UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
-------------------------------------------------------
For the Quarterly Period Ended June 30, 2006
Commission File Number: 0-30031
MAIN STREET TRUST, INC.
------------------------------------------------------
(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
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [ X ] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ X ] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Exchange Act Rule 12b-2). [ ] Yes [ X ] No
Indicate the number of shares outstanding of the registrant's common stock, as
of August 2, 2006:
Main Street Trust, Inc. Common Stock 10,110,884
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1
Table of Contents
PAGE
(a) PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 35
Item 4. Controls and Procedures 36
(b) PART II. OTHER INFORMATION
Item 1. Legal Proceedings 36
Item 1.A. Risk Factors 36
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 36
Item 3. Defaults Upon Senior Securities 36
Item 4. Submission of Matters to a Vote of Security
Holders 37
Item 5. Other Information 37
Item 6. Exhibits 37
SIGNATURES 38
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2006 and December 31, 2005
(Unaudited, in thousands, except share data)
June 30, December 31,
2006 2005
--------------------------
ASSETS
Cash and due from banks .......................................................... $ 43,821 $ 52,007
Federal funds sold and interest bearing deposits ................................. 2,769 42,059
--------------------------
Cash and cash equivalents .............................................. 46,590 94,066
--------------------------
Investments in debt and equity securities:
Available-for-sale, at fair value .............................................. 353,722 343,087
Held-to-maturity, at cost (fair value of $78,105 and $75,665
at June 30, 2006 and December 31, 2005, respectively) ........................ 79,886 76,542
Non-marketable equity securities ............................................... 17,543 24,994
--------------------------
Total investments in debt and equity securities ........................ 451,151 444,623
--------------------------
Loans, net of allowance for loan losses of $13,895 and $13,472
at June 30, 2006 and December 31, 2005, respectively ......................... 973,217 1,002,927
Mortgage loans held for sale ................................................... 2,064 1,661
Premises and equipment ......................................................... 22,707 23,047
Goodwill ....................................................................... 20,736 20,736
Core deposit intangibles ....................................................... 4,134 4,569
Accrued interest receivable .................................................... 9,476 8,461
Other assets ................................................................... 26,069 25,047
--------------------------
Total assets ........................................................... $ 1,556,144 $ 1,625,137
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing ......................................................... $ 212,905 $ 240,823
Interest bearing ............................................................. 992,826 1,035,149
--------------------------
Total deposits ......................................................... 1,205,731 1,275,972
--------------------------
Federal funds purchased, repurchase agreements and notes payable................ 141,716 118,452
Federal Home Loan Bank advances and other borrowings ........................... 44,670 67,386
Accrued interest payable ....................................................... 4,604 4,657
Other liabilities .............................................................. 13,422 14,901
--------------------------
Total liabilities ...................................................... 1,410,143 1,481,368
--------------------------
Commitments and contingencies (See Note 5)
Shareholders' equity:
Preferred stock, no par value; 2,000,000 shares authorized .................... -- --
Common stock, $0.01 par value; 15,000,000 shares authorized;
11,219,319 shares issued .................................................... 112 112
Paid in capital ................................................................ 55,515 55,189
Retained earnings .............................................................. 124,921 120,238
Accumulated other comprehensive loss ........................................... (2,854) (1,597)
--------------------------
177,694 173,942
Less: treasury stock, at cost, 1,120,038 and 1,072,644 shares
at June 30, 2006 and December 31, 2005, respectively ......................... (31,693) (30,173)
--------------------------
Total shareholders' equity ............................................. 146,001 143,769
--------------------------
Total liabilities and shareholders' equity ............................. $ 1,556,144 $ 1,625,137
==========================
See accompanying notes to unaudited consolidated financial statements.
3
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Six Months Ended June 30, 2006 and 2005
(Unaudited, in thousands, except share data)
2006 2005
-------------------------
Interest income:
Loans and fees on loans ............................................. $ 34,151 $ 27,318
Investments in debt and equity securities
Taxable ........................................................... 8,686 5,605
Tax-exempt ........................................................ 622 786
Federal funds sold and interest bearing deposits .................... 697 813
-------------------------
Total interest income ....................................... 44,156 34,522
-------------------------
Interest expense:
Deposits ............................................................ 15,620 9,003
Federal funds purchased, repurchase agreements and notes payable .... 2,597 1,258
Federal Home Loan Bank advances and other borrowings ................ 1,262 1,173
-------------------------
Total interest expense ...................................... 19,479 11,434
-------------------------
Net interest income ......................................... 24,677 23,088
Provision for loan losses ............................................. 900 630
-------------------------
Net interest income after provision for loan losses ......... 23,777 22,458
-------------------------
Non-interest income:
Remittance processing ............................................... 3,503 3,403
Trust and brokerage fees ............................................ 3,902 3,652
Service charges on deposit accounts ................................. 1,391 1,309
Securities transactions, net ........................................ 279 35
Gain on sales of mortgage loans, net ................................ 276 397
Other ............................................................... 1,673 1,277
-------------------------
Total non-interest income ................................... 11,024 10,073
-------------------------
Non-interest expense:
Salaries and employee benefits ...................................... 11,685 11,228
Occupancy ........................................................... 1,575 1,469
Equipment ........................................................... 1,243 1,281
Data processing ..................................................... 1,457 1,103
Office supplies ..................................................... 597 587
Service charges from correspondent banks ............................ 146 255
Amortization of core deposit intangibles ............................ 435 218
Other ............................................................... 3,209 2,862
-------------------------
Total non-interest expense .................................. 20,347 19,003
-------------------------
Income before income taxes .................................. 14,454 13,528
Income taxes ........................................................ 4,965 4,868
-------------------------
Net income .................................................. $ 9,489 $ 8,660
=========================
Per share data:
Basic earnings per share ............................................ $ 0.94 $ 0.88
Weighted average shares of common stock outstanding ................. 10,133,648 9,897,125
Diluted earnings per share .......................................... $ 0.93 $ 0.87
Weighted average shares of common stock and dilutive potential
common shares outstanding ....................................... 10,255,595 9,996,574
See accompanying notes to unaudited consolidated financial statements.
4
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Six Months Ended June 30, 2006 and 2005
(Unaudited, in thousands)
2006 2005
------------------
Net income ....................................................................... $ 9,489 $ 8,660
------------------
Other comprehensive income (loss), before tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period, net of tax of
($727) and ($478), for June 30, 2006 and 2005, respectively ................ (1,090) (717)
Less: reclassification adjustment for gains (losses) included in
net income, net of tax of ($112) and ($14), for June 30, 2006 and
2005, respectively ......................................................... (167) (21)
------------------
Other comprehensive loss ............................................... (1,257) (738)
------------------
Comprehensive income ................................................... $ 8,232 $ 7,922
==================
See accompanying notes to unaudited consolidated financial statements.
5
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Three Months Ended June 30, 2006 and 2005
(Unaudited, in thousands, except share data)
2006 2005
---------------------------
Interest income:
Loans and fees on loans ............................................. $ 17,356 $ 15,913
Investments in debt and equity securities
Taxable ........................................................... 4,580 3,241
Tax-exempt ........................................................ 292 385
Federal funds sold and interest bearing deposits .................... 400 592
---------------------------
Total interest income ........................................ 22,628 20,131
---------------------------
Interest expense:
Deposits ............................................................ 8,202 5,403
Federal funds purchased, repurchase agreements and notes payable .... 1,446 751
Federal Home Loan Bank advances and other borrowings ................ 581 787
---------------------------
Total interest expense ...................................... 10,229 6,941
---------------------------
Net interest income ......................................... 12,399 13,190
Provision for loan losses ............................................. 450 300
---------------------------
Net interest income after provision for loan losses ......... 11,949 12,890
---------------------------
Non-interest income:
Remittance processing ............................................... 1,738 1,696
Trust and brokerage fees ............................................ 1,987 1,810
Service charges on deposit accounts ................................. 706 783
Securities transactions, net ........................................ 12 (155)
Gain on sales of mortgage loans, net ................................ 150 260
Other ............................................................... 912 664
---------------------------
Total non-interest income ................................... 5,505 5,058
---------------------------
Non-interest expense:
Salaries and employee benefits ...................................... 5,764 6,281
Occupancy ........................................................... 783 807
Equipment ........................................................... 628 675
Data processing ..................................................... 719 552
Office supplies ..................................................... 301 289
Service charges from correspondent banks ............................ 82 145
Amortization of core deposit intangibles ............................ 217 218
Other ............................................................... 1,808 1,587
---------------------------
Total non-interest expense .................................. 10,302 10,554
---------------------------
Income before income taxes .................................. 7,152 7,394
Income taxes .......................................................... 2,353 2,667
---------------------------
Net income .................................................. $ 4,799 $ 4,727
===========================
Per share data:
Basic earnings per share ............................................ $ 0.47 $ 0.46
Weighted average shares of common stock outstanding ................. 10,125,520 10,341,054
Diluted earnings per share .......................................... $ 0.47 $ 0.45
Weighted average shares of common stock and dilutive potential
common shares outstanding ......................................... 10,247,920 10,438,479
See accompanying notes to unaudited consolidated financial statements.
6
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Three Months Ended June 30, 2006 and 2005
(Unaudited, in thousands)
2006 2005
------------------
Net income ............................................................................. $ 4,799 $ 4,727
------------------
Other comprehensive income (loss), before tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period, net of tax of
($354) and $510 for June 30, 2006 and 2005, respectively ......................... (529) 765
Less: reclassification adjustment for gains (losses) included in
net income, net of tax of ($5) and $62, for June 30, 2006 and
2005, respectively ............................................................... (7) 93
------------------
Other comprehensive income (loss) ............................................ (536) 858
------------------
Comprehensive income ......................................................... $ 4,263 $ 5,585
==================
See accompanying notes to unaudited consolidated financial statements.
7
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2006 and 2005
(Unaudited, in thousands)
2006 2005
--------------------
Cash flows from operating activities:
Net income .......................................................... $ 9,489 $ 8,660
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization - fixed assets ...................... 1,290 1,249
Amortization of bond premiums and accretion of accounts, net ...... 301 755
Amortization of core deposit intangibles .......................... 435 218
Provision for loan losses ......................................... 900 630
Securities transactions, net ...................................... (279) (35)
Federal Home Loan Bank stock dividend ............................. -- (338)
Undistributed loss (gain) from non-marketable equity securities ... 122 (540)
Gain on sales of mortgage loans, net .............................. (276) (397)
Gain on disposal of premises and equipment ........................ -- 8
Proceeds from sales of mortgage loans originated for sale ......... 24,186 29,077
Mortgage loans originated for sale ................................ (24,313) (30,161)
Other, net ........................................................ (1,784) (878)
--------------------
Net cash provided by operating activities ................... 10,071 8,248
--------------------
Cash flows from investing activities:
Net decrease (increase) in loans .................................... 28,200 (21,484)
Proceeds from maturities and calls of investments in debt securities:
Held-to-maturity .................................................. 9,573 5,352
Available-for-sale ................................................ 28,020 44,175
Proceeds from sales of investments:
Available-for-sale ................................................ 2,495 47,892
Purchases of investments in debt and equity securities:
Held-to-maturity .................................................. (15,409) (7,779)
Available-for-sale ................................................ (45,360) (68,532)
Other equity securities ........................................... (850) (310)
Principal paydowns from mortgage-backed securities:
Held-to-maturity .................................................. 2,298 3,677
Available-for-sale ................................................ 2,287 7,353
Return of principal on other equity securities ...................... 782 1,800
Proceeds from redemption of non-marketable equity securities ........ 7,397 --
Purchases of premises and equipment ................................. (950) (756)
Acquisition of Citizens First Financial Corporation ................. -- (6,385)
--------------------
Net cash provided by investing activities .................. 18,483 5,003
--------------------
Cash flows from financing activities:
Net decrease in deposits ............................................ (70,241) (62,502)
Net increase in federal funds purchased,
repurchase agreements, and notes payable .......................... 23,264 24,954
Advances from Federal Home Loan Bank and other borrowings ........... 1,000 31,000
Payments on Federal Home Loan Bank and other borrowings ............. (23,716) (9,404)
Cash dividends paid ................................................. (4,664) (4,160)
MSTI stock transactions, net ........................................ (1,673) (2,194)
--------------------
Net cash used by financing activities ....................... (76,030) (22,306)
--------------------
Net decrease in cash and cash equivalents ................... (47,476) (9,055)
Cash and cash equivalents at beginning of year ........................ 94,066 64,928
--------------------
Cash and cash equivalents at end of period ............................ $ 46,590 $ 55,873
====================
8
Supplemental disclosure of cash flow information:
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2006 and 2005
(Unaudited, in thousands)
2006 2005
--------------------
Cash paid during the year for:
Interest .......................................................... $ 19,532 $ 10,756
Income taxes ...................................................... 6,224 4,570
Real estate acquired through or in lieu of foreclosure ............ 610 --
Dividends declared not paid ......................................... 2,323 2,262
Acquisition of Citizens First Financial Corporation:
Stock issued ...................................................... 27,804
Cash paid ......................................................... 28,416
Capitalized expenses .............................................. 621
--------
Total cost of acquisition ................................. 56,841
========
Assets acquired:
Cash and due from banks ......................................... 6,022
Federal funds sold and interest bearing deposits ................ 16,630
--------
Cash and cash equivalents ................................. 22,652
Investments in debt and equity securities:
Available-for-sale, at fair value ............................. 23,865
Non-marketable equity securities .............................. 16,374
Loans, net of allowance for loan losses ......................... 228,114
Mortgage loans held for sale .................................... 282
Premises and equipment .......................................... 5,993
Accrued interest receivable ..................................... 1,571
Goodwill ........................................................ 20,736
Core deposit intangibles ........................................ 5,222
Other assets .................................................... 6,174
Liabilities assumed:
Deposits ...................................................... (232,089)
Federal Home Loan Bank advances and other borrowings .......... (37,599)
Accrued interest payable ...................................... (193)
Other liabilities ............................................. (4,261)
--------
Net assets acquired ....................................... 56,841
========
See accompanying notes to unaudited consolidated financial statements.
9
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements for Main Street
Trust, Inc., have been prepared in accordance with the instructions to Form 10-Q
and therefore do not include all information and footnotes necessary for fair
presentation of financial position, results of operations, and cash flows in
conformity with accounting principles generally accepted in the United States of
America. These financial statements should be read in conjunction with the
audited consolidated financial statements and related notes as of and for the
year ended December 31, 2005, and schedules in the Main Street Trust, Inc.'s
Form 10-K filed on March 16, 2006.
In the opinion of management, the consolidated financial statements of Main
Street Trust, Inc. and its subsidiaries, as of June 30, 2006 and for the
three-month and six-month periods ended June 30, 2006 and 2005, include all
adjustments necessary for a fair presentation of the results of those periods.
All such adjustments, outside of those related to the business combination
discussed in Note 2, are of a normal recurring nature.
Results of operations for the three-month and six-month periods ended June 30,
2006 are not necessarily indicative of the results which may be expected for the
year ended December 31, 2006.
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash and due from banks and federal funds sold and interest
bearing deposits. Generally, federal funds are sold for one-day periods.
Certain amounts in the 2005 consolidated financial statements have been
reclassified to conform with the 2006 presentation. Such reclassifications have
no effect on previously reported net income or shareholders' equity.
Note 2. Company Information/Business Combination
Main Street Trust, Inc. (the "Company"), an Illinois corporation, is a bank
holding company registered under the Bank Holding Company Act of 1956, as
amended. The Company was incorporated on August 12, 1999, and is the parent
company of Main Street Bank & Trust (the "Bank") and FirsTech, Inc. On June 14,
2001, the Company was certified by the Board of Governors of the Federal Reserve
System as a financial holding company. This designation allows the Company to
engage in a wider range of nonbanking activities, including greater authority to
engage in securities and insurance activities. However, the Company has no
current plans to do so.
On April 1, 2005, the Company acquired all of the outstanding stock of Citizens
First Financial Corp. ("Citizens"), which was the parent company of Citizens
Savings Bank, based in Bloomington, Illinois. The transaction has been accounted
for as a purchase. Assets and liabilities related to the acquisition of Citizens
are reported as of the April 2005 acquisition date. Results of operations of
Citizens since the acquisition date have been included in the Company's
consolidated financial statements. The Company merged Citizens Savings Bank into
the Bank as of the close of business on October 7, 2005. The Citizens
acquisition purchase price of approximately $56.841 million was allocated based
upon the fair value of the assets and liabilities acquired. The Citizens excess
purchase price has been allocated to goodwill and identifiable intangible
assets. $20.736 million was allocated to goodwill. $5.222 million was allocated
to core deposit intangibles at acquisition and is being amortized over a period
of six years.
Pro forma unaudited operating results for the six months ended June 30, 2005,
giving effect to the Citizens acquisition as if it had occurred as of January 1,
2005 are as follows:
2005
---------------------
(in thousands, except
per share data)
---------------------
Interest Income ....... $38,690
Interest Expense ...... 13,029
Net Income ............ 8,649
Basic EPS ............. 0.87
Diluted EPS ........... 0.87
10
These unaudited pro forma results have been prepared for comparative purposes
only and include certain adjustments, such as additional amortization expense on
revalued purchased assets and implied interest on additional borrowings to fund
the acquisition. In addition, 2005 merger related expenses were reallocated to a
period prior to the pro forma dates presented. All adjustments were tax
affected. They do not purport to be indicative of the results of operations that
actually would have resulted had the combination occurred on January 1, 2005 or
of future results of operations of the consolidated entities.
Note 3. Income per Share
Net income per common share has been computed as follows:
Six Months Ended Three Months Ended
June 30, June 30,
-----------------------------------------------------
2006 2005 2006 2005
-----------------------------------------------------
Net Income .................................... $ 9,489,000 $ 8,660,000 $ 4,799,000 $ 4,727,000
=====================================================
Shares
Weighted average common shares outstanding 10,133,648 9,897,125 10,125,520 10,341,054
Dilutive effect of outstanding options,
as determined by the application of the
treasury stock method ................... 121,947 99,449 122,400 97,425
-----------------------------------------------------
Weighted average common shares outstanding,
as adjusted ............................. 10,255,595 9,996,574 10,247,920 10,438,479
=====================================================
Basic earnings per share ...................... $ 0.94 $ 0.88 $ 0.47 $ 0.46
=====================================================
Diluted earnings per share .................... $ 0.93 $ 0.87 $ 0.47 $ 0.45
=====================================================
Note 4. Stock Option Plans
At June 30, 2006, the Company had one share-based compensation plan. Prior to
January 1, 2006, the Company accounted for that plan under the recognition and
measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations, as permitted by FASB Statement No. 123,
Accounting for Stock-Based Compensation. No stock-based compensation cost was
recognized in the Statement of Income for the period ended June 30, 2005, as all
options granted under the plan had an exercise price equal to the market value
of the underlying common stock on the date of grant. Effective January 1, 2006,
the Company adopted the fair value recognition provisions of FASB Statement No.
123(R), Share-Based Payment, using the modified-prospective-transition method.
Under that transition method, compensation cost recognized in 2006 includes: (a)
compensation cost for all share-based payments granted prior to, but not yet
vested as of January 1, 2006, based on the grant date fair value estimated in
accordance with the original provisions of Statement 123, and (b) compensation
cost for all share-based payments granted subsequent to January 1, 2006, based
on the grant-date fair value estimated in accordance with the provisions of
Statement 123(R). Results for prior periods have not been restated.
As a result of adopting Statement 123(R) on January 1, 2006, the Company's
income before income taxes and net income for the six months ended June 30,
2006, were $320,000 and $192,000 lower, respectively, than if it had continued
to account for share-based compensation under APB Opinion No. 25. Basic and
diluted earnings per share for the period ended June 30, 2006 would have been
$0.96 and $0.94, respectively, if the Company had not adopted Statement 123(R),
compared to reported basic and diluted earnings per share of $0.94 and $0.93,
respectively.
11
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of Statement
123 to options granted under the Company's stock option plan in all periods
presented. For purposes of this pro forma disclosure, the value of the options
is estimated using a Black-Scholes option-pricing formula and amortized over the
options' vesting periods.
Six Months Three Months
Ended Ended
-------------------------
June 30, June 30,
2005 2005
-------------------------
Net income on common stock:
As reported .................................. $ 8,660 $ 4,727
Deduct total stock-based compensation expense
determined under the fair value method for all
awards, net of related tax effects ........... (182) (91)
------------------------
Pro forma ............................ $ 8,478 $ 4,636
========================
Basic earnings per share:
As reported .................................. $ 0.88 $ 0.46
Pro forma .................................... 0.86 0.45
Diluted earnings per share:
As reported .................................. $ 0.87 $ 0.45
Pro forma .................................... 0.85 0.44
The Main Street Bank & Trust, Inc. 2000 Stock Incentive Plan (the "Plan"), which
is shareholder-approved, permits the grant of options for up to 2,205,000 shares
of the Company's common stock. The Board of Directors, or a committee appointed
by the Board, may issue options that constitute incentive stock options to
officers and employees and nonqualified options to directors, officers,
employees, consultants and advisors of the Company and its related corporations
(provided that such consultants and advisors render bona fide services not in
connection with the offer and sale of securities in a capital-raising
transaction). Restricted stock and stock appreciation rights ("SARs") may also
be granted. SARs may be granted separately or in tandem with or by reference to
an option granted prior to or simultaneously with the grant of such rights, to
such eligible directors, officers, employees, consultants and advisors as may be
selected by the Board of Directors. The Plan is intended to provide a means
whereby directors, officers, employees, consultants and advisors of the Company
and its related corporations may sustain a sense of proprietorship and personal
involvement in the continued development and financial success of the Company
and its related corporations, and to encourage them to remain with and devote
their best efforts to the business of the Company and its related corporations,
thereby advancing the interests of the Company and its shareholders. Grants
under the Plan to date have been nonqualified options 'ranted to directors and
officers. Options granted under the Plan have an exercise price equal to market
value of the underlying common stock on the grant date. Existing director
options granted prior to 2003 are fully vested and exercisable on the date
granted while director options granted in or after 2003 vest ratably over a
one-year period from the date granted. Existing officer options vest ratably
over a three-year period from the date granted. All outstanding options have a
10 year contractual life. Dividends are not paid on unexercised options. In the
event of a change of control, options and SARs become immediately and fully
exercisable.
The Company uses the Black-Scholes option pricing model to estimate the fair
value of stock-based awards with the following weighted-average assumptions for
the indicated periods:
Six Months Ended
June 30,
2006 2005
---------------------------------
Number of options granted ..... 150,500 137,500
Risk-free interest rate ....... 4.59% - 4.65% 3.83% - 4.08%
Expected life, in years ....... 6.50 - 8.00 7.00 - 8.00
Expected volatility ........... 14.28% 15.05% - 15.42%
Expected dividend yield ....... 3.06% 2.97% - 3.06%
12
Expected volatilities are based on historical volatility of the Company's stock.
The Company uses historical data to estimate option exercises and terminations
(turnover percentage) within the valuation model. The expected term of options
granted is derived from the output of the options valuation model which uses
historical data and represents the period of time that options granted are
expected to be outstanding. Expected turnover percentage and expected term are
estimated separately for directors and officers. The risk-free rate for periods
within the contractual life of the option is based on the U.S. Treasury Strips
as of the grant date.
A summary of option activity under the Plan as of June 30, 2006, and changes
since January 1, 2006 is presented below:
Weighted-
Weighted- Average Aggregate
Average Remaining Intrinsic
Exercise Contractual Value
Shares Price Life ($000)
------------------------------------------------
Outstanding as of January 1, 2006 767,413 $ 23.46
Granted ......................... 150,500 30.10
Exercised ....................... 32,524 19.30
Forfeited or expired ............ 3,822 30.04
-----------------------------------------------
Outstanding at June 30, 2006 .... 881,567 24.73 6.7 $ 5,098
===============================================
Vested at June 30, 2006 ......... 687,803 23.24 6.0 $ 5,002
===============================================
Exercisable at June 30, 2006 .... 687,803 23.24 6.0 $ 5,002
===============================================
The weighted-average grant-date fair value of options granted during the first
six months of 2006 and 2005 was $4.79 and $4.71, respectively. The total
intrinsic value of options exercised during the first six months of 2006 and
2005 was $356,000 and $230,000, respectively. The fair value of nonvested shares
is determined based on the market price of the Company's shares on the grant
date.
A summary of the status of the Company's nonvested shares as of June 30, 2006
and changes since January 1, 2006 is presented below:
Weighted-
Average
Grant-Date
Nonvested Shares Shares Fair Value
--------------------------------------------------------------------
Nonvested at January 1, 2006 ......... 112,950 $ 4.83
Granted .............................. 150,500 4.79
Vested ............................... 66,894 4.86
Forfeited ............................ 2,792 4.74
----------------------
Nonvested at June 30, 2006 ........... 193,764 $ 4.79
======================
As of June 30, 2006, there was $873,000 of total unrecognized compensation cost
related to nonvested stock option compensation arrangements granted under the
Plan. That cost is expected to be recognized over a weighted-average period of
1.9 years. The weighted average grant date fair value of shares vested during
the six month periods ended June 30, 2006 and 2005 was $4.86 and $4.67,
respectively.
Note 5. Commitments and Financial Instruments
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of amounts recognized )n the
consolidated balance sheets. The contractual amounts of those instruments
reflect the extent of involvement the Company has in particular classes of
financial instruments.
13
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. Management
does not anticipate any significant losses as a result of these transactions.
The following table summarizes these financial instruments and commitments (in
thousands) at June 30, 2006 and 2005:
June 30,
2006 2005
--------------------
Financial instruments whose contract amounts
represent credit risk:
Commitments ................................... $357,841 $262,305
Standby letters of credit ..................... 23,880 27,830
The majority of commitments are agreements to extend credit to a customer as
long as there is no violation of any condition established in the contract.
Commitments, principally variable interest rates, generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. For commitments to extend credit, the Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based
on management's credit evaluation. Collateral held varies, but may include
accounts receivable; inventory; property, plant and equipment; and
income-producing commercial properties. Also included in commitments at June 30,
2006 is $1.480 million to purchase other equity securities.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements and,
generally, have terms of one year or less. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Bank may hold collateral, which include accounts
receivables, inventory, property and equipment, and income producing properties,
supporting those commitments, if deemed necessary. In the event the customer
does not perform in accordance with the terms of the agreement with the third
party, the Bank would be required to fund the commitment. The maximum potential
amount of future payments the Bank could be required to make is represented by
the contractual amount shown in the summary above. If the commitment is funded,
the Bank would be entitled to seek recovery from the customer. At June 30, 2006
and 2005, no amounts had been recorded as liabilities for the Bank's potential
obligations under these guarantees.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Condition
Assets and Liabilities
Total assets decreased $68.993 million, or 4.2%, to $1.556 billion at June 30,
2006 compared to $1.625 billion at December 31, 2005. Decreases in federal funds
sold and interest bearing deposits, loans, cash and due from banks,
non-marketable equity securities, core deposit intangibles and premises and
equipment were partially offset by increases in both investments in debt and
equity securities available for sale and held to maturity, other assets, accrued
interest receivable and mortgage loans held for sale.
Cash and due from banks decreased $8.186 million, or 15.7%, to $43.821 million
at June 30, 2006 compared to $52.007 million at December 31, 2005.
Federal funds sold and interest bearing deposits decreased $39.290 million, or
93.4%, to $2.769 million at June 30, 2006 compared to $42.059 million at
December 31, 2005. Federal funds sold and interest bearing deposits fluctuate
with loan demand, deposit volume and investment opportunities.
14
Total investments in debt and equity securities increased $6.528 million, or
1.5%, to $451.151 million at June 30, 2006 compared to $444.623 million at
December 31, 2005. Included in the change were increases of $10.635 million, or
3.1%, in investments in securities available for sale and $3.344 million, or
4.4%, in securities held to maturity, offset somewhat by a decrease of $7.451
million, or 29.8% in non-marketable equity securities. In response to the FHLB's
decision to allow redemption of excess capital stock owned by member banks, the
Company sold $7.397 million of FHLB stock, which was classified as
non-marketable equity securities, during the second quarter of 2006. The Company
will evaluate the feasibility of any redemption the FHLB may offer in the
future. Investments fluctuate with loan demand, deposit volume and investment
opportunities.
Loans, net of allowance for loan losses, decreased $29.710 million, or 3.0%, to
$973.217 million at June 30, 2006 compared to $1.003 billion at December 31,
2005. Included in the change were decreases of $11.689 million, or 3.7%, in
commercial, financial and agricultural loans; $5.942 million, or 6.9%, in
installment and consumer loans; $5.918 million, or 4.2%, in residential real
estate loans; and $5.738 million, or 1.2%, in commercial real estate loans.
Management attributes the decrease in loans to the Company's unwillingness to
meet some of the underwriting and pricing available in the market. Included in
the $5.738 million decrease in commercial real estate loans was $15.826 million
related to one commercial project that was refinanced through a real estate
conduit during the first quarter of 2006. Additionally, the Company has seen a
slowdown in the residential real estate market during the first six months of
2006 compared to the same period in 2005.
Mortgage loans held for sale increased $403,000, or 24.3%, to $2.064 million at
June 30, 2006 compared to $1.661 million at December 31, 2005.
Premises and equipment decreased $340,000, or 1.5%, to $22.707 million at June
30, 2006 compared to $23.047 million at December 31, 2005. The decrease included
depreciation and amortization expense on fixed assets of $1.290 million offset
somewhat by purchases of $950,000.
Core deposit intangibles decreased $435,000, or 9.5%, to $4.134 million at June
30, 2006 compared to $4.569 million at December 31, 2005 due to amortization
related to the acquisition of Citizens in 2005.
Total liabilities decreased $71.225 million, or 4.8%, to $1.410 billion at June
30, 2006 compared to $1.481 billion at December 31, 2005. There were decreases
in all categories of liabilities, except federal funds purchased, repurchase
agreements and notes payable.
Total deposits decreased $70.241 million, or 5.5%, to $1.206 billion at June 30,
2006 from $1.276 billion at December 31, 2005. Non-interest bearing deposits
decreased $27.918 million, or 11.6%, to $212.905 million at June 30, 2006 from
$240.823 million at December 31, 2005. The decrease of $27.918 in non-interest
bearing deposits included a $16.578 million decrease in the balance of one
account between December 31, 2005 and June 30, 2006. Interest bearing deposits
decreased $42.323 million, or 4.1%, to $992.826 million at June 30, 2006 from
$1.035 billion at December 31, 2005. Although the Company was not offering
aggressive deposit pricing during the first half of 2006, interest bearing
deposits increased $63.734 million, or 6.9%, from $929.092 million at June 30,
2005 to $992.826 million at June 30, 2006.
Federal funds purchased, repurchase agreements and notes payable increased
$23.264 million, or 19.6%, to $141.716 million at June 30, 2006 from $118.452
million at December 31, 2005. This change was primarily due to an increase of
$27.550 million in federal funds purchased offset somewhat by a decrease of
$4.286 million in repurchase agreements.
Federal Home Loan Bank advances and other borrowings decreased $22.716 million,
or 33.7%, to $44.670 million at June 30, 2006 compared to $67.386 million at
December 31, 2005 primarily due to $21.000 million of matured FHLB advances and
a net decrease of a $1.500 million on a line of credit from a correspondent
bank.
15
Investment Securities
The carrying value of investments in debt and equity securities was as follows
for June 30, 2006 and December 31, 2005:
Carrying Value of Securities(1)
(in thousands)
June 30, 2006 December 31, 2005
----------------------------------
Available-for-sale:
Federal agencies .................................................................. $327,591 $312,484
Mortgage-backed securities ........................................................ 11,125 13,657
State and municipal ............................................................... 12,109 13,834
Marketable equity securities ...................................................... 2,897 3,112
---------------------------
Total available-for-sale .................................................. $353,722 $343,087
===========================
Held-to-maturity:
Federal agencies .................................................................. $ 32,628 $ 38,650
Mortgage-backed securities ........................................................ 29,472 17,091
State and municipal ............................................................... 17,786 20,801
---------------------------
Total held-to-maturity .................................................... $ 79,886 $ 76,542
===========================
Non-marketable equity securities:
Federal Home Loan Bank stock ...................................................... $ 14,053 $ 21,450
Other equity investments .......................................................... 3,490 3,544
---------------------------
Total non-marketable equity securities .................................... $ 17,543 $ 24,994
===========================
Total investment securities ............................................... $451,151 $444,623
===========================
(1) Investment securities available-for-sale and non-marketable other
equity investments are carried at fair value. Investment securities
held-to-maturity and Federal Home Loan Bank stock are carried at
amortized cost.
16
The following table shows the maturities and weighted-average yields of
investment securities at June 30, 2006. All securities are shown at their
contractual maturity.
Maturities and Weighted Average Yields of Debt Securities
(dollars in thousands)
------------------------------------------------------------------------------------------------------------------------------------
June 30, 2006
------------------------------------------------------------------------------------------------------------------------------------
1 year 1 to 5 5 to 10 Over 10
or less years years years Total
------------------------------------------------------------------------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------------------------------------------------------------------------------------------------------------------------------------
Securities available-for sale:
Federal agencies .................. $101,866 3.32% $225,725 3.99% $ -- -- $ -- -- $327,591 3.78%
Mortgage-backed securities(1) $ 1,236 3.50% $ 5,192 5.06% $ 4,680 4.13% $ 17 6.78% $ 11,125 4.50%
State and municipal (TE)(2) ....... $ 4,026 5.39% $ 7,436 6.64% $ 647 7.62% $ -- -- $ 12,109 6.28%
Marketable equity securities(3) ... $ -- -- $ -- -- $ -- -- $ -- -- $ 2,897 --
------------------------------------------------------------------------------------------------------------------------------------
Total ..................... $107,128 $238,353 $ 5,327 $ 17 $353,722
------------------------------------------------------------------------------------------------------------------------------------
Average Yield (TE) (2) .............. 3.40% 4.09% 4.56% 6.78% 3.89%
====================================================================================================================================
Securities held-to-maturity:
Federal agencies .................. $ 11,457 2.98% $ 16,849 2.99% $ 4,322 4.10% $ -- -- $ 32,628 3.14%
Mortgage-backed securities(1) ..... $ 266 2.45% $ 23,438 4.94% $ 5,539 5.71% $ 229 6.02% $ 29,472 5.07%
State and municipal (TE)(2) ....... $ 9,796 5.39% $ 7,670 5.89% $ 200 7.53% $ 120 7.95% $ 17,786 5.64%
------------------------------------------------------------------------------------------------------------------------------------
Total ..................... $ 21,519 $ 47,957 $ 10,061 $ 349 $ 79,886
------------------------------------------------------------------------------------------------------------------------------------
Average Yield (TE)(2) ............... 4.07% 4.41% 5.06% 6.69% 4.41%
====================================================================================================================================
Non-marketable equity securities(3):
Federal Home Loan Bank stock ...... $ -- -- $ -- -- $ -- -- $ -- -- $ 14,053 --
Other equity investments .......... $ -- -- $ -- -- $ -- -- $ -- -- $ 3,490 --
------------------------------------------------------------------------------------------------------------------------------------
Total ..................... $ -- -- $ -- -- $ -- -- $ -- -- $ 17,543 --
====================================================================================================================================
(1) Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties and certain securities require
principal prepayments prior to maturity.
(2) The average yield is presented on a tax equivalized basis on state and
municipal tax-exempt securities.
(3) Due to the nature of these securities, they do not have a stated
maturity date or rate.
17
Continuous gross unrealized losses of investments in debt and equity securities
(in thousands) which are classified as temporary were as follows:
Continuous unrealized Continuous unrealized
losses existing for less losses existing greater
than 12 months than 12 months Total
--------------------------------------------------------------------------
Fair Value Unrealized Fair Value Unrealized Fair Value Unrealized
Losses Losses Losses
--------------------------------------------------------------------------
Available-for-Sale:
Federal agencies ................. $202,238 $ 2,258 $124,891 $ 2,930 $327,129 $ 5,188
Mortgage-backed securities ....... 2,803 45 6,711 270 9,514 315
State and municipal .............. -- -- 3,183 70 3,183 70
----------------------------------------------------------------------
Subtotal, debt securities $205,041 $ 2,303 $134,785 $ 3,270 $339,826 $ 5,573
Other ............................ $ 1,643 $ 301 $ -- $ -- 1,643 301
----------------------------------------------------------------------
Total temporarily impaired
securities ............... $206,684 $ 2,604 $134,785 $ 3,270 $341,469 $ 5,874
=====================================================================
Held-to-Maturity:
Federal agencies ................. $ 96 $ 1 $ 31,443 $ 1,087 $ 31,539 $ 1,088
Mortgage-backed securities ....... 23,038 713 5,155 176 28,193 889
State and municipal .............. 868 3 7,147 83 8,015 86
----------------------------------------------------------------------
Total temporarily impaired
securities ............... $ 24,002 $ 717 $ 43,745 $ 1,346 $ 67,747 $ 2,063
=====================================================================
Management evaluates securities for other-than-temporary impairment at least on
a quarterly basis, and more frequently when economic or market concerns warrant
such evaluation. In estimating other-than-temporary impairment losses,
management considers (1) the length of time and the extent to which the fair
value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of the Company to retain
its investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value. Effective for the period ended December 31,
2005, the Company modified its policy for evaluating investments for
other-than-temporary impairment. Under its new policy, investments, other than
debt security investments where the impairment is deemed to be due solely to
interest rate movements, are assumed to be impaired and the impairment
recognized through earnings no later than twelve months from the date the
security was first impaired, unless there is "overwhelming evidence to the
contrary." Under the policy, "overwhelming evidence to the contrary" is a rare
instance, but might include, among other things, an announced sale soon after a
reporting period where the price would cause an impairment to reverse. Further,
under certain circumstances, including a bankruptcy, catastrophic event or other
circumstances which cause the Company to determine, after analyzing the specific
facts, that the decline in the fair value is other than temporary, the Company
would recognize an other than temporary impairment write-down upon such
occurrence or determination, and not wait twelve months from the time of the
impairment.
For the period ended June 30, 2006, the $3.270 million continuous unrealized
loss greater than 12 months on available-for-sale securities was made up of
thirty nine debt securities and was believed to be a temporary loss. None of the
marketable equity securities available-for-sale had a continuous unrealized loss
greater than 12 months. The $1.346 million continuous unrealized loss greater
than 12 months on held-to-maturity securities was made up of forty four debt
securities and was believed to be a temporary loss.
Unrealized losses on debt securities are generally due to changes in interest
rates and, as such, are considered by the Company to be temporary. Because of
the nature of U.S. Agency securities, most of which are single pay at maturity,
and because the Company has the ability to hold these investments until the
market value recovers, which may be maturity, the Company does not consider
these investments to be other than temporarily impaired. Because the Company
believes the decline in market value of mortgage-backed securities is
attributable to changes in interest rates and not credit quality and because the
Company has the ability to hold these investments until the market value
recovers, the Company does not consider these investments to be other than
temporarily impaired.
18
Loans
The following table presents the amounts and percentages of loans at June 30,
2006 and December 31, 2005 according to the categories of commercial, financial
and agricultural; commercial real estate; residential real estate; and
installment and consumer loans.
Amount of Loans Outstanding
(dollars in thousands)
------------------------------------------------------------------------------------------
June 30, 2006 December 31, 2005
------------------------------------------------------------------------------------------
Amount Percentage Amount Percentage
------------------------------------------------------------------------------------------
Commercial, financial and agricultural $ 308,172 31.22% $ 319,861 31.47%
Real Estate - Commercial ............. 463,768 46.98% 469,506 46.19%
Real Estate - Residential ............ 134,386 13.62% 140,304 13.81%
Installment and consumer ............. 80,786 8.18% 86,728 8.53%
------------------------------------------------------------------------------------------
Total loans ................ $ 987,112 100.00% $1,016,399 100.00%
==========================================================================================
The balance of loans outstanding as of June 30, 2006 by maturity is shown in the
following table:
Maturity of Loans Outstanding
(dollars in thousands)
--------------------------------------------------------------------------------------
June 30, 2006
--------------------------------------------------------------------------------------
1 year 1 to 5 Over 5
or less years years Total
--------------------------------------------------------------------------------------
Commercial, financial and agricultural $185,302 $ 79,839 $ 43,031 $308,172
Real Estate - Commercial ............. 152,183 207,421 104,164 $463,768
Real Estate - Residential ............ 12,095 33,679 88,612 $134,386
Installment and consumer ............. 18,103 29,785 32,898 $ 80,786
--------------------------------------------
Total ................................ $367,683 $350,724 $268,705 $987,112
============================================
Percentage of total loans outstanding. 37.25% 35.53% 27.22% 100.00%
============================================
Capital
Total shareholders' equity increased $2.232 million from December 31, 2005 to
June 30, 2006. Treasury stock transactions were $1.673 million primarily due to
purchases of treasury stock under the Company's stock repurchase plan offset
somewhat by the exercise of stock options. Additional paid in capital increased
$326,000 as a result of applying the guidance of the new Financial Accounting
Standard Board Statement (FASB) No. 123(R) which was adopted on January 1, 2006.
The change in shareholders' equity is summarized as follows:
Shareholders' Equity (in thousands)
-----------------------------------------------------------
Shareholders' equity, December 31, 2005 .... $ 143,769
Net income ................................. 9,489
Treasury stock transactions, net ........... (1,673)
Additional paid in capital transactions, net 326
Cash dividends declared .................... (4,653)
Other comprehensive income ................. (1,257)
-----------------------------------------------------------
Shareholders' equity, June 30, 2006 ........ $ 146,001
===========================================================
On June 20, 2006, the Board of Directors of the Company declared a quarterly
cash dividend of $0.23 per share of the Company's common stock. The dividend of
$2.323 million was paid on July 21, 2006, to holders of record on July 7, 2006.
19
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's and the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, banks must meet specific guidelines that involve quantitative measures
of assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's and the Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of June 30,
2006, that the Company and the Bank exceeded all capital adequacy requirements
to which they are subject.
As of June 30, 2006, the most recent notifications from primary regulatory
agencies categorized the Bank as "well capitalized" under the regulatory
framework for prompt corrective action. To be categorized as "well capitalized",
banks must maintain minimum total capital to risk-weighted assets, Tier I
capital to risk-weighted assets, and Tier I capital to average assets ratios as
set forth in the table. There are no conditions or events since that
notification that management believes have changed the Bank's categories.
The Company's and the Bank's actual capital amounts and ratios are presented in
the following table (in thousands):
To be well
For capital capitalized under
Actual adequacy prompt corrective
purposes: action provisions:
-----------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------------------
As of June 30, 2006:
Total capital
(to risk-weighted assets)
Consolidated $139,333 12.5% $88,919 8.0% N/A
Main Street Bank & Trust $129,681 11.8% $87,824 8.0% $109,781 10.0%
Tier I capital
(to risk-weighted assets)
Consolidated $125,401 11.3% $44,460 4.0% N/A
Main Street Bank & Trust $115,834 10.6% $43,912 4.0% $65,868 6.0%
Tier I capital
(to average assets)
Consolidated $125,401 8.0% $62,405 4.0% N/A
Main Street Bank & Trust $115,834 7.5% $62,012 4.0% $77,515 5.0%
Interest Rate Sensitivity
The concept of interest rate sensitivity attempts to gauge exposure of the
Company's net interest income to adverse changes in market driven interest rates
by measuring the amount of interest-sensitive assets and interest-sensitive
liabilities maturing or subject to repricing within a specified time period.
Liquidity represents the ability of the Company to meet the day-to-day demands
of deposit customers balanced by its investments of these deposits. The Company
must also be prepared to fulfill the needs of credit customers for loans with
various types of maturities and other financing arrangements. The Company
monitors its interest rate sensitivity and liquidity through the use of static
gap reports, which measure the difference between assets and liabilities
maturing or repricing within specified time periods as well as financial
forecasting/budgeting/reporting software packages.
20
The following table presents the Company's interest rate sensitivity at various
intervals at June 30, 2006:
Rate Sensitivity of Earning Assets and Interest Bearing Liabilities
(dollars in thousands)
-----------------------------------------------------------------------------------------------------------------------------
1-30 31-90 91-180 181-365 Over
Days Days Days Days 1 year Total
-----------------------------------------------------------------------------------------------------------------------------
Interest bearing assets:
Federal funds sold and
interest bearing deposits ............. $ 2,769 $ -- $ -- $ -- $ -- $ 2,769
Debt and equity securities (1) .......... 14,351 19,457 41,848 69,750 305,745 451,151
Loans (2) ............................... 323,616 43,394 60,553 90,987 470,626 989,176
-----------------------------------------------------------------------------------------------------------------------------
Total interest bearing assets ... $ 340,736 $ 62,851 $ 102,401 $ 160,737 $ 776,371 $1,443,096
-----------------------------------------------------------------------------------------------------------------------------
Interest bearing liabilities:
Savings and interest bearing
demand deposits ....................... $ 58,029 $ 1,632 $ 2,448 $ 4,895 $ 186,533 $ 253,537
Money market savings
deposits .............................. 272,555 -- -- -- -- 272,555
Time deposits ........................... 22,999 58,630 116,909 140,671 127,525 466,734
Federal funds purchased,
repurchase agreements,
and notes payable ..................... 126,310 5,061 4,105 6,240 -- 141,716
FHLB advances and
other borrowings ...................... 11,075 24,000 2,075 2,520 5,000 44,670
-----------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities $ 490,968 $ 89,323 $ 125,537 $ 154,326 $ 319,058 $1,179,212
-----------------------------------------------------------------------------------------------------------------------------
Net asset (liability) funding gap ......... (150,232) (26,472) (23,136) 6,411 457,313 263,884
-----------------------------------------------------------------------------------------------------------------------------
Repricing gap ............................. 0.69 0.70 0.82 1.04 2.43 1.22
Cumulative repricing gap .................. 0.69 0.70 0.72 0.78 1.22 1.22
-----------------------------------------------------------------------------------------------------------------------------
(1) Debt and equity securities include securities available-for-sale,
securities held-to-maturity, non-marketable equity securities.
(2) Loans are gross and include mortgage loans held-for-sale.
Included in the 1-30 day category of savings and interest-bearing demand
deposits are non-core deposits plus a percentage, based upon industry-accepted
assumptions and Company analysis, of the core deposits. "Core deposits" are the
lowest average balance of the prior twelve months of each product type included
in this category. "Non-core deposits" are the difference between the current
balance and core deposits. The time frames include a percentage, based upon
industry-accepted assumptions and Company analysis, of the core deposits, as
follows:
1-30 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 June 30, 2006, the Company was somewhat liability sensitive due to the levels
of savings and interest demand deposits, time deposits and federal funds
purchased, repurchase agreements and notes payable. As such, the effect of an
increase in the interest rate for all interest bearing assets and liabilities of
100 basis points would decrease annualized net interest income by approximately
$1.502 million in the 1-30 days category and $1.767 million in the 1-90 days
category, assuming no management intervention. A decrease in interest rates
would have the opposite effect for the same time periods. The Company's Asset
and Liability Management Policy states that the cumulative ratio of
rate-sensitive assets ("RSA") to rate-sensitive liabilities ("RSL") for the
12-month period should fall within the range of 0.75-1.25. As of June 30, 2006,
the Company's RSA/RSL was 0.78, which was within the established guidelines.
21
In addition to managing interest rate sensitivity and liquidity through the use
of gap reports, the Company has provided for emergency liquidity situations with
informal agreements with correspondent banks that permit the Company to borrow
federal funds on an unsecured basis. Additionally, at June 30, 2006, the Company
had a $15 million unsecured line of credit with a correspondent bank, all of
which was available at that date. The Company also has sufficient capacity to
permit it to borrow funds from the Federal Home Loan Bank on a secured basis
(refer to the Liquidity and Cash Flows section that follows for additional
information).
The Company uses financial forecasting/budgeting/reporting software packages to
perform interest rate sensitivity analysis for all product categories. The
Company's primary focus of its analysis is on the effect of interest rate
increases and decreases on net interest income. Management believes that this
analysis reflects the potential effects on current earnings of interest rate
changes. Call criteria and prepayment assumptions are taken into consideration
for investments in debt and equity securities. All of the Company's financial
instruments are analyzed by a software database which includes each of the
different product categories which are tied to key rates such as prime, Treasury
Bills, or the federal funds rate. The relationships of each of the different
products to the key rate that the product is tied to is proportional. The
software reprices the products based on current offering rates. The software
performs interest rate sensitivity analysis by performing rate shocks of plus or
minus 200 basis points in 100 basis point increments.
The following table shows projected results at June 30, 2006 and December 31,
2005 of the impact on net interest income from an immediate change in interest
rates. The results are shown as a percentage change in net interest income over
the next twelve months.
Basis Point Change
-------------------------------
+200 +100 -100 -200
-------------------------------
June 30, 2006 ........ 4.6% 2.3% (2.6%) (5.2%)
December 31, 2005 .... 8.9% 4.7% (4.7%) (9.4%)
The foregoing computations are based on numerous assumptions, including relative
levels of market interest rates, prepayments and deposit mix. The computed
estimates should not be relied upon as a projection of actual results. Despite
the limitations on preciseness inherent in these computations, management
believes that the information provided is reasonably indicative of the effect of
changes in interest rate levels on the net earning capacity of the Company's
current mix of interest bearing assets and interest bearing liabilities.
Management continues to use the results of these computations, along with the
results of its computer model projections, in order to enhance earnings
potential while positioning the Company to minimize the effect of a prolonged
shift in interest rates that would adversely affect future results of
operations.
At the present time, the most significant market risk affecting the Company is
interest rate risk. Other market risks such as foreign currency exchange risk
and commodity price risk do not occur in the normal business of the Company. The
Company also is not currently using trading activities or derivative instruments
to control interest rate risk.
Liquidity and Cash Flows
The Company requires cash to fund loan growth and deposit withdrawals. Cash
flows fluctuate with changes in economic conditions, current interest rate
trends and as a result of management strategies and programs. In general, funds
provided by customer deposits, federal funds purchased, repurchase agreements
and notes payable, and maturities, calls and paydowns of investment securities
are used to fund loans and purchase investment securities. Available funds are
used to fund demand for loans that meet the Company's credit quality guidelines,
with the remaining funds used to purchase investment securities and/or federal
funds sold. The Company monitors the demand for cash and initiates programs and
policies as considered necessary to meet funding gaps.
The Company was able to meet liquidity needs during the first half of 2006. A
review of the consolidated statement of cash flows in the accompanying financial
statements shows that the Company's cash and cash equivalents decreased $47.476
million from December 31, 2005 to June 30, 2006. The decrease in 2006 resulted
from cash used in financing activities, offset somewhat by cash provided by
investing and operating activities. There were differences in sources and uses
of cash during 2006 compared to 2005.
22
Cash used in financing activities during 2006 was $76.030 million compared to
$22.306 million during the same period in 2005, primarily due to less cash
provided by Federal Home Loan Bank advances and other borrowings, more payments
on Federal Home Loan Bank and other borrowings and more cash used by deposits.
Federal Home Loan Bank advances and other borrowings were $1.000 million during
the first half of 2006 compared to $31.000 million during the same period in
2005 which was used mainly as a source of working capital (of which $20 million
was repaid in July 2005). Cash used by Federal Home Loan Bank advances and other
borrowings was $23.716 million during the first half of 2006 compared to $9.404
million during the same period in 2005. $21.000 million of the $23.716 million
in 2006 was due to maturities of Federal Home Loan Bank advances. Cash used due
to decreases in deposits was $70.241 million during the first six months of 2006
compared to $62.502 million during the same period in 2005. During the first
half of 2006, the Company did not offer aggressive deposit pricing. During the
first half of 2005, the Company expected deposits to decrease due to an
anticipated outflow of short-term deposits attributable to the Company's Wealth
Management division which had grown approximately $43 million during the second
half of 2004.
More cash was provided by investing activities during the first half of 2006
compared to the same period in 2005, primarily due to differences in the loan
portfolio and investments in debt and equity securities. Cash provided by loans
during the first six months of 2006 was $28.200 million due to a decrease in
gross loans, compared to cash used to fund loan growth of $21.484 million during
the same period in 2005. The decrease in loans during the first half of 2006 is
attributable to the Company's unwillingness to meet some of the underwriting and
pricing available in the market. Cash used by investment activities during the
first half of 2006 was $8.767 million compared to cash provided of $33.628
million during the same period in 2005. In 2006, cash used to purchase debt and
equity securities of $61.619 million was somewhat offset by proceeds of $52.852
million from maturities, calls and sales of debt and equity securities,
principal paydowns on mortgage-backed securities, return of principal on other
equity securities and proceeds from redemption of non-marketable equity
securities. Included in the 2006 investment proceeds was $7.397 million due to
the redemption of excess FHLB stock. During the same period in 2005, proceeds of
$110.249 million from maturities, calls and sales o& debt and equity securities,
principal paydowns on mortgage-backed securities and return of principal on
other equity securities were offset somewhat by cash used to purchase debt and
equity securities of $76.621 million. In addition, $6.385 million was used to
fund the acquisition of Citizens in 2005. Cash provided by operating activities
during the first half of 2006 was $10.071 million compared to $8.248 million
during the same period in 2005.
The Company's future short-term cash requirements are expected to be provided by
maturities and sales of investments, sales of loans and deposit growth. Cash
required to meet longer-term liquidity requirements will mostly depend on future
goals and strategies of management, the competitive environment, economic
factors and changes in the needs of customers. If current sources of liquidity
cannot provide needed cash in the future, the Company can obtain long-term funds
from several sources, including, but not limited to, utilizing the Company's $15
million line of credit from a correspondent bank, FHLB advances and brokered
CDs. To meet short-term liquidity needs, the Company is able to borrow funds on
a temporary basis from the Federal Reserve Bank, the FHLB and correspondent
banks. With sound capital levels, the Company continues to have several options
for longer-term cash needs, such as for future expansion and acquisitions.
Management is not aware of any current recommendations by the Company's primary
regulators which if implemented would have a material effect on the Company's
liquidity, capital resources or operations.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting standards
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and the related disclosures of contingent
assets and liabilities. Actual results could differ from those estimates under
different assumptions and conditions. The Company believes that it has one
critical accounting policy, allowance for loan losses, that is subject to
estimates and judgments used in the preparation of its consolidated financial
statements.
23
Provision and Allowance for Loan Losses
The provision for loan losses is based on management's evaluation of the loan
portfolio in light of national and local economic conditions, changes in the
composition and volume of the loan portfolio, changes in the volume of past due
and nonaccrual loans, and other relevant factors. The allowance for loan losses,
which is reported as a deduction from loans, is available for loan charge-offs.
The allowance is increased by the provision charged to expense and is reduced by
loan charge-offs net of loan recoveries. The allowance is allocated between the
commercial, financial and agricultural; commercial real estate; residential real
estate; and installment and consumer loan portfolios according to the historical
losses experienced in each of these portfolios as well as the current level of
watch list loans and nonperforming loans for each portfolio. Loans for which
borrower cash flow and the estimated liquidation value of collateral are
inadequate to repay the total outstanding balance are evaluated separately and
assigned a specific allocation. The unallocated portion of the allowance is
determined by economic conditions and other factors mentioned above. The balance
of the allowance for loan losses was $13.895 million at June 30, 2006 compared
to $13.472 million at December 31, 2005, an increase of $423,000. Net
charge-offs were $477,000 and the provision totaled $900,000 during the first
six months of 2006. The allowance for loan losses as a percentage of gross
loans, including loans held-for-sale, was 1.40% at June 30, 2006, compared to
1.32% at December 31, 2005. Gross loans, including loans held-for-sale,
decreased 2.8% to $989.176 million at June 30, 2006 from $1.018 billion at
December 31, 2005.
One measure of the adequacy of the allowance for loan losses is the ratio of the
allowance to nonperforming loans. The allowance for loan losses as a percentage
of nonperforming loans was 169.8% at June 30, 2006 compared to 449.1% at
December 31, 2005. Nonperforming loans increased from $3.000 million at December
31, 2005 to $8.182 million at June 30, 2006. The $5.182 million increase in
nonperforming loans during the first six months of 2006 resulted from a $3.321
million increase in nonaccrual loans and an increase of $1.861 million in loans
past due 90 days or more. The increase in nonaccrual loans included the addition
of three commercial real estate loans to a real estate developer that totaled
$4.282 million. The increase in 90-day delinquencies was due primarily to two
commercial loans totaling $1.536 million to an owner of convenience stores
falling 90 days past due. Increases in commercial, financial and agricultural
loans and residential real estate loans made up the bulk of the remaining
increase in nonaccrual and 90-day delinquencies. Management believes that
nonperforming and potential problem loans are appropriately identified and
monitored based on the extensive loan analysis performed by the credit
administration department and the internal loan committees with oversight by the
Board of Directors. Historically, there have not been a significant amount of
loans charged off which had not been previously identified as problem loans by
the credit administration department or the loan committees. Management believes
the allowance for loan losses is at a level commensurate with the overall risk
exposure of the loan portfolio. However, certain borrowers may experience
difficulty and the level of non-performing loans, charge-offs, and delinquencies
could rise and require further increases in the provision for loan losses.
24
The following table summarizes changes in the allowance for loan losses by loan
categories for each period and additions to the allowance for loan losses, which
have been charged to operations.
Allowance for Loan Losses
(dollars in thousands)
-------------------------------------------------------------------------------------------------
June 30, 2006 June 30, 2005
-------------------------------------------------------------------------------------------------
Allowance for loan losses at beginning of year ................... $ 13,472 $ 9,650
Allocation for loan losses attributable to acquisition of Citizens -- 3,434
Charge-offs during period:
Commercial, financial and agricultural ......................... (468) --
Commercial real estate ......................................... (130) --
Residential real estate ........................................ (88) (5)
Installment and consumer ....................................... (191) (276)
-------------------------------------------------------------------------------------------------
Total .................................................. $ (877) $ (281)
-------------------------------------------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial, financial and agricultural ......................... $ 3 $ 16
Commercial real estate ......................................... -- 5
Residential real estate ........................................ 16 --
Installment and consumer ....................................... 381 174
-------------------------------------------------------------------------------------------------
Total ................................................... $ 400 $ 195
-------------------------------------------------------------------------------------------------
Net (charge-offs) recoveries ............................ $ (477) $ (86)
Provision for loan losses ........................................ 900 630
-------------------------------------------------------------------------------------------------
Allowance for loan losses at end of quarter ...................... $ 13,895 $ 13,628
=================================================================================================
Ratio of net charge-offs to
average net loans ................................................ (0.05)% (0.01)%
=================================================================================================
The following table shows the allocation of the allowance for loan losses
allocated to each category.
Allocation of the Allowance for Loan Losses
(in thousands)
----------------------------------------------------------------------------
June 30, 2006 December 31, 2005
----------------------------------------------------------------------------
Allocated:
Commercial, financial and agricultural $ 4,099 $ 4,433
Commercial real estate ............... 7,478 5,991
Residential real estate .............. 408 424
Installment and consumer ............. 1,320 1,447
----------------------------------------------------------------------------
Total allocated allowance .... $13,305 $12,295
Unallocated allowances ................. 590 1,177
----------------------------------------------------------------------------
Total ........................ $13,895 $13,472
============================================================================
25
The following table presents the aggregate amount of loans considered to be
nonperforming for the periods indicated. Nonperforming loans include loans
accounted for on a nonaccrual basis, accruing loans contractually past due 90
days or more as to interest or principal payments and loans which are troubled
debt restructurings as defined in Statement of Financial Accounting Standards
No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings."
Nonperforming Loans (dollars in thousands)
-------------------------------------------------------------------------
June 30, 2006 December 31, 2005
-------------------------------------------------------------------------
Nonaccrual loans(1) .......... $ 5,555 $ 2,234
=========================================================================
Loans past due 90 days or more $ 2,627 $ 766
=========================================================================
Restructured loans ........... $ 268 $ 324
=========================================================================
(1) Includes $971,000 at June 30, 2006 and $975,000 at December 31, 2005
of real estate and consumer loans which management does not consider
impaired as defined by the Statement of Financial Accounting Standards
No. 114, "Accounting by Creditors for Impairments of a Loan" (SFAS
114).
Other Nonperforming Assets (dollars in thousands)
-------------------------------------------------------------------------
June 30, 2006 December 31, 2005
-------------------------------------------------------------------------
Other real estate owned ........ $ 422 $ 188
=========================================================================
Nonperforming other assets ..... $ 21 $ 36
=========================================================================
Results of Operations
Results of Operations for the Six Months Ended June 30, 2006
Net income for the first six months of 2006 was $9.489 million, an $829,000, or
9.6%, increase from $8.660 million for the same period in 2005. Basic earnings
per share increased $0.06, or 6.8%, to $0.94 per share in the first six months
of 2006 from $0.88 per share in the first six months of 2005. Diluted earnings
per share increased $0.06, or 6.9%, to $0.93 per share in the first six months
of 2006 from $0.87 per share in the first six months of 2005.
26
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)
---------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30,
---------------------------------------------------------------------------------------------------------------------
2006 2005
---------------------------------------------------------------------------------------------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
---------------------------------------------------------------------------------------------------------------------
Assets
Taxable investment securities(1) ......... $ 437,188 $ 8,686 4.01% $ 289,578 $ 5,605 3.90%
Tax-exempt investment securities(1) (TE) . 31,446 957 6.14% 40,785 1,209 5.98%
Federal funds sold and interest bearing
deposits(2) ............................ 21,925 697 6.41% 42,897 813 3.82%
Loans (3),(4) (TE) ....................... 973,090 34,162 7.08% 880,805 27,324 6.26%
---------------------------------------------------------------------------------------------------------------------
Total interest bearing assets
and interest income (TE) ....... $1,463,649 $ 44,502 6.13% $1,254,065 $ 34,951 5.62%
---------------------------------------------------------------------------------------------------------------------
Cash and due from banks .................. $ 44,730 $ 41,612
Premises and equipment ................... 22,936 19,786
Other assets ............................. 59,447 68,383
---------------------------------------------------------------------------------------------------------------------
Total assets ................... $1,590,762 $1,383,846
Liabilities and Shareholders' Equity
Interest bearing demand deposits ......... $ 71,833 $ 227 0.64% $ 75,350 $ 205 0.55%
Savings .................................. 488,719 6,865 2.83% 400,563 2,740 1.38%
Time deposits ............................ 466,888 8,528 3.68% 407,558 6,058 3.00%
Federal funds purchased, repurchase
agreements, and notes payable .......... 128,946 2,597 4.06% 111,681 1,258 2.27%
FHLB advances and other borrowings ....... 51,670 1,262 4.93% 50,024 1,173 4.73%
---------------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities and interest expense $1,208,056 $ 19,479 3.25% $1,045,176 $ 11,434 2.21%
---------------------------------------------------------------------------------------------------------------------
Noninterest bearing demand deposits ...... $ 145,452 $ 127,609
Noninterest bearing savings deposits ..... 73,447 68,181
Other liabilities ........................ 18,307 13,694
---------------------------------------------------------------------------------------------------------------------
Total liabilities .............. $1,445,262 $1,254,660
Shareholders' equity ..................... 145,500 129,186
---------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity ........... $1,590,762 $1,383,846
=====================================================================================================================
Interest spread (average rate earned
minus average rate paid) (TE) .......... 2.88% 3.41%
=====================================================================================================================
Net interest income (TE) ................. $ 25,023 $ 23,517
=====================================================================================================================
Net yield on interest
earnings assets (TE) ................... 3.45% 3.78%
=====================================================================================================================
See next page for Notes 1-4.
Notes to Consolidated Average Balance Sheet and Interest Rates Tables:
(1) Investments in debt securities are included at carrying value. Income
from taxable investment securities included a net loss on venture
capital funds of approximately $121,000 in 2006 compared to a net gain
of approximately $459,000 in 2005. Due to the nature of venture
capital investments, future results cannot be predicted based on past
performance.
(2) Federal funds sold and interest bearing deposits included
approximately $154,000 in 2006 and $83,000 in 2005 of interest income
from third party processing of cashier checks.
(3) Loans are net of allowance for loan losses and include mortgage loans
held-for-sale. Nonaccrual loans are included in the total.
(4) Loan fees of approximately $842,000 and $661,000 in 2006 and 2005,
respectively, are included in total loan income.
27
Net interest income, the most significant component of the Company's earnings,
is the difference between interest received or accrued on the Company's earning
assets - primarily loans and investments - and interest paid or accrued on
deposits and borrowings. In order to compare the interest generated from
different types of earning assets, the interest income on certain tax-exempt
investment securities and loans is increased for analysis purposes to reflect
the income tax savings provided by the tax-exempt assets. This adjustment to
interest income for tax-exempt investment securities and loans was calculated
based on the federal income tax statutory rate of 35%. The following table
presents, on a tax-equivalent (TE) basis, an analysis of changes in net interest
income resulting from changes in average volumes of earning assets and interest
bearing liabilities and average rates earned and paid. The change in interest
due to the combined rate/volume variance has been allocated to rate and volume
changes in proportion to the absolute dollar amounts of change in each.
Analysis of Volume and Rate Changes
(in thousands)
---------------------------------------------------------------------------------
Six Months Ended June 30, 2006
---------------------------------------------------------------------------------
Increase
(Decrease)
from
Previous Due to Due to
Year Volume Rate
---------------------------------------------------------------------------------
Interest Income
Taxable investment securities ................. $ 3,081 $ 2,929 $ 152
Tax-exempt investment securities (TE) ......... (252) (283) 31
Federal funds sold and interest bearing
deposits .................................... (116) (511) 395
Loans (TE) .................................... 6,838 3,030 3,808
---------------------------------------------------------------------------------
Total interest income (TE) ............ $ 9,551 $ 5,165 $ 4,386
---------------------------------------------------------------------------------
Interest Expense
Interest bearing demand and savings deposits .. $ 4,147 $ 603 $ 3,544
Time deposits ................................. 2,470 960 1,510
Federal funds purchased,
repurchase agreements and notes payable ..... 1,339 220 1,119
FHLB advances and other borrowings ............ 89 39 50
---------------------------------------------------------------------------------
Total interest expense ................ $ 8,045 $ 1,822 $ 6,223
---------------------------------------------------------------------------------
Net Interest Income (TE) ........................ $ 1,506 $ 3,343 $(1,837)
=================================================================================
Net interest income on a tax-equivalent basis was $1.506 million, or 6.4%,
higher for the first six months of 2006 compared to the same period of 2005.
Total tax-equivalent interest income was $9.551 million, or 27.3%, higher in
2006 compared to 2005, and interest expense increased $8.045 million, or 70.4%.
The increase in tax-equivalent interest income and interest expense was due to
both increases in average volume and higher rates.
The increase in total tax-equivalent interest income was due to an increase in
interest income from loans and taxable investment securities, offset slightly by
decreases in interest income from tax-exempt investment securities and federal
funds sold and interest bearing deposits. The increase in interest income from
loans and taxable investment securities was due to increases in volume coupled
with higher rates. The decrease in interest income from tax-exempt investment
securities and federal fund sold and interest bearing deposits was due to a
decrease in volume, offset somewhat by higher rates.
The increase in total interest expense was due to an increase in interest
expense from all categories of interest bearing liabilities. The increase in
interest expense from all categories of interest bearing liabilities was
primarily due to higher rates.
The provision for loan losses recorded was $900,000 during the first six months
of 2006 compared to $630,000 during the same period of 2005. The provision
during both periods was based on management's analysis of the loan portfolio, as
discussed in the provision for loan losses section above.
28
The following table summarizes selected categories of non-interest income and
non-interest expense for the six months ended June 30, 2006 and 2005. The
acquisition of Citizens on April 1, 2005, has been accounted for as a purchase
and the results of operations of Citizens since the acquisition date have been
included in the Company's consolidated financial statements. Effective January
1, 2006, the Company adopted the fair value recognition provisions of FASB
Statement No. 123(R), Share-Based Payment, using the modified-prospective-
transition method. (Refer to Note 4, Stock Option Plans, for additional
information.) As a result, the Company recognized an additional $320,000 in
stock option expense in the first six months of 2006, with $232,000 being
allocated to salaries and benefits expense and $88,000 attributable to
non-employee options being allocated to other non-interest expense.
Noninterest Income and Expense
for the Six Months Ended
June 30, 2006 and 2005
(in thousands)
----------------------------------------------------------------------------------------------
Non-interest Income ........................ 06/30/2006 06/30/2005 $ change % change
----------------------------------------------------------------------------------------------
Remittance processing ...................... $ 3,503 $ 3,403 $ 100 2.9%
Trust and brokerage fees (1) ............... 3,902 3,652 250 6.8%
Service charges on deposit accounts ........ 1,391 1,309 82 6.3%
Securities transactions, net (2) ........... 279 35 244 697.1%
Gain on sales of mortgage loans, net (3) ... 276 397 (121) (30.5%)
Other (4) .................................. 1,673 1,277 396 31.0%
----------------------------------------------
Total non-interest income ........ $11,024 $10,073 $ 951 9.4%
==============================================
----------------------------------------------------------------------------------------------
Non-interest Expense ....................... 06/30/2006 06/30/2005 $ change % change
----------------------------------------------------------------------------------------------
Salaries and employee benefits (5) ......... $11,685 $11,228 $ 457 4.1%
Occupancy (6) .............................. 1,575 1,469 106 7.2%
Equipment .................................. 1,243 1,281 (38) (3.0%)
Data processing (7) ........................ 1,457 1,103 354 32.1%
Office supplies ............................ 597 587 10 1.7%
Service charges from correspondent banks (8) 146 255 (109) (42.7%)
Amortization of core deposit intangibles (9) 435 218 217 99.5%
Other (10) ................................. 3,209 2,862 347 12.1%
----------------------------------------------
Total non-interest expense ....... $20,347 $19,003 $ 1,344 7.1%
==============================================
(1) Included in the increase in trust and brokerage fees was an increase
of approximately $217,000 in trust fees as a result of an increase in
Wealth Management assets under management as of June 30, 2006 compared
to June 30, 2005, as well as the addition of new employee benefit
plans that began generating revenue during the first six months of
2006 compared to 2005.
(2) During the first quarter of 2006, the Company sold a number of equity
securities in order to reposition its investment portfolio in the
rising rate environment, and, in so doing, realized approximately
$267,000 in net gains from those sales.
(3) The decrease in gains on sales of mortgage loans reflected a $4.891
million, or 16.8%, decrease in funded mortgage loans held-for-sale,
from $29.077 million in the first six months of 2005 to $24.186
million in the first six months of 2006. The volume of funded mortgage
loans decreased mainly due to a slowdown in the residential real
estate market in the first six months of 2006 compared to the same
period in 2005.
(4) The increase in other non-interest income included an increase of
approximately $68,000 in Freddie Mac servicing fees due, in part, to
operating the Company's new Bloomington locations. Also contributing
to the increase in other non-interest income was an increase of
$60,000 in letter of credit fees, of which approximately $41,000 was
due to the timing of one customer's annual renewal.
(5) Included in salaries and benefits expense in 2006 was $232,000 of
stock option expense as a result of adopting FASB Statement No. 123
(R) effective January 1, 2006.
(6) In the first quarter of 2006, occupancy expense included $124,000
attributable to the expenses of operating Citizens compared to none in
the same period in 2005.
29
(7) The increase in data processing expense in 2006 included a $146,000,
or 22.9%, increase in computer processing expense and a $94,000, or
41.9% increase, in internet processing expense, due, in part, to
increased volume attributable to operating the Company's new
Bloomington locations. Also contributing to the increase in data
processing expense in 2006 was an increase of $78,000, or 106.6%, in
data processing expense attributable to the Company's Wealth
Management Group. This increase was due to )ncreased trading volume,
and the implementation costs associated with the conversion to a new
third party system.
(8) The decrease in service charges from correspondent banks was primarily
due to a change in the Company's cash letter processing vendor in
November 2005 which resulted in a decrease in fees as well as higher
earnings credits due to the rising rate environment.
(9) In the first quarter of 2006, amortization of core deposit intangibles
included $218,000 attributable to the acquisition of Citizens compared
to none for the first quarter of 2005.
(10) Other non-interest expense in 2006 included a $270,000 loss from a
low-income housing investment and $88,000 of stock option expense as a
result of adopting FASB Statement No. 123 (R) effective January 1,
2006.
Income tax expense increased $97,000, or 2.0%, during the first six months of
2006 compared to the same period in 2005. The effective tax rate decreased to
34.4% during the first six months of 2006 from 36.0% during the same period in
2005. This decrease was partly due to a $205,000 tax credit resulting from the
loss from a low-income housing project investment described in footnote 10
above.
Results of Operations For the Three Months Ended June 30, 2006
Net income for the second quarter of 2006 was $4.799 million, a $72,000, or
1.5%, increase from $4.727 million for the same period in 2005. Basic earnings
per share increased $0.01, or 2.2%, to $0.47 per share during the second quarter
of 2006 from $0.46 per share during the same period in 2005. Diluted earnings
per share increased $0.02, or 4.4%, to $0.47 per share during the second quarter
of 2006 from $0.45 per share during the same period in 2005.
30
The following schedule "Consolidated Average Balance Sheet and Interest Rates"
provides details of average balances, interest income or interest expense, and
the average rates for the Company's major asset and liability categories.
Consolidated Average Balance Sheet and Interest Rates
(dollars in thousands)
---------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30,
---------------------------------------------------------------------------------------------------------------------
2006 2005
---------------------------------------------------------------------------------------------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
---------------------------------------------------------------------------------------------------------------------
Assets
Taxable investment securities(1) ......... $ 437,504 $ 4,580 4.20% $ 274,589 $ 3,241 4.73%
Tax-exempt investment securities(1) (TE) . 30,072 449 5.99% 39,922 592 5.95%
Federal funds sold and interest bearing
deposits(2) ............................ 23,825 400 6.73% 56,615 592 4.19%
Loans (3),(4) (TE) ....................... 969,095 17,362 7.19% 999,918 15,916 6.38%
---------------------------------------------------------------------------------------------------------------------
Total interest bearing assets
and interest income (TE) ....... $1,460,496 $ 22,791 6.26% $1,371,044 $ 20,341 5.95%
---------------------------------------------------------------------------------------------------------------------
Cash and due from banks .................. $ 43,339 $ 44,525
Premises and equipment ................... 22,832 22,493
Other assets ............................. 59,745 111,459
---------------------------------------------------------------------------------------------------------------------
Total assets ................... $1,586,412 $1,549,521
=====================================================================================================================
Liabilities and Shareholders' Equity
Interest bearing demand deposits ......... $ 71,639 $ 117 0.66% $ 84,260 $ 115 0.55%
Savings .................................. 488,790 3,649 2.99% 432,866 1,695 1.57%
Time deposits ............................ 466,863 4,436 3.81% 472,474 3,593 3.05%
Federal funds purchased, repurchase
agreements, and notes payable .......... 134,926 1,446 4.30% 119,966 751 2.51%
FHLB advances and other borrowings ....... 45,095 581 5.17% 71,518 787 4.41%
---------------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities and interest expense $1,207,313 $ 10,229 3.40% $1,181,084 $ 6,941 2.36%
---------------------------------------------------------------------------------------------------------------------
Noninterest bearing demand deposits ...... $ 141,417 $ 139,036
Noninterest bearing savings deposits ..... 74,016 71,468
Other liabilities ........................ 17,543 14,200
---------------------------------------------------------------------------------------------------------------------
Total liabilities .............. $1,440,289 $1,405,788
Shareholders' equity ..................... 146,123 143,733
---------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity ........... $1,586,412 $1,549,521
=====================================================================================================================
Interest spread (average rate earned
minus average rate paid) (TE) .......... 2.86% 3.59%
=====================================================================================================================
Net interest income (TE) ................. $ 12,562 $ 13,400
=====================================================================================================================
Net yield on interest
earnings assets (TE) ................... 3.45% 3.92%
=====================================================================================================================
See next page for Notes 1-4.
Notes to Consolidated Average Balance Sheet and Interest Rate Tables:
(1) Investments in debt securities are included at carrying value. Income
from taxable investment securities included net gains on venture
capital funds of approximately $105,000 and $485,000 in 2006 and 2005,
respectively. Due to the nature of venture capital investments, future
results cannot be predicted based on past performance.
(2) Federal funds sold and interest bearing deposits included
approximately $89,000 in 2006 and $48,000 in 2005 of interest income
from third party processing of cashier checks.
(3) Loans are net of allowance for loan losses and include mortgage loans
held-for-sale. Nonaccrual loans are included in the total.
(4) Loan fees of approximately $459,000 and $418,000 in 2006 and 2005,
respectively, are included in total loan income.
31
Net interest income, the most significant component of the Company's earnings,
is the difference between interest received or accrued on the Company's earning
assets - primarily loans and investments - and interest paid or accrued on
deposits and borrowings. In order to compare the interest generated from
different types of earning assets, the interest income on certain tax-exempt
investment securities and loans is increased for analysis purposes to reflect
the income tax savings provided by the tax-exempt assets. This adjustment to
interest income for tax-exempt investment securities and loans was calculated
based on the federal income tax statutory rate of 35%. The following table
presents, on a tax- equivalent (TE) basis, an analysis of changes in net
interest income resulting from changes in average volumes of earning assets and
interest bearing liabilities and average rates earned and paid. The change in
interest due to the combined rate/volume variance has been allocated to rate and
volume changes in proportion to the absolute dollar amounts of change in each.
Analysis of Volume and Rate Changes
(in thousands)
Three Months Ended June 30, 2006
-----------------------------------------------------------------------------------
Increase
(Decrease)
from
Previous Due to Due to
Year Volume Rate
-----------------------------------------------------------------------------------
Interest Income
Taxable investment securities .................. $ 1,339 $ 1,789 $ (450)
Tax-exempt investment securities (TE) .......... (143) (280) 137
Federal funds sold and interest bearing
deposits ..................................... (192) (444) 252
Loans (TE) ..................................... 1,446 (503) 1,949
-----------------------------------------------------------------------------------
Total interest income (TE) ............. $ 2,450 $ 562 $ 1,888
-----------------------------------------------------------------------------------
Interest Expense
Interest bearing demand and savings deposits ... $ 1,956 $ 163 $ 1,793
Time deposits .................................. 843 (43) 886
Federal funds purchased,
repurchase agreements and notes payable ...... 695 104 591
FHLB advances and other borrowings ............. (206) (325) 119
-----------------------------------------------------------------------------------
Total interest expense ................. $ 3,288 $ (101) $ 3,389
-----------------------------------------------------------------------------------
Net Interest Income (TE) ......................... $ (838) $ 663 $(1,501)
==================================================================================
Net interest income on a tax-equivalent basis was $838,000, or 6.3%, lower for
the second quarter of 2006 compared to the second quarter of 2005. Total
tax-equivalent interest income was $2.450 million, or 12.0%, higher in 2006
compared to 2005, while interest expense increased $3.288 million, or 47.4%. The
increase in tax-equivalent interest income was due to an increase in both rates
and volume. The increase in interest expense was due to an increase in rates
offset slightly by a decrease in volume.
The increase in total tax-equivalent interest income was due to increases in
interest income from loans and taxable investment securities, offset somewhat by
decreases in interest income from federal funds sold and interest bearing
deposits and tax-exempt investment securities. The increase in interest income
from loans was due to an increase in rates, offset somewhat by a decrease in
volume. The increase in interest income from taxable investment securities was
due to an increase in volume, offset somewhat by a decrease in rates. The
decreases in interest income from federal funds sold and interest bearing
deposits and tax-exempt investment securities were due to decreases in volume,
offset somewhat by increases in rates during the second quarter of 2006 compared
to the same period in 2005.
The increase in total interest expense was due to increases in interest expense
on interest bearing demand and savings deposits, time deposits and federal funds
purchased, repurchase agreements and notes payable, offset slightly by a
decrease in interest expense on FHLB advances and other borrowings. The
increases in interest expense on interest bearing demand and savings deposits,
and federal funds purchased, repurchase agreements and notes payable were due to
increases in both rates and volume during the second quarter of 2006 compared to
the same period in 2005. The increase in interest expense from time deposits was
due to an increase in rates, offset slightly by lower volume. The decrease in
interest expense from FHLB advances and other borrowings was due to a decrease
in volume, offset somewhat by an increase in rates.
32
The provision for loan losses recorded was $450,000 in the second quarter of
2006 compared to $300,000 in the second quarter of 2005, an increase of 50.0%.
The provision during both periods was based on management's analysis of the loan
portfolio, as discussed in the provision and allowance for loan losses section
above.
The following table summarizes selected categories of non-interest income and
non-interest expense for the three months ended June 30, 2006 and 2005.
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of FASB Statement No. 123(R), Share-Based Payment, using the
modified-prospective-transition method. (Refer to Note 4, Stock Option Plans,
for additional information.) As a result, the Company recognized an additional
$163,000 in stock option expense in the second quarter of 2006, with $119,000
being allocated to salaries and benefits expense and $44,000 attributable to
non-employee options being allocated to other non-interest expense.
Noninterest Income and Expense
for the Three Months Ended
June 30, 2006 and 2005
(in thousands)
------------------------------------------------------------------------------------------
Non-interest Income ........................ 06/30/2006 06/30/2005 $ change % change
------------------------------------------------------------------------------------------
Remittance processing ...................... $ 1,738 $ 1,696 $ 42 2.5%
Trust and brokerage fees (1) ............... 1,987 1,810 177 9.8%
Service charges on deposit accounts ........ 706 783 (77) (9.8%)
Securities transactions, net (2) ........... 12 (155) 167 107.7%
Gain on sales of mortgage loans, net (3) ... 150 260 (110) (42.3%)
Other (4) .................................. 912 664 248 37.3%
-------------------------------------------
Total non-interest income ........ $ 5,505 $ 5,058 $ 447 8.8%
===========================================
------------------------------------------------------------------------------------------
Non-interest Expense ....................... 06/30/2006 06/30/2005 $ change % change
------------------------------------------------------------------------------------------
Salaries and employee benefits (5) ......... $ 5,764 $ 6,281 $ (517) (8.2%)
Occupancy .................................. 783 807 (24) (3.0%)
Equipment .................................. 628 675 (47) (7.0%)
Data processing (6) ........................ 719 552 167 30.3%
Office supplies ............................ 301 289 12 4.2%
Service charges from correspondent banks (7) 82 145 (63) (43.4%)
Amortization of core deposit intangibles ... 217 218 (1) (0.5%)
Other (8) .................................. 1,808 1,587 221 13.9%
-------------------------------------------
Total non-interest expense . $ 10,302 $ 10,554 $ (252) (2.4%)
===========================================
(1) Included in the increase in trust and brokerage fees was an increase
of approximately $132,000 in trust fees as a result of an increase in
Wealth Management assets under management as of June 30, 2006 compared
to June 30, 2005, as well as the addition of new employee benefit
plans that began generating revenue during the first six months of
2006 compared to 2005.
(2) The loss in 2005 was primarily due to a loss on one investment.
(3) The decrease in gains on sales of mortgage loans reflected a $6.722
million, or 34.8%, decrease in funded mortgage loans held-for-sale,
from $19.328 million in the second quarter of 2005 to $12.606 million
in the second quarter of 2006. The volume of funded mortgage loans
decreased mainly due to a slowdown in the residential real estate
market in the second quarter of 2006 compared to the same period in
2005.
(4) The increase in other non-interest income included an increase of
approximately $26,000 in Freddie Mac servicing fees due, in part, to
operating the Company's new Bloomington locations. Also contributing
to the increase in other non-interest income was an increase of
$48,000 in letter of credit fees, of which approximately $41,000 was
due to the timing of one customer's annual renewal.
(5) The decrease in salaries and benefits was due, in part, to improved
efficiencies realized after the acquisition of Citizens.
33
(6) The increase in data processing expense in 2006 included a $73,000, or
22.8%, increase in computer processing expense and a $45,000, or 38.5%
increase, in internet processing expense, due, in part, to operating
the Company's new Bloomington locations. Also contributing to the
increase in data processing expense in 2006 was an increase of
$24,000, or 66.6%, in data processing expense attributable to the
Company's Wealth Management Group. This increase was due to increased
trading volume, and the implementation costs associated with
conversion to a new third party system.
(7) The decrease in service charges from correspondent banks was primarily
due to a change in the Company's cash letter processing vendor in
November 2005 which resulted in a decrease in fees as well as higher
earnings credits due to the rising rate environment.
(8) Other non-interest expense in 2006 included a $270,000 loss from a
low-income housing investment.
Income tax expense decreased $314,000, or 11.8%, during the second quarter of
2006 compared to the same period in 2005. The effective tax rate decreased to
32.9% during the second quarter of 2006 from 36.1% in the second quarter of
2005. This was partly due to a $205,000 tax credit resulting from the loss from
a low-income housing project investment described in footnote 8 above.
Business Segment Information
The Company currently operates in two industry segments. The primary business
involves providing banking services to central Illinois to both business and
individual customers. These services include demand, savings, time and
individual retirement accounts; commercial, commercial real estate, consumer
(including automobile loans and personal lines of credit), agricultural, and
residential real estate lending; safe deposit and night depository services;
purchases of installment obligations from retailers, primarily without recourse;
farm management; farm realty service; full service trust department that offers
a wide range of services such as investment management, acting as trustee,
serving as guardian, executor or agent, comprehensive financial planning,
miscellaneous consulting, and brokerage services offered through a third-party
arrangement with Raymond James Financial Services. The other industry segment
involves retail payment processing. FirsTech provides the following services to
electric, water and gas utilities, telecommunication companies, cable television
firms and charitable organizations: retail lockbox processing of payments
delivered by mail on behalf of the biller; processing of payments delivered by
customers to pay agents such as grocery stores, convenience stores and currency
exchanges; and concentration of payments delivered by the Automated Clearing
House network and companies such as MasterCard RPPS.
Company information is provided for informational purposes only, since it is not
considered a separate segment for reporting purposes.
The following table quantifies the Company's business segment information for
the six-months ended June 30, 2006 and 2005:
As of and for the Banking Remittance
Six Months Ended: Services Services Company Eliminations Total
---------------------------------------------------------------------------------------------------------------
June 30, 2006
Total interest income .................... $ 44,159 $ 12 $ 16 $ (31) $ 44,156
Total interest expense ................... 19,327 -- 183 (31) 19,479
Provision for loan losses ................ 900 -- -- -- 900
Total non-interest income ................ 7,662 3,753 250 (641) 11,024
Total non-interest expense ............... 17,787 2,248 953 (641) 20,347
Income before income tax ................. 13,807 1,517 (870) -- 14,454
Income tax expense ....................... 4,886 637 (558) -- 4,965
Net income ............................... 8,921 880 (312) -- 9,489
Goodwill ................................. 20,736 -- -- -- 20,736
Total assets ............................. 1,542,104 4,550 155,474 (145,984) 1,556,144
Depreciation & amortization - fixed assets 1,115 148 27 -- 1,290
June 30, 2005
Total interest income .................... $ 33,832 $ 6 $ 716 $ (32) $ 34,522
Total interest expense ................... 11,366 -- 100 (32) 11,434
Provision for loan losses ................ 630 -- -- -- 630
Total non-interest income ................ 7,104 3,468 30 (529) 10,073
Total non-interest expense ............... 16,816 2,117 599 (529) 19,003
Income before income tax ................. 12,124 1,357 47 -- 13,528
Income tax expense ....................... 4,286 571 11 -- 4,868
Net income ............................... 7,838 786 36 -- 8,660
Goodwill ................................. 20,819 -- -- -- 20,819
Total assets ............................. 1,501,191 2,879 153,697 (141,965) 1,515,802
Depreciation & amortization - fixed assets 1,017 205 27 -- 1,249
34
Emerging Accounting Standards
The FASB has issued FASB Staff Position (FSP) FAS 123-R-3, "Transition Election
Related to Accounting for the Tax Effects of Share-Based Payments Awards." This
FSP provides a practical exception when a company transitions to the accounting
requirements in FASB Statement No. 123 (Revised 2004), Share-Based Payment.
Statement 123R requires a company to calculate the pool of excess tax benefits
available to absorb tax deficiencies recognized subsequent to adopting Statement
123R (termed the "APIC Pool"), assuming the Company has been following the
recognition provisions prescribed by FASB Statement No. 123, Accounting for
Stock-Based Compensation. The FASB learned that several companies do not have
the necessary historical information to calculate the APIC pool as envisioned by
Statement 123R and accordingly, the FASB decided to allow a practical exception
as documented in this FSP. The guidance in this FSP is effective immediately and
includes transition guidance. The Company believes it has the necessary
information to calculate the APIC pool and does not anticipate utilizing this
exception.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
This document (including information incorporated by reference) contains, and
future oral and written statements of the Company and its management may
contain, forward-looking statements, within the meaning of such term in the
Private Securities Litigation Reform Act of 1995, with respect to the financial
condition, results of operations, plans, objectives, future performance and
business of the Company. Forward-looking statements, which may be based upon
beliefs, expectations and assumptions of the Company's management and on
information currently available to management, are generally identifiable by the
use of words such as "believe", "expect", "anticipate", "plan", "intend",
"estimate", "may", "will", "would", "could", "should", or other similar
expressions. Additionally, all statements in this document, including
forward-looking statements, speak only as of the date they are made, and the
Company undertakes no obligation to update any statement in light of new
information or future events.
The Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
effect on the operations and future prospects of the Company and its
subsi$iaries include, but are not limited to, the following:
o The economic impact of past and any future terrorist attacks, acts of
war or threats thereof and the response of the United States to any
such threats and attacks.
o The costs, effects and outcomes of existing or future litigation.
o Changes in accounting policies and practices, as may be adopted by
state and federal regulatory agencies, the Financial Accounting
Standards Board, the Securities and Exchange Commission and the Public
Company Accounting Oversight Board.
o The ability of the Company to manage the risks associated with the
foregoing as well as anticipated.
In addition to the risk factors described above, there are other factors that
may impact any public company, including ours, which could have a material
adverse effect on the operations and future prospects of the Company and its
subsidiaries. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
See the "Interest Rate Sensitivity" section above.
35
Item 4. Controls and Procedures
As required by Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act
of 1934, management has evaluated, with the participation of our Chief Executive
Officer and Chief Financial Officer, the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this report.
Based on their evaluation, management concluded our disclosure controls and
procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e))
were effective as of June 30, 2006 to ensure that information required to be
disclosed by us in reports that we file or submit under the Securities Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms and were
effective as of June 30, 2006. These disclosure controls and procedures include
controls and procedures designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the Securities
Exchange Act is accumulated and communicated to management, including our Chief
Executive Officer and Chief Financial Officer, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
There have been no significant changes in the Company's internal controls over
financial reporting, that occurred during the quarter ended June 30, 2006 that
have materially affected, or are reasonably likely to materially affect the
Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the Company or its
subsidiaries is a party other than ordinary routine litigation incidental to
their respective businesses.
Item 1.A. Risk Factors
There have been no material changes in the risk factors applicable to the
Company from those disclosed in Part I, Item 1.A., "Risk Factors," in the
Company's 2005 Annual Report on Form 10-K. Please refer to that section of the
Company's 10-K for disclosures regarding the risks and uncertainties related to
the Company's business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
-----------------------------------------------------------------------------
(c) Total (d) Maximum
Number of Number
Shares of Shares
Purchased as that May
Part of Yet Be
(a) Total Publicly Purchased
Number of (b) Average Announced Under the
Shares Price Paid per Plans or Plans or
Period Purchased Share Programs (1) Programs (1)
-----------------------------------------------------------------------------
April 1 -
April 30, 2006 ..... -- $ -- -- 148,600
May 1 -
May 31, 2006 ....... 30,418 $ 30.55 30,382 118,218
June 1 -
June 30, 2006 ...... 30,500 $ 30.60 30,500 87,718
---------------------------------------------------
Total 60,918 $ 30.58 60,882 87,718
===================================================
(1) On October 27, 2003, the Company announced that its Board of Directors
had reinstated the Stock Repurchase Program allowing the purchase of
up to 500,000 shares of the Company's outstanding stock. The program
will expire when the Company repurchases all of the shares covered.
Item 3. Defaults Upon Senior Securities
None
36
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
On May 17, 2006, the Company's annual meeting of shareholders was held. At the
meeting, security holders elected directors to serve one year terms. There were
10,132,839 issued and outstanding shares of common stock entitled to vote at the
annual meeting. The voting at the annual meeting was as follows:
1. David J. Downey, Van A. Dukeman, Larry D. Haab, Frederic L. Kenney,
Gregory B. Lykins, August C. Meyer, Jr., George T. Shapland, Thomas G.
Sloan, and H. Gale Zacheis, M.D. were elected to serve as directors
for one year with terms expiring at the next annual meeting in 2007.
Election of Directors: Votes For Votes Withheld
----------------------------------------------------------------------
David J. Downey 7,373,770 102,269
Van A. Dukeman 7,367,615 108,424
Larry D. Haab 7,370,362 105,677
Frederic L. Kenney 7,371,653 104,386
Gregory B. Lykins 7,368,770 107,269
August C. Meyer, Jr. 7,339,894 136,145
George T. Shapland 7,370,362 105,677
Thomas G. Sloan 7,373,770 102,269
H. Gale Zacheis, M.D. 7,368,678 107,361
Item 5. Other Information
None
Item 6. Exhibits
31.1 Certification of Chief Executive Officer Pursuant to Rule
13-a-14(a)/15d-14(a)
31.2 Certification of Chief Financial Officer Pursuant to Rule
13-a-14(a)/15d-14(a)
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
37
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duty
authorized.
MAIN STREET TRUST, INC.
Date: August 9, 2006
------------------------------
By: /s/ David B. White
------------------------------
David B. White, Executive Vice President
and Chief Financial Officer
By: /s/ Van A. Dukeman
------------------------------
Van A. Dukeman, President
and Chief Executive Officer
38