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 September 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 by "X" whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes[ ] No[X] Indicate the number of shares outstanding of the registrant's common stock, as of November 2, 2005. Main Street Trust, Inc. Common Stock 10,222,987 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 10 Item 3. Quantitative and Qualitative Disclosure about Market Risk 36 Item 4. Controls and Procedures 36 (b) PART II. OTHER INFORMATION Item 1. Legal Proceedings 36 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 36 Item 3. Defaults Upon Senior Securities 37 Item 4. Submission of Matters to a Vote of Security Holders 37 Item 5. Other Information 37 Item 6. Exhibits 37 SIGNATURES 38 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements -------------------------------------- MAIN STREET TRUST, INC. AND SUBSIDIARIES Consolidated Balance Sheets September 30, 2005 and December 31, 2004 (Unaudited, in thousands, except share data) September 30, December 31, 2005 2004 -------------------------- ASSETS Cash and due from banks $ 42,520 $ 33,133 Federal funds sold and interest bearing deposits 70,325 31,795 -------------------------- Cash and cash equivalents 112,845 64,928 -------------------------- Investments in debt and equity securities: Available-for-sale, at fair value 228,915 269,580 Held-to-maturity, at cost (fair value of $80,082 and $81,099 at September 30, 2005 and December 31, 2004, respectively) 80,803 81,164 Non-marketable equity securities 24,858 7,982 -------------------------- Total investments in debt and equity securities 334,576 358,726 -------------------------- Loans, net of allowance for loan losses of $13,688 and $9,650 at September 30, 2005 and December 31, 2004, respectively 1,000,825 761,227 Mortgage loans held for sale 1,973 1,005 Premises and equipment 22,364 17,087 Goodwill 20,832 - Core deposit intangibles 4,786 - Accrued interest receivable 9,157 6,570 Other assets 26,061 18,575 -------------------------- Total assets $ 1,533,419 $ 1,228,118 ========================== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing $ 211,943 $ 172,908 Interest bearing 969,883 801,669 --------------------------- Total deposits 1,181,826 974,577 --------------------------- Federal funds purchased, repurchase agreements and notes payable 117,130 96,900 Federal Home Loan Bank advances and other borrowings 71,482 29,882 Accrued interest payable 3,727 2,601 Other liabilities 15,025 10,183 --------------------------- Total liabilities 1,389,190 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 118,075 108,071 Accumulated other comprehensive loss (1,410) (218) -------------------------- 171,966 163,154 Less: treasury stock, at cost, 990,777 and 1,770,329 shares at September 30, 2005 and December 31, 2004, respectively (27,737) (49,179) -------------------------- Total shareholders' equity 144,229 113,975 -------------------------- Total liabilities and shareholders' equity $ 1,533,419 $ 1,228,118 ===========================

See accompanying notes to unaudited consolidated financial statements. 3 MAIN STREET TRUST, INC. AND SUBSIDIARIES Consolidated Statements of Income For the Nine Months Ended September 30, 2005 and 2004 (Unaudited, in thousands, except share data) 2005 2004 ---------------------- Interest income: Loans and fees on loans $ 43,961 30,571 Investments in debt and equity securities Taxable 9,269 7,973 Tax-exempt 1,156 1,424 Federal funds sold and interest bearing deposits 1,252 339 ---------------------- Total interest income 55,638 40,307 ---------------------- Interest expense: Deposits 14,871 10,189 Federal funds purchased, repurchase agreements and notes payable 2,128 893 Federal Home Loan Bank advances and other borrowings 1,985 1,202 ---------------------- Total interest expense 18,984 12,284 ---------------------- Net interest income 36,654 28,023 Provision for loan losses 1,080 990 ---------------------- Net interest income after provision for loan losses 35,574 27,033 ---------------------- Non-interest income: Remittance processing 5,144 5,635 Trust and brokerage fees 5,805 4,831 Service charges on deposit accounts 2,129 1,820 Securities transactions, net (450) 139 Gain on sales of mortgage loans, net 726 777 Other 2,017 2,075 -------------------- Total non-interest income 15,371 15,277 -------------------- Non-interest expense: Salaries and employee benefits 17,325 13,978 Occupancy 2,293 1,968 Equipment 1,955 1,886 Data processing 1,669 1,633 Office supplies 906 887 Service charges from correspondent banks 389 652 Amortization of core deposit intangibles 435 - Other 4,342 3,953 -------------------- Total non-interest expense 29,314 24,957 -------------------- Income before income taxes 21,631 17,353 Income taxes 7,820 6,137 ----------------------- Net income $ 13,811 $ 11,216 ======================= Per share data: Basic earnings per share $ 1.38 $ 1.18 Weighted average shares of common stock outstanding 10,014,234 9,491,827 Diluted earnings per share $ 1.37 1.17 Weighted average shares of common stock and dilutive potential common shares outstanding 10,111,588 9,607,752

See accompanying notes to unaudited consolidated financial statements. 4 MAIN STREET TRUST, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income For the Nine Months Ended September 30, 2005 and 2004 (Unaudited, in thousands) 2005 2004 ---------------------- Net income $ 13,811 $ 11,216 ---------------------- Other comprehensive income (loss), before tax: Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period, net of tax of ($975) and ($1,083), for September 30, 2005 and 2004, respectively (1,462) (1,625) Less: reclassification adjustment for gains (losses) included in net income, net of tax of $180 and ($56), for September 30, 2005 and 2004, respectively 270 (83) ---------------------- Other comprehensive loss (1,192) (1,708) ---------------------- Comprehensive income $ 12,619 $ 9,508 ======================

See accompanying notes to unaudited consolidated financial statements. 5 MAIN STREET TRUST, INC. AND SUBSIDIARIES Consolidated Statements of Income For the Three Months Ended September 30, 2005 and 2004 (Unaudited, in thousands, except share data) 2005 2004 ----------------------- Interest income: Loans and fees on loans $ 16,643 $ 10,507 Investments in debt and equity securities Taxable 3,664 2,560 Tax-exempt 370 445 Federal funds sold and interest bearing deposits 439 151 ----------------------- Total interest income 21,116 13,663 ----------------------- Intererest expense: Deposits 5,868 3,643 Federal funds purchased, repurchase agreements and notes payable 870 336 Federal Home Loan Bank advances and other borrowings 812 405 ----------------------- Total interest expense 7,550 4,384 ----------------------- Net interest income 13,566 9,279 Provision for loan losses 450 330 ----------------------- Net interest income after provision for loan losses 13,116 8,949 ----------------------- Non-interest income: Remittance processing 1,741 1,820 Trust and brokerage fees 2,153 1,544 Service charges on deposit accounts 820 619 Securities transactions, net (485) 133 Gain on sales of mortgage loans, net 329 229 Other 740 613 ----------------------- Total non-interest income 5,298 4,958 ----------------------- Non-interest expense: Salaries and employee benefits 6,097 4,727 Occupancy 824 685 Equipment 674 606 Data processing 566 546 Office supplies 319 270 Service charges from correspondent banks 134 194 Amortization of core deposit intangibles 217 - Other 1,480 1,414 ----------------------- Total non-interest expense 10,311 8,442 ----------------------- Income before income taxes 8,103 5,465 Income taxes 2,952 1,910 ----------------------- Net income $ 5,151 $ 3,555 ======================= Per share data: Basic earnings per share $ 0.50 $ 0.38 Weighted average shares of common stock outstanding 10,248,453 9,460,495 Diluted earnings per share $ 0.50 $ 0.37 Weighted average shares of common stock and dilutive potential common shares outstanding 10,341,647 9,573,370

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 September 30, 2005 and 2004 (Unaudited, in thousands) 2005 2004 ---------------------- Net income $ 5,151 $ 3,555 Other comprehensive income (loss), before tax: Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period, net of tax of ($497) and $418, for September 30, 2005 and 2004, respectively (745) 625 Less: reclassification adjustment for gains (losses) included in net income, net of tax of $194 and ($54), for September 30, 2005 and 2004, respective 291 (79) ---------------------- Other comprehensive income (loss) (454) 546 ====================== Comprehensive income $ 4,697 $ 4,101 See accompanying notes to unaudited consolidated financial statements. 7 MAIN STREET TRUST, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Nine Months Ending September 30, 2005 and 2004 (Unaudited, in thousands) 2005 2004 -------------------- Cash flows from operating activities: Net income $ 13,811 $ 11,216 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,901 1,914 Amortization of bond discounts and premiums, net 952 1,879 Amortization of core deposit intangibles 435 - Provision for loan losses 1,080 990 Securities transactions, net 450 (139) Federal Home Loan Bank stock dividend (597) (187) Undistributed gain from non-marketable equity securities (1,585) (36) Gain on sales of mortgage loans, net (726) (777) Loss (gain) on disposal of premises and equipment 9 (286) Proceeds from sales of mortgage loans originated for sale 55,397 59,411 Mortgage loans originated for sale (55,357) (58,912) Other, net (287) (1,154) -------------------- Net cash provided by operating activities 15,483 13,919 -------------------- Cash flows from investing activities: Net increase in loans (12,564) (61,081) Proceeds from maturities and calls of investments in debt securities: Held-to-maturity 5,532 9,988 Available-for-sale 127,750 171,845 Proceeds from sales of investments: Available-for-sale 56,245 3,223 Purchases of investments in debt and equity securities: Held-to-maturity (13,779) (45,789) Available-for-sale (133,367) (192,532) Other equity securities (685) (175) Principal paydowns from mortgage-backed securities: Held-to-maturity 8,032 40,797 Available-for-sale 11,655 10,304 Return of principal on other equity securities 1,800 522 Purchases of premises and equipment (1,197) (1,694) Proceeds from sales of premises and equipment 3 623 Acquisition of Citizens First Financial Corporation, net of cash and cash equivalents acquired (6,385) - -------------------- Net cash provided by (used in) investing activities 43,040 (63,969) -------------------- Cash flows from financing activities: Net (decrease) increase in deposits (24,840) 91,563 Net increase (decrease) in federal funds purchased, repurchase agreements, and notes payable 20,230 (8,304) Advances from Federal Home Loan Bank and other borrowings 34,500 - Payments on Federal Home Loan Bank and other borrowings (30,499) (78) Cash dividends paid (6,421) (5,988) MSTI stock transactions, net (3,576) (1,971) -------------------- Net cash (used in) provided by financing activities (10,606) 75,222 -------------------- Net increase in cash and cash equivalents 47,917 25,172 Cash and cash equivalents at beginning of year 64,928 75,903 -------------------- Cash and cash equivalents at end of period $ 112,845 $ 101,075 ==================== See accompanying notes to unaudited consolidated financial statements. 8 MAIN STREET TRUST, INC. AND SUBSIDIARIES Supplemental Disclosure of Cash Flow Information For the Nine Months Ending September 30, 2005 and 2004 (Unaudited, in thousands) 2005 2004 ------------------------ Cash paid during the year for: Interest $ 18,051 $ 11,649 Income taxes 7,145 5,131 Real estate acquired through or in lieu of foreclosure - 40 Dividends declared not paid 2,250 1,984 Acquisition of Citizens First Financial Corporation: Stock issued 27,804 Cash paid 28,416 Capitalized expenses 621 --------- Total cost of acquisition 56,841 ========= Assets acquired: Cash and due from banks 6,022 Federal funds sold and interest bearing deposits 16,630 --------- Cash and cash equivalents 22,652 Investments in debt and equity securities: Available-for-sale, at fair value 23,865 Non-marketable equity securities 16,374 Loans, net of allowance for loan losses 228,114 Mortgage loans held for sale 282 Premises and Equipment 5,993 Accrued interest receivable 1,571 Goodwill 20,832 Core deposit intangibles 5,222 Other assets 6,288 Liabilities assumed: Deposits (232,089) Federal Home Loan Bank advances and other borrowings (37,599) Accrued interest payable (193) Other liabilities (4,471) ---------- 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 September 30, 2005 and for the three-month and nine-month periods ended September 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 nine-month periods ended September 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 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. Assets and liabilities related to the acquisition of Citizens are reported as of the April 2005 acquisition date. Results of operations of Citizens since the acquisition date have been included in the Company's consolidated financial statements. The Company merged Citizens Savings Bank into Main Street Bank & Trust as of the close of business on October 7, 2005. The Citizens acquisition purchase price of approximately $56.841 million was allocated based upon the fair value of the assets and liabilities acquired. The Citizens excess purchase price has been allocated to goodwill and identifiable intangible assets in accordance with current accounting literature, to the extent that supportable documentation was available at September 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 Proforma unaudited operating results for the nine months ended September 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 $ 59,806 $ 54,001 Interest Expense 20,579 17,716 Net Income 13,800 12,954 Basic EPS 1.38 1.25 Diluted EPS 1.36 1.23 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: Nine Months Ended Three Months Ended September 30, September 30, ----------------------------------------------------- 2005 2004 2005 2004 ----------------------------------------------------- Net Income $ 13,811,000 $ 11,216,000 $ 5,151,000 $3,555,000 ===================================================== Shares: Weighted average common shares outstanding 10,014,234 9,491,827 10,248,453 9,460,495 Dilutive effect of outstanding options, as determined by the application of the treasury stock method 97,354 115,925 93,194 112,875 ----------------------------------------------------- Weighted average common shares oustanding, as adjusted 10,111,588 9,607,752 10,341,647 9,573,370 ===================================================== Basic earnings per share $ 1.38 $ 1.18 $ 0.50 $ 0.38 ===================================================== Diluted earnings per share $ 1.37 $ 1.17 $ 0.50 $ 0.37 =====================================================

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. Nine Months Ended Three Months Ended ------------------------------------------- September 30, September 30, ------------------------------------------- 2005 2004 2005 2004 ------------------------------------------- Net income on common stock: As reported $ 13,811 $ 11,216 $ 5,151 $ 3,555 Deduct total stock-based compensation expense determined under the fair value method for all awards, net of related tax effects (274) (280) (92) (86) Pro forma $ 13,537 $ 10,936 $ 5,059 $ 3,469 ============================================= Basic earnings per share: As reported $ 1.38 $ 1.18 $ 0.50 $ 0.38 Pro forma 1.35 1.15 0.49 0.37 Diluted earnings per share: As reported $ 1.37 $ 1.17 $ 0.50 $ 0.37 Pro forma 1.34 1.14 0.49 0.36

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. Nine Months Ended September 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. 12 The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Management does not anticipate any significant losses as a result of these transactions. The following table summarizes these financial instruments and commitments (in thousands) at September 30, 2005 and 2004: September 30, 2005 2004 ------------------------------- Financial instruments whose contract amounts represent credit risk: Commitments $ 272,011 $ 285,407 Standby letters of credit 29,685 22,896 The acquisition of Citizens resulted in an additional $21.351 million in commitments and $549,000 in additional standby letters of credit at April 1, 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 at September 30, 2005 was $2.330 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 September 30, 2005 and 2004, no amounts had been recorded as liabilities for the Banks' potential obligations under these guarantees. 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results -------------------------------------------------------------------------------- of Operations ------------- Financial Condition ------------------- Assets and Liabilities ---------------------- Total assets increased $305.301 million, or 24.9%, to $1.533 billion at September 30, 2005 compared to $1.228 billion at December 31, 2004. Increases in loans, federal funds sold and interest bearing deposits, 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 investments in debt and equity securities available for sale and investments in debt and equity securities held to maturity. Most of the change in total assets was attributable to the acquisition of Citizens. On April 1, 2005, Citizens total assets were $331.193 million. Cash and due from banks increased $9.387 million, or 28.3%, to $42.520 million at September 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 increased $38.530 million, or 121.2%, to $70.325 million at September 30, 2005 compared to $31.795 million at December 31, 2004. The Citizens acquisition contributed $16.630 million. Federal funds sold and interest bearing deposits fluctuate with loan demand, deposit volume and investment opportunities. Total investments in debt and equity securities decreased $24.150 million, or 6.7%, to $334.576 million at September 30, 2005 compared to $358.726 million at December 31, 2004. Included in the change were decreases of $40.665 million, or 15.1%, in investments in securities available for sale and $361,000, or 0.4%, in securities held to maturity offset somewhat by an increase of $16.876 million, or 211.4%, in non-marketable equity securities. Included in the increase in non-marketable equity securities was $16.374 million of FHLB Stock owned by Citizens on April 1, 2005. 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 $239.598 million, or 31.5%, to $1.001 billion at September 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 $968,000, or 96.3%, to $1.973 million at September 30, 2005 compared to $1.005 million at December 31, 2004. The Citizens acquisition contributed $282,000 to the increase. Premises and equipment increased $5.277 million, or 30.9%, from $17.087 million at December 31, 2004 to $22.364 million at September 30, 2005. The increase included the acquisition of Citizens which contributed $5.993 million and purchases of $1.197 million offset somewhat by depreciation and amortization expense of $1.901 million, loss on disposal of property of $9,000 and proceeds from sale of property of $3,000. Total liabilities increased $275.047 million, or 24.7%, to $1.389 billion at September 30, 2005 from $1.114 billion at December 31, 2004. There were increases in all categories of liabilities as the acquisition of Citizens contributed $274.352 million to total liabilities. Total deposits increased $207.249 million, or 21.3%, to $1.182 billion at September 30, 2005 from $974.577 million at December 31, 2004. Interest bearing deposits increased $168.214 million, or 21.0%, to $969.883 million at September 30, 2005 from $801.669 million at December 31, 2004. Non-interest bearing deposits increased $39.035 million, or 22.6%, to $211.943 million at September 30, 2005 from $172.908 million at December 31, 2004. At the time of 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 $20.230 million, or 20.9%, to $117.130 million at September 30, 2005 from $96.900 million at December 31, 2004. Included in this change was an increase of $20.555 million in repurchase agreements, offset slightly by a decrease of $325,000 in federal funds purchased. Federal Home Loan Bank advances and other borrowings increased $41.600 million, or 139.2%, to $71.482 million at September 30, 2005 compared to $29.882 million at December 31, 2004. The increase included $37.599 million from the acquisition of Citizens. 14 Investment Securities --------------------- The carrying value of investments in debt and equity securities was as follows for September 30, 2005 and December 31, 2004: Carrying Value of Securities1 (in thousands) -------------------------------------------------------------------------------- September 30, 2005 December 31, 2004 -------------------------------------------------------------------------------- Available-for-sale: Federal agencies $ 194,444 $ 218,994 Mortgage-backed securities 16,829 27,713 State and municipal 14,547 16,715 Marketable equity securities 3,095 6,158 ---------- --------- Total available-for-sale $ 228,915 $ 269,580 Held-to-maturity: Federal agencies $ 38,710 $ 40,931 Mortgage-backed securities 17,249 14,992 State and municipal 24,844 25,241 ---------- --------- Total held-to-maturity $ 80,803 $ 81,164 ================================================================================ Non-marketable equity securities: Federal Home Loan Bank stock $ 21,250 $ 4,279 Other equity investments 3,608 3,703 ---------- --------- Total non-marketable equity securities $ 24,858 $ 7,982 ================================================================================ Total investment securities $ 334,576 $ 358,726 =============================================================================== 1Investment 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 September 30, 2005. All securities are shown at their contractual maturity. Maturities and Weighted Average Yields of Debt Securities (dollars in thousands) ------------------------------------------------------------------------------------------------------------------------------ September 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 $61,379 2.50% $131,606 3.22% $ 1,459 4.72% $ - - $194,444 3.00% Mortgage-backed securities1 $ 9,284 3.66% $ 6,847 4.88% $ 681 6.33% $ 17 4.54% $ 16,829 4.27% State and municipal (TE)2 $ 1,767 6.33% $ 8,612 5.67% $ 3,689 7.68% $ 479 7.76% $ 14,547 6.33% Marketable equity securities3 $ - - $ - - $ - - $ - - $ 3,095 - ------------------------------------------------------------------------------------------------------------------------------ Total $72,430 $147,065 $ 5,829 $ 496 $228,915 ------------------------------------------------------------------------------------------------------------------------------ Average Yield 2.75% 3.44% 6.78% 7.65% 3.31% ============================================================================================================================== Securities held- to-maturity: Federal agencies $11,145 2.63% $ 22,840 3.04% $ 4,725 3.85% $ - - - $ 38,710 3.02% Mortgage-backed securities1 $ 5,675 3.05% $ 11,177 4.58% $ 87 5.06% $ 310 5.99% $ 17,249 4.10% State and municipal (TE)2 $ 7,870 5.34% $ 16,619 5.58% $ 195 7.31% $ 160 7.95% $ 24,844 5.53% ------------------------------------------------------------------------------------------------------------------------------ Total $24,690 $ 50,636 $ 5,007 $ 470 $ 80,803 ------------------------------------------------------------------------------------------------------------------------------ Average Yield (TE)2 3.59% 4.21% 4.00% 6.66% 4.02% ============================================================================================================================== Non-marketable equity securities3: Federal Home Loan Bank stock $ - - $ - - $ - - $ - $ 21,250 - Other equity investments $ - - $ - - $ - - $ - - $ 3,608 - -------------------------------------------------------------------------------------- --------------------------------------- Total $ - - $ - - $ - - $ - - $ 24,858 - ==============================================================================================================================

1Expected 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. 2The average yield has been tax equivalized (TE) on state and municipal tax-exempt securities. 3Due 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 Continuous unrealized losses existing for less losses existing greater than 12 months than 12 months Total ------------------------------------------------------------------------------- Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses ------------------------------------------------------------------------------- Available-for-Sale: Federal agencies $ 36,870 $ (309) $ 138,401 $ (2,712) $ 175,271 $ (3,021) Mortgage-backed securities 21,005 (143) 8,212 (158) 29,217 (301) State and municipal 2,439 (41) 1,097 (10) 3,536 (51) -------------------------- ----------------------- ------------------------ Subtotal, debt securities $ 60,314 $ (493) $ 147,710 $ (2,880) $ 208,024 $ (3,373) Other equity securities 599 (108) 331 (289) 930 (397) -------------------------- ----------------------- ------------------------ Total temporarily impaired securities $ 60,913 $ (601) $ 148,041 $ (3,169) $ 208,954 $ (3,770) ========================== ======================== ======================= Held-to-Maturity: Federal agencies $ 1,566 $ (26) $ 36,310 $ (807) $ 37,876 $ (833) Mortgage-backed securities 10,677 (120) 5,617 (59) 16,294 (179) State and municipal 8,048 (49) 1,379 (10) 9,427 (59) -------------------------- ----------------------- ------------------------ Total temporarily impaired securities $ 20,291 $ (195) $ 43,306 $ (876) $ 63,597 $ (1,071) ========================== ======================== ========================

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 $3.169 million continuous unrealized loss greater than 12 months on available-for-sale securities at September 30, 2005 was made up of thirty-seven debt securities and four other securities which are common stocks and was believed to be a temporary loss. Common stocks represented $289,000 of the continuous unrealized loss on available-for-sale securities. Management has analyzed these securities to determine whether an other than temporary loss existed and considered several factors, including, but not limited to, the length of time and the extent to which the market value of the security has been less than cost, the financial condition and near-term prospects of the issuer and 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 market value. The $876,000 continuous unrealized loss greater than 12 months on held-to-maturity securities was made up of twenty-one debt securities and was believed to be a temporary loss. Unrealized losses on debt securities are generally due to changes in interest rates and, as such, are considered, by the Company, to be temporary. Because of the nature of U.S. Agency securities, most of which are single pay at maturity, and because the Company has the ability to hold these investments until a recovery of market value, which may be maturity, the Company does not consider these investments to be other than temporarily impaired. Because the Company believes the decline in market value of mortgage-backed securities is attributable to changes in interest rates and not credit quality and because the Company has the ability to hold these investments until recovery of market value, the Company did not consider these investments to be other than temporarily impaired. 17 Loans ----- The following table presents the amounts and percentages of loans at September 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) ---------------------------------------------------------------------------------------------------------- September 30, 2005 December 30, 2004 ---------------------------------------------------------------------------------------------------------- Amount Percentage Amount Percentage ---------------------------------------------------------------------------------------------------------- Commercial, financial and agricultural $ 319,928 31.54% $ 314,657 40.82% Real estate - commercial 465,390 45.87% 309,830 40.19% Real estate - residential 140,898 13.89% 62,464 8.10% Installment and consumer 88,297 8.70% 83,926 10.89% --------------------------------------------------------------------------------------------------------- Total loans $ 1,014,513 100.00% $ 770,877 100.00% ==========================================================================================================

The shift in the loan mix from December 31, 2004 to September 30, 2005 was primarily attributable to the acquisition of Citizens. The balance of loans outstanding as of September 30, 2005 by maturity is shown in the following table: Maturity of Loans Outstanding (dollars in thousands) -------------------------------------------------------------------------------------------------- September 30, 2005 -------------------------------------------------------------------------------------------------- 1 year 1 to 5 Over 5 or less years years Total Commercial, financial and agricultural $ 175,035 $ 92,770 $ 52,123 $ 319,928 Real estate - commercial 122,297 183,515 159,578 $ 465,390 Real estate - residential 35,170 48,328 57,400 $ 140,898 Installment and consumer 14,452 50,169 23,676 $ 88,297 -------------------------------------------------------------------------------------------------- Total $ 346,954 $ 374,782 $ 292,777 $1,014,513 ================================================================================================== Percentage of total loans outstanding 34.20% 36.94% 28.86% 100.00% ==================================================================================================

Capital ------- Total shareholders' equity increased $30.254 million from December 31, 2004 to September 30, 2005. Treasury stock transactions were $24.227 million primarily due to the issuance of treasury stock for the acquisition of Citizens First Financial Corporation, 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 13,811 Treasury stock transactions, net 24,227 Cash dividends declared (6,592) Other comprehensive income (1,192) -------------------------------------------------------------------------------- Shareholders' equity, September 30, 2005 $ 144,229 ================================================================================ On September 20, 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 $2.250 million was paid on October 21, 2005, to holders of record on October 7, 2005. 18 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 September 30, 2005, that the Company and its subsidiary banks exceeded all capital adequacy requirements to which they are subject. As of September 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. Citizens Savings Bank was merged into Main Street Bank & Trust on October 7, 2005. 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 Actual adequacy prompt corrective purposes: action provisions: ---------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio --------------------------------------------------------------------------------------------- As of September 30, 2005: Total capital (to risk-weighted assets) Consolidated $135,569 12.1% $89,959 8.0% N/A Main Street Bank & Trust $ 97,025 10.6% $73,424 8.0% $91,780 10.0% Citizens Savings Bank $ 32,524 16.9% $15,414 8.0% $19,268 10.0% Tier I capital (to risk-weighted assets) Consolidated $121,678 10.8% $44,980 4.0% N/A Main Street Bank & Trust $ 86,775 9.5% $36,712 4.0% $55,068 6.0% Citizens Savings Bank $ 30,102 15.6% $7,707 4.0% $11,561 6.0% Tier I capital (to average assets) Consolidated $121,678 8.1% $60,442 4.0% N/A Main Street Bank & Trust $ 86,775 7.2% $48,329 4.0% $60,412 5.0% Citizens Savings Bank $ 30,102 10.3% $11,711 4.0% $14,639 5.0%

19 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 September 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 $ 70,325 $ - $ - $ - $ - $ 70,325 Debt and equity securities 1 30,692 27,076 5,863 49,880 221,065 334,576 Loans 2 350,972 61,627 51,530 87,822 464,535 1,016,486 ------------------------------------------------------------------------------------------------------------------------ Total earning assets $451,989 $ 88,703 $ 57,393 $137,702 $685,600 $1,421,387 ------------------------------------------------------------------------------------------------------------------------ Interest bearing liabilities: Savings and interest bearing demand deposits $ 51,830 $ 1,803 $ 2,580 $ 5,161 $196,131 $ 257,505 Money market savings deposits 248,353 - - - - 248,353 Time deposits 42,679 71,489 89,730 103,879 156,248 464,025 Federal funds purchased, repurchase agreements, and notes payable 91,941 3,140 11,775 10,274 - 117,130 FHLB advances and other borrowings 14,575 21,000 18,144 8,225 9,538 71,482 ------------------------------------------------------------------------------------------------------------------------- Total interest bearing liabilities $449,378 $ 97,432 $122,229 $127,539 $361,917 $1,158,495 ------------------------------------------------------------------------------------------------------------------------- Net asset (liability) funding gap 2,611 (8,729) (64,836) 10,163 323,683 262,892 ------------------------------------------------------------------------------------------------------------------------- Repricing gap 1.01 0.91 0.47 1.08 1.89 1.23 Cumulative repricing gap 1.01 0.99 0.89 0.92 1.23 1.23 -------------------------------------------------------------------------------------------------------------------------

1Debt and equity securities include securities available-for-sale, securities held-to-maturity, non-marketable equity securities. 2Loans are gross and include mortgage loans held-for-sale. Included in the 1-30 day category of savings and interest-bearing demand deposits are non-core deposits plus a percentage, based upon industry-accepted assumptions and Company analysis, of the core deposits. "Core deposits" are the lowest average balance of the prior twelve months of each product type included in this category. "Non-core deposits" are the difference between the current balance and core deposits. The time frames include a percentage, based upon industry-accepted assumptions and Company analysis, of the core deposits, as follows: 1-30 Days 31-90 Days 91-180 Days 181-365 Days Over 1 Year --------- ---------- ----------- ----------- ----------- ~~Savings and interest-bearing demand deposits 0.45% 0.85% 1.25% 2.45% 95.00%~~

20 At September 30, 2005, the Company was slightly asset sensitive in the 1-30 days category, but somewhat liability sensitive in the 1- 90 days category. As such, the effect of an increase in the interest rate for all interest earning assets and interest bearing liabilities of 100 basis points would increase annualized net interest income by approximately $26,000 in the 1-30 days category, but would decrease annualized net interest income by approximately $61,000 in the 1-90 days category assuming no management intervention. A decrease in interest rates would have the opposite effect for the same time periods. The Company's Asset and Liability Management Policy states that the cumulative ratio of rate-sensitive assets ("RSA") to rate-sensitive liabilities ("RSL") for the 12-month period should fall within the range of 0.75-1.25. As of September 30, 2005, the Company's RSA/RSL was 0.92, 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 September 30, 2005 the Company had a $15 million unsecured line of credit with a correspondent bank, of which $3.5 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 September 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 ------------------------------------------------------------- September 30, 2005 10.5% 5.2% (5.5%) (11.2%) 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. 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. 21 Liquidity and Cash Flows ------------------------ The Company was able to meet liquidity needs during the first nine 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 increased $47.917 million from December 31, 2004 to September 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 increase in cash and cash equivalents came from cash provided by investing and operating activities, offset somewhat by cash used in financing activities. There were differences in sources and uses of cash during the first nine months of 2005 compared to the first nine months of 2004. Cash provided by investing activities during the first nine months of 2005 was $43.040 million compared to cash used of $63.969 million during the same period in 2004, primarily due to differences in investments in debt and equity securities and volume of loan growth. Cash provided by investing activities during the first nine months of 2005 was $63.183 million compared to cash used of $1.817 million during the same period in 2004. In 2005, proceeds of $211.014 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 $147.831 million. In 2004, purchases of debt and equity securities were $238.496 million compared to proceeds of $236.679 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 nine months of 2005 was $12.564 million compared to $61.081 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 during the first nine months of both 2005 and 2004. Cash used by financing activities during the first nine months of 2005 was $10.606 million compared to cash provided of $75.222 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 nine 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 a planned 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. The decrease in deposits was offset somewhat by an increase in federal funds purchased, repurchase agreements and notes payable during the first nine months of 2005 of $20.230 million, mainly as a result of an increase in repurchase agreements compared to a decrease of $8.304 million in federal funds purchased, repurchase agreements and notes payable during the same period in 2004 primarily due to a decrease in repurchase agreements. Cash provided by Federal Home Loan Bank advances and other borrowings of $34.500 million during the first nine months of 2005 was used mainly as a source of working capital and $30.499 million was repaid during the year. During the first nine months of 2004, there were no Federal Home Loan Bank advances and other borrowings and $78,000 in payments. 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 September 30, 2005, the Company had $3.5 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 $11.5 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. 22 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. 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 $13.688 million at September 30, 2005 compared to $9.650 million at December 31, 2004, an increase of $4.038 million. Of this increase, $3.434 million was attributable to the acquisition of Citizens. Net charge-offs were $476,000 and provisions totaled $1.080 million during the first nine months of 2005. The allowance for loan losses as a percentage of gross loans, including loans held-for-sale, was 1.35% at September 30, 2005, compared to 1.25% at December 31, 2004. Gross loans, including loans held-for-sale, increased 31.7% to $1.016 billion at September 30, 2005 from $771.882 million at December 31, 2004. Of this increase, $231.830 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 298.3% at September 30, 2005 compared to 431.6% at December 31, 2004. Nonperforming loans increased from $2.236 million at December 31, 2004 to $4.589 million at September 30, 2005. The $2.353 million increase in nonperforming loans during the first nine months of 2005 resulted from a $1.740 million increase in nonaccrual loans and an increase of $613,000 in loans past due 90 days or more. Of these increases, the acquisition of Citizens resulted in an additional $446,000 in nonaccrual loans. Other increases in nonaccruals included the addition of two commercial credits that totaled $892,000. Increases in retail mortgage loan and home equity lines of credit made up the bulk of the remaining increase in nonaccrual and 90-day delinquencies. Management believes that nonperforming and potential problem loans are appropriately identified and monitored based on the extensive loan analysis performed by the credit administration department, 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. 23 Allowance for Loan Losses (dollars in thousands) ---------------------------------------------------------------------------------------------------------- September 30, 2005 September 30, 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 $ (161) $ (279) Commercial real estate - - Residential real estate (2) - Installment and consumer (547) (856) ---------------------------------------------------------------------------------------------------------- Total $ (710) $ (1,135) ---------------------------------------------------------------------------------------------------------- Recoveries of loans previously charged off: Commercial, financial and agricultural $ 17 $ 157 Commercial real estate 5 - Residential real estate - 15 Installment and consumer 212 150 ---------------------------------------------------------------------------------------------------------- Total $ 234 $ 322 ---------------------------------------------------------------------------------------------------------- Net (charge-offs) recoveries $ (476) $ (813) Provision for loan losses 1,080 990 ---------------------------------------------------------------------------------------------------------- Allowance for loan losses at end of quarter $ 13,688 $ 9,963 ========================================================================================================== Ratio of net charge-offs to average net loans (0.05)% (0.12)% ==========================================================================================================

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) ------------------------------------------------------------------------------- September 30, 2005 December 31, 2004 ------------------------------------------------------------------------------- Allocated: Commercial, financial and agricultural $ 5,388 $ 5,289 Commercial real estate 5,137 1,637 Residential real estate 437 198 Installment and consumer 1,512 1,605 ------------------------------------------------------------------------------- Total allocated allowance $ 12,474 $ 8,729 Unallocated allowance 1,214 921 ------------------------------------------------------------------------------- Total 13,688 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) -------------------------------------------------------------------------------- September 30, 2005 December 31, 2004 ================================================================================ Nonaccrual loans1 $ 3,429 $ 1,689 ================================================================================ Loans past due 90 days or more $ 1,160 $ 547 ================================================================================ Restructured loans $ 369 $ 497 ================================================================================ 1Includes $1.100 million at September 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) -------------------------------------------------------------------------------- September 30, 2005 December 31, 2004 ================================================================================ Other real estate owned $ 40 $ - ================================================================================ Nonperforming other assets $ 50 $ 33 ================================================================================ 24 Results of Operations --------------------- Results of Operations for the Nine Months Ended September 30, 2005 ------------------------------------------------------------------ Net income for the first nine months of 2005 was $13.811 million, a $2.595 million, or 23.1%, increase from $11.216 million for the same period in 2004. This increase included $1.318 million of net income generated by Citizens since the acquisition. Basic earnings per share increased $0.20, or 16.9%, to $1.38 per share in the first nine months of 2005 from $1.18 per share in the first nine months of 2004. Diluted earnings per share increased $0.20, or 17.1%, to $1.37 per share in the first nine months of 2005 from $1.17 per share in the first nine months of 2004. 25 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) -------------------------------------------------------------------------------------------------------------------- Nine Months Ended September 30, -------------------------------------------------------------------------------------------------------------------- 2005 2004 -------------------------------------------------------------------------------------------------------------------- Average Average Balance Interest Rate Balance Interest Rate -------------------------------------------------------------------------------------------------------------------- Assets Taxable investment securities1 $ 318,483 $ 9,269 3.89% $ 328,765 $ 7,973 3.24% Tax-exempt investment securities1 (TE) 39,948 1,778 5.95% 47,467 2,191 6.17% Federal funds sold and interest bearing deposits2 42,069 1,252 3.98% 33,754 339 1.34% Loans3,4 (TE) 922,896 43,972 6.37% 702,101 30,579 5.82% -------------------------------------------------------------------------------------------------------------------- Total interest earning assets and interest income (TE) $ 1,323,396 $ 56,271 5.68% $1,112,087 $41,082 4.93% -------------------------------------------------------------------------------------------------------------------- Cash and due from banks $ 44,024 $ 46,102 Premises and equipment 20,685 17,196 Other assets 46,980 23,664 -------------------------------------------------------------------------------------------------------------------- Total assets $ 1,435,085 $1,199,049 ==================================================================================================================== Liabilities and Shareholders' Equity Interest bearing demand deposits $ 75,254 $ 374 0.66% $ 96,018 $ 497 0.69% Savings 408,827 4,652 1.52% 333,124 2,342 0.94% Time deposits 429,171 9,845 3.07% 352,729 7,350 2.78% Federal funds purchased, repurchase agreements, and notes payable 113,738 2,128 2.50% 98,827 893 1.21% FHLB advances and other borrowings 57,292 1,985 4.63% 29,936 1,202 5.36% -------------------------------------------------------------------------------------------------------------------- Total interest bearing liabilities and interest expense $ 1,084,282 $ 18,984 2.34% $ 910,634 $12,284 1.80% -------------------------------------------------------------------------------------------------------------------- Noninterest bearing demand deposits $ 131,058 $ 100,120 Noninterest bearing savings deposits 71,095 65,430 Other liabilities 14,584 10,113 -------------------------------------------------------------------------------------------------------------------- Total liabilities $ 1,301,019 $1,086,297 Shareholders' equity 134,066 112,752 -------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 1,435,085 $1,199,049 ==================================================================================================================== Interest spread (average rate earned minus average rate paid) (TE) 3.34% 3.13% ==================================================================================================================== Net interest income (TE) $ 37,287 $28,798 ==================================================================================================================== Net yield on interest earnings assets (TE) 3.77% 3.46% ====================================================================================================================

See next page for Notes 1-4. 26 Notes to Consolidated Average Balance Sheet and Interest Rates Tables: 1Investments in debt securities are included at carrying value. Income from venture capital funds of approximately $1.586 million and $36,000 in 2005 and 2004, respectively, is included in interest income from taxable investment securities. Due to the nature of venture capital investments, future results cannot be predicted based on past performance. 2Federal funds sold and interest bearing deposits included approximately $149,000 in 2005 and $45,000 in 2004 of interest income from third party processing of cashier checks. 3Loans are net of allowance for loan losses and include mortgage loans held-for-sale. Nonaccrual loans are included in the total. 4Loan fees of approximately $1.000 million and $1.082 million 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) ----------------------------------------------------------------------------------------- Nine Months Ended September 30, 2005 ----------------------------------------------------------------------------------------- Increase (Decrease) from Previous Due to Due to Year Volume Rate ----------------------------------------------------------------------------------------- Interest Income Taxable investment securities $ 1,296 $ (402) $ 1,698 Tax-exempt investment securities (TE) (413) (339) (74) Federal funds sold and bearing earning deposits 913 102 811 Loans (TE) 13,393 10,287 3,106 ----------------------------------------------------------------------------------------- Total interest income (TE) $ 15,189 $ 9,648 $ 5,541 ----------------------------------------------------------------------------------------- Interest Expense Interest bearing demand and savings deposits $ 2,187 $ 400 $ 1,787 Time deposits 2,495 1,697 798 Federal funds purchased, repurchase agreements and notes payable 1,235 152 1,083 FHLB advances and other borrowings 783 1,062 (279) ----------------------------------------------------------------------------------------- Total interest expense $ 6,700 $ 3,311 $ 3,389 ----------------------------------------------------------------------------------------- Net Interest Income (TE) $ 8,489 $ 6,337 $ 2,152 =========================================================================================

27 Net interest income on a tax equivalent basis was $8.489 million, or 29.5%, higher for the first nine months of 2005 compared to the same period of 2004. Total tax-equivalent interest income was $15.189 million, or 37.0%, higher in 2005 compared to 2004, and interest expense increased $6.700 million, or 54.5%. 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, taxable investment securities, and federal funds sold and interest bearing deposits, offset somewhat by a decrease in interest income from tax-exempt investment securities. The increase in interest income from loans was due to an increase in volume coupled with higher rates. The increase in interest income from taxable investment securities was due to higher rates, offset somewhat by lower volume. The increase in interest income on federal funds sold and interest earning deposits was primarily due to higher rates. The decrease in interest income from tax-exempt investment securities was primarily due to lower volume. The increase in total interest expense was due to an increase in interest expense from all categories of interest bearing liabilities. The increases in interest expense from interest bearing demand and savings deposits and federal funds purchased, repurchase agreements and notes payable were primarily due to higher rates. The increase in interest expense on time deposits was primarily due to higher 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 $1.080 million during the first nine months of 2005 compared to $990,000 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 Nine Months Ended September 30, 2005 and 2004 (in thousands) ----------------------------------------------------------------------------------------------------- Non-interest Income 09/30/2005 09/30/2004 $ change % change ----------------------------------------------------------------------------------------------------- Remittance processing 1 $ 5,144 $ 5,635 $ (491) (8.7%) Trust and brokerage fees 2 5,805 4,831 974 20.2% Service charges on deposit accounts 3 2,129 1,820 309 17.0% Securities transactions, net 4 (450) 139 (589) (423.7%) Gain on sales of mortgage loans, net 726 777 (51) (6.6%) Other 2,017 2,075 (58) (2.8%) ------------- ------------- ----------- ------------ Total non-interest income $15,371 $ 15,277 $ 94 0.6% ============== ============== ============ ============ ---------------------------------------------------------------------------------------------------- Non-interest Expense 09/30/2005 09/30/2004 $ change % change ---------------------------------------------------------------------------------------------------- Salaries and employee benefits 5 $17,325 $ 13,978 $3,347 23.9% Occupancy 6 2,293 1,968 325 16.5% Equipment 1,955 1,886 69 3.7% Data processing 1,669 1,633 36 2.2% Office supplies 906 887 19 2.1% Service charges from correspondent banks 7 389 652 (263) (40.3%) Amortization of core deposit intangibles 8 435 - 435 Other 9 4,342 3,953 389 9.8% ------------- ------------ ------------ ------------ Total non-interest expense $29,314 $ 24,957 $4,357 17.5% ============== ============= ============ ============

1 The decrease in remittance processing income was primarily due to a $839,000, or 45.1%, decrease in income from lockbox fees, offset somewhat by a $376,000, or 10.0%, 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 continue to demonstrate the Company's shift toward electronic processing from traditional lockbox services. 2 The increase in trust and brokerage fees included a $377,000, or 255.8%, increase in farm realty income, a $285,000, or 120.5%, increase in estate fees and an $88,000, or 31.9%, increase in brokerage income. The increase in farm realty income included approximately $238,000 in commissions attributable to the sale of several properties in the third quarter of 2005. 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. 28 3 The increase in income from service charges on deposit accounts was due to $513,000 generated by the Citizens accounts, offset somewhat by a $204,000, or 11.2%, decrease at Main Street Bank & Trust. 4 The decrease in income from securities transactions, net, was primarily due to a $566,000 net loss recognized on one venture fund, offset somewhat by a net gain of $103,000 on the sale of equity securities during the first nine months of 2005. 5 In 2005, salaries and benefits included $2.135 million attributable to additional employees as a result of the acquisition of Citizens and $307,000 in additional salaries and benefits expense attributable to the new branch in Peoria, Illinois that became fully operational in the fourth quarter of 2004. 6 In 2005, occupancy expense included $312,000 attributable to the expenses of operating Citizens. 7 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 nine months of 2005 compared to the same period in 2004. 8 Amortization of core deposit intangibles was attributable to the acquisition of Citizens. 9 Included in other non-interest expense in 2005 compared to 2004 was $448,000 attributable to Citizens. Income tax expense increased $1.683, or 27.4%, during the first nine months of 2005 compared to the same period in 2004. The effective tax rate increased to 36.2% during the first nine months of 2005 from 35.4% during the same period in 2004. Results of Operations For the Three Months Ended September 30, 2005 ------------------------------------------------------------------- Net income for the third quarter of 2005 was $5.151 million, a $1.596 million, or 44.9%, increase from $3.555 million for the same period in 2004. Basic earnings per share increased $0.12, or 31.6%, to $0.50 per share during the third quarter of 2005 from $0.38 per share during the same period in 2004. Diluted earnings per share increased $0.13, or 35.1%, to $0.50 during the third quarter of 2005 from $0.37 per share during the same period in 2004. 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. 29 Consolidated Average Balance Sheet and Interest Rates (dollars in thousands) ------------------------------------------------------------------------------------------------------------------------------ Three Months Ended September 30, ------------------------------------------------------------------------------------------------------------------------------ 2005 2004 ------------------------------------------------------------------------------------------------------------------------------ Average Average Balance Interest Rate Balance Interest Rate ------------------------------------------------------------------------------------------------------------------------------ Assets Taxable investment securities1 $ 321,759 $ 3,664 4.52% $ 337,101 $ 2,560 3.02% Tax-exempt investment securities1 (TE) 38,274 569 5.90% 44,479 685 6.13% Federal funds sold and interest bearing deposits2 40,413 439 4.31% 36,234 151 1.66% Loans3,4 (TE) 1,007,078 16,648 6.56% 722,047 10,509 5.79% ------------------------------------------------------------------------------------------------------------------------------ Total interest earning assets and interest income (TE) $ 1,407,524 $21,320 6.01% $ 1,139,861 $13,905 4.85% ------------------------------------------------------------------------------------------------------------------------------ Cash and due from banks $ 48,848 $ 46,108 Premises and equipment 22,483 16,982 Other assets 58,708 25,654 ------------------------------------------------------------------------------------------------------------------------------ Total assets $ 1,537,563 $1,228,605 ============================================================================================================================== Liabilities and Shareholders' Equity Interest bearing demand deposits $ 75,062 $ 169 0.89% $ 102,280 $ 192 0.75% Savings 425,355 1,912 1.78% 359,472 942 1.04% Time deposits 472,397 3,787 3.18% 356,431 2,509 2.80% Federal funds purchased, repurchase agreements, and notes payable 117,852 870 2.93% 92,687 336 1.44% FHLB advances and other borrowings 71,828 812 4.49% 29,912 405 5.39% ------------------------------------------------------------------------------------------------------------------------------ Total interest bearing liabilities and interest expense $ 1,162,494 $ 7,550 2.58% $ 940,782 $ 4,384 1.85% ------------------------------------------------------------------------------------------------------------------------------ Noninterest bearing demand deposits $ 137,956 $ 100,028 Noninterest bearing savings deposits 76,923 65,052 Other liabilities 16,364 10,357 ------------------------------------------------------------------------------------------------------------------------------ Total liabilities $ 1,393,737 $ 1,116,219 Shareholders' equity 143,826 112,386 ------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $ 1,537,563 $ 1,228,605 ============================================================================================================================== Interest spread (average rate earned minus average rate paid) (TE) 3.43% 3.00% ============================================================================================================================== Net interest income (TE) $13,770 $ 9,521 =============================================================================================================================== Net yield on interest earnings assets (TE) 3.88% 3.32% ==============================================================================================================================

See next page for Notes 1-4. Notes to Consolidated Average Balance Sheet and Interest Rate Tables: 1Investments in debt securities are included at carrying value. Income from venture capital funds of approximately $1.045 million and $26,000 in 2005 and 2004, respectively, is included in interest income from taxable investment securities. Due to the nature of venture capital investments, future results cannot be predicted based on past performance. 2Federal funds sold and interest bearing deposits included approximately $66,000 and $15,000 in 2005 and 2004, respectively, of interest income from third party processing of cashier checks. 3Loans are net of allowance for loan losses and include mortgage loans held-for-sale. Nonaccrual loans are included in the total. 30 4Loan fees of approximately $339,000 and $383,000 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) ------------------------------------------------------------------------------- Three Months Ended September 30, 2005 ------------------------------------------------------------------------------- Increase (Decrease) from Previous Due to Due to Year Volume Rate -------------------------------------------------------------------------------- Interest Income Taxable investment securities $ 1,104 $ (757) $ 1,861 Tax-exempt investment securities (TE) (116) (91) (25) Federal funds sold and interest earning deposits 288 19 269 Loans (TE) 6,139 4,595 1,544 -------------------------------------------------------------------------------- Total interest income (TE) $ 7,415 $ 3,766 $ 3,649 -------------------------------------------------------------------------------- Interest Expense Interest bearing demand and savings deposits $ 947 $ 100 $ 847 Time deposits 1,278 902 376 Federal funds purchased, repurchase agreements and notes payable 534 111 423 FHLB advances and other borrowings 407 846 (439) -------------------------------------------------------------------------------- Total interest expense $ 3,166 $ 1,959 $ 1,207 -------------------------------------------------------------------------------- Net Interest Income (TE) $ 4,249 $ 1,807 $ 2,442 ================================================================================ Net interest income on a tax equivalent basis was $4.249 million, or 44.6%, higher for the third quarter of 2005 compared to the third quarter of 2004. Total tax-equivalent interest income was $7.415 million, or 53.3%, higher in 2005 compared to 2004, while interest expense increased $3.166 million, or 72.2%. 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 earning deposits, 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 from federal funds sold and interest earning deposits was primarily due to an increase in rates during the third 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. 31 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 was primarily due to an increase in volume. 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 an increase in rates during the third 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. The provision for loan losses recorded was $450,000 in the third quarter of 2005 compared to $330,000 in the third quarter of 2004, an increase of 36.4%. 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 September 30, 2005 and 2004 (in thousands) ---------------------------------------------------------------------------------------------------- Non-interest Income 09/30/2005 09/30/2004 $ change % change ---------------------------------------------------------------------------------------------------- Remittance processing $ 1,741 $ 1,820 $ (79) (4.3%) Trust and brokerage fees 1 2,153 1,544 609 39.4% Service charges on deposit accounts 2 820 619 201 32.5% Securities transactions, net 3 (485) 133 (618) (464.7%) Gain on sales of mortgage loans, net 4 329 229 100 43.7% Other 5 740 613 127 20.7% ---------- -------------- ------------ ------------ Total non-interest income $ 5,298 $ 4,958 $ 340 6.9% ----------------------------------------------===========-==============--============--============ Non-interest Expense 09/30/2005 09/30/2004 $ change % change ---------------------------------------------------------------------------------------------------- Salaries and employee benefits 6 $ 6,097 $ 4,727 $ 1,370 29.0% Occupancy 7 824 685 139 20.3% Equipment 8 674 606 68 11.2% Data processing 566 546 20 3.7% Office supplies 9 319 270 49 18.1% Service charges from correspondent banks 10 134 194 (60) (30.9%) Amortization of core deposit intangibles 11 217 - 217 Other 1,480 1,414 66 4.7% ---------- -------------- ------------ ------------ Total non-interest expense $ 10,311 $ 8,442 $ 1,869 22.1% ----------------------------------------------===========-==============--============--============

1 The increase in trust and brokerage fees was mainly due to a $379,000, or 2,587.1%, increase in farm realty fees, a $93,000, or 126.0% increase in estate fees, and a $52,000, or 145.9% increase in income from employee benefits administration. Included in the increase in farm realty income was approximately $238,000 in commissions from the sale of several properties in the third quarter of 2005. The increase in estate fees was primarily due to one estate that began producing revenue during the first quarter of 2005. 2 The increase in income from service charges on deposit accounts was due to $259,000 as a result of the Citizens acquisition, offset somewhat by a $58,000, or 9.4%, decrease at Main Street Bank & Trust. 3 The decrease in securities transactions, net, was due to a $395,000 loss recognized on one venture fund and a net loss of $91,000 on the sale of several equity securities in the third quarter of 2005. 4 The increase in gains on sales of mortgage loans reflected a $10.897 million, or 70.7%, increase in funded mortgages held-for-sale, from $15.423 million in the third quarter of 2004 to $26.320 million in the third quarter of 2005. The volume of funded mortgage loans increased mainly due to more demand for refinancings in the third quarter of 2005 compared to the same period in 2004. 5 The increase in other non-interest income in the third quarter of 2005 included $81,000 attributable to the acquisition of Citizens and income of approximately $58,000 in proceeds from two life insurance policies. 32 6 The increase in salaries and benefits in the third quarter of 2005 included $1.055 million attributable to additional employees as a result of the acquisition of Citizens. 7 The increase in occupancy expense in the third quarter of 2005 included $173,000 attributable to the expense of operating Citizens. 8 Equipment expense in the third quarter of 2005 included $87,000 attributable to the expense of operating Citizens. 9 Office supplies expense in the third quarter of 2005 included $74,000 attributable to the expense of operating Citizens. 10 The decrease in service charges from correspondent banks in the third quarter of 2005 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 third quarter of 2005 compared to the same period in 2004. 11 Amortization of core deposit intangibles was attributable to the acquisition of Citizens. Income tax expense increased $1.042 million, or 54.6%, during the third quarter of 2005 compared to the same period in 2004. The effective tax rate increased to 36.4% during the third quarter of 2005 from 34.9% in the third quarter of 2004. Business Segment Information ---------------------------- The Company currently operates in two industry segments. The primary business involves providing banking services in central Illinois to both business and individual customers. These services include demand, savings, time and individual retirement accounts; commercial, commercial real estate, consumer (including automobile loans and personal lines of credit), agricultural, and residential real estate lending; safe deposit and night depository services; purchases of installment obligations from retailers, primarily without recourse; farm management; 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 Main Street Bank & Trust. The net expenses of these functions are allocated to the Company and FirsTech by charging a monthly management fee. 33 The following table quantifies the Company's business segment information for the nine-months ended September 30, 2005 and 2004: As of and for the Banking Remittance Nine Months Ended: Services Services Company Eliminations Total ----------------------------------------------------------------------------------------------------------- September 30, 2005 Total interest income $ 53,846 $ 10 $ 1,821 $ (39) $ 55,638 Total interest expense 18,813 - 210 (39) 18,984 Provision for loan losses 1,080 - - - 1,080 Total non-interest income 11,372 5,253 (456) (798) 15,371 Total non-interest expense 25,988 3,194 930 (798) 29,314 Income before income tax 19,337 2,069 225 - 21,631 Income tax expense 6,871 870 79 - 7,820 Net income 12,466 1,199 146 - 13,811 Total assets 1,517,540 3,296 157,292 (144,709) 1,533,419 Depreciation and amortization 1,573 288 40 - 1,901 September 30, 2004 Total interest income $ 40,196 $ 15 $ 172 $ (76) $ 40,307 Total interest expense 12,309 - 51 (76) 12,284 Provision for loan losses 990 - - - 990 Total non-interest income 9,732 5,696 3,529 (3,680) 15,277 Total non-interest expense 20,009 3,905 4,723 (3,680) 24,957 Income before income tax 16,620 1,806 (1,073) - 17,353 Income tax expense 5,810 759 (432) - 6,137 Net income 10,810 1,047 (641) - 11,216 Total assets 1,221,464 4,730 119,906 (106,502) 1,239,598 Depreciation and amortization 1,142 471 301 - 1,914

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 the 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. 34 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 Compan'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. 35 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 September 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. 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 Number of (b) Average Announced Under the Shares Price Paid per Plans or Plans or Period Purchased Share Programs 1 Programs 1 ------------------------------------------------------------------------------------------ July 1 - July 31, 2005 19,100 $ 28.71 19,100 278,600 August 1 - August 31, 2005 21,555 $ 29.02 21,555 257,045 September 1 - September 30, 2005 6,733 $ 29.03 6,733 250,312 ------------------------------------------------------------------------------------------- Total 47,388 $ 28.89 47,388 250,312 ---------------------============================---=================--====================

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. 36 Item 3. Defaults Upon Senior Securities ---------------------------------------- None Item 4. Submission of Matters to a Vote of Security Holders ------------------------------------------------------------ None Item 5. Other Information -------------------------- None Item 6. Exhibits ----------------- 31.1 Certification of Chief Executive Officer Pursuant to Rule 13-a-14(a)/15d-14(a) 31.2 Certification of Chief Financial Officer Pursuant to Rule 13-a-14(a)/15d-14(a) 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 37 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duty authorized. MAIN STREET TRUST, INC. Date: November 8, 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 38

MAIN STREET TRUST INC 10-Q