UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2000
Commission File Number: 0-30031
MAIN STREET TRUST, INC.
-----------------------
(Exact name of Registrant as specified in its charter)
Illinois 37-1338484
- ---------------- -------------
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
100 West University, Champaign, Illinois 61820
----------------------------------------------
(Address of principal executive offices) (Zip Code)
(217) 351-6500
-----------------------------
(Registrant's telephone number, including area code)
Indicate by "X" whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
-----
Indicate the number of shares outstanding of the registrant's common stock, as
of May 8, 2000:
Main Street Trust, Inc. Common Stock 10,067,001
<PAGE>
Table of Contents
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures 26
About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Changes in Securities 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 30
SIGNATURES 31
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 2000 (Unaudited) and December 31, 1999
(in thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 46,020 $ 48,328
Federal funds sold and interest earning deposits 30,925 39,022
Investments in debt and equity securities:
Available-for-sale, at fair value 219,878 206,844
Held-to-maturity, at cost (fair value of $85,781 and
$87,780 at March 31, 2000 and December 31, 1999, respectively) 88,349 89,935
Non-marketable equity securities 3,261 3,261
Loans, net of allowance for loan losses of $9,049 and $8,682 at March 31, 2000
and December 31, 1999, respectively 599,257 601,888
Mortgage loans held for sale 764 1,393
Premises and equipment 21,917 22,505
Accrued interest receivable 8,769 9,182
Other assets 12,992 13,388
------------- -------------
Total assets $ 1,032,132 $ 1,035,746
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand, non-interest bearing $ 81,361 $ 82,955
Demand, interest bearing 227,431 230,394
Savings 147,471 143,133
Time, $100 and over 88,371 92,382
Other time 251,357 246,211
------------- -------------
Total deposits 795,991 795,075
Federal funds purchased, repurchase agreements,
and notes payable 73,849 79,140
Federal Home Loan Bank advances and other borrowings 32,019 32,058
Accrued interest payable 4,039 3,611
Other liabilities 9,619 9,781
------------- -------------
Total liabilities 915,517 919,665
------------ -------------
Stockholders' equity:
Preferred stock, no par value; 2,000,000 shares authorized - -
Common stock, $0.01 par value; 15,000,000 shares authorized;
10,077,056 and 10,075,021 shares issued at March 31, 2000 and
December 31, 1999, respectively 101 101
Paid in capital 35,404 35,370
Retained earnings 84,592 83,972
Accumulated other comprehensive income (loss) (3,482) (3,362)
-------------- --------------
Total stockholders' equity 116,615 116,081
------------- -------------
Total liabilities and stockholders' equity $ 1,032,132 $ 1,035,746
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Three Months Ended March 31, 2000 and 1999
(Unaudited, in thousands, except share data)
<TABLE>
<CAPTION>
Interest income: 2000 1999
---- ----
<S> <C> <C>
Loans and fees on loans $ 12,891 $ 10,767
Investments in debt and equity securities
Taxable 3,961 4,469
Tax-exempt 474 479
Federal funds sold and interest earning deposits 548 401
------------- ------------
Total interest income 17,874 16,116
Interest expense:
Demand, savings, and other time deposits 5,861 5,527
Time deposits $100 and over 1,215 1,022
Federal funds purchased, repurchase agreements, and notes payable 1,005 665
Federal Home Loan Bank advances and other borrowings 459 384
------------- ------------
Total interest expense 8,540 7,598
------------- ------------
Net interest income 9,334 8,518
Provision for loan losses 136 151
------------- ------------
Net interest income after provision for loan losses 9,198 8,367
Non-interest income:
Remittance processing 1,875 2,041
Trust and brokerage fees 1,373 1,169
Service charges on deposit accounts 393 368
Securities transactions, net 2 11
Gain on sales of mortgage loans, net 34 258
Other 642 607
------------- ------------
Total non-interest income 4,319 4,454
Non-interest expenses:
Salaries and employee benefits 5,130 4,688
Merger related professional fees 2,452 -
Occupancy 561 596
Equipment 743 769
Data processing 385 289
Office supplies 292 268
Service charges from correspondent banks 299 291
Other 1,236 980
------------- -------------
Total non-interest expenses 11,098 7,881
Income before income taxes 2,419 4,940
Income taxes 1,425 1,532
------------- -------------
Net income $ 994 $ 3,408
============= =============
Per share data:
Basic earnings per share $ 0.10 $ 0.34
Weighted average shares of common stock outstanding 10,076,672 10,115,762
Diluted earnings per share $ 0.10 $ 0.33
Weighted average shares of common stock and dilutive potential
common shares outstanding 10,289,718 10,334,394
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Three Months Ended March 31, 2000 and 1999
(Unaudited, in thousands, except share data)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Net Income $ 994 $ 3,408
Other comprehensive income (loss):
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period, net of tax of
($62) and ($515), for March 31, 2000 and 1999, respectively (119) (999)
Less: reclassification adjustment for gains (losses) included in net
income, net of tax of $1 and $4, for March 31, 2000 and 1999,
respectively (1) (7)
-------------- --------------
Other comprehensive income (loss), net of tax (120) (1,006)
-------------- --------------
Comprehensive Income $ 874 $ 2,402
============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Three Months Ending March 31, 2000 and 1999
(Unaudited, in thousands)
<TABLE>
<CAPTION>
2000 1999
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income $ 994 $ 3,408
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 700 640
Amortization of bond premiums, net 92 251
Provision for loan losses 136 151
Securities transactions, net (2) (11)
Gain on sales of mortgage loans, net (34) (258)
Decrease in accrued interest receivable 413 881
Increase In accrued interest payable 428 111
Increase (decrease) in other assets 536 (1,153)
(Increase) decrease in other liabilities (162) 1,274
Stock appreciation rights (9) 3
Proceeds from sales of mortgage loans originated for sale 3,902 29,443
Mortgage loans originated for sale (3,239) (18,296)
-------------- --------------
Net cash provided by operating activities 3,755 16,444
-------------- --------------
Cash flows from investing activities:
Net decrease (increase) in loans 2,410 (17,665)
Proceeds from maturities and calls of investments in debt securities:
Held-to-maturity 1,260 10,993
Available-for-sale 3,160 42,022
Proceeds from sales of investments:
Available-for-sale - 3,000
Purchases of investments in debt and equity securities:
Held-to-maturity (524) (15,908)
Available-for-sale (17,196) (43,495)
Principal paydowns from mortgage-backed securities:
Held-to-maturity 834 776
Available-for-sale 746 1,629
Purchases of premises and equipment (105) (933)
-------------- --------------
Net cash used in investing activities (9,415) (19,581)
-------------- --------------
Cash flows from financing activities:
Net (decrease) increase in demand and savings deposits (219) 1,601
Net (decrease) increase in time deposits $100 and over (4,011) 4,427
Net increase (decrease) in other time deposits 5,146 (1,818)
Net (decrease) increase in federal funds purchased,
repurchase agreements and notes payable (5,291) 8,904
Net decrease in Federal Home Loan Bank advances and other borrowings (39) (806)
Cash dividends paid (359) (786)
Treasury stock transactions, net 28 (399)
-------------- --------------
Net cash (used in) provided by financing activities (4,745) 11,123
-------------- --------------
Net (decrease) increase in cash and cash equivalents (10,405) 7,986
Cash and cash equivalents at beginning of year 87,350 68,954
-------------- --------------
Cash and cash equivalents at end of period $ 76,945 $ 76,940
============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 8,112 $ 7,487
Income taxes 939 328
Real estate acquired through or in lieu of foreclosure 85 410
Dividends declared not paid - 425
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Notes to 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 generally accepted accounting principles. 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,
1999, and schedules included in BankIllinois Financial Corporation's Form 10-K
filed on March 22, 2000, and in Main Street Trust's Form 8-K filed on May 10,
2000 with respect to First Decatur BancShares Audited Consolidated Financial
Statements.
In the opinion of management, the consolidated financial statements of
Main Street Trust, Inc. (the "Company") and its subsidiaries, as of March 31,
2000 and for the three-month periods ended March 31, 2000 and 1999, include all
adjustments necessary for a fair presentation of the results of those periods.
All such adjustments are of a normal recurring nature.
Results of operations for the three-month period ended March 31, 2000
are not necessarily indicative of the results which may be expected for the year
ended December 31, 2000.
For purposes of the consolidated statements of cash flows, cash and
cash equivalents include cash and due from banks and federal funds sold.
Generally, federal funds are sold for one-day periods.
Certain amounts in the 1999 consolidated financial statements have been
reclassified to conform with the 2000 presentation. Such reclassifications have
no effect on previously reported net income.
Note 2. Business Combination
- -----------------------------
On August 12, 1999, BankIllinois Financial Corporation and First
Decatur Bancshares, Inc. entered into an Agreement and Plan of Merger which
provided for a "merger of equals" between the two companies, structured as a
merger of the two companies into the Company. The merger, which was completed on
March 23, 2000, has been accounted for as a pooling of interests and,
accordingly, all prior financial statements have been restated to include both
companies. As a result of the merger, former stockholders of BankIllinois
Financial Corporation and First Decatur Bancshares, Inc. received 5,550,724 and
4,526,332 shares of Company common stock, respectively.
The Company operates 19 banking centers and is the parent company of
BankIllinois, First National Bank of Decatur, First Trust Bank of Shelbyville
and FirsTech, Inc., a telecommunications bill processing company.
Note 3. New Accounting Rules and Regulations
- ---------------------------------------------
In June 1998, Statement on Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," was issued,
which originally required the Statement to be adopted in years beginning after
June 15, 1999. The Statement permits early adoption as of the beginning of any
fiscal quarter after its issuance. The Statement will require the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm
7
<PAGE>
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
Management does not anticipate that the adoption of the new Statement will have
a significant effect on the Company's earnings or financial position. In July
1999 the Statement on Financial Accounting Standards No. 137 was issued. This
Statement delayed the implementation of Statement No. 133 until fiscal years
beginning after June 15, 2000. The Company expects to adopt the Statement
effective January 1, 2001.
Note 4. Income per Share
- -------------------------
Net income per common share has been computed as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
---- ----
<S> <C> <C>
Net Income $ 994,000 $ 3,408,000
============= ===============
Shares:
Weighted average common shares outstanding 10,076,672 10,115,762
Dilutive effect of outstanding options, as determined
by the application of the treasury stock method 197,573 203,194
Dilutive effect of outstanding SARs, as determined
by the application of the treasury stock method 15,473 15,438
------------- ---------------
Weighted average common shares outstanding,
as adjusted 10,289,718 10,334,394
============= ===============
Basic earnings per share $ 0.10 $ 0.34
============= ===============
Diluted earnings per share $ 0.10 $ 0.33
============= ===============
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
-------------
Financial Condition
-------------------
Assets and Liabilities
Total assets remained stable with assets of $1,032,000 at March 31,
2000 compared to $1,036,000 at December 31, 1999. There were decreases in all
asset categories except securities available-for-sale.
Federal funds sold and interest earning deposits decreased $8,097,000,
or 20.8%, at March 31, 2000 compared to December 31, 1999. This decrease was a
result of excess federal funds sold being used to fund the increase in
securities available-for-sale.
Loans decreased $2,631,000, or 0.4% from December 31, 1999 to March 31,
2000. Included in this change was a decrease of $4,697,000, or 2.5% in
commercial, financial and agricultural loans. This decrease was somewhat offset
by an increase of $1,758,000, or 0.6% in residential real estate and an increase
of $675,000, or 0.5%, in installment and consumer loans.
Cash and due from banks decreased $2,308,000, or 4.8%, at March 31,
2000 compared to December 31, 1999. This decrease was primarily attributable to
a decrease in cash on hand, offset somewhat by higher due from banks and cash
items in process of collection. Cash on hand had been increased at December 31,
1999, in anticipation of potential Year 2000 needs.
8
<PAGE>
Mortgage loans held for sale decreased $629,000, or 45.2%, at March 31,
2000 compared to December 31, 1999. This decrease was primarily due to lower
demand in the mortgage loan area at March 31, 2000 than at December 31, 1999
when lower interest rates led to more refinancing as well as origination of new
mortgage loans.
Premises and equipment decreased $588,000, or 2.6%, from December 31,
1999 to March 31, 2000. This decrease was primarily due to depreciation expense,
offset somewhat by purchases.
Other assets decreased $396,000, or 3.0%, from December 31, 1999 to
March 31, 2000. This decrease was primarily caused by capitalized merger costs
of $698,000 at December 31, 1999, which were expensed during March 2000.
Somewhat offsetting this decrease was an increase of $480,000 in accrued trust
income.
Investments in securities available-for-sale increased $13,034,000, or
6.3%, at March 31, 2000 compared to December 31, 1999. Investments in securities
held-to-maturity decreased $1,586,000, or 1.8%, at March 31, 2000 compared to
December 31, 1999. The net increase in investments in debt and equity securities
was a result of shifting funds from federal funds sold and interest earning
deposits as well as cash and due from banks to higher yielding investment
securities.
Total liabilities decreased $4,148,000, or 0.5%, to $915,517,000 at
March 31, 2000 from $919,665,000 at December 31, 1999. Decreases in federal
funds purchased, repurchase agreements, and notes payable, as well as other
liabilities and Federal Home Loan Bank advances and other borrowings were
somewhat offset by increases in total deposits and accrued interest payable.
Federal funds purchased, repurchase agreements, and notes payable
decreased $5,291,000, or 6.7%, from $79,140,000 at December 31, 1999 to
$73,849,000 at March 31, 2000. Included in this change were decreases in
repurchase agreements of $4,505,000, federal funds purchased of $608,000, and
notes payable of $178,000.
Total deposits increased $916,000, or 0.1%, from $795,075,000 at
December 31, 1999 to $795,991,000 at March 31, 2000. The increase in deposits
included an increase of $5,146,000, or 2.1%, in other time deposits and an
increase of $4,338,000, or 3.0%, in savings deposits. Somewhat offsetting these
increases were decreases of $4,011,000, or 4.3%, in time deposits of $100,000
and over, $2,963,000, or 1.3%, in interest bearing demand deposits, and
$1,594,000, or 1.9%, in non-interest bearing demand deposits.
9
<PAGE>
Investment Securities
- ---------------------
The carrying value of investments in debt and equity securities was as
follows for March 31, 2000 and December 31, 1999:
Carrying Value of Securities
(in thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
March 31, 2000 December 31, 1999
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Available-for-sale:
U.S. Treasury $38,512 $37,601
Federal agencies 150,221 139,812
Mortgage-backed securities 13,903 14,870
State and municipal 10,615 10,220
Corporate and other obligations 318 320
Marketable equity securities 6,309 4,021
- -------------------------------------------------------------------------------------------------------------
Total available-for-sale $219,878 $206,844
=============================================================================================================
Held-to-maturity:
Federal agencies $28,995 $28,994
Mortgage-backed securities 26,347 27,193
State and municipal 33,007 33,748
- -------------------------------------------------------------------------------------------------------------
Total held-to-maturity $88,349 $89,935
=============================================================================================================
Non-marketable equity securities $3,261 $3,261
- -------------------------------------------------------------------------------------------------------------
Total securities $311,488 $300,040
=============================================================================================================
</TABLE>
10
<PAGE>
The following table shows the maturities and weighted-average yields of
investment securities at March 31, 2000. Mortgage-backed securities are placed
in maturity categories based on expected payments. All other securities are
shown at their contractual maturity.
Maturities and Weighted Average Yields of Debt Securities
(dollars in thousands)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
March 31, 2000
- ----------------------------------------------------------------------------------------------------------------------------
1 year 1 to 5 5 to 10 Over
or less years years 10 years Total
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available-for-sale
U.S. Treasury $23,466 5.68% $ 15,046 6.08% $ - - $ - - $ 38,512 5.84%
Federal agencies 21,263 5.55% 80,916 5.93% 44,085 6.32% 3,957 6.96% 150,221 6.02%
Mortgage-backed securities 2,145 6.24% 9,310 6.78% 2,204 6.83% 244 7.16% 13,903 6.71%
State and municipal 49 5.86% 1,266 5.06% 3,700 4.77% 5,600 4.97% 10,615 4.92%
Other securities 25 7.50% 293 7.85% - - - - 318 7.82%
Marketable equity securities1 - - - - - - - - 6,309 -
- -----------------------------------------------------------------------------------------------------------------------------
Total $46,948 $106,831 $49,989 $9,801 $219,878
- -----------------------------------------------------------------------------------------------------------------------------
Average Yield (TE) 5.65% 6.02% 6.23% 5.83% 5.98%
=============================================================================================================================
Securities held-to-maturity
Federal agencies $ - - $26,995 5.72% $ 2,000 6.40% $ - - $28,995 5.77%
Mortgage-backed securities 5,188 5.85% 19,174 5.68% 1,673 5.91% 312 6.18% 26,347 5.73%
State and municipal 2,368 4.66% 15,863 4.22% 13,238 4.95% 1,538 5.93% 33,007 4.63%
- -----------------------------------------------------------------------------------------------------------------------------
Total $7,556 $62,032 $16,911 $1,850 $88,349
=============================================================================================================================
Average Yield (TE) 5.48% 5.32% 5.22% 5.97% 5.33%
=============================================================================================================================
Non-marketable equity securities1 - - - - - - - - $ 3,261 -
=============================================================================================================================
</TABLE>
1 Due to the nature of these securities, they do not have a stated maturity date
or rate.
11
<PAGE>
Loans
- -----
The following tables present the amounts and percentages of loans for
March 31, 2000 and December 31, 1999 according to the categories of commercial,
financial and agricultural; real estate; and installment and consumer loans.
Amount of Loans Outstanding
(dollars in thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
March 31, 2000 December 31, 1999
- --------------------------------------------------------------------------------------------------------------
Amount Percentage Amount Percentage
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $183,733 30.20% $188,430 30.86%
Real estate 295,813 48.63% 294,055 48.16%
Installment and consumer1 128,760 21.17% 128,085 20.98%
- ---------------------------------------------------------------------------------------------------------------
Total loans $608,306 100.00% $610,570 100.00%
===============================================================================================================
</TABLE>
1Net of unearned discount
The balance of loans outstanding as of March 31, 2000 by maturity is
shown in the following table:
Maturity of Loans Outstanding
(dollars in thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
March 31, 2000
- -----------------------------------------------------------------------------------------------------------------------------
1 year 1-5 Over 5
or less years years Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $103,051 $59,375 $21,307 $183,733
Real estate 40,050 129,702 126,061 295,813
Installment and consumer1 29,134 95,237 4,389 128,760
- -----------------------------------------------------------------------------------------------------------------------------
Total $172,235 $284,314 $151,757 $608,306
=============================================================================================================================
Percentage of total loans outstanding 28.31% 46.74% 24.95% 100.00%
=============================================================================================================================
</TABLE>
1 Net of unearned discount
12
<PAGE>
Capital
- -------
Total stockholders' equity increased $534,000 from December 31, 1999 to
March 31, 2000. The change is summarized as follows:
(in thousands)
--------------
Stockholders' equity, December 31, 1999 $116,081
Net income 994
Treasury stock transactions, net 28
Stock appreciation rights (9)
Cash dividends declared (359)
Other comprehensive income (120)
---------------
Stockholders' equity, March 31, 2000 $116,615
===============
On April 3, 2000, the board of directors of the Company declared a cash
dividend of $0.10 per share of the Company's common stock. The dividend of
$1,008,000 was paid on April 21, 2000 to holders of record on April 10, 2000.
The Company and its subsidiary banks are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's and its subsidiary banks' financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, banks must meet specific capital guidelines that
involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Company's and its subsidiary banks' capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and its subsidiary banks to maintain minimum
amounts and ratios (set forth in the table below) of total and Tier I capital
(as defined in the regulations) to risk-weighted assets (as defined), and of
Tier I capital (as defined) to average assets (as defined). Management believes,
as of March 31, 2000, that the Company and its subsidiary banks exceeded all
capital adequacy requirements to which they are subject.
As of March 31, 2000, the most recent notifications from primary
regulatory agencies categorized all the Company's subsidiary banks as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, banks must maintain minimum total capital to
risk-weighted assets, Tier I capital to risk-weighted assets, and Tier I capital
to average assets ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed any of the
Company's subsidiary banks' categories.
13
<PAGE>
The Company's actual capital amounts and ratios are presented
in the following table (in thousands):
<TABLE>
<CAPTION>
To be well
Capitalized under
For capital prompt corrective
Actual adequacy purposes: action provisions:
-------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------------------------
As of March 31, 2000:
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk-weighted assets)
Consolidated $128,201 19.2% $53,360 8.0% N/A
BankIllinois $60,266 15.7% $30,686 8.0% $38,357 10.0%
First National Bank of Decatur $39,274 16.3% $19,236 8.0% $24,045 10.0%
Tier I capital
(to risk-weighted assets)
Consolidated $119,855 18.0% $26,680 4.0% N/A
BankIllinois $55,434 14.5% $15,343 4.0% $23,014 6.0%
First National Bank of Decatur $36,263 15.1% $9,618 4.0% $14,427 6.0%
Tier I capital
(to average assets)
Consolidated $119,855 11.4% $42,070 4.0% N/A
BankIllinois $55,434 9.9% $22,485 4.0% $28,106 5.0%
First National Bank of Decatur $36,263 9.1% $16,603 4.0% $20,004 5.0%
</TABLE>
Interest Rate Sensitivity
- -------------------------
The concept of interest rate sensitivity attempts to gauge exposure of
the Company's net interest income to adverse changes in market driven interest
rates by measuring the amount of interest-sensitive assets and
interest-sensitive liabilities maturing or subject to repricing within a
specified time period. Liquidity represents the ability of the Company to meet
the day-to-day demands of deposit customers balanced by its investments of these
deposits. The Company must also be prepared to fulfill the needs of credit
customers for loans with various types of maturities and other financing
arrangements. The Company monitors its interest rate sensitivity and liquidity
through the use of static gap reports which measure the difference between
assets and liabilities maturing or repricing within specified time periods as
well as financial forecasting/budgeting/reporting software packages.
14
<PAGE>
The following table presents the Company's interest rate
sensitivity at various intervals at March 31, 2000:
<TABLE>
<CAPTION>
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
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Federal funds sold
and interest earning deposits $ 30,925 $ - $ - $ - $ - $ 30,925
Debt and equity securities * 8,679 11,980 12,563 30,504 247,762 311,488
Loans ** 123,791 32,600 35,375 36,812 380,492 609,070
- ------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets $ 163,395 $ 44,580 $ 47,938 $ 67,316 $ 628,254 $ 951,483
- ------------------------------------------------------------------------------------------------------------------------------
Interest bearing liabilities:
Savings and interest-bearing
demand deposits*** $ 16,789 $ 1,348 $ 2,022 $ 4,052 $ 153,980 $ 178,191
Money market savings deposits 143,015 - - - - 143,015
Time deposits 34,797 40,707 56,820 71,998 135,406 339,728
Federal funds purchased,
repurchase agreements, and notes
payables 65,466 3,253 2,419 2,711 - 73,849
FHLB advances and other
other borrowings 5 9 1,014 214 30,777 32,019
- ------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities $ 260,072 $ 45,317 $ 62,275 $ 78,975 $ 320,163 $ 766,802
- ------------------------------------------------------------------------------------------------------------------------------
Net asset (liability) funding gap ($96,677) ($737) ($14,337) ($11,659) $ 308,091 $ 184,681
- ------------------------------------------------------------------------------------------------------------------------------
Repricing gap 0.63 0.98 0.77 0.85 1.96 1.24
Cumulative repricing gap 0.63 0.68 0.70 0.72 1.24 1.24
==============================================================================================================================
</TABLE>
* Debt and equity securities include securities available-for-sale,
securities held to maturity, and non-marketable equity securities.
** Loans are gross and include mortgage loans held-for-sale.
*** The total of savings and interest-bearing demand deposits does not include
$53,696,000 of non-transactional accounts which are savings accounts that
are non-interest bearing.
Included in the 1-30 day category of savings and interest-bearing demand
deposits are non-core deposits plus a percentage, based upon
industry-accepted assumptions and Company analysis, of the core deposits.
"Core deposits" are the lowest average balance of the prior twelve months
for each product type included in this category. "Non-core deposits" are
the difference between the current balance and core deposits. The time
frames include a percentage, based upon industry-accepted assumptions and
Company analysis, of the core deposits, as follows:
<TABLE>
<CAPTION>
1-30 Days 31-90 Days 91-180 Days 181-365 Days Over 1 Year
--------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Savings and interest-bearing
demand deposits 0.45% 0.85% 1.25% 2.45% 95.0%
</TABLE>
15
<PAGE>
At March 31, 2000, the Company was liability-sensitive due to the
levels of savings and interest bearing demand deposits, short-term time
deposits, and short-term borrowings. As such, the effect of a decrease in the
interest rate for all interest earning assets and interest bearing liabilities
of 100 basis points would increase annualized net interest income by
approximately $967,000 in the 1-30 days category and $974,000 in the 1-90 days
category assuming no management intervention. An increase in interest rates
would have the opposite effect for the same time periods.
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 which permit the
Company to borrow federal funds on an unsecured basis. Additionally, the Company
can borrow approximately $29,000,000 from the Federal Home Loan Bank on a
secured basis.
The Company uses financial forecasting/budgeting/reporting software
packages to perform interest rate sensitivity analysis for all product
categories. The Company's primary focus of its analysis is on the effect of
interest rate increases and decreases on net interest income. Management
believes that this analysis reflects the potential effects on current earnings
of interest rate changes. Call criteria and prepayment assumptions are taken
into consideration for investments in debt and equity securities. All of the
Company's financial instruments are analyzed by a software database which
includes each of the different product categories which are tied to key rates
such as prime, Treasury Bills, or the federal funds rate. The relationship of
each of the different products to the key rate that the product is tied to is
proportional. The software reprices the products based on current offering
rates. The software performs interest rate sensitivity analysis by performing
rate shocks of plus or minus 200 basis points in 100 basis point increments.
The following table shows projected results at March 31, 2000 and
December 31, 1999 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.
<TABLE>
<CAPTION>
Basis Point Change
------------------
<S> <C> <C> <C> <C>
+200 +100 -100 -200
March 31, 2000 (0.1%) (0.1%) 0.1% 0.1%
December 31, 1999 (0.7%) (0.4%) 0.4% 0.7%
</TABLE>
As shown in the above table, there was only a slight change on the
impact of interest rate changes on net interest income at March 31, 2000
compared to December 31, 1999. The Company continues to remain liability
sensitive, causing a projected decrease in net interest income from an increase
in interest rates, and having an opposite affect from a decrease in interest
rates.
The foregoing computations are based on numerous assumptions, including
relative levels of market interest rates, prepayments and deposit mix. The
computed estimates should not be relied upon as a projection of actual results.
Despite the limitations on preciseness inherent in these computations,
management believes that the information provided is reasonably indicative of
the effect of changes in interest rate levels on the net earning capacity of the
Company's current mix of interest earning assets and interest bearing
liabilities. Management continues to use the results of these computations,
along with the results of its computer model projections, in order to maximize
current earnings while positioning the Company to minimize the effect of a
prolonged shift in interest rates that would adversely affect future results of
operations.
At the present time, the most significant market risk affecting the
Company is interest rate risk. Other market risks such as foreign currency
exchange risk and commodity price risk do not
16
<PAGE>
occur in the normal business of the Company. The Company also is not currently
using trading activities or derivative instruments to control interest rate
risk.
Liquidity and Cash Flows
- ------------------------
The Company was able to meet liquidity needs during the first three
months of 2000. A review of the consolidated statements of cash flows included
in the accompanying financial statements shows that the Company's cash and cash
equivalents decreased $10,405,000 from December 31, 1999 to March 31, 2000. This
decrease came from net cash used in investing and financing activities offset by
net cash provided by operating activities.
There were differences in sources and uses of cash during the first
three months of 2000 compared to the first three months of 1999. Less cash was
used in the area of investing activities during the first three months of 2000
compared to the first three months of 1999 due to funding loan growth during
1999 compared to a slight decrease during 2000. More cash was used for purchases
of investment securities compared to maturities and calls during 2000 than 1999
when cash was used to fund the growth in loans. Cash was used in the area of
financing activities during the first three months of 2000 compared to cash
provided by financing during the first three months of 1999. This was primarily
due to use of funds in the areas of federal funds purchased, repurchase
agreements and other notes as well as time deposits $100,000 and over during
2000 compared to a source of funds in these areas during 1999. Somewhat
offsetting these uses of funds was a source of funds from other time deposits
during 2000 compared to 1999. Less cash was provided by operating activities
during the first three months of 2000 compared to the first three months of
1999, primarily due to lower volume of loans originated for sale. Lower earnings
due to merger related expenses during the first three months of 2000, also
contributed to less cash provided by operating activities.
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 balance of the
allowance for loan losses was $9,049,000 at March 31, 2000 compared to
$8,682,000 at December 31, 1999, as net recoveries were $231,000 and provisions
totaled $136,000 during the first quarter. The allowance for loan losses as a
percentage of total loans rose to 1.49% at March 31, 2000, compared to 1.42% at
December 31, 1999 as gross loans, including loans held-for-sale, decreased
slightly from $611,963,000 to $609,070,000. Net recoveries of $231,000 during
the first quarter of 2000 stemmed primarily from a $300,000 recovery associated
with a commercial credit.
The allowance for loan losses as a percentage of non-performing loans
was 1,503% at March 31, 2000. Non-performing loans, while increasing from
$552,000 at December 31, 1999, remained within an acceptable range at $602,000.
The $50,000 increase in non-performing loans during the first quarter resulted
from a $65,000 increase in loans over 90 days past due and still accruing,
somewhat offset by a $15,000 decrease in non-accruals. Although unforeseen
market conditions could result in significant adjustments in the future,
management believes that problem assets have been effectively identified and
that the allowance for loan losses is adequate to absorb possible losses in the
portfolio which are reasonably anticipated.
17
<PAGE>
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)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
March 31, 2000 March 31, 1999
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Allowance for loan losses at
beginning of year $8,682 $8,852
- ------------------------------------------------------------------------------------------------------
Charge-offs during period:
Commercial, financial and agricultural ($9) ($434)
Residential real estate (14) -
Installment and consumer (139) (78)
- ------------------------------------------------------------------------------------------------------
Total ($162) ($512)
- ------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial, financial and agricultural $335 $46
Residential real estate 1 2
Installment and consumer 57 64
- ------------------------------------------------------------------------------------------------------
Total $393 $112
- ------------------------------------------------------------------------------------------------------
Net (charge-offs) recoveries $231 ($400)
Provision for loan losses 136 151
- ------------------------------------------------------------------------------------------------------
Allowance for loan losses at end of quarter $9,049 $8,603
- ------------------------------------------------------------------------------------------------------
Ratio of net charge-offs (recoveries) to
average net loans (0.04)% 0.08%
======================================================================================================
</TABLE>
The following table shows the allocation of the allowance for loan
losses allocated to each category.
<TABLE>
<CAPTION>
Allocation of the Allowance for Loan Losses
- ------------------------------------------------------------------------------------------------------
March 31, 2000 December 31, 1999
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Allocated:
Commercial, financial and agricultural $3,164 $3,476
Residential real estate 799 790
Installment and consumer 556 452
Installment and consumer 1,287 1,258
- ------------------------------------------------------------------------------------------------------
Total allocated allowance $5,250 $5,524
Unallocated allowances 3,799 3,158
- ------------------------------------------------------------------------------------------------------
Total $9,049 $8,682
======================================================================================================
</TABLE>
18
<PAGE>
The following table presents the aggregate amount of loans considered
to be nonperforming for the periods indicated. Nonperforming loans include loans
accounted for on a nonaccrual basis, accruing loans contractually past due 90
days or more as to interest or principal payments and loans which are troubled
debt restructurings as defined in Statement of Financial Accounting Standards
No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings."
Nonperforming Loans (in thousands)
- ------------------------------------------------------------------------------
March 31, 2000 December 31, 1999
==============================================================================
Nonaccrual loans 1 $97 1 $112
==============================================================================
Loans past due 90 days or more $505 $440
==============================================================================
Renegotiated loans $98 $104
==============================================================================
1 Includes $63,000 at March 31, 2000 and $112,000 at December 31, 1999 of real
estate and consumer loans which management does not consider impaired as defined
by the Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" (SFAS 114).
Results of Operations
---------------------
Results of Operations For the Three Months Ended March 31, 2000
- ---------------------------------------------------------------
The merger of equals to create the Company, which occurred at the end
of the first quarter of 2000, resulted in significant merger related costs which
were expensed during the first quarter. These expenses had a significant effect
on the reported net income of the combined company. Net income for the first
three months of 2000 was $994,000, a $2,414,000, or 70.8%, decrease from
$3,408,000 during the first three months of 1999. Basic earnings per share
decreased $0.24, or 70.6%, to $0.10 in the first three months of 2000 from $0.34
in the same period of 1999. Diluted earnings per share decreased $0.23, or
69.7%, to $0.10 in the first three months of 2000 from $0.33 in the same period
of 1999.
Operating earnings for the three months ended March 31, 2000, were
$3,859,000 compared to $3,408,000 for the same period in 1999, an increase of
$451,000, or 13.2%. Basic earnings per share on operating earnings increased
$0.04, or 11.8%, to $0.38 in the first three months of 2000 from $0.34 during
the first three months of 1999. Diluted earnings per share on operating earnings
increased $0.05, or 15.2%, to $0.38 in the first three months of 2000 from $0.33
in the same period of 1999. The difference between operating and net earnings
was due to merger related expenses, net of tax, of $2,865,000 affecting the
first quarter of 2000. The merger related expenses consisted of $2,452,000 of
professional fees, $713,000 of early retirement and termination of employment
contracts, offset by $300,000 of tax benefit. The Company anticipates additional
non-recurring merger related expenses, which have not been quantified, during
the remainder of 2000 as it positions itself for 2001 and beyond.
19
<PAGE>
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.
<TABLE>
<CAPTION>
Consolidated Average Balance Sheet and Interest Rates
(dollars in thousands)
- --------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31,
- --------------------------------------------------------------------------------------------------------------------
2000 1999
- --------------------------------------------------------------------------------------------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
- --------------------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C> <C> <C> <C> <C> <C>
Taxable investment securities1 $265,364 $3,961 5.97% $308,756 $4,469 5.79%
Tax-exempt investment securities1 (TE) 42,285 718 6.79% 42,399 726 6.85%
Federal funds sold and interest earning
deposits 35,385 548 6.19% 29,280 401 5.48%
Loans2,3 (TE) 598,691 12,902 8.62% 505,313 10,781 8.53%
- --------------------------------------------------------------------------------------------------------------------
Total interest earning assets
and interest income (TE) $941,725 $18,129 7.70% $885,748 $16,377 7.40%
- --------------------------------------------------------------------------------------------------------------------
Cash and due from banks $55,906 $55,835
Premises and equipment 22,184 21,139
Other assets 21,931 19,262
- --------------------------------------------------------------------------------------------------------------------
Total assets $1,041,746 $981,984
====================================================================================================================
Liabilities and Stockholders' Equity
Interest bearing demand deposits $215,403 $2,053 3.81% $250,586 $2,071 3.31%
Savings 121,513 478 1.58% 75,356 300 1.59%
Time deposits 339,155 4,545 5.36% 316,321 4,178 5.28%
Federal funds purchased, repurchase
agreements, and notes payable 79,085 1,005 5.08% 65,002 665 4.09%
FHLB advances and other borrowings 32,043 459 5.73% 27,305 384 5.63%
- --------------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities and interest expense $787,199 $8,540 4.34% $734,570 $7,598 4.14%
- --------------------------------------------------------------------------------------------------------------------
Noninterest bearing demand deposits $67,921 $117,660
Noninterest bearing savings deposits4 56,961 4,270
Other liabilities 12,873 10,969
- --------------------------------------------------------------------------------------------------------------------
Total liabilities $924,954 $867,469
Stockholders' equity 116,792 114,515
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $1,041,746 $981,984
- --------------------------------------------------------------------------------------------------------------------
Interest spread (average
rate earned minus
average rate paid) (TE) 3.36% 3.26%
====================================================================================================================
Net interest income (TE) $9,589 $8,779
====================================================================================================================
Net yield on interest
earning assets (TE) 4.07% 3.96%
====================================================================================================================
</TABLE>
Notes:
1Investments in debt securities are included at carrying value.
2Loans are net of allowance for loan losses. Nonaccrual loans are included
in the total.
3Loan fees of approximately $235,000 and $291,000 in 2000 and 1999,
respectively, are included in total loan income. 4See definition of deposit
accounts in the "Analysis of Volume and Rate Changes" discussion below.
20
<PAGE>
The following table presents, on a tax equivalent basis, an analysis of
changes in net interest income resulting from changes in average volumes of
earning assets and interest bearing liabilities and average rates earned and
paid. The change in interest due to the combined rate/volume variance has been
allocated to rate and volume changes in proportion to the absolute dollar
amounts of change in each.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Analysis of Volume and Rate Changes
(in thousands)
- ---------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2000
- ---------------------------------------------------------------------------------------------------------------
Increase
(Decrease)
from
Previous Due to Due to
Year Volume Rate
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Taxable investment securities ($508) ($1,330) $822
Tax-exempt investment
securities (TE) (8) (2) (6)
Federal funds sold and interest earning deposits 147 90 57
Loans (TE) 2,121 2,011 110
- ----------------------------------------------------------------------------------------------------------------
Total interest income (TE) $1,752 $769 $983
- ----------------------------------------------------------------------------------------------------------------
Interest Expense
Interest bearing demand and savings deposits1 $160 $81 $79
Time deposits 367 305 62
Federal funds purchased,
repurchase agreements, and notes payable 340 161 179
FHLB advances and other borrowings 75 68 7
Total interest expense $942 $615 $327
- ----------------------------------------------------------------------------------------------------------------
Net Interest Income (TE) $810 $154 $656
================================================================================================================
</TABLE>
Notes:
1Due to deposit reclassifications described below, interest bearing demand
and savings deposits are included in the same line for comparability.
Net interest income on a tax equivalent basis was $810,000, or 9.2%
higher for the first three months of 2000 compared to 1999. Total tax-equivalent
interest income was $1,752,000, or 10.7% higher in 2000 compared to 1999, and
interest expense increased $942,000, or 12.4%. The increase in interest income
was due to both an increase in interest rates as well as higher average earning
assets. The increase in interest expense was primarily due to an increase in
average interest bearing liabilities as well as higher interest rates.
The increase in total interest income was mainly due to an increase in
interest income from loans as well as federal funds sold and interest earning
deposits, offset somewhat by decreases in taxable and tax-exempt investment
securities interest. The increase in interest income from loans was primarily
due to an increase in average loans outstanding during the first three months of
2000 compared to the first three months of 1999. The increase in interest from
federal funds sold and interest earning deposits was primarily due to an
increase in average balances during the period as well as an increase in rates.
The decrease in taxable investment interest income was mainly due to a decrease
in average taxable investments, offset somewhat by higher yields. The decrease
in interest
21
<PAGE>
from tax-exempt investments was caused by lower yields as well as a
decrease in average tax-exempt investments. The decrease in the total average
investment portfolio was primarily caused by shifting assets to fund loan
growth.
The increase in total interest expense was due to an increase in
interest on time deposits; federal funds purchased, repurchase agreements and
notes payable; interest bearing demand and savings deposits; and FHLB advances
and other borrowings. Interest expense on time deposits increased during the
first quarter of 2000 compared to the first quarter of 1999 mainly because of
higher volume. Interest expense on federal funds purchased, repurchase
agreements, and notes payable increased during 2000 compared to 1999 due to both
higher rates and higher average balances. Also contributing to the increase in
total interest expense was an increase in interest on interest bearing demand
and savings deposits which was due to both an increase in the average balance
and rates on these accounts. Interest expense on FHLB advances and other
borrowings increased in the first quarter of 2000 compared to the first quarter
of 1999 due to an increase in volume in this category. The lower average balance
of interest bearing demand deposits and the higher average balance of savings
deposits in the first quarter of 2000 compared to the first quarter of 1999 as
shown in the "Consolidated Average Balance Sheet and Interest Rates" table
above, was partially caused by reclassifying non-transactional interest bearing
demand deposits into the savings category during 2000. A portion of the Company
had already performed this reclassification in March 1999. Accounts identified
as transactional remained in the demand categories, while accounts identified as
non-transactional were reclassified into the savings categories. The
classification was based upon whether the account balance was fluctuating or
whether it exhibited stable balance portions which were called
non-transactional. Banks are required to hold balances at the Federal Reserve
Bank based upon transactional account balances. By identifying these accounts as
non-transactional, the Company was able to reduce the balances required to be
held at the Federal Reserve Bank in a non-interest bearing reserve account.
The provision for loan losses recorded was $136,000 during the first
three months of 2000. This was $15,000, or 9.9%, lower than the $151,000
recorded during the first three months of 1999. 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.
Total non-interest income decreased $135,000, or 3.0%, during the first
three months of 2000 compared to the first three months of 1999. Included in
this decrease was a decrease of $224,000, or 86.8%, in gains on sales of
mortgage loans held-for-sale. This decrease reflected a $25,541,000, or 86.7%,
decrease in funded mortgage loans held-for-sale during the first quarter 2000
compared to the first quarter 1999 when significant growth occurred in this area
due to lower interest rates. Remittance processing decreased $166,000, or 8.1%,
during the first three months of 2000 compared to the same period 1999. Although
the number of items processed is comparable between 2000 and 1999, there was a
shift from lockbox payments to mechanized payments which have both lower revenue
streams as well as lower costs. Somewhat offsetting these decreases was a
$204,000, or 17.5%, increase in trust and brokerage fees. The majority of this
increase was due to the addition of new accounts as well as additions to
existing accounts. The continued success of the stock market has also added to
the increase in assets under management upon which fees are based.
Total non-interest expense increased $3,217,000, or 40.8%, during the
first three months of 2000 compared to the first three months of 1999. Of this
increase, $2,452,000 was due to merger related expenses. Salaries and employee
benefits increased $442,000, or 9.4%, during the first quarter of 2000 compared
to the first quarter of 1999. Included in this increase was $713,000 due to
expense related to early retirement and termination of employment contracts as a
result of the merger. Somewhat offsetting this increase was a decrease in
salaries and employee benefits for FirsTech which closed its Hammond processing
center as well as reduced its number of employees.
22
<PAGE>
Data processing expense increased $96,000, or 33.2% during the first three
months of 2000 compared to the first three months of 1999. Included in this
increase was the addition of imaging technology during the latter part of 1999
as well as an increase in the number of transactions processed.
Income tax expense decreased $107,000, or 7.0%, during the first three
months of 2000 compared to the first three months of 1999, due to $300,000 of
tax benefit on expenses related to the merger offset by an increase of $193,000
due to higher operating income in 2000 resulting in more taxable income. The
effective tax rate increased from 31.0% during the first quarter of 1999 to
58.9% during the first quarter of 2000 due to $2,292,000 of non-deductible
merger related professional fees.
23
<PAGE>
Business Segment Information
- ----------------------------
The Company currently operates in two industry segments. The primary
business involves providing banking services to central Illinois. BankIllinois,
First National Bank of Decatur and First Trust Bank of Shelbyville offer a full
range of financial services to business and individual customers. These services
include demand, savings, time and individual retirement accounts; commercial,
consumer (including automobile loans and personal lines of credit),
agricultural, and real estate lending; safe deposit and night depository
services; farm management; full service trust departments; discount brokerage
services and purchases of installment obligations from retailers, primarily
without recourse. The other industry segment involves retail payment processing.
FirsTech provides the following services to electric, water and gas utilities,
telecommunication companies, cable television firms and charitable
organizations: retail lockbox processing of payments delivered by mail to the
biller; processing of payments delivered by customer to pay agents such as
grocery stores, convenience stores and currency exchanges; and concentration of
payments delivered by the Automated Clearing House network, money management
software such as Quicken and through networks such as Visa e-Pay and Mastercard
RPS. The following is a summary of selected data for the various business
segments:
<TABLE>
<CAPTION>
Banking Remittance
Services Services Company Eliminations Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
March 31, 2000
Total interest income $ 17,867 $ 30 $ 67 $ (90) $ 17,874
Total interest expense 8,630 - - (90) 8,540
Provision for loan losses 136 - - - 136
Total non-interest income 2,485 2,094 35 (295) 4,319
Total non-interest expense 6,418 1,689 3,286 (295) 11,098
Income before income tax 5,168 435 (3,184) - 2,419
Income tax expense 1,587 149 (311) - 1,425
Net income 3,581 286 (2,873) - 994
Total assets 1,021,046 6,299 120,747 (115,959) 1,032,132
Depreciation and amortization 563 131 6 - 700
March 31, 1999
Total interest income $ 16,118 $ 21 $ 44 $ (67) $ 16,116
Total interest expense 7,665 - - (67) 7,598
Provision for loan losses 151 - - - 151
Total non-interest income 2,463 2,167 35 (211) 4,454
Total non-interest expense 6,011 1,964 117 (211) 7,881
Income before income tax 4,754 224 (38) - 4,940
Income tax expense 1,469 76 (13) - 1,532
Net income 3,285 148 (25) - 3,408
Total assets 986,229 5,867 115,863 (114,410) 993,549
Depreciation and amortization 542 92 6 - 640
</TABLE>
24
<PAGE>
Year 2000
- ---------
The Year 2000 posed a unique set of challenges to those industries
reliant on information technology. Financial institutions and bill processing
companies are particularly dependent on electronic data processing systems. In
late 1996, the Company started the process of identifying the hardware and
software issues required to be addressed to assure Year 2000 compliance. The
Company began by assessing the issues related to the Year 2000 and the potential
for those issues to adversely affect the Company's and its subsidiaries'
operations.
As a result of the efforts of the Company's Year 2000 Committees, the
Company and its subsidiaries experienced an uneventful transition from 1999 to
2000. There was no disruption of services to customers or with internal
operations. Among the benefits derived from the time, effort and costs related
to Year 2000 was a complete review and update of the Company's disaster recovery
and contingency plans. As a result, the Company is now better prepared to deal
with technical or natural disasters which could threaten the Company's
operations. The Company will continue to remain aware of dates during 2000 which
are considered critical and will address issues should they arise.
Recent Regulatory Developments
- ------------------------------
On November 12, 1999, President Clinton signed legislation that will
allow bank holding companies to engage in a wider range of nonbanking
activities, including greater authority to engage in securities and insurance
activities. Under the Gramm-Leach-Bliley Act (the "Act"), a bank holding company
that elects to become a financial holding company may engage in any activity
that the Board of Governors of the Federal Reserve System (the "Federal
Reserve"), in consultation with the Secretary of the Treasury, determines by
regulation or order is financial in nature, incidental to any such financial
activity, or complementary to any such financial activity and does not pose a
substantial risk to the safety or soundness of depository institutions or the
financial system generally. The Act specifies certain activities that are deemed
to be financial in nature, including lending, exchanging, transferring,
investing for others, or safeguarding money or securities; underwriting and
selling insurance; providing financial, investment, or economic advisory
services; underwriting, dealing in or making a market in, securities; and any
activity currently permitted for bank holding companies by the Federal Reserve
under section 4(c)(8) of the Bank Holding Company Act. A bank holding company
may elect to be treated as a financial holding company only if all depository
institution subsidiaries of the holding company are well-capitalized,
well-managed and have at least a satisfactory rating under the Community
Reinvestment Act.
National banks are also authorized by the Act to engage, through
"financial subsidiaries," in any activity that is permissible for financial
holding companies (as described above) and any activity that the Secretary of
the Treasury, in consultation with the Federal Reserve, determines is financial
in nature or incidental to any such financial activity, except (i) insurance
underwriting, (ii) real estate development or real estate investment activities
(unless otherwise expressly permitted by law), (iii) insurance company portfolio
investments and (iv) merchant banking. The authority of a national bank to
invest in a financial subsidiary is subject to a number of conditions,
including, among other things, requirements that the bank must be well-managed
and well-capitalized (after deducting from capital the bank's outstanding
investments in financial subsidiaries). The Act provides that state banks may
invest in financial subsidiaries (assuming they have the requisite investment
authority under applicable state law) subject to the same conditions that apply
to national banks.
Various bank regulatory agencies have begun issuing regulations as
mandated by the Act. The Federal Reserve has issued an interim regulation
establishing procedures for bank holding companies to elect to become financial
holding companies. In addition, the Federal Reserve has issued interim
regulations listing the financial activities permissible for financial holding
companies and
25
<PAGE>
describing the parameters under which financial holding companies
may engage in securities and merchant banking activities. The Office of the
Comptroller of the Currency has issued a regulation regarding the parameters
under which national banks may establish and maintain financial subsidiaries.
The Federal Deposit Insurance Corporation has issued an interim regulation
regarding the parameters under which state nonmember banks may conduct
activities through subsidiaries that national banks may conduct only in
financial subsidiaries. In addition, all federal bank regulatory agencies have
jointly issued a proposed regulation that would implement the privacy provisions
of the Act. At this time, it is not possible to predict the impact the Act and
its implementing regulations may have on the Company. As of the date of this
filing, the Company has not applied for or received approval to operate as a
financial holding company. In addition, the Company's subsidiary banks have not
applied for or received approval to establish financial subsidiaries
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
- --------------------------------------------------------------------------------
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project" or similar expressions. 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 affect on the
operations and future prospects of the Company and its subsidiaries include, but
are not limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Company's market area, our implementation of new technologies, our ability
to develop and maintain secure and reliable electronic systems, and accounting
principles, policies and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. Further information concerning the Company and
its business, including additional factors that could materially affect the
Company's financial results, is included in the Company's filings with the
Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- -------------------------------------------------------------------
See pages 14 through 17.
26
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
The are no material pending legal proceedings to which the Company or its
subsidiaries is a party other than ordinary routine litigation incidental to
their respective businesses.
Item 2. Changes in Securities
- ------------------------------
None
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
On March 23, 2000, BankIllinois Financial Corporation and First Decatur
Bancshares, Inc. completed a merger into the Company. As a result of this merger
transaction, the Company is the successor to BankIllinois Financial and First
Decatur.
Each of BankIllinois Financial and First Decatur held a special meeting on March
21, 2000 to adopt the Agreement and Plan of Merger, dated August 12, 1999, by
and among BankIllinois Financial, First Decatur and the Company. The voting on
the matter was as follows:
<TABLE>
<CAPTION>
BankIllinois Financial Corporation:
For Against Abstain Broker Non- Votes Total
<S> <C> <C> <C> <C> <C>
Proposal to adopt the 4,697,243 6,967 361 None 4,704,571
Agreement and Plan of Merger
First Decatur Bancshares, Inc.:
For Against Abstain Broker Non- Votes Total
Proposal to adopt the 2,462,550 119,520 182,900 None 2,764,970
Agreement and Plan of Merger
</TABLE>
Prior to the consummation of the merger transaction, all of the issued and
outstanding shares of the Company were held in equal amounts by BankIllinois
Financial and First Decatur, and the board of directors consisted of Gregory L.
Lykins and John W. Luttrell. On March 22, 2000, the shareholders of the Company
executed a unanimous written consent of shareholders adopting the Articles of
Amendment and Restatement of Articles of Incorporation. There were 1,000 shares
of common stock issued and outstanding on the dates the consent was executed.
27
<PAGE>
Item 5. Other Information
- --------------------------
On March 23, 2000, BankIllinois Financial Corporation and First Decatur
Bancshares, Inc. completed a merger into Main Street Trust, Inc., a company
formed by the two companies to serve their combined customer base located across
central Illinois.
In the transaction, First Decatur's stockholders received 1.638 shares of the
newly issued Main Street common stock for each share held of First Decatur and
BankIllinois Financial stockholders received one share of Main Street stock for
each share held of BankIllinois Financial.
The following unaudited proforma consolidated statements of income are presented
to show the impact on the historical results of operations of Main Street Trust,
Inc. pursuant to the merger.
No proforma adjustments were necessary based on the pooling of interests method
of accounting. The unaudited proforma consolidated statements of income assume
the merger was consummated on January 1 of the earliest indicated period.
The unaudited proforma income amounts do not reflect any potential income
enhancements or cost reductions that are expected to result from the
consolidation of BankIllinois Financial and First Decatur operations and are not
necessarily indicative of the results expected of the future combined
operations. No assurances can be given with respect to the ultimate level of
income enhancements or cost reductions to be realized.
The following information should be read in conjunction with and is qualified in
its entirety by the consolidated financial statements and accompanying notes of
BankIllinois Financial and First Decatur, included or incorporated by reference
herein.
The unaudited proforma consolidated statements of income are intended for
informational purposes and are not necessarily indicative of the future
operating results of the combined company or of the operating results of the
combined company that would have actually occurred had the merger been in effect
for the period presented.
28
<PAGE>
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Unaudited Pro Forma Consolidated Statements of Income
Years Ended December 31, 1999, 1998 and 1997
(in thousands, except share data)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest income
Loans and fees on loans $ 47,162 $ 45,064 $ 44,357
Investments in debt and equity securities
Taxable 16,849 17,092 16,852
Tax exempt 1,945 1,517 1,085
Federal funds sold and interest earning deposits 1,254 2,007 1,411
--------- --------- ---------
Total interest income 67.210 65,680 63,705
Interest expense
Demand, savings and other time deposits 26,917 27,661 27,660
Federal funds purchased, repurchase agreements
and notes payable 3,225 2,727 2,579
Federal Home Loan Bank advances and other borrowings 1,685 1,474 888
--------- --------- ---------
Total interest expense 31,827 31,862 31,127
--------- --------- ---------
Net interest income 35,383 33,818 32,578
Provisions for loan loss 573 809 897
--------- --------- ---------
Net interest income after provision for loan loss 34,810 33,009 31,681
Non-interest income
Trust and brokerage fees 4,895 4,222 3,917
Service charges 2,699 2,707 2,930
Remittance processing income 8,160 5,165 4,241
Security transactions, net 140 66 11
Gain on sales of mortgage loans, net 654 1,101 553
Other 1,427 1,233 1,147
--------- --------- --------
Total non-interest income 17,975 14,494 12,799
Non-interest expense
Salaries and employee benefits 18,065 16,749 15,606
Occupancy 2,367 2,500 2,656
Equipment 3,413 2,949 3,099
Data processing 1,247 978 1,059
Service charges from correspondent banks 1,428 841 603
Reconciliation liability 2,500 - -
Other 6,912 6,484 5,988
--------- --------- ---------
Total non-interest expense 35,932 30,501 29,011
Income before income taxes 16,853 17,002 15,469
Income Taxes 5,165 5,318 4,977
--------- --------- --------
Net Income $ 11,688 $ 11,684 $ 10,492
========= ========= ========
Per share data:
Basic earnings per share $ 1.16 $ 1.13 $ 1.01
Weighted average shares of common stock outstanding 10,088,479 10,369,606 10,393,917
Diluted earnings per share $ 1.13 $ 1.10 $ 1.00
Weighted average shares of common stock and dilutive
potential common shares outstanding 10,304,661 10,578,297 10,541,122
</TABLE>
29
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
a. Exhibits
27. Financial Data Schedule
b. Reports
On January 13, 2000, First Decatur Bancshares, Inc. filed a Form 8-K, which
reported under Item 5 that a press release was issued announcing First Decatur's
1999 unaudited earnings.
On March 22, 2000, First Decatur Bancshares, Inc and BankIllinois Financial
Corporation each filed a Form 8-K, which reported under Item 5 that stockholders
of the respective corporations, at their special meetings, voted to approve the
previously announced merger of the two companies into Main Street Trust, Inc.
On March 24, 2000, Main Street Trust, Inc filed a Form 8-K, which reported under
Item 5 that effective March 23, 2000, BankIllinois Financial Corporation and
First Decatur Bancshares, Inc. completed their merger into Main Street Trust,
Inc.
On May 10, 2000, Main Street Trust, Inc. filed a Form 8-K, which filed under
Item 5 the Audited Consolidated Financial Statements of First Decatur
BancShares, Inc.
30
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MAIN STREET TRUST, INC.
Date: May 12, 2000
By: /s/ David B. White
Executive Vice President
and Chief Financial Officer
31
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 46,020
<INT-BEARING-DEPOSITS> 425
<FED-FUNDS-SOLD> 30,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 223,139
<INVESTMENTS-CARRYING> 88,349
<INVESTMENTS-MARKET> 85,781
<LOANS> 600,021
<ALLOWANCE> 9,049
<TOTAL-ASSETS> 1,032,132
<DEPOSITS> 795,991
<SHORT-TERM> 73,849
<LIABILITIES-OTHER> 13,658
<LONG-TERM> 32,019
<COMMON> 101
0
0
<OTHER-SE> 116,514
<TOTAL-LIABILITIES-AND-EQUITY> 1,032,132
<INTEREST-LOAN> 12,891
<INTEREST-INVEST> 4,435
<INTEREST-OTHER> 548
<INTEREST-TOTAL> 17,874
<INTEREST-DEPOSIT> 7,076
<INTEREST-EXPENSE> 8,540
<INTEREST-INCOME-NET> 9,334
<LOAN-LOSSES> 136
<SECURITIES-GAINS> 2
<EXPENSE-OTHER> 11,098
<INCOME-PRETAX> 2,419
<INCOME-PRE-EXTRAORDINARY> 2,419
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 994
<EPS-BASIC> 0.10
<EPS-DILUTED> 0.10
<YIELD-ACTUAL> 7.70
<LOANS-NON> 97
<LOANS-PAST> 505
<LOANS-TROUBLED> 98
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,682
<CHARGE-OFFS> 162
<RECOVERIES> 393
<ALLOWANCE-CLOSE> 9,049
<ALLOWANCE-DOMESTIC> 9,049
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
