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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCAHNGE ACT 1934
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-11132
FIRST BANKING CENTER, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1391327
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 Milwaukee Ave., Burlington, WI 53105
(Address of principal executive offices) (Zip Code)
(262) 763-3581
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of October 29, 2002, Common stock, $1.00 par value, 1,472,046
shares outstanding.
FIRST BANKING CENTER, INC AND SUBSIDIARY
INDEX
September 30, 2002
Part I Financial Information
Item 1 Consolidated Financial Statements
Unaudited Consolidated Balance Sheets,
September 30, 2002 and December 31, 2001
Unaudited Consolidated Statements of Income,
For the nine months ended September 30, 2002 and 2001
Unaudited Consolidated Statements of Cash Flows,
For the nine months ended September 30, 2002 and 2001
Notes to Unaudited Consolidated Financial Statements
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3 Quantitative and Qualitative Disclosures about Market Risk
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
Signature
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
FIRST BANKING CENTER, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2002 2001
-------------------------------
(Dollars in thousands)
ASSETS
Cash and due from banks $17,173 $20,735
Federal funds sold 7,067 12,010
Interest-bearing deposits in banks 8,352 267
Available for sale securities 70,174 59,343
Loans, less allowance for loan losses of $4,541 and
$4,367 in 2002 and 2001, respectively 362,655 361,705
Office buildings and equipment, net 10,522 10,521
Other real estate owned 53 0
Other assets 11,019 11,199
-------------------------------
TOTAL ASSETS $487,015 $475,780
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Demand $65,608 $66,612
Savings and NOW accounts 163,445 164,904
Time 144,439 120,898
-------------------------------
Total Deposits 373,492 352,414
Short-term borrowings 21,561 29,199
Other borrowings 40,574 47,847
Other liabilities 3,717 4,081
-------------------------------
TOTAL LIABILITIES $439,344 $433,541
-------------------------------
STOCKHOLDERS' EQUITY
Common Stock, $1.00 par value 3,000,000 shares authorized;
1,489,380 shares issued; 1,471,684 and 1,473,197 shares outstanding
as of September 30, 2002 and December 31, 2001, respectively 1,489 1,489
Surplus 4,191 4,184
Retained Earnings 40,958 36,649
Accumulated other comprehensive income 1,745 542
Common stock in treasury, at cost-17,696 and 16,183 shares
for September 30, 2002 and December 31, 2001, respectively ($712) ($625)
-------------------------------
TOTAL STOCKHOLDERS' EQUITY $47,671 $42,239
-------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $487,015 $475,780
===============================
"See accompanying notes to financial statements"
FIRST BANKING CENTER, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Three months ended Nine months ended
September 30, September 30,
2002 2001 2002 2001
----------------------------------------------------------
(Dollars in thousands, except per share data)
INTEREST INCOME
Interest and fees on loans $6,360 $7,333 $19,159 $22,153
Interest and dividends on securities:
Taxable 270 297 818 1,014
Non-taxable 413 371 1207 1,045
Interest on federal funds sold 31 53 80 213
Interest on interest-bearing deposits in banks 40 41 66 112
----------------------------------------------------------
TOTAL INTEREST INCOME 7,114 8,095 21,330 24,537
----------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 1,634 2,758 4,971 9,088
Interest on short-term borrowings 96 184 325 663
Interest on other borrowings 458 500 1,266 1,316
----------------------------------------------------------
TOTAL INTEREST EXPENSE 2,188 3,442 6,562 11,067
----------------------------------------------------------
NET INTEREST INCOME 4,926 4,653 14,768 13,470
Provision for loan losses 91 90 271 270
----------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 4,835 4,563 14,497 13,200
----------------------------------------------------------
NON-INTEREST INCOME
Trust fees 125 138 400 413
Service charges on deposit accounts 523 403 1,414 1,122
Investment securities gains 0 0 13 0
Automated teller machines 102 102 272 272
Other 307 276 896 692
----------------------------------------------------------
TOTAL NON-INTEREST INCOME 1,057 919 2,995 2,499
----------------------------------------------------------
NON-INTEREST EXPENSE
Salary and employee benefits 2,095 1,916 6,180 5,639
Occupancy 253 254 741 727
Equipment 437 337 1,187 1,010
Data Processing services 224 212 685 595
Stationary and office supplies 85 91 241 283
Other 622 702 1,772 1,944
----------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 3,716 3,512 10,806 10,198
----------------------------------------------------------
INCOME BEFORE INCOME TAXES 2,176 1,970 6,686 5,501
Income taxes 619 507 1,827 1,413
----------------------------------------------------------
NET INCOME $1,557 $1,463 $4,859 $4,088
==========================================================
Basic earnings per share $1.06 $1.00 $3.30 $2.80
Diluted earnings per share $1.03 $0.99 $3.23 $2.76
Dividends per share $0.37 $0.34 $0.37 $0.34
"See accompanying notes to financial statements"
FIRST BANKING CENTER, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended
September 30,
2002 2001
-------------------------------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $4,859 $4,088
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 637 617
Provision for loan losses 271 270
Disposal of office building and equipment gains (1) 0
Amortization of premiums and accretion of discounts
on securities, net 64 37
Amortization 76 76
Investment securities gains (13) 0
Tax benefit of nonqualified stock options exercised 7 2
Increase in other assets (569) (2,844)
Increase (decrease) in other liabilities (364) 1,219
-------------------------------
Net cash provided by operations before loan originations and sales 4,967 3,465
Loans originated for sale (43,896) (66,590)
Proceeds from sale of loans 44,733 65,878
-------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,804 2,753
-------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in interest-bearing deposits in banks (8,085) (9,471)
Net (increase) decrease in federal funds sold 4,943 (4,332)
Proceeds from sales of available for sale securities 7,615 2,786
Proceeds from maturities and calls of available for sale securities 54,295 99,948
Purchase of available for sale securities (70,969) (89,864)
Net increase in loans (2,058) (34,706)
Purchase of office buildings and equipment, net (637) (1,229)
-------------------------------
NET CASH USED IN INVESTING ACTIVITIES (14,896) (36,868)
-------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 21,078 2,931
Dividends paid (546) (500)
Proceeds from other borrowings 10,130 25,000
Payments on other borrowings (17,403) (14,180)
Net increase (decrease) in short term borrowings (7,638) 4,733
Purchase of treasury stock (179) (606)
Sale of treasury stock for the exercise of stock options 88 27
-------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,530 17,405
-------------------------------
NET DECREASE IN CASH AND DUE FROM BANKS (3,562) (16,710)
CASH AND DUE FROM BANKS:
Beginning 20,735 29,287
-------------------------------
Ending $17,173 $12,577
===============================
Supplemental Disclosures of Cash Flow Information,
Cash Paid During the Year for:
Interest $6,696 $11,347
Income taxes $1,671 $1,610
Supplemental Schedule of Noncash Investing Activities,
Change in Accumulated Other Comprehensive Income,
Unrealized Gain on Available-for-Sale Securities, Net $1,203 $808
Other real estate aquired in settlement of loan $53 $0
"See accompanying notes to financial statements"
FIRST BANKING CENTER, INC AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30,2002
NOTE 1 - Basis of Presentation
The unaudited consolidated financial statements include the accounts of First
Banking Center, Inc. and its subsidiary (the "Company"). In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the financial position, results of
operation and cash flows for the interim periods have been made. The results of
operations for the three and nine months ended September 30, 2002 are not
necessarily indicative of the results to be expected for the entire fiscal year.
The unaudited interim financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America and
industry practice. Certain information in footnote disclosure normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America and industry practice has
been condensed or omitted pursuant to rules and regulations of the Securities
and Exchange Commission. These financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's December 31, 2001 audited financial statements.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions which affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements, as well as the reported amounts of income and
expenses during the reported periods. Actual results could differ from those
estimates.
NOTE 2 - Earnings Per Share
The following information calculates the computation of earnings per share on a
basic and diluted basis.
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
--------------------------------------------------------
(Dollars in thousands, except per share data)
Basic
Net income $1,557 $1,463 $4,859 $4,088
Weighted average shares outstanding 1,472 1,462 1,472 1,462
Basic earnings per share $1.06 $1.00 $3.30 $2.80
========================================================
Diluted
Net income $1,557 $1,463 $4,859 $4,088
Weighted average shares outstanding 1,472 1,462 1,472 1,462
Effect of dilutive stock options outstanding 34 18 34 18
--------------------------------------------------------
Diluted weighted average shares outstanding 1,506 1,480 1,506 1,480
Diluted earnings per share $1.03 $0.99 $3.23 $2.76
========================================================
NOTE 3-Comprehensive Income
The following table presents our comprehensive income.
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
--------------------------------------------------------
(Dollars in thousands)
Net income $1,557 $1,463 $4,859 $4,088
Other comprehensive income
Net change in unrealized gain on available for sale securities 669 343 1,203 808
--------------------------------------------------------
Total comprehensive income $2,226 $1,806 $6,062 $4,896
========================================================
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FIRST BANKING CENTER, INC AND SUBSIDIARY
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As of September 30, 2002
The following discussion provides additional analysis of the financial condition
and results of operations of the Company for the nine months ended September 30,
2002. This discussion focuses on the significant factors that affected the
Company's earnings so far in 2002, with comparisons to 2001. As of September 30,
2002, First Banking Center (the "Bank") was the only direct subsidiary of the
Company and its operations contributed nearly all of the revenue for the year.
The Company provides various support functions for the Bank and receives payment
from the Bank for these services. These intercompany payments are eliminated for
the purpose of these consolidated financial statements. The Bank has two wholly
owned subsidiaries, FBC Financial Services, Corp., a brokerage and financial
services subsidiary, and FBC-Burlington, Inc., an investment subsidiary located
in Nevada.
Overview
As of September 30, 2002, total Company assets were $487.0 million increasing
2.4% from $475.8 million as of December 31, 2001. Total income, as of September
30, 2002, was $4.9 million or $3.30 per share, increasing 18.9% from $4.1
million or $2.80 per share in 2001. The significant items resulting in the
above-mentioned results are discussed below.
Financial Condition
Loans
Loans outstanding were $367.2 million and $366.1 million on September 30, 2002
and December 31, 2001 respectively. This represents an increase of $1.1 million
or .31%. The following table summarizes the changes to date in the major loan
classifications.
As a % of Total Loans
September 30, December 31, Change in September 30, December 31,
2002 2001 Balance 2002 2001
-------------------------------------------- ------------------------------
(Dollars in millions)
Residential Real Estate $158.4 $160.7 ($2.3) 43.1% 43.9%
Commercial Real Estate $88.3 $90.7 ($2.4) 24.0% 24.8%
Construction and Land Development $46.9 $43.6 $3.3 12.8% 11.9%
Commercial $26.0 $27.5 ($1.5) 7.1% 7.5%
Allowance for Loan Losses
The allowance for possible loan losses was $4.5 million or 1.2% of gross loans
on September 30, 2002, compared with $4.4 million or 1.2% of gross loans on
December 31, 2001. Net charge-offs for the last nine months were $97 thousand or
..03% of gross loans, compared to net charge-offs of $60 thousand or .02% of
gross loans for the year-ended December 31, 2001.
The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses when
management believes that the collectibility of the principal is unlikely. The
allowance for loan losses is adequate to cover probable credit losses relating
to specifically identified loans, as well as probable credit losses inherent in
the balance of the loan portfolio. In accordance with FASB Statements 5 and 114,
the allowance is provided for losses that have been incurred as of the balance
sheet date. The allowance is based on past events and current economic
conditions, and does not include the effects of expected losses on specific
loans or groups of loans that are related to future events or expected changes
in economic conditions. Management reviews a calculation of the allowance for
loan losses on a quarterly basis. While management uses the best information
available to make its evaluation, future adjustments to the allowance may be
necessary if there are significant changes in economic conditions. Impaired
loans are measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a practical expedient,
at the loan's observable market price or the fair value of the collateral if the
loan is collateral dependent. A loan is impaired when it is probable the 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.
As of September 30, 2002, $271 thousand was charged to current earnings and
added to the allowance for loan losses.
Non-accrual, Past Due and Renegotiated Loans
September 30, December 31,
2002 2001
----------------------------------
(Dollars in thousands)
Non-accrual Loans (a) $2,013 $1,541
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 $998 thousand of residential real
estate loans, $400 thousand of commercial loans, $371 thousand of commercial
real estate loans, and $102 thousand of agricultural loans. On September 30,
2002, the ratio of non-accrual loans to the allowance for loan losses was 44.3%
compared to 35.3% on December 31, 2001.
As of September 30, 2002, the Company had loans totaling $25,236,000 in addition
to those listed as non-accrual, past due or renegotiated that were identified by
the Banks' internal asset rating systems as classified assets and loans which
management has determined require additional monitoring. This represents a
decrease of $2,817,000 or 10.0% from December 31, 2001. Management is not aware
of any significant loans, group of loans or segments of the loan portfolio not
included above, where full collectibility cannot reasonably be expected.
Management has committed resources and is focusing on efforts designed to
control the amount of classified assets. The company does not have a substantial
portion of its loans concentrated in one or a few industries nor does it have
any foreign loans outstanding as of September 30, 2002. The company's loans are
concentrated geographically in the Wisconsin counties of Racine, Walworth,
Kenosha, Lafayette and Green.
Investments securities - Available for Sale
For the purposes of this discussion, investment security balances are based on
amortized costs. The securities available-for-sale portfolio increased $9.0
million or 15.4% from December 31, 2001. The increase came from three areas of
the portfolio. The company purchased $2.9 million of mortgage-backed securities,
$4.3 million of municipal securities and $57.4 million of U.S. Government Agency
Discount Notes. The company had $565 thousand of municipal securities and $44.5
million of U.S. Government Agency Discount Notes mature. There were $925
thousand of municipal securities called and $1.4 million of agency securities
called by various Government Agencies. The Company, also, sold $7.1 million of
U.S. Government Agency Discount Notes. These Discount Notes are purchased for
the use as collateral for the Company's sweep repurchase accounts.
Deposits and Borrowed Funds
Total deposits and borrowed funds were $435.6 million on September 30, 2002
compared to $429.5 million on December 31, 2001. This is an increase of $6.2
million or 1.4%. The increase is due to increased depositing in savings and time
deposits. Time deposits equal or greater than $100,000 increased $22.1 or 65.5%
due to an increase of $10.0 million in our brokered certificates and $10.0
million in large certificates issued to core deposit customers. The following
table summarizes the changes in the major classifications of deposits and
borrowed funds.
September 30, December 31, Change in
2002 2001 Balance
-------------------------------- ---------
(Dollars in millions)
Money Market and Savings $140.3 $134.6 $5.7
Demand Deposits $65.6 $66.6 ($1.0)
Time Deposits less than $100,000 $88.7 $87.2 $1.5
Time Deposits equal or greater than $100,000 $55.8 $33.7 $22.1
Securities sold under agreement to repurchase $21.5 $26.0 ($4.5)
Federal Home Loan Borrowings $40.1 $47.3 ($7.2)
Capital resources
As of September 30, 2002, the Company's stockholders' equity increased $5.4
million or 12.9%. Net income of $4.9 million was the primary reasons for the
increase in equity. The company has purchased $179 thousand of treasury stock so
far in 2002. Accumulated other comprehensive income increased $1.2 million to
$1.7 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 12.2% at
September 30, 2002, well above the 4% minimum required. Total capital to
risk-adjusted assets was 13.5%, 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 22.8%, which
compares to a positive 17% as of December 31, 2001. 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 $32.6 million at
September 30, 2002, compared with $33.0 million at December 31, 2001. The Bank
has a variety of sources of short-term liquidity available to it, including
federal funds purchased from correspondent banks, sales of securities available
for sale, FHLB advances, lines of credit and loan participations or sales. First
Banking Center also generates liquidity from the regular principal payments and
prepayments made on its portfolio of loans and mortgage-backed securities.
The liquidity of First Banking Center is comprised of three primary
classifications: cash flows from operating activities, cash flows from investing
activities, and cash flows from financing activities. Net cash provided by
operating activities was $5.8 million. Net cash used in investing activities was
$14.9 million. Net cash provided by financing activities was $5.5 million, as of
September 30, 2002.
As of September 30, 2001, net cash provided by operating activities was $2.8
million. Net cash used in investing activities was $36.9 million. Net cash
provided by financing activities was $17.4 million.
Impact of Inflation and Changing Prices
The consolidated financial statements and the accompanying notes have been
prepared in accordance with accounting principles generally accepted in the
United States of America, which require the measurement of financial position
and operating results in terms of historical dollar amounts without considering
the changes in the relative purchasing power of money over time due to
inflation. The impact of inflation is reflected in the increased cost of First
Banking Center's operations. Unlike industrial companies, nearly all of the
assets and liabilities of First Banking Center are monetary in nature. As a
result, interest rates have a greater impact on First Banking Center's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
Forward Looking Statements- Safe Harbor Statement under the Private Securities
Litigation Reform Act of 1995
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. First Banking Center intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe First Banking Center's future plans, strategies and expectations
are generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project" or similar expressions. First Banking
Center's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
affect on First Banking Center's operations and future prospects include, but
are not limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
our market area, our implementation of new technologies, First Banking Center's
ability to develop and maintain secure and reliable electronic systems and
accounting principles, policies and guidelines. These risks and uncertainties
should be considered in evaluating forward-looking statements and undue reliance
should not be placed on such statements.
Current Accounting Developments
In July 2001, the Financial Accounting Standards Board issued Statement 141,
Business Combinations and Statement 142, Goodwill and Other Intangible Assets.
Statement 141 eliminates the pooling method for accounting for business
combinations; requires that intangible assets that meet certain criteria be
reported separately from goodwill; and requires negative goodwill arising from a
business combination to be recorded as an extraordinary gain. Statement 142
eliminates the amortization of goodwill and other intangibles that are
determined to have an indefinite life; and requires, at a minimum, annual
impairment tests for goodwill and other intangible assets that are determined to
have an indefinite life. For the Company, the provisions of Statement 142 became
effective January 1, 2002 and did not have a material impact on the Company's
financial statements.
The Financial Accounting Standards Board has issued Statement 143, Accounting
for Asset Retirement Obligations and Statement 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Statement 143 requires that the
fair value of a liability for an asset retirement obligation be recognized in
the period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. Statement 144 supersedes FASB Statement
121 and the accounting and reporting provisions of APB Opinion No. 30. Statement
144 establishes a single accounting model for long-lived assets to be disposed
of by sale which includes measuring a long-lived asset classified as held for
sale at the lower of its carrying amount or its fair value less costs to sell
and to cease depreciation/amortization. For the Company, the provision of
Statement 143 is effective January 1, 2003. Implementation of this Statement is
not expected to have a material impact on the Company's financial statements.
For the Company, the provisions of Statement 144 became effective January 1,
2002 and did not have a material impact on the Company's financial statements.
Results of operations
Net Interest Income
Net interest income is the difference between interest income and fees on loans
and interest expense, and is the largest contributing factor to net income for
the Company. All discussions of rate are on a tax-equivalent basis, which
accounts for income earned on nontaxable loans and securities that are not fully
subject to federal taxes. Net interest income was $15.4 million and $14.0
million for September 30, 2002 and September 30, 2001 respectively. Net interest
margin as a percentage of average earning assets (includes loans placed on
nonaccrual status) was 4.73% for the nine months ended 2002 and 2001.
The decrease in interest income and fees on loans as of September 30, 2002 was
due to decreased yields on earning assets. The increase in interest income and
fees on loans as of September 30, 2001 was due primarily to increased average
earning assets. 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 earned on increasing average balances, as of September 30, 2002.
The rates earned decreased from 8.88% to
7.09%.
As of September 30, 2002 average balances outstanding increased, however, rates
paid for liabilities decreased causing a decrease in interest expense. Interest
expense as of September 30, 2001 remained consistent with 2000 as a result of
increased average balances outstanding and decreased rates paid on liabilities.
The major components of interest expense are interest paid on Certificates of
Deposit (Time Deposits) and on Money Market Deposits. As of September 30, 2002,
interest expense on Time Deposits decreased due to decreased rates paid on
increasing average balances. The rates paid decreased from 4.6% to 2.8%, as of
September 30, 2002. Interest expense on Money Market Deposits decreased as a
result of increased average balances, while rates paid decreased from 4.0% to
1.3%, as of September 30, 2002.
The following table summarizes the changes and reasons for the changes in
interest earned and paid during 2002 and 2001.
Three months ended
September 30,
2002 2001
------------------------------------ ------------------------------------
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 $ 366,039 6,377 6.97% 353,464 7,359 8.33%
Interest and dividends on securities:
Taxable 27,471 270 3.93% 18,213 297 6.52%
Nontaxable 34,921 626 7.17% 31,389 562 7.16%
Interest on Fed funds sold 7,886 31 1.57% 6,115 53 3.47%
Interest on interest-bearing deposits in banks 8,632 40 1.85% 1,076 41 15.24%
------------------------------------ ------------------------------------
Total Interest Income $ 444,949 7,344 6.60% 410,257 8,312 8.10%
==================================== ====================================
Interest Expense
Interest on deposits $ 301,233 1,634 2.17% 282,189 2,758 3.91%
Interest on short-term borrowings 21,810 96 1.76% 20,295 184 3.63%
Interest on other borrowings 41,116 458 4.46% 38,929 500 5.14%
------------------------------------ ------------------------------------
Total Interest Expense $ 364,159 2,188 2.40% 341,413 3,442 4.03%
==================================== ====================================
Net interest margin $ 5,156 4.64% $ 4,870 4.75%
======================== ========================
Nine months ended
September 30,
2002 2001
------------------------------------ ------------------------------------
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 $ 361,330 19,215 7.09% 333,873 22,233 8.88%
Interest and dividends on securities:
Taxable 28,653 818 3.81% 20,168 898 5.94%
Nontaxable 34,021 1,828 7.16% 29,726 1,583 7.10%
Interest on Fed funds sold 6,999 80 1.52% 6,506 213 4.37%
Interest on interest-bearing deposits in banks 4,739 66 1.86% 3,215 112 4.64%
------------------------------------ ------------------------------------
Total Interest Income $ 435,742 22,007 6.73% 393,488 25,039 8.48%
==================================== ====================================
Interest Expense
Interest on deposits $ 295,086 4,970 2.25% 275,810 9,088 3.30%
Interest on short-term borrowings 22,556 326 1.93% 19,382 663 3.42%
Interest on other borrowings 37,635 1,266 4.49% 32,519 1,316 4.05%
------------------------------------ ------------------------------------
Total Interest Expense $ 355,277 6,562 2.46% 327,711 11,067 3.38%
==================================== ====================================
Net interest margin $ 15,445 4.73% $ 13,972 4.73%
======================== ========================
Non-interest income
Non-interest income increased $496 thousand or 19.9% as of September 30, 2002.
The increase came in primarily two areas. Service charges on deposit accounts
increased $292 thousand as the number of accounts grew and charges for some
services were increased. Other income increased $204 thousand due to brokerage
services, visa debit card income, and miscellaneous investment income.
Non-interest expense
Non-interest expense increased $608 thousand or 6.0% as of September 30, 2002.
Salaries and benefits accounted for $541 thousand. The increase in salaries and
benefits is due to normal wage increases and increased health insurance costs.
Equipment expense increased $177 thousand due primarily to increases in repair
and maintenance. Data processing costs increased $90 thousand due to increased
volumes and additional services used. Other expenses decreased $214 thousand.
This is the result of cost control management.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
First Banking Center, like other financial institutions, is subject to direct
and indirect market risk. Direct market risk exists from changes in interest
rates. First Banking Center's net income is dependent on its net interest
income. Net interest income is susceptible to interest rate risk to the degree
that interest-bearing liabilities mature or reprice on a different basis than
interest-earning assets. When interest-bearing liabilities mature or reprice
more quickly than interest-earning assets in a given period, a significant
increase in market rates of interest could adversely affect net interest income.
Similarly, when interest-earning assets mature or reprice more quickly than
interest-bearing liabilities, falling interest rates could result in a decrease
in net income.
In an attempt to manage its exposure to changes in interest rates, management
monitors First Banking Center's interest rate risk. The Asset/Liability
Committee meets quarterly to review First Banking Center's interest rate risk
position and profitability, and to make or recommend adjustments for
consideration by the Board of Directors. Management also reviews the Bank's
securities portfolio, formulates investment strategies, and oversees the timing
and implementation of transactions to assure attainment of the Board's
objectives in the most effective manner. Notwithstanding First Banking Center's
interest rate risk management activities, the potential for changing interest
rates is an uncertainty that can have an adverse effect on net income.
In adjusting First Banking Center's asset/liability position, the Board and
management attempt to manage First Banking Center's interest rate risk while
maintaining or enhancing net interest margins. At times, depending on the level
of general interest rates, the relationship between long-term and short-term
interest rates, market conditions and competitive factors, the Board and
management may decide to increase First Banking Center's interest rate risk
position somewhat in order to increase its net interest margin. First Banking
Center's results of operations and net portfolio values remain vulnerable to
increases in interest rates and to fluctuations in the difference between
long-term and short-term interest rates.
One approach used to quantify interest rate risk is the net portfolio value
("NPV") analysis. In essence, this analysis calculates the difference between
the present value of liabilities and the present value of expected cash flows
from assets and off-balance-sheet contracts. The most recent NPV analysis, as of
September 30, 2002, projects that net portfolio value would decrease by
approximately 4.47% if interest rates would rise 200 basis points and would
decrease by approximately 1.80% if interest rates would rise 100 basis points
over the next year. It projects an increase in net portfolio value of
approximately 9.88% if interest rates would drop 200 basis points and an
increase of approximately 5.54% 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,
2001, as disclosed in the Company's 2001 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
None
FIRST BANKING CENTER, INC AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1943, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
First Banking Center, Inc.
November 11, 2002 /s/ Brantly Chappell
Date Brantly Chappell
Chief Executive Officer
November 11, 2002 /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: November 11, 2002
/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: November 11, 2002
/s/ James Schuster
-----------------------
James Schuster
Chief Financial Officer
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 September 30, 2002 as filed with
the Securities and Exchange Commission on November 14, 2002 (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: November 11, 2002
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 September 30, 2002 as filed with
the Securities and Exchange Commission on November 14, 2002 (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: November 11, 2002