ITEM 1: BUSINESS
First Banking Center, Inc.
First Banking Center, Inc. (the "Corporation") is a one-bank holding company incorporated as a business corporation under the laws of the State of Wisconsin on August 24, 1981. In April 1982, the Corporation became the sole owner of First Bank and Trust Company, Burlington, Wisconsin, a Wisconsin state-banking corporation. On September 1, 1984, the Corporation acquired 100% of the capital stock of the Bank of Albany, Albany, Wisconsin a Wisconsin state-banking corporation. On April 6, 1998, First Banking Center-Albany was merged with First Banking Center-Burlington.
On January 1, 1985, the name of the Corporation was changed from the First Community Bank Group, Inc. to the First Banking Center, Inc., and the name of the subsidiary companies were changed to First Banking Center - Burlington and First Banking Center - Albany, respectively. As of May 11, 1998 First Banking Center-Burlington changed its name to First Banking Center (the "Bank").
The Corporation's primary business activity is the ownership and control of First Banking Center. The Corporation's operations department also provides administrative and operational services for the Bank.
The Bank has two wholly owned subsidiaries, FBC Financial Services, Corp., a brokerage and financial services subsidiary, and FBC-Burlington, Inc., an investment subsidiary located in Nevada.
First Banking Center
The Bank was organized in 1920 and is a full service commercial bank located in the City of Burlington, Wisconsin. The Bank has branch offices located in Albany, Burlington, Darlington, Genoa City, Kenosha, Lake Geneva, Lyons, Monroe, Pell Lake, Pleasant Prairie, Union Grove, Walworth, and Wind Lake, Wisconsin. The Bank offers a wide range of services, which includes Loans, Personal Banking, Trust and Investment Services, and Insurance and Annuity Products.
Lending
The lending area provides a wide variety of credit services to commercial and individual consumers. Consumer lending consists primarily of residential mortgages, residential construction loans, installment loans, home equity loans, and student loans. Commercial lending consists of commercial property financing, equipment and inventory financing, and real estate development, as well as the financing of agricultural production, farm equipment, and farmland. Commercial lending usually involves a greater degree of credit risk than consumer lending. This increased risk requires higher collateral value to loan amount than may be necessary on some consumer loans. The collateral value required on a commercial loan is determined by the degree of risk associated with that particular loan.
Personal Banking
This area provides a wide variety of services to customers such as savings plans, certificates of deposit, checking accounts, individual retirement accounts, and other specialized services.
Trust and Investments
The Trust Department provides a full range of services to individuals, corporations and charitable organizations. It provides such specific services as investment advisory, custodial, executor, trustee and employee benefit plans.
Insurance and Investment Products
This area provides a complete line of life insurance as well as long-term health care, fixed and variable rate annuities, mutual funds, securities services, and discount brokerage.
COMPETITION
The financial services industry is highly competitive. The Bank competes with other commercial banks and with other financial institutions including savings and loan associations, finance companies, mortgage banking companies, insurance companies, brokerage firms, and credit unions.
SUPERVISION AND REGULATION
The Company is a bank holding company subject to the supervision of the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956, as amended. As a bank holding company, the Company is required to file an annual report and such additional information with the Board of Governors as the Board of Governors may require pursuant to the Act. The Board of Governors may also make examinations of the Company and its subsidiary.
The Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Board of Governors before it may acquire substantially all the assets of any bank, or ownership or control of any voting shares of any bank if, after such acquisitions, it would own or control, directly or indirectly, more than 5% of the voting shares of such bank. Under existing federal and state laws, the Board of Governors may approve the acquisition by the Company of the voting shares of, or substantially all the assets of, any bank located in states specified in the Wisconsin Interstate Banking Bill which became effective January 1, 1987.
In addition, a bank holding company is generally prohibited from itself engaging in, or acquiring direct or indirect control of voting shares of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities found by the Board of Governors, by order or regulation to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the activities that the Board of Governors has determined by regulation to be closely related to banking are making or servicing loans, full payout property leasing, investment advisory services, acting as a fiduciary, providing data processing services and promoting community welfare projects.
A subsidiary bank of a bank holding company is subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to the bank holding company or any of its subsidiaries, on investments in the stock or other securities thereof, and on the taking of such stock or securities as collateral for loans to any borrower. Further, under the Bank Holding Company Act and regulations of the Board of Governors, a bank holding company and its subsidiary is prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services.
The Company is also subject to the Securities Exchange Act of 1934 and has reporting obligation to the Securities and Exchange Commission. The business of banking is highly regulated and there are various requirements and restrictions in the laws of the United States and the State of Wisconsin affecting the Company's subsidiary bank and its operations, including the requirement to maintain reserves against deposits, restrictions on the nature and amount of loans which may be made by the bank and restrictions relating to investment, branching and other activities of the bank.
The Company is supervised and examined by the Federal Reserve Board. The Company's subsidiary bank, as a state chartered institution, is subject to the supervision of, and is regularly examined by, Wisconsin state authorities. The Bank is also a member of the Federal Reserve Bank and as such is subject to regulation and examination by that agency.
The Company, under Federal Reserve Board policy, is expected to act as a source of financial strength to the subsidiary bank and to commit resources to support the subsidiary.
GOVERNMENTAL POLICIES
The earnings of the Company's subsidiary bank as a lender and depositor of money are affected by legislative changes and by the policies of the various regulatory authorities including the State of Wisconsin, the United States Government, foreign governments and international agencies. The effect of this regulation upon the future business and earnings of the Company cannot be predicted. Such policies include, among others, statutory maximum lending rates, domestic monetary policies of the Board of Governors of the Federal Reserve System, United States fiscal policies and international currency regulations and monetary policies. Governmental and Reserve Board policies have had a significant effect on the operating results of commercial banks in the past and are expected to do so in the future. Management is not able to anticipate and evaluate the future impact of such policies and practices on the growth and profitability of the Company or its subsidiary bank.
The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (the "Act") made significant changes in the laws governing financial institutions, including changes which expand the permissible range of activities for bank holding companies and their affiliates (including non-banking financial activities); permit affiliations between banks, securities firms and insurance companies; make substantial changes in the regulatory structure for financial institutions; prohibit new unitary savings and loan holding companies; make changes to the Community Reinvestment Act of 1977; and enact substantial new financial privacy rules. The company is currently evaluating its options regarding expanded activities under the Act. The company is currently in the process of implementing the financial privacy rules imposed by the Act.
EMPLOYEES
The Company and its staff share a commitment to equal opportunity. All personnel decisions are made without regard to race, color, religion, sex, age, national origin, handicap, or veteran status. At January 31, 2003, the Company and its subsidiary had 243 full and part-time employees.
MISCELLANEOUS
The business of the Company is not seasonal. To the best of management's knowledge, there is no anticipated material effect upon the Company's capital expenditures, earnings, and competitive position by reason of any laws regulating or protecting the environment. The Company has no material patents, trademarks, licenses, franchises or concessions. No material amounts have been spent on research activities and no employees are engaged full time in research activities.
NOTE: Subsections of Item I, to which no response has been made are inapplicable to the business of the Company.
SELECTED FINANCIAL DATA
The Company, through the operations of its Bank, offers a wide range of financial services. The following financial data provides a detailed review of the Company's business activities.
The following information shows: the company's average assets, liabilities and stockholder's equity; the interest earned and average yield on interest earning assets; the interest paid and average rate on interest-bearing liabilities; and the maturity schedules for investment and specific loans; for the years ended December 31, 2002, 2001, and 2000. Also, where applicable, information is presented for December 31, 1999 and 1998.
The increase in non-accrual loans from 2001 to 2002 was due to a small number of commercial real estate and agricultural real estate loans. There is no loss anticipated on these loans.
The policy of the Company is to place a loan on non-accrual status if: (a) payment in full of interest and principal is not expected, or (b) principal or interest has been in default for a period of 90 days or more unless the obligation is both in the process of collection and well secured. Well secured is defined as collateral with sufficient market value to repay principal and all accrued interest. A debt is in the process of collection if collection of the debt is proceeding in due course either through legal action, including judgement enforcement procedures, or in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the dept or in its restoration to current status.
As of December 31, 2002, the Company had loans totaling $24,139,000 in addition to those listed as non-accrual, past due or renegotiated that were identified by the Banks' internal asset rating systems as classified assets. This represents a decrease of $5,167,000 or 17.6% from 2001. Management is not aware of any significant loans, group of loans or segments of the loan portfolio not included above, where full collectibility cannot reasonably be expected. Management has committed resources and is focusing on efforts designed to control the amount of classified assets. The company does not have a substantial portion of its loans concentrated in one or a few industries nor does it have any foreign loans outstanding as of December 31, 2002. Loan concentration by classification can be found in the loan section of Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations. The company's loans are concentrated geographically in the Wisconsin counties of Racine, Walworth, Kenosha, Lafayette, and Green.
ITEM 2:
ITEM 2: PROPERTIES
The Company owns no properties; it currently occupies space in the buildings that house the Lake Geneva and Kenosha branches.
First Banking Center
The Bank owns banking facilities in Albany, Burlington, Genoa City, Lake Geneva, Lyons, Monroe, Pell Lake, Pleasant Prairie, Union Grove, Walworth, and Wind Lake. The Bank leases facilities in Darlington and Kenosha. Each of the bank's offices is well maintained and adequately meets the needs of the bank.
The bank shares leased office space in Las Vegas, Nevada to house the operations of its investment subsidiary.
ITEM 3:
ITEM 3: LEGAL PROCEEDING
Neither the Corporation nor its subsidiary is a party, nor is any of their property, subject to any material existing or pending legal proceedings other than ordinary routine litigation incidental to its business. No officer, director, affiliate of the Corporation, or any of their associates is a party to any material proceedings adverse to the Corporation or its subsidiary.
ITEM 4:
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:
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's stock is not actively traded. Robert W. Baird & Co. Incorporated and A.G. Edwards & Sons, Inc., however, do make a market in the stock. The range and sales prices, based on information given to the Company by Robert W. Baird & Co. Incorporated, and A.G. Edwards & Sons, Inc., and by parties to sales, are listed below for each quarterly period during the last two years.
There were 793 holders of record of the Company's $1.00 par value common stock on March 24, 2003.
Cash Dividends for the last the two years ending 2002 and 2001 are presented in ITEM 6:
ITEM 6: SELECTED FINANCIAL DATA. The applicable dividend restrictions are discussed in ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA - Note 17 - Regulatory Capital Requirement and restrictions on Dividends.
ITEM 6: SELECTED FINANCIAL DATA
ITEM 7:
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides additional analysis of the financial statements presented in the Company's annual report and should be read in conjunction with this information. This discussion focuses on the significant factors that affected the Company's earnings in 2002, with comparisons to 2001. As of December 31, 2002, First Banking Center (the "Bank") was the only direct subsidiary of the Company and its operations contributed nearly all of the revenue for the year. The Company provides various support functions for the Bank and receives payment from the Bank for these services. These inter-company payments are eliminated for the purpose of these consolidated financial statements. The Bank has two wholly owned subsidiaries, FBC Financial Services, Corp., a brokerage and financial services subsidiary, and FBC-Burlington, Inc., an investment subsidiary located in Nevada.
Overview
As of December 31, 2002, total Company assets were $518.2 million increasing 8.91% from $475.8 million as of December 31, 2001. Total income for 2002 was $6.0 million or $4.04 per share, increasing 13.35% from $5.3 million or $3.57 per share in 2001. The significant items resulting in the above-mentioned results are discussed below.
Financial Condition
Loans
Loans outstanding were $372.1 million and $366.1 million on December 31, 2002 and December 31, 2001 respectively. This represents an increase of $6.0 million or 1.7% during 2002. Agricultural Real Estate loans grew by $6.1 million or 48.3% due to increased efforts by the company to expand its lending in this area. The following table summarizes the changes during 2002 in the major loan classifications.
Allowance for Loan Losses
The allowance for possible loan losses was $5.0 million or 1.34% of gross loans on December 31, 2002, compared with $4.4 million or 1.19% of gross loans on December 31, 2001. Net charge-offs for 2002 were $441 thousand or .118% of gross loans, compared to net charge-offs of $60 thousand or .016% of gross loans for 2001. As of December 31, 2002, loans on non-accrual status totaled $2.0 million or .54% of gross loans compared to $1.5 million or .42% of gross loans on December 31, 2001. The non-accrual loans consisted primarily of $1.4 million of residential real estate loans, $371 thousand of nonresidential real estate, $80 thousand of commercial loans, and $75 thousand of farmland real estate. On December 31, 2002, the ratio of non-accrual loans to the allowance for loan losses was 40.4% compared to 35.3% on December 31, 2001.
The Company's allocation of its allowance for loan losses can be found at Section IV, Schedule B of the Company's Form 10-K. A discussion of the changes in the allocations for the last three years can be found in the following three paragraphs.
During 2002 the Company continued to refine its identification and allocation process regarding possible loan losses. During the fourth quarter of 2002 the company increased its allocation for commercial loans due to weakness in commercial real estate values in its markets.
During the third quarter of 2001, the bank reviewed its allowance for possible loan loss adequacy calculation. After studying historical losses and current loan portfolio grading information, the calculations were adjusted to more accurately reflect where management felt the loan losses lie. As a result of this change, the amount of allowance for commercial loans decreased $652 thousand from 2000 to 2001.
The allowance for unallocated increased $1.1 million from 2000 to 2001. The unallocated portion of the allowance reflects management's estimate of probable inherent but undetected losses within the portfolio. These losses may be due to uncertainties in economic conditions, delays in obtaining information, including unfavorable information about a borrower's financial condition, the difficulty in identifying events that correlate perfectly to subsequent loss rates, and risk factors that have not yet manifested themselves in loss allocation factors. In addition, the unallocated allowance includes a component that explicitly accounts for inherent imprecision in loan loss migration models.
The adequacy of the allowance for estimated losses on loans was determined by management based on factors that included the overall composition of the loan portfolio, types of loans, past loss experience, loan delinquencies, potential substandard and doubtful credits, economic conditions and other factors that, in management's judgment, deserved evaluation in estimating loan losses. To ensure that an adequate allowance was maintained, provisions were made based on the increase in loan balances, management's assessment of the possible impact that economic conditions may have on the loan portfolio and a detailed analysis of the loan portfolio.
The loan portfolio is analyzed quarterly. This quarterly analysis incorporates First Banking Center's internal loan grading system. All loans identified as having potential weaknesses that deserve management's close attention, loans graded substandard and loans graded loss or doubtful are further reviewed to assess the actual exposure present.
Although management believes that the allowance for estimated losses on loans at December 31, 2002 was at a level adequate to absorb losses on existing loans, there can be no assurance that such losses will not exceed the estimated amounts or that First Banking Center will not be required to make additional provisions for loan losses in the future. Asset quality is a priority for First Banking Center and its subsidiaries. The ability to grow profitably is in part dependent upon the ability to maintain that quality. Along with other financial institutions, management shares a concern for the possible continued softening of the economy in 2003. Should the economic climate continue to deteriorate, borrowers may experience difficulty, and the level of non-performing loans, charge-offs and delinquencies could rise and require further increases in the provision.
During 2002 $1.1 million was charged to current earnings and added to the allowance for loan losses.
Investments securities - Available for Sale
The securities available-for-sale portfolio increased $28.3 million or 47.6% during 2002. The increase was primarily due to the purchase of $20.1 million of short term and adjustable rate mortgage-backed securities and $5.7 million of municipal securities.
Deposits and Borrowed Funds
Total deposits and borrowed funds were $465.6 million on December 31, 2002 compared to $429.5 million on December 31, 2001. This is an increase of $36.1 million or 8.4%. The following table summarizes the changes during 2002 in the major classifications of deposits and borrowed funds.
Capital resources
During 2002, the Company's stockholders' equity increased $6.5 million or 15.3%. Net income of $6.0 million was the primary reason for the increase in equity. The company purchased $252 thousand and reissued $654 thousand of treasury stock during 2002. Net unrealized gain/loss on available for sale securities increased $1 million to $1.6 million. Cash dividends paid in 2002 were $1.0 million or $.74 per share.
In December 1990, the Federal Reserve Board's risk-based guidelines became effective. Under these guidelines capital is measured against the Company's subsidiary bank's risk-weighted assets. The Company's tier 1 capital (common stockholders' equity less goodwill) to risk-weighted assets was 12.3% at December 31, 2002, well above the 4% minimum required. Total capital to risk-adjusted assets was 13.6%, also well above the 8% minimum requirement. The leverage ratio was at 9.3% compared to the 4% minimum requirement. According to FDIC capital guidelines, the subsidiary bank is considered to be "well capitalized."
Asset/liability management
The principal function of asset/liability management is to manage the balance sheet mix, maturities, repricing characteristics and pricing components to provide an adequate and stable net interest margin with an acceptable level of risk over time and through interest rate cycles.
Interest-sensitive assets and liabilities are those that are subject to repricing within a specific relevant time horizon. The Bank measures interest-sensitive assets and liabilities, and their relationship with each other at terms of immediate, quarterly intervals up to 1 year, and over 1 year.
Changes in net interest income, other than volume related, arise when interest rates on assets reprice in a time frame or interest rate environment that is different from the repricing period for liabilities. Changes in net interest income also arise from changes in the mix of interest earning assets and interest-bearing liabilities.
The Bank's strategy with respect to asset/liability management is to maximize net interest income while limiting its exposure to a potential downward movement. Strategy is implemented by the Bank's management, which takes action based upon its analysis of the Bank's present positioning, its desired future positioning, economic forecasts, and its goals. It is the Bank's desire to maintain a cumulative GAP of positive or negative 15% of rate sensitive assets at the 1-year time frame. The current percentage is a positive 20%, which compares to a positive 17% as of December 31, 2001. Although a positive GAP of 20% is outside of the target range the company feels the current position is desirable due to current and forecasted economic conditions.
Liquidity
Liquidity measures the ability of First Banking Center to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund its operations, and to provide for customers' credit needs. One source of liquidity is cash and short-term assets, such as interest-bearing deposits in other banks and federal funds sold, which totaled $33.7 million at December 31, 2002, compared with $33.0 million at December 31, 2001. The Bank has a variety of sources of short-term liquidity available to it, including federal funds purchased from correspondent banks, sales of securities available for sale, FHLB advances, lines of credit and loan participations or sales. First Banking Center also generates liquidity from the regular principal payments and prepayments made on its portfolio of loans and mortgage-backed securities.
The liquidity of First Banking Center is comprised of three primary classifications: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Net cash provided by operating activities was $7.1 million for fiscal 2002 compared to $235 thousand used in fiscal 2001. Net cash used in investing activities, consisting principally of loan funding and the purchase of securities, was $41.2 million for fiscal 2002 and $48.2 million for fiscal 2001. Net cash provided by financing activities, consisting principally of deposit growth, was $35.6 million for fiscal 2002 and $39.9 million for fiscal 2001.
Net cash used in operating activities was $235 thousand for fiscal 2001 compared to net cash provided by operating activities of $8.7 million for fiscal 2000. Net cash used in investing activities, consisting principally of loan funding and the purchase of securities, was $48.2 million in 2001 and $30.5 million in 2000. Net cash provided by financing activities, consisting primarily of deposit growth and proceeds from short-term borrowings, was $39.9 million for fiscal 2001 and $32.0 million for fiscal 2000.
The following table summarizes our significant contractual obligations and the other potential funding needs at December 2002 (amounts in thousands):
Management believes that First Banking Center has sufficient liquidity and capacity sources to meet presently known cash flow requirements arising from ongoing business transactions.
Impact of Inflation and Changing Prices
The consolidated financial statements and the accompanying notes have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollar amounts without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of First Banking Center's operations. Unlike industrial companies, nearly all of the assets and liabilities of First Banking Center are monetary in nature. As a result, interest rates have a greater impact on First Banking Center's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services.
Forward Looking Statements- Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. First Banking Center intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe First Banking Center's future plans, strategies and expectations are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions. First Banking Center's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on First Banking Center's operations and future prospects include, but are not limited to, changes in: interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in our market area, our implementation of new technologies, First Banking Center's ability to develop and maintain secure and reliable electronic systems and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.
Quantitative and Qualitative Disclosures About Market Risk
First Banking Center, like other financial institutions, is subject to direct and indirect market risk. Direct market risk exists from changes in interest rates. First Banking Center's net income is dependent on its net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than interest-earning assets. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income.
Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net income.
In an attempt to manage its exposure to changes in interest rates, management monitors First Banking Center's interest rate risk. The Asset/Liability Committee meets quarterly to review First Banking Center's interest rate risk position and profitability, and to make or recommend adjustments for consideration by the Board of Directors. Management also reviews the Bank's securities portfolio, formulates investment strategies, and oversees the timing and implementation of transactions to assure attainment of the Board's objectives in the most effective manner. Notwithstanding First Banking Center's interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income.
In adjusting First Banking Center's asset/liability position, the Board and management attempt to manage First Banking Center's interest rate risk while maintaining or enhancing net interest margins. At times, depending on the level of general interest rates, the relationship between long-term and short-term interest rates, market conditions and competitive factors, the Board and management may determine to increase First Banking Center's interest rate risk position somewhat in order to increase its net interest margin. First Banking Center's results of operations and net portfolio values remain vulnerable to increases in interest rates and to fluctuations in the difference between long-term and short-term interest rates.
One approach used to quantify interest rate risk is the net portfolio value ("NPV") analysis. In essence, this analysis calculates the difference between the present value of liabilities and the present value of expected cash flows from assets and off-balance-sheet contracts. The following table sets forth, at December 31, 2002 and December 31, 2001, an analysis of First Banking Center's interest rate risk as measured by the estimated changes in NPV resulting from instantaneous and sustained parallel shifts in the yield curve (+ or - 200 basis points).
First Banking Center does not currently engage in trading activities or use derivative instruments to control interest rate risk. Even though such activities may be permitted with the approval of the Board of Directors, First Banking Center does not intend to engage in such activities in the immediate future. Interest rate risk is the most significant market risk affecting First Banking Center. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of First Banking Center's business activities.
Results of operations
Net Interest Income
Net interest income is the difference between interest income and fees on loans and interest expense, and is the largest contributing factor to net income for the Company. All discussions of interest income and rate are on a tax-equivalent basis, which accounts for income earned on securities that are not fully subject to federal taxes. Net interest income was $21.0 million, $19.2 million and $16.9 million for 2002, 2001 and 2000 respectively. Net interest margin/income as a percentage of average earning assets was 4.72%, 4.77%, and 4.56% in 2002 and 2001 and 2000 respectively. The decrease in net interest margin/income in 2002 was the result of declining interest rates which caused net interest income to grow slower than average earning assets.
The increase in nontaxable interest income on Available-for-sale securities in the amount of $316 thousand during 2002 was due mainly to maintaining an increased average balance in nontaxable Available-for-sale securities.
The major component of interest income and fees on loans is the interest generated by loans. Although the average balances for outstanding for Loans increased during 2002, interest rates declined significantly enough that interest income and fees on Loans decreased $3.4 million.
The major components of interest expense are interest paid on Certificates of Deposit (Time deposits) and on Money Market Deposits. Interest expense on Savings and NOW Accounts and Time Deposits decreased $2.5 million and 2.2 million respectively due to a decrease in interest rates paid on those accounts.
Provision for loan losses
During 2002, $1.1 million was charged to current earnings and added to the allowance for loan losses. In 2001 and 2000, $500 and $360 thousand, respectively, was charged to earnings and added to the allowance for loan losses.
Non-interest income
Non-interest income increased $537 thousand or 15.4% during 2002. The increase came in primarily two areas. Service charges on deposit accounts increased $357 thousand as the number of accounts grew and charges for some services were increased. Commissions Income from investment services increased $76 thousand as sales of annuities were strong during 2002.
Non-interest income increased $354 thousand or 11.3% during 2001. The increase came in primarily in service charges on deposit accounts, which increased $260 thousand as the number of accounts grew and charges for some services were increased.
Non-interest expense
Non-interest expense increased $766 thousand or 5.4% during 2002. Salaries and benefits accounted for $782 thousand of the increase due to normal wage increases, increased commissions and bonuses tied to loan fee income and annuity sales and increased health insurance costs. Data processing costs increased $77 thousand due to the inflation clause in the main service provider's contract as well as increased volumes and additional services used. Equipment expense increased $161 thousand due primarily to increases on maintenance contracts on equipment and software. Other operating expenses decreased $293 thousand due to expense controls put in place by the Company.
Non-interest expense increased $2.1 million or 17.3% during 2001. Salaries and benefits accounted for $1.3 million of the increase due to normal wage increases, increased personal due to opening of two new branches and increased health insurance costs. Data processing costs increased $179 thousand due to the inflation clause in the main service provider's contract as well as increased volumes and additional services used. Occupancy expense increased $111 thousand due to increases in real estate, personal property taxes and the addition of two branch locations.
Income Taxes
Income tax expense for the year ended December 31, 2002 was $2.1 million compared to $1.8 million for 2001. The effective tax rate increased to 25.8% for the year ended December 31, 2002 compared to 25.3% in 2001.
Income tax expense for the year ended December 31, 2001 was $1.8 million compared to $1.9 million for 2000. The effective tax rate decreased to 25.3% for the year ended December 31, 2001 from 28.2% in 2000 due to the effect of other non-taxable and non-deductible items such as bank owned life insurance.
Critical Accounting Policies
Income Taxes
See Note 1 of the notes to our audited consolidated financial statements for our income tax accounting policy. Income tax expense recorded in the consolidated income statement involves interpretation and application of certain accounting pronouncements and federal and state tax codes, and is, therefore, considered a critical accounting policy. We undergo examinations by various regulatory taxing authorities. Such agencies may require that changes in the amount of tax expense or valuation allowance be recognized when their interpretations differ from those of management, based on their judgments about information available to them at the time of their examinations. See Note 11 of the notes to our audited consolidated financial statements for more income tax information.
Allowance for Loan Losses
Management believes the allowance for loan losses accounting policy is critical to the portrayal and understanding of our financial condition and results of operations. As such, selection and application of this "critical accounting policy" involves judgments, estimates, and uncertainties that are susceptible to change. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results or operations is a reasonable likelihood.
Quarterly Results of Operations (Unaudited)
ITEM 8:
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
FIRST BANKING CENTER, INC. AND SUBSIDIARY Burlington, Wisconsin Consolidated Financial Statements Including Independent Auditors' Report December 31, 2002 and 2001 - -------------------------------------------------------------------------------
Independent Auditors' Report 27
Consolidated Balance Sheets December 31, 2002 and 2001 28
Consolidated Statement of Income Years Ended December 31, 2002, 2001 and 2000 29
Consolidated Statements of Change in Stockholders' Equity Years Ended December 31, 2002, 2001 and 2000 30
Consolidated Statements of Cash Flows Years Ended December 31, 2002, 2001 and 2000 31-32
Notes to Consolidated Financial Statements 33-56
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors First Banking Center, Inc. and Subsidiary Burlington, Wisconsin
We have audited the accompanying consolidated balance sheets of First Banking Center, Inc. and subsidiary as of December 31, 2002 and 2001, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the years ended December 31, 2002, 2001, and 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Banking Center, Inc. and subsidiary as of December 31, 2002 and 2001, and the results of its operations and its cash flows for the years ended December 31, 2002, 2001, and 2000 in conformity with accounting principles generally accepted in the United States of America.
McGladrey & Pullen, LLP
Madison, Wisconsin February 7, 2003
FIRST BANKING CENTER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies
Nature of Banking Activities: The consolidated income of First Banking Center, Inc. (the Company) is principally from the income of its wholly owned subsidiary, First Banking Center (the Bank). The Bank grants agribusiness, commercial, residential, and consumer loans, accepts deposits and provides trust services to customers primarily in southeastern and southcentral Wisconsin. The Bank is subject to competition from other financial institutions and nonfinancial institutions providing financial products. Additionally the Company and the Bank are subject to the regulations of certain regulatory agencies and undergo periodic examination by those regulatory agencies.
Consolidation: The consolidated financial statements of the Company include the accounts of the Bank. The Bank includes the accounts of its wholly owned subsidiaries, FBC-Burlington, Inc. and FBC Financial Services Corp. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements.
Use of Estimates: In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, and the valuation of foreclosed real estate and deferred tax assets. The fair value disclosure of financial instruments is an estimate that can be computed within a range.
Presentation of Cash Flows: For purposes of reporting cash flows, cash and due from banks include cash on hand and amounts due from banks. Cash flows from federal funds sold, interest-bearing deposits in banks, loans, deposits, and short-term borrowings are treated as net increases or decreases.
Cash and Due From Banks: The Bank maintains amounts due from banks which, at times, may exceed federally insured limits. Management monitors these correspondent relationships. The Bank has not experienced any losses in such accounts.
Available-for-Sale Securities: Securities classified as available-for-sale are those debt securities that the Bank intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available-for-sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Bank's assets and liabilities, liquidity needs, regulatory capital consideration, and other similar factors. Securities classified as available-for-sale are carried at fair value. Unrealized gains or losses are reported as increases or decreases in accumulated other comprehensive income, net of the related deferred tax effect. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings.
Note 1. Summary of Significant Accounting Policies (Continued)
Loans: Loans are stated at the amount of unpaid principal, reduced by an allowance for loan losses. Interest income is accrued on the unpaid principal balance. The accrual of interest income on loans is discontinued when, in the opinion of management, there is reasonable doubt as to the borrower's ability to meet payment of interest or principal when they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Accrual of interest is generally resumed when the customer is current on all principal and interest payments and has been paying on a timely basis for a period of time.
Mortgage Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. All sales are made without recourse. The balance of mortgage loans held for sale is included in the loan balance on the financial statements.
Allowance for Loan Losses: The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is adequate to cover probable credit losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio. The allowance is based on past events and current economic conditions, and does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions.
Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. A loan is impaired when it is probable the creditor will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. Cash collections on impaired loans are credited to the loan receivable balance and no interest income is recognized on those loans until the principal balance is current.
In addition, various regulatory agencies periodically review the allowance for loan losses. These agencies may require the Bank to make additions to the allowance for loan losses based on their judgments of collectibility based on information available to them at the time of their examination.
Credit Related Financial Instruments: In the ordinary course of business the Bank has entered into off-balance-sheet financial instruments consisting of commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded.
Transfers of Financial Assets: Transfers of financial assets are accounted for as sales, only when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of the right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
Note 1. Summary of Significant Accounting Policies (Continued)
Office Buildings and Equipment: Office buildings and equipment are stated at cost, less accumulated depreciation. Provisions for depreciation are computed on straight-line and accelerated methods over the estimated useful lives of the assets. Management periodically reviews the carrying value of its long lived assets to determine if an impairment has occurred or whether changes in circumstances have occurred that would require a revision to the remaining useful life. In making such determination, management evaluates the performance, on an undiscounted basis, of the underlying operations or assets which give rise to such amount.
Other Real Estate Owned: Other real estate owned, acquired through partial or total satisfaction of loans, is carried at the lower of cost or fair value less cost to sell. At the date of acquisition, losses are charged to the allowance for loan losses. Revenue and expenses from operations and changes in the valuation allowance are included in loss on foreclosed real estate.
Stock-based Compensation Plan: At December 31, 2002, the Company had one stock-based key officer and employee compensation plan, which is described more fully in Note 10. The Company accounts for this plan under the recognitions and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in the income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Financial Accounting Standards Board (FASB) Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
Note 1. Summary of Significant Accounting Policies (Continued)
In determining compensation cost using the fair value method prescribed in Statement No. 123, the value of each grant is estimated at the grant date with the following weighted-average assumptions used for grants in 2002, 2001, and 2000, respectively: dividend yield of 1.7 percent, 1.6 percent, and 1.8 percent; expected price volatility of 5.2 percent, 5.2 percent, and 5.2 percent, blended risk-free interest rates of 3.9 percent, 4.7 percent, and 5.8 percent; and expected lives of 10 years, respectively.
Income Taxes: The Company files a consolidated federal income tax return and individual subsidiary state income tax returns. Accordingly, amounts equal to tax benefits of those companies having taxable federal losses or credits are reimbursed by the other companies that incur federal tax liabilities.
Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
Trust Assets: Property held for customers in fiduciary or agency capacities, other than cash on deposit at the Bank, is not included in the accompanying balance sheets, since such items are not assets of the Company.
Earnings Per Share: Earnings per share are computed based upon the weighted-average number of common shares outstanding during each year. In the computation of diluted earnings per share, all dilutive stock options are assumed to be exercised at the beginning of each year and the proceeds are used to purchase shares of the Company's common stock at the average market price during the year.
Comprehensive Income: Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.
Note 1. Summary of Significant Accounting Policies (Continued)
Current Accounting Developments: In October 2002, Statement on Financial Accounting Standards No. 147, Acquisitions of Certain Financial Institutions - an Amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9, was issued. FASB Statement No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, and FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a Similar Institution Is Acquired in a Business Combination Accounted for by the Purchase Method, provided interpretive guidance on the application of the purchase method to acquisitions of financial institutions. Except for transactions between two or more mutual enterprises, Statement No. 147 removes acquisitions of financial institutions from the scope of both Statement No. 72 and Interpretation No. 9 and requires that those transactions be accounted for in accordance with FASB Statements No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. Thus, the requirement in paragraph 5 of Statement No. 72 to recognize (and subsequently amortize) any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset no longer applies to acquisitions within the scope of Statement No. 147. In addition, Statement No. 147 amends FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets. Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that Statement No. 144 requires for other long-lived assets that are held and used. Paragraph 5 of Statement No. 147, which relates to the application of the purchase method of accounting, is effective for acquisitions for which the date of acquisition is on or after October 1, 2002. The provisions in paragraph 6 related to accounting for the impairment or disposal of certain long-term customer-relationship intangible assets are effective on October 1, 2002. Transition provisions for previously recognized unidentifiable intangible assets in paragraphs 8-14 are effective on October 1, 2002, with earlier application permitted.
The FASB has issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others - an interpretation of FASB Statement Nos. 5, 57, and 107 and rescission of FASB Interpretation No. 34. Interpretation No. 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about it obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of Interpretation No. 45 are applicable on a prospective basis to guarantees issued or modified after December 15, 2002. Implementation of these provisions of Interpretation No. 45 is not expected to have a material impact on the Company's consolidated financial statements. The disclosure requirements of Interpretation No. 45 are effective for financial statements of interim or annual periods ending after December 15, 2002, and have been adopted in the consolidated financial statements for December 31, 2002.
Note 2. Cash and Due From Banks
The Bank is required to maintain vault cash and reserve balances with Federal Reserve Bank based upon a percentage of deposits. These requirements approximated $5,320,000 and $4,694,000 at December 31, 2002 and 2001, respectively.
Note 3. Available-for-Sale Securities
Note 3. Available-for-Sale Securities (Continued)
The amortized cost and fair value of available-for-sale securities by contractual maturity at December 31, 2002 are shown below. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the following summary.
Securities with a carrying value of $27,165,000 and $28,220,000 as of December 31, 2002 and 2001, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.
Note 4. Loans
Note 4. Loans (Continued)
Note 4. Loans (Continued)
It is management's policy to place loans (commercial, residential, and or installment) on nonaccrual when principal and interest is past due 90 days or more. Such loans may continue on accrual only when they are both well secured and in the process of collection. Nonaccruing loans totaled $2,016,000 and $1,541,000 as of December 31, 2002 and 2001, respectively. Interest income in the amount of $23,000, $26,000, and $12,000 would have been earned on the nonaccrual loans had they been performing in accordance with their original terms during the years ended December 31, 2002, 2001, and 2000, respectively. The interest collected on nonaccrual loans and included in income for years ended December 31, 2002, 2001, and 2000 was not significant. Loans past due 90 days or more and still accruing interest were not material at December 31, 2002 and 2001.
Certain directors and executive officers of the Company, and their related interests, had loans outstanding in the aggregate amounts of $3,073,000 and $6,611,000 at December 31, 2002 and 2001, respectively. New loans of $3,276,000 and $3,555,000 were made during 2002 and 2001, respectively. Repayments on these loans were $6,814,000 and $1,030,000 during 2002 and 2001, respectively. These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other persons and did not involve more than normal risks of collectibility or present other unfavorable features.
Note 5. Office Buildings and Equipment
Note 6. Intangible Assets
The amount paid in excess of cost in the underlying carrying amount of net assets of the Genoa City and Pell Lake branches of the Bank at the date of the branch acquisition amounted to $1,509,000 and is included in other assets. The amount is being amortized over a period of ten to fifteen years. Amortization expense amounted to $102,000 for each of the years ended December 31, 2002, 2001, and 2000.
Note 7. Deposits
The aggregate amount of time deposits, each with a minimum denomination of $100,000, was approximately $56,201,000 and $33,701,000 at December 31, 2002 and 2001, respectively.
Note 8. Short-Term Borrowings
Securities sold under agreements to repurchase generally mature within one year.
Note 8. Short-Term Borrowings (Continued)
Federal funds purchased and treasury tax and loan note generally are repaid within 120 days from the transaction date.
Note 9. Other Borrowings
The Bank has a master contract agreement with the FHLB which provides for borrowing up to the maximum of 60 percent of the book value of the Bank's first lien 1-4 family real estate loans, or $102,755,000 at December 31, 2002. The indebtedness is evidenced by a master contract dated September 14, 1992. The FHLB provides both fixed and floating rate advances. Floating rates are tied to short-term market rates of interest, such as Federal funds and Treasury Bill rates. Fixed rate advances are priced in reference to market rates of interest at the time of the advance, namely the rates that FHLB pays to borrowers at various maturities. Certain FHLB borrowings are subject to a call feature. Maturity and interest rate information on advances from the FHLB as of December 31 is shown on the following page.
Note 9. Other Borrowings (Continued)
The advances are secured by real estate mortgages with a carrying value of $77,093,000 and $78,793,000 as of December 31, 2002 and 2001, respectively.
The Bank has a note payable with a third-party bank used to acquire a permanent facility for a branch that formerly occupied rented space. The note payable bears an interest rate of 6.5 percent with monthly principal and interest payments through July 2008 of $8,910.
Note 10. Stock Based Compensation
The Company has an Incentive Stock Option Plan which provides for the granting of options for up to 300,000 shares of common stock to key officers and employees of the Company. The exercise price of each option equals the market price of the Company's stock on the date of grant. Options may be exercised 33.33 percent per year beginning one year after the date of the grant and must be exercised within a four-year period. During 1999, the Incentive Stock Option Plan was amended to extend the time period for exercising grants to ten years.
Note 11. Income Taxes
Note 11. Income Taxes (Continued)
Note 12. Profit-Sharing Plan
The Company has a 401(k) plan whereby substantially all eligible employees participate in the 401(k) plan. Employees may contribute up to 15 percent of their compensation subject to certain limits based on federal tax laws. The Company makes matching contributions equal to 50 percent of the first 4 percent of an employee's compensation contributed to the 401(k) plan. Matching contributions vest to the employee over a six-year period. For the years ended December 31, 2002, 2001, and 2000, contributions to the 401(k) plan amounted to $251,000, $253,000, and $163,000, respectively.
Note 13. Salary Continuation Agreement
The Company has entered into salary continuation agreements with various executive officers. The agreements provide for the payment of specified amounts upon the employee's retirement or death which is being accrued over the anticipated remaining period of employment. Expenses recognized for future benefits under these agreements totaled $55,000, $56,000, and $57,000 during 2002, 2001, and 2000, respectively.
Although not part of the agreement, the Company purchased life insurance on the officers which could provide funding for the payment of benefits. Included in other assets is $1,739,000 and $1,663,000 of related cash surrender value of the life insurance as of December 31, 2002 and 2001, respectively.
Note 14. Benefit Plans
The Bank has entered into pension and death benefit agreements with some of its directors. Only directors who joined the Bank board before 1990 are eligible to participate. Pursuant to the agreement, pension benefits accrue at the rate of $10,000 for each full year a director serves on the board for the first six years of service. Upon completing six full years of service, the director is entitled to ten annual payments of ten thousand dollars each. Payments will commence in January of the year in which the director attains the age of 65 years. Payments under the plan are funded through the purchase of life insurance. The Bank is the owner and beneficiary of such life insurance policies and is responsible for payment of the premium on such policies. Total expense for the Directors' pension and death benefit agreements was $34,000, $36,000, and $37,000, respectively, for 2002, 2001, and 2000.
The Bank has also established a deferred compensation plan for its directors. Upon attaining the age of 65 or normal retirement, the Bank will pay monthly benefits for a period of 15 years. The amount of such payment is based upon the amount of fees deferred and length of participation in the deferred compensation plan. Expense for these agreements was $31,000, $35,000, and $36,000, respectively, for 2002, 2001, and 2000.
Note 15. Commitments and Contingencies
In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the consolidated financial statements.
The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, financial guarantees, and standby letters of credit. They involve, to varying degrees, elements of credit risk in excess of amounts recognized on the consolidated balance sheets.
The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and issuing letters of credit as they do for on-balance-sheet instruments.
Note 15. Commitments and Contingencies (Continued)
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third-party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties. Credit card commitments are unsecured.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third-party. Those guarantees are primarily issued to support public and private borrowing arrangements and, generally, have terms of one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds collateral, which may include accounts receivable, inventory, property, equipment, and income-producing properties, supporting those commitments if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third-party, the Bank would be required to fund the commitment. The maximum potential amount of future payments the Bank could be required to make is represented by the contractual amount shown in the summary on the previous page. If the commitment is funded the Bank would be entitled to seek recovery from the customer. At December 31, 2002 and 2001, no amounts have been recorded as liabilities for the Bank's potential obligations under these guarantees.
Note 16. Concentration of Credit Risk
The Company and the Bank do not engage in the use of interest rate swaps, futures, or option contracts as of December 31, 2002.
Practically all of the Bank's loans, commitments, and standby letters of credit have been granted to customers in the Bank's market area. Although the Bank has a diversified loan portfolio, the ability of their debtors to honor their contracts is dependent on the economic conditions of the counties surrounding the Bank. The concentration of credit by type of loan is set forth in Note 4.
A significant portion of the Bank's cash is maintained at Bank One. The total amount of cash on deposit exceeded federal insured limits by $12,600,000 as of December 31, 2002. In the opinion of management, no material risk of loss exists due to the financial condition of Bank One.
Note 17. Regulatory Capital Requirements and Restrictions of Dividends
The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy requires the Company and the Bank to maintain minimum amounts and ratios (set forth in the table on the following page) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2002 and 2001, that the Company and the Bank met all capital adequacy requirements to which they are subject.
As of December 31, 2002, the most recent notification from the regulatory agencies categorized the Company as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, an institution must maintain minimum total risk-based, Tier I risk-based, and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since these notifications that management believes have changed the Bank's category.
Note 17. Regulatory Capital Requirements and Restrictions of Dividends (Continued)
A source of income and funds of the Company are dividends from the Bank. Dividends declared by the Bank that exceed the retained net income for the most current year plus retained net income for the preceding two years must be approved by Federal and State regulatory agencies. Under this formula, dividends of approximately $12,942,000 may be paid without prior regulatory approval.
Note 18. Fair Value of Financial Information
FASB Statement No. 107, Disclosures About Fair Value of Financial Instruments, requires disclosure of fair value information about financial instruments, whether recognized or not recognized in the balance sheet, for which it is practicable to estimate that value. The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than a forced liquidation. Fair value is best-determined base upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Statement No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:
Cash and due from banks: The carrying amounts of cash and due from banks equal their fair values.
Federal funds sold: The carrying amounts of Federal funds sold equal their fair values.
Interest-bearing deposits in banks: The carrying amounts of interest- bearing deposits in banks equal their fair values.
Available-for-sale securities: Fair values for securities are based on quoted market prices.
Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for all other loans are estimated by discounting contractual cash flows using estimated market discount rates, which reflect the credit and interest rate risk inherent in the loan.
Cash surrender value of life insurance: Life insurance agreements reprice periodically with no significant change in credit risk. Fair values approximate carrying value for these agreements.
Accrued interest receivable and payable: The carrying amounts of accrued interest receivable and payable equal their fair values.
Deposits: The fair values disclosed for demand deposits (interest and non-interest checking, passbook savings and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates within the market place.
Short-term borrowings: The carrying amounts of short-term borrowings equal their fair values.
Other borrowings: The fair values of other borrowings are estimated using discounted cash flow analysis based on current interest rates being offered by instruments with similar terms and credit quality.
Note 18. Fair Value of Financial Information (Continued)
Off-balance-sheet instruments: The estimated fair value of fee income on letters of credit at December 31, 2002 and 2001 was insignificant. Loan commitments on which the committed interest rate is less than the current market rate are also insignificant at December 31, 2002 and 2001.
Note 19. Parent Company Only Financial Information
Note 19. Parent Company Only Financial Information (Continued)
Note 19. Parent Company Only Financial Information (Continued)
ITEM 9:
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:
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning our directors and executive officers required by this item is incorporated herein by reference from our definitive proxy statement for our 2003 Annual Meeting of Stockholders, a copy of which was filed with the Securities and Exchange Commission on March 14, 2003.
The information concerning compliance with the reporting requirements of Section 16(a) of the Securities and Exchange Commission Act of 1934 by our directors, officers and ten percent stockholders required by this item is incorporated herein by reference from our definitive proxy statement for our 2003 Annual Meeting of Stockholders, a copy of which was filed with the Securities and Exchange Commission on March 14, 2003.
ITEM 11:
ITEM 11: EXECUTIVE COMPENSATION
The information called for herein is presented in the proxy statement to be furnished in connection with the solicitation of proxies on behalf of the Board of Directors of the Registrant for use at its Annual Meeting to be held on Tuesday, April 15, 2003, is incorporated herein by reference.
ITEM 12:
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for herein is presented in the proxy statement to be furnished in connection with the solicitation of proxies on behalf of the Board of Directors of the Registrant for use at its Annual Meeting to be held on Tuesday, April 15, 2003, is incorporated herein by reference.
ITEM 13:
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Transactions with management and others
Since January 1, 1995 the company has been making rent payments to First Banking Center for the space that it occupies and the equipment it uses.
(b) Certain business relationships
None
(c) Indebtedness of management
This information is presented on page 14, Note 4 of the Annual Report to Shareholders, and is incorporated herein by reference.
(d) Transactions with promoters
None
ITEM 14:
ITEM 14: CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of our disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities and Exchange Act of 1934 (the "Act")) was carried out under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer and several other members of our senior management within the 90-day period preceding the filing date of this annual report. Our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as currently in effect are in ensuring that the information we are required to disclose in the reports we file or submit under the Act is (i) accumulated and communicated to our management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.
(b) Changes in Internal Controls: In the year ended December 31, 2002, there were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
ITEM 15:
ITEM 15: EXIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST BANKING CENTER, INC. Registrant
Date____________________ By ___________________________ Brantly Chappell Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.*
- -------------------------------- ----------------------------- Brantly Chappell, James Schuster, Chief Executive Officer, Director Chief Financial Officer
- -------------------------------- ----------------------------- Melvin Wendt, Director Daniel Jacobson, Director
- -------------------------------- ----------------------------- John Smith, Director John Ernster, Director
- -------------------------------- ----------------------------- David Boilini, Director Robert Fait, Director
- -------------------------------- ----------------------------- Charles Wellington, Director Keith Blumer, Director
- -------------------------------- Thomas Laken, Jr., Director
*Each of the above signatures is affixed as of March 10, 2003.
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Brantly Chappel, Chief Executive Officer, certify that:
1) I have reviewed this annual report on Form 10-K of First Banking Center, Inc.;
2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6) The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 24, 2002
/s/ Brantly Chappell
- ------------------------ Brantly Chappell Chief Executive Officer
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, James Schuster, Chief Financial Officer, certify that:
1) I have reviewed this annual report on Form 10-K of First Banking Center, Inc.;
2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annualy report;
3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6) The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 24, 2002
/s/ James Schuster
- ---------------------- James Schuster Chief Financial Officer
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The following certification is provided by the undersigned Chief Executive Officer of First Banking Center, Inc. on the basis of such officer's knowledge and belief for the sole purpose of complying with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
CERTIFICATION
In connection with the Annual Report of First Banking Center, Inc. (the "Company") on Form 10-K for the period ended December 31, 2002 as filed with the Securities and Exchange Commission on March 27, 2002 (the "Report"), I, Brantly Chappell, Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/Brantly Chappell
- ----------------------- Name: Brantly Chappell Title: Chief Executive Officer Date: March 24, 2002
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The following certification is provided by the undersigned Chief Financial Officer of First Banking Center, Inc. on the basis of such officer's knowledge and belief for the sole purpose of complying with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
CERTIFICATION
In connection with the Annual Report of First Banking Center, Inc. (the "Company") on Form 10-K for the period ended December 31, 2002 as filed with the Securities and Exchange Commission on March 27, 2002 (the "Report"), I, James Schuster, Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/James Schuster
- ------------------------ Name: James Schuster Title: Chief Financial Officer Date: March 24, 2002
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
(a) Annual Report to Shareholders (Incorporated within the 10K).
(b) All proxy material in connection with the 2003 Annual Shareholders Meeting.