Independent Auditor's Report
Board of Directors
First Banking Center, Inc. and Subsidiaries
Burlington, Wisconsin
We have audited the accompanying consolidated balance sheets of First Banking
Center, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income, changes in components of stockholders'equity,
and cash flows for the years ended December 31, 1995, 1994 and 1993. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Banking
Center, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the results
of its operations and its cash flows for the years ended December 31, 1995, 1994
and 1993, in conformity with generally accepted accounting principles.
Conley McDonald LLP
Brookfield, Wisconsin
January 12, 1996
First Banking Center, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 1995 and 1994
ASSETS
1995 1994
Cash and due from banks (Note B) $ 17,638,000 11,521,000
Federal funds sold 4,550,000 566,000
Cash and cash equivalents 22,188,000 12,087,000
Interest-bearing deposits in banks 4,303,000 1,899,000
Available for sale securities
- stated at fair value (Note C) 30,092,000 21,655,000
Held to maturity securities
- fair value of $30,167,000 in 1995
and $29,505,000 in 1994 (Note D) 29,905,000 30,132,000
Loans, less allowance for loan losses
of $2,336,000 and $2,095,000 in 1995
and 1994 respectively (Notes E, F and P) 168,019,000 155,678,000
Office buildings and equipment, net (Note G) 5,071,000 4,707,000
Accrued interest receivable and other assets
(Notes H, L and N) 4,990,000 4,927,000
Total assets $ 264,568,000 $ 231,085,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Non interest-bearing demand $ 32,995,000 $ 29,294,000
Interest-bearing demand 25,007,000 20,082,000
Money market demand accounts 36,167,000 37,063,000
Savings 25,425,000 27,237,000
Time (Note I) 89,236,000 73,434,000
Total deposits 208,830,000 187,110,000
Securities sold under repurchase agreements 20,225,000 13,755,000
U.S. Treasury note account 91,000 697,000
Long-term borrowings (Note J) 8,933,000 6,805,000
Accrued interest payable and other
liabilities (Note L) 2,605,000 1,892,000
Total liabilities 240,684,000 210,259,000
Commitments and contingencies (Note O)
Stockholders' equity (Note K)
Common stock, $1.00 par value,3,000,000 shares
authorized, 1,468,464 shares issued 1,468,000 1,468,000
Surplus 3,995,000 3,986,000
Retained earnings (Note Q and R) 18,570,000 16,353,000
Sub-total 24,033,000 21,807,000
Treasury stock, 27 and 5,316 shares for
1995 and 1994 respectively, at cost (1,000) (54,000)
Unrealized gain (loss) on available for
sale securities, net (148,000) (927,000)
Total stockholders' equity 23,884,000 20,826,000
Total liabilities and
stockholders' equity $ 264,568,000 $ 231,085,000
See Notes to Consolidated Financial Statements.
First Banking Center, Inc. and Subsidiaries
Consolidated Statements of Income
Years ended December 31, 1995, 1994 and 1993
1995 1994 1993
Interest income:
Interest and fees on loans (Note E) $ 15,017,000 12,170,000 11,758,000
Interest on securities:
Taxable 2,822,000 2,268,000 1,532,000
Non-exempt 480,000 557,000 604,000
Interest on federal funds sold 308,000 55,000 113,000
Interest on deposits in banks 183,000 182,000 340,000
Total interest income 18,810,000 15,232,000 14,347,000
Interest expense:
Interest on deposits (Note I ) 7,487,000 5,815,000 5,888,000
Interest on federal funds purchased
and securities sold under
repurchase agreements 940,000 446,000 90,000
Interest on U.S. Treasury note account 35,000 22,000 15,000
Interest on long-term borrowings(Note J) 504,000 352,000 265,000
Total interest expense 8,966,000 6,635,000 6,458,000
Net interest income 9,844,000 8,597,000 7,889,000
Provision for loan losses (Note F) 470,000 270,000 710,000
Net interest income after
provision for loan losses 9,374,000 8,327,000 7,179,000
Other operating income:
Trust Department income 345,000 326,000 318,000
Service charges on deposit accounts 632,000 539,000 593,000
Investment securities gains (losses)
(Note C) (11,000) (13,000) 5,000
Other income 541,000 506,000 458,000
Total other operating income 1,507,000 1,358,000 1,374,000
Other operating expenses:
Salaries and employee benefits
(Note M) 3,501,000 3,123,000 2,618,000
Occupancy expenses 547,000 511,000 473,000
Equipment expenses 659,000 491,000 424,000
Computer services 328,000 292,000 246,000
FDIC assessment 214,000 391,000 343,000
Other expenses 1,421,000 1,399,000 1,350,000
Total other operating expenses 6,670,000 6,207,000 5,454,000
Income before income taxes 4,211,000 3,478,000 3,099,000
Income taxes (Note L) 1,407,000 1,114,000 918,000
Net income $ 2,804,000 2,364,000 2,181,000
Earnings per share
Primary $ 1.91 1.61 1.50
Fully diluted $ 1.91 1.61 1.50
Weighted average shares outstanding 1,470,162 1,463,998 1,457,415
See Notes to Consolidated Financial Statements.
First Banking Center, Inc. and Subsidiaries
Consolidated Statements of Changes
in Components of Stockholder's Equity
Years ended December 31, 1995, 1994 and 1993
Unrealized
gain (loss)
on available
Common Retained Treasury for sale
stock Surplus earnings stock securities
Balances,
December 31, 1992 $ 1,468,000 3,962,000 12,818,000 (157,000)
Net income - 1993 2,181,000
Cash dividends paid -
$0.33 per share (484,000)
Exercise of stock
options 13,000 47,000
Balances,
December 31, 1993 1,468,000 3,975,000 14,515,000 (110,000)
Net income - 1994 2,364,000
Cash dividends paid -
$0.36 per share (526,000)
Exercise of stock
options 11,000 56,000
Change in unrealized
gain (loss) on
available for sale
securities, net (927,000)
Balances,
December 31, 1994 1,468,000 3,986,000 16,353,000 (54,000) (927,000)
Net income - 1995 2,804,000
Cash dividends paid -
$.40 per share (587,000)
Exercise of stock
options 9,000 53,000
Change in unrealized
gain (loss) on
available for sale
securities, net 779,000
Balances,
December 31, 1995 $ 1,468,000 3,995,000 18,570,000 (1,000) (148,000)
See Notes to Consolidated Financial Statements.
First Banking Center, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years ended December 31, 1995, 1994 and 1993
1995 1994 1993
Cash flows from operating activities:
Net income $ 2,804,000 2,364,000 2,181,000
Adjustments to reconcile
net income to net cash provided
by operating activities:
Depreciation 565,000 477,000 340,000
Provision for loan losses 470,000 270,000 710,000
Provision for deferred taxes (189,000) (188,000) (203,000)
Amortization and accretion of
bond premiums and discounts -net 121,000 171,000 97,000
Amortization of excess cost over
equity in underlying net assets
of subsidiary 2,000 (1,000) 10,000
Investment securities (gains) losses 11,000 13,000 (5,000)
(Increase) decrease in assets:
Interest receivable (468,000) (269,000) (43,000)
Other assets 238,000 (1,215,000) (49,000)
Increase (decrease) in liabilities:
Taxes payable (235,000) 204,000 (205,000)
Interest payable 350,000 26,000 19,000
Other liabilities 598,000 288,000 81,000
Total adjustments 1,463,000 (224,000) 752,000
Net cash provided by operating
activities 4,267,000 2,140,000 2,933,000
Cash flows from investing activities:
Net (increase) decrease in interest-
bearing deposits in banks (2,404,000) 9,110,000 194,000
Proceeds from sales of available
for sale securities 1,000,000 4,614,000
Proceeds from maturities of
available for sale securities 15,909,000 2,396,000
Purchase of available for sale
securities (24,288,000) (7,841,000)
Proceeds from maturities of held
to maturity securities 7,370,000 9,655,000
Purchase of held to maturity
securities (7,200,000) (10,255,000)
Proceeds from sales of securities
held for investment 335,000
Proceeds from maturities of securities
held for investment 11,574,000
Purchase of securities held
for investment (31,857,000)
Net increase in loans (12,811,000) (20,247,000) (12,114,000)
Purchase of office buildings
and equipment (929,000) (1,174,000) (440,000)
Net cash used in investing
activities (23,353,000) (13,742,000) (32,308,000)
First Banking Center, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(concluded)
Years ended December 31, 1995, 1994 and 1993
1995 1994 1993
Cash flows from financing activities:
Net increase in deposits $ 21,720,000 9,539,000 17,696,000
Dividends paid (587,000) (526,000) (484,000)
Proceeds from long-term borrowings 5,609,000 415,000 2,909,000
Payments on long-term borrowings (3,481,000)
Net increase (decrease) in
U.S. Treasury note account (606,000) (701,000) 167,000
Net increase in securities sold
under repurchase agreements 6,470,000 4,167,000 2,091,000
Proceeds from stock options exercised 62,000 67,000 60,000
Net cash provided by financing
activities 29,187,000 12,961,000 22,439,000
Net increase (decrease) in
cash and cash equivalents 10,101,000 1,359,000 (6,936,000)
Cash and cash equivalents
at beginning of year 12,087,000 10,728,000 17,664,000
Cash and cash equivalents
at end of year $ 22,188,000 12,087,000 10,728,000
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 8,616,000 6,609,000 6,439,000
Income taxes $ 1,642,000 1,106,000 1,326,000
Supplemental schedule of non-cash investing and
financing activities:
Securities held for investment reclassified to:
Held to maturity securities $ 29,604,000
Available for sale securities $ 22,269,000
Net change in unrealized gain (loss) on
available for sale securities $ 779,000 (927,000)
See Notes to Consolidated Financial Statements.
First Banking Center, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A.-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Consolidation:
The consolidated financial statements of First Banking Center,Inc. include the
accounts of its wholly owned subsidiaries, First Banking Center - Burlington and
First Banking Center -Albany. First Banking Center - Burlington includes the
accounts of its wholly owned subsidiary, First Banking Center Burlington
Investment Corporation. The consolidated financial statements have been
prepared in conformity with generally accepted accounting principles and conform
to predominate practice within the banking industry. All significant
intercompany accounts and transactions have been eliminated in the consolidated
financial statements.
2. Nature of banking activities:
The consolidated income of First Banking Center, Inc. is principally from income
of the two bank subsidiaries. The subsidiary Banks grant agribusiness,
commercial, residential loans, deposit and trust services to customers primarily
in southeastern and south central Wisconsin. The Banks are subject to
competition from other financial institutions and nonfinancial institutions
providing financial products. Additionally the Company and the Banks are
subject to the regulations of certain regulatory agencies and undergo periodic
examination by those regulatory agencies.
3. Basis of financial statement presentation:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates.
4. Cash and cash equivalents:
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, federal funds sold and investments with an
original maturity of three months or less. Generally, federal funds are sold
for one-day periods.
The Banks maintain amounts due from banks which, at times, may exceed federally
insured limits. The Banks have not experienced any losses in such accounts.
5. Investment in debt and marketable equity securities:
As of January 1, 1994, the Company changed its method for accounting for debt
and equity securities in accordance with FASB Statement No. 115. This statement
requires that management determine the appropriate classification of securities
at the date of adoption and thereafter as each individual security is acquired.
In addition, the appropriateness of such classification should be reassessed at
each balance sheet date. The January 1, 1994 balance of stockholders' equity
was decreased by $71,000 net of the $37,000 related tax effect, to recognize the
net unrealized holding loss on securities at that date. The classifications and
related accounting policies under FASB Statement No. 115 are as follows:
Available for sale securities:
Securities classified as available for sale are those debt securities that the
Company intends to hold for an indefinite period of time, but not necessarily
to maturity. Available for sale securities also includes equity securities.
Any decision to sell a security classified as available for sale would be based
on various factors, including significant movements in interest rates, changes
in the maturity mix of the Company's assets and liabilities, liquidity needs,
regulatory capital considerations, and other similar factors. Securities
available for sale are carried at fair value. Unrealized gains or losses net
of the related deferred tax effect are reported as increases or decreases in
stockholders' equity. Realized gains or losses, determined on the basis of the
cost of specific securities sold, are included in earnings.
Held to maturity securities:
Securities classified as held to maturity are those debt securities the Company
has both the intent and ability to hold to maturity regardless of changes in
market conditions, liquidity needs or changes in general economic conditions.
These securities are carried at cost adjusted for amortization of premium and
accretion of discount, computed by the interest method over their contractual
lives.
Transfers of debt securities into the held to maturity classification (if any)
from the available for sale classification are made at fair value on the date
of transfer. The unrealized holding gain or loss on the date of transfer is
retained in the separate component of stockholders' equity and in the carrying
value of the held to maturity securities. Such amounts are amortized over the
remaining contractual lives of the securities by the interest method.
Held for investment securities:
At December 31, 1993, investment securities were stated at cost adjusted for
amortization of premiums and accretion of discounts using a level yield method.
Realized gains or losses on the sale of securities were determined on the basis
of the specific security sold and were included in earnings.
6. Loans:
Loans are stated at the amount of unpaid principal reduced by the allowance for
loan losses. Interest on loans is calculated by using the simple interest
method on daily balances of the principal amount outstanding. Accrual of
interest on impaired loans is discontinued when, in the opinion of management,
there is reasonable doubt as to the borrower's ability to meet payments of
interest or principal when they become due. Cash collections on impaired loans
that are on a nonaccrual basis are credited to the loan receivable balance and
no interest income is recognized on those loans until the principal balance is
current. Accrual of interest is generally resumed when the customer is current
on all principal and interest payments and has been paying on a timely basis for
a period of time.
On January 1, 1995, the Company adopted Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan," as amended by FASB 118, which requires loans to be
considered impaired when, based on current information and events, it is
probable the Banks will be unable to collect all contractual principal and
interest payments due in accordance with the terms of the loan agreement. The
portion of the allowance for loan losses applicable to impaired loans has been
computed based on the present value of the estimated future cash flows of
interest and principal discounted at the loan's effective interest rate or on
the fair value of the collateral for collateral dependent loans.
7. Allowance for loan losses:
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 is an amount that management believes will be adequate to absorb
possible losses on existing loans that may become uncollectible, based on
evaluation of the collectibility of loans and prior loan loss experience. The
evaluations take into consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality, review of specific
problem loans, and current economic conditions that may affect the borrower's
ability to pay. 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 banks 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.
8. Office buildings and equipment:
Depreciable assets are stated at cost less accumulated depreciation. Provisions
for depreciation are computed on straight-line and accelerated methods over the
estimated useful lives of the assets, which range from 15 to 50 years for
buildings and 3 to 15 years for equipment.
9. Profit-sharing plan:
The Company has established a trusteed contributory 401(k) profit-sharing plan
for qualified employees. The Company's policy is to fund contributions as
accrued.
10. Income taxes:
The Company files a consolidated federal income tax return and individual
subsidiary state income tax returns. Accordingly, amounts equal to tax
benefits of those companies having taxable federal losses or credits are
reimbursed by the other companies that incur federal tax liabilities.
Amounts provided for income tax expense are based on income reported for
financial statement purposes and do not necessarily represent amounts currently
payable under tax laws. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. The differences relate
principally to the reserve for loan losses, nonaccrual loan income, deferred
compensation and pension, fixed assets and unrealized gains and losses on
available for sale securities. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
11. Off-balance-sheet financial instruments:
In the ordinary course of business the subsidiary Banks have entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit, commitments under credit card arrangements, commercial letters of credit
and standby letters of credit. Such financial instruments are recorded in the
financial statements when they are funded or related fees are incurred or
received.
The Company enters into interest rate swap agreements to manage interest rate
exposure in its loan portfolio from changes in market interest rates. The
interest rate swap agreements represent an exchange of interest payments with
independent parties to hedge forward interest rate exposure on certain fixed
rate loans. The interest differential to be paid or received on interest rate
swap agreements is accrued monthly and recognized over the life of the
agreement. The related amount payable to or receivable from counterparties is
included in other liabilities or assets. The fair values of the swap agreements
are not recognized in the consolidated financial statements. Gain or losses on
the sale of any interest rate contract are deferred and amortized as a yield
adjustment to the underlying assets or liabilities which were originally hedged.
The Company had no deferred gains or losses for interest rate contracts at
December 31, 1995 and 1994.
12. Trust assets and fees:
Property held for customers in fiduciary or agency capacities is not included
in the accompanying balance sheet, since such items are not assets of the
Company. In accordance with established industry practice, income from trust
fees is reported on the cash basis. Reporting of trust fees on an accrual basis
would have no material effect on reported income.
13. Earnings per share:
Earnings per share are computed based upon the weighted average number of common
and common equivalent shares outstanding during each year. In the computation
of weighted average shares outstanding all dilutive stock options are assumed
to be exercised at the beginning of each year and the proceeds are used to
purchase shares of the Company's common stock at the average market price during
the year. Fully diluted earnings per share are computed in a similar manner
except, to reflect maximum potential dilution, the market price at the close of
the reported period is used if higher than the average market price during the
year.
14. Fair value of financial instruments:
FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments,
requires disclosure of fair value information about financial instruments, both
assets and liabilities, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. Statement 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
Cash and cash equivalents:
The carrying amounts reported in the balance sheet for cash and short-term
instruments approximate their fair values.
Investment securities (including mortgage-backed securities):
Fair values for investment securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments.
Loans receivable:
For variable-rate loans that reprice frequently and with no significant change
in credit risk, fair values are based on carrying values. The fair values for
fixed rate loans are estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to borrowers
with similar credit quality.
Deposit liabilities:
The fair values disclosed for demand deposits equal their carrying amounts which
represents the amount payable on demand. The carrying amounts for
variable-rate, fixed term money market accounts and certificates of deposit
approximate their fair values at the reporting date. Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on certificates to a
schedule of aggregated expected maturities on time deposits.
Short-term borrowings:
The carrying amounts of federal funds purchased, borrowings under repurchase
agreements, and other short-term borrowings approximate their fair values.
Long-term borrowing:
The fair values for the fixed rate borrowings are estimated using a discounted
cash flow calculation that applies interest rates currently being offered on the
borrowings to a schedule of aggregated expected maturities on the borrowings.
Off-balance-sheet instruments:
The estimated fair value of fee income on letters of credit is insignificant.
Loan commitments on which the committed interest rate is different than the
current market rate are also insignificant.
The fair values of interest rate swap agreements are obtained from dealer
quotes. These values represent the estimated amount the Company would receive
or pay to terminate the contracts or agreements taking into account current
interest rates and, when appropriate, the current creditworthiness of the
counterparty.
15. Emerging Accounting Standards:
Accounting for Mortgage Servicing Rights:
FASB has issued Statement No. 122, Accounting for Mortgage Servicing Rights.
Statement No. 122 amends certain provisions of Statement No. 65 to eliminate the
accounting distinction between rights to service mortgage loans for others that
are acquired through loan origination activities and those acquired through
purchase transactions. If the Company sells or securitizes mortgage loans and
retains the mortgage servicing rights, the Company should allocate the total
cost of mortgage loans to the mortgage servicing rights and the loans (without
the mortgage servicing rights) based on their relative fair values. Any costs
allocated to mortgage servicing rights should be recognized as a separate asset.
This Statement is effective for the Company's year ending December 31, 1996.
The Company has not early adopted FASB 122 as management believes the effect
would not be material.
Stock-Based Compensation:
The FASB has issued Statement No. 123, Accounting for Stock-Based Compensation.
FASB No. 123 encourages, but does not require, the Company to account for
stock-based compensation awards on the basis of fair value at the date the
awards are granted. The fair value of the award would be shown as an expense
on the income statement. However, the FASB also allows the Company to continue
to measure compensation cost using the intrinsic value as prescribed by APB No.
25. If the Company elects to use the intrinsic value, they will not show an
expense in the income statement, however, they will be required to provide new
footnote disclosures about the stock-based compensation and must make pro forma
disclosures of net income and earnings per share as if the fair value-based
method of accounting had been applied. This statement is effective for the
Company's year ending December 31, 1996. The Company has not early adopted FASB
No. 123 as management believes the effect will not be material.
NOTE B.-CASH and DUE from BANKS
The Company's bank subsidiaries are required to maintain vault cash and reserve
balances with Federal Reserve Banks based upon a percentage of deposits. These
requirements approximated $1,182,000 and $1,033,000 at December 31, 1995 and
1994 respectively.
NOTE C.-AVAILABLE for SALE SECURITIES
Amortized costs and fair values of available for sale securities as of December
31, 1995 and 1994 are summarized as follows:
December 31, 1995
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
U.S. Treasury securities $ 3,749,000 24,000 2,000 3,771,000
Obligations of other U.S.
government agencies
and corporations 8,963,000 20,000 4,000 8,979,000
12,712,000 44,000 6,000 12,750,000
Mortgage-backed securities 13,204,000 7,000 199,000 13,012,000
Mutual funds 3,146,000 46,000 3,100,000
Federal Home Loan Bank stock 1,230,000 1,230,000
$ 30,292,000 51,000 251,000 30,092,000
December 31, 1994
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
U.S. Treasury securities $ 6,325,000 106,000 6,219,000
Obligations of other U.S.
government agencies
and corporations 250,000 23,000 227,000
6,575,000 129,000 6,446,000
Mortgage-backed securities 12,741,000 1,085,000 11,656,000
Mutual funds 3,003,000 119,000 2,884,000
Federal Home Loan Bank stock 669,000 669,000
$ 22,988,000 1,333,000 21,655,000
The amortized cost and fair value of available for sale securities as of
December 31, 1995, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities in mortgage-backed securities
equity securities, and mutual funds since the anticipated maturities are not
readily determinable. Therefore, these securities are not included in the
maturity categories in the following maturity summary:
December 31, 1995
Amortized Fair
cost value
Due in one year or less $ 7,424,000 7,428,000
Due after one year through 5 years 4,271,000 4,307,000
Due after 5 years through 10 years 1,017,000 1,015,000
$ 12,712,000 12,750,000
Following is a summary of the proceeds from sales of investment securities,
available for sale and held for investment as well as gross gains and losses for
the years ended December 31:
December 31,
1995 1994 1993
Proceeds from sales of investment
securities, available for sale
and held for investment $ 1,000,000 4,614,000 335,000
Gross gains on sales 9,000
Gross losses on sales (11,000) (13,000) (4,000)
$ (11,000) (13,000) 5,000
Related income taxes (benefit) $ (5,000) 2,000
Available for sale securities with a carrying amount of $19,244,000 and
$12,827,000 as of December 31, 1995 and 1994 respectively, were pledged as
collateral on public deposits and for other purposes as required or permitted
by law.
NOTE D.-HELD TO MATURITY SECURITIES
Amortized costs and fair values of held to maturity securities as of December
31, 1995 and 1994 are summarized as follows:
December 31, 1995
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
U.S. Treasury securities $ 7,564,000 88,000 27,000 7,625,000
Obligations of other U.S.
government agencies
and corporations 1,783,000 22,000 2,000 1,803,000
Obligations of states and
political subdivisions 11,377,000 105,000 30,000 11,452,000
Other 1,095,000 6,000 3,000 1,098,000
21,819,000 221,000 62,000 21,978,000
Mortgage-backed securities 8,086,000 144,000 41,000 8,189,000
$ 29,905,000 365,000 103,000 30,167,000
December 31, 1994
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
U.S. Treasury securities $ 7,582,000 295,000 7,287,000
Obligations of other U.S.
government agencies
and corporations 251,000 19,000 232,000
Obligations of states
and political subdivisions 8,914,000 91,000 163,000 8,842,000
Other 1,147,000 30,000 1,117,000
17,894,000 91,000 507,000 17,478,000
Mortgage-backed securities 12,238,000 83,000 294,000 12,027,000
$ 30,132,000 174,000 801,000 29,505,000
The amortized cost and fair value of securities held to maturity as of December
31, 1995, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities in mortgage-backed securities since the
anticipated maturities are not readily determinable. Therefore, these
securities are not included in the maturity categories in the following maturity
summary:
December 31, 1995
Amortized Fair
cost value
Due in one year or less $ 5,060,000 5,083,000
Due after one year through 5 years 12,468,000 12,595,000
Due after 5 years through 10 years 3,492,000 3,504,000
Due after 10 years 799,000 796,000
$ 21,819,000 21,978,000
Held to maturity securities with a carrying value of $5,771,000 and $4,797,000
as of December 31, 1995 and 1994 respectively, were pledged as collateral on
public deposits and for other purposes as required or permitted by law.
NOTE E.-LOANS
Major classifications of loans are as follows:
December 31,
1995 1994
Commercial $ 27,659,000 $ 27,713,000
Agricultural production 5,810,000 6,163,000
Real estate:
Construction 20,652,000 14,437,000
Commercial 37,005,000 33,027,000
Agricultural 733,000 1,014,000
Residential 67,729,000 66,004,000
Installment and consumer 6,961,000 7,074,000
Municipal loans 3,806,000 2,341,000
170,355,000 157,773,000
Allowance for loan losses (2,336,000) (2,095,000)
Total loans $ 168,019,000 $ 155,678,000
The following table presents data on impaired loans at December 31, 1995.
Impaired loans for which an allowance has been provided $
Impaired loans for which no allowance has been provided 1,501,000
Total loans determined to be impaired 1,501,000
Allowance for loan loss for impaired loans included in the
allowance for loan losses
Average recorded investment in impaired loans 807,000
Interest income recognized from impaired loans 7,000
Cash basis interest income recognized from impaired loans 7,000
The loan portfolio includes $778,000 at December 31, 1994 of loans which have
been placed on a nonaccrual status. Interest which would have been recorded,
had the loans been on the accrual basis, would have amounted to $12,000 in 1994.
Interest income on these loans, which is recorded only when received, amounted
to $4,000 in 1994. There were no restructured loans as of December 31, 1994.
Certain directors and executive officers of the Company, and their related
interests, had loans outstanding in the aggregate amounts of $765,000 and
$1,299,000 at December 31, 1995 and 1994 respectively. During 1995, $536,000
of new loans were made and repayments totaled $1,070,000. These loans were made
on substantially the same terms, including interest rates and collateral, as
those prevailing at the same time for comparable transactions with other persons
and did not involve more than normal risks of collectibility or present other
unfavorable features.
NOTE F.-ALLOWANCE for LOAN LOSSES
The allowance for loan losses reflected in the accompanying consolidated
financial statements represents the allowance available to absorb loan losses.
An analysis of changes in the allowance is presented in the following
tabulation:
December 31,
1995 1994 1993
Balance, beginning of year $ 2,095,000 1,886,000 1,714,000
Loan charge offs (291,000) (305,000) (604,000)
Recoveries 62,000 244,000 66,000
Provision charged to operations 470,000 270,000 710,000
Balance, end of year $ 2,336,000 2,095,000 1,886,000
NOTE G.-OFFICE BUILDINGS and EQUIPMENT
Office buildings and equipment are stated at cost less accumulated depreciation
and are summarized as follows:
December 31,
1995 1994
Land $ 1,079,000 1,063,000
Buildings and improvements 4,170,000 3,722,000
Furniture and equipment 2,983,000 2,769,000
8,232,000 7,554,000
Less accumulated depreciation 3,161,000 2,847,000
Total office buildings and equipment $ 5,071,000 4,707,000
Depreciation expense as of December 31, 1995, 1994, and 1993 was $565,000,
$477,000 and $340,000 respectively.
NOTE H.-VALUATION of CORE DEPOSITS
The fair market value of core deposits of the First Banking Center - Albany at
the date of acquisition amounted to $310,000. The valuation was determined by
an independent appraisal firm. The amount, net of amortization, has been
included as part of other assets and is being amortized over the average
remaining life of the deposits. Amortization expense for the years ended
December 31, 1995, 1994 and 1993 amounted to $3,000, $3,000 and $12,000
respectively. Accumulated amortization amounted to $298,000, $295,000 and
$292,000 at December 31, 1995, 1994 and 1993 respectively.
NOTE I.-DEPOSITS and INTEREST on DEPOSITS
Time deposits in excess of $100,000 totaled $7,734,000 and $5,793,000 at
December 31, 1995 and 1994 respectively.
Interest expense on deposits for the years ended December 31, 1995, 1994 and
1993 is as follows:
December 31,
1995 1994 1993
Interest bearing demand $ 519,000 441,000 403,000
Money market demand accounts 1,389,000 1,229,000 1,256,000
Savings deposits 771,000 793,000 736,000
Time, $100,000 and over 611,000 219,000 242,000
Time, under $100,000 4,197,000 3,133,000 3,251,000
Total $ 7,487,000 5,815,000 5,888,000
NOTE J.-LONG-TERM BORROWINGS
During 1992, the Company entered into a master contract agreement with the
Federal Home Loan Bank (FHLB) which provides for borrowing up to the maximum of
$12,600,000. The indebtedness is evidenced by a master contract dated September
14, 1992. FHLB provides both fixed and floating rate advances. Floating rates
are tied to short-term market rates of interest, such as Federal Funds Treasury
Bill rates. Fixed rate advances are priced in reference to market rates of
interest at the time of the advance, namely the rates that FHLB pays to
borrowers at various maturities.
Various advances were obtained during prior years with total outstanding
balances of $8,933,000 and $6,805,000 at December 31, 1995 and 1994
respectively, with applicable interest rates ranging from 4.60% to 6.83%.
Interest is payable monthly with principal payment due at maturity.
The advances are secured by a security agreement pledging a portion of the
Subsidiary banks' real estate mortgages with a carrying value of $14,292.000.
Future principal payments required to be made are as follows:
Years ending December 31:
1996 $ 3,049,000
1997 150,000
1998 5,263,000
1999 265,000
2000 206,000
$ 8,933,000
NOTE K.-STOCKHOLDERS' EQUITY
In 1994, the Board of Directors approved a three-for-one stock split to be
accomplished by a 200% stock dividend payable on September 6, 1994. All amounts
of per share data have been adjusted to reflect the stock split.
Transfers from retained earnings to surplus in the subsidiary banks have not
been reflected in the consolidated financial statements.
In 1994, the Company established a new Incentive Stock Option Plan which was
approved by the shareholders' at the 1995 annual meeting, providing for the
granting of options for up to 300,000 shares of common stock to key officers and
employees of the Company. Options are granted at the current market value
unless the stock is traded on a public market which it is then granted at the
average of the high and the low for the year, provided, however, if the
principal market is a national exchange, the grant price shall be the last
reported sales price. Options may be exercised 33.33% per year beginning one
year after the date of the grant and must be exercised within a four year
period.
Activity of the Incentive Stock Option Plan is summarized in the following
table:
Options Options Option price
available outstanding per share
Balance, December 31, 1992 $ 150,726 36,000 9.33-12.67
Granted (9,150) 9,150 15.33
Exercise of stock option (6,450) 9.33
Canceled 3,750 (3,750) 9.33-12.67
Balance, December 31, 1993 145,326 34,950 10.00-15.33
Stock options authorized
under new plan 300,000 -
Granted (9,600) 9,600 19.00
Exercise of stock option (6,600) 10.00-12.67
Canceled (145,326) (3,225) 10.00-15.33
Balance, December 31,1994 290,400 34,725 11.33-19.00
Granted (12,075) 12,075 22.00
Exercise of stock option (5,289) 11.33-12.67
Canceled 300 (3,575) 11.33-19.00
Exercisable, December 31, 1995 278,625 37,936 12.67-22.00
NOTE L.-INCOME TAXES
The provision for income taxes included in the accompanying consolidated
financial statements consists of the following:
December 31,
1995 1994 1993
Current provision:
Federal $ 1,326,000 1,105,000 961,000
State 270,000 197,000 160,000
Total current income taxes 1,596,000 1,302,000 1,121,000
Deferred income taxes (benefit) (189,000) (188,000) (203,000)
Total provision for income taxes $ 1,407,000 1,114,000 918,000
The net deferred tax assets in the accompanying balance sheets include the
following amounts of deferred tax assets and liabilities:
December 31,
1995 1994 1993
Deferred tax assets:
Allowance for loan losses $ 734,000 637,000 556,000
Unrealized loss on available
for sale securities 41,000 405,000
Depreciation 19,000 16,000
Pension 199,000 158,000 139,000
Deferred compensation 225,000 126,000 89,000
Other 27,000 41,000 3,000
Deferred tax liabilities:
Depreciation (25,000)
Other (10,000) (20,000)
Balance, end of year $ 1,201,000 1,376,000 783,000
Management believes it is more likely than not, that the gross deferred tax
assets will be fully realized. Therefore, no valuation allowance has been
recorded as of December 31, 1995 or 1994.
A reconciliation of statutory Federal income taxes based upon income before
taxes, to the provision for federal and state income taxes, as summarized above,
is as follows:
December 31,
1995 1994 1993
% of % of % of
pretax pretax pretax
Amount income Amount income Amount income
Reconciliation of statutory
to effective taxes:
Federal income taxes at
statutory rate $ 1,432,000 34.0% 1,183,000 34.0% 1,054,000 34.0%
Adjustments for:
Tax-exempt interest on
municipal obligations (188,000) (4.5) (216,000) (6.2) (237,000) (7.6)
Increases in taxes
resulting from State
income taxes 178,000 4.2 130,000 3.7 106,000 3.4
Other - net (15,000) (0.3) 17,000 0.5 (5,000) (0.2)
Effective income taxes $ 1,407,000 33.4% 1,114,000 32.0% 918,000 29.6%
NOTE M.-PENSION PLAN
The Company has a 401(k) plan, contributions in 1995 were $92,000, $94,000
in 1994, and $80,000, in 1993.
NOTE N.-SALARY CONTINUATION AGREEMENT
During 1994, the Company entered into a salary continuation agreement with an
officer. The agreement provides for the payment of specified amounts upon the
employee's retirement or death which is being accrued over the anticipated
remaining period of employment. Expense recognized for future benefits under
this agreement totaled $188,016 and $78,340 during 1995 and 1994 respectively.
Although not part of the agreement, the Company purchased paid-up life insurance
on the officer which could provide funding for the payment of benefits.
Included in other assets is $874,265 and $831,985 of related cash surrender
value as of December 31, 1995 and 1994 respectively.
NOTE O.-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 subsidiary Banks are party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of their
customers. These financial instruments include commitments to extend credit 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 subsidiary Banks' 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 subsidiary Banks use 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 Banks' exposure to
off-balance-sheet risk as of December 31, 1995 and 1994 is as follows:
1995 1994
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit $ 24,064,000 26,364,000
Standby letters of credit 4,387,000 2,233,000
Notional amount of financial instruments -
Interest rate swap 2,000,000 2,000,000
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 by the subsidiary Banks 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 subsidiary Banks evaluate each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the subsidiary Banks 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.
On April 10, 1991, the Company entered into a $2,000,000 interest rate swap
agreement with another company to manage interest rate exposure. The interest
rate swap agreement is structured as a hedge of specific fixed-rate loans whose
terms coincide with the term of the swap agreement. Under the terms of the swap
agreement, the parties exchange interest payment streams calculated on the
$2,000,000 notional principal amount. The swap agreement is structured so that
the Company pays a fixed interest rate of 8.27% and receives a variable rate
based on the 3 month LIBOR. The variable rate of this swap agreement at
December 31, 1995 was 5.94% and the weighted average for the year ended December
31, 1995 was 6.23%. The swap agreement expires on April 10, 1996, which
coincides with the maturity of the fixed rate loans.
NOTE P.-Concentration of Credit Risk
Practically all of the subsidiary Banks' loans, commitments, and commercial and
standby letters of credit have been granted to customers in the subsidiary
Banks' market area. Although the subsidiary Banks have a diversified loan
portfolio, the ability of their debtors to honor their contracts is dependent
on the economic conditions of the counties surrounding the subsidiary Banks.
The concentration of credit by type loan are set forth in note E.
NOTE Q.-RETAINED EARNINGS
A source of income and funds of First Banking Center, Inc. are dividends from
its subsidiary Banks. Dividends declared by the subsidiary Banks that exceed
the net income for the most current year plus retained net income for the
preceding two years must be approved by Federal and State regulatory agencies.
Under this formula, dividends of approximately $5,021,000 may be paid without
prior regulatory approval. Maintenance of adequate capital at the subsidiary
Banks effectively restricts potential dividends to an amount less than
$5,021,000.
NOTE R.-REGULATORY CAPITAL REQUIREMENTS
The subsidiary Banks are subject to various regulatory capital requirements
administered by the federal and state banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the subsidiary Banks' financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the subsidiary Banks must meet specific capital guidelines that involve
quantitative measures of the subsidiary Banks' assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The subsidiary Banks' capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
requires the subsidiary Banks to maintain minimum amounts and ratios (set forth
in the table below) of total and Tier 1 capital (as defined in the regulations)
to risk-weighted assets (as defined) and Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1995, the
subsidiary Banks meet all capital adequacy requirements to which it is subject.
As of December 31, 1995, the most recent notification from the regulatory
agencies categorized the subsidiary Banks as well-capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well-capitalized, the subsidiary Banks must maintain minimum total risk-based,
Tier I risk- based, and leverage ratios as set forth in the table. There are
no conditions or events since these notifications that management believes have
changed the institution's category.
Following is a comparison of the subsidiary Banks' 1995 actual with the minimum
requirements for well-capitalized and adequately capitalized banks, as defined
by the federal regulatory agencies' Prompt Corrective Action Rules:
1995 Actual Minimum Requirements
First Banking First Banking
Center- Center- Well Adequately
Burlington Albany capitalized capitalized
Tier 1 risk-based
capital 14.25% 15.02% 6.00% 4.00%
Total risk-based
capital 15.50% 16.28% 10.00% 8.00%
Leverage ratio 9.63% 9.78% 5.00% 4.00%
NOTE S.-Fair VALUES of FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as follows:
December 31, 1995 December 31, 1994
Estimated Estimated
Carrying fair Carrying fair
amount value amount value
Financial assets:
Cash and cash equivalents $ 22,188,000 22,188,000 12,087,000 12,087,000
Interest bearing deposits
in banks 4,303,000 4,303,000 1,899,000 1,899,000
Securities 60,197,000 60,259,000 51,787,000 51,160,000
Loans 170,355,000 170,535,000 157,773,000 156,962,000
Less allowance for
loan losses 2,336,000 2,095,000
Net loans 168,019,000 170,535,000 155,678,000 156,962,000
Financial liabilities:
Deposits 208,830,000 208,857,000 187,110,000 186,858,000
Repurchase agreements 20,225,000 20,229,000 13,755,000 13,755,000
U.S. Treasury note account 91,000 91,000 697,000 697,000
Long-term borrowings 8,933,000 8,974,000 6,805,000 6,601,000
Off-balance-sheet instruments
interest rate swap (25,000) (35,000)
NOTE T.-FIRST BANKING CENTER, INC. (PARENT COMPANY only) FINANCIAL INFORMATION
December 31,
1995 1994
Condensed balance sheets:
Assets:
Cash $ 205,000 136,000
Investment in subsidiaries 23,521,000 20,564,000
Interest-bearing deposits in banks 120,000 115,000
Other assets 123,000 49,000
Total assets $ 23,969,000 20,864,000
Liabilities - other liabilities $ 85,000 38,000
Stockholders' equity:
Common stock, $1.00 par, 3,000,000 shares
authorized, 1,468,000 shares issued $ 1,468,000 1,468,000
Surplus 3,995,000 3,986,000
Retained earnings 18,570,000 16,353,000
24,033,000 21,807,000
Treasury stock - 27 and 5,316, shares
for 1995 and 1994 respectively, at cost (1,000) (54,000)
Unrealized gain (loss) on available
for sale securities, net (148,000) (927,000)
Total stockholders' equity 23,884,000 20,826,000
Total liabilities and
stockholders' equity $ 23,969,000 20,864,000
December 31,
1995 1994 1993
Condensed statements of income:
Income:
Dividends from subsidiaries $ 687,000 603,000 515,000
Management fees from subsidiaries 1,293,000
Other 6,000 6,000 10,000
Total income 1,986,000 609,000 525,000
Expenses:
Salaries and employee benefits 912,000
Occupancy expenses 83,000
Equipment expense 185,000
Computer services 21,000
Other expenses 190,000 29,000 32,000
Total expenses 1,391,000 29,000 32,000
Income before income tax benefit
and equity in undistributed net
income of subsidiaries 595,000 580,000 493,000
Income tax benefit (31,000) (9,000) (8,000)
Income before equity in undistributed
net income of subsidiaries 626,000 589,000 501,000
Equity in undistributed net income
of subsidiaries 2,178,000 1,775,000 1,680,000
Net income $ 2,804,000 2,364,000 2,181,000
Condensed statements of cash flows:
Cash flows from operating activities:
Net income $ 2,804,000 2,364,000 2,181,000
Adjustments to reconcile net income to
net cash provided by operating
activities:
Amortization of goodwill 2,000 2,000 10,000
(Increase) decrease in other assets (54,000) (25,000)
(Increase) decrease in income taxes
receivable (23,000) (2,000) 2,000
Increase (decrease) other liabilities 48,000
Equity in undistributed earnings (2,178,000) (1,775,000) (1,680,000)
Total adjustments (2,205,000) (1,800,000) (1,668,000)
Net cash provided by operating activities 599,000 564,000 513,000
Cash flows from investing activities:
Net (increase) decrease in interest-
bearing deposits in banks $ (5,000) 21,000 (8,000)
Cash flows from financing activities:
Payments to subsidiaries (170,000)
Proceeds from stock options exercised 62,000 67,000 60,000
Dividends paid (587,000) (526,000) (484,000)
Net cash used in financing
activities (525,000) (459,000) (594,000)
Net increase (decrease) in cash
and cash equivalents 69,000 126,000 (89,000)
Cash and cash equivalents
at beginning of year 136,000 10,000 99,000
Cash and cash equivalents
at end of year $ 205,000 136,000 10,000
Supplemental disclosures of cash flow information:
Cash paid (received) during year for:
Interest $
Income taxes (received) $ (9,000) (8,000) (10,000)
FIRST BANKING CENTER, INC.
TRADING MARKET FOR THE COMPANY'S STOCK
The Company's stock is not actively traded. Robert W. Baird & Co. and A. G.
Edwards & Sons, Inc., however, do make a market in the stock. The range and
sales prices, based upon information given to the Company by Robert W. Baird
& Co. Incorporated, A. G. Edwards & Sons, Inc. and by parties to sales, are
listed below for each quarterly period during the last two years.
Stock Prices
Low High
1995 by quarter 1st 20.00 20.00
2nd 20.00 21.00
3rd 21.00 22.00
4th 22.00 22.00
1994 by quarter 1st 15.67 15.67
2nd 15.67 17.16
3rd 16.63 19.00
4th 18.50 20.00