FIRST BANKING CENTER INC - 10-Q Quarterly Report

Back to GetFilings.com

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 June 30, 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
defined 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 July 28, 2004, Common stock, $1.00 par value, 1,492,836
shares outstanding.

FIRST BANKING CENTER, INC AND SUBSIDIARY
TABLE OF CONTENTS
June 30, 2004

Part I Financial Information Page
----

Item 1 Consolidated Financial Statements

Unaudited Consolidated Balance Sheets,
June 30, 2004 and December 31, 2003 3

Unaudited Consolidated Statements of Income,
For the three and six month periods ended
June 30, 2004 and 2003 4

Unaudited Consolidated Statements of Cash Flows,
For the six months ended June 30, 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 10-19

Item 3 Quantitative and Qualitative Disclosures about Market
Risk 20

Item 4 Controls and Procedures 21

Part II Other Information

Item 1 Legal Proceedings 21

Item 2 Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities 21

Item 3 Defaults upon Senior Securities 22

Item 4 Submission of Matters to a Vote of Security Holders 22

Item 5 Other Information 22

Item 6 Exhibits and Reports on Form 8-K 22

Signatures 23

PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements

FIRST BANKING CENTER, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED BALANCE SHEETS

June 30, December 31,
ASSETS 2004 2003
------------------------------
(Dollars in thousands)

Cash and due from banks $ 15,484 $ 19,960
Federal funds sold 4,047 3,047
Interest-bearing deposits in banks 281 274
Available for sale securities 68,563 82,672
Loans, less allowance for loan losses of $4,696 and
$4,617 at 2004 and 2003, respectively 440,450 403,252
Office buildings and equipment, net 12,979 11,818
Other real estate owned 1,853 1,899
Federal Home Loan Bank stock 11,657 11,755
Other assets 10,094 9,240
------------------------------
TOTAL ASSETS $ 565,408 $ 543,917
==============================

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Deposits
Demand $ 62,241 $ 67,961
Savings and NOW accounts 204,876 194,419
Time 150,575 145,072
-----------------------------
Total deposits 417,692 407,452
Short-term borrowings 50,820 34,176
Other borrowings 38,633 44,673
Other liabilities 3,784 4,076
-----------------------------
TOTAL LIABILITIES $ 510,929 $ 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 June 30, 2004 and December 31, 2003,
respectively; 1,492,683 and 1,500,760 shares outstanding as of June 30, 2004
and December 31, 2003, respectively 1,503 1,501
Surplus 4,646 4,612
Retained earnings 48,478 46,161
Accumulated other comprehensive income 334 1,290
Common stock in treasury, at cost- 9,860 and 517 shares as of June 30, 2004
and December 31, 2003, respectively (482) (24)
-----------------------------
TOTAL STOCKHOLDERS' EQUITY $ 54,479 $ 53,540
-----------------------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 565,408 $ 543,917
=============================

See accompanying notes to unaudited consolidated financial statements

FIRST BANKING CENTER, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
----------------------------------------------------
(Dollars in thousands, (Dollars in thousands,
except per share data) except per share data)

INTEREST INCOME

Interest and fees on loans $ 5,928 $ 5,555 $ 11,695 $ 10,959
Interest and dividends on securities:
Taxable 230 356 510 681
Non-taxable 365 409 758 834
Interest on federal funds sold 5 22 9 60
Interest on interest-bearing deposits in banks 1 1 2 15
Other interest and dividends 176 222 365 399
----------------------------------------------------
TOTAL INTEREST INCOME 6,705 6,565 13,339 12,948
----------------------------------------------------

INTEREST EXPENSE
Interest on deposits 1,156 1,374 2,332 2,836
Interest on short-term borrowings 153 55 311 127
Interest on other borrowings 441 463 872 923
----------------------------------------------------
TOTAL INTEREST EXPENSE 1,750 1,892 3,515 3,886
----------------------------------------------------
NET INTEREST INCOME 4,955 4,673 9,824 9,062

Provision for loan losses 50 0 100 90
----------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 4,905 4,673 9,724 8,972
----------------------------------------------------

NON-INTEREST INCOME
Trust fees 188 139 338 258
Service charges on deposit accounts 576 480 1,038 945
Commissions 41 46 83 87
Automated banking fees 96 93 182 178
Securities gains, net 0 0 123 0
Loan gains, net 262 600 488 1,114
Other 219 170 488 341
----------------------------------------------------
TOTAL NON-INTEREST INCOME 1,382 1,528 2,740 2,923
----------------------------------------------------

NON-INTEREST EXPENSE
Salary and employee benefits 2,324 2,236 4,703 4,434
Occupancy 324 292 654 576
Equipment 357 353 704 694
Data processing services 274 257 549 502
Other 893 790 1,723 1,538
----------------------------------------------------
TOTAL NON-INTEREST EXPENSE 4,172 3,928 8,333 7,744
----------------------------------------------------
INCOME BEFORE INCOME TAXES 2,115 2,273 4,131 4,151

Income taxes 605 640 1,171 1,130
----------------------------------------------------
NET INCOME $ 1,510 $ 1,633 $ 2,960 $ 3,021
====================================================

Basic earnings per share $ 1.01 $ 1.09 $ 1.98 $ 2.02
Diluted earnings per share $ 0.98 $ 1.07 $ 1.92 $ 1.98

See accompanying notes to unaudited consolidated financial statements

FIRST BANKING CENTER, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended
June 30,
2004 2003
------------------------
(Dollars in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,960 $ 3,021
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 531 473
Provision for loan losses 100 90
Loan gains, net (488) (1,114)
Amortization of premiums and accretion of discounts
on securities, net 150 100
Amortization 90 62
Securities gains, net (123) -
Tax benefit of nonqualified stock options exercised 17 -
Increase in other assets (306) (853)
Increase in other liabilities (290) (295)
------------------------
Net cash provided by operating activities before loan originations and sales 2,641 1,484
Loans originated for sale (28,722) (51,341)
Proceeds from sale of loans 29,751 53,517
------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,670 3,660
------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing deposits in banks (7) 229
Net (increase) decrease in federal funds sold (1,000) 4,816
Proceeds from sales of available-for-sale securities 6,297 -
Proceeds from maturities and calls of available-for-sale securities 44,890 50,014
Purchase of available-for-sale securities (38,557) (48,703)
Net increase in loans (37,839) (934)
Purchase of office buildings and equipment (1,692) (859)
------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (27,908) 4,563
------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 10,240 (7,355)
Dividends paid (643) (583)
Payments on other borrowings (6,040) (437)
Net increase (decrease) in short-term borrowings 16,644 (3,359)
Sale of common stock for the exercise of stock options 19 60
Purchase of treasury stock (634) (66)
Sale of treasury stock for the exercise of stock options 176 66
------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 19,762 (11,674)
------------------------
NET DECREASE IN CASH AND DUE FROM BANKS (4,476) (3,451)

CASH AND DUE FROM BANKS:
Beginning 19,960 22,203
------------------------
Ending $ 15,484 $ 18,752
========================

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION,
Cash paid during the year for:
Interest $ 3,524 $ 3,973
Income taxes $ 620 $ 452

SUPPLEMETAL SCHEDULE OF NONCASH INVESTING ACTIVITIES,
Change in accumulated other comprehensive income,
Unrealized gains (losses) on available-for-sale securities, net $ (956) $ 538
Other real estate aquired in settlement of loans $ 103 $ -

See accompanying notes to unaudited consolidated financial statements

FIRST BANKING CENTER, INC AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 and six months ended June 30, 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 Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---------------------------------------
(Amounts in (Amounts in
thousands, except thousands, except
per share data) per share data)

Basic
Net income $ 1,510 $ 1,633 $ 2,960 $ 3,021
Weighted average shares outstanding 1,496 1,496 1,496 1,495
Basic earnings per share $ 1.01 $ 1.09 $ 1.98 $ 2.02

Diluted
Net income $ 1,510 $ 1,633 $ 2,960 $ 3,021
Weighted average shares outstanding 1,496 1,496 1,496 1,495
Effect of dilutive stock options outstanding 45 30 45 30
---------------------------------------
Diluted weighted average shares outstanding 1,541 1,526 1,541 1,525
Diluted earnings per share $ 0.98 $ 1.07 $ 1.92 $ 1.98

NOTE 3 - Comprehensive Income

The following table presents our comprehensive income:

Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---------------------------------------
(Dollars in (Dollars in
thousands) thousands)

Net income $ 1,510 $ 1,633 $ 2,960 $ 3,021
Other comprehensive income
Net change in unrealized gain (loss) on
available for sale securities (956) 625 (789) 538
---------------------------------------
Total comprehensive income $ 554 $ 2,258 $ 2,171 $ 3,559
=======================================

NOTE 4 - Stock-based Compensation Plan:

For the six months ended June 30, 2004, and June 30, 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 Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---------------------------------------
(Dollars in (Dollars in
thousands, except thousands, except
for per share data) for per share data)

Net income, as reported $ 1,510 $ 1,633 $ 2,960 $ 3,021
Deduct total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects 2 8 (168) (193)
---------------------------------------
Pro forma net income $ 1,512 $ 1,641 $ 2,792 $ 2,828
=======================================

Earnings per share:
Basic:
As reported $ 1.01 $ 1.09 $ 1.98 $ 2.02
Pro forma 1.01 1.10 1.87 1.89
Diluted:
As reported $ 0.98 $ 1.07 $ 1.92 $ 1.98
Pro forma 0.98 1.07 1.81 1.85

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 June 30, 2004, and
June 30, 2003, respectively: dividend yield of 1.7 percent and 1.7 percent;
expected price volatility of 5.1 percent and 5.2 percent, blended risk-free
interest rates of 4.9 percent and 3.5 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 June 30, 2004, as well
as that information for its depository products:

Payments Due by Fiscal Period
(in thousands)
---------------------------------------------------------------
Contractual Obligations (a) Remaining in 2005- 2007- 2009 and
Total 2004 2006 2008 thereafter
---------------------------------------------------------------

Time deposits, certificates of deposit $ 150,575 $ 81,780 $ 48,127 $ 10,711 $ 9,957
and similar products (b)
Short-term obligations (c) 50,820 50,820 - - -
Other borrowings (d) 38,633 13,362 11,060 11,211 3,000
Operating leases 332 95 174 63 -
Other long-term obligations (e) 2,336 132 497 427 1,280
---------------------------------------------------------------
Total contractual cash obligations $ 242,696 $ 146,189 $ 59,858 $ 22,412 $ 14,237
===============================================================

Notes

a. Excluding the "off balance sheet" lending commitments discussed below.

b. Excludes demand, savings, and money market deposits

c. 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 federal funds
purchased and security repurchase agreements are expected to be reissued
and, therefore, do not necessarily represent an immediate need for cash.

d. 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.

e. Other long-term obligations consisted primarily of salary continuation
agreements and benefit plans. See Exhibits 10.1, 10.2, 10.3 and 10.4 to the
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 June
30:

2004 2003
-----------------------
(Dollars in thousands)

Commitments to extend credit
Unused revolving home equity, consumer lines of credit $ 20,523 $ 16,189
Unused commercial lines of credit 75,699 56,685
Standby letters of credit 3,334 2,341

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

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 earlier in the summary. If the commitment is funded the
Bank would be entitled to seek recovery from the customer. At June 30, 2004 and
December 31, 2003, no amounts have been recorded as liabilities for the Bank's
potential obligations under these guarantees.

NOTE 6 - Derivative Instruments

At June 30, 2004, the Company was entered in an interest rate swap transaction
which resulted in the Company converting $10 million of fixed rate brokered CD's
into variable rate debt. This swap transaction requires the payment of interest
by the Company at a variable interest rate payment based on the one month LIBOR
rate adjusted monthly. In turn, the Company receives a fixed rate interest
payment equal to 5.0% using an actual/365 day basis.

Summary information about the interest rate swap at June 30 is as follows:

2004 2003
-------------------------------
(Dollars in thousands)

Notional amount $ 10,000 $ -
Weighted average fixed rate 5.00% -
Weighted average variable rate 1.27% -
Weighted average maturity, years 7.5 -
Fair value (114) -

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

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 include
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.

FIRST BANKING CENTER, INC AND SUBSIDIARY
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As of June 30, 2004

The following discussion provides additional analysis of the financial condition
and results of operations of the Company for the three and the six months ended
June 30, 2004. This discussion focuses on the significant factors that affected
the Company's earnings so far in 2004, with comparisons to 2003. As of June 30,
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 June 30, 2004, total Company assets were $565.4 million, increasing 3.95%
from $543.9 million as of December 31, 2003. Net income for the quarter ended
June 30, 2004 was $1.5 million or $0.98 per diluted share, decreasing $123,000
or 7.53% from $1.6 million or $1.07 per diluted share in the second quarter of
2003. Net income for the six months ended June 30, 2004 was $3.0 million or
$1.92 per diluted share, decreasing $61,000 or 2.00% from $3.0 million or $1.98
per diluted share in the first six months of 2003. The significant items
resulting in these results are discussed below.

Financial Condition

Loans

Loans outstanding were $445.1 million and $407.9 million on June 30, 2004 and
December 31, 2003 respectively. This represented an increase of $37.2 million or
9.1%. The increase was primarily the result of continued strong demand for
commercial loans secured by real estate and construction and land development
loans. The increase in agricultural real estate loans was primarily the
reclassification of farm residential property from residential real estate to
agricultural real estate. Our loan demand outpaced the growth in deposits in the
first six months of 2004; therefore, the Company also sold some investment
securities and borrowed additional funds to fund a portion of this increased
loan demand.

The following table summarizes the changes to date in the major loan
classifications:

As a % of Total Loans
June 30, December 31, Change in June 30, December 31,
2004 2003 Balance 2004 2003
--------------------------------------------- --------------------------------
(Dollars in millions)

Residential Real Estate $160.9 $178.5 ($17.6) 36.1% 43.8%
Commercial Real Estate $120.6 $101.1 $19.5 27.1% 24.8%
Construction and Land Development $55.4 $43.0 $12.4 12.4% 10.5%
Commercial $33.7 $27.6 $6.1 7.6% 6.8%
Agricultural Real Estate $45.9 $25.9 $20.0 10.3% 6.4%

Allowance for Loan Losses

One measure of the adequacy of the allowance for loan losses is the ratio of the
allowance for loan losses to total loans. The allowance for loan losses was $4.7
million or 1.05% of gross loans on June 30, 2004, compared with $4.6 million or
1.13% of gross loans on December 31, 2003. Net charge-offs were $21,000 or .01%
of gross loans and $46,000 or .01% for the six months ended June 30, 2004 and
2003, respectively. The allowance for loan losses was 166.64% of non-accrual
loans at June 30, 2004 as compared to 226.21% at December 31, 2003. See below
for further information regarding the increase in non-accrual loans and "Results
of Operations-Provision for Loan Losses" for matters relating to the
determination of the provision for loan losses in the first six months of 2004.

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. It is management's belief that 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. However, there can be no assurance that the allowance for loan losses
will be adequate to cover all losses that actually occur. In accordance with
FASB Statements 5 and 114, the allowance is provided for losses that have been
incurred as of the balance sheet date. The allowance is based on past events and
current economic conditions, and does not include the effects of expected losses
on specific loans or groups of loans that are related to future events or
expected changes in economic conditions. Management reviews a calculation of the
allowance for loan losses on a quarterly basis. While management uses the best
information available to make its evaluation, future adjustments to the
allowance may be necessary if there are significant changes in economic
conditions or trends, potential exposure in the loan portfolio or other factors.
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:

Six Months Ended
June 30,
2004 2003
-----------------------------------
(Dollars in thousands)

Balance, beginning of fiscal year $ 4,617 $ 4,988

Charge-offs:
Commercial 3 6
Agricultural production 0 42
Real estate:
Construction 0 0
Commercial 0 0
Agriculture 0 0
Other mortgages 46 0
Consumer (including installmment loans) 6 1
-----------------------------------
Total Charge-offs 55 49
-----------------------------------

Recoveries:
Commercial 0 1
Agricultural production 20 0
Real estate:
Construction 0 0
Commercial 0 0
Agriculture 0 0
Other mortgages 8 0
Consumer (including installment loans) 6 2
-----------------------------------
Total Recoveries 34 3
-----------------------------------

Net Charge-offs 21 46

Provision charged to operations 100 90
-----------------------------------
Balance, end of period $ 4,696 $ 5,032
===================================

Average amount of loans outstanding
before allowance for estimated losses on loans $439,334 $370,789
===================================

Ratio of net charge-offs during the
period to average loans outstanding
during the period 0.005% 0.012%
===================================

Non-accrual, Past Due and Renegotiated Loans

June 30, December 31,
2004 2003
-----------------------------------
(Dollars in thousands)

Non-accrual Loans (a) $2,818 $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 $1.9 million of residential real
estate loans, $350,000 of farmland, $213,000 of agricultural production loans,
and $190,000 of commercial loans. The increase during the first six months of
2004 was the result of non-accrual residential real estate loans increasing
$511,000, non-accrual farmland loans increasing $274,000, and non-accrual
agricultural production loans increasing $210,000, offset by non-accrual
commercial real estate loans of $300,000. The bulk of the increase relates to
factors involving specific loans.

As of June 30, 2004, the Company had loans totaling $26.1 million (in addition
to those listed as non-accrual, past due or restructured) that were identified
by the Bank's internal asset rating system as classified assets and loans which
management has determined require additional monitoring. This represented an
increase of $7.7 million or 41.8% from December 31, 2003. The increase was
primarily the result of the Company modifying its standards, beginning in the
first quarter of 2004, whereby it now identifies potential problem loans earlier
in the process than in the past. By identifying the loans earlier, they can be
monitored more closely with the idea that action can be taken before they become
problem loans. A portion of the increase, $1.2 million, represented 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; however, there can be no assurance that the allowance for
loan losses will be adequate to cover all losses that actually occur. 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 June 30, 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 June 30, 2004,
decreased $14.1 million or 17.1% from December 31, 2003. During the period, the
Company sold securities in the investment portfolio in part to fund the increase
in loans.

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 $35.0 million of U.S. government agency securities and
$3.6 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 $42.3 million of U.S. government agency notes and U.S.
government agency mortgage-backed securities and $2.7 million of municipal
securities.

Deposits

Total deposits were $417.7 million on June 30, 2004 compared to $407.5 million
on December 31, 2003. This is an increase of $10.2 million or 2.5%. Most of the
increase was in money market accounts as deposits shifted from demand and time
deposits; however, deposits showed a net gain because the Company issued a $10
million brokered time deposit. Brokered deposits are deposits generated outside
of the Company's market area. They are sold by a broker to individuals who have
no other relationships with the Company. The brokered deposits have a 7.5 year
maturity which exposes the Company to interest rate risk for a period of time
longer than the Company is accustomed to when issuing time deposits in its
market. To offset this risk, the deposits are callable every six months and the
Company has also entered into a callable interest rate swap that effectively
converts this 7.5 year fixed rate liability to a one month LIBOR based variable
rate liability. See Item 1, "NOTE 6 - Derivative Instruments" for more
information regarding the swap. The following table summarizes changes during
2004 in the major classifications of deposts:

June 30, December 31, Change in
2004 2003 Balance
----------------------------------- -----------
(Amounts in millions)

Money Market and Savings $ 159.0 $ 149.2 $ 9.8
NOW Accounts 45.9 45.2 0.7
Demand Deposits 62.2 68.0 (5.8)
Time Deposits less than $100,000 87.8 87.1 0.7
Time Deposits equal or greater than $100,000 62.8 57.9 4.9

Borrowed Funds

Total borrowed funds were $89.5 million on June 30, 2004, compared to $78.8
million on December 31, 2003. This was an increase of $10.7 million or 13.6%.
Securities sold under agreement to repurchase and Federal Home Loan borrowings
each decreased $6.0 million as maturities were not replaced. The Company
replaced these funds with brokered time deposits. Federal funds borrowed
increased by $22.7 million to fund the demand for loans. The following table
summarizes changes during 2004 in the major classifications of borrowed funds:

June 30, December 31, Change in
2004 2003 Balance
-------------------------------- -----------
(Amounts in millions)

Securities sold under agreement to repurchase $ 21.4 $ 27.4 $ (6.0)
Federal Home Loan Borrowing 38.2 44.2 (6.0)
Federal Funds Borrowed 29.4 6.7 22.7

Further information regarding our FHLB borrowings as of December 31, 2003 is
included in 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 June 30, 2004, the Company's stockholders' equity increased $939,000 or
1.8% from December 31, 2003. Net income of $3.0 million was the primary reason
for the increase. In addition, the Company issued $176,000 of common stock
through its incentive stock option plan. These increases were partially offset
by the Company's repurchase of $634,000 of common stock into treasury, cash
dividends of $643,000 (or $.43 per share for the period ended June 30, 2004),
and a decrease in accummulated other comprehensive income of $956,000, to
$334,000 at June 30, 2004 from $1.3 million at year end.

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 11.6% at June 30, 2004, well above the 4% minimum required. Total capital to
risk-adjusted assets was 12.7%; also well above the 8% minimum requirement. The
leverage ratio was at 9.5% compared to the 4% minimum requirement. According to
FDIC capital guidelines, the Company and the Bank were considered to be "well
capitalized," at June 30, 2004.

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. This strategy is implemented by the Bank's management, which takes
action based upon its analysis of a number of factors, including 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 percentage
at June 30, 2004 was a positive 18%, which compared to a positive 20% as of
December 31, 2003. Although these ratios were outside the Bank's target range,
and the Bank would therefore be somewhat exposed to declining rates, management
felt the ratios were appropriate due to management's projection for future
interest rates.

Liquidity

Liquidity measures the ability to meet maturing obligations and existing
commitments, to withstand fluctuations in deposit levels, to fund 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 $19.8 million at June 30, 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. As in the second quarter, the Bank can also
use brokered deposits to raise additional cash. See "Financial Condition -
Deposits" above. During the second quarter of 2004, the Bank became increasingly
dependent upon borrowed funds as its loans outstanding increased at a higher
rate than deposits. While management believes that these types of borrowings are
available on reasonable terms, there can be no assurance they will continue to
be. The Bank also generates liquidity from the regular principal payments and
prepayments made on its portfolio of loans and mortgage-backed securities and,
if appropriate, by selling available for sale securities. Although changes in
interest rates could negatively impact liquidity, management feels the Bank has
adequate sources to meet its liquidity needs. Any effects that changes in
interest rates have on income should have minimal impact 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 for the six months of 2004. Net
cash provided by operating activities was $3.7 million. This was primarily a
result of net income, normal increases and decreases in operations offset by net
secondary market loan proceeds over originating secondary market loans. Net cash
used in investing activities, consisting primarily of loan funding and purchases
of securities, was $27.9 million. Net cash provided by financing activities,
consisting primarily of a $16.6 million increase in short term borrowings and
deposit growth of $10.2 million, was $19.8 million for the six months ended June
30, 2004.

For the six months ending June 30, 2003, net cash provided by operating
activities was $3.7 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 federal funds sold and proceeds
from security transactions, was $4.6 million. Net cash used in financing
activities, consisting primarily of decreased deposits and short term
borrowings, was $11.7 million.

Off-Balance Sheet Liabilities and Contractual Obligations

Because the Company is a holding company for a financial institution, it
inherently has lending and other off-balance sheet financial commitments. It
also has substantial contractual obligations to pay monies deposited with it, in
addition to the types of long-term contractual obligations which other companies
incur. Information regarding the Company's off-balance sheet arrangements and a
summary of future contractual commitments is included in Note 5 - Commitments
and Contingencies in the interim financial statements included in this report in
Item 1. The information included in Note 5 is incorporated by reference in this
management's discussion and analysis.

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.

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 $5.0 million in the
second quarter of 2004, an increase of $282,000 from $4.7 million in the period
in 2003. For the six month period ended June 30, 2004, net interest income was
$9.8 million, an increase of $762,000 from $9.1 million in that period in 2003.
Net interest margin as a percentage of average earning assets (includes loans
placed on nonaccrual status) declined slightly to 3.95% from 4.10% and to 3.94%
from 4.11% for the three months and six months ended June 30, 2004 and 2003,
respectively.

The major component of interest income and fees on loans is the income generated
by loans. Although average yield declined to 5.40% from 6.00% and to 5.47% from
5.96% for the three months and six months ended June 30, 2004 and 2003,
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. The average Interest rate
declined to 1.59% from 1.99% and to 1.62% from 2.01% for the three months and
six months ended June 30, 2004 and 2003, respectively. Interest expense
decreased due to decreased rates paid on increased average balances.

The following table summarizes the changes and reasons for the changes in
interest earned and paid during the three and six months ended June 30, 2004 and
2003:

Three months ended
June 30,
2004 2003
--------------------------------------------------------
Interest Average Interest Average
Average Earned Yield Average Earned Yield
Balance or Paid or Cost Balance or Paid or Cost
--------------------------------------------------------
(Dollars in thusands)

Interest Income:
Interest and fees on loans (a) (b) $ 439,334 5,936 5.40% 370,789 5,566 6.00%
Interest and dividends on securities:
Taxable 46,656 406 3.48% 41,227 578 5.61%
Nontaxable (a) 35,444 554 6.25% 56,206 620 4.41%
Interest on Fed funds sold 1,967 5 1.02% 7,792 22 1.13%
Interest on interest-bearing deposits in banks 280 1 1.43% 212 1 1.89%
--------------------------------------------------------
Total Interest Income $ 523,681 6,902 5.27% 476,226 6,787 5.70%
========================================================

Interest Expense
Interest on deposits $ 342,632 1,156 1.35% 313,052 1,374 1.76%
Interest on short-term borrowings 53,361 153 1.15% 21,198 55 1.04%
Interest on other borrowings 43,860 441 4.02% 46,325 463 4.00%
--------------------------------------------------------
Total Interest Expense $ 439,853 1,750 1.59% 380,575 1,892 1.99%
========================================================
Net interest margin $5,152 3.94% $4,895 4.11%
============== ===============

Six months ended
June 30,
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) $ 428,118 11,713 5.47% 368,381 10,981 5.96%
Interest and dividends on securities:
Taxable 51,052 875 3.43% 36,360 1,080 5.94%
Nontaxable (a) 36,254 1,149 6.34% 46,651 1,264 5.42%
Interest on Fed funds sold 2,193 9 0.82% 9,925 60 1.21%
Interest on interest-bearing deposits in banks 279 2 1.43% 2,447 15 1.23%
--------------------------------------------------------
Total Interest Income $ 517,896 13,748 5.31% 463,764 13,400 5.78%
========================================================

Interest Expense
Interest on deposits $ 338,900 2,332 1.38% 315,984 2,836 1.80%
Interest on short-term borrowings 49,818 311 1.25% 23,871 127 1.06%
Interest on other borrowings 44,261 872 3.94% 46,399 923 3.98%
--------------------------------------------------------
Total Interest Expense $ 432,979 3,515 1.62% 386,254 3,886 2.01%
========================================================
Net interest margin $10,233 3.95% $9,514 4.10%
=============== ===============

(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 $600,000 and $1.1 million for the
three and six months ending June 30, 2003 respectively due to a
reclassification of gains on the sales of loans.

Provision for Loan Losses

For the six months ended June 30, 2004, $100,000 was charged to current earnings
and added to the allowance for loan losses compared to $90,000 during the first
six months of 2003. In the second quarter of 2004, $50,000 was expensed to the
provision, as compared to no addition in the comparable period in 2003. Net
charge-offs decreased slightly to $21,000 from $46,000 for the six months ended
June 30, 2004 as compared to the six months ended June 30, 2003. At this time
however, non-accrual loans increased $318,000 and classified loans increased
$471,000 during the second quarter of 2004, and increased $777,000 and $7.5
million, in the first six months of 2004. As a result of the increase in total
loans and non-performing and classified assets, charges to earnings rose during
the six months ended June 30, 2004 versus 2003. Management believes the exposure
to loss on the increased non-performing and classified loans is minimal and that
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 $146,000 or 9.6% for the three months ended June
30, 2004 compared to the three months ended June 30, 2003. The decrease was
primarily the result of decreased gains from the sale of loans. Non-interest
income decreased $183,000 or 6.3% for the six months ended June 30, 2004
compared to the six months ended June 30, 2003. The decrease was primarily the
result of $626,000 in decreased gains from the sales of loans offset by $123,000
of gains from the sale of securities and $74,000 of income from other real
estate owned and increases of $80,000 from trust fees and $93,000 from service
charges on deposit accounts. The decreased income from the sale of loans was the
result of increased interest rates on fixed rate residental real estate loans.
The increased interest rates caused a decline in the volume of fixed rate
residental real estate loans which the Company sells to the secondary market.

Non-interest Expense

Non-interest expense increased $244,000 or 6.2% and $589,000 or 7.6% for the
three and six months ended June 30, 2004 compared to the three and six months
ended June 30, 2003. Salaries and benefit costs, which is the largest component
of non-interest expense, accounted for $88,000 and $269,000 of the increase for
the three and six months ended June 30, 2004 compared to the three and six
months ended June 30, 2003. The increase in salaries and benefit costs can be
attributed primarily to normal wage increases and increased health insurance
costs. Occupancy expense increased $32,000 and $78,000 for the three and six
months ended June 30, 2004 compared to the three and six months ended June 30,
2003 due to increases in real estate taxes, depreciation and utilities. Other
expense increased $103,000 and $185,000 for the three and six months ended June
30, 2004 compared to the three and six months ended June 30, 2003. The bulk of
the increase is twofold. Professional service fees increased due to additional
regulatory requirements. Amortization expense increased due to the acquisition
of a branch in the second quarter of 2003.

Income Taxes

Income tax expense for the six months ending June 30, 2004 was $1,171,000
compared to $1,130,000 for the six months ending June 30, 2003. The effective
tax rate increased to 28.3% for the six months ending June 30, 2004 compared to
27.2% for the six months ending June 30, 2003. The increase was primarily a
result of an increase in taxable interest income.

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
instituted an audit program, including an audit of the Bank, specifically aimed
at out of state bank subsidiaries and 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 the state. If the Department is
successful in its efforts, it could result in a substantial negative impact on
the earnings of the Bank.

In late July 2004, the Department sent letters to financial institutions in
Wisconsin (whether or not undergoing an audit) reporting on settlements
involving 17 banks and their out-of-state investment subsidiaries. The letter
provided a summary of the Department's currently available settlement
parameters. For prior periods they include: restrictions on the types of
subsidiary income excluded from Wisconsin taxation; assessment of certain back
taxes for a limited period of time; limitations on net operating loss
carryforwards and interest deductions related to subsidiary loans; and interest
(but not penalties) on past-due taxes. For 2004 and going forward, the letter
states similar provisions, including limits on subsidiaries' assets. Settlement
on the terms outlined would result in the rescission of prior letter rulings,
and purport to be binding going forward except for future legislation or change
by mutual agreement. Implicit in the letter appears to be an acceptance of the
general proposition that some out-of-state investment subsidiary income is not
subject to Wisconsin taxes.

At this time, no assessment has yet been made by the Department against the Bank
nor has the Company determined how it intends to respond. The letter did not
provide sufficient detail to permit the Company to assess what effects the
acceptance of such a settlement offer might have upon it, nor does the Company
have sufficient information to determine what the Department's position would be
if an assessment were made and the Company were to challenge it. The Company
intends to seek to obtain that detail and to evaluate the impact of such a
settlement after it receives more specific details.

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" inherently 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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company, like other financial institutions, is subject to direct and
indirect market risk. Direct market risk exists from changes in interest rates.
The Company'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 interest rate risk. The Asset/Liability
Committee meets quarterly to review the interest rate risk position and
profitability, and to make or recommend adjustments. Management also reviews the
securities portfolio, formulates investment strategies, and oversees the timing
and implementation of transactions to assure attainment of the Company's
objectives in the most effective manner. Notwithstanding our 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 the asset/liability position, management attempts to manage
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, management may decide to increase interest rate risk
position somewhat in order to increase the net interest margin. The Company'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
June 30, 2004, projected that net portfolio value would decrease by
approximately 1.80% if interest rates would rise 200 basis points and would
decrease by approximately 0.49% if interest rates would rise 100 basis points
over the next year. It projects an increase in net portfolio value of
approximately 3.47% if interest rates would drop 200 basis points and an
increase of approximately 1.65% 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 10-K Annual Report. The Company'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.

The Company does not currently engage in trading activities to control interest
rates. Even though such activities may be permitted with the approval of the
Board of Directors, The Company does not intend to engage in such activities in
the immediate future. However, the Company has engaged in the use of derivative
instruments for the period ended June 30, 2004 and intends to engage in such
activities going forward.

Interest rate risk is the most significant market risk affecting the Company.
Other types of market risk, such as foreign currency exchange rate risk and
commodity price risk, do not arise in the normal course of the Company's
business activities.

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.

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 June 30, 2004:

Issuer Purchases of Equity Securities

- ---------------- ----------- ------------- ----------------------- -----------------------
Period (a) Total (b) Average (c) Total Number of (d) Maximum Number
Number of Price Paid Shares Purchased as (or Approximate
Shares per Share Part of Publicly Dollar Value) of
Purchased Announced Plans or Shares that May Yet
Programs* Be Purchased Under the
Plans or Programs*

- ------------------------------------------------------------------------------------------

Month #1
April 1 -
April 30, 5,321 49.95 - -
2004

Month #2
May 1 -
May 31, 533 47.86 - -
2004

Month #3
June 1 -
June 30, 1,000 50.00 - -
2004
- ------------------------------------------------------------------------------------------
Total 6,854* 49.80 * *
- ------------------------------------------------------------------------------------------

* 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

On April 20, 2004, the Company held its 2004 annual meeting of shareholders. The
only matter for action at the meeting was the election of three directors for
the class of directors whose terms expired at the meeting. The following
management nominees for directors were the only nominees; they were re-elected
by the votes indicated to serve for terms expiring at the 2007 annual meeting.

Nominee Votes For Votes Withheld

David Boilini 1,140,663 563
Daniel T. Jacobson 1,140,713 513
Thomas Laken, Jr. 1,140,713 513

In addition, the following directors continued in office for terms expiring at
the 2005 annual meeting of shareholders: Brantly Chappell, Dr. Robert Fait,
Melvin Wendt and Charles R. Wellington. The following directors continue in
office for terms expiring at the annual meeting of shareholders in 2006: Keith
Blumer, John M. Ernster and John S. Smith

In addition, subsequent to the 2004 annual meeting of shareholders, the
following persons were elected by the board as additional directors of the
Company for terms expiring at the annual meetings of shareholders in the years
indicated following their names: James Schuster (2007), James V. Scherrer, Sr.
(2005), Frank Cannella, Jr. (2007) and Richard Torhorst (2006).

Item 5. Other Information

None

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

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.

August 6, 2004 /s/ Brantly Chappell
Date -----------------------
Brantly Chappell
Chief Executive Officer

August 6, 2004 /s/ James Schuster
-----------------------
James Schuster
Chief Financial Officer