10-Q 1 mainstreet10q.txt 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, 2005 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 by "X" whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). Yes [X] No [ ] Indicate the number of shares outstanding of the registrant's common stock, as of August 2, 2005. Main Street Trust, Inc. Common Stock 10,247,675 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 13 Item 3. Quantitative and Qualitative Disclosures about Market Risk 33 Item 4. Controls and Procedures 33 (b) PART II. OTHER INFORMATION Item 1. Legal Proceedings 34 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 34 Item 3. Defaults Upon Senior Securities 34 Item 4. Submission of Matters to a Vote of Security Holders 34 Item 5. Other Information 35 Item 6. Exhibits 35 SIGNATURES 36 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements MAIN STREET TRUST, INC. AND SUBSIDIARIES Consolidated Balance Sheets June 30, 2005 and December 31, 2004 (Unaudited, in thousands, except share data) June 30, December 31, 2005 2004 ---------------------------------------------------------------------------------------------- ASSETS Cash and due from banks ........................................ $ 41,019 $ 33,133 Federal funds sold and interest bearing deposits ............... 14,854 31,795 -------------------------- Cash and cash equivalents .................................. 55,873 64,928 -------------------------- Investments in debt and equity securities: Available-for-sale, at fair value .............................. 261,146 269,580 Held-to-maturity, at cost (fair value of $79,217 and $81,099 at June 30, 2005 and December 31, 2004, respectively) .......... 79,527 81,164 Non-marketable equity securities ............................... 23,573 7,982 -------------------------- Total investments in debt and equity securities ........... 364,246 358,726 -------------------------- Loans, net of allowance for loan losses of $13,628 and $9,650 at June 30, 2005 and December 31, 2004, respectively ........... 1,010,195 761,227 Mortgage loans held for sale ................................... 2,768 1,005 Premises and equipment ......................................... 22,579 17,087 Goodwill ....................................................... 20,819 -- Core deposit intangibles ....................................... 5,004 -- Accrued interest receivable .................................... 8,770 6,570 Other assets ................................................... 25,548 18,575 -------------------------- Total assets ................................................... $ 1,515,802 $ 1,228,118 ========================== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing ........................................... $ 215,072 $ 172,908 Interest bearing ............................................... 929,092 801,669 -------------------------- Total deposits ............................................ 1,144,164 974,577 -------------------------- Federal funds purchased, repurchase agreements and notes payable 121,854 96,900 Federal Home Loan Bank advances and other borrowings ........... 89,077 29,882 Accrued interest payable ....................................... 3,471 2,601 Other liabilities .............................................. 14,073 10,183 -------------------------- Total liabilities .............................................. 1,372,639 1,114,143 -------------------------- 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 ................................................ 55,189 55,189 Retained earnings .............................................. 115,176 108,071 Accumulated other comprehensive loss ........................... (956) (218) -------------------------- 169,521 163,154 Less: treasury stock, at cost, 943,044 and 1,770,329 shares at June 30, 2005 and December 31, 2004, respectively ........... (26,358) (49,179) -------------------------- Total shareholders' equity ..................................... 143,163 113,975 -------------------------- Total liabilities and shareholders' equity ..................... $ 1,515,802 $ 1,228,118 ==========================

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, 2005 and 2004 (Unaudited, in thousands, except share data) 2005 2004 -------------------------------------------------------------------------------------------- Interest income: Loans and fees on loans ........................................ $ 27,318 $ 20,064 Investments in debt and equity securities Taxable ...................................................... 5,605 5,413 Tax-exempt ................................................... 786 979 Federal funds sold and interest bearing deposits ............... 813 188 ----------------------- Total interest income .................................... 34,522 26,644 ----------------------- Interest expense: Deposits ....................................................... 9,003 6,546 Federal funds purchased, repurchase agreements and notes payable 1,258 557 Federal Home Loan Bank advances and other borrowings ........... 1,173 797 ----------------------- Total interest expense ................................... 11,434 7,900 ----------------------- Net interest income ...................................... 23,088 18,744 Provision for loan losses ........................................ 630 660 ----------------------- Net interest income after provision for loan losses ...... 22,458 18,084 ----------------------- Non-interest income: Remittance processing .......................................... 3,403 3,815 Trust and brokerage fees ....................................... 3,652 3,287 Service charges on deposit accounts ............................ 1,309 1,201 Securities transactions, net ................................... 35 6 Gain on sales of mortgage loans, net ........................... 397 548 Other .......................................................... 1,277 1,462 ---------------------- Total non-interest income ................................ 10,073 10,319 ---------------------- Non-interest expense: Salaries and employee benefits ................................. 11,228 9,251 Occupancy ...................................................... 1,469 1,283 Equipment ...................................................... 1,281 1,280 Data processing ................................................ 1,103 1,087 Office supplies ................................................ 587 617 Service charges from correspondent banks ....................... 255 458 Amortization of core deposit intangibles ....................... 218 -- Other .......................................................... 2,862 2,539 ----------------------- Total non-interest expense ............................... 19,003 16,515 ----------------------- Income before income taxes ............................... 13,528 11,888 Income taxes ..................................................... 4,868 4,227 ----------------------- Net income ............................................... $ 8,660 $ 7,661 ======================= Per share data: Basic earnings per share ....................................... $ 0.88 $ 0.81 Weighted average shares of common stock outstanding ............ 9,897,125 9,507,493 Diluted earnings per share ..................................... $ 0.87 $ 0.80 Weighted average shares of common stock and dilutive potential common shares outstanding .................................... 9,996,574 9,625,020

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, 2005 and 2004 (Unaudited, in thousands) 2005 2004 -------------------------------------------------------------------------------- Net income .......................................... $ 8,660 $ 7,661 ---------------------- Other comprehensive income (loss), before tax: Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period, net of tax of ($478) and ($1,501), for June 30, 2005 and 2004, respectively .................................. (717) (2,250) Less: reclassification adjustment for gains (losses) included in net income, net of tax of ($14) and ($2), for June 30, 2005 and 2004, respectively ........................ (21) (4) ------------------------ Other comprehensive loss .......................... (738) (2,254) ------------------------ Comprehensive income .............................. $ 7,922 $ 5,407 ======================= 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, 2005 and 2004 (Unaudited, in thousands, except share data) 2005 2004 ----------------------------------------------------------------------------------------------- Interest income: Loans and fees on loans ...................................... $ 15,913 $ 10,013 Investments in debt and equity securities Taxable .................................................... 3,241 2,699 Tax-exempt ................................................. 385 476 Federal funds sold and interest bearing deposits ............. 592 75 ---------------------------- Total interest income .................................. 20,131 13,263 ---------------------------- Interest expense: Deposits ..................................................... 5,403 3,344 Federal funds purchased, repurchase agreements and notes payable .......................................... 751 276 Federal Home Loan Bank advances and other borrowings ......... 787 398 ---------------------------- Total interest expense ................................. 6,941 4,018 ---------------------------- Net interest income .................................... 13,190 9,245 Provision for loan losses ...................................... 300 330 ---------------------------- Net interest income after provision for loan losses .... 12,890 8,915 ---------------------------- Non-interest income: Remittance processing ........................................ 1,696 1,923 Trust and brokerage fees ..................................... 1,810 1,625 Service charges on deposit accounts .......................... 783 622 Securities transactions, net ................................. (155) (2) Gain on sales of mortgage loans, net ......................... 260 345 Other ........................................................ 664 659 ---------------------------- Total non-interest income .............................. 5,058 5,172 ---------------------------- Non-interest expense: Salaries and employee benefits ............................... 6,281 4,543 Occupancy .................................................... 807 638 Equipment .................................................... 675 647 Data processing .............................................. 552 555 Office supplies .............................................. 289 312 Service charges from correspondent banks ..................... 145 233 Amortization of core deposit intangibles ..................... 218 -- Other ........................................................ 1,587 1,390 ---------------------------- Total non-interest expense ............................. 10,554 8,318 ---------------------------- Income before income taxes ............................. 7,394 5,769 Income taxes ................................................... 2,667 2,051 ---------------------------- Net income ............................................. $ 4,727 $ 3,718 ============================ Per share data: Basic earnings per share ..................................... $ 0.46 $ 0.39 Weighted average shares of common stock outstanding .......... 10,341,054 9,505,500 Diluted earnings per share ................................... $ 0.45 $ 0.39 Weighted average shares of common stock and dilutive potential common shares outstanding .................................. 10,438,479 9,619,707

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, 2005 and 2004 (Unaudited, in thousands) 2005 2004 -------------------------------------------------------------------------------- Net income ............................................ $ 4,727 $ 3,718 ------------------- Other comprehensive income (loss), before tax: Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period, net of tax of $510 and ($1,906) for June 30, 2004 and 2003, respectively .................................... 765 (2,859) Less: reclassification adjustment for gains (losses) included in net income, net of tax of $62 and $1, for June 30, 2005 and 2004, respectively .............................. 93 1 ------------------- Other comprehensive income (loss) ..................... 858 (2,858) ------------------- Comprehensive income .................................. $ 5,585 $ 860 ===================

See accompanying notes to unaudited consolidated financial statements. 7 MAIN STREET TRUST, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Six Months Ending June 30, 2005 and 2004 (Unaudited, in thousands) 2005 2004 ------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income ........................................................... $ 8,660 $ 7,661 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ...................................... 1,249 1,303 Amortization of bond discounts and premiums, net ................... 755 1,206 Amortization of core deposit intangibles ........................... 218 -- Provision for loan losses .......................................... 630 660 Securities transactions, net ....................................... (35) (6) Federal Home Loan Bank stock dividend .............................. (338) (126) Undistributed gain from non-marketable equity securities ........... (540) (10) Gain on sales of mortgage loans, net ............................... (397) (548) Gain on disposal of premises and equipment ......................... 8 (292) Proceeds from sales of mortgage loans originated for sale .......... 29,077 43,988 Mortgage loans originated for sale ................................. (30,161) (43,698) Other, net ......................................................... (878) (2,293) ---------------------- Net cash provided by operating activities ...................... 8,248 7,845 ---------------------- Cash flows from investing activities: Net increase in loans ................................................ (21,484) (41,018) Proceeds from maturities and calls of investments in debt securities: Held-to-maturity ................................................... 5,352 7,755 Available-for-sale ................................................. 44,175 104,120 Proceeds from sales of investments: Available-for-sale ................................................. 47,892 88 Purchases of investments in debt and equity securities: Held-to-maturity ................................................... (7,779) (45,624) Available-for-sale ................................................. (68,532) (120,829) Other equity securities ............................................ (310) (125) Principal paydowns from mortgage-backed securities: Held-to-maturity ................................................... 3,677 30,331 Available-for-sale ................................................. 7,353 4,558 Return of principal on other equity securities ....................... 1,800 258 Purchases of premises and equipment .................................. (757) (978) Proceeds from sales of premises and equipment ........................ 1 623 Acquisition of Citizens First Financial Corporation, net of cash ..... (6,385) -- ----------------------- Net cash provided by (used in) investing activities ............ 5,003 (60,841) ----------------------- Cash flows from financing activities: Net (decrease) increase in deposits .................................. (62,502) 60,952 Net increase (decrease) in federal funds purchased, repurchase agreements, and notes payable ........................... 24,954 (20,854) Advances from Federal Home Loan Bank and other borrowings .......... 31,000 -- Payments on Federal Home Loan Bank and other borrowings .............. (9,404) (60) Cash dividends paid .................................................. (4,160) (3,998) MSTI stock transactions, net ......................................... (2,194) (1,100) ---------------------- Net cash provided by (used in) financing activities ............ (22,306) 34,940 ---------------------- Net decrease in cash and cash equivalents ...................... (9,055) (18,056) Cash and cash equivalents at beginning of year ......................... 64,928 75,903 ---------------------- Cash and cash equivalents at end of period ............................. $ 55,873 $ 57,847 ======================

See notes to unaudited consolidated financial statements. 8 Supplemental disclosures of cash flow information: MAIN STREET TRUST, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Six Months Ending June 30, 2005 and 2004 (Unaudited, in thousands) 2005 2004 -------------------------------------------------------------------------------- Cash paid during the year for: Interest ............................................. $ 10,756 $ 5,782 Income taxes ......................................... 4,570 4,775 Real estate acquired through or in lieu of foreclosure -- -- Dividends declared not paid ............................ 2,262 1,989 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 Investment 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 ............................................... 20,819 Core deposit intangibles ............................... 5,222 Other assets ........................................... 6,281 Liabilities assumed: Deposits ............................................... (232,089) Federal Home Loan Bank advances and other borrowings ... (37,599) Accrued interest payable ............................... (193) Other liabilities ...................................... (4,451) --------- 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, 2004, and schedules in the Main Street Trust, Inc.'s Form 10-K filed on March 15, 2005. In the opinion of management, the consolidated financial statements of Main Street Trust, Inc. and its subsidiaries, as of June 30, 2005 and for the three-month and six-month periods ended June 30, 2005 and 2004, 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, 2005 are not necessarily indicative of the results which may be expected for the year ended December 31, 2005. 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 2004 consolidated financial statements have been reclassified to conform with the 2005 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, Citizens Savings 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 March 23, 2000, the Company acquired all of the outstanding stock of BankIllinois, The First National Bank of Decatur, First Trust Bank of Shelbyville and FirsTech, Inc. following the merger of BankIllinois Financial Corporation and First Decatur Bancshares, Inc. into the Company. The merger, which was accounted for as a pooling of interests, was completed on March 23, 2000. The Company subsequently merged the Company's former banking subsidiary, First Trust Bank of Shelbyville, into BankIllinois effective June 19, 2002. On November 10, 2004, the Company merged BankIllinois and The First National Bank of Decatur into BankIllinois and renamed the bank Main Street Bank & Trust. 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 and the results of operations of Citizens since the acquisition date have been included in the Company's consolidated financial statements. The Company plans to merge Citizens Savings Bank into Main Street Bank & Trust during the fourth quarter of this year. The 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 in accordance with current accounting literature, to the extent that supportable documentation was available at June 30, 2005. Such amounts are subject to minor adjustments in the near term as additional analysis is performed or obtained from third party sources. $5.222 million was allocated to core deposit intangibles at acquisition and is being amortized over a period of six years. 10 Pro forma unaudited operating results for the six months ended June 30, 2005 and 2004, giving effect to the Citizens acquisition as if it had occurred as of January 1, 2004 are as follows: 2005 2004 -------------------------------------------------------------------------------- (in thousands, except per share data) Interest Income .......................... $38,690 $36,012 Interest Expense ......................... 13,029 11,651 Net Income ............................... 8,649 8,893 Basic EPS ................................ 0.87 0.85 Diluted EPS .............................. 0.87 0.85 These unaudited proforma 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 effected. They do not purport to be indicative of the results of operations that actually would have resulted had the combination occurred on January 1, 2004 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, ----------------------------------------------------- 2005 2004 2005 2004 ---------------------------------------------------------------------------------------------------- Net Income ................................. $ 8,660,000 $ 7,661,000 $ 4,727,000 $ 3,718,000 ===================================================== Shares: Weighted average common shares outstanding 9,897,125 9,507,493 10,341,054 9,505,500 Dilutive effect of outstanding options, as determined by the application of the treasury stock method .............. 99,449 117,527 97,425 114,207 ----------------------------------------------------- Weighted average common shares oustanding, as adjusted ............................ 9,996,574 9,625,020 10,438,479 9,619,707 ===================================================== Basic earnings per share ................... $ 0.88 $ 0.81 $ 0.46 $ 0.39 ===================================================== Diluted earnings per share ................. $ 0.87 $ 0.80 $ 0.45 $ 0.39 =====================================================

11 Note 4: Stock Option Plans The Company has established a stock incentive plan, which provides for the granting of options of the Company's common stock to certain directors, officers and employees. As permitted under accounting principles generally accepted in the United States of America, grants of options under the plans are accounted for under the recognition and measurement principles of APB Opinion No. 25 Accounting for Stock Issued to Employees, and related interpretations. Because options granted under the plans had an exercise price equal to market value of the underlying common stock on the grant date, no stock-based employee compensation cost is included in determining net income. The following table illustrates the effect on net income (in thousands, except per share data and earnings per share) if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation. Six Months Ended Three Months Ended ------------------------------------------------ June 30, June 30, 2005 2004 2005 2004 --------------------------------------------------------------------------------------------------- Net income on common stock: As reported .................................. $ 8,660 $ 7,661 $ 4,727 $ 3,718 Deduct total stock-based compensation expense determined under the fair value method for all awards, net of related tax effects ........... (182) (195) (91) (100) ------------------------------------------------ Pro forma .............................. $ 8,478 $ 7,466 $ 4,636 $ 3,618 ================================================ Basic earnings per share: As reported .................................. $ 0.88 $ 0.81 $ 0.46 $ 0.39 Pro forma .................................... 0.86 0.79 0.45 0.38 Diluted earnings per share: As reported .................................. $ 0.87 $ 0.80 $ 0.45 $ 0.39 Pro forma .................................... 0.85 0.78 0.44 0.38

The fair value of the stock options granted has been estimated using the Black-Scholes option - pricing model with the following weighted average assumptions. The Black-Scholes option-pricing model was developed for use in estimating the fair value of the traded options, which have no vesting restrictions. In addition, such models require the use of subjective assumptions, including expected stock price volatility. In management's opinion, such valuation models may not necessarily provide the best single measure of option value. Six Months Ended June 30, --------------------------------- 2005 2004 -------------------------------------------------------------------------------- Number of options granted .............. 137,500 140,500 Risk-free interest rate ................ 3.83% - 4.08% 3.94% Expected life, in years ................ 7.00 - 8.00 8.00 Expected volatility .................... 15.05% - 15.42% 15.95% Expected dividend yield ................ 2.97% - 3.06% 2.75% Note 5. Commitments and Financial Instruments The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the consolidated balance sheets. The contractual amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. 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. 12 The following table summarizes these financial instruments and commitments (in thousands) at June 30, 2005 and 2004: June 30, --------------------- 2005 2004 -------------------------------------------------------------------------------- Financial instruments whose contract amounts represent credit risk: Commitments ........................................ $262,305 $221,953 Standby letters of credit .......................... 27,830 21,076 The acquisition of Citizens resulted in an additional $23.587 million in commitments and $678,000 in additional standby letters of credit at June 30, 2005. The majority of commitments are agreements to extend credit to a customer as long as there is no violation of any condition established in the contract. Commitments, principally variable interest rates, generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. For commitments to extend credit, the Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation. Collateral held varies, but may include accounts receivable; inventory; property, plant and equipment; and income-producing commercial properties. Also included in commitments is $2.705 million to purchase other equity securities. Standby letters of credit are conditional commitments issued by the Banks to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and, generally, have terms of one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Banks may hold collateral, which include accounts receivables, inventory, property and equipment, and income producing properties, supporting those commitments, if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Banks would be required to fund the commitment. The maximum potential amount of future payments the Banks could be required to make is represented by the contractual amount shown in the summary above. If the commitment is funded, the Bank would be entitled to seek recovery from the customer. At June 30, 2005 and 2004, no amounts had been recorded as liabilities for the Banks' 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 increased $287.684 million, or 23.4%, to $1.516 billion at June 30, 2005 compared to $1.228 billion at December 31, 2004. Increases in loans, goodwill, non-marketable equity securities, cash and due from banks, other assets, premises and equipment, core deposit intangibles, accrued interest receivable and mortgage loans held for sale were partially offset by decreases in federal funds sold and interest bearing deposits, investments in debt and equity securities available for sale and investments in debt and equity securities held to maturity. Of the increase in total assets, $331.173 million was attributable to the acquisition of Citizens on April 1, 2005. Cash and due from banks increased $7.886 million, or 23.8%, to $41.019 million at June 30, 2005 compared to $33.133 million at December 31, 2004. The Citizens acquisition contributed $6.022 million to the increase in cash and due from banks. Federal funds sold and interest bearing deposits decreased $16.941 million, or 53.3%, to $14.854 million at June 30, 2005 compared to $31.795 million at December 31, 2004. The Citizens acquisition contributed $16.630 million. Available funds plus $10 million of outside borrowings were used to fund the cash portion of the acquisition. Federal funds sold and interest bearing deposits fluctuate with loan demand, deposit volume and investment opportunities. 13 Total investments in debt and equity securities increased $5.520 million, or 1.5%, to $364.246 million at June 30, 2005 compared to $358.726 million at December 31, 2004. This was primarily due to an increase in non-marketable equity securities of $15.591 million, or 195.3%. The increase included $16.374 million of FHLB Stock owned by Citizens on April 1, 2005. Somewhat offsetting this increase were decreases in investments in securities available for sale of $8.434 million, or 3.1%, and investments in securities held to maturity of $1.637 million, or 2.0%. The Citizens acquisition contributed $23.865 million of investments in securities available for sale. Investments fluctuate with loan demand, deposit volume and investment opportunities. Loans, net of allowance for loan losses, increased $248.968 million, or 32.7%, to $1.010 billion at June 30, 2005 from $761.227 million at December 31, 2004. The Citizens acquisition contributed $228.114 million to the increase in loans. Mortgage loans held for sale increased $1.763 million, or 175.4%, to $2.768 million at June 30, 2005 compared to $1.005 million at December 31, 2004. The Citizens acquisition contributed $282,000 to the increase. Premises and equipment increased $5.492 million, or 32.1%, from $17.087 million at December 31, 2004 to $22.579 million at June 30, 2005. The increase included $5.993 million from the Citizens acquisition, in addition to purchases of $757,000 offset somewhat by depreciation and amortization expense of $1.249 million, loss on disposal of property of $8,000 and proceeds from sale of property of $1,000. Total liabilities increased $258.496 million, or 23.2%, to $1.373 billion at June 30, 2005 from $1.114 billion at December 31, 2004. There were increases in all categories of liabilities as the acquisition of Citizens contributed $274.331 million to total liabilities. Total deposits increased $169.587 million, or 17.4%, to $1.144 billion at June 30, 2005 from $974.577 million at December 31, 2004. Interest bearing deposits increased $127.423 million, or 15.9%, to $929.092 million at June 30, 2005 from $801.669 million at December 31, 2004. Non-interest bearing deposits increased $42.164 million, or 24.4%, to $215.072 million at June 30, 2005 from $172.908 million at December 31, 2004. At the time of the acquisition, Citizens added $203.593 million of interest bearing deposits and $28.496 million of non-interest bearing deposits. The Company expected interest bearing deposits to decrease during the first quarter of 2005 due to an 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. Federal funds purchased, repurchase agreements and notes payable increased $24.954 million, or 25.8%, to $121.854 million at June 30, 2005 compared to $96.900 million at December 31, 2004. Included in this change were increases of $20.925 million in federal funds purchased and $4.029 million in repurchase agreements. Federal Home Loan Bank advances and other borrowings increased $59.195 million, or 198.1%, to $89.077 million at June 30, 2005 compared to $29.882 million at December 31, 2004. The increase included $37.599 million from the acquisition of Citizens and an additional $20 million of FHLB Borrowings by Main Street Bank & Trust which was subsequently repaid in July 2005. Of the $10 million borrowed for the acquisition of Citizens, $4 million was repaid. In addition, the Company increased other borrowings to meet working capital needs during the quarter. 14 Investment Securities The carrying value of investments in debt and equity securities was as follows for June 30, 2005 and December 31, 2004: Carrying Value of Securities(1) (in thousands) June 30, December 31, 2005 2004 -------------------------------------------------------------------------------- Available-for-sale: Federal agencies ................................ $213,799 $218,994 Mortgage-backed securities ...................... 29,566 27,713 State and municipal ............................. 14,669 16,715 Marketable equity securities .................... 3,112 6,158 --------------------- Total available-for-sale .................. $261,146 $269,580 ===================== Held-to-maturity: Federal agencies ................................ $ 38,782 $ 40,931 Mortgage-backed securities ...................... 15,692 14,992 State and municipal ............................. 25,053 25,241 --------------------- Total held-to-maturity .................... $ 79,527 $ 81,164 ===================== Non-marketable equity securities: Federal Home Loan Bank stock .................... $ 20,991 $ 4,279 Other equity investments ........................ 2,582 3,703 --------------------- Total non-marketable equity securities .... $ 23,573 $ 7,982 ===================== Total investment securities ............... $364,246 $358,726 ===================== (1) Investment securities available-for-sale are carried at fair value. Investment securities held-to-maturity are carried at amortized cost. 15 The following table shows the maturities and weighted-average yields of investment securities at June 30, 2005. All securities are shown at their contractual maturity. Maturities and Weighted Average Yields of Debt Securities (dollars in thousands) ------------------------------------------------------------------------------------------------------------------------------------ June 30, 2005 ------------------------------------------------------------------------------------------------------------------------------------ 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 .................... $ 76,496 3.03% $119,524 2.95% $ 17,779 4.28% $ -- -- $213,799 3.09% Mortgage-backed securities(1) ..................... $ 20,870 3.96% $ 8,367 4.86% $ 296 7.08% $ 33 4.54% $ 29,566 4.25% State and municipal (TE)(2) ....... $ 1,776 6.33% $ 8,673 5.67% $ 3,734 7.68% $ 486 7.76% $ 14,669 6.33% Marketable equity securities(3) ..................... $ -- -- $ -- -- $ -- -- $ -- -- $ 3,112 -- ------------------------------------------------------------------------------------------- Total ......................... $ 99,142 $136,564 $ 21,809 $ 519 $261,146 ------------------------------------------------------------------------------------------- Average Yield ......................... 3.28% 3.24% 4.90% 7.56% 3.41% =========================================================================================== Securities held- to-maturity: Federal agencies .................... $ 9,015 2.33% $ 24,742 3.10% $ 5,025 3.88% $ -- -- $ 38,782 3.02% Mortgage-backed securities(1) ..................... $ 9,500 3.46% $ 5,554 3.45% $ 36 3.34% $ 602 5.45% $ 15,692 3.53% State and municipal (TE)(2) ......... $ 7,828 5.21% $ 16,840 5.61% $ 180 7.07% $ 205 7.95% $ 25,053 5.52% ------------------------------------------------------------------------------------------- Total ......................... $ 26,343 $ 47,136 $ 5,241 $ 807 $ 79,527 =========================================================================================== Average Yield (TE)(2) ................. 3.60% 4.03% 3.99% 6.09% 3.91% =========================================================================================== Non-marketable equity securities(3): Federal Home Loan Bank stock ........ $ -- -- $ -- -- $ -- -- $ -- -- $ 20,991 -- Other equity investments ............ $ -- -- $ -- -- $ -- -- $ -- -- $ 2,582 -- ------------------------------------------------------------------------------------------- Total ......................... $ -- -- $ -- -- $ -- -- $ -- -- $ 23,573 -- =========================================================================================== (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 has been tax equivalized (TE) 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.

16 Continuous gross unrealized losses of investments in debt and equity securities (in thousands) which are classified as temporary were as follows: Continuous unrealized losses existing Continuous unrealized for less losses existing than 12 months greater than 12 months Total ---------------------- ---------------------- -------------------- Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses ------------------------------------------------------------------------------------------------------- Available-for-Sale: Federal agencies ............... $ 46,543 $ (317) $127,081 $ (2,171) $173,624 $ (2,488) Mortgage-backed securities ..... 12,081 (45) 9,207 (191) 21,288 (236) State and municipal ............ 3,544 (47) -- -- 3,544 (47) ----------------------------------------------------------------- Subtotal, debt securities $ 62,168 $ (409) $136,288 $ (2,362) $198,456 $ (2,771) Other equity securities .......... 403 (61) 562 (351) 965 (412) ----------------------------------------------------------------- Total temporarily impaired securities ............... $ 62,571 $ (470) $136,850 $ (2,713) $199,421 $ (3,183) ================================================================= Held-to-Maturity: Federal agencies ............... $ 1,084 $ (10) $ 36,592 $ (596) $ 37,676 $ (606) Mortgage-backed securities ..... 1,691 (23) 9,592 (100) 11,283 (123) State and municipal ............ 7,010 (35) 1,356 (10) 8,366 (45) ----------------------------------------------------------------- Total temporarily impaired securities ............... $ 9,785 $ (68) $ 47,540 $ (706) $ 57,325 $ (774) =================================================================

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. The $2.713 million continuous unrealized loss greater than 12 months on available for sale securities was made up of twenty-nine debt securities and seven other securities which are common stocks and is believed to be a temporary loss. Common stocks represented $351,000 of the continuous unrealized loss on available-for-sale securities, which was a decrease of $398,000 from the loss on common stocks of $749,000 on December 31, 2004. Management believes the market value of these securities will continue to improve as the economy continues to recover. The $706,000 continuous unrealized loss greater than 12 months on held-to-maturity securities was made up of twenty-one debt securities and is 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. Loans The following table presents the amounts and percentages of loans at June 30, 2005 and December 31, 2004 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, 2005 December 30, 2004 ------------------------------------------------- Amount Percentage Amount Percentage ------------------------------------------------------------------------------------------ Commercial, financial and agricultural $ 355,423 34.72% $314,657 40.82% Real Estate - Commercial ............. 433,860 42.38% 309,830 40.19% Real Estate - Residential ............ 146,041 14.26% 62,464 8.10% Installment and consumer ............. 88,499 8.64% 83,926 10.89% ----------------------------------------------- Total loans .................. $1,023,823 100.00% $770,877 100.00% ===============================================

17 The shift in the loan mix from December 31, 2004 to June 30, 2005 was primarily attributable to the acquisition of Citizens. The balance of loans outstanding as of June 30, 2005 by maturity is shown in the following table: Maturity of Loans Outstanding (dollars in thousands) ---------------------------------------------------------------------------------------------- June 30, 2005 ---------------------------------------------------------------------------------------------- 1 year 1 to 5 Over 5 or less years years Total --------------------------------------------------------------------------------------------- Commercial, financial and agricultural $ 192,994 $ 105,467 $ 56,962 $ 355,423 Real Estate - Commercial ............. 100,106 169,842 163,912 $ 433,860 Real Estate - Residential ............ 38,727 51,681 55,633 $ 146,041 Installment and consumer ............. 14,450 50,112 23,937 $ 88,499 ---------------------------------------------------- Total ........................ $ 346,277 $ 377,102 $ 300,444 $1,023,823 ==================================================== Percentage of total loans outstanding 33.82% 36.83% 29.35% 100.00% ====================================================

Capital Total shareholders' equity increased $29.188 million from December 31, 2004 to June 30, 2005. Treasury stock transactions were $25.610 million primarily due to the issuance of treasury stock for the acquisition of Citizens, offset somewhat by the purchase of stock under the Company's stock repurchase plan. The change in shareholders' equity is summarized as follows: Shareholders' Equity (in thousands) -------------------------------------------------------------------------------- Shareholders' equity, December 31, 2004 .................... $ 113,975 Net income ............................................... 8,660 Treasury stock transactions, net ......................... 25,610 Cash dividends declared .................................. (4,344) Other comprehensive income ............................... (738) --------- Shareholders' equity, June 30, 2005 ........................ $ 143,163 ========= On June 21, 2005, the Board of Directors of the Company declared a quarterly cash dividend of $0.22 per share of the Company's common stock. The dividend of $2.262 million was paid on July 22, 2005 to holders of record on July 8, 2005. 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 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 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, 2005, that the Company and its subsidiary banks exceeded all capital adequacy requirements to which they are subject. As of June 30, 2005, the most recent notifications from primary regulatory agencies categorized 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. 18 The Company's and the Banks' actual capital amounts and ratios are presented in the following table (in thousands): To be well For capital capitalized under adequacy prompt corrective Actual purposes: action provisions: ------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio --------------------------------------------------------------------------------------- As of June 30, 2005: Total capital (to risk-weighted assets) Consolidated ............. $133,832 11.9% $90,129 8.0% N/A Main Street Bank & Trust . $ 95,044 10.4% $73,461 8.0% $91,826 10.0% Citizens Savings Bank .... $ 32,825 16.9% $15,561 8.0% $28,652 10.0% Tier I capital (to risk-weighted assets) Consolidated ............ $120,032 10.7% $45,065 4.0% N/A Main Street Bank & Trust $ 84,753 9.2% $36,730 4.0% $55,095 6.0% Citizens Savings Bank ... $ 30,381 15.6% $ 7,780 4.0% $11,671 6.0% Tier I capital (to average assets) Consolidated ............ $120,032 7.9% $60,910 4.0% N/A Main Street Bank & Trust $ 84,753 7.0% $48,726 4.0% $60,907 5.0% Citizens Savings Bank ... $ 30,381 10.6% $11,461 4.0% $14,326 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. The following table presents the Company's interest rate sensitivity at various intervals at June 30, 2005: 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 earning assets: Federal funds sold and interest bearing deposits ............ $ 14,854 $ -- $ -- $ -- $ -- $ 14,854 Debt and equity securities (1) ......... 32,203 24,400 31,448 44,520 231,675 364,246 Loans (2) .............................. 373,579 55,945 58,598 91,600 446,869 1,026,591 ----------------------------------------------------------------------------- Total earning assets ............. $ 420,636 $ 80,345 $ 90,046 $ 136,120 $ 678,544 $1,405,691 ----------------------------------------------------------------------------- Interest bearing liabilities: Savings and interest bearing demand deposits ...................... $ 34,303 $ 1,836 $ 2,754 $ 5,506 $ 209,302 $ 253,701 Money market savings deposits ............................. 204,167 -- -- -- -- 204,167 Time deposits .......................... 25,477 65,043 97,475 120,666 162,563 471,224 Federal funds purchased, repurchase agreements, and notes payable .................... 99,394 3,019 4,548 14,893 -- 121,854 FHLB advances and other borrowings ..................... 32,000 10,075 2,075 18,219 26,708 89,077 ---------------------------------------------------------------------------- Total interest bearing liabilities $ 395,341 $ 79,973 $ 106,852 $ 159,284 $ 398,573 $1,140,023 ----------------------------------------------------------------------------- Net asset (liability) funding gap ........ 25,295 372 (16,806) (23,164) 279,971 265,668 ----------------------------------------------------------------------------- Repricing gap ............................ 1.06 1.00 0.84 0.85 1.70 1.23 Cumulative repricing gap ................. 1.06 1.05 1.02 0.98 1.23 1.23 ----------------------------------------------------------------------------- (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.

19 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%~~

Source: ALCO Policy At June 30, 2005, the Company was slightly asset sensitive in the 1-30 days category as well as the 1-90 day category. 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 decrease annualized net interest income by approximately $253,000 in the 1-30 days category and $257,000 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. 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, 2005, the Company's RSA/RSL was 0.98, which was within the established guidelines. 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, 2005, the Company had a $15 million unsecured line of credit with a correspondent bank, of which $1 million was outstanding and due in 2006. 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, 2005 and December 31, 2004 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, 2005 ............................... 10.8% 5.5% (5.4%) (10.9%) December 31, 2004 ........................... 10.3% 5.1% (5.1%) (10.3%) 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 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. 20 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 was able to meet liquidity needs during the first six months of 2005. A review of the consolidated statement of cash flows included in the accompanying financial statements shows that the Company's cash and cash equivalents decreased $9.055 million from December 31, 2004 to June 30, 2005. 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 decrease in cash and cash equivalents came from cash used in financing activities, offset somewhat by cash provided by operating and investing activities. There were differences in sources and uses of cash during the first six months of 2005 compared to the first six months of 2004. Cash used by financing activities during the first six months of 2005 was $22.306 million compared to cash provided of $34.940 million during the same period in 2004, primarily due to a decrease in deposits at the Company's Main Street Bank & Trust subsidiary during the first six months of 2005 compared to an increase during the same period in 2004. The Company expected deposits to decrease during the first half of 2005 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. Cash provided by advances from Federal Home Loan Bank and other borrowings of $31.000 million during the first half of 2005 was used mainly as a source of working capital ($20 million of which was repaid in July 2005) compared to none in 2004. Also, cash provided by federal funds purchased, repurchase agreements and notes payable was $24.954 million during the first six months of 2005, mainly as a result of an increase in federal funds purchased, compared to cash used of $20.854 million in the same period in 2004, as a result of a decrease in repurchase agreements. Cash provided by investing activities during the first six months of 2005 was $5.003 million compared to cash used of $60.841 million during the same period in 2004. In 2005, proceeds of $110.249 million from maturities, calls and sales of debt and equity securities, principal paydowns on mortgage-backed securities and return of equity on other equity securities were offset somewhat by cash used to purchase debt and equity securities of $76.621 million. In 2004, purchases of debt and equity securities were $166.578 million compared to proceeds of $147.110 million from maturities, calls and sales of debt and equity securities, principal paydowns on mortgage-backed securities and return of principal on other equity securities. Also contributing to the difference in investing activities was the difference in loan growth during these two periods. Cash used to fund loan growth during the first half of 2005 was $21.484 million compared to $41.018 million during the same period in 2004. In addition, $6.385 million was used to fund the acquisition of Citizens in 2005. Cash was provided by operating activities in both the first half of 2005 and 2004. On April 1, 2005, the Company borrowed $6 million, to be repaid within 3 years, to fund a portion of the Citizens acquisition cost. In addition, the Company negotiated an increase of its $10 million line of credit from a third party lender to $15 million and immediately advanced $4 million. As of June 30, 2005, the Company had $1 million outstanding on its $15 million line of credit which is due in 2006. The Company's future short-term cash requirements are expected to be provided by maturities and sales of investments, sales of loans and deposits. 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 remaining $14 million line of credit from a third party lender, FHLB borrowings 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. 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 judgements used in the preparation of its consolidated financial statements. 21 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 $13.628 million at June 30, 2005 compared to $9.650 million at December 31, 2004. Of this increase, $3.434 million was attributable to the acquisition of Citizens. Net charge-offs were $86,000 and provisions totaled $630,000 during the first six months of 2005. The allowance for loan losses as a percentage of gross loans, including loans held-for-sale, was 1.33% at June 30, 2005, compared to 1.25% at December 31, 2004. Gross loans, including loans held-for-sale, increased 33.1% to $1.027 billion at June 30, 2005 from $771.882 million at December 31, 2004. Of this increase, $231.904 million was attributable to the acquisition of Citizens. 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 360.1% at June 30, 2005 compared to 431.6% at December 31, 2004. Nonperforming loans increased from $2.236 million at December 31, 2004 to $3.784 million at June 30, 2005. The $1.548 million increase in nonperforming loans during the first six months of 2005 resulted from a $757,000 increase in nonaccrual loans and an increase of $791,000 in loans past due 90 days or more. Of these increases, the acquisition of Citizens resulted in an additional $455,000 in nonaccrual loans and an additional $63,000 in loans past due 90 days or more. There was also a $512,000 Main Street Bank & Trust commercial real estate loan which was 90 days past due by maturity that was paid off subsequent to the end of the quarter. Management believes that nonperforming and potential problem loans are appropriately identified and monitored based on the extensive loan analysis performed by the credit administration department, the internal loan committees and the board of directors. Historically, there 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. 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, --------------------- 2005 2004 ------------------------------------------------------------------------------------------ Allowance for loan losses at beginning of year ................... $ 9,650 $ 9,786 Allocation for loan losses attributable to acquisition of Citizens 3,434 -- --------------------- Charge-offs during period: Commercial, financial and agricultural ......................... $ -- $ -- Commercial Real Estate ......................................... -- -- Residential real estate ........................................ (5) -- Installment and consumer ....................................... (276) (603) --------------------- Total .................................................... $ (281) $ (603) --------------------- Recoveries of loans previously charged off: Commercial, financial and agricultural ......................... $ 16 $ 119 Commercial Real Estate ......................................... 5 -- Residential real estate ........................................ -- 15 Installment and consumer ....................................... 174 107 --------------------- Total .................................................... $ 195 $ 241 --------------------- Net (charge-offs) recoveries ............................. $ (86) $ (362) Provision for loan losses ........................................ 630 660 --------------------- Allowance for loan losses at end of quarter ...................... $ 13,628 $ 10,084 ===================== Ratio of net charge-offs to average net loans .............................................. (0.01)% (0.05)% =====================

22 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, December 31, 2005 2004 -------------------------------------------------------------------------------- Allocated: Commercial, financial and agricultural ........... $ 5,784 $ 5,289 Commercial Real Estate ........................... 5,434 1,637 Residential real estate .......................... 458 198 Installment and consumer ......................... 1,542 1,605 --------------------- Total allocated allowance .................. $13,218 $ 8,729 Unallocated allowances ............................. 410 921 --------------------- Total ...................................... $13,628 $ 9,650 ===================== 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, December 31, 2005 2004 -------------------------------------------------------------------------------- Nonaccrual loans(1) .............................. $2,446 $1,689 ======================= Loans past due 90 days or more ................... $1,338 $ 547 ======================= Restructured loans ............................... $ 414 $ 497 ======================= (1) Includes $945,000 at June 30, 2005 and $509,000 at December 31, 2004 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, December 31, 2005 2004 -------------------------------------------------------------------------------- Other real estate owned .................. $ 41 $ -- ======================== Nonperforming other assets ............... $126 $ 33 ======================== Results of Operations Results of Operations for the Six Months Ended June 30, 2005 Net income for the first six months of 2005 was $8.660 million, a $999,000, or 13.0%, increase from $7.661 million for the same period in 2004. This increase included $704,000 of net income generated by Citizens since the acquisition. Basic earnings per share increased $0.07, or 8.6%, to $0.88 per share in the first half of 2005 from $0.81 per share in the first half of 2004. Diluted earnings per share increased $0.07, or 8.8%, to $0.87 per share in the first half of 2005 from $0.80 per share in the first half of 2004. 23 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, ---------------------------------------------------------------------------------------------------------------------- 2005 2004 ---------------------------------------------------------------------------------------------------------------------- Average Average Balance Interest Rate Balance Interest Rate --------------------------------------------------------------------------------------------------------------------- Assets Taxable investment securities(1) ....... $ 289,578 $ 5,605 3.90% $ 324,597 $ 5,413 3.35% Tax-exempt investment securities(1) (TE) 40,785 1,209 5.98% 48,961 1,506 6.19% Federal funds sold and interest bearing deposits(2) .......................... 42,897 813 3.82% 32,514 188 1.16% Loans3,4 (TE) .......................... 880,805 27,324 6.26% 692,128 20,070 5.83% -------------------------------------------------------------------------- Total interest earning assets and interest income (TE) ....... $1,254,065 $ 34,951 5.62% $1,098,200 $ 27,177 4.98% -------------------------------------------------------------------------- Cash and due from banks ................ $ 41,612 $ 46,099 Premises and equipment ................. 19,786 17,303 Other assets ........................... 68,383 22,669 -------------------------------------------------------------------------- Total assets ................... $1,383,846 $1,184,271 ========================================================================== Liabilities and Shareholders' Equity Interest bearing demand deposits ....... $ 75,350 $ 205 0.55% $ 92,887 $ 305 0.66% Savings ................................ 400,563 2,740 1.38% 319,950 1,400 0.88% Time deposits .......................... 407,558 6,058 3.00% 350,878 4,841 2.77% Federal funds purchased, repurchase agreements, and notes payable ........ 111,681 1,258 2.27% 101,897 557 1.10% FHLB advances and other borrowings ..... 50,024 1,173 4.73% 29,948 797 5.35% -------------------------------------------------------------------------- Total interest bearing liabilities and interest expense $1,045,176 $ 11,434 2.21%$ 895,560 $ 7,900 1.77% -------------------------------------------------------------------------- Noninterest bearing demand deposits .... $ 127,609 $ 100,166 Noninterest bearing savings deposits ... 68,181 65,619 Other liabilities ...................... 13,694 9,991 -------------------------------------------------------------------------- Total liabilities .............. $1,254,660 $1,071,336 Shareholders' equity ................... 129,186 112,935 -------------------------------------------------------------------------- Total liabilities and shareholders' equity ........... $1,383,846 $1,184,271 ========================================================================== Interest spread (average rate earned minus average rate paid) (TE) ........ 3.41% 3.21% ========================================================================== Net interest income (TE) ............... $ 23,517 $ 19,277 ========================================================================== Net yield on interest earnings assets (TE) ................. 3.78% 3.53% ========================================================================== See next page for Notes 1-4.

24 Notes to Consolidated Average Balance Sheet and Interest Rates Tables: (1) Investments in debt securities are included at carrying value. (2) Federal funds sold and interest bearing deposits included approximately $83,000 in 2005 and $30,000 in 2004 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 $661,000 and $699,000 in 2005 and 2004, respectively, are included in total loan income. Net interest income, the most significant component of the Company's earnings, is the difference between interest received or accrued on the Company's earning assets - primarily loans and investments - and interest paid or accrued on deposits and borrowings. In order to compare the interest generated from different types of earning assets, the interest income on certain tax-exempt investment securities and loans is increased for analysis purposes to reflect the income tax savings provided by the tax-exempt assets. The adjustment to interest income for tax-exempt investment securities and loans was calculated based on the federal income tax statutory rate of 35%. The 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, 2005 ---------------------------------------------------------------------------------- Increase (Decrease) from Previous Due to Due to Year Volume Rate ---------------------------------------------------------------------------------- Interest Income Taxable investment securities .................. $ 192 $(1,340) $ 1,532 Tax-exempt investment securities (TE) .......... (297) (247) (50) Federal funds sold and interest bearing deposits 625 77 548 Loans (TE) ..................................... 7,254 5,725 1,529 ----------------------------- Total interest income (TE) ............... $ 7,774 $ 4,215 $ 3,559 ----------------------------- Interest Expense Interest bearing demand and savings deposits ... $ 1,240 $ 289 $ 951 Time deposits .................................. 1,217 813 404 Federal funds purchased, repurchase agreements and notes payable ...... 701 58 643 FHLB advances and other borrowings ............. 376 639 (263) ----------------------------- Total interest expense ................... $ 3,534 $ 1,799 $ 1,735 ----------------------------- Net Interest Income (TE) ......................... $ 4,240 $ 2,416 $ 1,824 =============================

Net interest income on a tax equivalent basis was $4.240 million, or 22.0%, higher for the first six months of 2005 compared to the same period of 2004. Total tax-equivalent interest income was $7.774 million, or 28.6%, higher in 2005 compared to 2004, and interest expense increased $3.534 million, or 44.7%. The increase in tax-equivalent interest income and interest expense was due to 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, federal funds sold and interest bearing deposits, and taxable investment securities, offset slightly by a decrease in interest income from tax-exempt investment securities. The increase in interest income from loans was primarily due to an increase in volume. The increase in interest income on federal funds sold and interest bearing deposits was primarily due to higher rates. The increase in interest income from taxable investment securities was due to higher rates, offset somewhat by lower volume. The decrease in interest income from tax-exempt investment securities was primarily due to lower volume. 25 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 interest bearing demand and savings deposits and federal funds purchased, repurchase agreements and notes payable was primarily due to higher rates, while the increase in interest expense from time deposits was mainly due to increased volume. The increase in interest expense from FHLB advances and other borrowings was due to higher volume, offset somewhat by lower rates. The provision for loan losses recorded was $630,000 during the first six months of 2005 compared to $660,000 during the same period in 2004. 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. -------------------------------------------------------------------------------------------- Noninterest Income and Expense for the Six Months Ended June 30, 2005 and 2004 (in thousands) -------------------------------------------------------------------------------------------- Non-interest Income 06/30/2005 06/30/2004 $ change % change -------------------------------------------------------------------------------------------- Remittance processing (1) .................. $ 3,403 $ 3,815 $ (412) (10.8%) Trust and brokerage fees (2) ............... 3,652 3,287 365 11.1% Service charges on deposit accounts (3) .... 1,309 1,201 108 9.0% Securities transactions, net ............... 35 6 29 (483.3%) Gain on sales of mortgage loans, net (4) ... 397 548 (151) (27.6%) Other (5) .................................. 1,277 1,462 (185) (12.7%) --------------------------------------------- Total non-interest income .......... $10,073 $10,319 $ (246) (2.4%) ============================================= Non-interest Expense -------------------------------------------------------------------------------------------- Salaries and employee benefits (6) ......... $11,228 $ 9,251 $ 1,977 21.4% Occupancy (7) .............................. 1,469 1,283 186 14.5% Equipment .................................. 1,281 1,280 1 0.1% Data processing ............................ 1,103 1,087 16 1.5% Office supplies ............................ 587 617 (30) (4.9%) Service charges from correspondent banks (8) 255 458 (203) (44.3%) Amortization of core deposit intangibles (9) 218 -- 218 Other (10) ................................. 2,862 2,539 323 12.7% -------------------------------------------- Total non-interest expense ......... $19,003 $16,515 $ 2,488 15.1% ============================================ (1) The decrease in remittance processing income was primarily due to a $651,000, or 49.5%, decrease in income from lockbox fees, offset somewhat by a $259,000, or 10.5%, increase in electronic processing income at the Company's remittance processing subsidiary, FirsTech. The decrease in lockbox fees was mainly due to the loss of two major accounts in the fourth quarter of 2004. This decrease was offset somewhat by an increase in electronic processing revenue from new and existing Internet Agent customers. These changes continue to demonstrate the Company's shift toward electronic processing from traditional lockbox services. (2) The increase in trust and brokerage fees included a $192,000, or 118.0%, increase in estate fees and a $77,000, or 44.1%, increase in brokerage income. The increase in estate fees was primarily due to one estate that began producing revenue during the first quarter of 2005. The increase in brokerage income was due to prospecting new customers and the timing of revenue from new customers prospected in prior periods. (3) The increase in income from services charges on deposit accounts was due to $254,000 as a result of the Citizens acquisition, offset somewhat by a $146,000, or 12.2%, decrease at Main Street Bank & Trust. (4) The decrease in gains on sales of mortgage loans reflected a $14.911 million, or 33.9%, decrease in funded mortgage loans held-for-sale, from $43.988 million in the first six months of 2004 to $29.077 million in the first six months of 2005. The volume of funded mortgage loans decreased mainly due to less demand for refinancings in the first half of 2005 compared to the same period in 2004. 26 (5) In 2004, other non-interest income included a gain of $291,000 on the sale of two parking lots. In 2005, other non-interest income included $82,000 from Citizens. (6) In 2005, salaries and benefits included $1.081 million attributable to additional employees as a result of the acquisition of Citizens. (7) In 2005, occupancy expense included $139,000 attributable to the expenses of operating Citizens. (8) The decrease in service charges from correspondent banks was largely due to the loss of two lockbox accounts as described in footnote 1, which resulted in a significant decrease in the number of checks cleared in the first half of 2005 compared to the same period in 2004. (9) Amortization of core deposit intangibles was attributable to the acquisition of Citizens. (10) Included in other non-interest expense in 2005 compared to 2004 was $235,000 attributable to Citizens.

Income tax expense increased $641,000, or 15.2%, during the first six months of 2005 compared to the same period in 2004. The effective tax rate increased to 36.0% during the first six months of 2005 from 35.6% during the same period in 2004. Results of Operations For the Three Months Ended June 30, 2005 Net income for the second quarter of 2005 was $4.727 million, a $1.009 million, or 27.1%, increase from $3.718 million for the same period in 2004. Basic earnings per share increased $0.07, or 17.9%, to $0.46 per share during the second quarter of 2005 from $0.39 per share during the same period in 2004. Diluted earnings per share increased $0.06, or 15.4%, to $0.45 per share during the second quarter of 2005 from $0.39 per share during the same period in 2004. 27 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, --------------------------------------------------------------------------------------------------------------------- 2005 2004 -------------------------------------------------------------------------- Average Average Balance Interest Rate Balance Interest Rate --------------------------------------------------------------------------------------------------------------------- Assets Taxable investment securities(1) ....... $ 274,589 $ 3,241 4.73% $ 341,868 $ 2,699 3.18% Tax-exempt investment securities(1) (TE) 39,922 592 5.95% 47,787 732 6.16% Federal funds sold and interest bearing deposits(2) .......................... 56,615 592 4.19% 24,460 75 1.23% Loans3,4 (TE) .......................... 999,918 15,916 6.38% 697,628 10,017 5.78% -------------------------------------------------------------------------- Total interest earning assets and interest income (TE) ....... $1,371,044 $ 20,341 5.95% $1,111,743 $ 13,523 4.89% -------------------------------------------------------------------------- Cash and due from banks ................ $ 44,525 $ 44,416 Premises and equipment ................. 22,493 17,088 Other assets ........................... 111,459 24,096 -------------------------------------------------------------------------- Total assets ................... $1,549,521 $1,197,343 ========================================================================== Liabilities and Shareholders' Equity Interest bearing demand deposits ....... $ 84,260 $ 115 0.55% $ 92,583 $ 154 0.67% Savings ................................ 432,866 1,695 1.57% 335,759 762 0.91% Time deposits .......................... 472,474 3,593 3.05% 354,475 2,428 2.75% Federal funds purchased, repurchase agreements, and notes payable ........ 119,966 751 2.51% 95,956 276 1.16% FHLB advances and other borrowings ..... 71,518 787 4.41% 29,930 398 5.35% -------------------------------------------------------------------------- Total interest bearing liabilities and interest expense $1,181,084 $ 6,941 2.36% $ 908,703 $ 4,018 1.78% -------------------------------------------------------------------------- Noninterest bearing demand deposits .... $ 139,036 $ 100,588 Noninterest bearing savings deposits ... 71,468 65,085 Other liabilities ...................... 14,200 10,158 -------------------------------------------------------------------------- Total liabilities .............. $1,405,788 $1,084,534 Shareholders' equity ................... 143,733 112,809 -------------------------------------------------------------------------- Total liabilities and shareholders' equity ........... $1,549,521 $1,197,343 ========================================================================== Interest spread (average rate earned minus average rate paid) (TE) ........ 3.59% 3.11% ========================================================================== Net interest income (TE) ............... $ 13,400 $ 9,505 ========================================================================== Net yield on interest earnings assets (TE) ................. 3.92% 3.44% ========================================================================== 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. (2) Federal funds sold and interest bearing deposits included approximately $48,000 and $13,000 in 2005 and 2004, respectively, of interest income from third party processing of cashier checks. (3) Loans are net of allowance for loan losses and include mortgage loans held-for-sale. Nonaccrual loans are included in the total. (4) Loan fees of approximately $418,000 and $403,000 in 2005 and 2004, respectively, are included in total loan income. 28 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. The adjustment to interest income for tax-exempt investment securities and loans was calculated based on the federal income tax statutory rate of 35%. The 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, 2005 ---------------------------------------------------------------------------------- Increase (Decrease) from Previous Due to Due to Year Volume Rate ---------------------------------------------------------------------------------- Interest Income Taxable investment securities .................. $ 542 $(2,895) $ 3,437 Tax-exempt investment securities (TE) .......... (140) (116) (24) Federal funds sold and interest bearing deposits 517 183 334 Loans (TE) ..................................... 5,899 4,744 1,155 ----------------------------- Total interest income (TE) ............... $ 6,818 $ 1,916 $ 4,902 ----------------------------- Interest Expense Interest bearing demand and savings deposits ... $ 894 $ 220 $ 674 Time deposits .................................. 1,165 881 284 Federal funds purchased, repurchase agreements and notes payable ...... 475 84 391 FHLB advances and other borrowings ............. 389 843 (454) ----------------------------- Total interest expense ................... $ 2,923 $ 2,028 $ 895 ----------------------------- Net Interest Income (TE) ......................... $ 3,895 $ (112) $ 4,007 =============================

Net interest income on a tax equivalent basis was $3.895 million, or 41.0%, higher for the second quarter of 2005 compared to the second quarter of 2004. Total tax-equivalent interest income was $6.818 million, or 50.4%, higher in 2005 compared to 2004, while interest expense increased $2.923 million, or 72.7%. The increase in interest income and interest expense was due to an increase in both rates and volume. The increase in total tax equivalent interest income was due to increases in interest income from loans, taxable investment securities and federal funds sold and interest bearing deposits, offset slightly by a decrease in interest income from tax-exempt investment securities. The increases in interest income from loans and federal funds sold and interest bearing deposits were due to both increases in rates and volume during the second quarter of 2005 compared to the same period in 2004. The increase in interest income from taxable investment securities was due to an increase in rates, offset somewhat by a decrease in volume. The decrease in interest income from tax-exempt investment securities was due to decreases in both rates and volume. The increase in total interest expense was due to increases in interest expense on all categories of interest bearing liabilities. The increases in interest expense on time deposits, 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 2005 compared to the same period in 2004. The increase in interest expense from FHLB advances and other borrowings was due to an increase in volume, offset slightly by lower rates. 29 The provision for loan losses recorded was $300,000 in the second quarter of 2005 compared to $330,000 in the second quarter of 2004, a decrease of 9.1%. 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. ----------------------------------------------------------------------------------------------- Noninterest Income and Expense for the Three Months Ended June 30, 2005 and 2004 (in thousands) ----------------------------------------------------------------------------------------------- Non-interest Income 06/30/2005 06/30/2004 $ change % change ----------------------------------------------------------------------------------------------- Remittance processing (1) .................. $ 1,696 $ 1,923 $ (227) (11.8%) Trust and brokerage fees (2) ............... 1,810 1,625 185 11.4% Service charges on deposit accounts (3) .... 783 622 161 25.9% Securities transactions, net (4) ........... (155) (2) (153) (7650.0%) Gain on sales of mortgage loans, net (5) ... 260 345 (85) (24.6%) Other ...................................... 664 659 5 0.8% ------------------------------------------------ Total non-interest income .......... $ 5,058 $ 5,172 $ (114) (2.2%) ================================================ Salaries and employee benefits (6) ......... $ 6,281 $ 4,543 $ 1,738 38.3% Occupancy (7) .............................. 807 638 169 26.5% Equipment .................................. 675 647 28 4.3% Data processing ............................ 552 555 (3) (0.5%) Office supplies ............................ 289 312 (23) (7.4%) Service charges from correspondent banks (8) 145 233 (88) (37.8%) Amortization of core deposit intangibles (9) 218 -- 218 Other (10) ................................. 1,587 1,390 197 14.2% ------------------------------------------------ Total non-interest expense ......... $ 10,554 $ 8,318 $ 2,236 26.9% ================================================ (1) The decrease in remittance processing income was primarily due to a $311,000, or 51.5%, decrease in income from lockbox fees, offset somewhat by a $92,000, or 7.0%, increase in electronic processing income at the Company's remittance processing subsidiary, FirsTech. The decrease in lockbox fees was mainly due to the loss of two major accounts in the fourth quarter of 2004. This decrease was offset somewhat by an increase in electronic processing revenue from new and existing Internet Agent customers. These changes in revenue volume continue to demonstrate the Company's shift toward electronic processing from traditional lockbox services. (2) The increase in trust and brokerage fees was mainly due to a $70,000, or 72.9%, increase in estate fees and a $35,000, or 40.3%, increase in brokerage income. The increase in estate fees was primarily due to one estate that began producing revenue during the first half of 2005. The increase in brokerage income was due to prospecting new customers and the timing of revenue from new customers prospected in prior periods. (3) The increase in income from services charges on deposit accounts was due to $254,000 as a result of the Citizens acquisition, offset somewhat by a $93,000, or 15.0%, decrease at Main Street Bank & Trust. (4) The decrease in securities transactions, net, was primarily due to a loss on one investment. (5) The decrease in gains on sales of mortgage loans reflected a $7.826 million, or 28.8%, decrease in funded mortgages held-for-sale, from $27.154 million in the second quarter of 2004 to $19.328 million in the second quarter of 2005. The volume of funded mortgage loans decreased mainly due to less demand for refinancings in the second quarter of 2005 compared to the same period in 2004. (6) The increase in salaries and benefits included $1.081 million attributable to additional employees as a result of the acquisition of Citizens. 30 (7) The increase in occupancy expense included $139,000 attributable to the expense of operating Citizens. (8) The decrease in service charges from correspondent banks was largely due to the loss of two lockbox accounts as described in footnote 1, which resulted in a significant decrease in the number of checks cleared in the second quarter of 2005 compared to the same period in 2004. (9) Amortization of core deposit intangibles was attributable to the acquisition of Citizens. (10) The increase in other non-interest expense included $235,000 attributable to the acquisition of Citizens.

Income tax expense increased $616,000, or 30.0%, during the second quarter of 2005 compared to the same period in 2004. The effective tax rate increased to 36.1% during the second quarter of 2005 from 35.6% in the second quarter of 2004. Business Segment Information The Company currently operates in two industry segments. The primary business involves providing banking services to central Illinois. The Bank offers a full range of financial services to 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; full service trust department that offers a wide range of services such as investment management, acting as trustee, serving as guardian, executor or agent, 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, money management software such as Quicken and through networks such as Visa e-Pay and MasterCard RPS. Company information is provided for informational purposes only, since it is not considered a separate segment for reporting purposes. During 2004, certain administrative, audit, compliance, accounting, finance, property management, human resources, sales management and marketing, courier, information systems and other support services were performed by the Company. The net expenses of these functions were allocated to the subsidiaries by charging a monthly management fee. Effective January 1, 2005, these functions were moved to the Banking Services Segment. During this process, approximately 77 full time equivalent employees were moved from the Company to the Bank. The net expenses of these functions are allocated to the Company and FirsTech by charging a monthly management fee. 31 The following table quantifies the Company's business segment information for the six-months ended June 30, 2005 and 2004: As of and for the Banking Remittance Six Months Ended: Services Services Company Eliminations Total -------------------------------------------------------------------------------------------------- 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 Total assets ................ 1,501,191 2,879 153,697 (141,965) 1,515,802 Depreciation and amortization 1,017 205 27 -- 1,249 June 30, 2004 Total interest income ....... $ 26,593 $ 9 $ 95 $ (53) $ 26,644 Total interest expense ...... 7,921 -- 32 (53) 7,900 Provision for loan losses ... 660 -- -- -- 660 Total non-interest income ... 6,555 3,858 2,359 (2,453) 10,319 Total non-interest expense .. 13,242 2,658 3,068 (2,453) 16,515 Income before income tax .... 11,325 1,209 (646) -- 11,888 Income tax expense .......... 3,980 508 (261) -- 4,227 Net income .................. 7,345 701 (385) -- 7,661 Total assets ................ 1,175,652 4,409 118,469 (103,853) 1,194,677 Depreciation and amortization 764 318 221 -- 1,303

Emerging Accounting Standards In December 2004, the Financial Accounting Standards Board published Statement No. 123 (revised 2004), Share-Based Payment ("FAS 123(R)"). FAS 123(R) requires that the compensation cost relating to share-based payment transactions, including grants of employee stock options and shares under employee stock purchase plans, be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. FAS 123(R) permits entities to use any option-pricing model that meets the fair value objectives in the Statement. The Statement was originally effective at the beginning of the Company's third quarter in 2005, however, in April 2005 the adoption of a new rule, by the Securities and Exchange Commission, changed the dates for compliance with this standard. The Company will now be required to implement Statement No. 123(R) beginning January 1, 2006. As of the effective date, the Company will have the option of applying the Statement using a modified prospective application or a modified retrospective application. Under the prospective method, compensation cost would be recognized for (1) all awards granted after the required effective date and for awards modified, cancelled or repurchased after that date and (2) the portion of prior awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated for pro forma disclosures under SFAS 123. Under the retrospective application method, compensation cost would be recognized as in (1) above and (2) for prior periods would be restated consistent with the pro forma disclosures required for those periods by SFAS 123. The valuation model and amortization assumption we have used continues to be available, but we have not yet completed our assessment of the alternatives. The impact of this Statement on the Company after the effective date and beyond will depend upon various factors, among them being the future compensation strategy. The SFAS 123 pro forma compensation costs presented in Note 4 to the financial statements have been calculated using the Black-Scholes option-pricing model and may not be indicative of amounts which should be expected in future periods. 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. 32 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 on the operations and future prospects of the Company and its subsidiaries include, but are not limited to, the following: o The strength of the United States economy in general and the strength of the local economies in which the Company conducts its operations which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of the Company's assets. o The economic impact of past and any future terrorist attacks, acts of war or threats thereof, and the response of the United States to any such threats and attacks. o The effects of, and changes in, federal, state and local laws, regulations and policies affecting banking, securities, insurance and monetary and financial matters. o The effects of changes in interest rates (including the effects of changes in the rate of prepayments of the Company's assets) and the policies of the Board of Governors of the Federal Reserve System. o The ability of the Company to compete with other financial institutions as effectively as the Company currently intends due to increases in competitive pressures in the financial services sector. o The inability of the Company to obtain new customers and to retain existing customers. o The timely development and acceptance of products and services, including products and services offered through alternative delivery channels such as the Internet. o Technological changes implemented by the Company and by other parties, including third party vendors, which may be more difficult or more expensive than anticipated or which may have unforeseen consequences to the Company and its customers. o The ability of the Company to develop and maintain secure and reliable electronic systems. o The ability of the Company to retain key executives and employees and the difficulty that the Company may experience in replacing key executives and employees in an effective manner. o Consumer spending and saving habits which may change in a manner that affects the Company's business adversely. o Business combinations and the integration of acquired businesses which may be more difficult or expensive than expected. o The costs, effects and outcomes of existing or future litigation. o Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies, the Financial Accounting Standards Board or the Public Company Accounting Oversight Board. o The ability of the Company to manage the risks associated with the foregoing as well as anticipated. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Additional information concerning the Company and its business, including other factors that could materially affect the Company's financial results, is included in the Company's filings with the Securities and Exchange Commission. Item 3. Quantitative and Qualitative Disclosures about Market Risk See the "Interest Rate Sensitivity" section above. Item 4. Controls and Procedures An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of June 30, 2005. Based on that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective. There have been no significant changes in the Company's disclosure controls or its internal controls over financial reporting, or in other factors that could significantly affect the disclosure controls or the Company's internal control over financial reporting. 33 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 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 Announced (b) Average Announced Under the Shares Price Paid per Plans or Plans or Period Purchased Share Programs (1) Programs (1) ---------------------------------------------------------------------------------------- April 1 - April 30, 2005 .......... -- $ -- -- 389,700 May 1 - May 31, 2005 ............ 15,000 $ 29.48 15,000 374,700 June 1 - June 30, 2005 ........... 77,000 $ 29.53 77,000 297,700 ---------------------------------------------------------- Total ................... 92,000 $ 29.52 92,000 297,700 ========================================================== (1) On October 27, 2003, the Company announced that its Board of Directors had reinstated the Stock Repurchase Program allowing the purchase of up to 500,000 shares of the Company's outstanding stock. The program will expire when the Company repurchases all of the shares covered.

Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders On May 11, 2005, the Company's annual meeting of shareholders was held. At the meeting, one item was put to a vote of the security holders. There were 9,460,870 issued and outstanding shares of common stock entitled to vote at the annual meeting. The voting presented 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., Gene A. Salmon, 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 2005. Election of Directors: Votes For Votes Withheld --------------------------------------------------------------------------- David J. Downey 7,584,060 117,509 Van A. Dukeman 7,589,554 112,015 Larry D. Haab 7,592,301 109,268 Frederic L. Kenney 7,595,083 106,486 Gregory B. Lykins 7,592,875 108,694 August C. Meyer, Jr. 7,593,629 107,940 Gene A. Salmon 7,594,554 107,015 George T. Shapland 7,596,720 104,849 Thomas G. Sloan 7,597,875 103,694 H. Gale Zacheis, M.D. 7,594,467 107,102 34 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. 35 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, 2005 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 36

MAIN STREET TRUST INC 10-Q