UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCAHNGE ACT 1934
For the quarterly period ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-11132
FIRST BANKING CENTER, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1391327
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 Milwaukee Ave., Burlington, WI 53105
(Address of principal executive offices) (Zip Code)
(262) 763-3581
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of November 2, 2001. Common stock, $1.00 par value, 1,463,815
shares outstanding.
FIRST BANKING CENTER, INC AND SUBSIDIARY
INDEX
September 30, 2001
Part I Financial Information
Item 1 Consolidated Financial Statements
Unaudited Consolidated Balance Sheets,
September 30, 2001 and December 31, 2000
Unaudited Consolidated Statements of Income,
For the three and nine months ended September 30, 2001 and 2000
Unaudited Consolidated Statements of Cash Flows,
For the nine months ended September 30, 2001 and 2000
Notes to Unaudited Consolidated Financial Statements
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3 Quantitative and Qualitative Disclosures about Market Risk
Part II Other Information
Item 1 Legal Proceedings
Item 2 Changes in Securities and Use of Proceeds
Item 3 Defaults upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
Signature
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
FIRST BANKING CENTER, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2001 2000
------------------------------
(In thousands)
ASSETS
Cash and due from banks $12,577 $29,287
Federal funds sold 4,332 0
Interest-bearing deposits in banks 10,167 696
Available for sale securities 53,506 65,189
Loans, less allowance for loan losses of $4,104 and
$3,927 in 2001 and 2000, respectively 351,789 316,641
Office buildings and equipment, net 10,437 9,825
Other assets 11,572 9,220
------------------------------
TOTAL ASSETS $454,380 $430,858
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Demand $54,372 $59,602
Savings and NOW accounts 153,690 150,438
Time 129,809 124,900
------------------------------
Total Deposits 337,871 334,940
Securities sold under agreements to repurchase
and federal funds purchased 22,032 17,299
Short-term borrowings 17,349 26,168
Long-term borrowings 29,515 9,876
Due to Brokers for security purchase 2,323 0
Other liabilities 3,523 4,627
------------------------------
TOTAL LIABILITIES $412,613 $392,910
------------------------------
STOCKHOLDERS' EQUITY
Common Stock, $1.00 par value 3,000,000 shares authorized; 1,489,380 shares
issued as of September 30, 2001 and
December 31, 2000, respectively 1,489 1,489
Surplus 4,177 4,178
Retained Earnings 36,112 32,525
------------------------------
41,778 38,192
Common stock in treasury, at cost-27,115 and 12,358 shares
for September 30, 2001 and December 31, 2000, respectively ($1,027) ($452)
Accumulated other comprehensive income 1,016 208
------------------------------
TOTAL STOCKHOLDERS' EQUITY $41,767 $37,948
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $454,380 $430,858
==============================
"See accompanying notes to financial statements"
FIRST BANKING CENTER, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Three months ended Nine months ended
September 30, September 30,
2001 2000 2001 2000
----------------------------------------------------------
(In thousands, except per share data)
INTEREST INCOME
Interest and fees on loans $7,333 $7,221 $22,153 $20,436
Interest and dividends on securities
Taxable 297 478 1,014 1,482
Non-taxable 371 333 1,045 986
Interest on federal funds sold 53 87 213 143
Interest on interest-bearing deposits in banks 41 2 112 3
----------------------------------------------------------
TOTAL INTEREST INCOME 8,095 8,121 24,537 23,050
----------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 2,758 3,363 9,088 9,142
Interest on securities sold under agreements to repurchase
and federal funds purchased 184 255 660 753
Interest on short-term borrowings 250 101 766 310
Interest on long-term borrowings 250 305 553 910
----------------------------------------------------------
TOTAL INTEREST EXPENSE 3,442 4,024 11,067 11,115
----------------------------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR
LOAN LOSSES 4,653 4,097 13,470 11,935
Provision for loan losses 90 90 270 270
----------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 4,563 4,007 13,200 11,665
----------------------------------------------------------
NON-INTEREST INCOME
Trust 138 100 413 325
Service charges on deposit accounts 403 341 1,122 988
Investment securities gains (losses) 0 0 0 (5)
Automated teller machines 102 104 272 284
Other income 276 205 692 679
----------------------------------------------------------
TOTAL NON-INTEREST INCOME 919 750 2,499 2,271
----------------------------------------------------------
NON-INTEREST EXPENSE
Salary and employee benefits 1,916 1,691 5,639 5,038
Occupancy 254 200 727 640
Equipment 337 345 1,010 1,034
Data Processing services 212 212 595 520
Goodwill amortization 25 26 76 77
Stationary and office supplies 91 72 283 216
Other 677 505 1,868 1,608
----------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 3,512 3,051 10,198 9,133
----------------------------------------------------------
INCOME BEFORE INCOME TAXES 1,970 1,706 5,501 4,803
Income taxes 507 491 1,413 1,338
----------------------------------------------------------
NET INCOME $1,463 $1,215 $4,088 $3,465
==========================================================
Basic earnings per share $1.00 $0.83 $2.80 $2.36
Diluted earnings per share $0.99 $0.82 $2.76 $2.33
Dividends per share $0.34 $0.32 $0.34 $0.32
"See accompanying notes to financial statements"
FIRST BANKING CENTER, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended
September 30,
2001 2000
---------------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $4,088 $3,465
Depreciation 617 653
Provision for loan losses 270 270
Loans originated for sale (66,590) (21,507)
Proceeds from sale of loans 65,878 23,347
Gain on sale of loans 0 (9)
Gain on disposal of office building and equipment 0 104
Amortization of premiums and accretion of discounts
on securities, net 37 37
Amortization 76 78
Loss on sale of investment securities 0 5
Increase in other assets (2,844) (804)
Increase in accrued expenses and other liabilities 1,219 295
---------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,751 5,934
---------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in interest-bearing deposits in banks (9,471) (703)
Net (increase) decrease in federal funds sold (4,332) 2,121
Activity in available for sale securities:
Proceeds from sales of available for sale securities 2,786 8,669
Proceeds from maturities of available for sale securities 99,948 9,540
Purchase of available for sale securities (89,864) (25,156)
Net increase in loans (34,706) (14,486)
Purchase of office buildings and equipment, net (1,229) (1,061)
---------------------------
NET CASH USED IN INVESTING ACTIVITIES (36,868) (21,076)
---------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 2,931 15,318
Dividends paid (500) (474)
Proceeds from other borrowings 25,000 0
Payments on other borrowings (14,180) (1,706)
Net increase (decrease) in securities sold under agreements
to repurchase and federal funds purchased 4,733 (4,131)
Purchase of treasury stock (606) (403)
Proceeds from reissuance of treasury stock under
stock option plan 29 38
---------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 17,407 8,642
---------------------------
Net decrease in Cash and Due From Banks (16,710) (6,500)
Cash and Due From Banks-Beginning of Period 29,287 19,123
---------------------------
---------------------------
Cash and Due From Banks-End of Period $12,577 $12,623
===========================
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $11,347 $11,106
Income taxes $1,610 $1,000
Supplemental schedule of non-cash investing and financing activities:
Net change in unrealized gain on available for sale securities $808 $454
"See accompanying notes to financial statements"
FIRST BANKING CENTER, INC AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30,2001
NOTE 1 - Basis of Presentation
The unaudited consolidated financial statements include the accounts of First
Banking Center, Inc. and its subsidiary (the "Company"). In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the financial position, results of
operation and cash flows for the interim periods have been made. The results of
operations for the three and nine months ended September 30, 2001 are not
necessarily indicative of the results to be expected for the entire fiscal year.
The unaudited interim financial statements have been prepared in conformity with
generally accepted accounting principles and industry practice. Certain
information in footnote disclosure normally included in financial statements
prepared in accordance with generally accepted accounting principles and
industry practice has been condensed or omitted pursuant to rules and
regulations of the Securities and Exchange Commission. These financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's December 31, 2000 audited
financial statements.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
which affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements, as
well as the reported amounts of income and expenses during the reported periods.
Actual results could differ from those estimates.
NOTE 2 - Earnings Per Share
The following information calculates the computation of earnings per share on a
basic and diluted basis.
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
-------------------------------------------------------------
(In thousands, except per share data)
Basic
Net income $1,463 $1,215 $4,088 $3,465
Weighted average shares outstanding 1,462 1,470 1,462 1,470
Basic earnings per share $1.00 $0.83 $2.80 $2.36
=============================================================
Diluted
Net income $1,463 $1,215 $4,088 $3,465
Weighted average shares outstanding 1,462 1,470 1,462 1,470
Effect of dilutive stock options outstanding 18 15 18 15
-------------------------------------------------------------
Diluted weighted average shares outstanding 1,480 1,485 1,480 1,485
Diluted earnings per share $0.99 $0.82 $2.76 $2.33
=============================================================
NOTE 3-Comprehensive Income
The following table presents our comprehensive income.
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
-------------------------------------------------------------
(In thousands) (In thousands)
Net income $1,463 $1,215 $4,088 $3,465
Other comprehensive income
Net change in unrealized gain on available for sale securities $343 $443 $808 $454
-------------------------------------------------------------
Total comprehensive income $1,806 $1,658 $4,896 $3,919
=============================================================
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FIRST BANKING CENTER, INC AND SUBSIDIARY
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As of September 30, 2001
The following discussion provides additional analysis of the financial condition
and results of operations of the Company for the nine months ended September 30,
2001. This discussion focuses on the significant factors that affected the
Company's earnings so far in 2001, with comparisons to 2000. As of September 30,
2001, First Banking Center (the "Bank") was the only direct subsidiary of the
Company and its operations contributed nearly all of the revenue for the year.
The Company provides various support functions for the Bank and receives payment
from the Bank for these services. These intercompany payments are eliminated for
the purpose of these consolidated financial statements. The Bank has two wholly
owned subsidiaries, FBC Financial Services, Corp., a brokerage and financial
services subsidiary, and FBC-Burlington, Inc., an investment subsidiary located
in Nevada.
Overview
As of September 30, 2001, total Company assets were $454.4 million increasing
5.46% from $430.9 million as of December 31, 2000. Total income, as of September
30, 2001, was $4.1 million or $2.80 per share, increasing 18.0% from $3.5
million or $2.36 per share in 2000. The significant items resulting in the
above-mentioned results are discussed below.
Financial Condition
Loans
Loans outstanding were $355.9 million and $320.6 million on September 30, 2001
and December 31, 2000 respectively. This represents an increase of $35.3 million
or 11.0%. The following table summarizes the changes to date in the major loan
classifications.
As a % of Total Loans
September 30, December 31, Change in September 30, December 31,
2001 2000 Balance 2001 2000
------------------------------------------------- ------------------------------------
------------------------------------------------- ------------------------------------
(Amounts in million)
Residential Real Estate $157.3 $135.7 $21.6 44.2% 43.9%
Commercial Real Estate $87.9 $85.2 $2.7 24.7% 26.3%
Construction and Land Development $40.0 $42.2 ($2.2) 11.3% 13.1%
Commercial $29.9 $26.2 $3.7 8.4% 8.2%
Allowance for Loan Losses
The allowance for possible loan losses was $4.1 million or 1.2% of gross loans
on September 30, 2001, compared with $3.9 million or 1.2% of gross loans on
December 31, 2000. Net charge-offs were $93 thousand or .03% of gross loans,
compared to net charge-offs of $14 thousand or .004% of gross loans for December
31, 2000.
The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses when
management believes that the collectibility of the principal is unlikely. The
allowance for loan losses is adequate to cover probable credit losses relating
to specifically identified loans, as well as probable credit losses inherent in
the balance of the loan portfolio. In accordance with FASB Statements 5 and 114,
the allowance is provided for losses that have been incurred as of the balance
sheet date. The allowance is based on past events and current economic
conditions, and does not include the effects of expected losses on specific
loans or groups of loans that are related to future events or expected changes
in economic conditions. Management reviews a calculation of the allowance for
loan losses on a quarterly basis. While management uses the best information
available to make its evaluation, future adjustments to the allowance may be
necessary if there are significant changes in economic conditions. Impaired
loans are measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a practical expedient,
at the loan's observable market price or the fair value of the collateral if the
loan is collateral dependent. A loan is impaired when it is probable the
creditor will be unable to collect all contractual principal and interest
payments due in accordance with the terms of the loan agreement.
In addition, various regulatory agencies periodically review the allowance for
loan losses. These agencies may require the bank to make additions to the
allowance for loan losses based on their judgments of collectibility based on
information available to them at the time of their examination.
As of September 30, 2001, $270 thousand was charged to current earnings and
added to the allowance for loan losses.
Non-accrual, Past Due and Renegotiated Loans
September 30, December 31,
2001 2000
--------------------------------
(In thousands)
Non-accrual Loans (a) $1,479 $827
Past Due 90 days + 0 0
Restructured Loans 0 0
The policy of the Company is to place a loan on non-accrual status if: (a)
payment in full of interest and principal is not expected, or (b) principal or
interest has been in default for a period of 90 days or more unless the
obligation is both in the process of collection and well secured. Well secured
is defined as collateral with sufficient market value to repay principal and all
accrued interest. A debt is in the process of collection if collection of the
debt is proceeding in due course either through legal action, including
judgement enforcement procedures, or in appropriate circumstances, through
collection efforts not involving legal action which are reasonably expected to
result in repayment of the dept or in its restoration to current status. The
non-accrual loans consisted primarily of $1.1 million of residential real estate
loans, $154 thousand of commercial real estate, and $120 thousand of
construction and land development loans. On September 30, 2001, the ratio of
non-accrual loans to the allowance for loan losses was 36.0% compared to 21.1%
on December 31, 2000.
As of September 30, 2001, the Company had loans totaling $24,583,000 in addition
to those listed as non-accrual, past due or renegotiated that were identified by
the Banks' internal asset rating systems as classified assets and loans which
management has determined require additional monitoring. This represents an
increase of $7,207,000 or 41.5% from December 31, 2000. Management is not aware
of any significant loans, group of loans or segments of the loan portfolio not
included above, where full collectibility cannot reasonably be expected.
Management has committed resources and is focusing on efforts designed to
control the amount of classified assets. The company does not have a substantial
portion of its loans concentrated in one or a few industries nor does it have
any foreign loans outstanding as of September 30, 2001. The company's loans are
concentrated geographically in the Wisconsin counties of Racine, Walworth,
Kenosha, Lafayette and Green.
Investments securities - Available for Sale
The securities available-for-sale portfolio decreased $11.7 million or 17.9%
from December 31, 2000. The decrease came in four areas of the portfolio.
Commercial paper decreased $2.6 million due to maturities. Money market mutual
funds decreased $4.2 as the proceeds were transferred to fed funds. Equity
securities in the amount of $2.3 million were transferred to other assets due to
changes required for regulatory reporting. U.S. Government Agency securities
declined $10.0 due to the call features exercised by various Government
Agencies. The Company purchased $82.6 million of U.S. Government Agency Discount
Notes and had $80.2 million of U.S. Government Agency Discount Notes mature.
These Discount Notes where used as collateral for the Company's sweep repurchase
accounts.
Deposits and Borrowed Funds
Total deposits and borrowed funds were $406.8 million on September 30, 2001
compared to $388.3 million on December 31, 2000. This is an increase of $18.5
million or 4.8%. The increase in Federal Home Loan Borrowings came in the form
of $5 million of 3 year fixed rate borrowings, $3 million of 10 year fixed rate
borrowings which is callable in 3 years, and $2 million dollars or 3 year
variable rate LIBOR based borrowings. The following table summarizes the changes
in the major classifications of deposits and borrowed funds.
September 30, December 31, Change in
2001 2000 Balance
---------------------------------- -----------
(Amounts in millions)
Money Market and Savings $131.1 $121.8 $9.3
Demand Deposits $54.4 $59.6 ($5.2)
Time Deposits less than $100,000 $93.7 $86.6 $7.1
Time Deposits equal or greater than $100,000 $36.1 $38.3 ($2.2)
Securities sold under agreement to repurchase $22.0 $17.3 $4.7
Federal Home Loan Borrowings $46.2 $35.3 $10.9
Capital resources
As of September 30, 2001, the Company's stockholders' equity increased $3.8
million or 10.1%. Net income of $4.1 million was the primary reasons for the
increase in equity. The company purchased $606 thousand of treasury stock so far
in 2001. Unrealized gains on available for sale securities increased $808
thousand to $1,016 thousand.
In December 1990, the Federal Reserve Board's risk-based guidelines became
effective. Under these guidelines capital is measured against the Company's
subsidiary bank's risk-weighted assets. The Company's tier 1 capital (common
stockholders' equity less goodwill) to risk-weighted assets was 11.3% at
September 30, 2001, well above the 4% minimum required. Total capital to
risk-adjusted assets was 12.4%, also well above the 8% minimum requirement. The
leverage ratio was at 9.1% compared to the 4% minimum requirement. According to
FDIC capital guidelines, the Company's subsidiary bank is considered to be "well
capitalized."
Results of operations
Net Interest Income
Net interest income is the difference between interest income and fees on loans
and interest expense, and is the largest contributing factor to net income for
the Company. All discussions of rate are on a tax-equivalent basis, which
accounts for income earned on securities that are not fully subject to federal
taxes. Net interest income was $13.5 million and $11.9 million for September 30,
2001 and September 30, 2000 respectively. Net interest income as a percentage of
average earning assets (net interest margin) was 4.7% and 4.6% for the nine
months ended 2001 and 2000 respectively.
The following table summarizes the changes and reasons for the changes in
interest income and fees on loans during 2001 and 2000. The increase in interest
income and fees on loans as of September 30, 2001 and 2000 was primarily due to
increased average earning assets.
Dollar/rate change
For the nine months ended: September 30, For the nine months ended: September 30,
2001 2000 2001 2000
---------------------------------------- ----------------------------------------
---------------------------------------- ----------------------------------------
(Amounts in millions)
Interest income $25.0 $23.7 $1.3 $2.7
Earning assets (Average balances) $393.5 $364.3 $29.2 $20.0
Yield on earning assets 8.48% 8.66% -0.18% 0.53%
The following table summarizes the changes and reasons for the changes in
interest expense for the nine months ended September 30, 2001 and 2000. As of
September 30, 2001 average balances outstanding increased, however, rates paid
for liabilities decreased causing no change in interest expense. The increase in
interest expense as of September 30, 2000 was due to increased rates paid for
liabilities and increased average balances outstanding.
Dollar/rate change
For the nine months ended: September 30, For the nine months ended: September 30,
2001 2000 2001 2000
---------------------------------------- ----------------------------------------
---------------------------------------- ----------------------------------------
(Amounts in millions)
Interest expense $11.1 $11.1 $0.0 $1.9
Interest bearing liabilities (Average balances) $327.7 $307.1 $20.6 $18.6
Cost of interest bearing liabilities 4.50% 4.83% -0.33% 0.56%
The major component of interest income and fees on loans is the income generated
by loans. The table below summarizes the income, average balance and yield on
loans for 2001 and 2000.
Dollar/rate change
For the nine months ended: September 30, For the nine months ended: September 30,
2001 2000 2001 2000
---------------------------------------- ----------------------------------------
---------------------------------------- ----------------------------------------
(Amounts in millions)
Interest income $22.2 $20.4 $1.8 $2.7
Loans (Average balances) $333.9 $303.3 $30.6 $26.5
Yield on loans 8.85% 8.98% -0.13% 0.44%
The major components of interest expense are interest paid on Certificates of
Deposit (Time Deposits) and on Money Market Deposits. The tables below summarize
the expense, average balance and rates on these components for 2001 and 2000.
The increase in interest expense on Time Deposits was a result of an increase in
average balances, as of September 30, 2001. The decrease in Money Market
Deposits was a result of decreased rates paid, as of September 30, 2001.
Dollar/rate change
For the nine months ended: September 30, For the nine months ended: September 30,
Time deposits 2001 2000 2001 2000
---------------------------------------- ----------------------------------------
---------------------------------------- ----------------------------------------
(Amounts in millions)
Interest expense $6.0 $5.9 $0.1 $0.7
Time deposits (Average balances) $174.7 $172.5 $2.2 $6.3
Cost of time deposits 4.61% 4.54% 0.07% 0.41%
Dollar/rate change
For the nine months ended: September 30, For the nine months ended: September 30,
Money Market deposits 2001 2000 2001 2000
---------------------------------------- ----------------------------------------
---------------------------------------- ----------------------------------------
(Amounts in millions)
Interest expense $3.1 $3.3 ($0.2) $1.1
Money Market deposits (Average balances) $101.1 $87.3 $13.8 $14.2
Cost of Money Market deposits 4.02% 4.99% -0.97% 0.95%
Non-interest income
Non-interest income increased $228 thousand or 10.0% as of September 30, 2001.
The increase came in primarily two areas. Service charges on deposit accounts
increased $134 thousand as the number of accounts grew and charges for some
services were increased. Trust income increased $88 thousand as that line of
business continues to grow.
Non-interest expense
Non-interest expense increased $1.1 million or 11.7% as of September 30, 2001.
Salaries and benefits accounted for $601 thousand. The increase in salaries and
benefits is due to normal wage increases, increased health insurance costs and
additional staff resulting from the addition of two branches. Occupancy expense
increased $87 thousand due primarily to increases in real estate and personal
property taxes. Data processing costs increased $75 thousand due to increased
volumes and additional services used. Other expenses increased $327 thousand.
This is the result of opening two branches this year.
Asset/liability management
The principal function of asset/liability management is to manage the balance
sheet mix, maturities, repricing characteristics and pricing components to
provide an adequate and stable net interest margin with an acceptable level of
risk over time and through interest rate cycles.
Interest-sensitive assets and liabilities are those that are subject to
repricing within a specific relevant time horizon. The Bank measures
interest-sensitive assets and liabilities, and their relationship with each
other at terms of immediate, quarterly intervals up to 1 year, and over 1 year.
Changes in net interest income, other than volume related, arise when interest
rates on assets reprice in a time frame or interest rate environment that is
different from the repricing period for liabilities. Changes in net interest
income also arise from changes in the mix of interest earning assets and
interest-bearing liabilities.
The Bank's strategy with respect to asset/liability management is to maximize
net interest income while limiting its exposure to a potential downward
movement. Strategy is implemented by the Bank's management, which takes action
based upon its analysis of the Bank's present positioning, its desired future
positioning, economic forecasts, and its goals. It is the Bank's desire to
maintain a cumulative GAP of positive or negative 15% of rate sensitive assets
at the 1-year time frame. The current percentage is a positive 11%, which
compares to a positive 2% as of December 31, 2000.
Liquidity
Liquidity measures the ability of First Banking Center to meet maturing
obligations and its existing commitments, to withstand fluctuations in deposit
levels, to fund its operations, and to provide for customers' credit needs. One
source of liquidity is cash and short-term assets, such as interest-bearing
deposits in other banks and federal funds sold, which totaled $27.1 million at
September 30, 2001, compared with $30.0 million at December 31, 2000. The Bank
has a variety of sources of short-term liquidity available to it, including
federal funds purchased from correspondent banks, sales of securities available
for sale, FHLB advances, lines of credit and loan participations or sales. First
Banking Center also generates liquidity from the regular principal payments and
prepayments made on its portfolio of loans and mortgage-backed securities.
The liquidity of First Banking Center is comprised of three primary
classifications: cash flows from operating activities, cash flows from investing
activities, and cash flows from financing activities. Net cash provided by
operating activities was $2.7 million. Net cash used in investing activities was
$36.9 million. Net cash provided by financing activities was $17.4 million.
As of September 30, 2000, net cash provided by operating activities was $5.9
million. Net cash used in investing activities was $21.1 million. Net cash
provided by financing activities was $8.6 million.
Impact of Inflation and Changing Prices
The consolidated financial statements and the accompanying notes have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollar amounts without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of First Banking Center's operations. Unlike
industrial companies, nearly all of the assets and liabilities of First Banking
Center are monetary in nature. As a result, interest rates have a greater impact
on First Banking Center's performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services.
Forward Looking Statements- Safe Harbor Statement under the Private Securities
Litigation Reform Act of 1995
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. First Banking Center intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe First Banking Center's future plans, strategies and expectations
are generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project" or similar expressions. First Banking
Center's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
affect on First Banking Center's operations and future prospects include, but
are not limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
our market area, our implementation of new technologies, First Banking Center's
ability to develop and maintain secure and reliable electronic systems and
accounting principles, policies and guidelines. These risks and uncertainties
should be considered in evaluating forward-looking statements and undue reliance
should not be placed on such statements.
Current Accounting Developments
Statement of Financial Accounting Standard ("SFAS") 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS 137 and 138
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS 133 requires that changes in the derivative's
fair value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting. SFAS 133
was effective January 1, 2001. The Company adopted SFAS 133 and the
implementation of this standard did not have a material impact on the Company's
financial statements.
SFAS 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, a replacement of SFAS 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
revises the standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures, but it carries
over most of SFAS 125's provisions without reconsideration. SFAS 140 provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. The provisions of SFAS 140 are
effective for transfers after March 31, 2001. It is effective for disclosures
about securitizations and collateral and for recognition and reclassification of
collateral for fiscal years ending after December 15, 2000. The Company adopted
SFAS 140 and the implementation of this standard did not have a material impact
on the Company's financial statements.
On September 30, 2001, the Financial Accounting Standards Board finalized
Statement of Financial Accounting Standards 141, Business Combinations (SFAS
141) and Statement of Financial Accounting Standards 142, Goodwill and Other
Intangible Assets (SFAS 142). SFAS 141 requires all business combinations
initiated after September 30, 2001 to be accounted for using the purchase
method. Under the provisions of SFAS 142, goodwill is no longer subject to
amortization over its estimated useful life, but instead will be subject to at
least annual assessments for impairment by applying a fair-value based test.
SFAS 142 also requires that an acquired intangible asset should be separately
recognized if the benefit of the intangible asset is obtained through
contractual or other legal rights, or if the asset can be sold, transferred,
licensed, rented or exchanged, regardless of the acquirer's intent to do so. The
provisions of SFAS 142 are effective for fiscal years beginning after December
31, 2001. The Company is in the process of evaluating its goodwill and
intangible assets for impairment under the provisions of SFAS 142.
SFAS 143, Accounting for Asset Retirement Obligations, addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
statement requires that the fair value of a liability for an asset retirement
obligation be recognized in the period it is incurred if a reasonable estimate
of fair value can be made. The associated retirement costs are capitalized as a
component of the carrying amount of the long-lived asset and allocated to
expense over the useful life of the asset. The statement is effective for
financial statements issued for fiscal years beginning after June 15, 2002.
Management does not believe the adoption of the statement will have a material
impact on the Company's financial statements.
SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
establishes accounting and reporting standards for the impairment or disposal of
long-lived assets. This statement supercedes SFAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed. SFAS
144 provides one accounting model to be used for long-lived assets to be
disposed of by sale, whether previously held for use or newly acquired and
broadens the presentation of discontinued operations to include more disposal
transactions. The provisions of SFAS 144 are effective for financial statements
issued for fiscal years beginning after December 15, 2001. Management believes
the adoption of the statement will not have a material effect on the Company's
financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The company has not experienced any material changes to its market risk position
since December 31, 2000, from that disclosed in the company's 2000 Form 10-K
Annual Report. First Banking Center, like other financial institutions, is
subject to direct and indirect market risk. Direct market risk exists from
changes in interest rates. First Banking Center's net income is dependent on its
net interest income. Net interest income is susceptible to interest rate risk to
the degree that interest-bearing liabilities mature or reprice on a different
basis than interest-earning assets. When interest-bearing liabilities mature or
reprice more quickly than interest-earning assets in a given period, a
significant increase in market rates of interest could adversely affect net
interest income.
Similarly, when interest-earning assets mature or reprice more quickly than
interest-bearing liabilities, falling interest rates could result in a decrease
in net income.
In an attempt to manage its exposure to changes in interest rates, management
monitors First Banking Center's interest rate risk. The Asset/Liability
Committee meets quarterly to review First Banking Center's interest rate risk
position and profitability, and to make or recommend adjustments for
consideration by the Board of Directors. Management also reviews the Bank's
securities portfolio, formulates investment strategies, and oversees the timing
and implementation of transactions to assure attainment of the Board's
objectives in the most effective manner. Notwithstanding First Banking Center's
interest rate risk management activities, the potential for changing interest
rates is an uncertainty that can have an adverse effect on net income.
In adjusting First Banking Center's asset/liability position, the Board and
management attempt to manage First Banking Center's interest rate risk while
maintaining or enhancing net interest margins. At times, depending on the level
of general interest rates, the relationship between long-term and short-term
interest rates, market conditions and competitive factors, the Board and
management may decide to increase First Banking Center's interest rate risk
position somewhat in order to increase its net interest margin. First Banking
Center's results of operations and net portfolio values remain vulnerable to
increases in interest rates and to fluctuations in the difference between
long-term and short-term interest rates.
One approach used to quantify interest rate risk is the net portfolio value
("NPV") analysis. In essence, this analysis calculates the difference between
the present value of liabilities and the present value of expected cash flows
from assets and off-balance-sheet contracts. The most recent NPV analysis, as of
September 30, 2001, projects that net portfolio value would decrease by
approximately 8.0% if interest rates would rise 200 basis points and would
decrease by approximately 4.0% if interest rates would rise 100 basis points
over the next year. It projects an increase in net portfolio value of
approximately 10.6% if interest rates would drop 200 basis points and
approximately 5.0% if interest rates would drop 100 basis points. Both
simulations are within board-established policy limits. First Banking Center's
policy is to limit the effect of a 200 basis point rate shock to plus or minus
20% of projected net interest income and to minus 35% of the market value of
portfolio equity.
First Banking Center does not currently engage in trading activities or use
derivative instruments to control interest rate risk. Even though such
activities may be permitted with the approval of the Board of Directors, First
Banking Center does not intend to engage in such activities in the immediate
future.
Interest rate risk is the most significant market risk affecting First Banking
Center. Other types of market risk, such as foreign currency exchange rate risk
and commodity price risk, do not arise in the normal course of First Banking
Center's business activities.
Part II-OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
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 and Reports on Form 8-K
None
FIRST BANKING CENTER, INC AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1943, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
First Banking Center, Inc.
November 14, 2001 _________________________
Date Brantly Chappell
Chief Executive Officer
November 14, 2001 __________________________
Date James Schuster
Chief Financial Officer