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, 2001
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 61 of 61 total sequentially numbered
pages.
As of March 13, 2002, the Registrant had issued and outstanding 11,173,947
shares of the Registrant's Common Stock. The aggregate market value of the
voting stock held by non-affiliates of the Registrant as of March 13, 2002 was
approximately $143.3 million.*
* Based on the last reported price ($18.70) of an actual transaction in
Registrant's Common Stock on March 13, 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 14, 2002.
MAIN STREET TRUST, INC.
Form 10-K Annual Report
Table of Contents
Part I
Item 1. Description of Business.......................................
A. General
B. Business of the Company and Subsidiary
C. Competition
D. Monetary Policy and Economic Conditions
E. Regulation and Supervision
F. Employees
Item 2. Properties....................................................
Item 3. Legal Proceedings.............................................
Item 4. Submission of Matters to a Vote of Security Holders...........
Part II
Item 5. Market for Registrant's Common Equity and
Related Shareholder Matters.................................
Item 6. Selected Consolidated Financial Data..........................
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations...............
Item 7a. Quantitative and Qualitative Disclosures about Market Risk....
Item 8. Financial Statements and Supplementary Data...................
Item 9. Changes in and Disagreements on Accounting and Financial
Disclosure .................................................
Part III
Item 10. Directors and Executive Officers of the Registrant............
Item 11. Executive Compensation........................................
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions................
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.................................................
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
on March 23, 2000, the Company acquired all of the outstanding stock of
BankIllinois, 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.
On August 12, 1999, BankIllinois Financial Corporation and First Decatur
Bancshares, Inc. entered into an agreement and plan of merger which
provided for the merger of the two companies 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 statements have
been restated as though the prior entities had been consolidated for all
periods presented.
B. Business of the Company and Subsidiaries
General
The Company conducts the business of banking and offers trust services
through BankIllinois, First National Bank of Decatur and First Trust Bank
of Shelbyville (the "Banks"), and retail payment processing through
FirsTech, Inc., its wholly owned subsidiaries. As of December 31, 2001, the
Company had consolidated total assets of $1.152 billion, shareholders'
equity of $136.0 million and trust assets under administration of
approximately $1.386 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 and time 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 at BankIllinois and through Raymond James at
First National Bank of Decatur and First Trust Bank of Shelbyville, 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 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.
Lending Activities
General. The Company's primary source of revenue is interest revenue from
lending activities. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--Results of Operations--Net Interest
Income."
Loan Portfolio Composition. The Company's loan portfolio totaled
approximately $682.3 million at December 31, 2001, representing 59% of
total assets at that date. At that date, the loan portfolio included
approximately $246.0 million of commercial, financial and agricultural
loans, $316.7 million of real estate loans and $119.6 million of
installment and consumer loans. See "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Results of
Operations--Financial Condition--Loans."
For a discussion of risks with respect to the loan portfolio, strategies
for addressing and managing such risks, non-performing loans and allowance
for loan losses, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--Results of Operations--Allowance for
Loan Losses and Loan Quality" and "--Financial Condition--Loans."
Interest Rates and Fees. 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. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--Results of Operations--Net Interest
Income."
Investment Securities
The carrying value of investment securities at December 31, 2001 was
approximately $335.4 million, representing 29% of the Company's total
assets. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Financial Condition--Investment Securities."
Interest Rate Sensitivity
For a discussion of the Banks' approach to managing its mix of interest
rate sensitive assets and liabilities, see "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Financial
Condition--Interest Rate Sensitivity."
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; 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,
2001, 2000 and 1999, FirsTech, Inc. accounted for $7,678,000 (9%),
$7,571,000 (8%), and $8,824,000 (10%), respectively, of the consolidated
total revenues of the Company and accounted for $2,113,000 (9%), $1,722,000
(9%), and $1,256,000 (7%), 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
2001, remittance processing for these companies accounted for approximately
42% 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 2001, the remittance collection business
for these companies accounted for approximately 53% 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.
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. Regulation and Supervision
General
Financial institutions and their holding companies are extensively
regulated under federal and state law. As a result, the growth and earnings
performance of the Company can be affected not only by management decisions
and general economic conditions, but also by the requirements of applicable
state and federal statutes and regulations and the policies of various
governmental 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"), the Federal Deposit Insurance Corporation
(the "FDIC"), the Internal Revenue Service and state taxing authorities and
the Securities and Exchange Commission (the "SEC"). The effect of
applicable statutes, regulations and regulatory policies can be
significant, and cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions, such as the Company and its subsidiaries, regulate, among
other things, the scope of business, investments, reserves against
deposits, capital levels relative to operations, the nature and amount of
collateral for loans, the establishment of branches, mergers,
consolidations and dividends. The system of supervision and regulation
applicable to the Company and its subsidiaries establishes a comprehensive
framework for their respective operations and is intended primarily for the
protection of the FDIC's deposit insurance funds and the depositors, rather
than the shareholders, of financial institutions.
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 to the Company and its subsidiaries, nor does it restate all of the
requirements of the statutes, regulations and regulatory policies that are
described. As such, the following is qualified in its entirety by reference
to the applicable statutes, regulations and regulatory policies. Any change
in applicable law, regulations or regulatory policies may have a material
effect on the business of the Company and its subsidiaries.
Recent Regulatory Developments
The terrorist attacks in September, 2001, have impacted the financial
services industry and have already led to federal legislation that attempts
to address certain related issues involving financial institutions. On
October 26, 2001, President Bush signed into law the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept
and Obstruct Terrorism Act of 2001 (the "USA PATRIOT Act"). Among its other
provisions, the USA PATRIOT Act requires each financial institution: (i) to
establish an anti-money laundering program; (ii) to establish due diligence
policies, procedures and controls with respect to its private banking
accounts and correspondent banking accounts involving foreign individuals
and certain foreign banks; and (iii) to avoid establishing, maintaining,
administering, or managing correspondent accounts in the United States for,
or on behalf of, foreign banks that do not have a physical presence in any
country. The USA PATRIOT Act also requires the Secretary of the Treasury to
prescribe, by regulations to be issued jointly with the federal banking
regulators and certain other agencies, minimum standards that financial
institutions must follow to verify the identity of customers, both foreign
and domestic, when a customer opens an account. In addition, the USA
PATRIOT Act contains a provision encouraging cooperation among financial
institutions, regulatory authorities and law enforcement authorities with
respect to individuals, entities and organizations engaged in, or
reasonably suspected of engaging in, terrorist acts or money laundering
activities. At this time, the Company is unable to determine whether the
provisions of the USA PATRIOT Act will have a material impact 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, 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. The Company is also subject to regulation
by the Commissioner under the Illinois Bank Holding Company Act, as
amended.
Investments and Activities. Under the BHCA, a bank holding company must
obtain Federal Reserve approval before: (i) acquiring, directly or
indirectly, ownership or control of any voting shares of another bank or
bank holding company if, after the acquisition, it would own or control
more than 5% of the shares of the other bank or bank holding company
(unless it already owns or controls the majority of such shares); (ii)
acquiring all or substantially all of the assets of another bank; or (iii)
merging or consolidating with another bank holding company. Subject to
certain conditions (including certain 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 without
regard to whether the acquisition is prohibited by the law of the state in
which the target bank is located. In approving interstate acquisitions,
however, 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 which 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 also generally prohibits the Company from acquiring direct or
indirect ownership or control of more than 5% of the voting shares of any
company which 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." Under current regulations of the Federal
Reserve, this authority would permit the Company to engage in a variety of
banking-related businesses, including the operation of a thrift, sales and
consumer finance, equipment leasing, the operation of a computer service
bureau (including software development), and mortgage banking and
brokerage. 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 activities 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 BHCA generally does not
place territorial restrictions on the domestic activities of non-bank
subsidiaries of bank holding companies or financial holding companies. The
Company has received approval to operate as a financial holding company.
Federal law also prohibits any person or company from acquiring "control"
of a bank or bank holding company without prior notice to the appropriate
federal bank regulator. "Control" is defined in certain cases as the
acquisition of 10% or more of the outstanding shares of a bank or bank
holding company.
Capital Requirements. Bank holding companies are required to maintain
minimum levels of capital in accordance with Federal Reserve capital
adequacy guidelines. If capital falls below minimum guideline 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 risk-weighted
assets; 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 which do not qualify as Tier 1
capital and a portion of the company's allowance for loan and lease losses.
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, 2001, the Company had regulatory capital in excess of
the Federal Reserve's minimum requirements.
Dividends. The Illinois Business Corporation Act, as amended, 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, the Federal Reserve has issued a policy statement with regard
to the payment of cash dividends by bank holding companies. The policy
statement provides that a bank holding company should not pay cash
dividends which exceed its net income or which 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 Banks
General. BankIllinois and First Trust Bank of Shelbyville ("Shelbyville")
are Illinois-chartered banks, the deposit accounts of which are insured by
the FDIC's Bank Insurance Fund ("BIF"). As BIF-insured, Illinois-chartered
banks, BankIllinois and Shelbyville are subject to the examination,
supervision, reporting and enforcement requirements of the Commissioner, as
the chartering authority for Illinois banks, and the FDIC which under
federal law is designated as the primary federal regulator of
state-chartered, FDIC-insured banks that are not members of the Federal
Reserve System. Both banks are also members of the Federal Home Loan Bank
System, which provides a central credit facility primarily for member
institutions.
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.
As a BIF-insured national bank, Decatur is subject to the examination,
supervision, reporting and enforcement requirements of the OCC, as the
chartering authority for national banks, and the FDIC, as administrator of
the BIF. Decatur is also a member of the Federal Home Loan Bank System.
Deposit Insurance. As FDIC-insured institutions, the Bank Subsidiaries 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.
During the year ended December 31, 2001, BIF assessments ranged from 0% of
deposits to 0.27% of deposits. For the semi-annual assessment period
beginning January 1, 2002, BIF assessment rates will continue to range from
0% of deposits to 0.27% of deposits.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution
(i) has engaged or is engaging in unsafe or unsound practices; (ii) is in
an unsafe or unsound condition to continue operations; or (iii) has
violated any applicable law, regulation, order, or any condition imposed in
writing by, or written agreement with, the FDIC. The FDIC may also suspend
deposit insurance temporarily during the hearing process for a permanent
termination of insurance if the institution has no tangible capital.
Management of the Company is not aware of any activity or condition that
could result in termination of the deposit insurance of the Bank
Subsidiaries.
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. During the year ended December 31,
2001, 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 Illinois Commissioner and the OCC,
respectively, to fund the operations of such agencies. In general, the
amount of such supervisory assessments is based upon each institution's
total assets. During the year ended December 31, 2001, the Bank
Subsidiaries paid supervisory assessments totaling $215,000.
Capital Requirements. The FDIC and the OCC have established the following
minimum capital standards for state-chartered insured non-member banks 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, Tier 1 capital and total capital
consist of substantially the same components as Tier 1 capital and total
capital under the Federal Reserve's capital guidelines for bank holding
companies (see "--The Company--Capital Requirements").
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 OCC and the FDIC, 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.
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 the 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, 2001: (i) none of the Bank Subsidiaries was subject to a
directive from the FDIC or the OCC 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 are "well-capitalized", as defined by applicable regulations.
Additionally, 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 owns more than 25% of the outstanding stock of each of the Bank
Subsidiaries, the Bank Subsidiaries are deemed to be commonly controlled.
Dividends. Under the Illinois Banking Act, BankIllinois and Shelbyville may
not pay dividends in excess of their net profits.
The National Bank Act imposes limitations on the amount of dividends that
may be paid by a national bank, such as Decatur. Generally, a national bank
may pay dividends out of its undivided profits, in such amounts and at such
times as the bank's board of directors deems prudent. Without prior OCC
approval, however, a national bank may not pay dividends in any calendar
year which, in the aggregate, exceed the bank's year-to-date net income
plus the bank's retained net income for the two preceding years.
The payment of dividends by any financial institution or its holding
company is affected by the requirement 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, 2001. As of
December 31, 2001, approximately $56,481,000 was available to be paid as
dividends to the Company by the Bank Subsidiaries. Notwithstanding the
availability of funds for dividends, however, the banking regulators may
prohibit the payment of any dividends by the Bank Subsidiaries if such
payment is deemed to 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.
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 becoming 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 a correspondent relationship.
Safety and Soundness Standards. The federal banking agencies have adopted
guidelines which 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.
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 and Shelbyville,
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.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Riegle-Neal Act"), both 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 by the Riegle-Neal Act only if specifically authorized
by state law. The legislation allowed individual states to "opt-out" of
certain provisions of the Riegle-Neal Act by enacting appropriate
legislation prior to June 1, 1997. Illinois permits interstate mergers,
subject to certain conditions, including a prohibition against interstate
mergers involving an Illinois bank that has been in existence and
continuous operation for fewer than five years.
State Bank Activities. 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 or its subsidiary, respectively, 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 or Shelbyville.
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 (as described
above) 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 $41.3
million or less, the reserve requirement is 3% of total transaction
accounts; and for transaction accounts aggregating in excess of $41.3
million, the reserve requirement is $1.239 million plus 10% of the
aggregate amount of total transaction accounts in excess of $41.3 million.
The first $5.7 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.
F. Employees
The Company had a total of 464 employees at December 31, 2001, consisting
of 370 full-time employees and 94 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.
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 2001.
PART II
Item 5. Market For Registrant's Common Equity And Related Shareholder Matters
The Company's Common Stock was held by approximately 750 shareholders of record
as of March 25, 2002, 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 quarters of 2000 and 2001.
Cash
High Low Dividends
---------------------------------------------------------------------
2000 First quarter $20.95 $20.95 $ 0.08
Second quarter 20.95 19.04 0.10
Third quarter 19.28 16.87 0.10
Fourth quarter 17.62 16.50 0.10
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
During the fourth quarter of 2001, the Company declared a $0.13 per share cash
dividend, which was paid on January 25, 2002. 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.
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, 2001. 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. All references to numbers of shares and per share amounts have
been retroactively restated to reflect the 5% stock dividend in 2001.
Year Ended December 31,
------------------------------------------------------------------
2001 2000 1999 1998 1997
------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data)
Interest income ................................... $ 73,195 $ 74,271 $ 67,070 $ 65,710 $ 63,705
Interest expense .................................. 33,598 36,599 31,713 31,862 31,127
------------------------------------------------------------------
Net interest income ....................... 39,597 37,672 35,357 33,848 32,578
Provision for loan losses ......................... 2,670 804 573 809 897
------------------------------------------------------------------
Net interest income after provision for loan losses 36,927 36,868 34,784 33,039 31,681
Non-interest income ............................... 17,101 16,236 17,858 14,554 12,799
Non-interest expense .............................. 30,121 34,689 35,789 30,591 29,011
Income tax expense ................................ 7,736 6,426 5,165 5,318 4,977
------------------------------------------------------------------
Net income ................................... $ 16,171 $ 11,989 $ 11,688 $ 11,684 $ 10,492
------------------------------------------------------------------
Basic earnings per share .......................... $ 1.48 $ 1.08 $ 1.05 $ 1.02 $ 0.92
------------------------------------------------------------------
Diluted earnings per share ........................ $ 1.45 $ 1.06 $ 1.03 $ 1.00 $ 0.90
------------------------------------------------------------------
Return on average total assets .................... 1.47% 1.15% 1.16% 1.23% 1.17%
Return on average shareholders' equity ............ 12.32% 10.03% 10.10% 10.29% 10.04%
Cash dividends declared per common share1 ......... $ 0.45 $ 0.40 $ 0.29 $ 0.28 $ 0.15
------------------------------------------------------------------
Total assets ...................................... $1,151,511 $1,091,081 $1,035,746 $ 979,019 $ 931,539
Investment in debt and equity securities .......... 335,422 303,187 300,040 354,346 293,711
Loans held for investment, net .................... 673,061 659,849 601,594 502,118 506,251
Deposits .......................................... 884,109 839,932 795,075 765,666 729,853
Borrowings ........................................ 120,102 110,636 111,198 88,145 72,410
Total shareholders' equity ........................ 135,993 125,402 116,081 112,586 103,059
Total shareholders' equity to total assets ........ 11.81% 11.49% 11.21% 11.73% 11.06%
Average shareholders' equity to average assets .... 11.91% 11.45% 11.46% 11.95% 11.64%
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 2001, 2000
and 1999 for the Company, including all subsidiaries, and an analysis of the
Company's financial condition at December 31, 2001 compared to December 31, 2000
and at December 31, 2000 compared to December 31, 1999. This discussion and
analysis should be read in conjunction with the consolidated financial
statements and related notes, which begin at page 30 of this report.
Overview
The years ended December 31, 2001, 2000 and 1999 were years of transition for
Main Street Trust, Inc. 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. Each of the last three years have non-recurring items which
have had significant effects on the Company's reported results, many of which
were merger related.
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. Non-recurring costs incurred in 1999 included a $2,500,000
reconciliation liability expense and an $815,000 pension plan termination
expense as well as other employee-related matters, net of tax of $1,127,000. The
resulting effect of these costs on basic and diluted earnings per share for
1999, was a decrease of approximately $0.20 and $0.19 respectively.
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.
Results of Operations
The Company had record earnings of $16,171,000 in 2001 compared to $11,989,000
in 2000 and $11,688,000 in 1999. The Company had a return on average assets of
1.47%, 1.15% and 1.16% in 2001, 2000 and 1999, respectively. The rates of return
in 2001, 2000 and 1999 were significantly affected by non-recurring events
discussed above. Basic earnings per share was $1.48, $1.08 and $1.05 in 2001,
2000 and 1999, respectively. Diluted earnings per share was $1.45, $1.06 and
$1.03 in 2001, 2000 and 1999 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
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 34%. The adjustment to net
interest income for the tax effect of tax-exempt assets is shown in the
following schedule. Net tax equivalent (TE) interest income of $40,866,000 in
2001 reflected an increase from the $38,770,000 recorded in 2000, which was an
increase from the $36,417,000 recorded in 1999.
Net Interest Income on a Tax Equivalent Basis
(in thousands)
2001 2000 1999
---------------------------------
Total interest income ................... $73,195 $74,271 $67,070
Total interest expense .................. 33,598 36,599 31,713
---------------------------------
Net interest income ................ 39,597 37,672 35,357
Tax equivalent adjustment:
Tax-exempt investments ............. 1,210 1,046 1,004
Tax-exempt loans ................... 59 52 56
---------------------------------
Total adjustment .............. 1,269 1,098 1,060
---------------------------------
Net interest income (TE) ................ $40,866 $38,770 $36,417
=================================
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)
2001 2000 1999
--------------------------------------------------------------------------------------------
Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------------------------------------------------------------------------------------------
Assets
Taxable investment securities1 ....... $ 250,890 $ 13,831 5.51% $ 259,980 $ 15,533 5.97% $ 289,879 $ 16,855 5.81%
Tax-exempt investment securities1 (TE) 52,836 3,557 6.73% 44,630 3,077 6.89% 42,564 2,952 6.94%
Federal funds sold and interest
bearing deposits2 .................. 39,526 1,737 4.39% 22,688 1,553 6.85% 23,994 1,226 5.11%
Loans3,4 (TE) ........................ 669,702 55,339 8.26% 623,652 55,206 8.85% 549,098 47,097 8.58%
--------------------------------------------------------------------------------------------
Total interest earning assets
and interest income (TE) ... $1,012,954 $ 74,464 7.35% $ 950,950 $ 75,369 7.93% $ 905,535 $ 68,130 7.52%
--------------------------------------------------------------------------------------------
Cash and due from banks .............. $ 49,282 $ 48,809 $ 62,236
Premises and equipment ............... 20,336 21,641 21,318
Other assets ......................... 20,013 22,034 21,423
--------------------------------------------------------------------------------------------
Total assets .................... $1,102,585 $1,043,434 $1,010,512
============================================================================================
Liabilities and Shareholders' Equity
Interest bearing demand deposits ..... $ 107,992 $ 2,229 2.06% $ 81,416 $ 2,112 2.59% $ 93,885 $ 2,181 2.32%
Savings .............................. 229,493 6,743 2.94% 235,935 9,021 3.82% 230,298 7,652 3.32%
Time deposits ........................ 360,590 19,859 5.51% 344,305 19,531 5.67% 324,059 17,084 5.27%
Federal funds purchased, repurchase
agreements and notes payable ....... 74,918 2,550 3.40% 75,376 3,764 4.99% 74,663 3,110 4.17%
FHLB advances and other borrowings ... 38,980 2,217 5.69% 36,718 2,171 5.91% 29,376 1,686 5.74%
--------------------------------------------------------------------------------------------
Total interest bearing liabilities
and interest expense ....... $ 811,973 $ 33,598 4.14% $ 773,750 $ 36,599 4.73% $ 752,281 $ 31,713 4.22%
--------------------------------------------------------------------------------------------
Non-interest bearing demand deposits5 $ 102,136 $ 88,059 $ 97,856
Non-interest bearing savings deposits5 42,810 47,906 33,896
Other liabilities .................... 14,375 14,210 10,714
--------------------------------------------------------------------------------------------
Total liabilities ............... $ 971,294 $ 923,925 $ 894,747
Shareholders' equity ................. 131,291 119,509 115,765
--------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity ....... $1,102,585 $1,043,434 $1,010,512
============================================================================================
Interest spread (average rate earned
minus average rate paid) (TE) ... 3.21% 3.20% 3.30%
============================================================================================
Net interest income (TE) ............. $ 40,866 $ 38,770 $ 36,417
============================================================================================
Net yield on interest
earning assets (TE) ............. 4.03% 4.08% 4.02%
============================================================================================
Notes: see next page for notes 1-5
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
$114,000, $154,000 and $138,000 in 2001, 2000 and 1999, 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 $1,058,000, $1,061,000, and $1,212,000 in 2001,
2000 and 1999, respectively, are included in total loan income.
5 Current regulations permit the Company to reclassify certain demand
deposits to savings deposits. Accounts identified as transactional remained
in the demand categories, while accounts identified as non-transactional
were reclassified into the savings categories. The classification was based
upon whether the account balance was fluctuating or whether it exhibited
stable balance portions, which were called non-transactional. Banks are
required to hold balances at the Federal Reserve Bank based upon
transactional account balances. By identifying these accounts as
non-transactional, the Company was able to reduce the balances required to
be held at the Federal Reserve Bank in a non-interest bearing reserve
account.
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)
2001 2000
--------------------------------------------------------------
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 ..... ($1,702) ($ 530) ($1,172) ($1,322) ($1,777) $ 455
Tax-exempt investment securities .. 480 554 (74) 125 142 (17)
Federal funds sold and interest
bearing deposits ................ 184 874 (690) 327 (71) 398
Loans ............................. 133 3,933 (3,800) 8,109 6,560 1,549
--------------------------------------------------------------
Total interest income ..... ($ 905) $ 4,831 ($5,736) $ 7,239 $ 4,854 $ 2,385
--------------------------------------------------------------
Interest Expense
Interest bearing demand
and savings deposits ............ ($2,161) $ 671 ($2,832) $ 1,300 ($ 212) $ 1,512
Time deposits ..................... 328 907 (579) 2,447 1,105 1,342
Federal funds purchased, repurchase
agreements and notes payable .... (1,214) (23) (1,191) 654 30 624
Federal Home Loan Bank advances
and other borrowings ............ 46 131 (85) 485 433 52
--------------------------------------------------------------
Total interest expense .... ($3,001) $ 1,686 ($4,687) $ 4,886 $ 1,356 $ 3,530
--------------------------------------------------------------
Net Interest Income (TE) ............ $ 2,096 $ 3,145 ($1,049) $ 2,353 $ 3,498 ($1,145)
==============================================================
Total average earning assets increased from $950,950,000 in 2000 to
$1,012,954,000 in 2001, but generated lower levels of interest income due to a
significant decrease in interest rates during 2001. Average loans increased
$46,050,000, 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 $16,838,000 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 $8,206,000, 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 $9,090,000, 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.
Total average earning assets increased from $905,535,000 in 1999 to $950,950,000
in 2000, generating higher levels of interest income in 2000, and interest
expense increased due to a trend toward higher rates during 2000. Average loans
increased $74,554,000, resulting in an increase of $8,109,000 in interest
income, of which $6,560,000 was due to an increase in volume and $1,549,000 was
attributable to higher rates. Average tax-exempt investment securities increased
$2,066,000, resulting in an increase of $125,000 in interest income, of which
$142,000 was due to an increase in volume, offset slightly by $17,000 due to
lower rates. These increases in average balances were somewhat offset by a
decrease in average taxable investment securities of $29,899,000, resulting in a
decrease of $1,322,000 in interest income in this category, of which $1,777,000
was due to lower volume, somewhat offset by $455,000 due to an increase in
rates. Also, average federal funds sold and interest bearing deposits decreased
$1,306,000 in 2000. However, interest income in this category increased
$327,000. Of this increase, $398,000 was due to an increase in rates, offset
somewhat by $71,000 due to lower volume.
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 2001 compared to 2000. The average rate
earned on loans decreased 59 basis points from 8.85% in 2000 to 8.26% in 2001.
The yield on tax-exempt investment securities decreased 16 basis points from
6.89% in 2000 to 6.73% in 2001. The yield on taxable investment securities
decreased 46 basis points from 5.97% for the year ended December 31, 2000 to
5.51% for the year ended December 31, 2001. The yield on federal funds sold and
interest bearing deposits decreased 246 basis points from 6.85% in 2000 to 4.39%
in 2001.
The total actual balance of loans at December 31, 2001 was higher than at
December 31, 2000. Commercial, financial and agricultural loans increased
$26,501,000 from 2000 to 2001. Somewhat offsetting this increase were decreases
of $10,190,000 and $2,719,000 in consumer and installment loans, and real estate
loans, respectively. Lower market rates contributed to the overall increase in
the demand for loans from 2000 to 2001.
Average rates on total interest bearing liabilities decreased 59 basis points,
from 4.73% in 2000 to 4.14% in 2001, resulting in a decrease in interest expense
of $3,001,000 in 2001 compared to 2000, due to the falling rate environment.
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.
Interest expense increased $4,886,000 in 2000 compared to 1999. This was mainly
caused by an increase of $2,447,000 of interest on time deposits. Of this
increase, $1,342,000 was due to an increase in rate, as the average rate paid
increased from 5.27% in 1999 to 5.67% in 2000, and $1,105,000 was due to an
increase in volume. Interest expense on interest bearing demand and savings
deposits increased $1,300,000 in 2000, of which $1,512,000 was due to an
increase in rates, as average rates paid increased from 3.03% in 1999 to 3.51%
in 2000. This increase was slightly offset by a $212,000 decrease due to lower
volume. The average balance of federal funds purchased, repurchase agreements
and notes payable increased from $74,663,000 in 1999 to $75,376,000 in 2000.
This resulted in an increase in interest expense of $654,000, of which $624,000
was due to rate increases and $30,000 was due to higher volume. Interest expense
on Federal Home Loan Bank advances and other borrowings increased $485,000, with
$433,000 attributable to volume increases and $52,000 due to higher rates.
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
which 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 0.34% in 2001, though there was an increase from 0.10%
in 2000. Net charge-offs increased to $2,290,000 in 2001 from $607,000 in 2000,
though net charge-offs for 2000 included a $300,000 recovery associated with a
commercial credit. The Company charged off $2,673,000 in loans during 2001
compared to $1,252,000 in 2000. Increases in charge-offs of commercial,
financial and agricultural loans of $1,066,000 and installment and consumer
loans of $362,000 accounted for most of the change. The increased charge-offs
were due largely to charge-offs on two agriculture credits totaling $847,000 and
increased charge-offs in the retail lending area, particularly in indirect
vehicle loans. Recoveries of previously charged off loans decreased from
$645,000 in 2000 to $383,000 in 2001, with the largest decrease in the area of
commercial, financial and agricultural loans which decreased $284,000 from 2000
to 2001. The provision for loan losses increased $1,866,000, from $804,000 in
2000 to $2,670,000 in 2001. This increase was necessary to bring the allowance
for loan losses as a percentage of total loans, including loans held for sale,
to 1.34%, in line with the 2000 year end level of 1.32%, and to provide
additional reserves because of the softening economy. (See the section on
Allowance for Loan Losses and Loan Quality elsewhere in this report for further
discussion relating to the adequacy of the allowance for loan losses.) 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 2002. In addition to the softening of the economy in
2001, the tragic events of September 11, 2001 have further clouded the economic
outlook, severely impacting several major industries, as well as the economy as
a whole. Additionally, consumer confidence, a key factor in the economy, was
negatively impacted. Although the economy shows signs of improving, the past
economic slowdown could still adversely affect cash flows from 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 $865,000, or 5.3%, 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 $305,000, or 16.6%, from $1,837,000 in 2000 to $1,532,000
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 have been depressed
causing fee income, which is based on market valuation, to decline in this area.
Non-interest income decreased $1,622,000, or 9.1%, from 1999 to 2000. This
decrease was primarily due to a decrease at FirsTech, Inc. in remittance
processing income of $1,546,000, or 19.0%. Although the number of items
processed was comparable between 2000 and 1999, there was a shift from lockbox
payments to mechanized payments which have both lower revenue streams as well as
lower costs. Gain on sales of mortgage loans held-for-sale decreased $315,000,
or 59.8%. This decrease reflected a $34,349,000, or 57.4%, decrease in mortgage
loans sold during 2000 compared to 1999 due to the changing interest rate
environment. Also contributing to the decrease in non-interest income was a
$298,000, or 14.0%, decrease in other income from $2,135,000 in 1999 to
$1,837,000 in 2000. This decrease was due, in part, to $159,000 in consulting
revenue in 1999, which did not occur in 2000, as well as a decrease of $96,000
in mortgage servicing income. Further contributing to the decrease in
non-interest income was a decrease in income from securities transactions of
$120,000, or 85.1%. This was mainly the result of selling an equity investment
in 1999 for a gain of $100,000 with no comparable sales in 2000. Somewhat
offsetting these decreases was an increase of $576,000, or 11.8%, in trust and
brokerage fees. The majority of this increase was due to the addition of new
business. Higher market values during the first three quarters of 2000 also
added to the increase in assets under management on which fees are based.
Service charges on deposit accounts increased $81,000, or 4.0%.
Non-interest Expense
Total non-interest expense decreased $4,568,000, or 13.2%, to $30,121,000 in
2001 from $34,689,000 in 2000. The 2000 expense was a decrease of $1,100,000, or
3.1%, compared to 1999 non-interest expense of $35,789,000. During 2001, merger
related professional fees were none 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. There was no effect in year 2000 from this
reconciliation difference. 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
$500,000, or 11.6%, 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%. During 2000, salaries and employee benefits decreased $501,000, or 2.7%,
other expense decreased $476,000, or 10.0%, service charges from correspondent
banks decreased $430,000, or 30.1%, occupancy expense decreased $187,000, or
7.8% and office supplies expense decreased $19,000, or 1.5%. Somewhat offsetting
these decreases were increases in merger related professional fees of
$2,544,000, equipment expense of $279,000, or 8.3%, and data processing expense
of $190,000, or 14.8%.
Salaries and employee benefits decreased $513,000, or 2.8%, from $18,274,000 in
2000 to $17,761,000 in 2001. 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. Salaries and employee benefits
in 2000 decreased $501,000, or 2.7%, from $18,775,000 in 1999. This decrease was
mainly due to closure of FirsTech, Inc.'s Hammond processing center in 1999.
Equipment expense decreased $247,000, or 6.8%, from $3,652,000 in 2000 to
$3,405,000 in 2001. This was primarily due to $587,000 in merger related
write-downs of computer equipment and software in 2000. In 2000, equipment
expense increased $279,000, or 8.3%, from $3,373,000 in 1999. Included in this
increase was the aforementioned merger related write-down of computer equipment
and software.
Services charges from correspondent banks decreased $113,000, or 11.3%, from
$998,000 in 2000 to $885,000 in 2001. In 2000, services charges from
correspondent banks decreased $430,000, or 30.1%, from $1,428,000 in 1999. These
decreases reflected a continuing shift from lockbox payments to mechanized
payments, which have lower costs.
Other non-interest expense increased $500,000, or 11.6%, from $4,295,000 in 2000
to $4,795,000 in 2001. In 2000, other non-interest expense decreased $476,000,
or 10.0%, from $4,771,000 in 1999. Included in these changes was $461,000 in
other real estate income in 2000 from the sale of a property which had been
previously written down.
Data processing expense increased $473,000, or 32.2%, from $1,470,000 in 2000 to
$1,943,000 in 2001. 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. In
2000, data processing expense increased $190,000, or 14.8%, from $1,280,000 in
1999. The increases in data processing expense over these periods was due to the
Company's continuing commitment to invest in technology as it positions itself
for the future.
Office supplies expense increased $299,000, or 24.2%, from $1,236,000 in 2000 to
$1,535,000 in 2001. 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 2000, office supplies
expense decreased $19,000, or 1.5%, from $1,255,000 in 1999.
Occupancy expense increased $77,000, or 3.5%, from $2,220,000 in 2000 to
$2,297,000 in 2001. In 2000, occupancy expense decreased $187,000, or 7.8%, from
$2,407,000 in 1999. This decrease was primarily related to the closure of
FirsTech, Inc.'s Hammond processing center.
Income Tax Expense
Income tax expense increased $1,310,000, or 20.4%, from $6,426,000 in 2000 to
$7,736,000 in 2001. This was due to an increase in taxable income. In 2000
income tax expense increased $1,261,000, or 24.4%, from $5,165,000 in 1999, due
to an increase in taxable income as well as merger related expenses for which
the Company has not recognized a tax benefit. The Company's effective tax rate
was 32.4%, 34.9% and 30.6% for the years ended December 31, 2001, 2000 and 1999,
respectively. The effective tax rate was higher in 2000 due to merger related
expenses for which the Company has not recognized a tax benefit.
The tax effects of temporary differences, which gave rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2001 and 2000, are shown in note 11 in the Notes to Consolidated Financial
Statements.
Financial Condition
Total assets increased $60,430,000, or 6%, from $1,091,081,000 at December 31,
2000 to $1,151,511,000 at December 31, 2001. The increase in total assets
resulted from an increase of $52,810,000, or 25%, in securities
available-for-sale, an increase of $28,928,000, or 49%, in cash and due from
banks, an increase of $13,212,000, or 2%, in loans, net of allowance for loan
losses, an increase of $6,685,000, or 320%, in mortgage loans held-for-sale, an
increase of $579,000, or 13%, in other equity securities, and an increase of
$412,000, or 4%, in other assets. These increases were somewhat offset by a
decrease of $21,154,000, or 25%, in investment securities held-to-maturity, a
decrease of $17,688,000, or 70%, in federal funds sold and interest bearing
deposits, a decrease of $1,739,000, or 16%, in accrued interest receivable, and
a decrease of $1,615,000, or 8%, in premises and equipment. The increase in
year-end assets was partially a result of deposits being $44,177,000, or 5%,
higher and federal funds purchased, repurchase agreements and other notes being
$15,549,000, or 22%, higher at December 31, 2001 than at December 31, 2000 which
provided additional funds for the increase in loans and investments. Average
assets were $59,151,000, or 6%, higher in 2001 than 2000. Included in the
increase in average assets was an increase of $46,050,000, or 7%, in average net
loans including mortgage loans held-for-sale, an increase in average federal
funds sold and interest earning deposits of $16,838,000, or 74%, and an increase
in tax-exempt investment securities of $8,206,000, or 18%. These increases were
somewhat offset by a decrease of $9,090,000, or 3%, in taxable investment
securities, a decrease of $2,021,000, or 9%, in other assets, and a decrease of
$1,305,000, or 6%, in premises and equipment. The increase in average assets was
a result of higher average deposits and Federal Home Loan Bank advances and
other borrowings. There was an increase in total average deposits of
$45,400,000, or 6%, in 2001 from 2000. Included in this increase were some
shifts in the average deposit mix in 2001 versus 2000. Average interest bearing
demand deposits increased $26,576,000, or 33%, average time deposits increased
$16,285,000, or 5%, and average non-interest bearing demand deposits increased
$14,077,000, or 16%. Somewhat offsetting these increases were a decrease in
average interest bearing savings of $6,442,000, or 3%, and a decrease of
$5,096,000, or 11%, in non-interest bearing savings deposits.
Investment Securities
The carrying value of investments in debt and equity securities was as follows:
Carrying Value of Securities
(in thousands)
--------------------------------
December 31, 2001 2000 1999
--------------------------------------------------------------------------------
Securities available-for-sale:
U.S. Treasury ......................... $ 8,577 $ 23,812 $ 37,601
Federal agencies ...................... 191,325 156,322 139,812
Mortgage-backed securities ............ 28,279 11,513 14,870
State and municipal ................... 15,642 15,349 10,220
Corporate and other obligations ....... 3,099 294 320
Marketable equity securities .......... 19,574 6,396 4,021
--------------------------------
Total ....................... $266,496 $213,686 $206,844
================================
Securities held-to-maturity:
Federal agencies ...................... $ 1,750 $ 29,428 $ 28,994
Mortgage-backed securities ............ 19,842 22,642 27,193
State and municipal ................... 42,226 32,902 33,748
--------------------------------
Total ....................... $ 63,818 $ 84,972 $ 89,935
================================
Other equity securities:
FHLB and FRB stock 1 .................. $ 3,766 $ 3,526 $ 3,261
Other equity investments .............. 1,342 1,003 --
--------------------------------
Total ....................... $ 5,108 $ 4,529 $ 3,261
================================
Total securities ............ $335,422 $303,187 $300,040
================================
1 FHLB and FRB are commonly used acronyms for Federal Home Loan Bank and
Federal Reserve Bank, respectively.
The unrealized gain on securities available-for-sale, net of tax effect,
increased $2,150,000, to a gain of $2,750,000 at December 31, 2001 from a gain
of $600,000 at December 31, 2000.
The following table shows the maturities and weighted-average yields of
investment securities at December 31, 2001:
Maturities and Weighted Average Yields of Debt Securities
(dollars in thousands)
----------------------------------------------------------------------------------------------
December 31, 2001
----------------------------------------------------------------------------------------------
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 ............... $ 5,493 5.83% $ 3,084 3.97% $ -- -- $ -- -- $ 8,577 5.16%
Federal agencies ............ 28,422 5.83% 160,890 4.95% 2,013 6.24% -- -- 191,325 5.09%
Mortgage-backed securities1 . 4,384 4.22% 22,610 5.94% 1,285 5.28% -- -- 28,279 5.65%
State and municipal ......... 629 6.32% 6,174 6.14% 6,298 7.53% 2,541 7.63% 15,642 6.95%
Other securities ............ -- -- 3,099 5.32% -- -- -- -- 3,099 5.32%
Marketable equity securities2 -- -- -- -- -- -- -- -- 19,574 --
----------------------------------------------------------------------------------------------
Total ............... $ 38,928 $195,857 $ 9,596 $ 2,541 $266,496
==============================================================================================
Average Yield ................. 5.66% 5.09% 6.96% 7.63% 5.28%
==============================================================================================
Securities held-to-maturity:
Federal agencies ............ $ -- -- $ 1,750 6.04% $ -- -- $ -- -- $ 1,750 6.04%
Mortgage-backed securities1 . 8,869 5.23% 9,511 6.29% -- -- 1,462 6.34% 19,842 5.82%
State and municipal ......... 2,448 6.73% 31,885 6.28% 7,893 7.14% -- -- 42,226 6.47%
----------------------------------------------------------------------------------------------
Total ............... $ 11,317 $ 43,146 $ 7,893 $ 1,462 $ 63,818
==============================================================================================
Average Yield ................. 5.55% 6.27% 7.14% 6.34% 6.25%
==============================================================================================
Other equity securities2
FHLB and FRB stock .......... $ -- -- $ -- -- $ -- -- $ -- -- $ 3,766 --
Other equity investments .... -- -- -- -- -- -- -- -- 1,342 --
----------------------------------------------------------------------------------------------
Total ................ $ -- -- $ -- -- $ -- -- $ -- -- $ 5,108 --
==============================================================================================
1 Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties and certain securities require principal
repayments prior to maturity.
2 Due to the nature of these securities, they do not have a stated maturity
date or rate.
Loans
The following tables present the amounts and percentages of loans at 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)
----------------------------------------------------
2001 2000 1999 1998 1997
----------------------------------------------------
Commercial, financial and agricultural $246,042 $219,541 $188,430 $168,862 $167,752
Real estate .......................... 316,693 319,412 293,761 240,529 234,976
Installment and consumer ............. 119,585 129,775 128,085 101,580 112,360
----------------------------------------------------
Total loans ..................... $682,320 $668,728 $610,276 $510,971 $515,088
====================================================
Percentage of Loans Outstanding
-----------------------------------------------
2001 2000 1999 1998 1997
-------------------------------------------------------------------------------------------
Commercial, financial and agricultural 36.06% 32.83% 30.88% 33.05% 32.57%
Real estate .......................... 46.41% 47.76% 48.13% 47.07% 45.62%
Installment and consumer ............. 17.53% 19.41% 20.99% 19.88% 21.81%
-----------------------------------------------
Total ........................... 100.00% 100.00% 100.00% 100.00% 100.00%
===============================================
Total loans increased $13,592,000, or 2.0%, from December 31, 2000 to December
31, 2001, with increases in commercial, financial and agricultural loans of
$26,501,000, offset somewhat by decreases in installment and consumer loans and
real estate loans of $10,190,000 and $2,719,000, respectively.
Total loans increased $58,452,000, or 9.6%, from December 31, 1999 to December
31, 2000, with increases in commercial, financial and agricultural loans, real
estate loans, and installment and consumer loans of $31,111,000, $25,651,000 and
$1,690,000, respectively. Strong loan demand was responsible for the overall
increase in loans from 1999 to 2000.
The balance of loans outstanding as of December 31, 2001 by maturities is shown
in the following table:
Maturity of Loans Outstanding
(dollars in thousands)
December 31, 2001
--------------------------------------------
1 year 1-5 over 5
or less years years Total
--------------------------------------------
Commercial, financial and agricultural $113,822 $100,385 $ 31,835 $246,042
Real estate .......................... 41,684 112,380 162,629 316,693
Installment and consumer ............. 38,036 74,294 7,255 119,585
--------------------------------------------
Total ........................... $193,542 $287,059 $201,719 $682,320
============================================
Percentage of total loans outstanding 28.37% 42.07% 29.56% 100.00%
============================================
As of December 31, 2001, commercial, financial and agricultural loans with
maturities of greater than one year were comprised of $74,266,000 in fixed-rate
loans and $57,954,000 in floating-rate loans. Real estate loans with maturities
greater than one year at December 31, 2001 included $88,621,000 in fixed-rate
loans and $186,388,000 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)
2001 2000 1999 1998 1997
-----------------------------------------------------------------------------------------------------
Allowance for loan losses at
beginning of year ....................... $ 8,879 $ 8,682 $ 8,852 $ 8,837 $ 8,969
-------------------------------------------------------
Charge-offs during period:
Commercial, financial and agricultural .. $(1,165) $ (99) $ (506) $ (200) $ (198)
Residential real estate ................. (27) (34) -- (15) (25)
Installment and consumer ................ (1,481) (1,119) (750) (933) (1,383)
-------------------------------------------------------
Total ........................... $(2,673) $(1,252) $(1,256) $(1,148) $(1,606)
-------------------------------------------------------
Recoveries of loans previously charged off:
Commercial, financial and agricultural .. $ 179 $ 463 $ 268 $ 52 $ 154
Residential real estate ................. 37 9 53 14 146
Installment and consumer ................ 167 173 192 288 277
-------------------------------------------------------
Total ........................... $ 383 $ 645 $ 513 $ 354 $ 577
-------------------------------------------------------
Net charge-offs ................. $(2,290) $ (607) $ (743) $ (794) $(1,029)
Provision for loan losses ................. 2,670 804 573 809 897
-------------------------------------------------------
Allowance for loan losses at end of year .. $ 9,259 $ 8,879 $ 8,682 $ 8,852 $ 8,837
=======================================================
Ratio of net charge-offs to
average net loans ....................... 0.34% 0.10% 0.14% 0.16% 0.21%
=======================================================
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 board 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. The majority of the
increased charge-offs in commercial, financial, and agricultural loans during
2001 was due to two agricultural credits totaling $847,000. The level of
charge-offs of installment and consumer loans in 1999, 2000, and 2001 was
reflective of the significant growth of the indirect loan portfolio in 1999 and
2000.
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)
------------------------------------------
2001 2000 1999 1998 1997
------------------------------------------
Allocated:
Commercial, financial and agricultural $5,487 $3,426 $3,476 $4,038 $4,340
Residential real estate .............. 419 855 799 1,040 1,446
Installment and consumer ............. 2,000 1,649 1,289 1,332 1,343
------------------------------------------
Total allocated allowance ....... $7,906 $5,930 $5,564 $6,410 $7,129
Unallocated allowances ................. 1,353 2,949 3,118 2,442 1,708
------------------------------------------
Total .................................. $9,259 $8,879 $8,682 $8,852 $8,837
==========================================
The portion of the allowance for loan losses which was unallocated decreased by
$1,596,000 to $1,353,000 at December 31, 2001 from $2,949,000 a year earlier as
the method of allocation was adjusted to be consistent among all subsidiary
Banks. This resulted in more of the allowance being allocated to the riskier
components of commercial, financial and agricultural (to $5,487,000 at December
31, 2001 from $3,426,000 a year earlier) and installment and consumer
($2,000,000 at December 31, 2001 compared to $1,649,000 a year earlier) while
less was allocated to the low risk residential real estate component (down from
$855,000 at December 31, 2000 to $419,000 at December 31, 2001). 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 allocations.
Management believes that nonperforming and potential problem loans are
appropriately identified and monitored based on the extensive loan analysis
performed by the credit administration department, the internal loan committees
and the board of directors. Historically, there 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)
------------------------------------------------
2001 2000 1999 1998 1997
--------------------------------------------------------------------------------
Nonaccrual loans .............. 1 $ 3,341 1 $602 1 $112 1 $1,507 1 $2,530
Loans past due 90 days or more $ 1,774 $846 $440 $1,084 $1,170
Renegotiated loans ............ $ 67 $ 88 $104 $ 121 $ 140
1 Includes $3,216,000, $505,000, $112,000, $787,000 and $700,000 at December
31, 2001, 2000, 1999, 1998 and 1997, 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).
There were no other interest earning assets which would be required to be
disclosed as being nonperforming if such other assets were loans.
At December 31, 2001, the Company had approximately $5,136,000 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 $5,136,000 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 $3,341,000 of nonaccrual
loans at December 31, 2001 compared to $602,000 at December 31, 2000. The
increase in nonaccrual loans was primarily due to identified agricultural
credits. One of the credits was charged down by $700,000 prior to December 31,
2001 and the remaining balances of both credits are substantially secured. Loans
past due 90 days or more but still accruing increased by $928,000 in 2001 to a
balance of $1,774,000 at December 31, 2001, from $846,000 at December 31, 2000.
These loans are well secured and in the process of collection.
The following table categorizes nonaccrual loans as of December 31, 2001 based
on levels of performance and also details the allocation of interest collected
during the period in 2001 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)
At December 31, Cash Interest Payments Applied As:
2001 -----------------------------------
------------------- Recovery of Reduction
Book Contractual Interest Prior Partial of
Balance Balance Income Charge-offs Principal
--------------------------------------------------------
Contractually past due with:
Substantial performance ......... $ 344 $ 344 $ 58 $ -- $ 71
Limited performance ............. 224 235 4 -- 5
No performance .................. 2,773 2,890 -- -- --
------------------------------------------------------
Total ............................. $3,341 $3,469 $ 62 $ -- $ 76
======================================================
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, 2001 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 $1,615,000 in 2001 from 2000. This
decrease was primarily due to depreciation expense of $2,731,000, proceeds from
sale of property of $35,000 and loss on disposal of property of $41,000. These
decreases were somewhat offset by $1,192,000 of purchases.
Other Assets
Other assets increased $412,000 in 2001 from 2000. This change was primarily due
to an increase in cash surrender value of life insurance.
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)
2001 2000 1999
-------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
--------------------------------------------------------------
Demand
Non-interest bearing $102,136 -- $ 88,059 -- $ 97,856 --
Interest bearing ... 107,992 2.06% 81,416 2.59% 93,885 2.32%
Savings
Non-interest bearing 42,810 -- 47,906 -- 33,896 --
Interest bearing ... 229,493 2.94% 235,935 3.82% 230,298 3.32%
Time
$100,000 and over .. 110,966 4.73% 93,761 5.81% 86,418 5.19%
Under $100,000 ..... 249,624 5.85% 250,544 5.62% 237,641 5.30%
-------------------------------------------------------------
Totals .......... $843,021 $797,621 $779,994
=============================================================
In analyzing its deposit activity, management has noted that average total
deposits increased $45,400,000, or 6%, during 2001. Included in this increase
were shifts in the average deposit mix in 2001 versus 2000. There were increases
in average interest bearing demand deposits of $26,576,000, or 33%, average time
$100,000 and over of $17,205,000, or 18%, and average non-interest bearing
demand deposits of $14,077,000, or 16%. Somewhat offsetting these increases were
decreases in average interest bearing savings of $6,442,000, or 3%, average
non-interest bearing savings deposits of $5,096,000, or 11%, and average time
deposits under $100,000 of $920,000, or less than 1%.
The table below sets forth the maturity of deposits greater than $100,000 at
December 31, 2001:
Maturity of Time Deposits of $100,000 or More
(in thousands)
Total Time
State of Illinois Brokered Deposits of
Maturity at December 31, 2001 Time Deposit CDs CDs IRAs $100,000 or More
-------------------------------------------------------------------------------------------------
3 months or less ........ $ 5,000 $ -- $ 47,976 $ 985 $ 53,961
3 to 6 months ........... 5,000 -- 15,760 895 21,655
6 to 12 months .......... -- -- 24,989 1,125 26,114
Over 12 months .......... 200 12,000 23,588 2,524 38,312
---------------------------------------------------------
Total .............. $ 10,200 $ 12,000 $112,313 $ 5,529 $140,042
=========================================================
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, 2001 and 2000, the average balance for the years ended December 31,
2001, 2000 and 1999, 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, 2001 and 2000, are disclosed in note 17 in the
Notes to Consolidated Financial Statements.
Capital
Total shareholders' equity rose $10,591,000 from $125,402,000 in December 31,
2000 to $135,993,000 at December 31, 2001. The increase represented net income
of $16,171,000, an increase in accumulated other comprehensive income (loss) of
$2,150,000 and a $23,000 increase from stock appreciation rights. Decreases
included cash dividends declared of $4,945,000, net treasury stock transactions
of $2,802,000 and the purchase of $6,000 in fractional shares of common stock
following the stock dividend.
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
December 31, 2001 and 2000 was 11.8% and 11.6%, respectively. The leverage
ratios for the individual banks are disclosed in note 19 in the Notes to
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 December 31, 2001 and 2000 was
18.0% and 18.6%--significantly higher than the regulatory minimum. The
individual banks' total risk-weighted assets ratios 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
2001. A review of the consolidated statement of cash flows in the accompanying
financial statements shows that the Company's cash and cash equivalents
increased $11,240,000 from December 31, 2000 to December 31, 2001. The increase
in 2001 resulted from operating and financing activities, somewhat offset by
investing activities. There were differences in sources and uses of cash during
2001 compared to 2000. Less cash was used in the area of investing activities
during 2001 compared to 2000. Funding of new loans decreased in 2001 compared to
2000, as the growth of the loan portfolio in 2001 was not as great as in 2000.
Principal paydowns from mortgage-backed securities were slightly higher in 2001
compared to 2000. These sources were somewhat offset by higher net purchases of
investments in debt and equity securities compared to proceeds from maturities,
calls and sales of the same. There was an increase in cash provided by financing
activities. This was mainly due to an increase in federal funds purchased,
repurchase agreements and notes payable in 2001 compared to a decrease in 2000.
This source of funds was somewhat offset by a use of funds to repay FHLB
advances and other borrowings in 2001 compared to a source of funds in 2000 when
borrowings increased. Less cash was provided by operating activities in 2001
compared to 2000. This was mainly due to more funds used for loans originated
for sale offset somewhat by more proceeds from sales of loans originated for
sale in 2001 compared to 2000 due to lower interest rates.
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.
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.
The following table shows the Company's interest rate sensitivity position at
various intervals at December 31, 2001:
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 $ 7,484 $ -- $ -- $ -- $ -- $ 7,484
Debt and equity securities1 ..................... 27,571 22,373 24,396 32,014 229,068 335,422
Loans2 .......................................... 166,727 31,815 35,054 62,885 394,614 691,095
------------------------------------------------------------------------------
Total interest earning assets .............. $ 201,782 $ 54,188 $ 59,450 $ 94,899 $ 623,682 $1,034,001
------------------------------------------------------------------------------
Interest bearing liabilities:
Savings and interest bearing demand deposits3 ... $ 34,625 $ 1,374 $ 2,061 $ 4,126 $ 161,938 $ 204,124
Money market savings deposits ................... 149,554 -- -- -- -- 149,554
Time deposits ................................... 54,140 50,310 65,923 82,727 118,524 371,624
Federal funds purchased, repurchase agreements
and notes payable ............................. 82,713 27 504 1,477 486 85,207
FHLB Advances and other borrowings .............. -- 161 -- 7,000 27,734 34,895
------------------------------------------------------------------------------
Total interest bearing liabilities ......... $ 321,032 $ 51,872 $ 68,488 $ 95,330 $ 308,682 $ 845,404
==============================================================================
Net asset (liability) funding gap ................. $ (119,250) $ 2,316 $ (9,038) $ (431) $ 315,000 $ 188,597
------------------------------------------------------------------------------
Repricing gap ..................................... 0.63 1.04 0.87 1.00 2.02 1.22
Cumulative repricing gap .......................... 0.63 0.69 0.71 0.76 1.22 1.22
==============================================================================
1 Debt and equity securities include securities available-for-sale.
2 Loans include mortgage loans held-for-sale.
3 The total of savings and interest bearing demand deposits does not include
$25,401,000 of non-transactional accounts which are savings accounts that
are non-interest bearing.
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, 2001, 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 $1,193,000 in 30 days and $1,169,000 in 90 days assuming
no management intervention. A rise in interest rates would have the opposite
effect for the same periods.
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 $35,975,000 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, 2001 and December
31, 2000 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, 2001 ........... 6.6% 3.3% (3.3%) (5.6%)
December 31, 2000 ........... 0.2% 0.1% (0.1%) (0.2%)
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, the Financial Accounting Standards Board issued Statement No. 141,
"Business Combinations" (SFAS No. 141). SFAS No. 141 addresses financial
accounting and reporting for business combinations and supersedes APB Opinion
No. 16, "Business Combinations", and SFAS No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises". SFAS No. 141 requires all business
combinations in the scope of this SFAS to be accounted for using the purchase
method. SFAS No. 141 is effective for business combinations initiated after June
30, 2001 and all business combinations accounted for using the purchase method
for which the acquisition date is July 1, 2001 or later. Management does not
believe the adoption of Statement No. 141 will have a significant impact on its
financial statements.
In June 2001, the Financial Accounting Standards Board issued Statement No. 142,
"Goodwill and Other Intangible Assets" (SFAS 142). SFAS No. 142 addresses
financial accounting and reporting for acquired goodwill and other intangible
assets and supersedes APB Opinion No. 17, "Intangible Assets". It addresses how
intangible assets should be accounted for at acquisition and in subsequent
periods. Most significantly, goodwill and intangible assets that have indefinite
useful lives will not be amortized but rather will be tested at least annually
for impairment. Intangible assets that have finite useful lives will continue to
be amortized over their useful lives. The standard also provides specific
guidelines for testing goodwill for impairment and requires additional
disclosures about goodwill and intangible assets. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001. SFAS No. 142 is required to be
applied to the beginning of any entity's fiscal year and to be applied to all
goodwill and other intangible assets recognized in its financial statements at
that date. Impairment losses for goodwill and indefinite-lived intangible assets
that arise due to the initial application of this Standard are to be reported as
resulting from a change in accounting principle. Management does not believe the
adoption of SFAS No. 142 will have a significant impact on its financial
statements.
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 operation 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.
In August 2001, Statement on Financial Accounting Standards No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets", was issued to supersede
Statement No. 121, "Accounting for the Impairment and for Long-Lived Assets to
Be Disposed Of", and the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". Statement No. 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years, with early application encouraged.
Management does not believe the adoption of Statement No. 144 will have a
significant impact on its financial statements.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1996
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 the terrorist attacks that occurred on September
11th, as well as any future threats and attacks, and the response of the
United States to any such threats and attacks.
o The effects of, and changes in, federal, state and local laws, regulations
and policies affecting banking, securities, insurance and monetary and
financial matters.
o The effects of changes in interest rates (including the effects of changes
in the rate of prepayments of the Company's assets) and the policies of the
Board of Governors of the Federal Reserve System.
o The ability of the Company to compete with other financial institutions as
effectively as the Company currently intends due to increases in
competitive pressures in the financial services sector.
o The inability of the Company to obtain new customers and to retain existing
customers.
o The timely development and acceptance of products and services, including
products and services offered through alternative delivery channels such as
the Internet.
o Technological changes implemented by the Company and by other parties,
including third party vendors, which may be more difficult or more
expensive than anticipated or which may have unforeseen consequences to the
Company and its customers.
o The ability of the Company to develop and maintain secure and reliable
electronic systems.
o The ability of the Company to retain key executives and employees and the
difficulty that the Company may experience in replacing key executives and
employees in an effective manner.
o Consumer spending and saving habits which may change in a manner that
affects the Company's business adversely.
o Business combinations and the integration of acquired businesses which may
be more difficult or expensive than expected.
o The costs, effects and outcomes of existing or future litigation.
o Changes in accounting policies and practices, as may be adopted by state
and federal regulatory agencies and the Financial Accounting Standards
Board.
o The ability of the Company to manage the risks associated with the
foregoing as well as anticipated.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements.
Additional information concerning the Company and its business, including other
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
See pages 26 through 27.
Item 8. Financial Statements and Supplementary Data
MAIN STREET TRUST, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2001, 2000 and 1999
MAIN STREET TRUST, INC.
AND SUBSIDIARIES
TABLE OF CONTENTS
INDEPENDENT AUDITOR'S REPORT
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Independent Auditor's Report
The Board of Directors
Main Street Trust, Inc.
Champaign, Illinois
We have audited the accompanying consolidated balance sheet of Main Street
Trust, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for the years then ended. 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, 2001 and 2000, and the
results of their operations and their cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of
America.
We previously audited and reported on the consolidated statements of income,
changes in shareholders' equity and cash flows of BankIllinois Financial
Corporation and subsidiary for the year ended December 31, 1999, prior to their
restatement for the 2000 pooling of interests. The contribution of BankIllinois
Financial Corporation and subsidiary to total shareholders' equity, net interest
income, and net income represented 54.9%, 55.4% and 64.6% of the respective
restated totals for the year ended December 31, 1999. The other companies
included in the December 31, 1999 restated consolidated statements of income,
changes in shareholders' equity and cash flows for the year then ended were
audited and reported on separately by other auditors; and their report dated
January 28, 2000 expressed an unqualified opinion on those financial statements.
We also audited the combination of the accompanying consolidated statements of
income, changes in shareholders' equity and cash flows for the year ended
December 31, 1999, after restatement for the 2000 pooling of interests; in our
opinion, such consolidated financial statements have been properly combined on
the basis described in Note 2 to the consolidated financial statements.
/s/ McGladrey & Pullen, LLP
Champaign, Illinois
February 8, 2002
MAIN STREET TRUST, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2001 and 2000
(in thousands, except share data)
2001 2000
-------------------------
Assets
Cash and due from banks ............................................... $ 87,895 $ 58,967
Federal funds sold and interest bearing deposits ...................... 7,484 25,172
-------------------------
Cash and cash equivalents 95,379 84,139
-------------------------
Investments in debt and equity securities:
Available-for-sale, at fair value ................................... 266,496 213,686
Held-to-maturity, at cost (fair value of $64,727 and $84,849 at
December 31, 2001 and 2000, respectively) ......................... 63,818 84,972
Other equity securities ............................................. 5,108 4,529
-------------------------
Total investments in debt and equity securities .............. 335,422 303,187
-------------------------
Loans, net of allowance for loan losses of $9,259 and
$8,879 at December 31, 2001 and 2000, respectively .................. 673,061 659,849
Mortgage loans held for sale .......................................... 8,775 2,090
Premises and equipment ................................................ 19,259 20,874
Accrued interest receivable ........................................... 8,890 10,629
Other assets .......................................................... 10,725 10,313
-------------------------
Total assets ........................................... $ 1,151,511 $ 1,091,081
=========================
Liabilities and Shareholders' Equity
Deposits:
Demand, non-interest bearing ........................................ $ 133,406 $ 108,981
Demand, interest bearing ............................................ 111,241 87,517
Savings ............................................................. 267,838 286,123
Time, $100 and over ................................................. 140,042 100,030
Other time .......................................................... 231,582 257,281
------------------------
Total deposits 884,109 839,932
Federal funds purchased, repurchase agreements, and notes payable ..... 85,207 69,658
Federal Home Loan Bank advances and other borrowings ............. 34,895 40,978
Accrued interest payable .............................................. 3,390 4,584
Other liabilities ..................................................... 7,917 10,527
------------------------
Total liabilities ...................................... 1,015,518 965,679
------------------------
Shareholders' equity:
Preferred stock, no par value; 2,000,000 shares authorized .......... -- --
Common stock, $0.01 par value; 15,000,000 shares authorized;
11,111,281 and 11,111,582 shares issued at December 31, 20001
and 2000, respectively ............................................ 111 111
Paid in capital ..................................................... 54,147 54,222
Retained earnings ................................................... 83,810 72,591
Accumulated other comprehensive income .............................. 2,750 600
-------------------------
140,818 127,524
Less: treasury stock, at cost, 267,783 and 117,786 shares at
December 31, 2001 and 2000, respectively .......................... (4,825) (2,122)
-------------------------
Total shareholders' equity ............................. 135,993 125,402
-------------------------
Total liabilities and shareholders' equity ............. $1,151,511 $1,091,081
=========================
See accompanying notes to consolidated financial statements.
MAIN STREET TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended December 31, 2001, 2000 and 1999
(in thousands, except share data)
2001 2000 1999
----------------------------------------
Interest income:
Loans and fees on loans ................................. $ 55,280 $ 55,154 $ 47,041
Investments in debt and equity securities:
Taxable ............................................... 13,831 15,533 16,855
Tax-exempt ............................................ 2,347 2,031 1,948
Federal funds sold and interest bearing deposits ........ 1,737 1,553 1,226
----------------------------------------
Total interest income ............................. 73,195 74,271 67,070
----------------------------------------
Interest expense:
Demand, savings, and other time deposits ................ 23,586 25,213 22,427
Time deposits $100 and over ............................. 5,245 5,451 4,490
Federal funds purchased, repurchase agreements,
and notes payable ..................................... 2,550 3,764 3,110
Federal Home Loan Bank advances and other borrowings .... 2,217 2,171 1,686
----------------------------------------
Total interest expense ............................ 33,598 36,599 31,713
----------------------------------------
Net interest income ............................... 39,597 37,672 35,357
Provision for loan losses ................................. 2,670 804 573
----------------------------------------
Net interest income after provision for loan losses 36,927 36,868 34,784
----------------------------------------
Non-interest income:
Remittance processing ................................... 7,187 6,605 8,151
Trust and brokerage fees ................................ 5,227 5,474 4,898
Service charges on deposit accounts ..................... 2,217 2,087 2,006
Securities transactions, net ............................ 110 21 141
Gain on sales of mortgage loans, net .................... 828 212 527
Other ................................................... 1,532 1,837 2,135
----------------------------------------
Total non-interest income ......................... 17,101 16,236 17,858
----------------------------------------
Non-interest expense:
Salaries and employee benefits .......................... 17,761 18,274 18,775
Occupancy ............................................... 2,297 2,220 2,407
Equipment ............................................... 3,405 3,652 3,373
Data processing fees .................................... 1,943 1,470 1,280
Office supplies ......................................... 1,535 1,236 1,255
Service charges from correspondent banks ................ 885 998 1,428
Merger related professional fees ........................ -- 2,544 --
Reconciliation liability ................................ (2,500) -- 2,500
Other ................................................... 4,795 4,295 4,771
----------------------------------------
Total non-interest expense ........................ 30,121 34,689 35,789
----------------------------------------
Income before income taxes ........................ 23,907 18,415 16,853
Income taxes .............................................. 7,736 6,426 5,165
----------------------------------------
Net income ........................................ $ 16,171 $ 11,989 $ 11,688
========================================
Per share data:
Basic earnings per share ................................ $ 1.48 $ 1.08 $ 1.05
Weighted average shares of common stock outstanding ..... 10,930,736 11,077,959 11,122,548
Diluted earnings per share .............................. $ 1.45 $ 1.06 $ 1.03
Weighted average shares of common stock and dilutive
potential common shares outstanding ................... 11,138,290 11,300,674 11,360,888
See accompanying notes to consolidated financial statements.
MAIN STREET TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
Years Ended December 31, 2001, 2000 and 1999
(in thousands, except share data)
Accumulated
Other
Compre-
Common Stock hensive Treasury Stock
------------------- Paid-In Retained Income --------------------
Shares Amount Capital Earnings (Loss) Shares Amount Total
---------------------------------------------------------------------------------------
Balance, January 1, 1999 ................. 10,578,973 $ 106 $ 44,300 $ 66,534 $ 1,646 -- $ -- $112,586
Restated for 5% stock dividend - 2001 .... 528,922 5 9,916 (9,921) -- -- -- --
---------------------------------------------------------------------------------------
Balance January 1, 1999, as restated ..... 11,107,895 111 54,216 56,613 1,646 -- -- 112,586
---------------------------------------------------------------------------------------
Comprehensive Income:
Net income ............................. -- -- -- 11,688 -- -- -- 11,688
Net change in unrealized gain (loss)
on securities available-for-sale,
net of taxes ($2,532) ................ -- -- -- -- (4,915) -- -- (4,915)
Reclassification adjustment, net of
tax of ($48) ......................... -- -- -- -- (93) -- -- (93)
--------
Comprehensive income ................... 6,680
--------
Fractional shares of common stock
purchased following stock dividend ..... (211) -- (5) -- -- -- -- (5)
Stock appreciation rights ................ -- -- 15 -- -- -- -- 15
Cash dividends ($0.29 per share) ......... -- -- -- (3,195) -- -- -- (3,195)
---------------------------------------------------------------------------------------
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 available-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
========================================================================================
See accompanying notes to consolidated financial statements.
MAIN STREET TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 2001, 2000 and 1999
(in thousands)
2001 2000 1999
-----------------------------------
Cash flows from operating activities:
Net income ............................................................. $ 16,171 $ 11,989 $ 11,688
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization .......................................... 2,757 2,839 2,699
Amortization of bond premiums, net ..................................... (78) 202 783
Provision for loan losses .............................................. 2,670 804 573
Deferred income taxes .................................................. (1,643) (26) (975)
Securities transactions, net ........................................... (110) (21) (141)
Federal Home Loan Bank stock dividend .................................. (240) (169) --
Gain on sales of mortgage loans, net ................................... (828) (212) (527)
Loss on disposal of premises and equipment ............................. 41 587 27
Proceeds from sales of mortgage loans originated for sale .............. 104,155 25,537 59,886
Mortgage loans originated for sale ..................................... (110,012) (25,728) (49,179)
Other, net ............................................................. (2,377) 647 1,851
-----------------------------------
Net cash provided by operating activities ........................ 10,506 16,449 26,685
-----------------------------------
Cash flows from investing activities:
Net increase in loans .................................................. (15,882) (59,066) (101,375)
Proceeds from maturities and calls of investments in debt securities:
Held-to-maturity ..................................................... 32,239 3,456 19,164
Available-for-sale ................................................... 140,054 38,727 85,529
Proceeds from sales of investments in debt and equity securities:
Available-for-sale ................................................... 29,567 9,619 34,573
Purchases of investments in debt and equity securities:
Held-to-maturity ................................................... (21,744) (3,054) (21,608)
Available-for-sale ................................................. (223,994) (51,581) (77,623)
Other equity securities ............................................ (750) (1,099) (41)
Principal paydowns from mortgage-backed securities:
Held-to-maturity .................................................. 9,948 4,503 3,486
Available-for-sale ................................................ 6,127 2,272 4,253
Return of principal on other equity securities ....................... 31 -- --
Purchases of premises and equipment .................................. (1,192) (1,769) (3,928)
Proceeds from sale of premises and equipment ......................... 35 -- --
-----------------------------------
Net cash used in investing activities ............................ (45,561) (57,992) (57,570)
-----------------------------------
Cash flows from financing activities:
Net increase in deposits ............................................... 44,177 44,857 29,409
Net increase (decrease) in federal funds purchased,
repurchase agreements, and notes payable ............................. 15,549 (9,482) 18,899
Net (decrease) increase in Federal Home Loan Bank
advances and other borrowings ........................................ (6,083) 8,920 4,154
Cash dividends paid .................................................... (4,540) (3,869) (3,176)
MSTI post merger stock transactions, net ............................... (2,808) (2,094) --
-----------------------------------
Net cash provided by financing activities ........................ 46,295 38,332 49,286
-----------------------------------
Net increase (decrease) in cash and cash
equivalents ...................................................... 11,240 (3,211) 18,401
Cash and cash equivalents at beginning of year ........................... 84,139 87,350 68,949
-----------------------------------
Cash and cash equivalents at end of year ................................. $ 95,379 $ 84,139 $ 87,350
===================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ............................................................. $ 34,792 $ 36,105 $ 31,624
Income taxes ......................................................... 8,775 6,684 6,819
Real estate acquired through or in lieu of foreclosure ................. -- 92 410
Dividends declared not paid ............................................ 1,452 1,047 444
See accompanying notes to consolidated financial statements.
MAIN STREET TRUST, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Organization
MainStreet Trust, Inc. is a holding company whose subsidiaries BankIllinois,
First National Bank of Decatur, First Trust Bank of Shelbyville 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 generally accepted accounting principles 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
On August 12, 1999, BankIllinois Financial Corporation and First Decatur
Bancshares, Inc. entered into an agreement and Plan of Merger, which
provided for a "merger of equals" between the two companies, structured as
a merger of the two companies into the Company. The merger, which was
completed on March 23, 2000, has been accounted for as a pooling of
interests and, accordingly, all prior financial statements have been
restated to include both companies. As a result of the merger, former
shareholders of BankIllinois Financial Corporation and First Decatur
Bancshares, Inc. received 6,119,673 and 4,990,281 shares of Company common
stock, respectively.
The consolidated financial statements include the accounts of Main Street
Trust, Inc. and its wholly owned subsidiaries, BankIllinois, First National
Bank of Decatur, First Trust Bank of Shelbyville, (the "Banks") and
FirsTech, Inc., a retail payment processing company. 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.
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
---------------------------------------------------------------------
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 ... 10,504 7,543 (148) (798) 17,101
Total non-interest expense .. 26,799 5,565 (1,445) (798) 30,121
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 ... 9,933 7,434 174 (1,305) 16,236
Total non-interest expense .. 25,317 5,849 4,828 (1,305) 34,689
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
1999
-----------------------------
Total interest income ....... $ 67,105 $ 106 $ 180 $ (321) $ 67,070
Total interest expense ...... 32,034 -- -- (321) 31,713
Provision for loan losses ... 573 -- -- -- 573
Total non-interest income ... 9,944 8,718 127 (931) 17,858
Total non-interest expense .. 25,293 7,568 3,859 (931) 35,789
Income before income tax .... 19,149 1,256 (3,552) -- 16,853
Income tax expense .......... 5,946 426 (1,207) -- 5,165
Net income .................. 13,203 830 (2,345) -- 11,688
Total assets ................ 1,025,562 6,565 118,667 (115,048) 1,035,746
Depreciation and amortization 2,238 437 24 -- 2,699
(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.
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.
Other 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. Net unrealized losses are recognized in a valuation
allowance by charges to income. 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.
(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, 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 loans 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.
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.
(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, as discussed in Note 13 to the consolidated financial statements,
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:
2001 2000 1999
-----------------------------------------
Net income ............................................... $ 16,171,000 $11,989,000 $11,688,000
Shares:
Weighted average common shares outstanding .......... 10,930,736 11,077,959 11,122,548
Dilutive effect of outstanding options, as determined
by the application of the treasury stock method . 207,554 222,715 238,340
-----------------------------------------
Weighted average common shares outstanding,
as adjusted ..................................... 11,138,290 11,300,674 11,360,888
=========================================
Basic earnings per share ................................. $ 1.48 $ 1.08 $ 1.05
=========================================
Diluted earnings per share ............................... $ 1.45 $ 1.06 $ 1.03
=========================================
(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.
(j) Stock Dividend
During September 2001, the Company effected a 5% stock dividend. All
references in the accompanying financial statements to number of shares and
per share amounts have been retroactively restated to reflect the stock
dividends.
(k) Reclassification
Certain amounts in the 1999 and 2000 consolidated financial statements have
been reclassified to conform with the 2001 presentation. Such
reclassifications have no effect on previously reported net income.
(l) Emerging Accounting Standards
In June 2001, the Financial Accounting Standards Board issued Statement No.
141, "Business Combinations" (SFAS No. 141). SFAS No. 141 addresses
financial accounting and reporting for business combinations and supersedes
APB Opinion No. 16, "Business Combinations" and SFAS No. 38, "Accounting
for Preacquisition Contingencies of Purchased Enterprises". SFAS No. 141
requires all business combinations in the scope of this SFAS to be
accounted for using the purchase method. SFAS No. 141 is effective for
business combinations initiated after June 30, 2001 and all business
combinations accounted for using the purchase method for which the
acquisition date is July 1, 2001 or later. Management does not believe the
adoption of Statement No. 141 will have a significant impact on its
financial statements.
In June 2001, the Financial Accounting Standards Board issued Statement No.
142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS No. 142
addresses financial accounting and reporting for acquired goodwill and
other intangible assets and supersedes APB Opinion No. 17, "Intangible
Assets". It addresses how intangible assets should be accounted for at
acquisition and in subsequent periods. Most significantly, goodwill and
intangible assets that have indefinite useful lives will not be amortized
but rather will be tested at least annually for impairment. Intangible
assets that have finite useful lives will continue to be amortized over
their useful lives. The standard also provides specific guidance for
testing goodwill for impairment and requires additional disclosures about
goodwill and intangible assets. SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001. SFAS No. 142 is required to be applied
to the beginning of any entity's fiscal year and to be applied to all
goodwill and other intangible assets recognized in its financial statements
at that date. Impairment losses for goodwill and indefinite-lived
intangible assets that arise due to the initial application of this
Standard are to be reported as resulting from a change in accounting
principle. Management does not believe the adoption of SFAS No. 142 will
have a significant impact on its financial statements.
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.
In August 2001, Statement on Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" was issued
to supersede Statement No. 121, "Accounting for the Impairment and for
Long-Lived Assets to Be Disposed Of", and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions".
Statement No. 144 is effective for financial statements issued for fiscal
years beginning after December 15, 2001, and interim periods within those
fiscal years, with early application encouraged. Management does not
believe the adoption of Statement No. 144 will have a significant impact on
its financial statements.
3. Cash and Due from Banks
The compensating balances held at correspondent banks were $74,947,000 and
$45,806,000 at December 31, 2001 and 2000, 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 $9,472,000 and $8,025,000
at December 31, 2001 and 2000, 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, 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
=============================================
December 31, 2000
U.S. Treasury and other
government agencies ................................. $180,170 $ 661 $ 697 $180,134
Mortgage-backed securities ............................ 11,528 69 84 11,513
Obligations of states and political subdivisions ...... 15,087 289 27 15,349
Other ................................................. 5,990 1,480 780 6,690
---------------------------------------------
$212,775 $ 2,499 $ 1,588 $213,686
=============================================
Held-to-Maturity
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------
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
=============================================
December 31, 2000
U.S. Treasury and other
government agencies ................................. $ 29,428 $ 16 $ 175 $ 29,269
Obligations of states and political subdivisions ...... 32,902 320 129 33,093
Mortgage-backed securities ............................ 22,642 10 165 22,487
---------------------------------------------
$ 84,972 $ 346 $ 469 $ 84,849
=============================================
A summary of other equity securities (in thousands) at December 31, 2001 and
2000 is as follows:
2001 2000
--------------------
Federal Home Loan Bank Stock, at cost .............. $3,535 $3,295
Federal Reserve Bank Stock, at cost ................ 231 231
Other investments, at fair value ................... 1,342 1,003
--------------------
$5,108 $4,529
====================
Realized gains and losses (in thousands) on sales and maturities for the years
ended December 31, 2001, 2000 and 1999 were as follows:
2001 2000 1999
--------------------------
Gross gains .............................. $ 563 $ 320 $ 223
Gross losses ............................. (453) (299) (82)
--------------------------
Net gains ................................ $ 110 $ 21 $ 141
==========================
Applicable income taxes .................. $ 39 $ 7 $ 49
==========================
Investments in debt and equity securities with a carrying value of $217,369,000
and $192,580,000 were pledged at December 31, 2001 and 2000, 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, 2001, 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 .............. $ 33,901 $ 34,544 $ 2,448 $ 2,476
Due after one year through five years 170,475 173,247 33,635 34,187
Due after five years through ten years 8,158 8,311 7,893 8,063
Due after ten years .................. 2,515 2,541 -- --
-----------------------------------------
$215,049 $218,643 $ 43,976 $ 44,726
Mortgage-backed securities ........... 27,852 28,279 19,842 20,001
Marketable equity securities ......... 19,367 19,574 -- --
Other equity securities .............. 5,138 5,108 -- --
-----------------------------------------
Total debt securities .. $267,406 $271,604 $ 63,818 $ 64,727
=========================================
5. Loans
A summary of loans (in thousands), by classification, at December 31, 2001 and
2000 is as follows:
2001 2000
-----------------------
Commercial, financial, and agricultural .......... $246,042 $219,541
Real estate ...................................... 316,693 319,412
Installment and consumer ......................... 119,585 129,775
-----------------------
$682,320 $668,728
Less:
Allowance for loan losses ..................... 9,259 8,879
-----------------------
$673,061 $659,849
=======================
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 2001, 2000 and 1999, the Company sold approximately $104,155,000,
$25,537,000 and $59,886,000, respectively, of residential mortgage loans in the
secondary market, primarily to Fannie Mae and Bank of America. Gross gains of
approximately $856,000, $228,000 and $562,000, and gross losses of approximately
$28,000, $16,000 and $35,000, were realized on the sales during 2001, 2000 and
1999, 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, 2001, 2000 and 1999:
2001 2000 1999
------------------------------
Fannie Mae ................................. $107,950 $111,060 $122,887
Freddie Mac ................................ 4,216 1,051 1,432
Illinois Housing Development Authority ..... 2,288 2,759 2,605
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 2001 was as follows:
2001
--------
Balance, January 1 ..................................... $ 24,691
New loans .............................................. 23,416
Repayments ............................................. (15,637)
--------
Balance, December 31 ................................... $ 32,470
========
At December 31, 2001, one to four family real estate mortgage loans of
approximately $124,638,000 were pledged to secure advances from the Federal Home
Loan Bank.
Activity in the allowance for loan losses (in thousands) for 2001, 2000 and 1999
was as follows:
2001 2000 1999
----------------------------
Balance, beginning of year ...................... $8,879 $8,682 $8,852
Provision charged to expense .................... 2,670 804 573
Loans charged off ............................... (2,673) (1,252) (1,256)
Recoveries on loans previously charged off ...... 383 645 513
----------------------------
Balance, end of year ............................ $9,259 $8,879 $8,682
============================
The following table presents summary data on nonaccrual and other impaired loans
(in thousands) at December 31, 2001, 2000 and 1999:
2001 2000 1999
----------------------------
Impaired loans on nonaccrual .................... $ 125 $ 97 $ --
Impaired loans continuing to accrue interest .... -- -- --
----------------------------
Total impaired loans ............................ $ 125 $ 97 $ --
============================
Other non-accrual loans not classified
as impaired ................................. $ 3,216 $ 505 $ 112
============================
Allowance for loan losses on impaired loans ..... $ 19 $ 15 $ --
============================
Impaired loans for which there is no related
allowance for loan losses ................... $ -- $ -- $ --
============================
Average recorded investment in impaired
loans ....................................... $ 142 $ 19 $ 217
============================
Interest income recognized from impaired
loans ....................................... $ -- $ -- $ --
============================
Cash basis interest income recognized from
impaired loans .............................. $ 5 $ -- $ 97
============================
6. Premises and Equipment
A summary of premises and equipment (in thousands) at December 31, 2001 and 2000
is as follows:
2001 2000
-------------------
Land ................................................... $ 4,783 $ 4,835
Furniture and equipment ................................ 14,119 15,024
Buildings and leasehold improvements ................... 22,669 22,679
-------------------
41,571 42,538
Less accumulated depreciation and amortization ......... 22,312 21,664
-------------------
$19,259 $20,874
===================
Depreciation and amortization expense was $2,731,000, $2,813,000 and $2,672,000
for 2001, 2000 and 1999, respectively.
The Company leases various operating facilities and equipment under
noncancellable operating lease arrangements. These leases expire at various
dates through November 2007 and have renewal options to extend the lease terms
for various dates through November 2017. The rental expense for these operating
leases was $239,000, $202,000 and $209,000 in 2001, 2000 and 1999, 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, 2001 are as follows:
2002 $ 232
2003 124
2004 108
2005 52
2006 44
Thereafter 26
--------
$ 586
========
7. Deposits
As of December 31, 2001, the scheduled maturities of time deposits (in
thousands) were as follows:
2002 $253,111
2003 83,904
2004 26,604
2005 5,770
2006 2,235
--------
$371,624
========
8. Federal Funds Purchased, Repurchase Agreements, and Notes Payable
A summary of short-term borrowings (in thousands) at December 31, 2001 and 2000
is as follows:
2001 2000
-----------------
Federal funds purchased .................................... $ 5,725 $ 2,375
U.S. Treasury demand notes ................................. 2,201 4,569
Securities sold under agreements to repurchase:
U.S. Treasury and other government agency securities
with carrying values of $98,968,509 and $88,513,000
and market values of $99,158,612 and $88,210,000
at December 31, 2001 and 2000, respectively ............ 77,281 62,714
-----------------
$85,207 $69,658
=================
Information relating to short-term borrowings (dollars in thousands) is as
follows:
2001 2000 1999
-----------------------------
Federal funds purchased:
Average daily balance ....................... $ 4,629 $ 3,549 $ 9,417
Maximum balance at month-end ................ $12,090 $11,860 $30,300
Weighted average interest rate at year-end .. 1.29% 5.13% 3.91%
Weighted average interest rate for the year.. 4.36% 4.95% 4.79%
Securities sold under agreements to repurchase:
Average daily balance ....................... $68,061 $64,173 $62,844
Maximum balance at month-end ................ $77,281 $80,787 $79,065
Weighted average interest rate at year-end .. 2.27% 5.32% 5.90%
Weighted average interest rate for the year . 3.32% 5.28% 4.24%
U.S. Treasury demand notes
Average daily balance ....................... $ 2,228 $ 2,588 $ 2,401
Maximum Balance at month-end ................ $ 5,186 $ 5,330 $ 5,490
Weighted average interest rate at year-end .. 2.70% 6.28% 4.49%
Weighted average interest rate for the year . 4.12% 6.29% 4.46%
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, 2001 is as follows:
December 31
---------------------------------------------------
2001 2000
---------------------------------------------------
Weighted
FHLB Other Average
Advances Borrowings Total Rate Total
---------------------------------------------------
Maturing in year ending:
2001 $ -- $ -- $ -- - $11,023
2002 7,000 23 7,023 6.09% 7,023
2003 -- 23 23 8.50% 23
2004 -- 23 23 8.50% 23
2005 -- 23 23 8.50% 23
2006 5,000 23 5,023 5.69% 23
2007 2,734 23 2,757 6.85% 2,817
2008 20,000 23 20,023 5.27% 20,023
--------------------------------------------------
$34,734 $ 161 $34,895 5.63% $40,978
==================================================
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 $35,975,000 at
December 31, 2001 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 the previous year. The rate at December 31, 2001 was 8.50%.
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, 2001, the entire line was available.
11. Income Taxes
Federal income tax expense (in thousands) for 2001, 2000 and 1999 is summarized
as follows:
2001 2000 1999
----------------------------
Current ....................... $ 9,379 $ 6,452 $ 6,140
Deferred ...................... (1,643) (26) (975)
----------------------------
Total ......................... $ 7,736 $ 6,426 $ 5,165
============================
Actual income tax expense (in thousands) for 2001, 2000 and 1999 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:
2001 2000 1999
---------------------------------
Computed "expected" income taxes ......... $ 8,367 $ 6,445 $ 5,899
Tax-exempt interest income, net of
disallowed interest expense ............ (718) (646) (624)
Nondeductible merger expenses ............ -- 509 --
Income taxed at lower rates .............. -- -- (169)
Other, net ............................... 87 118 59
---------------------------------
$ 7,736 $ 6,426 $ 5,165
=================================
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, 2001 and 2000 are as follows:
2001 2000
------------------
Deferred tax assets:
Allowance for loan losses .............................. $ 3,102 $ 2,723
Deferred compensation .................................. 1,631 1,407
Stock appreciation rights .............................. 85 110
Other employee benefits ................................ 133 54
Severance payable ...................................... 15 48
Other .................................................. 37 100
------------------
Total deferred tax assets ........................ $ 5,003 $ 4,442
------------------
Deferred tax liabilities:
Unrealized holding gain on available-for-sale securities $(1,442) $ (309)
Premises and equipment ................................. (1,124) (1,520)
Mortgage servicing rights .............................. (229) (171)
Deferred loan fees ..................................... (104) (112)
Discount accretion ..................................... (161) (107)
Other .................................................. (370) (869)
------------------
Total deferred tax liabilities ................... $(3,430) $(3,088)
------------------
Valuation allowance ...................................... -- (287)
------------------
Net deferred tax assets ......................... $ 1,573 $ 1,067
==================
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized.
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. The 401(k)
plan allows for participants' contributions of up to 15% of gross salary, the
first 6% of which is 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
$746,000, $928,000 and $717,000 for 2001, 2000 and 1999, respectively.
Effective December 31, 1999, the Company terminated the defined benefit plan
that covered substantially all of the employees of First National Bank of
Decatur, FirsTech, Inc. and First Trust Bank of Shelbyville. As a result of the
termination of the Plan, the Company recorded an estimated settlement loss of
$2,139,000, recorded a gain on curtailment of $1,587,000 and reduced the related
prepaid pension asset in accordance with Statement of Financial Accounting
Standards No. 88, Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination of Benefits.
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, $280,000 and $260,000 in 2001, 2000 and 1999,
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
stock dividends or stock splits declared by the Company. At December 31, 2001
and 2000, $285,894 and $276,579 had been deferred from this plan, which
represented 22,746 and 22,205 phantom stock units.
13. Stock Options and Related Plans
The Company has established a stock incentive plan, which provides for the
granting of both qualified and non-qualified options of the Company's common
stock to certain key managerial employees, and a stock option plan which
provides for the granting of non-qualified stock options and stock appreciation
rights (SARs) to certain key managerial employees. The option price must be at
least 100% of the fair market value of the common stock on the date the option
is granted and the maximum option term cannot exceed 10 years. The plan allows
for the granting of options in tandem with SARs. Exercise of an SAR cancels the
related option and entitles the holder to receive a payment in return, equal to
the excess of the fair market value of the shares subject to the option
surrendered over the exercise price. Payment by the Company will be made in
shares of the Company's common stock with cash paid in lieu of fractional
shares. The exercise of an SAR is subject to all of the terms and conditions of
the related option. All of these options are fully vested.
In 1996, 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, which vest and thus become exercisable ratably over a
three-year period from the date granted. All options granted subsequent to
January 1, 1996 were issued from the 1996 plan.
As a result of the merger, all options granted under the previous plans vested.
In 2000, 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. Director options vest, and thus become exercisable,
immediately while officer and employee options vest, and thus become
exercisable, ratably over a three-year period from the date granted.
The Company has an employee stock option plan (Plan) which is accounted for in
accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and accordingly, no compensation expense for the stock
option grants has been recognized. Under this Plan, the Company grants selected
key officers stock option awards, which vest and become fully exercisable after
the fifth anniversary of the date of the grant. Stock options granted under this
Plan shall expire ten years from the date of grant. At December 31, 2001, there
were options outstanding (not intended to be incentive stock options) for 31,147
shares. These options were granted on December 31, 1993, with an exercise price
of $9.24 per share and have a remaining contractual life of two years as of
December 31, 2001. During 1999, all 31,147 shares became vested and exercisable.
No shares have been exercised pursuant to the Plan.
The following is a summary of the changes in options outstanding under the stock
incentive and stock option plans:
2001 2000 1999
--------------------------------------------------------------------------------
Grant Grant Grant
Price Price Price
Shares Range Shares Range Shares Range
--------------------------------------------------------------------------------
Options outstanding,
beginning of year ....... 726,273 $ 5.36 - $19.76 604,810 $ 5.36 - $19.76 533,360 $ 5.36 - $16.86
Granted ................... 169,050 $17.50 - $17.50 133,383 $18.37 - $18.30 87,955 $19.76 - $19.76
Exercised ................. (17,360) $ 5.36 - $12.05 (6,827) $ 5.36 - $16.86 (13,071) $ 5.36 - $19.76
Options forfeited ......... (8,965) $16.86 - $19.76 (5,093) $12.05 - $19.70 (3,434) $12.05 - $19.76
----------------------------------------------------------------------------------
Options outstanding,
end of year ............. 868,998 $ 5.36 - $19.76 726,273 $ 5.36 - $19.76 604,810 $ 5.36 - $19.76
==================================================================================
Options exercisable,
end of year ............. 784,769 $ 5.36 - $19.76 687,778 $ 5.36 - $19.76 541,746 $ 5.36 - $19.76
==================================================================================
Weighted average fair value
of options granted ...... $ 3.73 $ 2.20 $ 3.79
===================================================================================
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 2001 Life Price 2001 Price
--------------------------------------------------------------------------------
$ 0.00 - $ 5.93 280,428 2.0 $ 5.36 280,428 $ 5.36
$ 5.93 - $ 7.90 27,200 3.0 6.92 27,200 6.92
$ 7.90 - $ 9.88 31,147 2.0 9.24 31,147 9.24
$11.86 - $13.83 69,491 0.2 12.20 69,491 12.20
$15.81 - $17.78 247,877 6.5 17.28 184,291 17.21
$17.78 - $19.76 212,855 5.9 18.91 192,212 18.96
-----------------------------------------------------------
868,998 4.1 $ 12.81 784,769 $ 12.29
===========================================================
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.
2001 2000 1999
---------------------------------------
Number of options granted ....... 169,050 133,383 87,955
Risk-free interest rate ......... 5.05% 5.14% 6.06%
Expected life, in years ......... 6.97 8.80 3.46
Expected volatility ............. 14.10% 11.06% 7.79%
Expected dividend yield ......... 2.23% 2.39% 1.41%
Grants under the stock incentive and stock option plans are accounted for
following APB Opinion No. 25 and related interpretations. Accordingly, no
compensation cost has been recognized for incentive stock option grants under
the plans. Had compensation cost for all of the stock-based compensation plans
been determined based on the fair values of awards (the method described by
Statement No. 123), on the grant date, reported income and earnings per common
share would have been reduced to the pro forma amounts shown below:
2001 2000 1999
----------------------------------------
Net income on common stock:
As reported .................... $ 16,171 $ 11,989 $ 11,688
Pro forma ...................... 15,878 11,743 11,453
Basic earnings per share:
As reported .................... $ 1.48 $ 1.08 $ 1.05
Pro forma ...................... 1.45 1.06 1.03
Diluted earnings per share:
As reported .................... $ 1.45 $ 1.06 $ 1.03
Pro forma ...................... 1.43 1.04 1.01
At December 31, 2001, 10,212 SAR's remained outstanding.
14. Dividend Restrictions
Without prior approval of the Comptroller of the Currency, 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 First National Bank of Decatur's
retained net profits (as defined) for that year and the two preceding years. At
December 31, 2001, First National Bank of Decatur had available retained
earnings of approximately $11,087,000 for the payment of dividends without
obtaining prior regulatory approval.
Without prior approval, BankIllinois and First Trust Bank of Shelbyville are
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, 2001,
BankIllinois and First Trust Bank of Shelbyville had available retained earnings
of approximately $35,989,000 and $9,405,000 respectively, 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, 2001 and 2000 and
the related condensed statements of income and cash flows for the years ended
December 31, 2001, 2000 and 1999 for Main Street Trust, Inc.:
Condensed Balance Sheets
------------------------
(in thousands)
2001 2000
-----------------------
Assets:
Cash ........................................... $ 5,411 $ 1,587
Investment in banks ............................ 117,550 112,482
Investment in FirsTech ......................... 7,065 6,242
Investment in other securities ................. 6,708 7,255
Other assets ................................... 2,384 2,752
-----------------------
$139,118 $130,318
=======================
Liabilities and shareholders' equity:
Dividends payable .............................. $ 1,452 $ 1,047
Other liabilities .............................. 1,673 3,869
Shareholders' equity ........................... 135,993 125,402
-----------------------
$139,118 $130,318
=======================
Condensed Statements of Income
(in thousands)
2001 2000 1999
-----------------------------
Revenue:
Dividends received from subsidiaries ......... $ 12,000 $ 5,359 $ 8,438
Interest income on deposits .................. 39 87 100
Income on securities ......................... 72 85 80
Securities transactions, net ................. (279) 42 (9)
Other ........................................ 131 132 135
------------------------------
Total revenue ........................... 11,963 5,705 8,744
------------------------------
Expenses:
Reconciliation liability ..................... (2,500) -- 2,500
Merger related professional fees ............. -- 2,544 --
Termination of pension plan and benefit costs -- -- 743
Other ........................................ 1,055 2,285 615
------------------------------
Total expense ........................... (1,455) 4,829 3,858
------------------------------
Income before applicable income tax
expense (benefit) and equity in
undistributed income or subsidiaries .... 13,408 876 4,886
Applicable income tax expense (benefit) ........ 591 (754) (1,207)
Equity in undistributed income of subsidiaries . 3,354 10,359 5,595
------------------------------
Net income .............................. $ 16,171 $ 11,989 $ 11,688
==============================
Condensed Statements of Cash Flows
(in thousands)
2001 2000 1999
--------------------------------
Cash flows from operating activities:
Net income ..................................... $ 16,171 $ 11,989 $ 11,688
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income of Subsidiaries (3,354) (10,359) (5,595)
Depreciation ................................. 30 24 24
Other, net ................................... (1,649) 964 288
--------------------------------
Net cash provided by operating activities 11,198 2,618 6,405
--------------------------------
Cash flows from investing activities:
Equity securities transactions, net ............ (37) (2,508) (1,031)
Other, net ..................................... (12) 27 --
--------------------------------
Net cash used in investing activities .. (49) (2,481) (1,031)
--------------------------------
Cash flows from financing activities:
Treasury stock transactions, net ............... (2,802) (2,057) --
Fractional shares purchased following stock
dividend and merger .......................... (6) (11) (5)
Cash dividends paid ............................ (4,540) (3,869) (3,176)
Other, net ..................................... 23 37 --
--------------------------------
Net cash used in financing activities .. (7,325) (5,900) (3,181)
--------------------------------
Cash at beginning of year .......................... 1,587 7,350 5,157
--------------------------------
Cash at end of year ................................ $ 5,411 $ 1,587 $ 7,350
================================
16. Quarterly Results of Operations (Unaudited) (in thousands, except per share
data)
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 .................... 4,420 4,332 4,262 4,087
Non-interest expense ................... 6,328 7,804 7,923 8,066
------------------------------------------
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
==========================================
Year Ended December 31, 2000
Three Months Ended
----------------------------------------------
December 31 September 30 June 30 March 31
----------------------------------------------
Interest income ........................... $19,489 $18,878 $18,030 $17,874
Interest expense .......................... 9,945 9,525 8,589 8,540
-------------------------------------------
Net interest income ............. 9,544 9,353 9,441 9,334
Provision for losses on loans ............. 346 191 131 136
-------------------------------------------
Net interest income after
provision for losses
on loans ................... 9,198 9,162 9,310 9,198
Non-interest income ....................... 3,876 3,977 4,064 4,319
Non-interest expense ...................... 7,959 7,989 7,643 11,098
-------------------------------------------
Income before income taxes ...... 5,115 5,150 5,731 2,419
Income taxes .............................. 1,581 1,606 1,814 1,425
-------------------------------------------
Net income ....................... $ 3,534 $ 3,544 $ 3,917 $ 994
===========================================
Basic earnings per share .................. $ 0.32 $ 0.32 $ 0.35 $ 0.09
===========================================
Diluted earnings per share ................ $ 0.31 $ 0.31 $ 0.35 $ 0.09
===========================================
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, 2001 and 2000:
2001 2000
--------------------------
Financial instruments whose contract amounts
represent credit risk:
Commitments .............................. $173,705 $132,163
Standby letters of credit ................ 3,540 4,093
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 Company to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers. The standby letters of credit are unsecured.
The Company does not engage in the use of interest rate swaps, futures, forwards
or options contracts.
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.
Following is a summary of the carrying amounts and fair values of the Company's
financial instruments at December 31, 2001 and 2000:
2001 2000
------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-----------------------------------------
Assets:
Cash and cash equivalents ............... $ 95,379 $ 95,379 $ 84,139 $ 84,139
Investments in debt and equity securities 335,422 336,331 303,187 303,064
Mortgage loans held for sale ............ 8,775 8,775 2,090 2,090
Loans ................................... 673,061 705,391 659,849 678,678
Accrued interest receivable ............. 8,890 8,890 10,629 10,629
Liabilities:
Deposits ................................ $884,109 $885,208 $839,932 $842,984
Federal funds, repurchase agreements,
and notes payable .................. 85,207 83,076 69,658 70,338
FHLB advances and other borrowings ...... 34,895 39,337 40,978 40,924
Accrued interest payable ................ 3,390 3,390 4,584 4,584
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, 2001 and 2000. 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.
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.
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,
2001, that the Company and its subsidiary banks exceeded all capital adequacy
requirements to which they are subject.
As of December 31, 2001, the most recent notifications from primary regulatory
agencies categorized all the Company's subsidiary banks as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, banks must maintain minimum total capital to risk-weighted
assets, Tier I capital to risk-weighted assets, and Tier I capital to average
assets ratios as set forth in the table. There are no conditions or events since
that notification that management believes have changed any of the Company's
subsidiary banks' categories.
The Company's and the Banks' actual capital amounts and ratios as of December
31, 2001 and 2000 are presented in the following tables:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------
As of December 31, 2001:
Total capital
(to risk-weighted assets)
Consolidated ..................... $142,403 18.0% $ 63,212 8.0% N/A
BankIllinois ..................... $ 65,208 14.9% $ 34,908 8.0% $ 43,634 10.0%
First National Bank of Decatur ... $ 47,672 16.3% $ 23,363 8.0% $ 29,204 10.0%
First Trust Bank of Shelbyville .. $ 11,084 22.6% $ 3,926 8.0% $ 4,907 10.0%
Tier I capital
(to risk-weighted assets)
Consolidated ..................... $133,053 16.8% $ 31,606 4.0% N/A
BankIllinois ..................... $ 59,983 13.8% $ 17,454 4.0% $ 26,181 6.0%
First National Bank of Decatur ... $ 44,083 15.1% $ 11,681 4.0% $ 17,522 6.0%
First Trust Bank of Shelbyville .. $ 10,531 21.5% $ 1,963 4.0% $ 2,944 6.0%
Tier I capital
(to average assets)
Consolidated ..................... $133,053 11.8% $ 44,950 4.0% N/A
BankIllinois ..................... $ 59,983 9.9% $ 24,200 4.0% $ 30,250 5.0%
First National Bank of Decatur ... $ 44,083 10.2% $ 17,274 4.0% $ 21,592 5.0%
First Trust Bank of Shelbyville .. $ 10,531 13.3% $ 3,166 4.0% $ 3,957 5.0%
As of December 31, 2000:
Total capital
(to risk-weighted assets)
Consolidated ..................... $133,352 18.6% $ 57,224 8.0% N/A 10.0%
BankIllinois ..................... $ 64,777 16.1% $ 32,125 8.0% $ 40,156 10.0%
First National Bank of Decatur ... $ 43,886 16.0% $ 21,996 8.0% $ 27,495 10.0%
First Trust Bank of Shelbyville .. $ 12,194 29.2% $ 3,339 8.0% $ 4,174 10.0%
Tier I capital
(to risk-weighted assets)
Consolidated ..................... $124,474 17.4% $ 28,612 4.0% N/A 6.0%
BankIllinois ..................... $ 59,698 14.9% $ 16,062 4.0% $ 24,093 6.0%
First National Bank of Decatur ... $ 40,449 14.7% $ 10,998 4.0% $ 16,497 6.0%
First Trust Bank of Shelbyville .. $ 11,869 28.4% $ 1,669 4.0% $ 2,504 6.0%
Tier I capital
(to average assets)
Consolidated ..................... $124,474 11.6% $ 42,982 4.0% N/A 5.0%
BankIllinois ..................... $ 59,698 10.7% $ 22,403 4.0% $ 28,004 5.0%
First National Bank of Decatur ... $ 40,449 9.5% $ 16,952 4.0% $ 21,190 5.0%
First Trust Bank of Shelbyville .. $ 11,869 16.3% $ 2,907 4.0% $ 3,634 5.0%
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information in the Company's 2002 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 2002 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 2002 Proxy Statement, the names
and ages of the executive officers of the Company as of December 31, 2001, 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 50) Officer of Main Street, BankIllinois, The First
National Bank of Decatur, and First Trust Bank of
Shelbyville and Director of FirsTech; Executive
Vice President and Chief Financial Officer of
BankIllinois Financial and BankIllinois (1993-2000)
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 2001, we are not
aware of any failures to comply with the filing requirements of Section 16(a)
during 2001, except for Mr. Kenney, who filed a Form 4 reporting a purchase of
5,000 shares five months late.
Item 11. Executive Compensation
The information in the 2002 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 2002 Proxy Statement under the caption "Security
Ownership of Certain Beneficial Owners and Management" is incorporated by
reference.
Item 13. Certain Relationships And Related Transactions
The information in the 2002 Proxy Statement under the caption "Transactions with
Management" is incorporated by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Index to Financial Statements
See page 31.
(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 2001.
(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.
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
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 X
and between the Company
and Gregory B. Lykins
10.2 Employment Agreement by X
and between the Company
and Van A. Dukeman
10.3 Employment Agreement by Exhibit 10.5 to the Registration
and between the Company Statement of Form S-4 filed with
and David B. White the Commission on March 15, 1996,
as amended (SEC File No. 33-90342)
10.4 Employment Agreement by X
and between the Company,
FirsTech, Inc. and Phillip
C. Wise
21.1 Subsidiaries of the X
Registrant
23.1 Consent of McGladrey & X
Pullen, LLP
23.2 Consent of BKD LLP X
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 28, 2002.
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 28, 2002.
/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
/s/ John W. Luttrell
-------------------------------------
John W. Luttrell 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