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1
PART 1
ITEM 1: BUSINESS
First Banking Center, Inc.
First Banking Center, Inc. (the Corporation) is a multi-bank holding
company incorporated as a business corporation under the laws of the State of
Wisconsin on August 24, 1981. In April, 1982, the Corporation became the sole
owner of First Bank and Trust Company, Burlington, Wisconsin, a Wisconsin state
banking corporation. On September 1, 1984, the Corporation acquired 100% of the
capital stock of the Bank of Albany, Albany, Wisconsin, a Wisconsin state
banking corporation.
On January 1, 1985, the name of the Corporation was changed from the First
Community Bank Group, Inc. to the First Banking Center, Inc., and the name of
the subsidiary companies were changed to First Banking Center - Burlington and
First Banking Center - Albany, respectively.
The Corporation's primary business activity is the ownership and control of
these banks. The Corporation's operations department also provides
administrative and operational services for the banks.
First Banking Center - Burlington
The Bank was organized in 1920 and is a full service commercial bank
located in the City of Burlington, Wisconsin. The Bank has branch offices
located in Burlington, Genoa City, Kenosha, Lake Geneva, Lyons, Pell Lake,
Somers, Union Grove, Walworth, Whitewater, and Wind Lake, Wisconsin. The bank
offers a wide range of services which includes: Loans, Personal Banking, Trust
and Investment Services, and Insurance and Annuity Products.
Lending
The lending area provides a wide variety of credit services to
commercial and individual consumers. Consumer lending consists
primarily of residential mortgages, installment loans, home equity
loans, and student loans. Commercial lending consists of commercial
property financing, equipment and inventory financing, and real estate
development, as well as the financing of agricultural production, farm
equipment, and farmland. Commercial lending usually involves a greater
degree of credit risk than consumer lending. This increased risk
requires higher collateral value to loan amount than may be necessary
on some consumer loans. The collateral value required on a commercial
loan is determined by the degree of risk associated with that
particular loan.
Personal Banking
This area provides a wide variety of services to customers such as
savings plans, certificates of deposit, checking accounts, individual
retirement accounts, securities services, discount brokerage, and
other specialized services.
Trust and Investments
The Trust Department provides a full range of services to individuals,
corporations and charitable organizations. It
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provides such specific services as investment advisory, custodial,
executor, trustee and employee benefit plans.
Insurance and Annuity Products
This area provides a complete line of life insurance as well as long-
term health care, fixed and variable rate annuities, and mutual funds.
First Banking Center - Albany
The Bank was organized in 1892 and is a full service commercial bank
located in the Village of Albany, Green County, Wisconsin. The bank is located
approximately 65 miles west of Burlington. The bank has a branch office located
in Monroe, Wisconsin, which was established in December of 1992. The bank offers
credit services primarily to business and individual customers. Credit services
offered include lines of credit, term loans, automobile financing, personal
loans, and residential and commercial mortgages. The bank's retail services
include checking accounts, savings plans, certificates of deposit, individual
retirement accounts, and other specialized services.
COMPETITION
The financial services industry is highly competitive. The subsidiary banks
compete with other commercial banks and with other financial institutions
including savings and loan associations, finance companies, mortgage banking
companies, insurance companies, brokerage firms, and credit unions.
SUPERVISION AND REGULATION
The Company is a bank holding company subject to the supervision of the
Board of Governors of the Federal Reserve System under the Bank Holding Company
Act of 1956, as amended. As a bank holding company, the Company is required to
file an annual report and such additional information with the Board of Gover-
nors as the Board of Governors may require pursuant to the Act. The Board of
Governors may also make examinations of the Company and its subsidiaries.
The Bank Holding Company Act requires every bank holding company to obtain
the prior approval of the Board of Governors before it may acquire substantially
all the assets of any bank, or ownership or control of any voting shares of any
bank if, after such acquisitions, it would own or control, directly or indirect-
ly, more than 5% of the voting shares of such bank. Under existing federal and
state laws, the Board of Governors may approve the acquisition by the Company of
the voting shares of, or substantially all the assets of, any bank located in
states specified in the Wisconsin Interstate Banking Bill which became effective
January 1, 1987.
In addition, a bank holding company is generally prohibited from itself
engaging in, or acquiring direct or indirect control of voting shares of any
company engaged in non-banking activities. One of the principal exceptions to
this prohibition is for activities found by the Board of Governors, by order or
regulation to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. Some of the activities that the Board of
Governors has determined by regulation to be closely related to banking are
making or servicing loans, full payout property leasing, investment advisory
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services, acting as a fiduciary, providing data processing services and
promoting community welfare projects.
Subsidiary banks of a bank holding company are subject to certain re-
strictions imposed by the Federal Reserve Act on any extensions of credit to the
bank holding company or any of its subsidiaries, on investments in the stock or
other securities thereof, and on the taking of such stock or securities as
collateral for loans to any borrower. Further, under the Bank Holding Company
Act and regulations of the Board of Governors, a bank holding company and its
subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property or furnishing
of services.
The Company is also subject to the Securities Exchange Act of 1934 and has
reporting obligation to the Securities and Exchange Commission.
The business of banking is highly regulated and there are various
requirements and restrictions in the laws of the United States and the State of
Wisconsin affecting the Company's subsidiary banks and their operations,
including the requirement to maintain reserves against deposits, restrictions on
the nature and amount of loans which may be made by the banks and restrictions
relating to investment, branching and other activities of the banks.
The Company is supervised and examined by the Federal Reserve Board. The
Company's subsidiary banks, as state chartered institutions, are subject to the
supervision of, and are regularly examined by, Wisconsin state authorities. The
Banks are also members of the Federal Reserve Bank and as such are subject to
regulation and examination by that agency.
The Company, under Federal Reserve Board policy, is expected to act as a
source of financial strength to each subsidiary bank and to commit resources to
support each of the subsidiaries.
GOVERNMENTAL POLICIES
The earnings of the Company's subsidiary banks as lenders and depositors of
money are affected by legislative changes and by the policies of the various
regulatory authorities including the State of Wisconsin, the United States
Government, foreign governments and international agencies. The effect of this
regulation upon the future business and earnings of the Company cannot be
predicted. Such policies include, among others, statutory maximum lending rates,
domestic monetary policies of the Board of Governors of the Federal Reserve
System, United States fiscal policies and international currency regulations and
monetary policies. Governmental and Reserve Board policies have had a
significant effect on the operating results of commercial banks in the past and
are expected to do so in the future. Management is not able to anticipate and
evaluate the future impact of such policies and practices on the growth and
profitability of the Company or its subsidiary banks.
MATERIAL DEPOSIT AND LOANS
No single borrower accounted for a material portion of the loans in the
subsidiary banks.
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No single depositor accounted for a material portion of deposits in the
subsidiary banks.
EMPLOYEES
The Company and its staff share a commitment to equal opportunity. All
personnel decisions are made without regard to race, color, religion, sex, age,
national origin, handicap or veteran status. At March 15, 1997, the Company and
its subsidiaries had 196 full and part-time employees.
MISCELLANEOUS
The business of the Company is not seasonal. To the best of management's
knowledge, there is no anticipated material effect upon the Company's capital
expenditures, earnings, and competitive position by reason of any laws
regulating or protecting the environment. The Company has no material patents,
trademarks, licenses, franchises or concessions. No material amounts have been
spent on research activities and no employees are engaged full time in research
activities.
NOTE: Subsections of Item I, to which no response has been made are
inapplicable to the business of the Company.
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FIRST BANKING CENTER, INC.
Burlington, Wisconsin
SELECTED FINANCIAL DATA
The Company, through the operations of its Banks, offers a wide range of
financial services. The following financial data provides a detailed review of
the Company's business activities.
The following information shows: the company's average assets, liabilities
and stockholder's equity; the interest earned and average yield on interest
earning assets; the interest paid and average rate on interest-bearing
liabilities; and the maturity schedules for investment and specific loans; for
the years ended December 31, 1997, 1996, and 1995. Also, where applicable,
information is presented for December 31, 1994 and 1993.
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Section I
Schedule A
FIRST BANKING CENTER, INC.
DISTRIBUTION OF ASSETS, LIABILITIES
AND STOCKHOLDERS' EQUITY
Average Balance Sheet
(000's Omitted)
1997 1996 1995
Cash and due from banks $ 10,645 9,972 8,648
Fed funds sold and securities
purchased
under agreement to resell 5,262 4,101 5,191
Interest bearing deposits in other 2,544 3,102 3,180
banks
Investment securities:
U.S. Treasury agency and other 43,333 46,589 48,073
States and political 23,595 14,691 8,829
subdivisions
Unrealized Gain/(Loss) on (15) (378) (672)
Securities
Loans:
Real estate mortgages 73,505 64,848 68,019
Consumer - net 17,074 12,757 12,183
Commercial and other 116,940 98,709 82,742
Total 207,519 176,314 162,944
Less allowance for loan losses (3,035) (2,568) (2,200)
Net loans 204,484 173,746 160,744
Goodwill 1,450 261 14
Other assets 13,181 11,078 9,695
Total assets $ 304,479 263,162 243,702
Interest bearing deposits:
NOW accounts $ 22,609 20,392 18,705
Savings deposits 33,527 27,531 26,163
Money Market deposit accounts 45,554 36,610 34,849
Time deposits 107,672 91,000 85,454
Total interest bearing 209,362 175,533 165,171
deposits
Demand deposits 35,262 29,550 26,563
Total deposits 244,624 205,083 191,734
Short-term borrowings 547 490 766
Securities sold under agreements
to repurchase 18,912 21,427 17,112
Other liabilities 3,096 2,861 2,443
Long-Term Borrowings 9,981 8,398 9,186
Total liabilities 277,160 238,259 221,241
Equity capital 27,319 24,903 22,461
Total liabilities and $ 304,479 263,162 243,702
capital
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SECTION I
Schedule B
FIRST BANKING
CENTER, INC.
INTEREST RATES
AND INTEREST
DIFFERENTIAL
Three Year
Summary of
Interest Rates
and Interest
Differential
(000's Omitted)
1997 1996 1995
AVERAGE RELATED YIELD AVERAGE RELATED YIELD AVERAGE RELATED YIELD
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
Earning assets:
Time Deposits
in banks $ 2,544 145 5.70% 3,102 173 5.58% 3,180 183 5.75%
Investments
(taxable)(a) 43,278 2,769 6.40% 46,589 2,887 6.20% 48,073 2,941 6.12%
Investments
(nontax.)(a)(b) 23,635 1,728 7.31% 14,691 1,100 7.49% 8,829 749 8.48%
Funds sold 5,262 286 5.44% 4,101 248 6.05% 5,191 308 5.93%
Loans (b)(c)(d) 207,519 18,704 9.01% 176,314 16,317 9.25% 162,944 15,092 9.26%
Total earning
assets $ 282,238 23,632 8.37% 244,497 20,725 8.48% 228,217 19,273 8.45%
Interest
bearing
liabilities:
NOW accounts $ 22,609 584 2.58% 20,392 561 2.75% 18,705 519 2.77%
Savings
deposits 33,527 928 2.77% 27,531 766 2.78% 26,163 771 2.95%
Money Market
deposit
accounts 45,681 1,955 4.28% 36,610 1,515 4.14% 34,849 1,389 3.99%
Time deposits 107,673 6,094 5.66% 91,000 5,245 5.76% 85,454 4,808 5.63%
Short-term
borrowings 548 29 5.29% 490 20 4.08% 766 48 6.27%
Sec'ts. sold
under
agreements to
repurchase 18,912 990 5.23% 21,427 1,143 5.33% 17,112 927 5.42%
Long-term
borrowings 9,981 637 6.38% 8,398 514 6.12% 9,186 504 5.49%
Total int.
bearing
liabilities $ 238,931 11,217 4.69% 205,848 9,764 4.74% 192,235 8,966 4.66%
Interest spread 12,415 3.68% 10,961 3.74% 10,307 3.79%
Interest margin 12,415 4.40% 10,961 4.48% 10,307 4.52%
(a) Portions of investments both taxable and nontaxable have been presented on
state taxable equivalent basis assuming a 7.9% tax rate.
(b) The interest and average yield for nontaxable instruments are presented on
a federal taxable equivalent basis assuming a 34% tax rate.
(c) Loans placed on nonaccrual status have been included in average balances
used to determine average rates.
(d) Loan interest income includes net loan fees.
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SECTION I
Schedule C
FIRST BANKING CENTER, INC.
Two Year Summary of Rate and Volume
Variances
(000's Omitted)
$ AMOUNT VOLUME RATE (a)
OF CHANGE VARIANCE VARIANCE
Increase (decrease) for 1997:
Time deposits in banks $ (28) (31) 3
Investment (taxable) (b) (118) (205) 87
Investments (nontaxable) (b) (c) 628 670 (42)
Funds sold 38 70 (32)
Loans (c) (d) 2,387 3,171 (784)
Total interest income 2,907 3,675 (768)
NOW accounts 23 61 (38)
Savings deposits 162 167 (5)
Money Market deposit accounts 440 376 64
Other time deposits 849 960 (111)
Short-term borrowings 9 2 7
Sec. sold under Agreement to (153) (134) (19)
Repurchase
Long-term Borrowings 123 97 26
Total interest expense 1,453 1,529 (76)
Net change for 1996: $ 1,454 2,146 (692)
Increase (decrease) for 1996:
Time deposits in banks $ (10) (4) (6)
Investment (taxable) (b) (54) (91) 37
Investments (nontaxable) (b) 351 497 (146)
(c)
Funds sold (60) (65) 5
Loans (c) (d) 1,225 1,204 21
Total interest income 1,452 1,541 (89)
NOW accounts 42 47 (5)
Savings deposits (5) 40 (45)
Money Market deposit accounts 126 75 51
Other time deposits 437 312 125
Short-term borrowings (28) (17) (11)
Sec. sold under Agreement to 216 234 (18)
Repurchase
Long-term Borrowings 10 (43) 53
Total interest expense 798 648 150
Net change for 1996: $ 654 893 (239)
(a) The application of the rate/volume has been allocated in full to the rate
variance.
(b) Portions of investments both taxable and nontaxable have been presented on
a state taxable equivalent basis assuming a 7.9% tax rate.
(c) The interest and average yild fro nontaxable instruments are presented on a
federal tax equivalent basis assuming a 34% tax rate.
(d) Loans placed on nonaccrual status have been included in average balances
used to determine average rates.
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SECTION II
Schedule A
FIRST BANKING CENTER, INC.
Book Value of Investment
Portfolio (a)
(000's Omitted)
1997 1996 1995
Available for Sale:
U.S. Treasury and other U.S.
Gov't. Agencies and $ 43,212 42,437 25,762
Corporations
Obligations of states and 27,389 19,394 0
political subdivisions
Other 4,000 3,531 4,330
Held to Maturity:
U.S. Treasury and other U.S.
Gov't. Agencies and
Corporations 0 0 17,284
Obligations of states and
political subdivisions 0 0 11,377
Other 0 0 1,244
Total $ 74,601 65,362 59,997
(a) The aggregate book value of securities from any single issuer does not
exceed ten percent of stockholder's equity; except for, securities issued by the
U.S. Government and U.S. Government agencies and corporations.
(b) Prior to January 1, 1994 and the implementation of FASB 115, all securities
were classified as securities held for investment.
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SECTION II
Schedule B
FIRST BANKING CENTER, INC.
Maturity Schedule of
Investments by Book Value
(000's Omitted)
December 31, 1997
AFTER AFTER
1 YEAR 5YEARS
1 YEAR THROUGH THROUGH AFTER
OR LESS 5 YEARS 10 YEARS 10 YEARS TOTAL
Available for Sale Securities
U.S. Treasury and U.S. $ 19,623 22,345 1,086 158 43,212
Gov't agencies and
corporations (a)
Weighted average yield 5.67% 6.47% 6.81% 8.15% 6.12%
States of the U.S. and 3,003 7,057 17,256 73 27,389
Political Subdivisions (b)
Weighted average yield 6.73% 6.80% 7.27% 8.32% 7.09%
Other Securities (a) 4,000 0 0 0 4,000
Weighted average yield 5.93% 0.00% 0.00% 0.00% 5.93%
TOTAL AVAILABLE FOR SALE $ 26,626 29,402 18,342 231 74,601
Weighted Ave. Yield of 5.83% 6.55% 7.24% 8.01% 6.47%
Total
(a) Portions of investments both taxable and nontaxable have been presented on
a state taxable equivalent basis assuming a 7.9% tax rate.
(b) The interest and average yield for nontaxable securities are presented on a
federal taxable equivalent basis assuming a 34% tax rate.
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SECTION III
Schedule A
FIRST BANKING CENTER, INC.
Loan Summarization
(000's Omitted)
December 31,
1997 1996 1995 1994 1993
Commercial $ 32,886 30,808 27,659 27,713 24,908
Agricultural 6,857 6,167 5,810 6,163 7,593
production
Real Estate:
Construction 24,353 25,164 20,652 14,437 13,213
Commercial 52,540 40,935 37,005 33,027 23,663
Agriculture 8,177 705 733 1,014 1,646
Residential 86,015 79,129 67,729 66,004 56,548
Municipal 4,972 4,254 3,806 2,341 2,815
Consumer 8,308 7,225 6,961 7,074 7,201
TOTAL $ 224,108 194,387 170,355 157,773 137,587
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SECTION III
Schedule B
FIRST BANKING
CENTER, INC.
LOAN MATURITIES AND
SENSITIVITY TO
CHANGES IN INTEREST
RATE
(000's Omitted)
LOAN MATURITIES AMOUNT OVER ONE YEAR WITH
FLOATING
1 YEAR AFTER 1 AFTER OR ADJ.
OR THROUGH FIVE PREDETERMINED INTEREST
LESS 5 YEARS YEARS TOTAL RATES RATES TOTAL
>
December 31, l997
Comm'l and
agricultural $28,305 10,314 1,124 39,743 7,883 3,556 11,439
Real estate - constr. 18,573 5,734 46 24,353 2,828 2,952 5,780
TOTAL $46,878 16,048 1,170 64,096 10,711 6,508 17,219
December 31, l996
Comm'l and
agricultural $28,395 8,234 346 36,975 6,730 1,850 8,580
Real estate - constr. 22,404 2,760 0 25,164 1,961 799 2,760
TOTAL $50,799 10,994 346 62,139 8,691 2,649 11,340
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Section III
Schedule C
First Banking Center, Inc.
Non-Performing Loans
(000's omitted)
1997 1996 1995 1994 1993
Nonaccrual Loans $824 $260 $1,501 $778 $1,754
Past Due 90 days + (1) 2 17 2 ---- ----
Restructured Loans (2) ---- ---- ---- ---- ----
Notes:
(1) Loans are generally placed in nonaccrual status when contractually past due
90 days or more.
(2) There were no restructured loans for each of the presented years.
(3) Interest which would have been recorded had the loans been on an accrual
basis, would have amounted to $14,000 in 1997, $6,000 in 1996, $25,000 in
1995, $12,000 in 1994, and $95,000 in 1993. Interest income on these loans,
which is recorded only when received, amounted to $21,000 in 1997, $6,000
in 1996, $7,000 in 1995, $4,000 in 1994, and $2,000 in 1993.
(4) Each of the loans which are contractually past due 90 days or more as to
principal or interest payments are reviewed by management and reported to
the Loan Committee of the Board of Directors of each Bank. These loans are
then placed on a nonaccrual basis.
(5) As of December 31, 1997, management, to the best of its knowledge, is not
aware of any significant loans, group of loans or segments of the loan
portfolio not included above, where there are serious doubts as to the
ability of the borrowers to comply with the present loan payment terms.
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SECTION IV
Schedule A
FIRST BANKING CENTER, INC.
Analysis of The
Allowance for Loan
Losses
(000's Omitted)
1997 1996 1995 1994 1993
Beginning loan loss reserve $ 2,897 2,336 2,095 1,886 1,714
Charge-offs:
Commercial 14 0 22 4 167
Agricultural production 0 0 0 1 5
Real Estate:
Construction 0 0 0 0 114
Commercial 0 0 0 0 190
Agriculture 2 0 0 0 0
Other Mortgages 3 1 214 198 29
Installment - consumer 43 33 55 102 99
Recoveries:
Commercial 0 12 19 68 6
Agricultural production 0 0 0 3 10
Real Estate:
Construction 0 0 0 113 2
Commercial 30 0 0 0 0
Agriculture 0 0 0 0 17
Other Mortgages 20 5 2 13 2
Installment - consumer 17 31 41 47 29
Net Charge- (5) (14) 229 61 538
offs/(Recoveries)
Additions charged to
operations (1) 230 247 470 270 710
Additions related to
branch acquisitions 0 300 0 0 0
Balance at end of period $ 3,132 2,897 2,336 2,095 1,886
Ratio of net charge-
offs/recoveries during
the period to ave.
loans outstanding
during the period -0.002% -0.01% 0.14% 0.04% 0.42%
Note: (1) For each year ending December 31, the determination of the additions
to loan loss reserve charged to operating expenses was based on an evaluation of
the loan portfolio, current domestic economic conditions, past loan losses and
other factors.
15
SECTION IV
Schedule B
FIRST BANKING CENTER, INC.
The allowance for loan losses is based on an evaluation of risk in the loan
portfolio, current domestic economic conditions, past loan losses and other
factors. The majority of risk in the loan portfolio lies in commercial loans,
which include commercial real estate, agricultural production, and construction
loans. The Company has allocated $1.1 million or 37% of the allowance to these
loans. These loans comprise about 58% of the loan portfolio. Residential
mortgages carry a small element of risk and comprise about 38% of the loan
portfolio. One hundred nineteen thousand dollars of the allowance or about 3.8%
has been allocated to residential mortgages. Consumer loans comprise about 4% of
the loan portfolio and $61 thousand or about 1.9% of the allowance is allocated
to consumer loans. The company has allocated $34 thousand dollars of the
allowance to unfunded loan commitments which total approximately $34 million
dollars. The balance of the allowance or $1.8 million is unallocated.
16
SECTION V
Schedule A
FIRST BANKING CENTER, INC.
Three Year Summary of Average Deposits
(000's Omitted)
RATE RATE RATE
1997 PAID 1996 PAID 1995 PAID
Deposit in domestic bank offices:
Non-interest bearing demand 35,262 29,550 26,563
Interest-bearing demand 22,609 2.58% 36,610 4.14% 34,849 3.99%
Savings deposits 33,527 2.77% 27,531 2.78% 26,163 2.95%
Time deposits 107,672 5.66% 91,000 5.76% 85,454 5.63%
Total Deposits 244,624 3.91% 205,083 3.94% 191,734 3.90%
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SECTION V
Schedule B
FIRST BANKING CENTER, INC.
Maturity Schedule for Time Deposits
of $100,000 or More
(000's Omitted)
For Year Ending December 31, 1997:
OVER OVER
3 MONTHS 6 MONTHS
3 MONTHS THRU 6 THRU 12 OVER 12
OR LESS MONTHS MONTHS MONTHS
Certificates of Deposit $ 7,066 1,868 8,796 1,580
Other Time Deposits 146 0 371 134
TOTAL $ 7,212 1,868 9,167 1,714
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SECTION VI
FIRST BANKING CENTER, INC.
Three Year Summary of Return on
Equity and Assets
1997 1996 1995
Return on average assets 0.95% 1.07% 1.15%
Return on average equity 10.56% 11.29% 12.48%
Dividend payout ratios on common 25.77% 24.21% 20.94%
stock
Average equity to average assets 8.97% 9.46% 9.22%
SECTION VII
FIRST BANKING CENTER, INC.
Short-term Borrowings
(000's Omitted)
Securities Sold Under Agreements
To Repurchase (1)
1997 1996 1995
End of Year:
Balance $30,286 $30,925 $20,225
Weighted Ave. Rate 5.14% 5.42% 5.48%
For the Year:
Maximum Amount Outstanding $30,286 $34,175 $20,225
Average Amount Outstanding $18,917 $21,427 $17,112
Weighted Ave. Rate 5.23% 5.31% 5.39%
(1) Securities sold under repurchase agreements are borrowed on a short-term
basis by the subsidiary banks at prevailing rates for these funds. The
approximate average maturity was 1.6 months, 3.2 months, and 3.6 months
for the years 1997, 1996 and 1995, respectively.
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ITEM 2: PROPERTIES
The Company owns no properties; it currently occupies space in the
buildings that house the Lake Geneva and Kenosha branches. Since January 1, 1995
the company has been making rent payments to First Banking Center - Burlington
for the space that it occupies and the equipment it uses.
Burlington
The Bank owns banking facilities in Burlington, Lyons, Genoa City, Pell
Lake, Somers, Walworth, Wind Lake, Kenosha and Lake Geneva. Each of the banks
offices is well maintained and adequately meets the needs of the bank. The bank
leases office space in Union Grove, and Whitewater.
Albany
The bank owns banking offices in Albany and Monroe. Both structures are
well maintained and adequately meet the needs of the bank.
ITEM 3: LEGAL PROCEEDING
Neither the Corporation nor it subsidiaries is a party, nor is any of their
property, subject to any material existing or pending legal proceedings other
than ordinary routine litigation incidental to its business. No officer,
director, affiliate of the Corporation, or any of their associates is a party to
any material proceedings adverse to the Corporation or its subsidiaries.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No items were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of the security holders through the
solicitation of proxies or otherwise.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market price of common stock and related matters are presented on page 3 of
the Annual Report to Shareholders for the year ended December 31, 1997 and are
incorporated herein by reference.
There were 753 holders of record of the Company's $1.00 par value common
stock on March 1, 1998.
ITEM 6: SELECTED FINANCIAL DATA
Selected financial data is presented on page 28 of the Annual Report to
Shareholders for the year ended December 31, 1997 and is incorporated herein by
reference.
20
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations is presented on pages 29-33 of the Annual Report to Shareholders for
the year ended December 31, 1997 and is incorporated herein by reference.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The following consolidated financial statements of the Registrant and its
subsidiaries included in the Annual Report to Shareholders for the year ended
December 31, 1997 are incorporated herein by reference:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets
December 31, 1997 and 1996
Consolidated Statements of Income
Years ended December 31, 1997, 1996, and 1995
Consolidated Statements of Changes in Components of Stockholder's Equity
Years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows
Years ended December 31, 19967 1996, and 1995
Notes to Consolidated Financial Statements
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
The Company had no disagreement with the accountants regarding any
information presented.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for herein is presented in the proxy statement to be
furnished in connection with the solicitation of proxies on behalf of the Board
of Directors of the Registrant for use at its Annual Meeting to be held on
Tuesday, April 21, 1998, is incorporated herein by reference.
ITEM 11: EXECUTIVE COMPENSATION
The information called for herein is presented in the proxy statement to be
furnished in connection with the solicitation of proxies on behalf of the Board
of Directors of the Registrant for use at its Annual Meeting to be held on
Tuesday, April 21, 1998, is incorporated herein by reference.
21
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for herein is presented in the proxy statement to
be furnished in connection with the solicitation of proxies on behalf of the
Board of Directors of the Registrant for use at its Annual Meeting to be
held on Tuesday, April 21, 1998, is incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Transactions with management and other
None
(b) Certain business relationships
None
(c) Indebtedness of management
This information is presented on page 14, Note F of the Annual
Report to Shareholders, and is incorporated herein by
reference.
(d) Transactions with promoters
None
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS AND FORM 8-K
(a) (1) Financial Statements (see ITEM 8 for listing).
(2) Financial Statement Schedules (all required schedules not applicable).
(3) Exhibits
(3.1) Articles of Incorporation have been submitted with previous 10-K
reports.
(13) 1997 Annual Report to Shareholders (contained herein).
(22) Notice of Annual Meeting and Proxy Statement.
(b) Reports on Form 8-K
None
(c) Financial Statements and Financial Statement Schedules required to be filed
as part of this report are included in the Annual Report To Shareholders,
Note X, Pages 25-27.
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST BANKING CENTER, INC.
Registrant
Date MARCH 27, 1998 By: BRANTLEY CHAPPELL
Brantley Chappell
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.*
BRANTLEY CHAPPELL JAMES SCHUSTER
Brantley Chappell, James Schuster,
Chief Executive Officer, Director Chief Accounting Officer
MELVIN WENDT RICHARD MCKINNEY
Melvin Wendt, Director Richard McKinney, Director
JOHN SMITH JOHN ERNSTER
John Smith, Director John Ernster, Director
DAVID BOILINI PAT SEBRANEK
David Boilini, Director Pat Sebranek, Director
CHARLES WELLINGTON
Charles Wellington, Director
*Each of the above signatures is affixed as of March 27, 1998.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
(a) Annual Report to Shareholders
(b) All proxy material in connection with the 1997 Annual
Shareholders Meeting. Above items will be furnished to
shareholders subsequent to this filing.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
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 ID No.)
incorporation or organization)
400 Milwaukee Ave. Burlington, WI 53105
(Address of principal executive offices)(Zip Code)
(414)763-3581 (Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.[X]
As of January 30, 1998 1,484,818 shares of common stock, par value $1.00
were outstanding and the aggregate market value of the shares (based upon the
average bid and ask price), all of which is held by nonbank affiliates, was
approximately $43,802,131.
Documents incorporated by references: The Notice of 1997 Annual Meeting
and Proxy Statement of April 21, 1998 is incorporated by reference into Parts II
and III of the Form 10-K. The Annual Report to Stockholders for the year ended
December 31, 1997.
FIRST BANKING CENTER, INC.
400 Milwaukee Avenue
Burlington, Wisconsin 53105
(414) 763-3581
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
APRIL 21, 1998
To the Stockholders of First Banking Center, Inc.
Notice is hereby given that the Annual Meeting of Stockholders of First Banking
Center, Inc., Burlington, Wisconsin, pursuant to action of the Board of
Directors, will be held at the Banking House, 400 Milwaukee Avenue, Burlington,
Wisconsin, on the 21st day of April, 1998, at 1:30 P.M. for the purpose of
considering and voting upon the following matters:
1.) Election of 9 directors as described in the Proxy Statement dated
March 3, 1998.
2.) Such other business as may properly come before the meeting or any
adjournments thereof.
Only stockholders of record at the close of business on March 3, 1998 will be
entitled to notice of and to vote at the Annual Meeting of April 21, 1998, or
any adjournment(s) thereof.
John S. Smith
Secretary-Treasurer
Burlington, Wisconsin
March 3, 1998
YOU ARE REQUESTED TO PLEASE FILL IN, SIGN, DATE AND RETURN THE PROXY SUBMITTED
HEREWITH IN THE ENCLOSED ENVELOPE. THE GIVING OF SUCH PROXY WILL NOT AFFECT YOUR
RIGHT TO REVOKE SUCH PROXY OR TO VOTE IN PERSON SHOULD YOU LATER DECIDE TO
ATTEND THE MEETING.
FIRST BANKING CENTER, INC.
Burlington, Wisconsin
PROXY FOR ANNUAL MEETING
This Proxy is Solicited by the Board of Directors of First Banking Center, Inc.
For The Annual Meeting of Stockholders
April 21, 1998
The undersigned hereby constitutes and appoints Patricia Bigelow and Alvin
Noble, and each of them, with full power to act alone and with power of
substitution, to be the true and lawful attorney and proxy of the undersigned to
vote at the Annual Meeting of Shareholders of First Banking Center, Inc. to be
held at the Banking House, 400 Milwaukee Avenue, Burlington, Wisconsin on April
21, 1998 at 1:30 P.M., or at any adjournment(s) thereof, the shares of stock
which the undersigned would be entitled to vote at that meeting and at any
adjournment(s) thereof, as indicated below. The undersigned hereby revokes any
proxy heretofore given and ratifies all that said attorneys and proxies or their
substitutes may do by virtue hereof.
1.) ELECTION OF DIRECTORS
The nine persons listed below have been nominated for election as directors
as discussed in the Proxy Statement dated March 3, 1998 attached hereto:
David Boilini Roman Borkovec Brantly Chappell John Ernster
Richard McKinney Patrick Sebranek John S. Smith Charles Wellington
Melvin Wendt
( ) ELECT AS DIRECTORS THE NINE NOMINEES LISTED ABOVE
( ) WITHHOLD AUTHORITY TO VOTE FOR THE NINE NOMINEES LISTED ABOVE
( ) WITHHOLD AUTHORITY TO VOTE FOR INDIVIDUAL NOMINEES (TO WITHHOLD
AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, CHECK THIS BOX AND
DRAW A LINE THROUGH THAT NOMINEE'S NAME ABOVE)
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THE NINE PERSONS
LISTED ABOVE.
If any additional matters are properly presented, the persons named in the
proxy will have the discretion to vote in accordance with their own judgment
in such matters. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
AND MAY BE REVOKED PRIOR TO ITS EXERCISE BY WRITTEN NOTICE TO THE SECRETARY OF
THE CORPORATION OR BY SUBMITTING A LATER-DATED PROXY, OR BY ATTENDING THE ANNUAL
MEETING. THIS PROXY WILL BE VOTED IN ACCORDANCE WITH INSTRUCTIONS GIVEN BY THE
STOCKHOLDER, BUT IF NO INSTRUCTIONS ARE GIVEN, THIS PROXY WILL BE VOTED TO ELECT
THE PERSONS LISTED ABOVE.
The undersigned hereby acknowledges receipt of the Notice of Annual Meeting
dated March 3, 1998, and the Proxy Statement dated March 3, 1998 and enclosed
herewith.
Dated _______________________, 1998
____________________________________________
____________________________________________
____________________________________________
Signature of Stockholder(s)
Number of Shares ________________________
(Please sign your name exactly as it
appears on the Proxy. In signing as
Executor, Administrator, Personal
Representative, Guardian, Trustee, or
Attorney, please add your title as such.
All joint owners should sign.)
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [ X ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ X ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
FIRST BANKING CENTER, INC.
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ X ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
(1) Title of each class of Securities to which transaction
applies:
___________________________________________________________
(2) Aggregate number of securities to which transaction applies:
___________________________________________________________
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how
it was determined):
___________________________________________________________
(4) Proposed maximum aggregate value of transaction:
___________________________________________________________
(5) Total Fee Paid:
___________________________________________________________
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or Schedule
and the date of its filing.
1) Amount Previously Paid:
__________________________________________________________
2) Form, Schedule or Registration Statement No.:
__________________________________________________________
3) Filing Party:
__________________________________________________________
4) Date Filed:
__________________________________________________________
1
FIRST BANKING CENTER, INC.
AND SUBSIDIARIES
BURLINGTON, WISCONSIN
CONSOLIDATED FINANCIAL STATEMENTS AND INDEPENDENT AUDITOR'S REPORT
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
2
TABLE OF CONTENTS
FINANCIAL STATEMENTS:
Financial Highlights 3
Trading Market for Company's Stock 3
Consolidated balance sheets
December 31, 1997 and 1996 4
Consolidated statements of income
Years ended December 31, 1997, 1996 and 1995 5
Consolidated statement of comprehensive income
Years ended December 31, 1997, 1996 and 1995 6
Consolidated statements of changes in components of
stockholders' equity
Years ended December 31, 1997, 1996 and 1995 6 - 7
Consolidated statements of cash flows
Years ended December 31, 1997, 1996 and 1995 7 - 8
Notes to consolidated financial statements 9 - 27
Summary of Operations 28
Independent Auditor's Report 28 - 29
Management's Discussion and Analysis 29 - 33
3
FIRST BANKING CENTER, INC.
FINANCIAL HIGHLIGHTS
FOR THE YEAR 1997 1996
Net Income $2,884,000 $2,811,000
Cash Dividends 741,000 678,000
Net Income per share
Basic 1.95 1.91
Diluted 1.94 1.90
Return on Average Equity 10.56% 11.29%
Return on Average Assets 0.95% 1.07%
AVERAGES
Assets $304,479,000 $263,162,000
Total earning assets 280,952,000 242,029,000
Loans 204,484,000 173,746,000
Deposits 244,624,000 205,083,000
Stockholders' equity 27,319,000 24,903,000
AT YEAR END
Total Assets $327,833,000 $304,720,000
Stockholders' equity 28,920,000 26,240,000
Book value per share 19.47 17.78
FIRST BANKING CENTER, INC.
TRADING MARKET FOR THE COMPANY'S STOCK
The Company's stock is not actively traded. Robert W. Baird & Co.
Incorporated and A.G. Edwards & Sons, Inc., however, do make a
market in the stock. The range and sales prices, based upon
information given to the Company by Robert W. Baird & Co.
Incorporated, A. G. Edwards & Sons, Inc. and by parties to sales,
are listed below for each quarterly period during the last two
years.
Stock Prices
Low High
1997 by quarter 1st $25.50 $26.50
2nd 26.75 27.75
3rd 26.75 27.75
4th 27.50 28.50
1996 by quarter 1st 22.00 23.00
2nd 22.00 23.00
3rd 24.00 25.50
4th 25.00 26.25
Semi-annual dividends paid the last two fiscal years.
1997 1996
Dividends paid
June .25 .23
December .25 .23
FIRST BANKING CENTER, INC. AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
ASSETS 1997 1996
Cash and due from banks (Note C) $ 16,286,000 $ 21,412,000
Federal funds sold 7,905,000
Cash and cash equivalents 16,286,000 29,317,000
Interest-bearing deposits in banks 820,000 4,869,000
Available for sale securities -
stated at fair value (Note D) 74,601,000 65,362,000
Loans, less allowance for loan
losses of $3,132,000 and
$2,897,000 in 1997 and 1996
respectively (Notes F, G and S) 220,976,000 191,490,000
Office buildings and equipment,
net (Note H) 7,650,000 6,595,000
Accrued interest receivable and
other assets (Notes I, J, O and Q) 7,500,000 7,087,000
Total assets $ 327,833,000 $ 304,720,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits: (Note K)
Demand $ 40,090,000 $ 37,109,000
Savings and NOW accounts 106,493,000 100,662,000
Time 106,316,000 97,088,000
Total deposits 252,899,000 234,859,000
Securities sold under repurchase
agreements (Note L) 30,286,000 30,925,000
U.S. Treasury note account 540,000 540,000
Long-term borrowings (Note M) 11,957,000 9,489,000
Accrued interest payable and other
liabilities (Notes O and Q) 3,231,000 2,667,000
Total liabilities 298,913,000 278,480,000
Commitments and contingencies (Note R)
Stockholders' equity: (Notes N and U)
Common stock, $1.00 par value,
3,000,000 shares authorized;
1,484,718 and 1,476,198 shares
issued and outstanding as of
December 31, 1997 and 1996
respectively 1,485,000 1,476,000
Surplus 4,221,000 4,091,000
Retained earnings (Note T) 22,846,000 20,703,000
28,552,000 26,270,000
Accumulated other comprehensive income -
unrealized gain (loss) on securities, net 368,000 (30,000)
Total stockholders' equity 28,920,000 26,240,000
Total liabilities and
stockholders' equity $ 327,833,000 $ 304,720,000
See Notes to Consolidated Financial Statements.
4
FIRST BANKING CENTER, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997, 1996
and 1995
1997 1996 1995
Interest income:
Interest and fees on loans (Note F) $ 18,658,000 $ 16,234,000 $ 15,017,000
Interest on securities:
Taxable 2,666,000 2,781,000 2,822,000
Tax-exempt 1,107,000 712,000 480,000
Interest on federal funds sold 285,000 248,000 308,000
Interest on deposits in banks 145,000 173,000 183,000
Total interest income 22,861,000 20,148,000 18,810,000
Interest expense:
Interest on deposits (Note K) 9,543,000 8,087,000 7,487,000
Interest on federal funds purchased
and securities
sold under repurchase agreements 997,000 1,143,000 940,000
Interest on U.S. Treasury note account 22,000 20,000 35,000
Interest on long-term borrowings
(Note M) 636,000 514,000 504,000
Total interest expense 11,198,000 9,764,000 8,966,000
Net interest income before provision
for loan losses 11,663,000 10,384,000 9,844,000
Provision for loan losses (Note G) 230,000 247,000 470,000
Net interest income after
provision for loan losses 11,433,000 10,137,000 9,374,000
Other operating income:
Trust Department income 341,000 355,000 345,000
Service charges on deposit accounts 911,000 733,000 632,000
Investment securities gains (losses)
(Note D) 2,000 (13,000) (11,000)
Other income 902,000 687,000 541,000
Total other operating income 2,156,000 1,762,000 1,507,000
Other operating expenses:
Salaries and employee benefits (Note P) 5,294,000 4,290,000 3,501,000
Occupancy expenses 642,000 605,000 547,000
Equipment expenses 1,085,000 876,000 659,000
Computer services 431,000 418,000 328,000
FDIC assessment 27,000 4,000 214,000
Other expenses (Note Q) 2,111,000 1,577,000 1,421,000
Total other operating expenses 9,590,000 7,770,000 6,670,000
Income before income taxes 3,999,000 4,129,000 4,211,000
Income taxes (Note O) 1,115,000 1,318,000 1,407,000
Net income $ 2,884,000 $ 2,811,000 $ 2,804,000
Earnings per share:
Basic $ 1.95 $ 1.91 $ 1.92
Diluted $ 1.94 $ 1.90 $ 1.91
Weighted average shares outstanding 1,477,257 1,471,230 1,463,578
See Notes to Consolidated Financial Statements.
6
FIRST BANKING CENTER, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
Years ended December 31, 1997, 1996
and 1995
1997 1996 1995
Net income $ 2,884,000 $ 2,811,000 $ 2,804,000
Other comprehensive income:
Unrealized gains (losses) arising
during period 399,000 109,000 772,000
Less reclassified adjustment for
(gains)losses included in net income (1,000) 9,000 7,000
Total other comprehensive income 398,000 118,000 779,000
Comprehensive income $ 3,282,000 $ 2,929,000 $ 3,583,000
See Notes to Consolidated Financial Statements.
Consolidated Statments of Changes in Components of
Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995
Accumulated
other
comprehensive
income
Unrealized
gain
Common Surplus Retained Treasury (loss) on
Stock earnings stock securities, net
Balances, December 31, 1994 $ 1,468,000 $ 3,986,000 $ 16,353,000 $ (54,000) $ (927,000)
Net income - 1995 2,804,000
Cash dividends paid -
$.40 per share (587,000)
Exercise of stock options 9,000 53,000
Change in unrealized gain on
available for sale
securities, net 779,000
Balances, December 31, 1995 1,468,000 3,995,000 18,570,000 (1,000) (148,000)
Net income - 1996 2,811,000
Cash dividends paid -
$.46 per share (678,000)
7
Exercise of stock options 1,000
Issuance of 7,734 new
shares of stock for the
exercise of stock options 8,000 96,000
Change in unrealized gain on
available for sale
securities, net 118,000
Balances, December 31, 1996 1,476,000 4,091,000 20,703,000 (30,000)
Net income - 1997 2,884,000
Cash dividends paid -
$.50 per share (741,000)
Exercise of stock options
Issuance of 8,520 new shares
of stock for the exercise of
stock options 9,000 130,000
Change in unrealized gain on
available for sale
sercurites, net 398,000
Balances, December 31, 1997 $ 1,485,000 $ 4,221,000 $ 22,846,000 $ $ 368,000
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
Cash flows from operating activities:
Net income $ 2,884,000 $ 2,811,000 $ 2,804,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 904,000 751,000 565,000
Provision for loan losses 230,000 247,000 470,000
Loss on disposal of office
building and equipment 5,000
Provision for deferred taxes (137,000) (189,000) (189,000)
Amortization and accretion of bond
premiums and discounts - net 76,000 134,000 121,000
Amortization of excess cost over
equity in underlying net assets
of subsidiary 104,000 20,000 2,000
Investment securities (gains) losses (2,000) 13,000 11,000
(Increase) decrease in assets:
Interest receivable (455,000) 219,000 (468,000)
Other assets (128,000 (684,000) 238,000
Increase (decrease) in liabilities:
Taxes payable 331,000 (140,000) (235,000)
Interest payable 15,000 209,000 350,000
Other liabilities 218,000 (6,000) 598,000
Total adjustments 1,161,000 574,000 1,463,000
Net cash provided by operating activities 4,045,000 3,385,000 4,267,000
Cash flows from investing activities:
Net (increase) decrease in interest-
bearing deposits in banks 4,049,000 (566,000) (2,404,000)
Proceeds from sales of available for
sale securities 4,322,000 3,750,000 1,000,000
Proceeds from maturities of available
for sale securities 50,990,000 27,386,000 15,909,000
Purchase of available for sale securities (64,022,000) (34,738,000) (24,288,000)
Purchase of held to maturity securities 6,190,000 7,370,000
Proceeds from maturities of held to
maturity securities (7,936,000) (7,200,000)
Proceeds from sale of student loans 779,000
Net increase in loans (29,717,000) (24,497,000) (12,811,000)
Purchase of office buildings and (1,990,000) (2,297,000) (929,000)
Proceeds from disposal of office
building and equipment 26,000 21,000
Deposit premium paid in purchase of
branches (1,509,000)
Net cash used in investing activities (36,342,000) (33,417,000) (23,353,000)
8
FIRST BANKING CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(concluded)
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
Cash flows from financing activities:
Net increase in deposits $ 18,040,000 $ 26,029,000 $ 21,720,000
Dividends paid (741,000) (678,000) (587,000)
Proceeds from long-term borrowings 2,618,000 3,605,000 5,609,000
Payments on long-term borrowings (150,000) (3,049,000) (3,481,000)
Net increase (decrease) in U.S. 449,000 (606,000)
Net increase in securities sold under
repurchase agreements (640,000) 10,700,000 6,470,000
Proceeds from stock options exercised 139,000 105,000 62,000
Net cash provided by financing
activities 19,266,000 37,161,000 29,187,000
Increase in cash and cash equivalents (13,031,000) 7,129,000 10,101,000
Cash and cash equivalents at beginning
of year 29,317,000 22,188,000 12,087,000
Cash and cash equivalents at end of
year $ 16,286,000 $ 29,317,000 $ 22,188,000
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $ 11,184,000 $ 9,555,000 $ 8,616,000
Income taxes $ 917,000 $ 1,458,000 $ 1,642,000
Supplemental schedule of non-cash
investing and financing activities:
Securities held for investment
reclassified to available for sale
securities $ $ 31,587,000 $
Net change in unrealized gain (loss)
on available for sale securities $ 398,000 $ 118,000 $ 779,000
Acquisitions:
Excess of cost over equity in
underlying net assets acquired
net assets acquired $ $ 1,509,000 $
Assets acquired:
Cash and cash equivalents 2,644,000
Loans 14,043,000
Office building and equipment, net 247,000
Other assets 1,000
Total assets $ $ 18,444,000 $
Liabilities assumed:
Deposits $ $ 18,431,000 $
Other liabilities 13,000
Total liabilities $ $ 18,444,000 $
See Notes to Consolidated Financial Statements.
9
Note A. Summary of Significant Accounting Policies
1. Consolidation:
The consolidated financial statements of First Banking Center, Inc. include the
accounts of its wholly owned subsidiaries, First Banking Center - Burlington and
First Banking Center - Albany. First Banking Center - Burlington includes the
accounts of its wholly owned subsidiary, First Banking Center Burlington
Investment Corporation. The consolidated financial statements have been
prepared in conformity with generally accepted accounting principles and conform
to general practices within the banking industry. All significant intercompany
accounts and transactions have been eliminated in the consolidated financial
statements.
2. Nature of banking activities:
The consolidated income of First Banking Center, Inc. is principally from income
of the two bank subsidiaries. The subsidiary Banks grant agribusiness,
commercial, residential and consumer loans, accepts deposits and provides trust
services to customers primarily in southeastern and south central Wisconsin.
The subsidiary Banks are subject to competition from other financial
institutions and nonfinancial institutions providing financial products.
Additionally the Company and the subsidiary Banks are subject to the regulations
of certain regulatory agencies and undergo periodic examination by those
regulatory agencies.
3. Basis of financial statement presentation:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates.
4. Cash and cash equivalents:
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, federal funds sold and investments with an
original maturity of three months or less. Generally, federal funds are sold
for one-day periods.
The subsidiary Banks maintain amounts due from banks which, at times, may exceed
federally insured limits. The subsidiary Banks have not experienced any losses
in such accounts.
5. Available for sale securities:
Securities classified as available for sale are those debt securities that the
subsidiary Banks intend to hold for an indefinite period of time, but not
necessarily to maturity. Any decision to sell a security classified as
available for sale would be based on various factors, including significant
movements in interest rates, changes in the maturity mix of the subsidiary
Banks' assets and liabilities, liquidity needs, regulatory capital
consideration, and other similar factors. Securities classified as available
for sale are carried at fair value. Unrealized gains or losses are reported as
increases or decreases in comprehensive income, net of the related deferred tax
effect. Realized gains or losses, determined on the basis of the cost of
specific securities sold, are included in earnings.
10
Note A. Summary of Significant Accounting Policies (continued)
6. Loans:
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or payoff are reported at the amount of unpaid
principal, reduced by the allowance for loan losses. Interest on loans is
calculated by using the simple interest method on daily balances of the
principal amount outstanding. The accrual of interest income on impaired loans
is discontinued when, in the opinion of management, there is reasonable doubt
as to the borrower's ability to meet payment of interest or principal when they
become due. When interest accrual is discontinued, all unpaid accrued interest
is reversed. Cash collections on impaired loans are credited to the loan
receivable balance, and no interest income is recognized on those loans until
the principal balance is current. Accrual of interest is generally resumed when
the customer is current on all principal and interest payments and has been
paying on a timely basis for a period of time.
7. Allowance for loan loses:
The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses when
management believes that the collectibility of the principal is unlikely. The
allowance is an amount that management believes will be adequate to absorb
possible losses on existing loans that may become uncollectible, based on
evaluation of the collectibility of loans and prior loan loss experience. The
evaluations take into consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality, review of specific
problem loans, and current economic conditions that may affect the borrower's
ability to pay. While management uses the best information available to make
its evaluation, future adjustments to the allowance may be necessary if there
are significant changes in economic conditions. Impaired loans are measured
based on the present value of expected future cash flows discounted at the
loan's effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. A loan is impaired when it is probable the creditor will
be unable to collect all contractual principal and interest payments due in
accordance with the terms of the loan agreement.
In addition, various regulatory agencies periodically review the allowance for
loan losses. These agencies may require the banks to make additions to the
allowance for loan losses based on their judgments of collectibility based on
information available to them at the time of their examination.
8. Office buildings and equipment:
Depreciable assets are stated at cost less accumulated depreciation. Provisions
for depreciation are computed on straight-line and accelerated methods over the
estimated useful lives of the assets, which range from 15 to 50 years for
buildings and 3 to 15 years for equipment.
9. Profit-sharing plan:
The Company has established a trusteed contributory 401(k) profit-sharing plan
for qualified employees. The Company's policy is to fund contributions as
accrued.
10. Other real estate owned:
Other real estate owned, acquired through partial or total satisfaction of loans
is carried at the lower of cost or fair value less cost to sell. At the date of
acquisition losses are charged to the allowance for loan losses. Revenue and
expenses from operations and changes in the valuation allowance are included in
loss on foreclosed real estate.
11
Note A. Summary of Significant Accounting Policies (continued)
11. Income taxes:
The Company files a consolidated federal income tax return and individual
subsidiary state income tax returns. Accordingly, amounts equal to tax benefits
of those companies having taxable federal losses or credits are reimbursed by
the other companies that incur federal tax liabilities.
Amounts provided for income tax expense are based on income reported for
financial statement purposes and do not necessarily represent amounts currently
payable under tax laws. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes. The differences relate principally to the reserve
for loan losses, nonaccrual loan income, deferred compensation and pension,
fixed assets and unrealized gains and losses on available for sale securities.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.
12. Off-balance-sheet financial instruments:
In the ordinary course of business the subsidiary Banks have entered into off-
balance-sheet financial instruments consisting of commitments to extend credit,
commitments under credit card arrangements, commercial letters of credit and
standby letters of credit. Such financial instruments are recorded in the
financial statements when they are funded or related fees are incurred or
received.
13. Trust assets and fees:
Property held for customers in fiduciary or agency capacities is not included in
the accompanying balance sheet, since such items are not assets of the Company.
In accordance with established industry practice, income from trust fees is
reported on the cash basis. Reporting of trust fees on an accrual basis would
have no material effect on reported income.
14. Earnings per share:
Earnings per share are computed based upon the weighted average number of common
shares outstanding during each year. In the computation of diluted earnings per
share, all dilutive stock options are assumed to be exercised at the beginning
of each year and the proceeds are used to purchase shares of the Company's
common stock at the average market price during the year.
15. Fair value of financial instruments:
Financial Accounting Standards Board Statement No. 107, "Disclosures About Fair
Value of Financial Instruments", requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. Statement No. 107 excludes certain
financial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
12
Note A. Summary of Significant Accounting Policies (continued)
15. Fair value of financial instruments: (continued)
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
Carrying amounts approximate fair values for the following instruments:
Cash and cash equivalents
Federal funds sold
Interest-bearing deposits in banks
Short-term borrowing
Accrued interest receivable
Accrued interest payable
Variable rate loans that reprice frequently where no
significant change in credit risk has occurred
Demand deposits
Variable rate money market accounts
Variable rate certificate of deposit
Available for sale securities
Discounted cash flows:
Using interest rates currently being offered on instruments with
similar terms and with similar credit quality:
All loans except variable rate loans described above
Fixed rate certificates of deposit
Notes payable and other borrowing
Quoted fees currently being charged for similar instruments:
Taking into account the remaining terms of the agreements and the
counterparties' credit standing:
Off-balance-sheet instruments:
Guarantees
Letters of credit
Lending commitments
Since the majority of the Company's off-balance-sheet instruments consists of
nonfee-producing, variable rate commitments, the Company had determined it does
not have a distinguishable fair value.
13
Note B. Accounting Change
In 1997, the Financial Accounting Standards Board (FASB) issued Statement No.
130, "Reporting Comprehensive Income", which requires all entities to report
comprehensive income in the financial statements. This Statement is effective
for fiscal years beginning after December 15, 1997 with early adoption
permitted. The Company has elected to early adopt FASB No. 130. As provided by
this Statement, 1996 and 1995 comparative financial statements have been
restated for the change in accounting principle. Adoption of this Statement has
no effect on total stockholders' equity.
Note C. Cash and Due from Banks
The Company's bank subsidiaries are required to maintain vault cash and reserve
balances with Federal Reserve Banks based upon a percentage of deposits. These
requirements approximated $1,549,000 and $1,250,000 at December 31, 1997 and
1996 respectively.
Note D. Available for Sale Securities
Amortized costs and fair values of available for sale securities as of December
31, 1997 and 1996 are summarized as follows:
December 31, 1997
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses Value
U.S. Treasury securities $ 6,154,0000 $ 56,000 $ 3,000 $ 6,207,000
Obligations of other U.S.
government agencies
and corporations 17,088,000 21,000 5,000 17,104,000
Obligation of states and 26,921,000 468,000 27,389,000
political subdivisions
Commercial paper 1,400,000 1,400,000
Mortgage-backed securities 18,453,000 112,000 64,000 18,501,000
Mutual funds 2,333,000 17,000 2,316,000
Federal Reserve Stock 450,000 450,000
Federal Home Loan Bank Stock 1,234,000 1,234,000
$ 74,033,000 $ 657,000 $ 89,000 $ 74,601,000
14
Note D. Available for Sale Securities (continued)
December 31, 1996
Amortized Gross Gross Fair
cost unrealized unrealized Value
gains losses
U.S. Treasury securities $ 6,657,000 $ 30,000 $ 15,000 $ 6,672,000
Obligations of other U.S.
government agencies and
corporations 13,890,000 11,000 27,000 13,874,000
Obligation of states and
political subdivisons 19,383,000 94,000 83,000 19,394,000
Other 140,000 1,000 141,000
40,070,000 136,000 125,000 40,081,000
Mortgage-backed securities 21,920,000 140,000 169,000 21,891,000
Mutual funds 1,724,000 18,000 1,706,000
Federal Reserve Stock 450,000 450,000
Federal Home Loan Bank Stock 1,234,000 1,234,000
$ 65,398,000 $ 276,000 $ 312,000 $ 65,362,000
The amortized cost and fair value of available for sale securities as of
December 31, 1997, by contractual maturity, are shown on the following page.
Expected maturities will differ from contractual maturities in mortgage-backed
securities, equity securities, and mutual funds since the anticipated maturities
are not readily determinable. Therefore, these securities are not included in
the maturity categories in the following maturity summary listed below:
Decemember 31, 1997
Amortized Fair
cost value
Due in one year or less $ 18,757,000 $ 18,765,000
Due after one year through 5 years 15,858,000 16,007,000
Due after 5 years through 10 years 16,878,000 17,255,000
Due after 10 years 70,000 73,000
$ 51,563,000 $ 52,100,000
15
Note D. Available for Sale Securities (continued)
Following is a summary of the proceeds from sales of investment securities
available for sale, as well as gross gains and losses for the years ended
December 31:
1997 1996 1995
Proceeds from sales of available for $ 4,322,000 $ 3,750,000 $ 1,000,000
sale securities
Gross gains on sales $ 31,000 $ 6,000 $
Gross losses on sales (29,000) (19,000) (11,000)
$ 2,000 $ (13,000) $ (11,000)
Related income taxes (benefit) $ 1,000 $ (5,000) $ (4,000)
Available for sale securities with a carrying amount of $31,026,000 and
$32,056,000 as of December 31, 1997 and 1996 respectively, were pledged as
collateral on public deposits and for other purposes as required or permitted by
law.
Note E. Held to Maturity Securities
During 1996, management reevaluated its investment goals and objectives and
determined it would be better served by classifying its entire investment
portfolio as available for sale. Accordingly, the Company reclassified all of
its held to maturity securities to available for sale effective December 31,
1996.
Note F. Loans
Major classifications of loans are as follows:
December 31,
1997 1996
Commercial $ 32,886,000 $ 30,808,000
Agricultural production 6,857,000 6,167,000
Real estate:
Construction 24,353,000 25,164,000
Commercial 52,540,000 40,935,00
Agricultural 8,177,000 705,000
Residential 86,015,000 79,129,000
Installment and consumer 8,308,000 7,225,000
Municipal loans 4,972,000 4,254,000
224,108,000 194,387,000
Allowance for loan losses (3,132,000) (2,897,000)
Total loans $ 220,976,000 $ 191,490,000
16
Note F. Loans (continued)
Impairment of loans having recorded investment at December 31, 1997 of $824,000
and $260,000 at December 31, 1996 has been recognized in conformity with FASB
Statement No. 114 as amended by FASB Statement No. 118. The average recorded
investment in impaired loans during 1997 and 1996 was $1,457,000 and $759,000
respectively. There was no allowance for loan losses related to these loans at
December 31, 1997 and 1996. Interest income on impaired loans of $14,000,
$6,000 and $7,000 was recognized for cash payments received in 1997, 1996 and
1995 respectively.
Certain directors and executive officers of the Company, and their related
interests, had loans outstanding in the aggregate amounts of $1,210,000 and
$1,065,000 at December 31,1997 and 1996 respectively. During 1997, $558,000 of
new loans were made and repayments totaled $413,000. These loans were made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the same time for comparable transactions with other persons and
did not involve more than normal risks of collectibility or present other
unfavorable features.
Note G. Allowance for Loan Losses
The allowance for loan losses reflected in the accompanying consolidated
financial statements represents the allowance available to absorb loan losses.
An analysis of changes in the allowance is presented in the following
tabulation:
December31,
1997 1996 1995
Balance, beginning of year $ 2,897,000 $ 2,336,000 $ 2,095,000
Charge-offs (62,000) (34,000) (291,000)
Recoveries 67,000 48,000 62,000
Addition to allowance related
to branch aquisitions 300,000
Provision charged to operations 230,000 247,000 470,000
Balance, end of year $ 3,132,000 $ 2,897,000 $ 2,336,000
Note H. Office Buildings and Equipment
Office buildings and equipment are stated at cost less accumulated depreciation
and are summarized as follows:
December 31,
1997 1996
Land $ 1,550,000 $ 1,283,000
Buildings and improvements 6,180,000 4,999,000
Furniture and equipment 4,555,000 4,061,000
12,285,000 10,343,000
Less accumulated depreciation 4,635,000 3,748,000
Total office buildings and equipment $ 7,650,000 $ 6,595,000
Depreciation expense as of December 31, 1997, 1996 and 1995 was $904,000,
$751,000 and $565,000 respectively.
Note I. Excess of Cost Over Equity in Underlying Net Assets of Subsidiaries
The excess of cost over equity in underlying net assets of the Genoa City and
Pell Lake branches of the First
17
Banking Center - Burlington at the date of the branch acquisition amounted to
$1,479,000. The amount is being amortized over a period of fifteen years.
Amortization expense amounted to $99,000 and $16,000 for the years ended
December 31, 1997 and 1996 respectively. Accumulated amortization amounted to
$115,000 and $16,000 at December 31, 1997 and 1996 respectively.
Note J. Valuation of Core Deposits
The fair market value of core deposits of the First Banking Center - Albany at
the date of acquisition amounted to $310,000. The valuation was determined by
an independent appraisal firm. The amount, net of amortization, has been
included as part of other assets and is being amortized over the average
remaining life of the deposits. Amortization expense for the years ended
December 31, 1997, 1996 and 1995 amounted to $3,000, $3,000 and $3,000
respectively. Accumulated amortization amounted to $304,000, $301,000 and
$298,000 at December 31, 1997, 1996 and 1995 respectively.
The fair market value of core deposits of the Genoa City and Pell Lake branches
of First Banking Center - Burlington at the date of the branch acquisition
amounted to $30,000. The amount, net of amortization, has been included as part
of other assets and is being amortized over a period of ten years. Amortization
expense amounted to $3,000 and $1,000 for the years ended December 31, 1997 and
1996 respectively. Accumulated amortization amounted to $4,000 and $1,000 at
December 31, 1997 and 1996 respectively.
Note K. Deposits and Interest on Deposits
The aggregate amount of Time deposits, each with a minimum denomination of
$100,000, was approximately $19,961,000 and $10,242,000 in 1997 and 1996
respectively.
At December 31, 1997, the scheduled maturities of Time deposits are as follows:
1998 $ 80,948,000
1999 17,629,000
2000 5,121,000
2001 2,313,000
2002 305,000
$ 106,316,000
Interest expense on deposits for the years ended December 31, 1997, 1996 and
1995 is as follows:
December 31,
1997 1996 1995
Interest bearing transaction accounts $ 585,000 $ 561,000 $ 519,000
Money market demand accounts 1,950,000 1,515,000 1,389,000
Savings deposits 921,000 766,000 771,000
Time, $100,000 and over 993,000 455,000 611,000
Time, under $100,000 5,094,000 4,790,000 4,197,000
Total $ ,543,000 $ 8,087,000 $ 7,487,000
Note L. Securities Sold Under Repurchase Agreements
Securities sold under repurchase agreements generally mature within 1 to 120
days from the transaction date.
18
Information concerning securities sold under repurchase agreements is summarized
as follows:
1997 1996
Average balance during the year $ 18,917,000 $ 21,427,000
Average interest rate during the year 5.23% 5.31%
Maximum month-end balance during the year $ 30,286,000 $ 34,175,000
Securities underlying the agreements at
year-end:
Carrying value $ 31,026,000 $ 31,516,000
Estimated fair value $ 31,026,000 $ 31,516,000
Note M. Long-Term Borrowings
During 1992, the Company entered into a master contract agreement with the
Federal Home Loan Bank (FHLB) which provides for borrowing up to the maximum of
60% of the book value of the Bank's 1-4 family real estate loans, $39,918,000 at
December 31, 1997. The indebtedness is evidenced by a master contract dated
September 14, 1992. FHLB provides both fixed and floating rate advances.
Floating rates are tied to short-term market rates of interest, such as Federal
funds and Treasury Bill rates. Fixed rate advances are priced in reference to
market rates of interest at the time of the advance, namely the rates that FHLB
pays to borrowers at various maturities.
Various advances were obtained with total outstanding balances of $11,957,000
and $9,489,000 at December 31, 1997 and 1996 respectively, with applicable
interest rates ranging from 5.43% to 6.83%. Interest is payable monthly with
principal payment due at maturity.
The advances are secured by a security agreement pledging a portion of the
subsidiary Banks' real estate mortgages with a carrying value of $19,928,000.
Future principal payments required to be made are as follows:
Years ending December 31:
1998 $ 6,263,000
1999 3,045,000
2000 324,000
2001 2,325,000
$ 11,957,000
Note N. Stockholders' Equity
Transfers from retained earnings to surplus in the subsidiary banks have not
been reflected in the consolidated financial statements.
The Company has an Incentive Stock Option Plan which provides for the granting
of options for up to 300,000 shares of common stock to key officers and
employees of the Company. Options are granted at the current market value
unless the stock is traded on a public market which it is then granted at the
average of the high and the low for the year, provided, however, if the
principal market is a national exchange, the grant price shall be the last
reported sales price. Options may be exercised 33.33% per year beginning one
year after the date of the grant and must be exercised within a four year
period.
Activity of the Incentive Stock Option Plan is summarized in the following
table:
19
Options Options Option price
available outstanding per share
Balance, December 31, 1994 290,400 34,725 $ 11.33 - 19.00
Granted (12,075) 12,075 22.00
Exercise of stock option (5,289) 11.33 - 12.67
Canceled 300 (3,575) 11.33 - 19.00
Balance, December 31, 1995 278,625 37,936 12.67 - 22.00
Granted (14,800) 14,800 5.50
Exercise of stock option (7,761) 12.67 - 19.00
Canceled 4,383 (4,383) 12.67 - 22.00
Balance, December 31, 1996 268,208 40,592 15.33 - 25.50
Granted (23,800) 23,800 27.25 - 28.50
Exercise of stock option (8,520) 15.33 - 25.00
Exercisable, December 31, 1997 244,408 55,872 19.00 - 28.50
The Company applies APB Opinion 25 and related interpretation in accounting for
its plan. Accordingly, no compensation cost has been recognized for its
incentive stock option plan. Had compensation cost for the Company's stock-
based compensation plan been determined based upon the fair value at the grant
dates for awards under the plan consistent with the method of FASB Statement
123, the Company's net income and earnings per share would be reduced to the pro
forma amounts indicated below:
1997 1996 1995
Net income - as reported $ 2,884,000 $ 2,811,000 $ 2,804,000
Pro forma $ 2,822,000 2,778,000 2,785,000
Basic earnings per share -
as reported $ 1.95 $ 1.91 $ 1.92
Pro forma $ 1.91 $ 1.89 $ 1.90
Diluted earnings per share -
as reported $ 1.94 $ 1.90 $ 1.91
Pro forma $ 1.90 $ 1.88 $ 1.89
Per
share
Income Shares amount
1997:
Earnings per share $ 2,884,000 1,477,257 $ 1.95
Effect of options 7,911
Earnings per share - assuming dilution $ 2,884,000 1,485,168 $ 1.94
1996:
Earnings per share $ 2,811,000 1,471,230 $ 1.91
Effect of options 8,124
Earnings per share - assuming dilution $ 2,811,000 1,479,354 $ 1.90
20
Note N. Stockholders' Equity
(continued)
1995:
Earnings per share $ 2,804,000 1,463,578 $ 1.92
Effect of options 6,584
Earnings per share - assuming dilution $ 2,804,000 1,470,162 $ 1.91
Note O. Income Taxes
The provision for income taxes included in the accompanying consolidated
financial statements consists of the following:
December
31,
1997 1996 1995
Current taxes:
Federal $ 1,022,000 $ 1,251,000 $ 1,326,000
State 230,000 256,000 270,000
1,252,000 1,507,000 1,596,000
Deferred income taxes (benefit):
Federal (121,000) (163,000) (163,000)
State (16,000) (26,000) (26,000)
(137,000) (189,000) (189,000)
Total provision for income taxes $ 1,115,000 $ 1,318,000 $ 1,407,000
The net deferred tax assets in the accompanying consolidated balance sheets
include the following amounts of deferred tax assets and liabilities:
December 31,
1997 1996
Deferred tax assets:
Allowance for loan losses $ 922,000 $ 832,000
Unrealized loss on available for
sale securities 5,000
Depreciation 12,000 14,000
Pension 212,000 207,000
Deferred compensation 356,000 310,000
Other 9,000 3,000
Deferred tax liabilities:
Depreciation
Unrealized gain on available for
sale securities (199,000)
Other (25,000) (17,000)
Balance, end of year $ 1,287,000 $ 1,354,000
Management believes it is more likely than not, that the gross deferred tax
assets will be fully realized. Therefore, no valuation allowance has been
recorded as of December 31, 1997 or 1996.
21
Note O. -Income Taxes (continued)
A reconciliation of statutory Federal income taxes based upon income before
taxes, to the provision for federal and state income taxes, as summarized above,
is as follows:
December 31,
1997 1996 1995
% of % of % of
pretax pretax pretax
Amount income Amount income Amount income
Reconciliation of
statutory to
effective taxes:
Federal income taxes
at statutory rate $ 1,360,000 34.0% $ 1,404,000 34.0% $ 1,432,000 34.0%
Adjustments for:
Tax-exempt interest on
municipal obligations (422,000) (10.5) (256,000) (6.2) (188,000) (4.5)
Increases in taxes
resulting from state
income taxes 152,000 3.8 169,000 4.1 178,000 4.2
Other - net 25,000 0.6 1,000 (15,000) (0.3)
Effective income
taxes - operations $ 1,115,000 27.9% $ 1,318,000 31.9% $ 1,407,000 33.4%
Note P. Profit-Sharing Plan
The Company has a 401(k) plan. Contributions in 1997 were $149,000, $114,000 in
1996 and $92,000 in 1995.
Note Q. Salary Continuation Agreement
During 1994, the Company entered into a salary continuation agreement with an
officer. In 1997, the Company entered into an additional agreement with another
officer. The agreements provide for the payment of specified amounts upon the
employee's retirement or death which is being accrued over the anticipated
remaining period of employment. During 1997, one of the officers retired and
payments commenced. Expenses recognized for future benefits under these
agreements totaled $151,000, $217,000 and $188,000 during 1997, 1996 and 1995
respectively.
Although not part of the agreement, the Company purchased paid-up life insurance
on the officer which could provide funding for the payment of benefits.
Included in other assets is $1,383,000 and $919,000 of related cash surrender
value as of December 31, 1997 and 1996 respectively.
Note R. Commitments and Contingencies
In the normal course of business, the Company is involved in various legal
proceedings. In the opinion of management, any liability resulting from such
proceedings would not have a material adverse effect on the consolidated
financial statements.
The Company is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit, financial guarantees
and standby letters of credit. They involve, to varying degrees, elements of
credit risk in excess of amounts recognized on the consolidated balance sheets.
22
Note R. Commitments and Contingencies (continued)
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Company uses the same credit policies in making
commitments and issuing letters of credit as they do for on-balance-sheet
instruments.
A summary of the contract or notional amount of the Company's exposure to off-
balance-sheet risk as of December 31, 1997 and 1996 is as follows:
1997 1996
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit $ 27,745,000 $ 29,270,000
Credit card commitment $ 2,149,000 $ 1,797,000
Standby letters of credit $ 3,962,000 $ 3,109,000
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Standby letters of credit are conditional
commitments issued to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private borrowing
arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Company evaluates each customer's credit worthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation of the
counterparty. Collateral held varies but may include accounts receivable,
inventory, property and equipment, and income-producing commercial properties.
Credit card commitments are unsecured.
The Company and the subsidiary Banks do not engage in the use of interest rate
swaps, futures or option contracts as of December 31, 1997.
Note S. Concentration of Credit Risk
Practically all of the subsidiary Banks' loans, commitments, and commercial and
standby letters of credit have been granted to customers in the subsidiary
Banks' market area. Although the subsidiary Banks have a diversified loan
portfolio, the ability of their debtors to honor their contracts is dependent on
the economic conditions of the counties surrounding the subsidiary Banks. The
concentration of credit by type loan are set forth in Note F.
Note T. Retained Earnings
A source of income and funds of First Banking Center, Inc. are dividends from
its subsidiary Banks. Dividends declared by the subsidiary Banks that exceed
the retained net income for the most current year plus retained net income for
the preceding two years must be approved by Federal and State regulatory
agencies. Under this formula, dividends of approximately $6,326,000 may be paid
without prior regulatory approval. Maintenance of adequate capital at the
subsidiary Banks effectively restricts potential dividends to an amount less
than $6,326,000
Note U. Regulatory Capital Requirements
The Company is subject to various regulatory capital requirements administered
by the federal and state banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company must meet specific capital guidelines that involve quantitative measures
of the Company's
23
Note U. Regulatory Capital Requirements (continued)
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk-weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
requires the Company to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined) and Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997, the Company
meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the regulatory
agencies categorized the Company as well-capitalized under the regulatory
framework for prompt corrective action. To be categorized as well-capitalized,
the Company must maintain minimum total risk-based, Tier I risk-based, and
leverage ratios as set forth in the table. There are no conditions or events
since these notifications that management believes have changed the
institution's category.
Listed below is a comparison of the Company and subsidiary Banks' 1997 and 1996
actual with the minimum requirements for well-capitalized and adequately
capitalized banks, as defined by the federal regulatory agencies' Prompt
Corrective Action Rules:
To be well
capitalized
under
prompt
For Capital corrective
adequacy action
Actual purposes provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1997:
Total capital (to risk-
weighted assets):
First Banking Center, Inc. $ 30,286,000 13.18% $ 18,360,000 8.00% $ 22,950,000 10.00%
First Banking Center - Burlington $ 26,392,000 12.64% $ 16,688,000 8.00% $ 20,860,000 10.00%
First Banking Center - Albany $ 3,090,000 14.92% $ 1,656,000 8.00% $ 2,070,000 10.00%
Tier I capital (to risk-
weighted assets):
First Banking Center, Inc. $ 27,153,000 11.82% $ 9,180,000 4.00% $ 13,770,000 6.00%
First Banking Center - Burlington $ 23,596,000 11.30% $ 8,344,000 4.00% $ 12,516,000 6.00%
First Banking Center - Albany $ 2,830,000 13.67% $ 828,000 4.00% $ 1,242,000 6.00%
Tier I capital (to average
assets):
First Banking Center, Inc. $ 27,153,000 8.73% $ 12,434,000 4.00% $ 15,543,000 5.00%
First Banking Center - Burlington $ 23,596,000 8.32% $ 11,333,000 4.00% $ 14,167,000 5.00%
First Banking Center - Albany $ 2,830,000 10.37% $ 1,092,000 4.00% $ 1,365,000 5.00%
As of December 31, 1996:
Total capital (to risk-
weighted assets):
First Banking Center, Inc. $ 27,241,000 13.69% $ 15,914,000 8.00% $ 19,892,000 10.00%
First Banking Center - Burlington $ 23,810,000 13.15% $ 14,483,000 8.00% $ 18,103,000 10.00%
First Banking Center - Albany $ 2,952,000 16.73% $ 1,412,000 8.00% $ 1,765,000 10.00%
Tier I capital (to risk-
weighted assets):
First Banking Center, Inc. $ 24,750,000 12.44% $ 7,957,000 4.00% $ 11,935,000 6.00%
First Banking Center - Burlington $ 21,543,000 11.90% $ 7,241,000 4.00% $ 10,862,000 6.00%
First Banking Center - Albany $ 2,730,000 15.47% $ 706,000 4.00% $ 1,059,000 6.00%
Tier I capital (to average
assets):
First Banking Center, Inc. $ 24,750,000 9.31% $ 10,632,000 4.00% $ 13,290,000 5.00%
First Banking Center - Burlington $ 21,543,000 9.04% $ 9,537,000 4.00% $ 11,921,000 5.00%
First Banking Center - Albany $ 2,730,000 9.97% $ 1,095,000 4.00% $ 1,369,000 5.00%
24
Note V. Business Acquisition
In November 1996, First Banking Center - Burlington acquired the branch offices
in Genoa City and Pell Lake, Wisconsin. This acquisition has been accounted for
as a purchase and, accordingly, the acquired assets and liabilities have been
recorded at their estimated fair value at the date of acquisition. The proforma
effect on net income is immaterial.
Note W. Fair Value of Financial Information
The estimated fair values of the Company's financial instruments are as follows:
December 31, 1997 Decemer 31, 1996
Carrying Estimated Carrying Estimated
amount fair amount fair
value value
Financial assets:
Cash and cash
equivalents $ 16,286,000 $ 16,286,000 $ 29,317,000 $ 29,317,000
Interest bearing
deposits in banks $ 820,000 $ 820,000 $ 4,869,000 $ 4,869,000
Securities $ 74,601,000 $ 74,601,000 $ 65,362,000 $ 65,362,000
Net loans $ 220,976,000 $ 220,771,000 $ 191,490,000 $ 191,009,000
Accrued interest
receivable $ 2,355,000 $ 2,355,000 $ 1,900,000 $ 1,900,000
Financial liabilities:
Deposits $ 252,899,000 $ 252,882,000 $ 234,859,000 $ 234,920,000
Repurchase agreements $ 30,286,000 $ 30,286,000 $ 30,925,000 $ 30,925,000
U.S. Treasury note
account $ 540,000 $ 540,000 $ 540,000 $ 540,000
Long-term borrowings $ 11,957,000 $ 12,022,000 $ 9,489,000 $ 9,549,000
Accrued interest
payable $ 1,100,000 $ 1,100,000 $ 1,086,000 $ 1,086,000
The estimated fair value of fee income on letters of credit at December 31, 1997
and 1996 is insignificant. Loan commitments on which the committed interest
rate is less than the current market rate are also insignificant at December 31,
1997 and 1996.
The Company assumes interest rate risk (the risk that general interest rate
levels will change) as a result of its normal operations. As a result, fair
values of the Company's financial instruments will change when interest rate
levels change and that change may be either favorable or unfavorable to the
Company. Management attempts to match maturities of assets and liabilities to
the extent believed necessary to minimize interest rate risk. However,
borrowers with fixed rate obligations are less likely to prepay in a rising rate
environment and more likely to repay in a falling rate environment. Conversely,
depositors who are receiving fixed rates are more likely to withdraw funds
before maturity in a rising rate environment and less likely to do so in a
falling rate environment. Management monitors rates and maturities of assets
and liabilities and attempts to minimize interest rate risk by adjusting terms
of new loans and deposits and by investing in securities with terms that
mitigate the Company's overall interest rate risk.
25
Note X. First Banking Center, Inc. (Parent Company only) Financial Information
CONDENSED BALANCE SHEETS 12/31/97 12/31/96
Assets:
Cash $ 371,000 $ 161,000
Investment in subsidiaries 28,186,000 25,754,000
Interest-bearing deposits in banks 131,000 125,000
Loans 90,000
Other assets 217,000 253,000
Total assets $ 28,995,000 $ 26,293,000
Liabilities - other liabilities $ 75,000 $ 53,000
Stockholders' equity:
Common stock, $1.00 par value, 3,000,000
shares authorized; 1,484,718 and 1,476,198
shares issued and outstanding in 1997 and
1996 respectively 1,485,000 1,476,000
Surplus 4,221,000 4,091,000
Retained earnings 22,846,000 20,703,000
28,552,000 26,270,000
Accumulated other comprehensive income -
unrealized gain (loss) on securities, net 368,000 (30,000)
Total stockholders' equity 28,920,000 26,240,000
Total liabilities and stockholders' equity $ 28,995,000 $ 26,293,000
26
Note X. First Banking Center, Inc. (Parent Company only) Financial Information
(continued)
CONDENSED STATEMENTS OF INCOME 12/31/97 12/31/96 12/31/95
Income:
Dividends from subsidiaries $ 951,000 $ 750,000 $ 687,000
Management fees from subsidiaries 2,156,000 1,714,000 1,293,000
Other 7,000 7,000 6,000
Total income 3,114,000 2,471,000 1,986,000
Expenses:
Salaries and employee benefits 1,558,000 1,167,000 912,000
Occupancy expenses 127,000 90,000 83,000
Equipment expense 208,000 220,000 185,000
Computer services 37,000 31,000 21,000
Other expenses 385,000 278,000 190,000
Total expenses 2,315,000 1,786,000 1,391,000
Income before income tax benefit and
equity in undistributed net income
of subsidiaries 799,000 685,000 595,000
Income tax benefit (52,000) (11,000) (31,000)
Income before equity in undistributed
net income of subsidiaries 851,000 696,000 626,000
Equity in undistributed net income
of subsidiaries 2,033,000 2,115,000 2,178,000
Net income 2,884,000 2,811,000 2,804,000
Other comprehensive income,
net of taxes:
Unrealized gain (losses) on securities
arising during period 399,000 109,000 772,000
Less reclassified adjustment for
(gain) losses included in net income (1,000) 9,000 7,000
Total other comprehensive income 398,000 118,000 779,000
Comprehensive income $ 3,282,000 $ 2,929,000 $ 3,583,000
27
Note X. First Banking Center, Inc. (Parent Company only) Financial Information
(continued)
CONDENSED STATEMENTS OF CASH FLOWS 12/31/97 12/31/96 12/31/95
Cash flows from operating
activities:
Net income $ 2,884,000 $ 2,811,000 $ 2,804,000
Adjustments to reconcile net income
to net cash provided by operating
activities
Amortization of goodwill 1,000 3,000 2,000
(Increase) decrease in other assets 24,000 (153,000) (54,000)
(Increase) decrease in
income taxes receivable 8,000 20,000 (23,000)
Increase (decrease) in
other liabilities 23,000 (32,000) 48,000
Equity in undistributed earnings (2,033,00) (2,115,000) (2,178,000)
Total adjustments (1,977,000) (2,277,000) (2,205,000)
Net cash provided by
operating activities 907,000 534,000 599,000
Cash flows from investing
activities:
Net increase in interest
bearing deposits in banks (5,000) (5,000) (5,000)
Net increase in loans (90,000)
Net cash used in
investing activities (95,000) (5,000) (5,000)
Cash flows from financing
activities:
Proceeds from stock options 139,000 105,000 62,000
exercised
Dividends paid (741,000) (678,000) (587,000)
Net cash used in
financing activities (602,000) (573,000) (525,000)
Increase (decrease) in cash
and cash equivalents 210,000 (44,000) 69,000
Cash and cash equivalents at
beginning of year 161,000 205,000 136,000
Cash and cash equivalents at
end of year $ 371,000 $ 161,000 $ 205,000
Supplemental disclosures of cash
flow information:
Cash received during year for
income taxes $ (60,000) $ (31,000) $ (9,000)
28
FIRST BANKING CENTER, INC. AND SUBSIDIARIES
SUMMARY OF OPERATIONS
COMPARATIVE FIVE-YEAR SUMMARY (000's Omitted)
Years Ended December 31,
1997 1996 1995 1994 1993
Summary of consolidated
income:
Interest income $22,861 20,148 18,810 15,232 14,347
Interest expense 11,198 9,764 8,966 6,635 6,458
Net interest income 11,663 10,384 9,844 8,597 7,889
Provision for loan losses 230 247 470 270 710
Net interest income after
provision for loan loss 11,433 10,137 9,374 8,327 7,179
Other income 2,156 1,762 1,507 1,358 1,374
Sub-total 13,589 11,899 10,881 9,685 8,553
Other expense 9,590 7,770 6,670 6,207 5,454
Income before income taxes 3,999 4,129 4,211 3,478 3,099
Income taxes 1,115 1,318 1,407 1,114 918
Net income 2,884 2,811 2,804 2,304 2,181
Per share of common stock:
Earnings per common shares
outstanding:
Basic $ 1.95 $ 1.91 $ 1.92 $ 1.62 $ 1.51
Diluted 1.94 1.90 1.91 1.61 1.50
Dividends 0.50 0.46 0.40 0.36 0.33
Weighted average number of
common shares outstanding 1,485,168 1,471,230 1,470,162 1,463,998 1,457,415
Year-end assets $327,833 $304,720 $264,379 $231,085 $216,169
Average assets 304,479 263,162 243,702 217,860 197,059
Year-end equity capital 28,920 26,240 23,884 20,826 19,848
Average equity capital 27,319 24,903 22,572 20,314 19,062
INDEPENDENT AUDITOR'S REPORT
Board of Directors
First Banking Center, Inc. and Subsidiaries
Burlington, Wisconsin
We have audited the accompanying consolidated balance sheets of First Banking
Center, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in components of stockholders'
equity, and cash flows for the years then ended December 31, 1997, 1996 and
1995. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
29
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Banking
Center, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the results
of its operations and its cash flows for the years then ended December 31, 1997,
1996 and 1995, in conformity with generally accepted accounting principles.
As described in Note B to the financial statements, the 1996 and 1995 financial
statements have been restated to adopt FASB No. 130.
Brookfield, Wisconsin
January 14, 1998
FIRST BANKING CENTER, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF COMPANY'S FINANCIAL CONDITION AND
RESULTS OF
OPERATIONS
The following is a discussion of the financial condition, changes in
financial condition, and results of operations of the Company for
the year-end December 31, 1997.
Financial condition
Loans
As of December 31, 1997, loans outstanding were $224.1 million for an
increase of $29.7 million or 15% from December 31, 1996. During 1997 Residential
Real Estate loans increased $6.8 million, and Commercial Real Estate loans
increased $11.6 million or 9% and 28% respectively. At December 31, 1997,
Construction and Land Development loans were at $24.3 million or 11% of total
loans, Residential Real Estate loans were at $86.0 million or 38% of total
loans, and Commercial loans were at $32.8 million or 15% of total loans, and
Commercial Real Estate loans were at $52.5 million or 23% of total loans.
Allowance for Loan Losses
The allowance for possible loan losses was $3.0 million or 1.46% of gross
loans on December 31, 1997, compared with $2.9 million or 1.49% of gross loans
on December 31, 1996. Net recoveries for 1997 were $5 thousand, or .002% of
gross loans, compared to net recoveries of $14 thousand or .01% of gross loans
for 1996. As of December 31, 1997, loans on non-accrual status totaled $824
thousand or .37% of gross loans compared to $260 thousand or .13% of gross loans
on December 31, 1996. The non-accrual loans consisted primarily of $458 thousand
of residential real estate loans and $264 thousand of commercial loans. On
December 31, 1997, the ratio of non-accrual loans to the allowance for loan
losses was 26% compared to 9% on December 31, 1996.
30
The Banks evaluate the adequacy of the allowance for loan losses based on
an analysis of specific problem loans, as well as on an aggregate basis.
Management reviews a calculation of the allowance for loan losses on a quarterly
basis and feels that the allowance for loan losses is adequate. The allowance
for loan loss is maintained at a level management considers adequate to provide
for potential future losses. The level of the allowance is based on
management's periodic and comprehensive evaluation of the loan portfolio,
including past loan loss experience; current and projected economic trends; the
volume, growth and composition of the loan portfolio, and other relevant
factors. Management also considers reports of examinations furnished by State
and Federal banking authorities in this regard.
During 1997 $230 thousand was charged to current earnings and added to the
allowance for loan losses.
Investment securities - Held to Maturity
The Company classified no investment securities as held to maturity during
1997.
Investments securities - Available for Sale
The securities available-for-sale portfolio increased $9.2 million or 14%
during 1997. The majority of the increase came from an additional $6.4 million
of Tax Exempt securities with maturities in the 7-10 year range.
Deposits and Borrowed Funds
As of December 31, 1997, total deposits were $252.8 million, which is an
increase of $18 million or 7.7% from December 31, 1996. Time deposits increased
$9.2 million or 9.4% since December 31, 1996. Securities sold under agreement to
repurchase decreased $640 thousand or 2% and Federal Home Loan Borrowings
increased $2.5 million or 26% since December 31, 1996.
Capital resources
During 1997, the Company's stockholders' equity increased $2.7 million or
10%. Net income of $2.9 million and change in unrealized loss on available for
sale securities of $398 thousand were the primary reasons for the increase in
equity. Cash dividends paid in 1997 were $741 thousand or $.50 per share.
In December 1990, the Federal Reserve Board's risk-based guidelines became
effective. Under these guidelines capital is measured against the Company's
subsidiary banks risk-weighted assets. The Company's tier 1 capital (common
stockholders' equity less goodwill) to risk-weighted assets was 11.8% at
December 31, l996, well above the 4% minimum required. Total capital to risk-
adjusted assets was 13.1%, also well above the 8% minimum requirement. The
leverage ratio was at 8.7% compared to the 4% minimum requirement. According to
FDIC capital guidelines, the company is considered to be "well capitalized."
31
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 Company 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 Company's strategy with respect to asset/liability management is to
maximize net interest income while limiting our 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 Company's desire to
maintain a cumulative GAP of + or - 15% of rate sensitive assets at the 0 to 359
day time frame.
The following table summarizes the repricing opportunities as of December
31, 1997, for each major category of interest-bearing assets and interest-
bearing liabilities:
0-89 90-179 180-359 +360
Days Days Days Days Total
Investments (1) $19 $2 $7 $45 $73
Loans 87 33 56 48 224
Total rate sensitive 116 35 63 93 297
assets
Rate sensitive liabilities 164 24 37 33 258
(2)
GAP (58) 11 26 60
Cumulative GAP (58) (47) (21) 39
GAP/Rate sensitive assets -54% -38% -10% 13%
(1) Includes Federal Funds Sold and Interest-Bearing Deposits in financial
institutions.
(2) Bank management treats Savings, NOW, and Money Market Demand Deposits
as immediately repricable.
32
Liquidity
The liquidity position of the Company is managed to ensure that sufficient
funds are available to meet customers' needs for loans and deposit withdrawals.
Liquidity to meet demand is provided by maintaining marketable investment
securities, money market assets such as Interest Bearing Deposits in Banks,
Federal Funds Sold, as well as, maintaining a full line of competitively priced
deposit and short-term borrowing products. The banks are also members of the
Federal Home Loan Bank system, which provides the company with an additional
source of liquidity. The banks are authorized to borrow up to 60% of the book
value of their 1-4 family real estate mortgages secured by a security agreement
pledging the bank's 1-4 family real estate mortgages with a carrying value of
$66 million. During 1997 the Company's loan to deposit ratio increased from 82 %
to 87%. This increase was due to an increase in loans of $29.5 million or 15%
while deposits increased $18 million or 8%. Securities sold under repurchase
agreements decreased $639 thousand or 2% during 1997.
Management is unaware of any recommendations by regulatory authorities,
known trends, events or uncertainties that will have or that are reasonably
likely to have a material effect on the Company's liquidity, capital resources,
or operations.
Results of operations
Results of operations overview
During 1997 the Company reported earnings of $2.9 million, an increase of
$73 thousand from 1996.
Net Interest Income
Net interest income for 1997 was $11.7 million compared to $10.4 million
for 1996 an increase of $1.3 million or 12%. The increase in net interest income
is due primarily to an increase in interest and fees on loans that increased
from $16.2 million to $18.7 million or 15%. The increase in loan income is the
result of a $31.2 million or 18% increase in average balances outstanding. Total
interest income increased $2.7 million as the yield on interest earning asset
decreased from 8.42% to 8.37% and average earning assets increased from $245.1
million to $282.2 million. Total interest expense increased $1.4 million. This
increase is due primarily to an increase in average interest bearing deposits of
$39.7 million or 17%. The cost of all interest bearing liabilities decreased
from 4.74% in 1996 to 4.70% in 1997. The Company's 1997 net interest margin
decreased from 4.44% to 4.40%.
Provision for loan losses
The Banks have established the allowance for loan losses to reduce the
gross level of loans outstanding by an estimate of uncollectible loans. As
loans are deemed uncollectible, they are charged against the allowance. A
provision for loan losses is expensed against current income on a monthly basis.
This provision acts to replenish the allowance for loan losses to accommodate
charge-offs and growth in the loan portfolio, thereby maintaining the allowance
at an adequate level.
During 1997 $230 thousand was charged to current earnings and added to the
allowance for loan losses.
33
Non-interest income and expense
Non-interest income during 1997 increased $394 thousand or 22% from 1996.
This increase is due primarily to increased income from service charges on
deposit, which increased $178 thousand or 24% and other income, including
brokerage fees, which increased $215 or 31%.
Non-interest expense during 1997 increased from $7.8 million to $9.6
million an increase of $1.8 million or 23%. Salaries and
benefits increased $1 million or 23%, equipment expense increase $209 thousand
or 24%, and occupancy expense increased $37 thousand or
6%.