UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
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 (IRS Employer ID No.)
incorporation or organization)
400 Milwaukee Ave. Burlington, WI 53105
(Address of principal executive offices)(Zip Code)
(262)763-3581
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as define
in Rule 12b-2 of the act).
Yes [ ] No [X]
The aggregate market value of the voting shares held by nonaffiliates of the
Registrant was $66,208,545 as of June 30, 2002. Solely for the purpose of this
computation, it has been assumed that executive officers and directors of the
Registrant are "affiliates"
There were 1,494,469 shares of the Registrant's common stock outstanding as of
March 27, 2003.
Documents incorporated by references: The Notice of 2003 Annual Meeting and
Proxy Statement of April 15, 2003 is incorporated by reference into Parts II and
III of the Form 10-K.
PART 1
ITEM 1: BUSINESS
First Banking Center, Inc.
First Banking Center, Inc. (the "Corporation") is a one-bank holding company
incorporated as a business corporation under the laws of the State of Wisconsin
on August 24, 1981. In April 1982, the Corporation became the sole owner of
First Bank and Trust Company, Burlington, Wisconsin, a Wisconsin state-banking
corporation. On September 1, 1984, the Corporation acquired 100% of the capital
stock of the Bank of Albany, Albany, Wisconsin a Wisconsin state-banking
corporation. On April 6, 1998, First Banking Center-Albany was merged with First
Banking Center-Burlington.
On January 1, 1985, the name of the Corporation was changed from the First
Community Bank Group, Inc. to the First Banking Center, Inc., and the name of
the subsidiary companies were changed to First Banking Center - Burlington and
First Banking Center - Albany, respectively. As of May 11, 1998 First Banking
Center-Burlington changed its name to First Banking Center (the "Bank").
The Corporation's primary business activity is the ownership and control of
First Banking Center. The Corporation's operations department also provides
administrative and operational services for the Bank.
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.
First Banking Center
The Bank was organized in 1920 and is a full service commercial bank located in
the City of Burlington, Wisconsin. The Bank has branch offices located in
Albany, Burlington, Darlington, Genoa City, Kenosha, Lake Geneva, Lyons, Monroe,
Pell Lake, Pleasant Prairie, Union Grove, Walworth, and Wind Lake, Wisconsin.
The Bank offers a wide range of services, which includes Loans, Personal
Banking, Trust and Investment Services, and Insurance and Annuity Products.
Lending
The lending area provides a wide variety of credit services to
commercial and individual consumers. Consumer lending consists
primarily of residential mortgages, residential construction loans,
installment loans, home equity loans, and student loans. Commercial
lending consists of commercial property financing, equipment and
inventory financing, and real estate development, as well as the
financing of agricultural production, farm equipment, and farmland.
Commercial lending usually involves a greater degree of credit risk
than consumer lending. This increased risk requires higher collateral
value to loan amount than may be necessary on some consumer loans. The
collateral value required on a commercial loan is determined by the
degree of risk associated with that particular loan.
Personal Banking
This area provides a wide variety of services to customers such as
savings plans, certificates of deposit, checking accounts, individual
retirement accounts, and other specialized services.
Trust and Investments
The Trust Department provides a full range of services to individuals,
corporations and charitable organizations. It provides such specific
services as investment advisory, custodial, executor, trustee and
employee benefit plans.
Insurance and Investment Products
This area provides a complete line of life insurance as well as
long-term health care, fixed and variable rate annuities, mutual
funds, securities services, and discount brokerage.
COMPETITION
The financial services industry is highly competitive. The Bank competes with
other commercial banks and with other financial institutions including savings
and loan associations, finance companies, mortgage banking companies, insurance
companies, brokerage firms, and credit unions.
SUPERVISION AND REGULATION
The Company is a bank holding company subject to the supervision of the Board of
Governors of the Federal Reserve System under the Bank Holding Company Act of
1956, as amended. As a bank holding company, the Company is required to file an
annual report and such additional information with the Board of Governors as the
Board of Governors may require pursuant to the Act. The Board of Governors may
also make examinations of the Company and its subsidiary.
The Bank Holding Company Act requires every bank holding company to obtain the
prior approval of the Board of Governors before it may acquire substantially all
the assets of any bank, or ownership or control of any voting shares of any bank
if, after such acquisitions, it would own or control, directly or indirectly,
more than 5% of the voting shares of such bank. Under existing federal and state
laws, the Board of Governors may approve the acquisition by the Company of the
voting shares of, or substantially all the assets of, any bank located in states
specified in the Wisconsin Interstate Banking Bill which became effective
January 1, 1987.
In addition, a bank holding company is generally prohibited from itself engaging
in, or acquiring direct or indirect control of voting shares of any company
engaged in non-banking activities. One of the principal exceptions to this
prohibition is for activities found by the Board of Governors, by order or
regulation to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. Some of the activities that the Board of
Governors has determined by regulation to be closely related to banking are
making or servicing loans, full payout property leasing, investment advisory
services, acting as a fiduciary, providing data processing services and
promoting community welfare projects.
A subsidiary bank of a bank holding company is subject to certain restrictions
imposed by the Federal Reserve Act on any extensions of credit to the bank
holding company or any of its subsidiaries, on investments in the stock or other
securities thereof, and on the taking of such stock or securities as collateral
for loans to any borrower. Further, under the Bank Holding Company Act and
regulations of the Board of Governors, a bank holding company and its subsidiary
is prohibited from engaging in certain tie-in arrangements in connection with
any extension of credit, lease or sale of property or furnishing of services.
The Company is also subject to the Securities Exchange Act of 1934 and has
reporting obligation to the Securities and Exchange Commission. The business of
banking is highly regulated and there are various requirements and restrictions
in the laws of the United States and the State of Wisconsin affecting the
Company's subsidiary bank and its operations, including the requirement to
maintain reserves against deposits, restrictions on the nature and amount of
loans which may be made by the bank and restrictions relating to investment,
branching and other activities of the bank.
The Company is supervised and examined by the Federal Reserve Board. The
Company's subsidiary bank, as a state chartered institution, is subject to the
supervision of, and is regularly examined by, Wisconsin state authorities. The
Bank is also a member of the Federal Reserve Bank and as such is subject to
regulation and examination by that agency.
The Company, under Federal Reserve Board policy, is expected to act as a source
of financial strength to the subsidiary bank and to commit resources to support
the subsidiary.
GOVERNMENTAL POLICIES
The earnings of the Company's subsidiary bank as a lender and depositor of money
are affected by legislative changes and by the policies of the various
regulatory authorities including the State of Wisconsin, the United States
Government, foreign governments and international agencies. The effect of this
regulation upon the future business and earnings of the Company cannot be
predicted. Such policies include, among others, statutory maximum lending rates,
domestic monetary policies of the Board of Governors of the Federal Reserve
System, United States fiscal policies and international currency regulations and
monetary policies. Governmental and Reserve Board policies have had a
significant effect on the operating results of commercial banks in the past and
are expected to do so in the future. Management is not able to anticipate and
evaluate the future impact of such policies and practices on the growth and
profitability of the Company or its subsidiary bank.
The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (the "Act")
made significant changes in the laws governing financial institutions, including
changes which expand the permissible range of activities for bank holding
companies and their affiliates (including non-banking financial activities);
permit affiliations between banks, securities firms and insurance companies;
make substantial changes in the regulatory structure for financial institutions;
prohibit new unitary savings and loan holding companies; make changes to the
Community Reinvestment Act of 1977; and enact substantial new financial privacy
rules. The company is currently evaluating its options regarding expanded
activities under the Act. The company is currently in the process of
implementing the financial privacy rules imposed by the Act.
EMPLOYEES
The Company and its staff share a commitment to equal opportunity. All personnel
decisions are made without regard to race, color, religion, sex, age, national
origin, handicap, or veteran status. At January 31, 2003, the Company and its
subsidiary had 243 full and part-time employees.
MISCELLANEOUS
The business of the Company is not seasonal. To the best of management's
knowledge, there is no anticipated material effect upon the Company's capital
expenditures, earnings, and competitive position by reason of any laws
regulating or protecting the environment. The Company has no material patents,
trademarks, licenses, franchises or concessions. No material amounts have been
spent on research activities and no employees are engaged full time in research
activities.
NOTE: Subsections of Item I, to which no response has been made are inapplicable
to the business of the Company.
SELECTED FINANCIAL DATA
The Company, through the operations of its Bank, offers a wide range of
financial services. The following financial data provides a detailed review of
the Company's business activities.
The following information shows: the company's average assets, liabilities and
stockholder's equity; the interest earned and average yield on interest earning
assets; the interest paid and average rate on interest-bearing liabilities; and
the maturity schedules for investment and specific loans; for the years ended
December 31, 2002, 2001, and 2000. Also, where applicable, information is
presented for December 31, 1999 and 1998.
Section I, Schedule A - Average Balance Sheet
ASSETS 2002 2001 2000
---------- ----------- ----------
(Dollars in thousands)
Cash and due from banks $ 13,199 12,372 12,474
Fed funds sold 8,422 5,875 3,170
Interest-bearing deposits in banks 4,393 2,606 231
Available-for-sale securities 63,550 51,271 58,259
Loans, net 360,107 336,289 305,458
Office buildings and equipment, net 10,438 10,176 9,645
Other assets 12,572 10,680 9,027
---------- ----------- ----------
Total assets $ 472,681 429,269 398,264
========== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Demand $ 61,641 53,004 50,095
Savings and NOW accounts 168,713 152,947 141,999
Time 130,170 124,445 120,215
---------- ----------- ----------
Total Deposits 360,524 330,396 312,309
Short-term borrowings 23,048 20,861 18,460
Other borrowings 39,454 33,618 27,955
Other liabilities 3,548 3,840 3,959
---------- ----------- ----------
Total liabilities 426,574 388,715 362,683
Stockholders' Equity
Common stock 1,490 1,489 1,489
Surplus 4,200 4,176 4,223
Retained earnings 39,938 34,915 30,870
Accumulated other comprehensive 1,062 682 (589)
income (loss)
Common stock in treasury, at cost (583) (708) (412)
---------- ----------- ----------
Total stockholders' equity 46,107 40,554 35,581
---------- ----------- ----------
Total liabilities and stockholders' equity $ 472,681 429,269 398,264
========== =========== ==========
Section I, Schedule B - Three Year Summary of Interest Rates and Interest Differential
2002 2001 2000
-------------------------- -------------------------- --------------------------
Interest Average Interest Average Interest Average
Average Earned Yield Average Earned Yield Average Earned Yield
Balance or Paid or Cost Balance or Paid or Cost Balance or Paid or Cost
-------------------------- -------------------------- --------------------------
(Dollars in thousands)
Interest earning assets:
Interest-bearing deposits in banks $ 4,393 85 1.93% 2,606 121 4.65% 231 15 6.29%
Available-for-sale securities:
Taxable 27,665 1,005 3.63% 20,589 1,146 5.57% 28,847 1,857 6.44%
Nontaxable (a) 35,885 2,470 6.88% 30,683 2,154 7.02% 27,370 2,001 7.31%
Fed funds sold 8,422 122 1.45% 5,875 232 3.95% 3,170 196 6.19%
Loans (a)(b)(c) 364,583 25,836 7.09% 340,328 29,192 8.58% 309,306 27,883 9.01%
Other Interest 4,602 266 5.78% 2,440 153 6.27% 2,042 146 7.15%
--------- ------- ------ -------- -------- ------- -------- ------- -------
Total interest earnings assets $ 445,550 29,784 6.68% 402,521 32,998 8.20% 370,966 32,098 8.65%
========= ======= ====== ======== ======== ======= ======== ======= =======
Interest bearing liabilities:
Savings and NOW accounts $ 168,713 1,780 1.06% 152,947 4,281 2.80% 141,999 5,612 3.95%
Time deposits 130,170 4,808 3.69% 124,445 6,965 5.60% 120,215 6,997 5.82%
Short-term borrowings 23,048 417 1.81% 20,861 829 3.97% 18,460 1,011 5.48%
Other borrowings 39,454 1,737 4.40% 33,618 1,742 5.18% 27,955 1,580 5.65%
--------- ------- ------ -------- -------- ------- -------- ------- -------
Total int.bearing liabilities $ 361,385 8,742 2.42% 331,871 13,817 4.16% 308,629 15,200 4.92%
========= ======= ====== ======== ======== ======= ======== ======= =======
Net interest margin/income(d) 21,042 4.72% 19,181 4.77% 16,898 4.56%
======= ====== ======== ======= ======= =======
(a) The interest and average yield for nontaxable loans and investments are
presented on a federal taxable equivalent basis assuming a 35% tax rate.
(b) Loans placed on nonaccrual status have been included in average balances
used to determine average rates.
(c) Loan interest income includes net loan fees.
(d) Net interest earnings divided by total interest-earning assets, with net
interest earnings equaling the difference between total interest earned
and total interest paid.
Section I, Schedule C - Two Year Summary of Rate and Volume Variances
2002 2001
------------------------------------ ---------------------------------
Inc./(Dec.) Inc./(Dec.)
From Volume (a) Rate (a) From Volume(a) Rate (a)
Prior Year Variance Variance Prior Year Variance Variance
------------------------------------ ---------------------------------
(Dollars in thousands)
Interest Income
Interest-bearing deposits in banks $ (36) 57 (93) 106 111 (5)
Available-for-sale securities:
Taxable (141) 326 (467) (711) (483) (228)
Nontaxable (b) 316 359 (43) 153 235 (82)
Fed funds sold (110) 75 (185) 36 125 (89)
Loans (b) (c) (d) (3,356) 1,975 (5,331) 1,309 2,705 (1,396)
Other Interest 113 126 (13) 7 26 (19)
----------- ----------- ------------ ----------- ---------- ----------
Total change in interest income (3,214) 2,918 (6,132) 900 2,719 (1,819)
----------- ----------- ------------ ----------- ---------- ----------
Interest Expense
Savings and NOW accounts (2,501) 402 (2,903) (1,331) 406 (1,737)
Time deposits (2,157) 307 (2,464) (32) 242 (274)
Short-term borrowings (411) 79 (490) (182) 120 (302)
Other borrowings (6) 278 (284) 162 300 (138)
----------- ----------- ------------ ----------- ---------- ----------
Total change in interest expense (5,075) 1,066 (6,141) (1,383) 1,068 (2,451)
----------- ----------- ------------ ----------- ---------- ----------
Net change $ 1,861 1,852 9 2,283 1,651 632
=========== =========== ============ =========== ========== ==========
(a) The change in interest due to both rate and volume has been allocated in
proportionto the relationship of the absolute dollar amounts of the change
in each.
(b) The interest and average yield for nontaxable loans and investments are
presented on a federal tax equivalent basis assuming a 35% tax rate.
(c) Loans placed on nonaccrual status have been included in average balances
used to determine average rates.
(d) Loan interest income includes net loan fees.
Section II, Schedule A - Investment Portfolio
2002 2001 2000
------------------------------
(Dollars in thousands)
Available for Sale:
U.S. Treasury and other U.S.
Gov't. Agencies and Corporations $ 48,288 25,741 30,510
Obligations of states and
political subdivisions 39,342 33,602 28,279
Other 0 0 6,400
------------------------------
Total $ 87,630 59,343 65,189
==============================
NOTE:
The aggregate book value of securities from any single issuer does not
exceed ten percent of stockholder's equity; except for, securities
issued by the U.S. Government and U.S. Government agencies and
corporations.
Section II, Schedule B - Investment Securities Maturities and Yield
The following table presents the maturity of securities held on December 31,
2002 and the weighted average yield by range of maturity.
-------- ------- ------- -------- -------
After After
1 Year 5 Years
1 Year Through Through After
or Less 5 Years 10 Years 10 Years Total
-------- -------- -------- -------- -------
(Dollars in thousands)
Available for Sale Securities
U.S. Treasury and U.S. Gov't agencies $ 22,648 22,026 31 3,583 48,288
and corporations(a)
Weighted average yield 2.28% 4.06% 9.95% 4.74% 3.28%
States of the U.S. and Political 3,394 15,603 12,067 8,278 39,342
Subdivisions (b)
Weighted average yield 6.59% 7.14% 6.68% 7.27% 6.98%
------- ------- ------- ------- -------
TOTAL AVAILABLE FOR SALE $ 26,042 37,629 12,098 11,861 87,630
======= ======= ======= ======= =======
======= ======= ======= ======= =======
Weighted Ave. Yield of Total 2.85% 5.34% 6.69% 6.51% .94%
======= ======= ======= ======= =======
(a) Includes mortgage backed securities at average maturity dates.
(b) The interest and average yield for nontaxable securities are presented
on a federal taxable equivalent basis assuming a 35% tax rate.
Section III, Schedule A - Loan Portfolio
The composition of the loan portfolio at December 31 is presented as follows:
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
(Dollars in thousands)
Commercial $ 26,163 27,487 26,219 28,458 38,185
Agricultural production 22,175 23,013 11,326 14,965 9,985
Real Estate:
Construction 42,370 43,603 42,242 37,796 30,008
Commercial 91,769 90,685 85,192 83,592 67,761
Agriculture 18,691 12,604 8,732 9,705 7,754
Residential 163,888 160,713 135,696 110,793 96,139
Municipal 3,309 3,293 4,166 6,141 6,503
Consumer 3,779 4,674 6,995 7,274 8,465
--------- --------- --------- --------- ---------
TOTAL $ 372,144 366,072 320,568 298,724 264,800
========= ========= ========= ========= =========
Section III, Schedule B - Maturities and Sensitivity of Loans to Interest Rates
The following table presents consolidated loan maturities by yearly ranges. Also
included for loans after one year are the amounts that have predetermined
interest rates and floating adjustable rates.
Loan Maturities Amount Over One Year With
------------------------------------------- ------------------------------------------------
After 1 After Floating or
1 Year Through Five Predetermined Adj. Interest
or Less 5 Years Years Total Rates Rates Total
------------------------------------------- ------------------------------------------------
(Dollars in thousands)
December 31, 2002:
Comm'l and $ 39,060 6,439 2,839 48,338 9,278 - 9,278
agricultural
Real estate - 39,885 2,485 42,370 2,485 - 2,485
construction -
-------- -------- ------- -------- ------------------ -------------- -------
TOTAL $ 78,945 8,924 2,839 90,708 11,763 - 11,763
======== ======= ======= ======== ================== ============== ========
Section III, Schedule C - Risk Elements
Non-accrual, Past Due and Renegotiated Loans
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(Dollars in thousands)
Non-accrual Loans (a)
2,016 1,541 827 1,256 1,517
Past Due 90 days +
- - - 2 16
Restructured Loans
- - - - -
a) Interest which would have been recorded had the loans been on an accrual
basis, would have amounted to $23,000 in 2002, $26,000 in 2001, $12,000
in 2000, $36,000 in 1999, and $39,000 in 1998. Interest income on these
loans, which is recorded only when received, amounted to $23,000 in 2002,
$14,000 in 2001, $12,000 in 2000, $31,000 in 1999, and $20,000 in 1998.
The increase in non-accrual loans from 2001 to 2002 was due to a small number of
commercial real estate and agricultural real estate loans. There is no loss
anticipated on these loans.
The policy of the Company is to place a loan on non-accrual status if: (a)
payment in full of interest and principal is not expected, or (b) principal or
interest has been in default for a period of 90 days or more unless the
obligation is both in the process of collection and well secured. Well secured
is defined as collateral with sufficient market value to repay principal and all
accrued interest. A debt is in the process of collection if collection of the
debt is proceeding in due course either through legal action, including
judgement enforcement procedures, or in appropriate circumstances, through
collection efforts not involving legal action which are reasonably expected to
result in repayment of the dept or in its restoration to current status.
As of December 31, 2002, the Company had loans totaling $24,139,000 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. This represents a
decrease of $5,167,000 or 17.6% from 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 December 31, 2002. Loan concentration by classification can be
found in the loan section of Item 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations. The company's loans are
concentrated geographically in the Wisconsin counties of Racine, Walworth,
Kenosha, Lafayette, and Green.
Section IV, Schedule A - Summary of Loan Loss Experience
Analysis of the Allowance for Estimated Losses on Loans
2002 2001 2000 1999 1998
--------- -------- -------- -------- --------
(Dollars in thousands)
Balance, beginning of fiscal year $ 4,367 3,927 3,581 3,421 3,132
Charge-offs:
Commercial 197 21 51 51 2
Agricultural production 0 27 0 0 0
Real Estate:
Construction 0 0 0 0 0
Commercial 150 27 48 0 0
Agriculture 0 0 0 0 0
Other Mortgages 87 25 40 42 35
Installment - consumer 23 35 30 104 51
--------- -------- -------- -------- --------
Total Charge-offs 457 135 169 197 88
--------- -------- -------- -------- --------
Recoveries:
Commercial 0 16 46 6 9
Agricultural production 1 7 0 0 0
Real Estate:
Construction 0 0 0 0 0
Commercial 0 40 0 0 0
Agriculture 0 0 0 0 2
Other Mortgages 1 5 100 0 1
Installment - consumer 14 7 9 21 35
--------- -------- -------- -------- --------
Total Recoveries 16 75 155 27 47
--------- -------- -------- -------- --------
Net Charge-offs/(Recoveries) 441 60 14 170 41
Provision charged to operations (a) 1062 500 360 330 330
Additions related to
branch acquisitions 0 0 0 0 0
--------- -------- -------- -------- --------
Balance, end of fiscal year $ 4,988 4,367 3,927 3,581 3,421
========= ======== ======== ======== ========
Average amount of loans outstanding
before allowance for estimated
losses on loans $
364,583 340,328 309,306 283,151 244,578
========= ======== ======== ======== ========
Ratio of net charge-offs/
recoveries during the period
to average loans outstanding
during the period 0.121% 0.018% 0.005% 0.060% 0.017%
(a) For each year ending December 31, the determination of the additions to
loan loss reserve charged to operating expenses was based on an evaluation
of the loan portfolio, current domestic economic conditions, past loan
losses and other factors.
Section IV, Schedule B - Allocation of the Allowance for Estimated Losses on Loans
The following table presents the allowance for estimated losses on loans by type
of loans and percentage of loans in each category to total loans:
2002 2001 2000
------------------------------- ------------------------------- -------------------------------
Amount % of ALL % to Total Amount % of ALL % to Total Amount % of ALL % to Total
Loans Loans Loans
------------------------------- ------------------------------- -------------------------------
(Dollars in thousands)
Commercial Loans (a) $ 4,402 88.2% 55.0% $ 2,428 55.6% 54.8% $ 3,080 78.4% 55.5%
Real Estate-Residential Loans 145 2.9% 44.0% 106 2.4% 43.9% 136 3.5% 42.3%
Consumer Loans 136 2.7% 1.0% 99 2.3% 1.3% 56 1.4% 2.2%
Loan Commitments 73 1.5% N/A 77 1.8% N/A 63 1.6% N/A
Unallocated 232 4.7% N/A 1,657 37.9% N/A 592 15.1% N/A
--------- --------- ---------
Total $ 4,988 $ 4,367 $ 3,927
========= ========= =========
(a) Commercial Loans include commercial real estate, agricultural production,
municipal and construction loans.
Section V, Schedule B - Maturity Schedule for Time Deposits of $100,000 or more as of December 31, 2002
Over Over
3 Months 6 Months
3 Months thru thru Over 12
or Less 6 Months 12 Months Months
----------- ----------- ----------- -----------
(Dollars in thousands)
Certificates of Deposit $ 14,756 11,232 13,826 16,387
=========== =========== =========== ===========
Section VI - Three Year Summary of Return on Equity and Assets for the years ended December 31,
2002 2001 2000
-----------------------------------------
Return on average assets 1.26% 1.22% 1.20%
Return on average equity 12.92% 12.96% 13.45%
Dividend payout ratios on common stock 18.43% 19.33% 19.77%
Average equity to average assets 9.75% 9.45% 8.93%
Section VII - Short-term Borrowings
2002 2001 2000
-----------------------------------------
(Dollars in thousands)
Securities Sold Under Agreements
To Repurchase (a)
End of Year:
Balance $24,977 $26,099 $17,299
Weighted Ave. Rate 1.13% 2.00% 4.88%
For the Year:
Maximum Amount Outstanding $24,977 $33,001 $21,553
Average Amount Outstanding $22,726 $20,395 $17,780
Weighted Ave. Rate 1.81% 3.96% 5.43%
(a) Securities sold under repurchase agreements are borrowed on a short-term
basis by the subsidiary bank at prevailing rates for these funds. The
approximate average maturity was 5.0 months, 6.0 months, and 3.0 months for
the years 2002, 2001, and 2000, respectively.
ITEM 2: PROPERTIES
The Company owns no properties; it currently occupies space in the buildings
that house the Lake Geneva and Kenosha branches.
First Banking Center
The Bank owns banking facilities in Albany, Burlington, Genoa City, Lake Geneva,
Lyons, Monroe, Pell Lake, Pleasant Prairie, Union Grove, Walworth, and Wind
Lake. The Bank leases facilities in Darlington and Kenosha. Each of the bank's
offices is well maintained and adequately meets the needs of the bank.
The bank shares leased office space in Las Vegas, Nevada to house the operations
of its investment subsidiary.
ITEM 3: LEGAL PROCEEDING
Neither the Corporation nor its subsidiary is a party, nor is any of their
property, subject to any material existing or pending legal proceedings other
than ordinary routine litigation incidental to its business. No officer,
director, affiliate of the Corporation, or any of their associates is a party to
any material proceedings adverse to the Corporation or its subsidiary.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No items were submitted during the fourth quarter of the fiscal year covered by
this report to a vote of the security holders through the solicitation of
proxies or otherwise.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's stock is not actively traded. Robert W. Baird & Co. Incorporated
and A.G. Edwards & Sons, Inc., however, do make a market in the stock. The range
and sales prices, based on information given to the Company by Robert W. Baird &
Co. Incorporated, and A.G. Edwards & Sons, Inc., and by parties to sales, are
listed below for each quarterly period during the last two years.
2002 2001
Low High Low High
First quarter $ 38.50 $ 43.00 $ 34.75 $ 38.00
Second quarter $ 42.00 $ 45.00 $ 37.00 $ 38.25
Third quarter $ 42.00 $ 45.00 $ 37.50 $ 42.50
Fourth quarter $ 43.00 $ 45.00 $ 38.50 $ 43.00
There were 793 holders of record of the Company's $1.00 par value common stock
on March 24, 2003.
Cash Dividends for the last the two years ending 2002 and 2001 are presented in
ITEM 6: SELECTED FINANCIAL DATA. The applicable dividend restrictions are
discussed in ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA - Note 17 -
Regulatory Capital Requirement and restrictions on Dividends.
ITEM 6: SELECTED FINANCIAL DATA
FIRST BANKING CENTER, INC. AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands of except per share data)
December 31,
----------------------------------------------------------------
2002 2001 2000 1999 1998
----------------------------------------------------------------
Interest income $ 28,873 $ 32,163 $ 31,286 $ 27,692 $ 25,474
Interest expense 8,742 13,817 15,200 12,586 12,127
----------------------------------------------------------------
Net interest income 20,131 18,346 16,086 15,106 13,347
Provision for loan losses 1,062 500 360 330 330
----------------------------------------------------------------
Net interest income after
provision for loan loss 19,069 17,846 15,726 14,776 13,017
Noninterest Income 4,017 3,480 3,126 2,829 2,530
Noninterest Expense 15,058 14,292 12,187 11,583 10,772
----------------------------------------------------------------
Income before income taxes 8,028 7,034 6,665 6,022 4,775
Income taxes 2,069 1,777 1,879 1,860 1,387
----------------------------------------------------------------
Net income $ 5,959 $ 5,257 $ 4,786 $ 4,162 $ 3,388
================================================================
Earnings per common share:
Basic earnings per share $ 4.04 $ 3.57 $ 3.24 $ 2.80 $ 2.28
Diluted earnings per share $ 3.98 $ 3.52 $ 3.21 $ 2.78 $ 2.27
Cash dividends per share $ 0.74 $ 0.69 $ 0.64 $ 0.59 $ 0.54
Book value per share $ 32.61 $ 28.67 $ 25.69 $ 22.59 $ 21.43
Year-end assets $ 518,157 $ 475,780 $ 430,858 $ 392,089 $ 369,131
Average assets 472,681 429,269 398,264 377,110 332,980
Year-end equity capital 48,720 42,239 37,948 33,417 31,895
Average equity capital 46,107 40,554 35,581 33,220 30,394
Return on average assets 1.26% 1.22% 1.20% 1.10% 1.02%
Return on average equity 12.92% 12.96% 13.45% 12.53% 11.15%
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion provides additional analysis of the financial
statements presented in the Company's annual report and should be read in
conjunction with this information. This discussion focuses on the significant
factors that affected the Company's earnings in 2002, with comparisons to 2001.
As of December 31, 2002, First Banking Center (the "Bank") was the only direct
subsidiary of the Company and its operations contributed nearly all of the
revenue for the year. The Company provides various support functions for the
Bank and receives payment from the Bank for these services. These inter-company
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 December 31, 2002, total Company assets were $518.2 million increasing
8.91% from $475.8 million as of December 31, 2001. Total income for 2002 was
$6.0 million or $4.04 per share, increasing 13.35% from $5.3 million or $3.57
per share in 2001. The significant items resulting in the above-mentioned
results are discussed below.
Financial Condition
Loans
Loans outstanding were $372.1 million and $366.1 million on December 31, 2002
and December 31, 2001 respectively. This represents an increase of $6.0 million
or 1.7% during 2002. Agricultural Real Estate loans grew by $6.1 million or
48.3% due to increased efforts by the company to expand its lending in this
area. The following table summarizes the changes during 2002 in the major loan
classifications.
As a % of Total Loans
Balance December 31, Change in on December 31,
2002 2001 Balance 2002 2001
------------------------------------------ -----------------------------
(Dollars in million)
Residential Real Estate $163.9 $ 160.7 $ 3.2 44.0% 43.9%
Commercial Real Estate 91.8 90.7 1.1 24.7% 24.8%
Construction and Land Development 42.4 43.6 (1.2) 11.4% 11.9%
Commercial 26.2 27.5 (1.3) 7.0% 7.5%
Agricultural Real Estate 18.7 12.6 6.1 5.0% 3.4%
Allowance for Loan Losses
The allowance for possible loan losses was $5.0 million or 1.34% of gross loans
on December 31, 2002, compared with $4.4 million or 1.19% of gross loans on
December 31, 2001. Net charge-offs for 2002 were $441 thousand or .118% of gross
loans, compared to net charge-offs of $60 thousand or .016% of gross loans for
2001. As of December 31, 2002, loans on non-accrual status totaled $2.0 million
or .54% of gross loans compared to $1.5 million or .42% of gross loans on
December 31, 2001. The non-accrual loans consisted primarily of $1.4 million of
residential real estate loans, $371 thousand of nonresidential real estate, $80
thousand of commercial loans, and $75 thousand of farmland real estate. On
December 31, 2002, the ratio of non-accrual loans to the allowance for loan
losses was 40.4% compared to 35.3% on December 31, 2001.
The Company's allocation of its allowance for loan losses can be found at
Section IV, Schedule B of the Company's Form 10-K. A discussion of the changes
in the allocations for the last three years can be found in the following three
paragraphs.
During 2002 the Company continued to refine its identification and allocation
process regarding possible loan losses. During the fourth quarter of 2002 the
company increased its allocation for commercial loans due to weakness in
commercial real estate values in its markets.
During the third quarter of 2001, the bank reviewed its allowance for possible
loan loss adequacy calculation. After studying historical losses and current
loan portfolio grading information, the calculations were adjusted to more
accurately reflect where management felt the loan losses lie. As a result of
this change, the amount of allowance for commercial loans decreased $652
thousand from 2000 to 2001.
The allowance for unallocated increased $1.1 million from 2000 to 2001. The
unallocated portion of the allowance reflects management's estimate of probable
inherent but undetected losses within the portfolio. These losses may be due to
uncertainties in economic conditions, delays in obtaining information, including
unfavorable information about a borrower's financial condition, the difficulty
in identifying events that correlate perfectly to subsequent loss rates, and
risk factors that have not yet manifested themselves in loss allocation factors.
In addition, the unallocated allowance includes a component that explicitly
accounts for inherent imprecision in loan loss migration models.
The adequacy of the allowance for estimated losses on loans was determined by
management based on factors that included the overall composition of the loan
portfolio, types of loans, past loss experience, loan delinquencies, potential
substandard and doubtful credits, economic conditions and other factors that, in
management's judgment, deserved evaluation in estimating loan losses. To ensure
that an adequate allowance was maintained, provisions were made based on the
increase in loan balances, management's assessment of the possible impact that
economic conditions may have on the loan portfolio and a detailed analysis of
the loan portfolio.
The loan portfolio is analyzed quarterly. This quarterly analysis incorporates
First Banking Center's internal loan grading system. All loans identified as
having potential weaknesses that deserve management's close attention, loans
graded substandard and loans graded loss or doubtful are further reviewed to
assess the actual exposure present.
Although management believes that the allowance for estimated losses on loans at
December 31, 2002 was at a level adequate to absorb losses on existing loans,
there can be no assurance that such losses will not exceed the estimated amounts
or that First Banking Center will not be required to make additional provisions
for loan losses in the future. Asset quality is a priority for First Banking
Center and its subsidiaries. The ability to grow profitably is in part dependent
upon the ability to maintain that quality. Along with other financial
institutions, management shares a concern for the possible continued softening
of the economy in 2003. Should the economic climate continue to deteriorate,
borrowers may experience difficulty, and the level of non-performing loans,
charge-offs and delinquencies could rise and require further increases in the
provision.
During 2002 $1.1 million was charged to current earnings and added to the
allowance for loan losses.
Investments securities - Available for Sale
The securities available-for-sale portfolio increased $28.3 million or 47.6%
during 2002. The increase was primarily due to the purchase of $20.1 million of
short term and adjustable rate mortgage-backed securities and $5.7 million of
municipal securities.
Deposits and Borrowed Funds
Total deposits and borrowed funds were $465.6 million on December 31, 2002
compared to $429.5 million on December 31, 2001. This is an increase of $36.1
million or 8.4%. The following table summarizes the changes during 2002 in the
major classifications of deposits and borrowed funds.
Dec. 31, Dec. 31, Change in
2002 2001 Balance
---------------- --------------- -----------
(Amounts in millions)
Money Market and Savings $ 144.8 $ 134.6 $10.2
Demand Deposits 73.0 66.6 6.4
Time Deposits less than $100,000 90.2 87.2 3.0
Time Deposits equal or greater than $100,000 56.2 33.7 22.5
Securities sold under agreement to repurchase 25.0 26.1 (1.1)
Federal Home Loan Borrowings 46.3 47.3 (1.0)
Capital resources
During 2002, the Company's stockholders' equity increased $6.5 million or 15.3%.
Net income of $6.0 million was the primary reason for the increase in equity.
The company purchased $252 thousand and reissued $654 thousand of treasury stock
during 2002. Net unrealized gain/loss on available for sale securities increased
$1 million to $1.6 million. Cash dividends paid in 2002 were $1.0 million or
$.74 per share.
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 12.3% at
December 31, 2002, well above the 4% minimum required. Total capital to
risk-adjusted assets was 13.6%, also well above the 8% minimum requirement. The
leverage ratio was at 9.3% compared to the 4% minimum requirement. According to
FDIC capital guidelines, the 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 20%, which
compares to a positive 17% as of December 31, 2001. Although a positive GAP of
20% is outside of the target range the company feels the current position is
desirable due to current and forecasted economic conditions.
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 $33.7 million at
December 31, 2002, compared with $33.0 million at December 31, 2001. The Bank
has a variety of sources of short-term liquidity available to it, including
federal funds purchased from correspondent banks, sales of securities available
for sale, FHLB advances, lines of credit and loan participations or sales. First
Banking Center also generates liquidity from the regular principal payments and
prepayments made on its portfolio of loans and mortgage-backed securities.
The liquidity of First Banking Center is comprised of three primary
classifications: cash flows from operating activities, cash flows from investing
activities, and cash flows from financing activities. Net cash provided by
operating activities was $7.1 million for fiscal 2002 compared to $235 thousand
used in fiscal 2001. Net cash used in investing activities, consisting
principally of loan funding and the purchase of securities, was $41.2 million
for fiscal 2002 and $48.2 million for fiscal 2001. Net cash provided by
financing activities, consisting principally of deposit growth, was $35.6
million for fiscal 2002 and $39.9 million for fiscal 2001.
Net cash used in operating activities was $235 thousand for fiscal 2001 compared
to net cash provided by operating activities of $8.7 million for fiscal 2000.
Net cash used in investing activities, consisting principally of loan funding
and the purchase of securities, was $48.2 million in 2001 and $30.5 million in
2000. Net cash provided by financing activities, consisting primarily of deposit
growth and proceeds from short-term borrowings, was $39.9 million for fiscal
2001 and $32.0 million for fiscal 2000.
The following table summarizes our significant contractual obligations and the
other potential funding needs at December 2002 (amounts in thousands):
Time Long Term Operating
Year Deposits Debt Lease Total
----------------------------------------------------
2003 $30,413 $2,083 $24 $32,520
2004 8,031 22,402 24 $30,457
2005 2,940 5,967 24 $8,931
2006 1,077 5,093 21 $6,191
2007 11,099 8 $11,107
2008 and Beyond 111 $111
----------------------------------------------------
$42,461 $46,755 $101 $89,317
====================================================
-------------
Commitments to extend credit $72,786
=============
Management believes that First Banking Center has sufficient liquidity and
capacity sources to meet presently known cash flow requirements arising from
ongoing business transactions.
Impact of Inflation and Changing Prices
The consolidated financial statements and the accompanying notes have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollar amounts without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of First Banking Center's operations. Unlike
industrial companies, nearly all of the assets and liabilities of First Banking
Center are monetary in nature. As a result, interest rates have a greater impact
on First Banking Center's performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services.
Forward Looking Statements- Safe Harbor Statement Under the Private Securities
Litigation Reform Act of 1995
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. First Banking Center intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe First Banking Center's future plans, strategies and expectations
are generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project" or similar expressions. First Banking
Center's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
affect on First Banking Center's operations and future prospects include, but
are not limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
our market area, our implementation of new technologies, First Banking Center's
ability to develop and maintain secure and reliable electronic systems and
accounting principles, policies and guidelines. These risks and uncertainties
should be considered in evaluating forward-looking statements and undue reliance
should not be placed on such statements.
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 determine 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 following table sets forth, at
December 31, 2002 and December 31, 2001, an analysis of First Banking Center's
interest rate risk as measured by the estimated changes in NPV resulting from
instantaneous and sustained parallel shifts in the yield curve (+ or - 200 basis
points).
Change in
Interest Rates Estimated NPV Estimated Increase(Decrease) in NPV
- --------------------------------------------------------------- ------------------------------------------
(Basis points) December 31, 2002 December 31, 2001 December 31, 2002 December 31, 2001
- --------------------------------------------------------------- ------------------------------------------
+200 45,323 43,773 (1,284) (965)
+100 46,607 44,738 (1,461) (814)
- --- 48,068 45,552 - -
- -100 49,092 46,640 1,024 1,088
- -200 51,212 47,655 2,120 1,015
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.
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 interest income and rate are on a tax-equivalent
basis, which accounts for income earned on securities that are not fully subject
to federal taxes. Net interest income was $21.0 million, $19.2 million and $16.9
million for 2002, 2001 and 2000 respectively. Net interest margin/income as a
percentage of average earning assets was 4.72%, 4.77%, and 4.56% in 2002 and
2001 and 2000 respectively. The decrease in net interest margin/income in 2002
was the result of declining interest rates which caused net interest income to
grow slower than average earning assets.
2002 2001 2000
--------------------------- --------------------------- ----------------------------
Interest Average Interest Average Interest Average
Average Earned Yield Average Earned Yield Average Earned Yield
Balance or Paid or Cost Balance or Paid or Cost Balance or Paid or Cost
--------------------------- --------------------------- ----------------------------
(Dollars in thousands)
Interest earning assets:
Interest-bearing deposits in banks $ 4,393 85 1.93% 2,606 121 4.65% 231 15 6.29%
Available-for-sale securities:
Taxable 27,665 1,005 3.63% 20,589 1,146 5.57% 28,847 1,857 6.44%
Nontaxable (a) 35,885 2,470 6.88% 30,683 2,154 7.02% 27,370 2,001 7.31%
Fed funds sold 8,422 122 1.45% 5,875 232 3.95% 3,170 196 6.19%
Loans (a)(b)(c) 364,583 25,836 7.09% 340,328 29,192 8.58% 309,306 27,883 9.01%
Other Interest 4,602 266 5.78% 2,440 153 6.27% 2,042 146 7.15%
--------------------------- --------------------------- ----------------------------
Total interest earnings assets $ 445,550 29,784 6.68% 402,521 32,998 8.20% 370,966 32,098 8.65%
=========================== =========================== ============================
Interest bearing liabilities:
Savings and NOW accounts $ 168,713 1,780 1.06% 152,947 4,281 2.80% 141,999 5,612 3.95%
Time deposits 130,170 4,808 3.69% 124,445 6,965 5.60% 120,215 6,997 5.82%
Short-term borrowings 23,048 417 1.81% 20,861 829 3.97% 18,460 1,011 5.48%
Other borrowings 39,454 1,737 4.40% 33,618 1,742 5.18% 27,955 1,580 5.65%
--------------------------- --------------------------- ----------------------------
Total int.bearing liabilities $ 361,385 8,742 2.42% 331,871 13,817 4.16% 308,629 15,200 4.92%
=========================== =========================== ============================
Net interest marginincome(d) 21,042 4.72% 19,181 4.77% 16,898 4.56%
================= ================= =================
(a) The interest and average yield for nontaxable loans and investments are
presented on a federal taxable equivalent basis assuming a 35% tax rate.
(b) Loans placed on nonaccrual status have been included in average balances
used to determine average rates.
(c) Loan interest income includes net loan fees.
(d) Net interest earnings divided by total interest-earning assets, with net
interest earnings equaling the difference between total interest earned and
total interest paid.
The increase in nontaxable interest income on Available-for-sale securities in
the amount of $316 thousand during 2002 was due mainly to maintaining an
increased average balance in nontaxable Available-for-sale securities.
The major component of interest income and fees on loans is the interest
generated by loans. Although the average balances for outstanding for Loans
increased during 2002, interest rates declined significantly enough that
interest income and fees on Loans decreased $3.4 million.
The major components of interest expense are interest paid on Certificates of
Deposit (Time deposits) and on Money Market Deposits. Interest expense on
Savings and NOW Accounts and Time Deposits decreased $2.5 million and 2.2
million respectively due to a decrease in interest rates paid on those accounts.
Provision for loan losses
During 2002, $1.1 million was charged to current earnings and added to the
allowance for loan losses. In 2001 and 2000, $500 and $360 thousand,
respectively, was charged to earnings and added to the allowance for loan
losses.
Non-interest income
Non-interest income increased $537 thousand or 15.4% during 2002. The increase
came in primarily two areas. Service charges on deposit accounts increased $357
thousand as the number of accounts grew and charges for some services were
increased. Commissions Income from investment services increased $76 thousand as
sales of annuities were strong during 2002.
Non-interest income increased $354 thousand or 11.3% during 2001. The increase
came in primarily in service charges on deposit accounts, which increased $260
thousand as the number of accounts grew and charges for some services were
increased.
Non-interest expense
Non-interest expense increased $766 thousand or 5.4% during 2002. Salaries and
benefits accounted for $782 thousand of the increase due to normal wage
increases, increased commissions and bonuses tied to loan fee income and annuity
sales and increased health insurance costs. Data processing costs increased $77
thousand due to the inflation clause in the main service provider's contract as
well as increased volumes and additional services used. Equipment expense
increased $161 thousand due primarily to increases on maintenance contracts on
equipment and software. Other operating expenses decreased $293 thousand due to
expense controls put in place by the Company.
Non-interest expense increased $2.1 million or 17.3% during 2001. Salaries and
benefits accounted for $1.3 million of the increase due to normal wage
increases, increased personal due to opening of two new branches and increased
health insurance costs. Data processing costs increased $179 thousand due to the
inflation clause in the main service provider's contract as well as increased
volumes and additional services used. Occupancy expense increased $111 thousand
due to increases in real estate, personal property taxes and the addition of two
branch locations.
Income Taxes
Income tax expense for the year ended December 31, 2002 was $2.1 million
compared to $1.8 million for 2001. The effective tax rate increased to 25.8% for
the year ended December 31, 2002 compared to 25.3% in 2001.
Income tax expense for the year ended December 31, 2001 was $1.8 million
compared to $1.9 million for 2000. The effective tax rate decreased to 25.3% for
the year ended December 31, 2001 from 28.2% in 2000 due to the effect of other
non-taxable and non-deductible items such as bank owned life insurance.
Critical Accounting Policies
Income Taxes
See Note 1 of the notes to our audited consolidated financial statements for our
income tax accounting policy. Income tax expense recorded in the consolidated
income statement involves interpretation and application of certain accounting
pronouncements and federal and state tax codes, and is, therefore, considered a
critical accounting policy. We undergo examinations by various regulatory taxing
authorities. Such agencies may require that changes in the amount of tax expense
or valuation allowance be recognized when their interpretations differ from
those of management, based on their judgments about information available to
them at the time of their examinations. See Note 11 of the notes to our audited
consolidated financial statements for more income tax information.
Allowance for Loan Losses
Management believes the allowance for loan losses accounting policy is critical
to the portrayal and understanding of our financial condition and results of
operations. As such, selection and application of this "critical accounting
policy" involves judgments, estimates, and uncertainties that are susceptible to
change. In the event that different assumptions or conditions were to prevail,
and depending upon the severity of such changes, the possibility of materially
different financial condition or results or operations is a reasonable
likelihood.
Quarterly Results of Operations (Unaudited)
Quarterly results of operations are as follow:
Quarter Ended
MAR 2002 JUN 2002 SEP 2002 DEC 2002
-----------------------------------------------------------
(Amounts in thousands)
Total interest income $ 7,091 7,125 7,114 7,543
Total interest expense 2,246 2,128 2,188 2,180
-----------------------------------------------------------
Net interest income 4,845 4,997 4,926 5,363
Provision for loan losses 90 90 91 791
Other income 970 968 1,057 1,022
Other expense 3,564 3,526 3,716 4,252
-----------------------------------------------------------
Income before income taxes 2,161 2,349 2,176 1,342
Applicable income taxes 570 638 619 242
-----------------------------------------------------------
Net Income $ 1,591 1,711 1,557 1,100
===========================================================
Net income per share:
Basic $ 1.08 1.16 1.06 0.74
===========================================================
Diluted $ 1.06 1.14 1.03 0.75
===========================================================
Quarter Ended
MAR 2001 JUN 2001 SEP 2001 DEC 2001
-----------------------------------------------------------
(Amounts in thousands)
Total interest income $ 8,207 8,235 8,095 7,626
Total interest expense 3,957 3,668 3,442 2,750
-----------------------------------------------------------
Net interest income 4,250 4,567 4,653 4,876
Provision for loan losses 90 90 90 230
Other income 756 824 919 981
Other expense 3,306 3,380 3,512 4,094
-----------------------------------------------------------
Income before income taxes 1,610 1,921 1,970 1,533
Applicable income taxes 405 501 507 364
-----------------------------------------------------------
Net Income $ 1,205 1,420 1,463 1,169
===========================================================
Net income per share:
Basic $ 0.82 0.96 1.00 0.79
===========================================================
Diluted $ 0.81 0.96 0.99 0.76
===========================================================
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
FIRST BANKING CENTER, INC.
AND SUBSIDIARY
Burlington, Wisconsin
Consolidated Financial Statements
Including Independent Auditors' Report
December 31, 2002 and 2001
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
Independent Auditors' Report 27
Consolidated Balance Sheets
December 31, 2002 and 2001 28
Consolidated Statement of Income
Years Ended December 31, 2002, 2001 and 2000 29
Consolidated Statements of Change in Stockholders' Equity
Years Ended December 31, 2002, 2001 and 2000 30
Consolidated Statements of Cash Flows
Years Ended December 31, 2002, 2001 and 2000 31-32
Notes to Consolidated Financial Statements 33-56
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
First Banking Center, Inc. and Subsidiary
Burlington, Wisconsin
We have audited the accompanying consolidated balance sheets of First Banking
Center, Inc. and subsidiary as of December 31, 2002 and 2001, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for the years ended December 31, 2002, 2001, and 2000. 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 auditing standards generally accepted
in the United States of America. 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 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 subsidiary as of December 31, 2002 and 2001, and the results of
its operations and its cash flows for the years ended December 31, 2002, 2001,
and 2000 in conformity with accounting principles generally accepted in the
United States of America.
McGladrey & Pullen, LLP
Madison, Wisconsin
February 7, 2003
FIRST BANKING CENTER, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
ASSETS 2002 2001
- --------------------------------------------------------------------------------------------------------------------
(Amounts in thousands, except
share and per share data)
Cash and due from banks $ 22,203 $ 20,735
Federal funds sold 11,058 12,010
Interest-bearing deposits in banks 441 267
Available-for-sale securities 87,630 59,343
Loans, less allowance for loan losses of $4,988
and $4,367 at 2002 and 2001, respectively 367,156 361,705
Office buildings and equipment, net 10,576 10,521
FHLB stock 10,488 2,364
Other assets 8,605 8,835
------------------------------------
Total assets $ 518,157 $ 475,780
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand $ 72,957 $ 66,612
Savings and NOW accounts 174,431 164,904
Time 146,413 120,898
------------------------------------
Total deposits 393,801 352,414
Short-term borrowings 25,077 29,199
Other borrowings 46,755 47,847
Other liabilities 3,804 4,081
------------------------------------
Total liabilities 469,437 433,541
------------------------------------
Stockholders' Equity:
Common stock, $1.00 par value, 3,000,000 shares authorized; 1,494,029 and
1,489,380 shares issued as of December 31, 2002 and 2001; 1,494,029 and
1,473,197 shares outstanding as of
December 31, 2002 and 2001; 1,494 1,489
Surplus 4,375 4,184
Retained earnings 41,287 36,649
Accumulated other comprehensive income 1,564 542
Common stock in treasury, at cost - none and 16,183 shares
as of December 31, 2002 and 2001, respectively - (625)
------------------------------------
Total stockholders' equity 48,720 42,239
------------------------------------
Total liabilities and stockholders' equity $ 518,157 $ 475,780
====================================
See Notes to Consolidated Financial Statements.
FIRST BANKING CENTER, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2002, 2001, and 2000
2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
(Amounts in thousands, except
share and per share data)
Interest income:
Interest and fees on loans $ 25,765 $ 29,090 $ 27,751
Interest and dividends on securities:
Taxable 1,005 1,146 2,003
Nontaxable 1,630 1,421 1,321
Interest on federal funds sold 122 232 196
Interest on interest-bearing deposits in banks 85 121 15
Other interest 266 153 -
---------------------------------------------
Total interest income 28,873 32,163 31,286
---------------------------------------------
Interest expense:
Interest on deposits 6,588 11,246 12,609
Interest on short-term borrowings 417 825 1,005
Interest on other borrowings 1,737 1,746 1,586
---------------------------------------------
Total interest expense 8,742 13,817 15,200
---------------------------------------------
Net interest income 20,131 18,346 16,086
Provision for loan losses 1,062 500 360
---------------------------------------------
Net interest income after provision for loan losses 19,069 17,846 15,726
---------------------------------------------
Noninterest income:
Trust fees 485 513 499
Service charges on deposit accounts 1,934 1,577 1,317
Commissions 387 311 289
Automated banking fees 597 541 504
Securities gains (losses), net 13 (1) 12
Other 601 539 505
---------------------------------------------
Total noninterest income 4,017 3,480 3,126
---------------------------------------------
Noninterest expenses:
Salaries and employee benefits 8,814 8,032 6,746
Occupancy 979 940 829
Equipment 1,543 1,382 1,362
Data processing services 901 824 645
Other 2,821 3,114 2,605
---------------------------------------------
Total noninterest expenses 15,058 14,292 12,187
---------------------------------------------
Income before income taxes 8,028 7,034 6,665
Income taxes 2,069 1,777 1,879
---------------------------------------------
Net income $ 5,959 $ 5,257 $ 4,786
=============================================
Basic earnings per share $ 4.04 $ 3.57 $ 3.24
=============================================
Diluted earnings per share $ 3.98 $ 3.52 $ 3.21
=============================================
Weighted average common shares outstanding 1,474 1,473 1,477
=============================================
Weighted average common and equivalent common
shares outstanding 1,498 1,492 1,492
=============================================
See Notes to Consolidated Financial Statements.
FIRST BANKING CENTER, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years Ended December
31, 2002, 2001, and 2000
Accumulated
Other
Common Retained Comprehensive Treasury
Stock Surplus Earnings Income (Loss) Stock Total
- -------------------------------------------------------------------------------------------------------------------
(Amounts in thousands, except for share and per share data)
Balance, December 31, 1999 $ 1,489 $4,236 $ 28,717 $ (683) $ (342) $33,417
------------
Comprehensive income:
Net income - - 4,786 - - 4,786
Change in net unrealized gains
on available-for-sale securities - - - 1,335 - 1,335
Reclassification adjustment for gains
included in net income - - - 12 - 12
Income tax effect - - - (456) - (456)
------------
Comprehensive income 5,677
------------
Purchase of 10,980 shares of
treasury stock - - - - (404) (404)
Cash dividends paid - $0.64 per share - - (946) - - (946)
Tax benefit of nonqualified stock
options exercised - 10 - - - 10
Sale of 8,444 shares of treasury stock
for the exercise of stock options - (68) (32) - 294 194
-------------------------------------------------------------------------
Balance, December 31, 2000 1,489 4,178 32,525 208 (452) 37,948
------------
Comprehensive income:
Net income - - 5,257 - - 5,257
Change in net unrealized gains
on available-for-sale securities - - - 506 - 506
Reclassification adjustment for losses
included in net income - - - (1) - (1)
Income tax effect - - - (171) - (171)
------------
Comprehensive income 5,591
------------
Purchase of 15,660 shares of
treasury stock - - - - (606) (606)
Cash dividends paid - $0.69 per share - - (1,016) - - (1,016)
Tax benefit of nonqualified stock
options exercised - 6 - - - 6
Sale of 11,835 shares of treasury stock
for the exercise of stock options - - (117) - 433 316
-------------------------------------------------------------------------
Balance, December 31, 2001 1,489 4,184 36,649 542 (625) 42,239
------------
Comprehensive income:
Net income - - 5,959 - - 5,959
Change in net unrealized gains
on available-for-sale securities - - - 1,536 - 1,536
Reclassification adjustment for gains
included in net income - - - 13 - 13
Income tax effect - - - (527) - (527)
------------
Comprehensive income 6,981
------------
Sale of 4,649 shares of
common stock for exercise of
stock options 5 162 - - - 167
Purchase of 5,700 shares of
treasury stock - - - - (252) (252)
Cash dividends paid - $0.74 per share - - (1,098) - - (1,098)
Tax benefit of nonqualified stock
options exercised - 29 - - - 29
Sale of 21,883 shares of treasury stock
for the exercise of stock options - - (223) - 877 654
-------------------------------------------------------------------------
Balance, December 31, 2002 $ 1,494 $4,375 $ 41,287 $ 1,564 $ - $48,720
=========================================================================
See Notes to Consolidated Financial Statements.
FIRST BANKING CENTER, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002, 2001, and 2000
2002 2001 2000
- -------------------------------------------------------------------------------------------------------------
(Amounts in thousands)
Cash Flows From Operating Activities:
Net income $ 5,959 $ 5,257 $ 4,786
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 869 798 851
Provision for loan losses 1,062 500 360
Gain on sale of loans (1) - (9)
Deferred income taxes (24) (9) 353
Amortization of premiums and accretion of
discounts on securities, net 115 59 46
Amortization 101 102 104
Investment securities (gains) losses (13) 1 (12)
Tax benefit of nonqualified stock options exercised 29 6 10
Increase in other assets (374) (2,000) (708)
Increase (decrease) in other liabilities (277) (193) 1,098
--------------------------------------------
Net cash provided by operations before loan
origination and sales 7,446 4,521 6,879
Loans originated for sale (82,908) (94,362) (30,125)
Proceeds from sales of loans 82,541 89,607 31,960
--------------------------------------------
Net cash provided by (used in) operating activities 7,079 (234) 8,714
--------------------------------------------
Cash Flows From Investing Activities:
Net (increase) decrease in interest-bearing deposits in banks (174) 429 (656)
Net (increase) decrease in federal funds sold 952 (12,010) 4,242
Proceeds from sales of available-for-sale securities 7,615 21,241 10,458
Proceeds from maturities and calls of
available-for-sale securities 62,038 140,606 10,925
Purchase of available-for-sale securities (96,493) (155,555) (30,319)
Net increase in loans (6,145) (40,809) (23,684)
Purchase of office buildings and equipment, net (924) (1,494) (1,247)
Purchase of FHLB stock (8,124 (597) (253)
--------------------------------------------
Net cash used in investing activities $ (41,255) $ (48,189) $ (30,534)
--------------------------------------------
(Continued)
FIRST BANKING CENTER, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31, 2002, 2001, and 2000
2002 2001 2000
- --------------------------------------------------------------------------------------------------------------
(Amounts in thousands)
Cash Flows From Financing Activities:
Net increase in deposits $ 41,387 $ 17,474 $ 28,796
Dividends paid (1,098) (1,016) (946)
Proceeds from other borrowings 10,130 38,350 10,000
Payments on other borrowings (11,222) (26,447) (1,824)
Net increase (decrease) in short-term borrowings (4,122) 11,800 (3,832)
Sale of common stock 167 - -
Purchase of treasury stock (252) (606) (404)
Sale of treasury stock for the exercise of stock options 654 316 194
--------------------------------------------
Net cash provided by financing activities 35,644 39,871 31,984
--------------------------------------------
Net increase (decrease) in cash and due from banks 1,468 (8,552) 10,164
Cash and due from banks:
Beginning 20,735 29,287 19,123
--------------------------------------------
Ending $ 22,203 $ 20,735 $ 29,287
============================================
Supplemental Disclosures of Cash Flow Information, cash paid during the year
for:
Interest $ 8,823 $ 14,375 $ 14,944
Income taxes 2,221 2,211 1,366
Supplemental Schedules of Noncash Investing Activities,
Change in accumulated other comprehensive income,
unrealized gains on available-for-sale securities, net $ 1,022 $ 334 $ 891
See Notes to Consolidated Financial Statements.
FIRST BANKING CENTER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies
Nature of Banking Activities: The consolidated income of First Banking Center,
Inc. (the Company) is principally from the income of its wholly owned
subsidiary, First Banking Center (the Bank). The Bank grants agribusiness,
commercial, residential, and consumer loans, accepts deposits and provides trust
services to customers primarily in southeastern and southcentral Wisconsin. The
Bank is subject to competition from other financial institutions and
nonfinancial institutions providing financial products. Additionally the Company
and the Bank are subject to the regulations of certain regulatory agencies and
undergo periodic examination by those regulatory agencies.
Consolidation: The consolidated financial statements of the Company include the
accounts of the Bank. The Bank includes the accounts of its wholly owned
subsidiaries, FBC-Burlington, Inc. and FBC Financial Services Corp. The
consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America and
conform to general practices within the banking industry. All significant
intercompany accounts and transactions have been eliminated in the consolidated
financial statements.
Use of Estimates: In preparing consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Material estimates that are
particularly susceptible to significant change in the near term relate to the
determination of the allowance for loan losses, and the valuation of foreclosed
real estate and deferred tax assets. The fair value disclosure of financial
instruments is an estimate that can be computed within a range.
Presentation of Cash Flows: For purposes of reporting cash flows, cash and due
from banks include cash on hand and amounts due from banks. Cash flows from
federal funds sold, interest-bearing deposits in banks, loans, deposits, and
short-term borrowings are treated as net increases or decreases.
Cash and Due From Banks: The Bank maintains amounts due from banks which, at
times, may exceed federally insured limits. Management monitors these
correspondent relationships. The Bank has not experienced any losses in such
accounts.
Available-for-Sale Securities: Securities classified as available-for-sale are
those debt securities that the Bank intends to hold for an indefinite period of
time, but not necessarily to maturity. 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
Bank's assets and liabilities, liquidity needs, regulatory capital
consideration, and other similar factors. Securities classified as
available-for-sale are carried at fair value. Unrealized gains or losses are
reported as increases or decreases in accumulated other comprehensive income,
net of the related deferred tax effect. Realized gains or losses, determined on
the basis of the cost of specific securities sold, are included in earnings.
Note 1. Summary of Significant Accounting Policies (Continued)
Loans: Loans are stated at the amount of unpaid principal, reduced by an
allowance for loan losses. Interest income is accrued on the unpaid principal
balance. The accrual of interest income on loans is discontinued when, in the
opinion of management, there is reasonable doubt as to the borrower's ability to
meet payment of interest or principal when they become due. When interest
accrual is discontinued, all unpaid accrued interest is reversed. 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.
Mortgage Loans Held for Sale: Mortgage loans originated and intended for sale in
the secondary market are carried at the lower of cost or estimated market value
in the aggregate. All sales are made without recourse. The balance of mortgage
loans held for sale is included in the loan balance on the financial statements.
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. Subsequent recoveries, if any, are credited to the
allowance. 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. 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. 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. Cash
collections on impaired loans are credited to the loan receivable balance and no
interest income is recognized on those loans until the principal balance is
current.
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.
Credit Related Financial Instruments: In the ordinary course of business the
Bank has entered into off-balance-sheet financial instruments consisting of
commitments to extend credit and standby letters of credit. Such financial
instruments are recorded in the financial statements when they are funded.
Transfers of Financial Assets: Transfers of financial assets are accounted for
as sales, only when control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when (1) the assets have been
isolated from the Company, (2) the transferee obtains the right (free of
conditions that constrain it from taking advantage of the right) to pledge or
exchange the transferred assets, and (3) the Company does not maintain effective
control over the transferred assets through an agreement to repurchase them
before their maturity or the ability to unilaterally cause the holder to return
specific assets.
Note 1. Summary of Significant Accounting Policies (Continued)
Office Buildings and Equipment: Office buildings and equipment 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. Management periodically reviews the carrying value of its long lived
assets to determine if an impairment has occurred or whether changes in
circumstances have occurred that would require a revision to the remaining
useful life. In making such determination, management evaluates the performance,
on an undiscounted basis, of the underlying operations or assets which give rise
to such amount.
Other Real Estate Owned: Other real estate owned, acquired through partial or
total satisfaction of loans, is carried at the lower of cost or fair value less
cost to sell. At the date of acquisition, losses are charged to the allowance
for loan losses. Revenue and expenses from operations and changes in the
valuation allowance are included in loss on foreclosed real estate.
Stock-based Compensation Plan: At December 31, 2002, the Company had one
stock-based key officer and employee compensation plan, which is described more
fully in Note 10. The Company accounts for this plan under the recognitions and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based employee compensation
cost is reflected in the income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of Financial Accounting Standards Board (FASB) Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.
Year Ended December 31,
-----------------------------------------------------
2002 2001 2000
-----------------------------------------------------
(Amounts in thousands, except for per share data)
Net income, as reported $ 5,959 $ 5,257 $ 4,786
Deduct total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (169) (193) (135)
-----------------------------------------------------
Pro forma net income $ 5,790 $ 5,064 $ 4,651
=====================================================
Earnings per share:
Basic:
As reported $ 4.04 $ 3.57 $ 3.24
Pro forma 3.93 3.44 3.15
Diluted:
As reported $ 3.98 $ 3.52 $ 3.21
Pro forma 3.86 3.39 3.12
Note 1. Summary of Significant Accounting Policies (Continued)
In determining compensation cost using the fair value method prescribed in
Statement No. 123, the value of each grant is estimated at the grant date with
the following weighted-average assumptions used for grants in 2002, 2001, and
2000, respectively: dividend yield of 1.7 percent, 1.6 percent, and 1.8 percent;
expected price volatility of 5.2 percent, 5.2 percent, and 5.2 percent, blended
risk-free interest rates of 3.9 percent, 4.7 percent, and 5.8 percent; and
expected lives of 10 years, respectively.
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. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes. Valuation allowances are established when necessary
to reduce deferred tax assets to the amount expected to be realized.
Trust Assets: Property held for customers in fiduciary or agency capacities,
other than cash on deposit at the Bank, is not included in the accompanying
balance sheets, since such items are not assets of the Company.
Earnings Per Share: Earnings per share are computed based upon the
weighted-average number of common shares outstanding during each year. In the
computation of diluted earnings per share, 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.
Comprehensive Income: Accounting principles generally require that recognized
revenue, expenses, gains, and losses be included in net income. Although certain
changes in assets and liabilities, such as unrealized gains and losses on
available-for-sale securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income.
Note 1. Summary of Significant Accounting Policies (Continued)
Current Accounting Developments: In October 2002, Statement on Financial
Accounting Standards No. 147, Acquisitions of Certain Financial Institutions -
an Amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9,
was issued. FASB Statement No. 72, Accounting for Certain Acquisitions of
Banking or Thrift Institutions, and FASB Interpretation No. 9, Applying APB
Opinions No. 16 and 17 When a Savings and Loan Association or a Similar
Institution Is Acquired in a Business Combination Accounted for by the Purchase
Method, provided interpretive guidance on the application of the purchase method
to acquisitions of financial institutions. Except for transactions between two
or more mutual enterprises, Statement No. 147 removes acquisitions of financial
institutions from the scope of both Statement No. 72 and Interpretation No. 9
and requires that those transactions be accounted for in accordance with FASB
Statements No. 141, Business Combinations, and No. 142, Goodwill and Other
Intangible Assets. Thus, the requirement in paragraph 5 of Statement No. 72 to
recognize (and subsequently amortize) any excess of the fair value of
liabilities assumed over the fair value of tangible and identifiable intangible
assets acquired as an unidentifiable intangible asset no longer applies to
acquisitions within the scope of Statement No. 147. In addition, Statement No.
147 amends FASB Statement No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, to include in its scope long-term customer-relationship
intangible assets of financial institutions such as depositor- and
borrower-relationship intangible assets and credit cardholder intangible assets.
Consequently, those intangible assets are subject to the same undiscounted cash
flow recoverability test and impairment loss recognition and measurement
provisions that Statement No. 144 requires for other long-lived assets that are
held and used. Paragraph 5 of Statement No. 147, which relates to the
application of the purchase method of accounting, is effective for acquisitions
for which the date of acquisition is on or after October 1, 2002. The provisions
in paragraph 6 related to accounting for the impairment or disposal of certain
long-term customer-relationship intangible assets are effective on October 1,
2002. Transition provisions for previously recognized unidentifiable intangible
assets in paragraphs 8-14 are effective on October 1, 2002, with earlier
application permitted.
The FASB has issued Interpretation No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others - an interpretation of FASB Statement Nos. 5, 57, and 107 and rescission
of FASB Interpretation No. 34. Interpretation No. 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about it obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and measurement provisions of
Interpretation No. 45 are applicable on a prospective basis to guarantees issued
or modified after December 15, 2002. Implementation of these provisions of
Interpretation No. 45 is not expected to have a material impact on the Company's
consolidated financial statements. The disclosure requirements of Interpretation
No. 45 are effective for financial statements of interim or annual periods
ending after December 15, 2002, and have been adopted in the consolidated
financial statements for December 31, 2002.
Note 2. Cash and Due From Banks
The Bank is required to maintain vault cash and reserve balances with Federal
Reserve Bank based upon a percentage of deposits. These requirements
approximated $5,320,000 and $4,694,000 at December 31, 2002 and 2001,
respectively.
Note 3. Available-for-Sale Securities
Amortized costs and fair values of available-for-sale securities are summarized
as follows:
December 31, 2002
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
----------------------------------------------------------------
(Amounts in thousands)
U.S. Treasury securities $ 356 $ 34 $ - $ 390
Obligations of other U.S. government
agencies and corporations 23,142 456 - 23,598
Obligations of states and
political subdivisions 37,544 1,815 (17) 39,342
Commercial Paper 1,000 - - 1,000
----------------------------------------------------------------
62,042 2,305 (17) 64,330
Mortgage-backed securities 23,218 107 (25) 23,300
----------------------------------------------------------------
$ 85,260 $ 2,412 $ (42) $ 87,630
================================================================
December 31, 2001
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
----------------------------------------------------------------
(Amounts in thousands)
U.S. Treasury securities $ 358 $ 21 $ - $ 379
Obligations of other U.S. government
agencies and corporations 22,050 194 (55) 22,189
Obligations of states and
political subdivisions 33,026 732 (156) 33,602
----------------------------------------------------------------
55,434 947 (211) 56,170
Mortgage-backed securities 3,088 85 - 3,173
----------------------------------------------------------------
$ 58,522 $ 1,032 $ (211) $ 59,343
================================================================
Note 3. Available-for-Sale Securities (Continued)
The amortized cost and fair value of available-for-sale securities by
contractual maturity at December 31, 2002 are shown below. Maturities may differ
from contractual maturities in mortgage-backed securities because the mortgages
underlying the securities may be called or prepaid without any penalties.
Therefore, these securities are not included in the maturity categories in the
following summary.
Amortized Fair
Cost Value
------------------------------------
(Amounts in thousands)
Due in one year or less $ 13,646 $ 13,737
Due after one year through 5 years 28,986 30,248
Due after 5 years through 10 years 11,529 12,067
Due after 10 years 7,881 8,278
------------------------------------
62,042 64,330
Mortgage-backed securities 23,218 23,300
------------------------------------
$ 85,260 $ 87,630
====================================
Securities with a carrying value of $27,165,000 and $28,220,000 as of December
31, 2002 and 2001, respectively, were pledged as collateral on public deposits
and for other purposes as required or permitted by law.
Note 4. Loans
Major classifications of loans as of December 31 were as follows:
2002 2001
------------------------------------
(Amounts in thousands)
Commercial $ 26,163 $ 27,487
Agricultural production 22,175 23,013
Real estate:
Construction 42,370 43,603
Commercial 91,769 90,685
Agricultural 18,691 12,604
Residential 163,888 160,713
Municipal loans 3,309 3,293
Consumer and other 3,779 4,674
------------------------------------
372,144 366,072
Less allowance for loan losses 4,988 4,367
------------------------------------
Net loans $ 367,156 $ 361,705
====================================
Note 4. Loans (Continued)
Changes in the allowance for loan losses for the years ended December 31, are
presented as follows:
2002 2001 2000
-----------------------------------------------------
(Amounts in thousands)
Balance at beginning of year $ 4,367 $ 3,927 $ 3,581
Charge-offs (457) (135) (169)
Recoveries 16 75 155
Provision charged to expense 1,062 500 360
-----------------------------------------------------
Balance at end of year $ 4,988 $ 4,367 $ 3,927
=====================================================
The following is a summary of information pertaining to impaired loans as of
December 31:
2002 2001
-------------------------------
(Amounts in thousands)
Impaired loans for which an allowance has been $ 2,016 $ 93
provided
Impaired loans for which no allowance has been
provided - 1,448
-------------------------------
Total loans determined to be impaired $ 2,016 $ 1,541
===============================
Allowance provided for impaired loans, included
in the allowance for loan losses $ 209 $ 5
===============================
2002 2001 2000
-----------------------------------------------
(Amounts in thousands)
Average investment in impaired loans $ 1,856 $ 1,580 $ 1,136
===============================================
Interest income recognized and collected on a
cash basis on impaired loans $ 23 $ 14 $ 12
===============================================
Note 4. Loans (Continued)
It is management's policy to place loans (commercial, residential, and or
installment) on nonaccrual when principal and interest is past due 90 days or
more. Such loans may continue on accrual only when they are both well secured
and in the process of collection. Nonaccruing loans totaled $2,016,000 and
$1,541,000 as of December 31, 2002 and 2001, respectively. Interest income in
the amount of $23,000, $26,000, and $12,000 would have been earned on the
nonaccrual loans had they been performing in accordance with their original
terms during the years ended December 31, 2002, 2001, and 2000, respectively.
The interest collected on nonaccrual loans and included in income for years
ended December 31, 2002, 2001, and 2000 was not significant. Loans past due 90
days or more and still accruing interest were not material at December 31, 2002
and 2001.
Certain directors and executive officers of the Company, and their related
interests, had loans outstanding in the aggregate amounts of $3,073,000 and
$6,611,000 at December 31, 2002 and 2001, respectively. New loans of $3,276,000
and $3,555,000 were made during 2002 and 2001, respectively. Repayments on these
loans were $6,814,000 and $1,030,000 during 2002 and 2001, respectively. 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 5. Office Buildings and Equipment
Office buildings and equipment are stated at cost, less accumulated depreciation
as of December 31, are summarized as follows:
2002 2001
------------------------------------
(Amounts in thousands)
Land $ 1,762 $ 1,632
Buildings and improvements 9,950 9,729
Furniture and equipment 7,556 7,006
------------------------------------
19,268 18,367
Less accumulated depreciation 8,692 7,846
------------------------------------
Total office buildings and equipment $ 10,576 $ 10,521
====================================
Note 6. Intangible Assets
The amount paid in excess of cost in the underlying carrying amount of net
assets of the Genoa City and Pell Lake branches of the Bank at the date of the
branch acquisition amounted to $1,509,000 and is included in other assets. The
amount is being amortized over a period of ten to fifteen years. Amortization
expense amounted to $102,000 for each of the years ended December 31, 2002,
2001, and 2000.
Note 7. Deposits
The aggregate amount of time deposits, each with a minimum denomination of
$100,000, was approximately $56,201,000 and $33,701,000 at December 31, 2002 and
2001, respectively.
At December 31, 2002, the scheduled maturities of time deposits were as follows
(amounts in thousands):
Years Ending December 31,
- ---------------------------------------
2003 $ 30,413
2004 8,031
2005 2,940
2006 1,077
----------------
$ 42,461
================
Note 8. Short-Term Borrowings
Short-term borrowings consisted of the following at December 31:
2002 2001
------------------------------------
(Amounts in thousands)
Securities sold under agreements to repurchase $ 24,977 $ 26,099
Federal funds purchased - 3,000
Treasury, Tax & Loan note 100 100
------------------------------------
$ 25,077 $ 29,199
====================================
Securities sold under agreements to repurchase generally mature within one year.
Note 8. Short-Term Borrowings (Continued)
Information concerning securities sold under agreements to repurchase is
summarized as follows:
2002 2001
------------------------------------
(Amounts in thousands)
Average daily balance during the year $ 22,726 $ 20,395
Average daily interest rate during the year 1.81% 3.96%
Maximum month-end balance during the year $ 24,977 $ 33,001
Weighted average rate as of December 31 1.13% 2.00%
Securities underlying the agreements at year-end:
Carrying value $ 27,165 $ 28,220
Estimated fair value 27,165 28,220
Federal funds purchased and treasury tax and loan note generally are repaid
within 120 days from the transaction date.
Note 9. Other Borrowings
Other borrowings consisted of the following at December 31:
2002 2001
------------------------------------
(Amounts in thousands)
Federal Home Loan Bank (FHLB) advances $ 46,256 $ 47,276
Note payable 499 571
------------------------------------
$ 46,755 $ 47,847
====================================
The Bank has a master contract agreement with the FHLB which provides for
borrowing up to the maximum of 60 percent of the book value of the Bank's first
lien 1-4 family real estate loans, or $102,755,000 at December 31, 2002. The
indebtedness is evidenced by a master contract dated September 14, 1992. The
FHLB provides both fixed and floating rate advances. Floating rates are tied to
short-term market rates of interest, such as Federal funds and 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. Certain FHLB borrowings are subject to a call feature.
Maturity and interest rate information on advances from the FHLB as of December
31 is shown on the following page.
Note 9. Other Borrowings (Continued)
2002 2001
------------------------------------
(Amounts in thousands)
Due during fiscal year ended December 31, 2002
with interest rates ranging from 5.78% to 5.86% $ - $ 18,350
Due during fiscal year ending December 31, 2003
with interest rates ranging from 5.78% to 5.86% 2,006 2,006
Due during fiscal year ending December 31, 2004
with interest rates ranging from 1.38% to 6.88% 19,320 18,820
Due during fiscal year ending December 31, 2005
with interest rates ranging from 2.75% to 6.08% 5,880 50
Due during fiscal year ending December 31, 2006
with interest rates ranging from 1.84% to 1.88% 5,000 5,000
Due during fiscal year ending December 31, 2007
with interest rates ranging from 3.38% to 5.21% 11,000 -
Thereafter with rates ranging from 3.8% to 6.14% 3,050 3,050
------------------------------------
$ 46,256 $ 47,276
====================================
The advances are secured by real estate mortgages with a carrying value of
$77,093,000 and $78,793,000 as of December 31, 2002 and 2001, respectively.
The Bank has a note payable with a third-party bank used to acquire a permanent
facility for a branch that formerly occupied rented space. The note payable
bears an interest rate of 6.5 percent with monthly principal and interest
payments through July 2008 of $8,910.
Future principal payments required to be made on the note payment are as follows
(amounts in thousands):
Years Ending December 31,
- ---------------------------------------
2003 $ 77
2004 82
2005 87
2006 93
2007 99
Thereafter 61
----------------
$ 499
================
Note 10. Stock Based Compensation
The Company has an Incentive Stock Option Plan which provides for the granting
of options for up to 300,000 shares of common stock to key officers and
employees of the Company. The exercise price of each option equals the market
price of the Company's stock on the date of grant. Options may be exercised
33.33 percent per year beginning one year after the date of the grant and must
be exercised within a four-year period. During 1999, the Incentive Stock Option
Plan was amended to extend the time period for exercising grants to ten years.
Activity of the Incentive Stock Option Plan is summarized in the following
table:
Weighted-
Average Weighted-
Fair Value Average
of Option Options Options Exercise
Granted Available Exercisable Outstanding Price
--------------------------------------------------------------------
Balance - December 31, 1999 157,858 30,632 128,776 $ 31.53
Granted $ 9.31 (45,275) 45,275 36.14
Exercise of stock options - (8,444) 22.93
Canceled 6,781 (6,781) 31.88
------------- -------------
Balance - December 31, 2000 119,364 35,380 158,826 $ 33.28
Granted $ 8.43 (38,775) 38,775 40.73
Exercise of stock options - (11,835) 26.70
Canceled 6,625 (6,625) 30.94
------------- -------------
Balance - December 31, 2001 87,214 85,416 179,141 $ 35.41
Granted $ 7.16 (34,350) 34,350 44.50
Exercise of stock options - (26,532) 30.94
Canceled 1,575 (1,575) 32.18
------------- -------------
Balance - December 31, 2002 54,439 106,785 185,384
============= =============
The following table summarizes information about stock options outstanding at
December 31, 2002:
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------- -------------------------------------
Range of Weighted-Average Weighted-Average Weighted-Average
Exercise Number Remaining Exercise Number Exercise
Price Outstanding Contractual Life Price Exercisable Price
- --------------------------------------------------------------------------- -------------------------------------
$26.70-31.15 300 0.3 $ 30.00 300 $ 30.00
31.15-35.60 72,059 6.4 33.96 71,992 33.95
35.60-40.05 49,651 8.0 36.49 29,002 36.30
40.05-44.50 63,374 8.1 43.13 5,491 41.50
------------ --------------
185,384 106,785
============ ==============
Note 11. Income Taxes
The provision for income taxes included in the accompanying consolidated
financial statements for the years ended December 31, consisted of the
following:
2002 2001 2000
-----------------------------------------------------
(Amounts in thousands)
Current $ 2,093 $ 1,786 $ 1,526
Deferred (24) (9) 353
-----------------------------------------------------
$ 2,069 $ 1,777 $ 1,879
=====================================================
The net deferred tax asset included with other assets in the accompanying
consolidated balance sheets include the following amounts of deferred tax assets
and liabilities:
2002 2001
------------------------------------
(Amounts in thousands)
Deferred tax assets:
Allowance for loan losses $ 1,474 $ 1,273
Deferred compensation 431 449
Other 40 35
Deferred tax liabilities:
Office buildings and equipment (433) (311)
Stock dividends (125) (83)
Unrealized gains on available for sale securities (806) (279)
------------------------------------
Net deferred tax asset $ 581 $ 1,084
====================================
Note 11. Income Taxes (Continued)
A reconciliation of expected income tax expense to the income tax expense
included in the consolidated statements of income for the years ended December
31 was as follows:
2002 2001 2000
------------------------ ------------------------ -------------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
---------------------------------------------------------------------------
(Amounts in thousands)
Computed expected tax
expense $2,810 35.0% $ 2,462 35.0% $2,333 35.0%
Effect of graduated tax rates (80) (1.0) (70) (1.0) (67) (1.0)
Tax-exempt interest, net (578) (7.2) (509) (7.2) (487) (7.3)
State income taxes, net
of federal benefit - - - - 34 0.5
Other, net (83) (1.0) (106) (1.5) 66 1.0
----------------------------------------------------------------------------
$2,069 25.8% $ 1,777 25.3% $1,879 28.2%
============================================================================
Note 12. Profit-Sharing Plan
The Company has a 401(k) plan whereby substantially all eligible employees
participate in the 401(k) plan. Employees may contribute up to 15 percent of
their compensation subject to certain limits based on federal tax laws. The
Company makes matching contributions equal to 50 percent of the first 4 percent
of an employee's compensation contributed to the 401(k) plan. Matching
contributions vest to the employee over a six-year period. For the years ended
December 31, 2002, 2001, and 2000, contributions to the 401(k) plan amounted to
$251,000, $253,000, and $163,000, respectively.
Note 13. Salary Continuation Agreement
The Company has entered into salary continuation agreements with various
executive officers. The agreements provide for the payment of specified amounts
upon the employee's retirement or death which is being accrued over the
anticipated remaining period of employment. Expenses recognized for future
benefits under these agreements totaled $55,000, $56,000, and $57,000 during
2002, 2001, and 2000, respectively.
Although not part of the agreement, the Company purchased life insurance on the
officers which could provide funding for the payment of benefits. Included in
other assets is $1,739,000 and $1,663,000 of related cash surrender value of the
life insurance as of December 31, 2002 and 2001, respectively.
Note 14. Benefit Plans
The Bank has entered into pension and death benefit agreements with some of its
directors. Only directors who joined the Bank board before 1990 are eligible to
participate. Pursuant to the agreement, pension benefits accrue at the rate of
$10,000 for each full year a director serves on the board for the first six
years of service. Upon completing six full years of service, the director is
entitled to ten annual payments of ten thousand dollars each. Payments will
commence in January of the year in which the director attains the age of 65
years. Payments under the plan are funded through the purchase of life
insurance. The Bank is the owner and beneficiary of such life insurance policies
and is responsible for payment of the premium on such policies. Total expense
for the Directors' pension and death benefit agreements was $34,000, $36,000,
and $37,000, respectively, for 2002, 2001, and 2000.
The Bank has also established a deferred compensation plan for its directors.
Upon attaining the age of 65 or normal retirement, the Bank will pay monthly
benefits for a period of 15 years. The amount of such payment is based upon the
amount of fees deferred and length of participation in the deferred compensation
plan. Expense for these agreements was $31,000, $35,000, and $36,000,
respectively, for 2002, 2001, and 2000.
Note 15. Commitments and Contingencies
In the normal course of business, the Company is involved in various legal
proceedings. In the opinion of management, any liability resulting from such
proceedings would not have a material adverse effect on the consolidated
financial statements.
The Company is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit, financial
guarantees, and standby letters of credit. They involve, to varying degrees,
elements of credit risk in excess of amounts recognized on the consolidated
balance sheets.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Company uses the same credit policies in making
commitments and issuing letters of credit as they do for on-balance-sheet
instruments.
A summary of the contract or notional amount of the Company's exposure to
off-balance-sheet risk as of December 31 is as follows:
2002 2001
------------------------------------
(Amounts in thousands)
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $ 68,889 $ 71,274
Standby letters of credit 3,897 5,449
Note 15. Commitments and Contingencies (Continued)
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Standby letters of credit are conditional
commitments issued to guarantee the performance of a customer to a third-party.
Those guarantees are primarily issued to support public and private borrowing
arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Company evaluates each customer's credit worthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation of the
counterparty. Collateral held varies but may include accounts receivable,
inventory, property and equipment, and income-producing commercial properties.
Credit card commitments are unsecured.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third-party. Those guarantees are
primarily issued to support public and private borrowing arrangements and,
generally, have terms of one year or less. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Bank holds collateral, which may include accounts
receivable, inventory, property, equipment, and income-producing properties,
supporting those commitments if deemed necessary. In the event the customer does
not perform in accordance with the terms of the agreement with the third-party,
the Bank would be required to fund the commitment. The maximum potential amount
of future payments the Bank could be required to make is represented by the
contractual amount shown in the summary on the previous page. If the commitment
is funded the Bank would be entitled to seek recovery from the customer. At
December 31, 2002 and 2001, no amounts have been recorded as liabilities for the
Bank's potential obligations under these guarantees.
Note 16. Concentration of Credit Risk
The Company and the Bank do not engage in the use of interest rate swaps,
futures, or option contracts as of December 31, 2002.
Practically all of the Bank's loans, commitments, and standby letters of credit
have been granted to customers in the Bank's market area. Although the Bank has
a diversified loan portfolio, the ability of their debtors to honor their
contracts is dependent on the economic conditions of the counties surrounding
the Bank. The concentration of credit by type of loan is set forth in Note 4.
A significant portion of the Bank's cash is maintained at Bank One. The total
amount of cash on deposit exceeded federal insured limits by $12,600,000 as of
December 31, 2002. In the opinion of management, no material risk of loss exists
due to the financial condition of Bank One.
Note 17. Regulatory Capital Requirements and Restrictions of Dividends
The Company (on a consolidated basis) and the Bank 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 Company and the Bank's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and the Bank must meet
specific capital guidelines that involve quantitative measures of their assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk-weightings, and
other factors. Prompt corrective action provisions are not applicable to bank
holding companies.
Quantitative measures established by regulation to ensure capital adequacy
requires the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table on the following page) 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, 2002 and 2001, that the Company and the Bank met all capital
adequacy requirements to which they are subject.
As of December 31, 2002, the most recent notification from the regulatory
agencies categorized the Company as well-capitalized under the regulatory
framework for prompt corrective action. To be categorized as well-capitalized,
an institution must maintain minimum total risk-based, Tier I risk-based, and
Tier 1 leverage ratios as set forth in the following table. There are no
conditions or events since these notifications that management believes have
changed the Bank's category.
Note 17. Regulatory Capital Requirements and Restrictions of Dividends
(Continued)
The Company's and the Bank's actual capital amounts and ratios as of December
31, 2002 and 2001 are presented in the following table:
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
---------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------------------------------------------
(Amounts in thousands)
As of December 31, 2002:
Total capital
(to risk-weighted assets):
First Banking Center, Inc. $ 50,953 13.6% $ 30,103 8.0% N/A
First Banking Center 48,746 13.0 29,979 8.0 $ 37,474 10.0%
Tier I capital
(to risk-weighted assets):
First Banking Center, Inc. 46,273 12.3 15,052 4.0 N/A
First Banking Center 44,066 11.8 14,990 4.0 22,484 6.0
Tier I capital
(to average assets):
First Banking Center, Inc. 46,273 9.3 19,891 4.0 N/A
First Banking Center 44,066 8.9 14,990 4.0 18,737 5.0
As of December 31, 2001:
Total capital
(to risk-weighted assets):
First Banking Center, Inc. $ 45,080 12.5% $ 28,973 8.0% N/A
First Banking Center 43,487 12.0 28,885 8.0 $ 36,106 10.0%
Tier I capital
(to risk-weighted assets):
First Banking Center, Inc. 40,713 11.2 14,486 4.0 N/A
First Banking Center 39,120 10.8 14,442 4.0 21,664 6.0
Tier I capital
(to average assets):
First Banking Center, Inc. 40,713 9.1 17,871 4.0 N/A
First Banking Center 39,120 8.8 17,839 4.0 22,299 5.0
A source of income and funds of the Company are dividends from the Bank.
Dividends declared by the Bank that exceed the retained 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 $12,942,000 may be paid without prior regulatory approval.
Note 18. Fair Value of Financial Information
FASB Statement No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure of fair value information about financial instruments,
whether recognized or not recognized in the balance sheet, for which it is
practicable to estimate that value. The fair value of a financial instrument is
the current amount that would be exchanged between willing parties, other than a
forced liquidation. Fair value is best-determined base upon quoted market
prices. However, in many instances, there are no quoted market prices for the
Company's various financial instruments. 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 assumptions
used, including the discount rate and estimates of future cash flows.
Accordingly, the fair value estimates may not be realized in an immediate
settlement of the instrument. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented may not necessarily
represent the underlying fair value of the Company.
The following methods and assumptions were used by the Company in estimating
fair value disclosures for financial instruments:
Cash and due from banks: The carrying amounts of cash and due from banks
equal their fair values.
Federal funds sold: The carrying amounts of Federal funds sold equal their
fair values.
Interest-bearing deposits in banks: The carrying amounts of interest-
bearing deposits in banks equal their fair values.
Available-for-sale securities: Fair values for securities are based on
quoted market prices.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
values. Fair values for all other loans are estimated by discounting
contractual cash flows using estimated market discount rates, which reflect
the credit and interest rate risk inherent in the loan.
Cash surrender value of life insurance: Life insurance agreements reprice
periodically with no significant change in credit risk. Fair values
approximate carrying value for these agreements.
Accrued interest receivable and payable: The carrying amounts of accrued
interest receivable and payable equal their fair values.
Deposits: The fair values disclosed for demand deposits (interest and
non-interest checking, passbook savings and certain types of money market
accounts) are, by definition, equal to the amount payable on demand 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 within the market place.
Short-term borrowings: The carrying amounts of short-term borrowings equal
their fair values.
Other borrowings: The fair values of other borrowings are estimated using
discounted cash flow analysis based on current interest rates being offered
by instruments with similar terms and credit quality.
Note 18. Fair Value of Financial Information (Continued)
Off-balance-sheet instruments: The estimated fair value of fee income on
letters of credit at December 31, 2002 and 2001 was insignificant. Loan
commitments on which the committed interest rate is less than the current
market rate are also insignificant at December 31, 2002 and 2001.
The estimated fair values of the Company's financial instruments were as
follows:
2002 2001
----------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------------------------------------------------------------
(Amounts in thousands)
Financial assets:
Cash and due from banks $ 22,203 $ 22,203 $ 20,735 $ 20,735
Federal funds sold 11,058 11,058 12,010 12,010
Interest-bearing deposits
in banks 441 441 267 267
Available-for-sale securities 87,630 87,630 59,343 59,343
Loans, net 367,156 366,362 361,705 365,681
Cash surrender value of life insurance 2,666 2,666 2,413 2,413
Accrued interest receivable 3,344 3,344 3,285 3,285
Financial liabilities:
Deposits 393,801 393,889 352,414 352,625
Short-term borrowings 25,007 25,007 29,199 29,199
Other borrowings 46,755 47,403 47,847 49,146
Accrued interest payable 932 932 1,010 1,010
Note 19. Parent Company Only Financial Information
BALANCE SHEETS
(Parent Company Only)
December 31,
--------------------------------------
2002 2001
--------------------------------------
(Amounts in thousands)
ASSETS
Cash $ 191 $ 130
Interest-bearing deposits in banks 1,096 771
Investment in subsidiary 46,513 40,646
Loans 945 555
Other assets 577 550
--------------------------------------
Total assets $ 49,322 $ 42,652
======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Other liabilities $ 602 $ 413
--------------------------------------
Stockholders' Equity
Common stock 1,494 1,489
Surplus 4,375 4,178
Retained earnings 41,287 36,655
Accumulated other comprehensive income 1,564 542
Common stock in treasury, at cost - (625)
--------------------------------------
Total stockholders' equity 48,720 42,239
--------------------------------------
Total liabilities and stockholders' equity $ 49,322 $ 42,652
======================================
Note 19. Parent Company Only Financial Information (Continued)
STATEMENTS OF INCOME
(Parent Company Only)
December 31,
-------------------------------------------------------
2002 2001 2000
-------------------------------------------------------
(Amounts in thousands)
Income:
Interest and dividends from subsidiary $ 1,094 $ 1,903 $ 1,307
Management fees from subsidiary 5,013 4,786 3,926
Other 35 32 24
-------------------------------------------------------
Total income 6,142 6,721 5,257
-------------------------------------------------------
Expenses:
Salaries and employee benefits 3,015 2,717 2,242
Occupancy expenses 321 312 278
Equipment expense 658 636 577
Computer services 189 224 163
Other expenses 834 897 666
-------------------------------------------------------
Total expenses 5,017 4,786 3,926
-------------------------------------------------------
Income before income taxes and equity
in undistributed net income of subsidiary 1,125 1,935 1,331
Income taxes 11 11 8
-------------------------------------------------------
Income before equity in undistributed
net income of subsidiary 1,114 1,924 1,323
Equity in undistributed net income
of subsidiary 4,845 3,333 3,463
-------------------------------------------------------
Net income $ 5,959 $ 5,257 $ 4,786
=======================================================
Note 19. Parent Company Only Financial Information (Continued)
STATEMENTS OF CASH FLOWS
(Parent Company Only)
December 31,
-------------------------------------------------
2002 2001 2000
-------------------------------------------------
(Amounts in thousands)
Cash Flows From Operating Activities:
Net income $ 5,959 $ 5,257 $ 4,786
Adjustments to reconcile net income to net
cash flows provided by operating activities:
Tax benefit of non-qualified stock options exercised 29 6 10
(Increase) decrease in other assets (29) (147) 110
Increase in other liabilities 191 193 9
Equity in undistributed net income of subsidiary (4,845) (3,333) (3,463)
-------------------------------------------------
Net cash provided by operating activities 1,305 1,976 1,452
-------------------------------------------------
Cash Flows From Investing Activities:
Net increase in interest-bearing
deposits in banks (325) (501) (160)
Net increase in loans (390) (219) (125)
-------------------------------------------------
Net used in investing activities (715) (720) (285)
-------------------------------------------------
Cash Flows From Financing Activities:
Sale of common stock 167 - -
Purchase of treasury stock (252) (606) (404)
Sale of treasury stock for the exercise of stock options 654 316 194
Dividends paid (1,098) (1,016) (946)
-------------------------------------------------
Net cash used in financing activities (529) (1,306) (1,156)
-------------------------------------------------
Net increase (decrease) in cash 61 (50) 11
Cash:
Beginning 130 180 169
-------------------------------------------------
Ending $ 191 $ 130 $ 180
=================================================
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
The Company had no disagreement with the accountants regarding any information
presented.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning our directors and executive officers required by this
item is incorporated herein by reference from our definitive proxy statement for
our 2003 Annual Meeting of Stockholders, a copy of which was filed with the
Securities and Exchange Commission on March 14, 2003.
The information concerning compliance with the reporting requirements of Section
16(a) of the Securities and Exchange Commission Act of 1934 by our directors,
officers and ten percent stockholders required by this item is incorporated
herein by reference from our definitive proxy statement for our 2003 Annual
Meeting of Stockholders, a copy of which was filed with the Securities and
Exchange Commission on March 14, 2003.
ITEM 11: EXECUTIVE COMPENSATION
The information called for herein is presented in the proxy statement to be
furnished in connection with the solicitation of proxies on behalf of the Board
of Directors of the Registrant for use at its Annual Meeting to be held on
Tuesday, April 15, 2003, is incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for herein is presented in the proxy statement to be
furnished in connection with the solicitation of proxies on behalf of the Board
of Directors of the Registrant for use at its Annual Meeting to be held on
Tuesday, April 15, 2003, is incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Transactions with management and others
Since January 1, 1995 the company has been making rent payments to First Banking
Center for the space that it occupies and the equipment it uses.
(b) Certain business relationships
None
(c) Indebtedness of management
This information is presented on page 14, Note 4 of the
Annual Report to Shareholders, and is incorporated herein by
reference.
(d) Transactions with promoters
None
ITEM 14: CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures: An
evaluation of our disclosure controls and procedures (as
defined in Rule 13a-14(c) under the Securities and Exchange
Act of 1934 (the "Act")) was carried out under the
supervision and with the participation of our Chief
Executive Officer, Chief Financial Officer and several other
members of our senior management within the 90-day period
preceding the filing date of this annual report. Our Chief
Executive Officer and Chief Financial Officer concluded that
our disclosure controls and procedures as currently in
effect are in ensuring that the information we are required
to disclose in the reports we file or submit under the Act
is (i) accumulated and communicated to our management
(including the Chief Executive Officer and Chief Financial
Officer) in a timely manner, and (ii) recorded, processed,
summarized and reported within the time periods specified in
the SEC's rules and forms.
(b) Changes in Internal Controls: In the year ended December
31, 2002, there were no significant changes in our internal
controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation.
ITEM 15: EXIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FIRST BANKING CENTER, INC.
Registrant
Date____________________ By ___________________________
Brantly Chappell
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.*
- -------------------------------- -----------------------------
Brantly Chappell, James Schuster,
Chief Executive Officer, Director Chief Financial Officer
- -------------------------------- -----------------------------
Melvin Wendt, Director Daniel Jacobson, Director
- -------------------------------- -----------------------------
John Smith, Director John Ernster, Director
- -------------------------------- -----------------------------
David Boilini, Director Robert Fait, Director
- -------------------------------- -----------------------------
Charles Wellington, Director Keith Blumer, Director
- --------------------------------
Thomas Laken, Jr., Director
*Each of the above signatures is affixed as of March 10, 2003.
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Brantly Chappel, Chief Executive Officer, certify that:
1) I have reviewed this annual report on Form 10-K of First Banking Center,
Inc.;
2) Based on my knowledge, this annual 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 annual
report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual
report (the "Evaluation Date"); and
c) presented in this annual 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
annual 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: March 24, 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 annual report on Form 10-K of First Banking Center,
Inc.;
2) Based on my knowledge, this annual 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 annualy
report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual
report (the "Evaluation Date"); and
c) presented in this annual 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
annual 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: March 24, 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 Annual Report of First Banking Center, Inc. (the
"Company") on Form 10-K for the period ended December 31, 2002 as filed with the
Securities and Exchange Commission on March 27, 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: March 24, 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 Annual Report of First Banking Center, Inc. (the
"Company") on Form 10-K for the period ended December 31, 2002 as filed with the
Securities and Exchange Commission on March 27, 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: March 24, 2002
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
(a) Annual Report to Shareholders (Incorporated within the 10K).
(b) All proxy material in connection with the 2003 Annual Shareholders Meeting.