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 March 31, 2002
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 April 16, 2002. Common stock, $1.00 par value, 1,474,077
shares outstanding.
FIRST BANKING CENTER, INC AND SUBSIDIARY
INDEX
March 31, 2002
Part I Financial Information
Item 1 Consolidated Financial Statements
Unaudited Consolidated Balance Sheets,
March 31, 2002 and December 31, 2001
Unaudited Consolidated Statements of Income,
For the three months ended March 31, 2002 and 2001
Unaudited Consolidated Statements of Cash Flows,
For the three months ended March 31, 2002 and 2001
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
March 31, December 31,
2002 2001
------------------------------
(Dollars in thousands)
ASSETS
Cash and due from banks $12,154 $20,735
Federal funds sold 14,235 12,010
Interest-bearing deposits in banks 188 267
Available for sale securities 55,922 59,343
Loans, less allowance for loan losses of $4,460 and
$4,367 in 2002 and 2001, respectively 349,918 361,705
Office buildings and equipment, net 10,445 10,521
Other assets 11,256 11,199
------------------------------
TOTAL ASSETS $454,118 $475,780
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Demand $56,929 $66,612
Savings and NOW accounts 172,760 164,904
Time 117,016 120,898
------------------------------
Total Deposits 346,705 352,414
Short-term borrowings 23,175 29,199
Other borrowings 35,830 47,847
Other liabilities 4,672 4,081
------------------------------
TOTAL LIABILITIES $410,382 $433,541
------------------------------
STOCKHOLDERS' EQUITY
Common Stock, $1.00 par value 3,000,000 shares authorized; 1,489,380 shares
issued; 1,474,077 and 1,473,197 shares outstanding
as of March 31, 2002 and December 31, 2001, respectively 1,489 1,489
Surplus 4,187 4,184
Retained Earnings 38,238 36,649
Accumulated other comprehensive income 417 542
Common stock in treasury, at cost-15,303 and 16,183 shares
for March 31, 2002 and December 31, 2001, respectively ($595) ($625)
------------------------------
TOTAL STOCKHOLDERS' EQUITY $43,736 $42,239
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $454,118 $475,780
==============================
"See accompanying notes to financial statements"
FIRST BANKING CENTER, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Three months ended
March 31,
2002 2001
----------------------------
(Dollars in thousands,
except per share data)
INTEREST INCOME
Interest and fees on loans $6,373 $7,377
Interest and dividends on securities:
Taxable 276 414
Non-taxable 392 326
Interest on federal funds sold 33 79
Interest on interest-bearing deposits in banks 17 11
----------------------------
TOTAL INTEREST INCOME 7,091 8,207
----------------------------
INTEREST EXPENSE
Interest on deposits 1,722 3,290
Interest on short-term borrowings 122 293
Interest on other borrowings 402 374
----------------------------
TOTAL INTEREST EXPENSE 2,246 3,957
----------------------------
NET INTEREST INCOME 4,845 4,250
Provision for loan losses 90 90
----------------------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 4,755 4,160
----------------------------
NON-INTEREST INCOME
Trust fees 138 138
Service charges on deposit accounts 433 321
Other 399 297
----------------------------
TOTAL NON-INTEREST INCOME 970 756
----------------------------
NON-INTEREST EXPENSE
Salary and employee benefits 2,106 1,853
Occupancy 242 251
Equipment 374 328
Data Processing services 231 192
Other 611 682
----------------------------
TOTAL NON-INTEREST EXPENSE 3,564 3,306
----------------------------
INCOME BEFORE INCOME TAXES 2,161 1,610
Income taxes 570 405
----------------------------
NET INCOME $1,591 $1,205
============================
Basic earnings per share $1.08 $0.82
Diluted earnings per share $1.06 $0.81
"See accompanying notes to financial statements"
FIRST BANKING CENTER, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended
March 31,
2002 2001
---------------------------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,591 $1,205
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 212 206
Provision for loan losses 90 90
Loans originated for sale (4,880) (22,772)
Proceeds from sale of loans 8,970 18,911
Amortization of premiums and accretion of discounts
on securities, net 23 177
Amortization 25 25
Tax benefit of nonqualified stock options exercised 3 0
Increase in other assets (17) (1,389)
Increase (decrease) in other liabilities 591 (872)
---------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 6,608 (4,419)
---------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing deposits in banks 79 (12)
Net increase in federal funds sold (2,225) (14,249)
Proceeds from sales of available for sale securities 0 400
Proceeds from maturities and calls of available for sale securities 28,955 47,857
Purchase of available for sale securities (25,747) (29,811)
Net decrease in loans 7,607 1,983
Purchase of office buildings and equipment, net (136) (249)
---------------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 8,533 5,919
---------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits (5,709) (15,974)
Proceeds from other borrowings 1,000 5,000
Payments on other borrowings (13,017) (10,878)
Net increase (decrease) in short term borrowings (6,024) 1,900
Purchase of treasury stock (8) (187)
Sale of treasury stock for the exercise of stock options 36 0
---------------------------
NET CASH USED IN FINANCING ACTIVITIES (23,722) (20,139)
---------------------------
NET DECREASE IN CASH AND DUE FROM BANKS (8,581) (18,639)
CASH AND DUE FROM BANKS:
Beginning 20,735 29,287
---------------------------
Ending $12,154 $10,648
===========================
Supplemental Disclosures of Cash Flow Information,
Cash Paid During the Year for:
Interest $2,233 $4,213
Income taxes (refund) ($6) $317
Supplemental Schedule of Noncash Investing Activities,
Change in Accumulated Other Comprehensive Income,
Unrealized Gain (Loss) on Available-for-Sale Securities, Net ($125) $463
"See accompanying notes to financial statements"
FIRST BANKING CENTER, INC AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31,2002
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 months ended March 31, 2002 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
accounting principles generally accepted in the United States of America and
industry practice. Certain information in footnote disclosure normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America 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, 2001 audited financial statements.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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
March 31,
2002 2001
----------------------------
(Dollars in thousands,
except per share data)
Basic
Net income $1,591 $1,205
Weighted average shares outstanding 1,474 1,472
Basic earnings per share $1.08 $0.82
============================
Diluted
Net income $1,591 $1,205
Weighted average shares outstanding 1,474 1,472
Effect of dilutive stock options outstanding 31 17
----------------------------
Diluted weighted average shares outstanding 1,505 1,489
Diluted earnings per share $1.06 $0.81
============================
NOTE 3-Comprehensive Income
The following table presents our comprehensive income.
Three Months Ended
March 31,
2002 2001
----------------------------
(Dollars in thousands)
Net income $1,591 $1,205
Other comprehensive income
Net change in unrealized gain on available for sale securities ($125) $463
----------------------------
Total comprehensive income $1,466 $1,668
============================
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 March 31, 2002
The following discussion provides additional analysis of the financial condition
and results of operations of the Company for the three months ended March 31,
2002. This discussion focuses on the significant factors that affected the
Company's earnings so far in 2002, with comparisons to 2001. As of March 31,
2002, 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 March 31, 2002, total Company assets were $454.1 million decreasing 4.6%
from $475.8 million as of December 31, 2001. Total income, as of March 31, 2002,
was $1.6 million or $1.08 per share, increasing 32.0% from $1.2 million or $.82
per share in 2001. The significant items resulting in the above-mentioned
results are discussed below.
Financial Condition
Loans
Loans outstanding were $354.4 million and $366.1 million on March 31, 2002 and
December 31, 2001 respectively. This represents a decrease of $11.7 million or
3.2%. The decrease is due to the sale of residential real estate loans. The
following table summarizes the changes to date in the major loan
classifications.
As a % of Total Loans
March 31, December 31, Change in March 31, December 31,
2002 2001 Balance 2002 2001
------------------------------------------ -------------------------------
(Dollars in millions)
Residential Real Estate $151.9 $160.7 ($8.8) 42.9% 43.9%
Commercial Real Estate $87.1 $90.7 ($3.6) 24.6% 24.8%
Construction and Land Development $43.9 $43.6 $0.3 12.4% 11.9%
Commercial $26.8 $27.5 ($0.7) 7.6% 7.5%
Allowance for Loan Losses
The allowance for possible loan losses was $4.5 million or 1.3% of gross loans
on March 31, 2002, compared with $4.4 million or 1.2% of gross loans on December
31, 2001. Net recoveries were $3 thousand or .001% of gross loans, compared to
net charge-offs of $60 thousand or .016% of gross loans for December 31, 2001.
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 March 31, 2002, $90 thousand was charged to current earnings and added to
the allowance for loan losses.
Non-accrual, Past Due and Renegotiated Loans
March 31, December 31,
2002 2001
-----------------------------------
(Dollars in thousands)
Non-accrual Loans (a) $1,678 $1,541
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 $1.3 million of residential real estate
loans, $266 thousand of commercial loans, and $120 thousand of construction and
land development loans. On March 31, 2002, the ratio of non-accrual loans to the
allowance for loan losses was 37.6% compared to 35.3% on December 31, 2001.
As of March 31, 2002, the Company had loans totaling $28,217,000 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 $163,000 or 5.8% from December 31, 2001. 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 March 31, 2002. The company's loans are
concentrated geographically in the Wisconsin counties of Racine, Walworth,
Kenosha, Lafayette and Green.
Investments securities - Available for Sale
For the purposes of this discussion, investment security balances are based on
amortized costs. The securities available-for-sale portfolio decreased $3.2
million or 5.5% from December 31, 2001. The decrease came mainly in one area of
the portfolio. U.S. Government Agency securities declined $1.4 million due to
the call features exercised by various Government Agencies. The Company
purchased $18.0 million of U.S. Government Agency Discount Notes and had $20.5
million of U.S. Government Agency Discount Notes mature. These Discount Notes
are used as collateral for the Company's sweep repurchase accounts.
Deposits and Borrowed Funds
Total deposits and borrowed funds were $405.7 million on March 31, 2002 compared
to $429.5 million on December 31, 2001. This is a decrease of $23.8 million or
5.5%. The decrease is due to normal seasonal decline in the collection and
distribution of tax funds by municipal customers. The following table summarizes
the changes in the major classifications of deposits and borrowed funds.
March 31, December 31, Change in
2002 2001 Balance
--------------------------------------- ------------
(Dollars in millions)
Money Market and Savings $149.0 $134.6 $14.4
Demand Deposits $56.9 $66.6 ($9.7)
Time Deposits less than $100,000 $84.3 $87.2 ($2.9)
Time Deposits equal or greater than $100,000 $32.7 $33.7 ($1.0)
Securities sold under agreements to repurchase $23.1 $26.1 ($3.0)
Federal Home Loan Borrowings $35.3 $47.3 ($12.0)
Capital resources
As of March 31, 2002, the Company's stockholders' equity increased $1.5 million
or 3.5%. Net income of $1.6 million was the primary reasons for the increase in
equity. The company purchased $8 thousand of treasury stock so far in 2002.
Accumulated other comprehensive income decreased $125 thousand to $417 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 11.9% at March
31, 2002, well above the 4% minimum required. Total capital to risk-adjusted
assets was 13.2%, also well above the 8% minimum requirement. The leverage ratio
was at 9.3% compared to the 4% minimum requirement. According to FDIC capital
guidelines, the Company's subsidiary bank is considered to be "well
capitalized."
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 16%, which
compares to a positive 17% as of December 31, 2001.
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 $26.6 million at
March 31, 2002, compared with $33.0 million at December 31, 2001. 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 $6.6 million. Net cash provided by investing activities was $8.5 million.
Net cash used in financing activities was $23.7 million, as of March 31, 2002.
As of March 31, 2001, net cash used in operating activities was $4.4 million.
Net cash provided by investing activities was $5.9 million. Net cash used in
financing activities was $20.1 million.
Impact of Inflation and Changing Prices
The consolidated financial statements and the accompanying notes have been
prepared in accordance with accounting principles generally accepted in the
United States of America, 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
In July 2001, the Financial Accounting Standards Board issued Statement 141,
Business Combinations and Statement 142, Goodwill and Other Intangible Assets.
Statement 141 eliminates the pooling method for accounting for business
combinations; requires that intangible assets that meet certain criteria be
reported separately from goodwill; and requires negative goodwill arising from a
business combination to be recorded as an extraordinary gain. Statement 142
eliminates the amortization of goodwill and other intangibles that are
determined to have an indefinite life; and requires, at a minimum, annual
impairment tests for goodwill and other intangible assets that are determined to
have an indefinite life. For the Company, the provisions of Statement 142 became
effective January 1, 2002 and did not have a material impact on the Company's
financial statements.
The Financial Accounting Standards Board has issued Statement 143, Accounting
for Asset Retirement Obligations and Statement 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Statement 143 requires that the
fair value of a liability for an asset retirement obligation be recognized in
the period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. Statement 144 supersedes FASB Statement
121 and the accounting and reporting provisions of APB Opinion No. 30. Statement
144 establishes a single accounting model for long-lived assets to be disposed
of by sale which includes measuring a long-lived asset classified as held for
sale at the lower of its carrying amount or its fair value less costs to sell
and to cease depreciation/amortization. For the Company, the provision of
Statement 143 is effective January 1, 2003. Implementation of this Statement is
not expected to have a material impact on the Company's financial statements.
For the Company, the provisions of Statement 144 became effective January 1,
2002 and did not have a material impact on the Company's financial statements.
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 $4.8 million and $4.3 million for March 31, 2002
and March 31, 2001 respectively. Net interest income as a percentage of average
earning assets (net interest margin) was 4.8% and 4.7% for the three months
ended 2002 and 2001 respectively.
The following table summarizes the changes and reasons for the changes in
interest income and fees on loans during 2002 and 2001. The decrease in interest
income and fees on loans as of March 31, 2002 was due to decreased yields on
earning assets. The increase in interest income and fees on loans as of March
31, 2001 was due primarily to increased yields on earning assets.
Dollar/rate change
For the three months ended: For the three months ended:
March 31, March 31,
2002 2001 2002 2001
--------------------------------- ---------------------------------
(Dollars in millions)
Interest income $7.3 $8.4 ($1.1) $0.9
Earning assets (Average balances) $425.6 $380.9 $44.7 $16.7
Yield on earning assets 6.87% 8.82% -1.95% 0.60%
The following table summarizes the changes and reasons for the changes in
interest expense for the three months ended March 31, 2002 and 2001. As of March
31, 2002 average balances outstanding increased, however, rates paid for
liabilities decreased causing a decrease in interest expense. The increase in
interest expense as of March 31, 2001 was due to increased rates paid for
liabilities.
Dollar/rate change
For the three months ended: For the three months ended:
March 31, March 31,
2002 2001 2002 2001
--------------------------------- --------------------------------
(Dollars in millions)
Interest expense $2.2 $4.0 ($1.8) $0.5
Interest bearing liabilities (Average balances) $411.3 $368.7 $42.6 $15.5
Cost of interest bearing liabilities 2.18% 4.29% -2.11% 0.38%
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 2002 and 2001.
Dollar/rate change
For the three months ended: For the three months ended:
March 31, March 31,
2002 2001 2002 2001
--------------------------------- ---------------------------------
(Dollars in millions)
Interest income $6.4 $7.4 ($1.0) $1.0
Loans (Average balances) $357.6 $323.0 $34.6 $22.3
Yield on loans 7.13% 9.14% -2.01% 0.61%
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 2002 and 2001.
The decrease in interest expense on Time Deposits was a result of a decrease in
average balances, while rates paid decreased from 6.2% to 4.4%, as of March 31,
2002. The decrease in interest expense on Money Market Deposits was a result of
an increase in average balances, while rates paid decreased from 5.1% to 1.4%,
as of March 31, 2002.
Dollar/rate change
For the three months ended: For the three months ended:
March 31, March 31,
Time deposits 2002 2001 2002 2001
--------------------------------- ---------------------------------
(Dollars in millions)
Interest expense $1.2 $1.8 ($0.6) $0.3
Time deposits (Average balances) $118.9 $122.4 ($3.5) $8.2
Cost of time deposits 4.10% 6.04% -1.94% 0.62%
Dollar/rate change
For the three months ended: For the three months ended:
March 31, March 31,
Money Market deposits 2002 2001 2002 2001
--------------------------------- ----------------------------------
(Dollars in millions)
Interest expense $0.4 $1.2 ($0.8) $0.2
Money Market deposits (Average balances) $119.2 $98.0 $21.2 $14.5
Cost of Money Market deposits 1.40% 4.96% -3.56% 0.32%
Non-interest income
Non-interest income increased $214 thousand or 28.3% as of March 31, 2002. The
increase came in primarily two areas. Service charges on deposit accounts
increased $112 thousand as the number of accounts grew and charges for some
services were increased. Other income increased $102 thousand due to brokerage
services, visa debit card income, and miscellaneous investment income.
Non-interest expense
Non-interest expense increased $258 thousand or 7.8% as of March 31, 2002.
Salaries and benefits accounted for $253 thousand. The increase in salaries and
benefits is due to normal wage increases and increased health insurance costs.
Equipment expense increased $46 thousand due primarily to increases in repair
and maintenance. Data processing costs increased $39 thousand due to increased
volumes and additional services used. Other expenses decreased $71 thousand.
This is the result of cost control management.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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
March 31, 2002, projects that net portfolio value would decrease by
approximately 1.65% if interest rates would rise 200 basis points and would
decrease by approximately .37% if interest rates would rise 100 basis points
over the next year. It projects an increase in net portfolio value of
approximately 4.59% if interest rates would drop 200 basis points and
approximately 1.88% 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.
May 13, 2002 _________________________
Date Brantly Chappell
Chief Executive Officer
May 13, 2002 __________________________
Date James Schuster
Chief Financial Officer