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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT 1934
For the quarterly period ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-11132
FIRST BANKING CENTER, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1391327
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 Milwaukee Ave., Burlington, WI 53105
(Address of principal executive offices) (Zip Code)
(262) 763-3581
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as define
in Rule 12b-2 of the Act).
Yes [ ] No [ X ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of May 17, 2004, Common stock, $1.00 par value, 1,492,083
shares outstanding.
FIRST BANKING CENTER, INC AND SUBSIDIARY
TABLE OF CONTENTS
March 31, 2004
Page
----
Part I Financial Information
Item 1 Consolidated Financial Statements
Unaudited Consolidated Balance Sheets,
March 31, 2004 and December 31, 2003 3
Unaudited Consolidated Statements of Income,
For the three months ended March 31, 2004 and 2003 4
Unaudited Consolidated Statements of Cash Flows,
For the three months ended March 31, 2004 and 2003 5
Notes to Unaudited Consolidated Financial Statements 6-9
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-17
Item 3 Quantitative and Qualitative Disclosures about Market 18
Risk
Item 4 Controls and Procedures 19
Part II Other Information
Item 1 Legal Proceedings 20
Item 2 Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities 20
Item 3 Defaults upon Senior Securities 20
Item 4 Submission of Matters to a Vote of Security Holders 20
Item 5 Other Information 20
Item 6 Exhibits and Reports on Form 8-K 21-26
Signatures 22-26
2
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
FIRST BANKING CENTER, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
ASSETS 2004 2003
----------------------------
(Dollars in thousands)
Cash and due from banks $ 14,214 $ 19,960
Federal funds sold 3,512 3,047
Interest-bearing deposits in banks 280 274
Available for sale securities 77,532 82,672
Loans, less allowance for loan losses of $4,629 and
$4,617 at 2004 and 2003, respectively 424,331 403,252
Office buildings and equipment, net 12,451 11,818
Other real estate owned 1,750 1,899
Federal Home Loan Bank Stock 11,487 11,755
Other assets 9,656 9,240
----------------------------
TOTAL ASSETS $ 555,213 $ 543,917
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Demand $ 57,980 $ 67,961
Savings and NOW accounts 191,219 194,419
Time 143,977 145,072
----------------------------
Total Deposits 393,176 407,452
Short-term borrowings 57,681 34,176
Other borrowings 44,653 44,673
Other liabilities 4,713 4,076
----------------------------
TOTAL LIABILITIES $ 500,223 $ 490,377
----------------------------
STOCKHOLDERS' EQUITY
Common Stock, $1.00 par value 3,000,000 shares authorized;
1,502,543 and 1,501,277 shares issued as of March 31, 2004 and
December 31, 2003, respectively; 1,497,271 and 1,500,760 shares
outstanding as of March 31, 2004 and December 31, 2003, respectively 1,503 1,501
Surplus 4,667 4,612
Retained Earnings 47,611 46,161
Accumulated other comprehensive income 1,457 1,290
Common stock in treasury, at cost-5,272 and 517 shares
as of March 31, 2004 and December 31, 2003, respectively (248) (24)
----------------------------
TOTAL STOCKHOLDERS' EQUITY $ 54,990 $ 53,540
----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 555,213 $ 543,917
============================
See accompanying notes to unaudited consolidated financial statements
3
FIRST BANKING CENTER, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
March 31,
2004 2003
-----------------------------
(Dollars in thousands, except
per share data)
INTEREST INCOME
Interest and fees on loans $ 5,767 $ 5,404
Interest and dividends on securities:
Taxable 280 325
Non-taxable 393 425
Interest on federal funds sold 4 38
Interest on interest-bearing deposits in banks 1 14
Other interest 189 177
-----------------------------
TOTAL INTEREST INCOME 6,634 6,383
-----------------------------
INTEREST EXPENSE
Interest on deposits 1,176 1,462
Interest on short-term borrowings 158 72
Interest on other borrowings 431 460
-----------------------------
TOTAL INTEREST EXPENSE 1,765 1,994
-----------------------------
NET INTEREST INCOME 4,869 4,389
Provision for loan losses 50 90
-----------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,819 4,299
-----------------------------
NON-INTEREST INCOME
Trust fees 150 119
Service charges on deposit accounts 462 465
Commissions 42 41
Automated banking fees 86 85
Securities gains, net 123 0
Loan gains, net 226 514
Other 269 171
-----------------------------
TOTAL NON-INTEREST INCOME 1,358 1,395
-----------------------------
NON-INTEREST EXPENSE
Salary and employee benefits 2,379 2,198
Occupancy 330 284
Equipment 347 341
Data Processing services 275 245
Other 830 748
-----------------------------
TOTAL NON-INTEREST EXPENSE 4,161 3,816
-----------------------------
INCOME BEFORE INCOME TAXES 2,016 1,878
Income taxes 566 490
-----------------------------
NET INCOME $ 1,450 $ 1,388
=============================
Basic earnings per share $ 0.96 $ 0.93
Diluted earnings per share $ 0.94 $ 0.91
See accompanying notes to unaudited consolidated financial statements
4
FIRST BANKING CENTER, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
2004 2003
--------------------------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,450 $ 1,388
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 267 223
Provision for loan losses 50 90
Loan gains, net (226) (514)
Amortization of premiums and accretion of discounts
on securities, net 72 70
Amortization 45 26
Securities (gains), net (123) -
Tax benefit of nonqualified stock options exercised 15 -
(Increase) decrease in other assets (129) 4
Increase in other liabilities 638 3,084
--------------------------
Net cash provided by operations before loan originations and sales 2,059 4,371
Loans originated for sale (13,010) (11,447)
Proceeds from sale of loans 12,606 14,620
--------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,655 7,544
--------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing deposits in banks (6) 229
Net (increase) decrease in federal funds sold (465) 4,965
Proceeds from sales of available-for-sale securities 6,297 -
Proceeds from maturities and calls of available-for-sale securities 33,414 34,707
Purchase of available-for-sale securities (34,268) (33,000)
Net (increase) decrease in loans (20,499) 1,101
Purchase of office buildings and equipment (900) (580)
--------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (16,427) 7,422
--------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits (14,276) (17,553)
Payments on other borrowings (20) (418)
Net increase (decrease) in short-term borrowings 23,505 (2,390)
Sale of common stock for the exercise of stock options 41 40
Purchase of treasury stock (293) (32)
Sale of treasury stock for the exercise of stock options 69 19
--------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 9,026 (20,334)
--------------------------
NET DECREASE IN CASH AND DUE FROM BANKS (5,746) (5,368)
CASH AND DUE FROM BANKS:
Beginning 19,960 22,203
--------------------------
Ending $ 14,214 $ 16,835
==========================
Supplemental Disclosures of Cash Flow Information,
Cash Paid During the Year for:
Interest $ 1,819 $ 2,103
Income taxes $ 15 $ (79)
Supplemental Schedule of Noncash Investing Activities,
Change in Accumulated Other Comprehensive Income,
Unrealized gains (losses) on Available-for-Sale Securities, Net $ 167 $ (87)
Other Real Estate aquired in settlement of loans $ - $ -
See accompanying notes to unaudited consolidated financial statements
5
FIRST BANKING CENTER, INC AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 1 - Basis of Presentation
The unaudited consolidated financial statements include the accounts of First
Banking Center, Inc. (the "Company") and First Banking Center, its wholly owned
subsidiary. In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the financial
position, results of operation and cash flows for the interim periods have been
made. The results of operations for the three months ended March 31, 2004 are
not necessarily indicative of the results to be expected for the entire fiscal
year.
The unaudited interim financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America and
industry practice. Certain information in footnote disclosure normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America and industry practice has
been condensed or omitted pursuant to rules and regulations of the Securities
and Exchange Commission. These financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's December 31, 2003 audited financial statements.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions which affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements, as well as the reported amounts of income and
expenses during the reported periods. Actual results could differ from those
estimates.
NOTE 2 - Earnings per Share
The following information calculates the computation of earnings per share on a
basic and diluted basis.
Three Months Ended
March 31,
2004 2003
----------------------
(Amounts in thousands,
except per share data)
Basic
Net income $ 1,450 $ 1,388
Weighted average shares outstanding 1,503 1,495
Basic earnings per share $ 0.96 $ 0.93
Diluted
Net income $ 1,450 $ 1,388
Weighted average shares outstanding 1,503 1,495
Effect of dilutive stock options outstanding 38 30
----------------------
Diluted weighted average shares outstanding 1,541 1,525
Diluted earnings per share $ 0.94 $ 0.91
NOTE 3 - Comprehensive Income
The following table presents our comprehensive income.
Three Months Ended
March 31,
2004 2003
----------------------
(Dollars in thousands)
Net income $ 1,450 $ 1,388
Other comprehensive income
Net change in unrealized gain (loss) on available for
sale securities 167 (87)
----------------------
Total comprehensive income $ 1,617 $ 1,301
======================
6
NOTE 4 - Stock-based Compensation Plan:
For the three months ended March 31, 2004, and March 31, 2003, the Company had
one stock-based compensation plan for officers and key employees. 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.
Three Months Ended
March 31,
2004 2003
--------------------------
(Amounts in thousands,
except for per share data)
Net income, as reported $ 1,450 $ 1,388
Deduct total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (170) (201)
--------------------------
Pro forma net income $ 1,280 $ 1,187
==========================
Earnings per share:
Basic:
As reported $ 0.96 $ 0.93
Pro forma 0.85 0.79
Diluted:
As reported $ 0.94 $ 0.91
Pro forma 0.83 0.78
In determining compensation cost using the fair value method prescribed in
Statement No. 123, the value of each grant is estimated at the grant date with
the following weighted-average assumptions used for grants on March 31, 2004,
and March 31, 2003, respectively: dividend yield of 1.7 percent and 1.7 percent;
expected price volatility of 5.2 percent and 5.2 percent, blended risk-free
interest rates of 3.9 percent and 4.3 percent; and expected lives of 10 years,
respectively.
NOTE 5 - Commitments and Contingencies
Information in the following table provides a summary of the Company's other
contractual obligations and commercial commitments as of March 31, 2004, as well
as that information for its depository products:
Payments Due by Fiscal Period
(in thousands)
---------------------------------------------------------------
Contractual Obligations (a) Remaining in 2005-2006 2007-2008 2009 and
Total 2004 thereafter
---------------------------------------------------------------
Deposits, Certificates of Deposit $ 143,977 $ 81,069 $ 52,802 $ 9,928 $ 178
and similar products
Short-term Obligations (b) 57,681 57,681
Other Borrowings (c) 44,653 19,382 11,060 11,211 3,000
Operating leases 332 95 174 63 -
Other long-term obligations (d) 2,472 194 357 287 1,634
---------------------------------------------------------------
Total contractual cash obligations $ 249,115 $ 158,421 $ 64,393 $ 21,489 $ 4,812
===============================================================
7
Notes
a. Excluding the "off balance sheet" lending commitments discussed below.
b. See Note 8 in the Notes to Consolidated Financial Statements for the year
ended December 31, 2003 for a description of the Company's various
short-term borrowings. Many short-term borrowings such as fed funds
purchased and security repurchase agreements are expected to be reissued
and, therefore, do not necessarily represent an immediate need for cash.
c. See Note 9 in the Notes to Consolidated Financial Statements for the year
ended December 31, 2003 for a description of the Company's various other
borrowings.
d. Other long-term obligations consisted primarily of salary continuation
agreements and Benefit Plans. See Exhibits 10.1, 10.2, 10.3 and 10.4 filed
with Form 10-K as of December 31, 2003 for a detailed description of the
Company's Salary continuation agreements and Benefit Plans.
In the ordinary 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
ordinary course of its banking 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.
Information in the following table provides a summary of the contract or
notional amount of the Company's exposure to off-balance-sheet risk as of March
31, 2004 is as follows:
Commitments to extend credit
Unused revolving home equity, consumer lines of credit $ 19,759
Unused commercial lines of credit 64,262
Standby letters of credit 2,817
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Standby letters of credit are conditional commitments issued by the 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
8
receivable, inventory, property, equipment, and income-producing properties,
supporting those commitments if deemed necessary. In the event the customer does
not perform in accordance with the terms of the agreement with the third-party,
the Bank would be required to fund the commitment. The maximum potential amount
of future payments the Bank could be required to make is represented by the
contractual amount shown in the summary on the previous page. If the commitment
is funded the Bank would be entitled to seek recovery from the customer. At
March 31, 2004 and December 31, 2003, no amounts have been recorded as
liabilities for the Bank's potential obligations under these guarantees.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FIRST BANKING CENTER, INC AND SUBSIDIARY
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As of March 31, 2004
The following discussion provides additional analysis of the financial condition
and results of operations of the Company for the three months ended March 31,
2004. This discussion focuses on the significant factors that affected the
Company's earnings so far in 2004, with comparisons to 2003. As of March 31,
2004, First Banking Center (the "Bank") was the only direct subsidiary of the
Company and its operations contributed nearly all of the revenue for the year.
The Company provides various support functions for the Bank and receives payment
from the Bank for these services. These intercompany payments are eliminated for
the purpose of these consolidated financial statements. The Bank has three
wholly owned subsidiaries, FBC Financial Services, Corp., a brokerage and
financial services subsidiary, FBC-Burlington, Inc., an investment subsidiary
located in Nevada and Burco Holdings, LLC, a real estate subsidiary for the
purpose of holding and liquidating property acquired as other real estate.
Overview
As of March 31, 2004, total Company assets were $555.2 million increasing 2.1%
from $543.9 million as of December 31, 2003. Total income, for the three months
ended March 31, 2004, was $1.5 million or $0.94 per diluted share, increasing
$62,000 or 4.5% from $1.4 million or $0.91 per diluted share in the first
quarter of 2003. The significant items resulting in the above-mentioned results
are discussed below.
Financial Condition
Loans
Loans outstanding were $429.0 million and $407.9 million on March 31, 2004 and
December 31, 2003 respectively. This represents an increase of $21.1 million or
5.2%. The increase is primarily the result of continued strong demand for
commercial loans in the Bank's market area. The following table summarizes the
changes to date in the major loan classifications.
As a % of Total Loans
March 31, December 31, Change in March 31, December 31,
2004 2003 Balance 2004 2003
--------------------------------------------- --------------------------------
(Dollars in millions)
Residential Real Estate $171.7 $178.5 ($6.8) 40.0% 43.8%
Commercial Real Estate $113.7 $101.1 $12.6 26.5% 24.8%
Construction and Land Development $50.6 $43.0 $7.6 11.8% 10.5%
Commercial $33.8 $27.6 $6.2 7.9% 6.8%
Agricultural Real Estate $29.6 $25.9 $3.7 6.9% 6.4%
Allowance for Loan Losses
The allowance for loan losses was $4.6 million or 1.08% of gross loans on March
31, 2004, compared with $4.6 million or 1.13% of gross loans on December 31,
2003. Net charge-offs were $38,000 or .01% of gross loans and $40,000 or .01%
for the three months ended March 31, 2004 and 2003 respectively.
The allowance for loan losses is established through a provision for loan losses
charged to expense. See "Provision for Loan Losses" below for information on the
provision during the periods. Loans are charged against the allowance for loan
losses when management believes that the collectibility of the principal is
unlikely. The allowance for loan losses is adequate to cover probable credit
losses relating to specifically identified loans, as well as probable credit
losses inherent in the balance of the loan portfolio. In accordance with FASB
Statements 5 and 114, the allowance is provided for losses that have been
incurred as of the balance sheet date. The allowance is based on past events and
10
current economic conditions, and does not include the effects of expected losses
on specific loans or groups of loans that are related to future events or
expected changes in economic conditions. Management reviews a calculation of the
allowance for loan losses on a quarterly basis. While management uses the best
information available to make its evaluation, future adjustments to the
allowance may be necessary if there are significant changes in economic
conditions. Impaired loans are measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the fair value of
the collateral if the loan is collateral dependent. A loan is impaired when it
is probable the company will be unable to collect all contractual principal and
interest payments due in accordance with the terms of the loan agreement.
In addition, various regulatory agencies periodically review the allowance for
loan losses. These agencies may require the bank to make additions to the
allowance for loan losses based on their judgments of collectibility based on
information available to them at the time of their examination.
The following table provides a detailed analysis of changes in the indicated
periods in the allowance for estimated loan losses:
Three Months Ended March 31,
2004 2003
--------------------------------
(Dollars in thousands)
Balance, beginning of fiscal year $ 4,617 $ 4,988
Charge-offs:
Commercial 0 0
Agricultural production 0 0
Real Estate:
Construction 0 0
Commercial 0 0
Agriculture 0 42
Other Mortgages 46 0
Consumer (including installmment loans) 2 0
--------------------------------
Total Charge-offs 48 42
--------------------------------
Recoveries:
Commercial 0 1
Agricultural production 0 0
Real Estate:
Construction 0 0
Commercial 0 0
Agriculture 0 0
Other Mortgages 8 0
Consumer (including installment loans) 2 1
--------------------------------
Total Recoveries 10 2
--------------------------------
Net Charge-offs 38 40
Provision charged to operations 50 90
--------------------------------
Balance, end of period $ 4,629 $ 5,038
================================
Average amount of loans outstanding before allowance
for estimated losses on loans $ 392,209 $ 367,724
================================
Ratio of net charge-offs during the period to average
loans outstanding during the period 0.010% 0.011%
================================
11
Non-accrual, Past Due and Renegotiated Loans
March 31, December 31,
2004 2003
----------------------------------
(Dollars in thousands)
Non-accrual Loans (a) $2,500 $2,041
Past Due 90 days + (b) 0 0
Restructured Loans 0 0
The policy of the Company is to place a loan on non-accrual status if:
(a) payment in full of interest and principal is not expected, or
(b) principal or interest has been in default for a period of 90 days or more
unless the obligation is both in the process of collection and well
secured. Well secured is defined as collateral with sufficient market value
to repay principal and all accrued interest. A debt is in the process of
collection if collection of the debt is proceeding in due course either
through legal action, including judgment enforcement procedures, or in
appropriate circumstances, through collection efforts not involving legal
action which are reasonably expected to result in repayment of the debt or
in its restoration to current status.
The non-accrual loans consisted primarily of $314,000 of commercial real estate
loans, $1.8 million of residential real estate loans and $159,000 of
agricultural real estate. On March 31, 2004, the ratio of non-accrual loans to
the allowance for loan losses was 54.0% compared to 44.2% on December 31, 2003.
The increase during the quarter was due primarily to an increase in non-accrual
residential real estate loans, in which the Company believes it has adequate
collateral and anticipates minimal losses. The Company believes it has an
adequate allowance for any anticipated losses for these loans.
As of March 31, 2004, the Company had loans totaling $25.5 million (in addition
to those listed as non-accrual, past due or restructured) that were identified
by the Bank's internal asset rating systems as classified assets and loans which
management has determined require additional monitoring. This represents an
increase of $7.1 million or 38.6% from December 31, 2003. The increase is
primarily the result of continued monitoring of the loan portfolio and the early
identification of loans the Company believes should be monitored more closely
than non-classified loans. A portion of the increase, $1.2 million, represents a
change in the way the Company treats the guaranteed portion of a loan. Beginning
with the first quarter of 2004, the Company included the guaranteed portion of a
classified loan in the classified loan total. The Company believes it has
adequate reserves for anticipated losses that could result from the increase in
classified assets. Management is not aware of any significant loans, group of
loans or segments of the loan portfolio not included above, where full
collectibility cannot reasonably be expected. Management has committed resources
and is focusing on efforts designed to control the amount of classified assets.
The Company does not have a substantial portion of its loans concentrated in one
or a few industries nor does it have any foreign loans outstanding as of March
31, 2004. The Company's loans are concentrated geographically in the Wisconsin
counties of Racine, Walworth, Kenosha, Lafayette and Green.
Investments securities - Available for Sale
The fair value of the securities available-for-sale portfolio at March 31, 2004,
decreased $5.1 million or 6.2% from December 31, 2003. For the purposes of this
discussion, changes in investment security balances are based on amortized
costs. The decrease came from three areas of the portfolio. The Company
purchased $32.0 million of U.S. Government Agency and $2.3 million of municipal
securities. The Company sold $4.6 million of U.S. Government Agency Notes and
$1.7 million of municipal securities. There were maturities and calls of $32.3
million of U.S. Government Agency Notes and U.S. Government Agency
mortgage-backed securities and $1.2 million of municipal securities.
12
Deposits
Total deposits were $393.2 million on March 31, 2004 compared to $407.5 million
on December 31, 2003. This is a decrease of $14.3 million or 3.6%. Most of the
decrease was in demand deposits and is primarily a result of seasonal
fluctuations in municipal deposits.
March 31, December 31, Change in
2004 2003 Balance
----------------------------------- -------------
(Amount in millions)
Money Market and Savings $ 146.3 $ 149.2 $ (2.9)
NOW Accounts 44.9 45.2 (0.3)
Demand Deposits 58.0 68.0 (10.0)
Time Deposits less than $100,000 86.3 87.1 (0.8)
Time Deposits equal or greater than $100,000 57.7 57.9 (0.2)
Borrowed Funds
Total borrowed funds were $102.3 million on March 31, 2004, compared to $78.8
million on December 31, 2003. This is an increase of $23.5 million or 29.8%. The
Company increased its borrowings because demand for loans has been growing
faster than deposits. The following table summarizes changes during 2004 in the
major classifications of borrowed funds.
March 31, December 31, Change in
2004 2003 Balance
----------------------------------- -------------
(Amounts in millions)
Securities sold under agreement to repurchase $ 27.1 $ 27.4 $ (0.3)
Federal Home Loan Borrowings 44.2 44.2 -
Federal Funds Borrowed 30.5 6.7 23.8
Further information regarding our FHLB borrowings as of December 31, 2003 is
included in the Note 9 of our Consolidated Financial Statements in our annual
report on Form 10-K for the year ended December 31, 2003.
Capital resources
As of March 31, 2004, the Company's stockholders' equity increased $1.5 million
or 2.7% from December 31, 2003. Net income of $1.5 million was the primary
reason for the increase. In addition, other comprehensive income increased
$167,000 from $1.3 million to $1.5 million. These increases were partially
offset by net repurchases of stock; the Company purchased $293,000 and sold
$69,000 of treasury stock during the first three months of 2004.
Under the Federal Reserve Board's risk-based 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 12.1% at March 31, 2004, well above the 4% minimum required. Total capital
to risk-adjusted assets was 13.2%; also well above the 8% minimum requirement.
The leverage ratio was at 9.6% compared to the 4% minimum requirement. According
to FDIC capital guidelines, the 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.
13
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 19%, which
compares to a positive 20% as of December 31, 2003. Although these ratios are
outside the Bank's target range, and the Bank is therefore somewhat exposed to
declining rates, the Company's management feels the ratios are appropriate at
this time due to management's projection for future interest rates.
Liquidity
Liquidity measures our ability 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 $18.0 million at March 31, 2004, compared
with $23.3 million at December 31, 2003. 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. During the first quarter of
2004, the Bank became increasingly dependent upon borrowed funds, as its loans
outstanding increased while deposits modestly decreased. While the Bank believes
that these types of borrowings are available on reasonable terms, there can be
no assurance they will continue to be. We also generate liquidity from the
regular principal payments and prepayments made on its portfolio of loans and
mortgage-backed securities. Although changes in interest rates could negatively
impact liquidity, the Bank feels it has adequate sources to meet its liquidity
needs. Any effects changes in interest rates have on income would have minimal
effect on liquidity.
The cash position of the Bank is determined by activity in three primary
classifications: cash flows from operating activities, cash flows from investing
activities, and cash flows from financing activities. As a net result of these
activities, the Bank's cash decreased slightly in the first three months of
2004. Net cash provided by operating activities was $1.7 million. This was
primarily a result of normal increases and decreases in operations offset by net
originating secondary market loans over secondary market loan proceeds. Net cash
used in investing activities, consisting primarily of loan funding and the
purchase of securities, was $16.4 million. Net cash provided by financing
activities, consisting primarily of a $23.5 million increase in short term
borrowings offset by the decrease in deposits, was $9.0 million, for the three
months ended March 31, 2004.
For the three months ending March 31, 2003, net cash provided by operating
activities was $7.5 million. This was primarily a result of net secondary market
loan proceeds over originating secondary market loans. Net cash provided by
investing activities, consisting primarily of loan funding and the purchase of
securities was $7.4 million. Net cash used in financing activities, consisting
primarily of deposit growth and short term borrowings, was $20.3 million.
Impact of Inflation and Changing Prices
The consolidated financial statements and the accompanying notes have been
prepared in accordance with accounting principles generally accepted in the
United States of America, which require the measurement of financial position
and operating results in terms of historical dollar amounts without considering
the changes in the relative purchasing power of money over time due to
inflation. The impact of inflation is reflected in the increased cost of our
operations. Unlike industrial companies, nearly all of our assets and
liabilities are monetary in nature. As a result, interest rates have a greater
impact on our 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.
14
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. We intend 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
Our 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 our 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,
Our 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.
Results of operations
Net Interest Income
Net interest income is the difference between interest income and fees on loans
and interest expense, and is the largest contributing factor to net income for
the Company. All discussions of rate are on an annualized tax-equivalent basis,
which accounts for income earned on nontaxable loans and securities that are not
fully subject to federal taxes. Net interest income was $5.1 million and $4.6
million for the three months ended March 31, 2004 and March 31, 2003
respectively. Net interest margin as a percentage of average earning assets
(includes loans placed on nonaccrual status) was 3.99% and 3.84% for the three
months ended March 31, 2004 and March 31, 2003.
The major component of interest income and fees on loans is the income generated
by loans. Although average yield declined slightly, from 5.89% to 5.54% for the
three months ending March 31, 2003 to March 31, 2004 respectively, interest
income and fees on loans increased as a result of increased average loan
balances.
The major components of interest expense are interest paid on Certificates of
Deposit (Time Deposits) and on Money Market Deposits. Interest expense on Time
Deposits decreased due to decreased rates paid on increased average balances.
The rates paid decreased from 2.42% to 1.72%, for the three months ended March
31, 2003 and 2004 respectively. Interest expense on Money Market Deposits
decreased as a result of decreased rates on decreased average balances. The
rates paid decreased from .78% to .74%, for the three months ended March 31,
2004 and 2003 respectively.
15
The following table summarizes the changes and reasons for the changes in
interest earned and paid during the three months ended March 31, 2004 and 2003.
Three months ended
March 31,
2004 2003
-----------------------------------------------------------------------
Interest Average Interest Average
Average Earned Yield Average Earned Yield
Balance or Paid or Cost Balance or Paid or Cost
-----------------------------------------------------------------------
(Dollars in thousands)
Interest Income:
Interest and fees on loans (a) (b) $ 416,902 5,777 5.54% 367,724 5,415 5.89%
Interest and dividends on securities:
Taxable 52,073 469 3.60% 58,858 502 3.41%
Nontaxable (a) 37,064 595 6.42% 36,531 644 7.05%
Interest on Fed funds sold 2,419 4 0.66% 13,368 38 1.14%
Interest on interest-bearing deposits in banks 278 1 1.44% 4,706 14 1.19%
-----------------------------------------------------------------------
Total Interest Income $ 508,736 6,846 5.38% 481,187 6,613 5.50%
=======================================================================
Interest Expense
Interest on deposits $ 335,170 1,176 1.40% 316,691 1,462 1.85%
Interest on short-term borrowings 46,685 165 1.41% 26,052 72 1.11%
Interest on other borrowings 44,250 424 3.83% 45,985 460 4.00%
-----------------------------------------------------------------------
Total Interest Expense $ 426,105 1,765 1.66% 388,728 1,994 2.05%
=======================================================================
Net interest margin $5,081 3.99% $4,619 3.84%
=================== =====================
(a) The interest and average yield for nontaxable loans and investments are
presented on an annualized federal taxable equivalent basis assuming a 34%
tax rate.
(b) Interest and fees on loans decreased $514,000 for the Quarter Ending March
31, 2003 due to a reclassification of gains on the sales of loans.
Provision for loan losses
For the three months ending March 31, 2004, $50,000 was charged to current
earnings and added to the allowance for loan losses compared to $90,000 during
the first three months of 2003. Net charge-offs decreased slightly to $38,000
from $40,000 for the period ended March 31, 2004 as compared to the period ended
March 31, 2003; however, non-accrual loans increased $500,000 and classified
loans increased $7.0 million during the first quarter of 2004. Even though total
loans and non-performing and classified assets increased, the Bank charged less
to earnings during the three months ending March 31, 2004 versus 2003 because
management believes the Bank's exposure to loss on the increased non-performing
and classified loans is minimal and, in our judgment, there is adequate
collateral to cover the loan balances.
See "Allowance for Loan Losses" below for a description of the processes which
the Company uses in determining the amount of the provision and the allowance
for loan losses.
Non-interest income
Non-interest income decreased $37,000 or 2.7% for the three months ended March
31, 2004. The decrease was primarily the result of $288,000, in decreased gains
from the sales of loans offset with $123,000 of gains from the sale of
securities, $53,000 of income from other real estate owned and an increase of
$31,000 from trust fees.
Non-interest expense
Non-interest expense increased $345,000 or 9.0% for the three months ended March
31, 2004 compared to the three months ended March 31, 2003. Salaries and benefit
costs accounted for $181,000 for the three months ended March 31, 2004 compared
to the three months ended March 31, 2003. The increase in salaries and benefit
costs can be attributed to normal wage increases and increased health insurance
benefit costs. Occupancy expense increased $46,000 for the three months ended
March 31, 2004 compared to the three months ended March 31, 2003 due to
increases in real estate taxes, depreciation and utilities. Other expense
increased $118,000 for the three months ended March 31, 2004 compared to the
three months ended March 31, 2003.
16
Income Taxes
Income tax expense for the three months ending March 31, 2004 was $566,000
compared to $490,000 for the three months ending March 31, 2003. The effective
tax increased to 28.1% for the three months ending March 31, 2004 compared to
26.1% for the three months ending March 31, 2003. The increase is primarily as a
result of an increase in taxable interest income net with a decrease in interest
expense.
Like many Wisconsin financial institutions, the Bank has a non-Wisconsin
subsidiary which holds and manages investments assets, the income from which has
not yet been subject to Wisconsin tax. The Wisconsin Department of Revenue has
instituted an audit program, including an audit of the Bank, specifically aimed
at out of state bank subsidiaries and has indicated that it may withdraw
favorable rulings previously issued in connection with such subsidiaries. As a
result of these developments, the Department may take the position that some or
all of the income of the out of state subsidiary is taxable in Wisconsin, which
will likely be challenged by financial institutions in state. If the Department
is successful in its efforts, it could result in a substantial negative impact
on the earnings of the Bank.
Critical Accounting Policies
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. For further detail, see the explanations under "Financial
Condition-Loans" above.
Income Taxes
See Note 1 of the notes to our audited consolidated financial statements for the
year ended December 31, 2003 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.
In addition, as noted above, the Bank is undergoing a state tax audit relating
to the activities and holdings of one of its subsidiaries; we must make
judgments as to the expected effect of that audit. See "Results of
Operations-Income Taxes" and Note 12 of the notes to our audited consolidated
financial statements for the year ended December 31, 2003 for more income tax
information.
17
Item 3. Quantitative and Qualitative Disclosures about Market Risk
First Banking Center, like other financial institutions, is subject to direct
and indirect market risk. Direct market risk exists from changes in interest
rates. First Banking Center's net income is dependent on its net interest
income. Net interest income is susceptible to interest rate risk to the degree
that interest-bearing liabilities mature or reprice on a different basis than
interest-earning assets. When interest-bearing liabilities mature or reprice
more quickly than interest-earning assets in a given period, a significant
increase in market rates of interest could adversely affect net interest income.
Similarly, when interest-earning assets mature or reprice more quickly than
interest-bearing liabilities, falling interest rates could result in a decrease
in net income.
In an attempt to manage its exposure to changes in interest rates, management
monitors First Banking Center's interest rate risk. The Asset/Liability
Committee meets quarterly to review First Banking Center's interest rate risk
position and profitability, and to make or recommend adjustments for
consideration by the Board of Directors. Management also reviews the Bank's
securities portfolio, formulates investment strategies, and oversees the timing
and implementation of transactions to assure attainment of the Board's
objectives in the most effective manner. Notwithstanding First Banking Center's
interest rate risk management activities, the potential for changing interest
rates is an uncertainty that can have an adverse effect on net income.
In adjusting First Banking Center's asset/liability position, the Board and
management attempt to manage First Banking Center's interest rate risk while
maintaining or enhancing net interest margins. At times, depending on the level
of general interest rates, the relationship between long-term and short-term
interest rates, market conditions and competitive factors, the Board and
management may decide to increase First Banking Center's interest rate risk
position somewhat in order to increase its net interest margin. First Banking
Center's results of operations and net portfolio values remain vulnerable to
increases in interest rates and to fluctuations in the difference between
long-term and short-term interest rates.
One approach used to quantify interest rate risk is the net portfolio value
("NPV") analysis. In essence, this analysis calculates the difference between
the present value of liabilities and the present value of expected cash flows
from assets and off-balance-sheet contracts. The most recent NPV analysis, as of
March 31, 2004, projects that net portfolio value would decrease by
approximately 3.49% if interest rates would rise 200 basis points and would
decrease by approximately 1.81% if interest rates would rise 100 basis points
over the next year. It projects an increase in net portfolio value of
approximately 3.80% if interest rates would drop 200 basis points and an
increase of approximately 2.16% if interest rates would drop 100 basis points.
Both simulations are within board-established policy limits. The Company has not
experienced any material changes to its market risk position since December 31,
2003, as disclosed in the Company's 2003 Form 10K Annual Report. First Banking
Center's policy is to limit the effect of a 200 basis point rate shock to plus
or minus 20% of projected net interest income and to minus 20% of the market
value of portfolio equity.
First Banking Center does not currently engage in trading activities or use
derivative instruments to control interest rate risk. Even though such
activities may be permitted with the approval of the Board of Directors, First
Banking Center does not intend to engage in such activities in the immediate
future.
Interest rate risk is the most significant market risk affecting First Banking
Center. Other types of market risk, such as foreign currency exchange rate risk
and commodity price risk, do not arise in the normal course of First Banking
Center's business activities.
18
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures designed to ensure that
the information the Company must disclose in its filings with the Securities and
Exchange Commission is recorded, processed, summarized and reported on a timely
basis. The Company's principal executive officer and principal financial officer
have reviewed and evaluated the Company's disclosure controls and procedures as
defined in Rules 13a-15(e) and 15d-15(e) under the securities and Exchange Act
of 1934, as amended (the "Exchange Act") as of the end of the period covered by
this report (the "Evaluation Date"). Based on such evaluation, such officers
have concluded that, as of the Evaluation Date, the Company's disclosure
controls and procedures are effective in bringing to their attention, on a
timely basis, material information relating to the Company required to be
included in the Company's periodic filings under the Exchange Act.
There have not been any changes in the Company's internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that
occurred during the Company's most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
19
Part II-OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities.
(e) The following table sets forth information on the Company's repurchase of
shares of its common stock during the quarter ended March 31, 2004:
Issuer Purchases of Equity Securities
(a) Total (b) Average (c) Total Number of (d) Maximum Number
Number of Price Paid Shares (or Units) (or Approximate
Period Shares (or per Share Purchased as Part of Dollar Value) of
Units) (or Unit) Publicly Announced Shares (or Units)
Purchased Plans or Programs that May Yet Be
Purchased Under the
Plans or Programs
- --------------------------------------------------------------------------------------------
Month #1
January 1 - 600 46.92 - -
January 31,
2004
Month #2
February 1 - 350 47.48 - -
February 29,
2004
Month #3
March 1 - 5,272 46.99 - -
March 31,
2004
- --------------------------------------------------------------------------------------------
Total 6,222 47.01 * *
- --------------------------------------------------------------------------------------------
* There is no active trading market for the Company's common stock. All
repurchases were therefore made in private transactions. Although the Company
does not have a formal repurchase program, it regularly repurchases shares,
particularly in situations in which it is approached by shareholders seeking to
sell shares; it has disclosed the fact that it will from time to time make such
purchases.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
20
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of the Chief Executive Officer pursuant to Rule
13a-14(a)/15(d)-14(a) as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (exhibit is being filed herewith).
31.2 Certification of the Chief Financial Officer pursuant to Rule
13a-14(a)/15(d)-14(a) as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (exhibit is being filed herewith).
32.1 Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (exhibit is being filed herewith).
32.2 Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (exhibit is being filed herewith).
(b) Reports on Form 8-K
None
21
FIRST BANKING CENTER, INC AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1943, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
First Banking Center, Inc.
May 17, 2004 /s/ Brantly Chappell
Date -----------------------
Brantly Chappell
Chief Executive Officer
May 17, 2004 /s/ James Schuster
Date -----------------------
James Schuster
Chief Financial Officer
22