BankIllinois ............................. $ 70,514 14.5% $ 19,413 4.0% $ 29,119 6.0%
The First National Bank of Decatur ....... $ 44,083 15.1% $ 11,681 4.0% $ 17,522 6.0%
Tier I capital
(to average assets)
Consolidated ............................. $133,053 11.8% $ 44,950 4.0% N/A
BankIllinois ............................. $ 70,514 10.3% $ 27,366 4.0% $ 34,207 5.0%
The First National Bank of Decatur ....... $ 44,083 10.2% $ 17,274 4.0% $ 21,592 5.0%
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
61
PART III
Item 10. Directors and Executive Officers of the Registrant
The information in the Company's 2003 Proxy Statement under the caption
"Election of Directors" and under the caption "Security Ownership of Certain
Beneficial Owners and Management" is incorporated by reference. The information
regarding executive officers not provided in the 2003 Proxy Statement is noted
below.
Executive Officers
The term of office for the executive officers of the Company is from the date of
election until the next annual organizational meeting of the Board of Directors.
In addition to the information provided in the 2003 Proxy Statement, the names
and ages of the executive officers of the Company as of December 31, 2002, as
well as the offices of the Company and the Subsidiaries held by these officers
on that date, and principal occupations for the past five years are set forth
below.
Name Position with Main Street, its subsidiaries
(Age) and occupation for the last five years
----- ---------------------------------------------------------------------------------
David B. White Executive Vice President and Chief Financial
(Age 51) Officer of Main Street, BankIllinois and The First National Bank of Decatur and
Director of FirsTech; Executive Vice President and Chief Financial Officer of
BankIllinois Financial and BankIllinois (1993-2000)
Christopher M. Shroyer President, Chief Executive Officer and Director of The First
(Age 37) National Bank of Decatur; Executive Vice President, Lending, The First National
Bank of Decatur (2000-2001); Senior Vice President, Lending, The First National
Bank of Decatur (1999-2000); Vice President and Department Head, Commercial
Lending, The First National Bank of Decatur (1997-1999)
Robert F. Plecki, Jr. President and Director of BankIllinois; Executive Vice
(Age 42) President, Retail Banking, BankIllinois (1998-2001); Senior Vice President,
Retail Banking, BankIllinois (1996-1998)
Leanne C. Heacock Executive Vice President, Management Information Systems,
(Age 37) Main Street, BankIllinois and The First National Bank of Decatur and Director of
FirsTech; Executive Vice President, Management Information Systems, BankIllinois
and The First National Bank of Decatur (2001-2002); Executive Vice President,
Management Information Systems, BankIllinois (1999-2001); Senior Vice
President, Management Information Systems, BankIllinois (1998-1999)
Section 16(a) Beneficial Ownership Compliance
Section 16(a) of the Securities Exchange Act requires that the directors,
executive officers and persons who own more than 10% of our common stock file
reports of ownership and changes in ownership with the Securities and Exchange
Commission. These persons are also required to furnish us with copies of all
Section 16(a) forms they file. Based solely on our review of the copies of such
forms furnished to us and, if appropriate, representations made by any reporting
person concerning whether a Form 5 was required to be filed for 2002, we are not
aware of any failures to comply with the filing requirements of Section 16(a)
during 2002, except for Mr. VanBuskirk, who filed a Form 4 reporting an exercise
of options to purchase 5,104 shares one month late, and Mr. Sloan, who filed a
Form 4 reporting a purchase of 1,000 shares one day late.
Item 11. Executive Compensation
The information in the 2003 Proxy Statement under the caption "Executive
Compensation" is incorporated by reference, with the exception of the sections
entitled "Compensation Committee Report on Executive Compensation" and
"Shareholder Return Performance Presentation", which are not included by
reference herein.
Item 12. Security Ownership Of Certain Beneficial Owners And Management
The information in the 2003 Proxy Statement under the caption "Security
Ownership of Certain Beneficial Owners and Management" is incorporated by
reference.
62
Equity Compensation Plan Information
The table below sets forth the following information as of December 31, 2002 for
(i) all compensation plans previously approved by our shareholders and (ii) all
compensation plans not previously approved by our shareholders:
(a) the number of securities to be issued upon the exercise of outstanding
options, warrants and rights;
(b) the weighted-average exercise price of such outstanding options, warrants
and rights;
(c) other than securities to be issued upon the exercise of such outstanding
options, warrants and rights, the number of securities remaining available
for future issuance under the plans.
====================================================================================================================================
EQUITY COMPENSATION PLAN INFORMATION
------------------------------------------------------------------------------------------------------------------------------------
Number of securities to be Number of securities remaining
Plan category issued upon exercise of Weighted-average exercise available for future issuance
outstanding options price of outstanding options
------------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved
by security holders............... 441,522(1) $18.14 1,763,478
------------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans not
approved by security holders...... 0 0 0
------------------------------------------------------------------------------------------------------------------------------------
Total............................. 441,522 (1) $18.14 1,763,478
====================================================================================================================================
(1) Does not include options assumed by the Company in 2000 in connection with
the merger of First Decatur Bancshares, Inc. and BankIllinois Financial
Corporation with and into the Company. At the time of the merger, there
were options issued under the Central Illinois Financial Corporation Stock
Option Plan, BankIllinois Financial Co. 1994 Stock Incentive Plan,
BankIllinois Financial Corporation 1996 Stock Incentive Plan and the First
Decatur Bancshares, Inc. Employee Stock Option Plan, each of which was
approved by shareholders of the respective company at the time of their
adoption. All of the options granted under these plans fully vested at the
time of the merger and no additional options were available for grant after
the merger. As of December 31, 2002, there were options outstanding for an
aggregate of 147,728 shares of the Company's common stock under the prior
plans with a weighted average exercise price of $16.04.
Item 13. Certain Relationships And Related Transactions
The information in the 2003 Proxy Statement under the caption "Transactions with
Management" is incorporated by reference.
Item 14. Controls and Procedures
Based upon an evaluation within the 90 days prior to the filing date of this
report, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the Company's internal controls
subsequent to the date of the evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
63
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Index to Financial Statements
See page 32.
(a)(2) Financial Statement Schedules
N/A
(a)(3) Schedule of Exhibits
The Exhibit Index which immediately follows the signature page
to this Form 10-K is incorporated by reference.
(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K
during the fourth quarter of 2002.
(c) Exhibits
The exhibits required to be filed with this Form 10-K are
included with this Form 10-K and are located immediately following
the Exhibit Index to this Form 10-K.
64
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on March 19, 2003.
By: /s/ Van A. Dukeman By: /s/ David B. White
----------------------------------- ----------------------------
Van A. Dukeman David B. White
President, CEO and Director Executive Vice President and
Principal Financial and
Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on March 19, 2003.
/s/ Gregory B. Lykins
---------------------------------
Gregory B. Lykins Chairman and Director
/s/ Van A. Dukeman
---------------------------------
Van A. Dukeman President, CEO and Director
/s/ Phillip C. Wise
---------------------------------
Phillip C. Wise Executive Vice President and Director
/s/ David J. Downey
----------------------------------
David J. Downey Director
/s/ Larry D. Haab
----------------------------------
Larry D. Haab Director
/s/ Frederic L. Kenney
----------------------------------
Frederic L. Kenney Director
----------------------------------
August C. Meyer, Jr. Director
/s/ Gene A. Salmon
----------------------------------
Gene A. Salmon Director
/s/ George T. Shapland
----------------------------------
George T. Shapland Director
/s/ Thomas G. Sloan
----------------------------------
Thomas G. Sloan Director
/s/ Roy V. VanBuskirk
----------------------------------
Roy V. VanBuskirk Director
/s/ H. Gale Zacheis
----------------------------------
H. Gale Zacheis Director
65
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Van A. Dukeman, Chief Executive Officer of the Company, certify that:
1. I have reviewed this annual report on Form 10-K of Main Street Trust, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within the 90 days prior to the filing
date of this annual report (the "Evaluation Date");
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function);
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to date of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 21, 2003
/s/ Van A. Dukeman
-----------------------
Van A. Dukeman
Chief Executive Officer
66
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, David B. White, Chief Financial Officer of the Company, certify that:
1. I have reviewed this annual report on Form 10-K of Main Street Trust, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within the 90 days prior to the filing
date of this annual report (the "Evaluation Date");
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function);
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to date of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 21, 2003
/s/ David B. White
-----------------------
David B. White
Chief Financial Officer
67
MAIN STREET TRUST, INC.
EXHIBIT INDEX
TO
ANNUAL REPORT ON FORM 10-K
Incorporated
Exhibit No. Description Herein by Filed
Reference To Herewith
-------------- ---------------------------- ------------------------------------- -----------------
3.1 Amended and Restated Exhibit 3.1 to the Form S-4 filed
Articles of Incorporation with the Commission on November 30,
1999 (SEC File No. 33-91759)
3.2 Bylaws Exhibit 3.2 to the Form S-4 filed with
the Commission on November 30,
1999 (SEC File No. 33-91759)
4.1 Specimen common stock Exhibit 4.1 to the Form 10-K filed
certificate with the Commission on March 30,
2001 (SEC File No. 000-30031)
4.2 Second Amended and Exhibit 4.2 to the Form 10-K filed
Restated Shareholders' with the Commission on March 30,
Agreement, dated as of 2001 (SEC File No. 000-30031)
November 1, 2000
10.1 Employment Agreement by Exhibit 10.1 to the Form 10-K filed
and between the Company with the Commission on March 29,
and Gregory B. Lykins 2002 (SEC File No. 000-30031)
10.2 Employment Agreement by Exhibit 10.2 to the Form 10-K filed
and between the Company with the Commission on March 29,
and Van A. Dukeman 2002 (SEC File No. 000-30031)
10.3 Employment Agreement by Exhibit 10.5 to the Registration
and between the Company Statement on Form S-4 filed with the
and David B. White Commisson on March 15, 1996, as
amended (SEC File No. 33-90342)
10.4 Employment Agreement by Exhibit 10.4 to the Form 10-K filed
and between the Company, with the Commission on March 29,
FirsTech, Inc. and Phillip 2002 (SEC File No. 000-30031)
C. Wise
10.5 Employment Agreement by X
and between The First
National Bank of Decatur
and Chris Shroyer
21.1 Subsidiaries of the X
Registrant
23.1 Consent of McGladrey & X
Pullen, LLP
99.1 Section 906 Certification X
99.2 Section 906 Certification X