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, 2003
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 30, 2003, Common stock, $1.00 par value, 1,495,062
shares outstanding.
Indicate by check mark whether the registrant is an accelerated filer (as define
in Rule 12b-2 of the act). Yes [ ] No [X]
The aggregate market value of the voting shares held by nonaffiliates of the
Registrant was $66,208,545 as of June 30, 2002. Solely for the purpose of this
computation, it has been assumed that executive officers and directors of the
Registrant are affiliates.
FIRST BANKING CENTER, INC AND SUBSIDIARY
INDEX
March 31, 2003
Part I Financial Information
Item 1 Consolidated Financial Statements
Unaudited Consolidated Balance Sheets,
March 31, 2003 and December 31, 2002
Unaudited Consolidated Statements of Income, For the three
months ended March 31, 2003 and 2002
Unaudited Consolidated Statements of Cash Flows, For the
three months ended March 31, 2003 and 2002
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
Item 4 Controls and Procedures
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
Signatures
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
FIRST BANKING CENTER, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
ASSETS 2003 2002
--------------------------
(Dollars in thousands)
Cash and due from banks $ 16,835 $ 22,203
Federal funds sold 6,093 11,058
Interest-bearing deposits in banks 212 441
Available for sale securities 85,721 87,630
Loans, less allowance for loan losses of $5,038
and $4,988 in 2003 and 2002, respectively 363,306 367,156
Office buildings and equipment, net 10,933 10,576
FHLB Stock 10,762 10,488
Other assets 8,346 8,605
--------------------------
TOTAL ASSETS $ 502,208 $ 518,157
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Demand $ 65,178 $ 72,957
Savings and NOW accounts 162,969 174,431
Time 148,101 146,413
--------------------------
Total Deposits 376,248 393,801
Short-term borrowings 22,687 25,077
Other borrowings 46,337 46,755
Other liabilities 6,888 3,804
--------------------------
TOTAL LIABILITIES $ 452,160 $ 469,437
--------------------------
STOCKHOLDERS' EQUITY
Common Stock, $1.00 par value 3,000,000 shares authorized;
1,495,062 and 1,494,029 shares issued; 1,494,759 and
1,494,029 shares outstanding as of March 31, 2003 and
December 31, 2002, respectively 1,495 1,494
Surplus 4,414 4,375
Retained Earnings 42,675 41,287
Accumulated other comprehensive income 1,477 1,564
Common stock in treasury, at cost-303 and 0 shares
as of March 31, 2003 and December 31, 2002, respectively (13) -
--------------------------
TOTAL STOCKHOLDERS' EQUITY $ 50,048 $ 48,720
--------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 502,208 $ 518,157
==========================
"See accompanying notes to financial statements"
FIRST BANKING CENTER, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Three months ended
March 31,
2003 2002
------------------------
(Dollars in thousands,
except per share data)
INTEREST INCOME
Interest and fees on loans $ 5,918 $ 6,373
Interest and dividends on securities:
Taxable 482 276
Non-taxable 425 392
Interest on federal funds sold 38 33
Interest on interest-bearing deposits in banks 34 17
------------------------
TOTAL INTEREST INCOME 6,897 7,091
------------------------
INTEREST EXPENSE
Interest on deposits 1,462 1,722
Interest on short-term borrowings 72 122
Interest on other borrowings 460 402
------------------------
TOTAL INTEREST EXPENSE 1,994 2,246
------------------------
NET INTEREST INCOME 4,903 4,845
Provision for loan losses 90 90
------------------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 4,813 4,755
------------------------
NON-INTEREST INCOME
Trust fees 119 138
Service charges on deposit accounts 465 433
Investment securities gains 41 130
Automated teller machines 85 76
Other 171 193
------------------------
TOTAL NON-INTEREST INCOME 881 970
------------------------
NON-INTEREST EXPENSE
Salary and employee benefits 2,198 2,106
Occupancy 284 242
Equipment 341 374
Data Processing services 245 231
Stationary and office supplies 94 70
Other 654 541
------------------------
TOTAL NON-INTEREST EXPENSE 3,816 3,564
------------------------
INCOME BEFORE INCOME TAXES 1,878 2,161
Income taxes 490 570
------------------------
NET INCOME $ 1,388 $ 1,591
========================
Basic earnings per share $ 0.93 $ 1.08
Diluted earnings per share $ 0.91 $ 1.06
"See accompanying notes to financial statements"
FIRST BANKING CENTER, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended
March 31,
2003 2002
------------------------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,388 $ 1,591
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 223 212
Provision for loan losses 90 90
Amortization of premiums and accretion of discounts
on securities, net 70 23
Amortization 26 25
Investment securities gains (41) (130)
Tax benefit of nonqualified stock options exercised - 3
Decrease (Increase) in other assets 4 (17)
-----------------------
Increase in other liabilities 3,084 591
Net cash provided by operations before loan
originations and sales 4,844 2,388
Loans originated for sale (11,447) (4,880)
-----------------------
Proceeds from sale of loans 14,106 8,970
-----------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,503 6,478
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in interest-bearing deposits in banks 229 79
Net decrease (increase) in federal funds sold 4,965 (2,225)
Proceeds from maturities and calls of available for
sale securities 34,748 28,825
Purchase of available for sale securities (33,000) (25,747)
Net increase in loans 1,101 7,607
-----------------------
Purchase of office buildings and equipment, net (580) (136)
-----------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 7,463 8,403
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits (17,553) (5,709)
Proceeds from other borrowings - 1,000
Payments on other borrowings (418) (13,017)
Net (decrease) in short term borrowings (2,390) (6,024)
Sale of common stock 40 -
Purchase of treasury stock (32) (8)
-----------------------
Sale of treasury stock for the exercise of
stock options 19 36
-----------------------
NET CASH USED IN FINANCING ACTIVITIES (20,334) (23,722)
NET DECREASE IN CASH AND DUE FROM BANKS (5,368) (8,841)
-----------------------
CASH AND DUE FROM BANKS:
Beginning 22,203 20,735
Ending $ 16,835 $ 11,894
=======================
Supplemental Disclosures of Cash Flow Information,
Cash Paid During the Year for:
Interest $ 2,103 $ 2,233
Income taxes $ (79) $ (6)
Supplemental Schedule of Noncash Investing Activities,
Change in Accumulated Other Comprehensive Income,
Unrealized Gain on Available-for-Sale Securities, Net $ (87) $ (125)
"See accompanying notes to financial statements"
FIRST BANKING CENTER, INC AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31,2003
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, 2003 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, 2002 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,
2003 2002
--------------------------------
(Dollars in thousands, except
per share data)
Basic
Net income $ 1,388 $ 1,591
Weighted average shares outstanding 1,495 1,474
Basic earnings per share $ 0.93 $ 1.08
================================
Diluted
Net income $ 1,388 $ 1,591
Weighted average shares outstanding 1,495 1,474
Effect of dilutive stock options outstanding 30 31
--------------------------------
Diluted weighted average shares outstanding
1,525 1,505
Diluted earnings per share $ 0.91 $ 1.06
================================
NOTE 3 - Comprehensive Income
The following table presents our comprehensive income.
Three Months Ended
March 31,
2003 2002
--------------------------------
(Dollars in thousands)
Net income $ 1,388 $ 1,591
Other comprehensive income
Net change in unrealized gain on available for sale securities (87) (125)
--------------------------------
Total comprehensive income $ 1,301 $ 1,466
================================
NOTE 4 - Stock-based Compensation Plan:
For the three months ended March 31, 2003 and 2002, the Company had one
stock-based key officer and employee compensation plan. The Company accounts for
this plan under the recognitions and measurement principles of APB Opinion No.
25, Accounting for Stock Issued to Employees, and related Interpretations. No
stock-based employee compensation cost is reflected in the income, as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of Financial Accounting Standards
Board (FASB) Statement No. 123, Accounting for Stock-Based Compensation, to
stock-based employee compensation.
Quarter Ended
March 31, March 31,
2003 2002
----------------------------------
(Amounts in thousands, except
for per share data)
Net income, as reported $ 1,388 $ 1,591
Deduct total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (201) (239)
----------------------------------
Pro forma net income $ 1,187 $ 1,352
==================================
Earnings per share:
Basic:
As reported $ 0.93 $ 1.08
Pro forma 0.79 0.92
Diluted:
As reported $ 0.91 $ 1.06
Pro forma 0.78 0.90
In determining compensation cost using the fair value method prescribed in
Statement No. 123, the value of each grant is estimated at the grant date with
the following weighted-average assumptions used for grants on March 31, 2002 and
2001, respectively: dividend yield of 1.5 percent and 1.7 percent; expected
price volatility of 5.2 percent and 5.2 percent, blended risk-free interest
rates of 4.3 percent and 4.3 percent; and expected lives of 10 years,
respectively.
Note 5 - Commitments and Contingencies
In the normal course of business, the Company is involved in various legal
proceedings. In the opinion of management, any liability resulting from such
proceedings would not have a material adverse effect on the consolidated
financial statements.
The Company is 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, financial
guarantees, and standby letters of credit. They involve, to varying degrees,
elements of credit risk in excess of amounts recognized on the consolidated
balance sheets.
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 notional amount of
those instruments. The Company uses the same credit policies in making
commitments and issuing letters of credit as they do for on-balance-sheet
instruments.
A summary of the contract or notional amount of the Company's exposure to
off-balance-sheet risk as of March 31 is as follows:
2003 2002
-------------------------------
(Amounts in thousands)
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $ 67,402 $ 67,414
Standby letters of credit 2,908 6,291
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
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. Standby letters of credit are conditional
commitments issued to guarantee the performance of a customer to a third-party.
Those guarantees are primarily issued to support public and private borrowing
arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Company evaluates each customer's credit worthiness 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 of the
counterparty. Collateral held varies but may include accounts receivable,
inventory, property and equipment, and income-producing commercial properties.
Credit card commitments are unsecured.
Standby letters of credit are conditional commitments issued by the Bank 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 Bank holds collateral, which may include accounts
receivable, inventory, property, 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 Bank would be required to fund the commitment. The maximum potential amount
of future payments the Bank could be required to make is represented by the
contractual amount shown in the summary on the previous page. If the commitment
is funded the Bank would be entitled to seek recovery from the customer. At
March 31, 2003 and 2002, no amounts have been recorded as liabilities for the
Bank's potential obligations under these guarantees.
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, 2003
The following discussion provides additional analysis of the financial condition
and results of operations of the Company for the three months ended March 31,
2003. This discussion focuses on the significant factors that affected the
Company's earnings so far in 2003, with comparisons to 2002. As of March 31,
2003, 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, 2003, total Company assets were $502.2 million decreasing 3.1%
from $518.1 million as of December 31, 2002. Total income, for the three months
ended March 31, 2003, was $1.4 million or $.93 per share, decreasing 12.8% from
$1.6 million or $1.08 per share in 2002. The significant items resulting in the
above-mentioned results are discussed below.
Financial Condition
Loans
Loans outstanding were $368.3 million and $372.1 million on March 31, 2003 and
December 31, 2002 respectively. This represents a decrease of $3.8 million or
1.0%. 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,
2003 2002 Balance 2003 2002
----------------------------------------- ------------------------------
(Dollars in millions)
Residential Real Estate $167.4 $163.9 $3.5 45.5% 44.0%
Commercial Real Estate $92.7 $91.8 $0.9 25.2% 24.7%
Construction and Land Development $38.1 $42.4 ($4.3) 10.3% 11.4%
Commercial $23.9 $26.2 ($2.3) 6.5% 7.0%
Agricultural $19.0 $18.7 $0.3 5.2% 5.0%
Allowance for Loan Losses
The allowance for possible loan losses was $5.0 million or 1.4% of gross loans
on March 31, 2003, compared with $5.0 million or 1.34% of gross loans on
December 31, 2002. Net charge-offs for the last three months were $40 thousand
or .01% of gross loans, compared to net charge-offs of $441 thousand or .12% of
gross loans for the year ended December 31, 2002.
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 company
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.
For the three months ending March 31, 2003, $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,
2003 2002
----------------------------------
(Dollars in thousands)
Non-accrual Loans (a) $7,493 $2,016
Past Due 90 days + (b) 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 debt or
in its restoration to current status.
The non-accrual loans consisted primarily of $5.7 million of commercial real
estate loans, $1.5 million of residential real estate loans and $163 thousand of
commercial loans. On March 31, 2003, the ratio of non-accrual loans to the
allowance for loan losses was 148.7% compared to 40.4% on December 31, 2002. The
5.7 million of non-accrual commercial loans consists primarily of two loans
which are in the process of collection. The company believes it has an adequate
allowance for any anticipated losses for these loans.
As of March 31, 2003, the Company had loans totaling $15.6 million 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 a
decrease of $8.5 million or 35.4% from December 31, 2002. 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, 2003. 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 $1.8
million or 2.1% from December 31, 2002. The decrease came from three areas of
the portfolio. The company purchased $4.5 million of mortgage-backed securities,
$3.0 million of Commercial Paper and $26.0 million of U.S. Government Agency
Discount Notes. The company had $590 thousand of municipal securities, $2.1
million of Commercial Paper and CDs, and $28.0 million of U.S. Government Agency
Discount Notes mature. There were $295 thousand of municipal securities called
and $466 thousand of agency securities called by various Government Agencies.
Deposits and Borrowed Funds
Total deposits and borrowed funds were $445.3 million on March 31, 2003 compared
to $465.6 million on December 31, 2002. This is a decrease of $20.3 million or
4.4%. The decrease is due to decreased demand deposits and savings. Demand
deposits and savings deposits decrease $7.8 million or 10.7 % and $8.1 or 5.6%
respectively. The following table summarizes the changes in the major
classifications of deposits and borrowed funds.
March 31, December 31, Change in
2003 2002 Balance
-------------------------------------- -----------
(Dollars in millions)
Money Market and Savings $136.7 $144.8 ($8.1)
Demand Deposits $65.2 $73.0 ($7.8)
Time Deposits less than $100,000 $88.2 $90.2 ($2.0)
Time Deposits equal or greater than $100,000 $60.0 $56.2 $3.8
Securities sold under agreement to repurchase $22.6 $25.0 ($2.4)
Federal Home Loan Borrowings $46.3 $46.8 ($0.5)
Capital resources
As of March 31, 2003, the Company's stockholders' equity increased $1.3 million
or 2.73%. Net income of $1.4 million was the primary reason for the increase in
equity. The company purchased $13 thousand of treasury stock during the first
three months of 2003. Accumulated other comprehensive income decreased $87
thousand from $1.6 million to $1.5 million.
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 13.0% at March
31, 2003, well above the 4% minimum required. Total capital to risk-adjusted
assets was 14.2%, also well above the 8% minimum requirement. The leverage ratio
was at 9.5% 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 21.1%, which
compares to a positive 20% as of December 31, 2002. Although these ratios are
outside the Bank's target range, the Bank's management feels the ratios are
appropriate at this time due to management's projection for future interest
rates.
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 $23.1 million at
March 31, 2003, compared with $33.7 million at December 31, 2002. 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 $7.5 million. Net cash provided by investing activities
was $7.5 million. Net cash used in financing activities was $20.3 million, for
the three months ended March 31, 2003.
For the three months ending March 31, 2002, net cash provided by operating
activities was $6.5 million. Net cash provided by investing activities was $8.4
million. Net cash used in financing activities was $23.7 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
The Financial Accounting Standards Board has issued Statement 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging". This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under Statement 133. The Statement is effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. Implementation of the Statement is not expected
to have a material impact on the 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 nontaxable loans and securities that are not fully
subject to federal taxes. Net interest income was $5.1 million March 31, 2003
and 2002. Net interest margin as a percentage of average earning assets
(includes loans placed on nonaccrual status) was 4.27% and 4.76% for the three
months ended March 2003 and 2002.
The major component of interest income and fees on loans is the income generated
by loans. Interest income and fees on loans decreased due to decreased rates on
increasing average balances. The rates earned decreased from 7.15% to 6.45%.
As of March 31, 2003 average balances outstanding increased, however, rates paid
for liabilities decreased causing a decrease in interest expense. The major
components of interest expense are interest paid on Certificates of Deposit
(Time Deposits) and on Money Market Deposits. Interest expense on Time Deposits
decreased due to decreased rates paid on increasing average balances. The rates
paid decreased from 3.0% to 2.4%, for the months ended March 31, 2003 and 2002
respectively. Interest expense on Money Market Deposits decreased as a result of
decreased average balances. The rates paid decreased from 1.41% to .78%, for the
three months ended March 31, 2003 and 2002 respectively.
The following table summarizes the changes and reasons for the changes in
interest earned and paid during the three months ended March 2003 and 2002.
Three months ended
March 31,
2003 2002
----------- ---------- ---------- ----------- ---------- ----------
Interest Average Interest Average
Average Earned Yield Average Earned Yield
Balance or Paid or Cost Balance or Paid or Cost
----------- ---------- ---------- ----------- ---------- ----------
(Dollars in thousands)
Interest Income:
Interest and fees on loans (a) $ 367,724 5,929 6.45% 357,585 6,392 7.15%
Interest and dividends on securities:
Taxable 58,858 482 3.28% 22,224 276 4.97%
Nontaxable (a) 36,531 644 7.05% 33,118 594 7.17%
Interest on Fed funds sold 13,368 38 1.14% 8,824 33 1.50%
Interest on interest-bearing deposits in
banks 4,706 34 2.89% 3,891 17 1.75%
----------- ---------- ---------- ----------- ---------- ----------
Total Interest Income $ 481,187 7,127 5.92% 425,642 7,312 6.87%
=========== ========== ========== =========== ========== ==========
Interest Expense
Interest on deposits $ 316,691 1,462 1.85% 292,642 1,722 2.35%
Interest on short-term borrowings 26,052 72 1.11% 24,397 132 2.16%
Interest on other borrowings 45,985 460 4.00% 35,509 392 4.42%
----------- ---------- ---------- ----------- ---------- ----------
Total Interest Expense $ 388,728 1,994 2.05% 352,548 2,246 2.55%
=========== ========== ========== =========== ========== ==========
Net interest margin $ 5,133 4.27% $ 5,066 4.76%
========== ========== ========== ==========
<FN>
(a) The interest and average yield for nontaxable loans and investments are presented on a federal taxable basis
assuming a 34% tax rate.
</FN>
Non-interest income
Non-interest income decreased $89 thousand or 9.2% as of March 31, 2003. The
decrease was a result of a decline in brokerage annuity sales.
Non-interest expense
Non-interest expense increased $252 thousand or 7.1% as of March 31, 2003.
Salaries and benefits accounted for $92 thousand. The increase in salaries and
benefits is due to normal wage increases and increased health insurance costs.
Occupancy expense increased $42 thousand due primarily to increases in real
estate taxes, depreciation and utilities. Other expenses increased $113
thousand.
Critical Accounting Policies
Income Taxes
See Note 1 of the notes to our audited consolidated financial statements for the
year ended December 31, 2002 for our income tax accounting policy. Income tax
expense recorded in the consolidated income statement involves interpretation
and application of certain accounting pronouncements and federal and state tax
codes, and is, therefore, considered a critical accounting policy. We undergo
examinations by various regulatory taxing authorities. Such agencies may require
that changes in the amount of tax expense or valuation allowance be recognized
when their interpretations differ from those of management, based on their
judgments about information available to them at the time of their examinations.
See Note 11 of the notes to our audited consolidated financial statements for
the year ended December 31, 2002 for more income tax information.
Allowance for Loan Losses
Management believes the allowance for loan losses accounting policy is critical
to the portrayal and understanding of our financial condition and results of
operations. As such, selection and application of this "critical accounting
policy" involves judgments, estimates, and uncertainties that are susceptible to
change. In the event that different assumptions or conditions were to prevail,
and depending upon the severity of such changes, the possibility of materially
different financial condition or results or operations is a reasonable
likelihood.
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, 2003, projects that net portfolio value would decrease by
approximately 5.75% if interest rates would rise 200 basis points and would
decrease by approximately 2.77% if interest rates would rise 100 basis points
over the next year. It projects an increase in net portfolio value of
approximately 13.37% if interest rates would drop 200 basis points and an
increase of approximately 8.53% if interest rates would drop 100 basis points.
Both simulations are within board-established policy limits. The Company has not
experienced any material changes to its market risk position since December 31,
2002, as disclosed in the Company's 2002 Form 10K Annual Report. 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.
Item 4. Controls and Procedures
Within the 90 days prior to the date of this report, the Company's Chief
Executive Officer and Chief Financial Officer carried out an evaluation, with
the participation of other members of management as they deemed appropriate, of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures as contemplated by Exchange Act Rule 13a-14. Based upon,
and as of the date of that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective, in all material respects, in timely alerting them to
material information relating to the Company (and its consolidated subsidiaries)
required to be included in the periodic reports the Company is required to file
and submit to the SEC under the Exchange Act.
There have been no significant changes to the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date that the internal controls were most recently evaluated. There were no
significant deficiencies or material weaknesses identified in that evaluation
and, therefore, no corrective actions were taken.
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
(a) Exhibits
99.1 Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (exhibit
is being filed herewith).
99.2 Certification of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (exhibit
is being filed herewith).
(b) 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 15, 2003 /s/ Brantly Chappell
Date ---------------------------
Brantly Chappell
Chief Executive Officer
May 15, 2003 /s/ James Schuster
Date ---------------------------
James Schuster
Chief Financial Officer
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Brantly Chappel, Chief Executive Officer, certify that:
1) I have reviewed this quarterly report on Form 10-Q of First Banking Center,
Inc.;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Brantly Chappell
-----------------------
Brantly Chappell
Chief Executive Officer
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, James Schuster, Chief Financial Officer, certify that:
1) I have reviewed this quarterly report on Form 10-Q of First Banking Center,
Inc.;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ James Schuster
-----------------------
James Schuster
Chief Financial Officer
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The following certification is provided by the undersigned Chief Executive
Officer of First Banking Center, Inc. on the basis of such officer's knowledge
and belief for the sole purpose of complying with 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
CERTIFICATION
In connection with the Quarterly Report of First Banking Center, Inc. (the
"Company") on Form 10-Q for the period ended March 31, 2003 as filed with the
Securities and Exchange Commission on May 15, 2003 (the "Report"), I, Brantly
Chappell, Chief Executive Officer of the Company, hereby certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/Brantly Chappell
------------------------------
Name: Brantly Chappell
Title: Chief Executive Officer
Date: May 15, 2003
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The following certification is provided by the undersigned Chief Financial
Officer of First Banking Center, Inc. on the basis of such officer's knowledge
and belief for the sole purpose of complying with 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
CERTIFICATION
In connection with the Quarterly Report of First Banking Center, Inc. (the
"Company") on Form 10-Q for the period ended March 31, 2003 as filed with the
Securities and Exchange Commission on May 15, 2003 (the "Report"), I, James
Schuster, Chief Financial Officer of the Company, hereby certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/James Schuster
------------------------------
Name: James Schuster
Title: Chief Financial Officer
Date: May 15, 2003