UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0-32535
FIRST BANCTRUST CORPORATION
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
37-1406661
(IRS EMPLOYER IDENTIFICATION NO.)
206 SOUTH CENTRAL AVENUE
PARIS, ILLINOIS
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
61944
(ZIP CODE)
217-465-6381
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
CHECK WHETHER THE ISSUER: (1) FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION
13 OR 15(d) OF THE EXCHANGE ACT DURING THE PAST 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 [ ]
STATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON
EQUITY AS OF THE LATEST PRACTICABLE DATE.
AS OF MAY 12, 2004 THE REGISTRANT HAD OUTSTANDING 1,250,225 SHARES OF COMMON
STOCK.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): YES [ ] NO [X]
First BancTrust Corporation
Form 10-QSB Quarterly Report
Index Page
PART I - Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets 1
(As of March 31, 2004 and December 31, 2003)
Condensed Consolidated Statements of Income 2
(For the three months ended March 31, 2004 and 2003)
Condensed Consolidated Statements of Cash Flows 4
(For the three months ended March 31, 2004 and 2003)
Item 2 Management's Discussion and Analysis of
Financial Condition or Plan of Operation 10
Item 3 Controls and Procedures 17
PART II - Other Information
Item 1 Legal Proceedings 17
Item 2 Changes in Securities and Issuer Purchases of
Equity Securities 18
Item 3 Defaults Upon Senior Securities 18
Item 4 Submission of Matters to a Vote of Security
Holders 18
Item 5 Other Information 19
Item 6 Exhibits and Reports on Form 8-K 19
SIGNATURES 19
CERTIFICATIONS 20
FIRST BANCTRUST CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of dollars except share data)
MARCH 31, DECEMBER 31,
2004 2003
(unaudited)
----------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 5,420 $ 6,581
Interest-bearing demand deposits 7,160 3,713
--------- ---------
Cash and cash equivalents 12,580 10,294
Available-for-sale securities 94,384 93,742
Loans held for sale 316 453
Loans, net of allowance for loans losses of $2,212 and $2,124 106,879 106,411
Premises and equipment 2,704 2,781
Federal Home Loan Bank stock 4,071 4,006
Foreclosed assets held for sale, net 147 95
Interest receivable 1,849 2,238
Loan servicing rights, net of valuation allowance of $240 and $267 862 964
Cash surrender value of life insurance 4,333 4,346
Deferred income taxes -- 37
Other assets 759 827
--------- ---------
Total assets $ 228,884 $ 226,194
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest bearing deposits $ 16,292 $ 15,495
Interest bearing deposits 148,334 147,533
--------- ---------
Total deposits 164,626 163,028
Federal Home Loan Bank advances 35,500 35,500
Pass through payments received on loans sold 244 262
Advances from borrowers for taxes and insurance 240 109
Deferred income taxes 336 --
Interest payable 150 127
Other 637 777
--------- ---------
Total liabilities 201,733 199,803
--------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 1,000,000 shares authorized
and unissued
Common stock, $.01 par value, 5,000,000 shares authorized;
1,520,875 shares issued and 1,250,225 shares outstanding 15 15
Additional paid-in capital 14,630 14,579
Retained earnings 17,844 17,743
Unearned employee stock ownership plan shares -
76,058 and 79,859 shares (879) (923)
Unearned incentive plan shares - 47,702 and 49,415 shares (787) (815)
Accumulated other comprehensive income 892 356
Treasury stock, at cost - 270,650 shares (4,564) (4,564)
--------- ---------
Total stockholders' equity 27,151 26,391
--------- ---------
Total liabilities and stockholders' equity $ 228,884 $ 226,194
========= =========
See notes to condensed financial statements.
1
FIRST BANCTRUST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars except share data)
(unaudited)
THREE MONTHS ENDED MARCH 31 2004 2003
-------------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME
Loans
Taxable $ 1,972 $ 2,232
Tax exempt 16 9
Securities
Taxable 763 714
Tax exempt 93 75
Dividends on Federal Home Loan Bank stock 65 56
Deposits with financial institutions and other 11 17
------- -------
Total interest and dividend income 2,920 3,103
------- -------
INTEREST EXPENSE
Deposits 761 847
Federal Home Loan Bank advances and other debt 363 315
------- -------
Total interest expense 1,124 1,162
------- -------
NET INTEREST INCOME 1,796 1,941
Provision for loan losses 150 164
------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,646 1,777
------- -------
NONINTEREST INCOME
Customer service fees 186 165
Other service charges and fees 169 212
Net gains on loan sales 60 166
Net realized gains on sales of available-for-sale securities 37 --
Net loan servicing fees 131 136
Brokerage fees 8 35
Abstract and title fees 83 105
Other 73 71
------- -------
Total noninterest income 747 890
------- -------
NONINTEREST EXPENSE
Salaries and employee benefits 1,169 1,029
Net occupancy expense 74 54
Equipment expense 146 174
Data processing fees 103 101
Professional fees 116 75
Foreclosed assets expense, net 28 25
Marketing expense 46 50
Amortization of loan servicing rights 155 262
Recovery of impairment of loan servicing rights (27) (84)
Other expenses 237 234
------- -------
Total noninterest expense 2,047 1,920
------- -------
2
INCOME BEFORE INCOME TAX $ 346 $ 747
Income tax expense 120 235
------- -------
NET INCOME 226 512
------- -------
OTHER COMPREHENSIVE INCOME:
Unrealized appreciation (depreciation) on available-for-sale securities 560 (394)
Less: Reclassification adjustment for realized gains included
in net income 24 --
------- -------
536 (394)
------- -------
COMPREHENSIVE INCOME $ 762 $ 118
======= =======
BASIC EARNINGS PER SHARE $ 0.20 $ 0.43
======= =======
DILUTED EARNINGS PER SHARE $ 0.19 $ 0.41
======= =======
See notes to condensed financial statements.
3
FIRST BANCTRUST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
(unaudited)
THREE MONTHS ENDED MARCH 31 2004 2003
-------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 226 $ 512
Items not requiring (providing) cash
Depreciation and amortization 72 70
Provision for loan losses 150 164
Investment securities amortization, net 82 106
Amortization of loan servicing rights 155 262
Recovery of impairment of loan servicing rights (27) (84)
Deferred income taxes -- (6)
Net realized gains on available-for-sale securities (37) --
Net loss on sales of foreclosed assets 14 7
Net loss on sale of premises and equipment 6 --
Net gains on loan sales (60) (166)
Loans originated for sale (3,033) (11,852)
Proceeds from sales of loans originated for sale 3,204 11,251
Federal Home Loan Bank stock dividends (65) (47)
Compensation expense related to employee stock ownership plan 96 65
Compensation expense related to incentive plan 27 27
Changes in
Interest receivable 389 564
Cash surrender value of life insurance 13 (44)
Other assets 68 (149)
Interest payable 23 47
Other liabilities (140) (80)
-------- --------
Net cash provided by operating activities 1,163 647
-------- --------
INVESTING ACTIVITIES
Purchases of available-for-sale securities (7,197) (28,228)
Proceeds from maturities of available-for-sale securities 7,284 14,358
Proceeds from sales of available-for-sale securities 135 --
Net change in loans (740) 1,869
Proceeds from sales of foreclosed assets 56 79
Proceeds from sales of premises and equipment 10 --
Purchases of premises and equipment (11) (47)
-------- --------
Net cash used by investing activities (463) (11,969)
-------- --------
4
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, money market,
NOW and savings deposits $ 2,652 $ (111)
Net increase (decrease) in certificates of deposit (1,054) 292
Proceeds from the issuance of Federal Home Loan Bank advances -- 18,000
Repayment of Federal Home Loan Bank advances and other debt -- (6,001)
Pass through payments received on loans sold (18) (115)
Net increases in advances by borrowers for taxes and insurance 131 133
Dividends paid (125) (68)
Purchase of treasury stock -- (1,498)
-------- --------
Net cash provided (used) by financing activities 1,586 10,632
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,286 (690)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 10,294 10,453
-------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 12,580 $ 9,763
======== ========
SUPPLEMENTAL CASH FLOWS INFORMATION
Real estate acquired in settlement of loans $ 122 $ 172
Interest paid $ 1,101 $ 1,115
Income tax paid $ 0 $ 290
See notes to condensed financial statements.
5
FIRST BANCTRUST CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements
have been prepared pursuant to the rules and regulations for reporting on Form
10-QSB. Accordingly, certain disclosures required by accounting principles
generally accepted in the United States of America are not included herein.
These interim statements should be read in conjunction with the audited
consolidated financial statements and notes thereto, included in the Company's
Form 10-KSB filed with the Securities and Exchange Commission.
Interim statements are subject to possible adjustments in connection with the
annual audit of the Company for the year ended December 31, 2004. In the opinion
of management of the Company, the accompanying unaudited interim condensed
consolidated financial statements reflect all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the consolidated
financial position and consolidated results of operations for the periods
presented. The results of operations for the three months ended March 31, 2004
are not necessarily indicative of the results to be expected for the full year.
The Company has a stock-based employee compensation plan, which is described
more fully in the Notes to Financial Statements included in the December 31,
2003 Annual Report to shareholders. The Company accounts for this plan under the
recognition 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 net income, as all options granted under the
plan had an exercise price equal to the market value of the underlying common
stock on the grant date. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.
6
Three Months Three Months
Ended Ended
March 31, 2004 March 31, 2003
Net income, as reported $ 226 $ 512
Less: Total stock-based employee
compensation cost determined under
the fair value based method, net of
income taxes (33) ---
-------- --------
Pro forma net income $ 193 $ 512
======== ========
EARNINGS PER SHARE:
Basic - as reported $ 0.20 $ 0.43
Basic - pro forma $ 0.17 $ 0.43
Diluted - as reported $ 0.19 $ 0.41
Diluted - pro forma $ 0.16 $ 0.41
Note 2 - Conversion to Stock Form of Ownership
On October 16, 2000 the Board of Directors of First Bank & Trust, sb (the
"Bank") adopted a Plan of Conversion to convert from an Illinois mutual savings
bank to an Illinois stock savings bank with the concurrent formation of a
holding company. First BancTrust Corporation (the "Company") was incorporated in
November 2000. A subscription offering of the shares of common stock, $0.01 par
value per share ("Common Stock"), of the Company was offered initially to
eligible deposit account holders of the Bank. The Bank's conversion from an
Illinois mutual savings bank to an Illinois stock savings bank was completed on
April 18, 2001 (the "Conversion").
In connection with the conversion, the Company issued 1,520,875 shares of common
stock to the public for gross proceeds of $15.2 million, $14.4 million net of
conversion costs. The Bank issued all of its outstanding capital stock to the
Company in exchange for one-half of the net proceeds of the offering, which
amounted to $7.2 million. The Company accounted for the purchase in a manner
similar to a pooling of interests, whereby assets and liabilities of the Bank
maintain their historical cost basis in the consolidated company.
Note 3 - Employee Stock Ownership Plan
In connection with the conversion, the Bank established an Employee Stock
Ownership Plan ("ESOP") for the benefit of its employees. In the initial stock
offering, deposit account owners purchased all available shares. The ESOP
purchased required shares in the open market subsequent to the conversion date
for $1.4 million with funds borrowed from the Company. The ESOP expense was
$96,000 and $65,000 for the three-month periods ended March 31, 2004 and 2003,
respectively.
7
Shares purchased by the ESOP with the loan proceeds are held in a suspense
account and are allocated to ESOP participants based on a pro rata basis as debt
service payments are made to the Company. The loan is secured by the shares
purchased with the proceeds and will be repaid by the ESOP with funds from the
Company's discretionary contributions to the ESOP and earnings on ESOP assets.
Principal payments are scheduled to occur over an eight-year period.
Note 4 - Earnings per Share
Basic earnings per share have been computed based upon the weighted average
common shares outstanding for the three month periods ended March 31, 2004 and
2003. Diluted earnings per share reflect the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company.
Earnings per share were computed as follows (dollar amounts in thousands except
share data):
Weighted
Average Per Share
Income Shares Amount
---------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2004:
Basic Earnings Per Share:
Income available to common stockholders $ 226 1,124,627 $ 0.20
Effect of Dilutive Securities:
Unearned recognition and retention plan shares 50,546
Stock Options 26,077
-------------------------------
Diluted Earnings per Share:
Income available to common stockholders and
assumed conversions $ 226 1,201,250 $ 0.19
===============================
FOR THE THREE MONTHS ENDED MARCH 31, 2003:
Basic Earnings Per Share:
Income available to common stockholders $ 512 1,186,356 $ 0.43
Effect of Dilutive Securities:
Unearned recognition and retention plan shares 56,269
-------------------------------
Diluted Earnings per Share:
Income available to common stockholders and
assumed conversions $ 512 1,242,625 $ 0.41
===============================
Note 5 - Authorized Share Repurchase Program
On March 13, 2003, the Board of Directors authorized the open-market stock
repurchases of up to 3.9% or 46,500 shares of the Company's outstanding stock
over the next one-year period ending March 13, 2004. Of the 46,500 shares
authorized, 41,722 shares were repurchased on the open
8
market before the repurchase resolution expired. On May 15, 2003, the Board of
Directors authorized the open-market stock repurchases of up to 5%, or 62,272 of
the Company's outstanding stock over the one-year period ending May 15, 2004,
as, in the opinion of management, market conditions warrant. Previously, the
Company had completed three other repurchase programs for stock repurchases of
228,928 shares representing 16.1% of the outstanding shares. As of May 12, 2004,
the Company had repurchased a cumulative total of 270,650 shares.
Note 6 - Subsequent Event
On April 19, 2004, the Board of Directors of the Company approved a two for one
stock split of the Company's common stock payable as a 100% stock dividend on
May 21, 2004 to shareholders of record on April 30, 2004. The Company will
retroactively apply the impact of this stock split in all financial statements
published after May 21, 2004.
Note 7 - Recent Accounting Pronouncements
In March 2004, the SEC issued Staff Accounting Bulletin No. 105 (SAB 105),
Application of Accounting Principles to Loan Commitments. Current accounting
guidance requires the commitment to originate mortgage loans to be held for sale
be recognized on the balance sheet at fair value from inception through
expiration or funding. SAB 105 requires that the fair-value measurement include
only differences between the guaranteed interest rate in the loan commitment and
a market interest rate, excluding any expected future cash flows related to the
customer relationship or loan servicing. SAB 105 is effective for commitments to
originate mortgage loans to be held for sale that are entered into after March
31, 2004. Its adoption is not expected to have a material impact on the
consolidated financial position on results of operations of the Company.
In March 2004, the FASB's Emerging Issues Task Force reached a consensus on EITF
Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments. The guidance prescribes a three-step model
for determining whether an investment is other-than-temporarily impaired and
requires disclosures about unrealized losses on investments. The accounting
guidance is effective for reporting periods beginning after June 15, 2004, while
the disclosure requirements are effective for annual reporting periods ending
after June 15, 2004. The Company has adopted the requirements of this EITF.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995 as amended, and is including this statement for purposes of these
safe harbor provisions. Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies and expectations of the
Company, are generally identifiable by use of the words "believe," "expect,"
"intend," "anticipate," "estimate," "project," or similar expressions. The
Company'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 the operations and future prospects of the Company and its
wholly-owned subsidiaries include, but are not limited to, changes in: interest
rates; general economic conditions; legislative/regulatory provisions; monetary
and fiscal policies of the U.S. Government, including policies of the U.S.
Treasury and the Federal Reserve Board; the quality of composition of the loan
or investment portfolios; demand for loan products; deposit flows; competition;
demand for financial services in the Company's market area; 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 statement. Further information concerning the Company and
its business, including additional factors that could materially affect the
Company's financial results, is included in the Company's filings with the
Securities and Exchange Commission.
The following discussion compares the financial condition of First BancTrust
Corporation (Company), First Bank & Trust, s.b. (Bank), First Charter Service
Corporation, ECS Service Corporation, and the Bank's wholly owned subsidiary,
Community Finance Center, Inc. at March 31, 2004 to its financial condition at
December 31, 2003 and the results of operations for the three-month period
ending March 31, 2004 to the same period in 2003. Application was made and
approved in 2003 by regulators to establish a new banking facility in Savoy,
Illinois in Champaign County. Operations began in a temporary facility in late
September, 2003 with the purchase of $3.2 million in deposits from another area
financial institution. Permanent facilities are under construction in a prime
commercial area, which should be completed in mid-2004. This discussion should
be read in conjunction with the interim financial statements and notes included
herein.
FINANCIAL CONDITION
Total assets of the Company increased by $2.7 million or 1.2%, to $228.9 million
at March 31, 2004 from $226.2 million at December 31, 2003. The increase in
assets was primarily due to increases in cash and cash equivalents of $2.3
million, increases in available-for-sale securities of 642,000, and in loans,
net of allowance for loan losses, of $468,000, offset by a decrease in loans
held for sale of $137,000, a decrease in interest receivable of $389,000, and a
$102,000 decrease
10
in loan servicing rights, net of valuation allowance. The increase in assets was
funded primarily by an increase in deposits.
The Company's cash and due from banks decreased by $1.2 million or 17.6% to $5.4
million at March 31, 2004 from $6.6 million at December 31, 2003. This decrease
was more than offset by an increase in interest-bearing demand deposits of $3.4
million or 92.8% to $7.2 million at March 31, 2004 compared to $3.7 million at
December 31, 2003. The net increase in cash and cash equivalents of $2.3 million
was primarily a result of an increase in deposits. Available-for-sale investment
securities amounted to $94.4 million at March 31, 2004 compared to $93.7 million
at December 31, 2003, a $642,000 increase. The increase resulted from $7.2
million in investment purchases, primarily in mortgage-backed securities and
Federal Home Loan Bank ("FHLB") agency bonds, and an increase in market value of
$909,000, partially offset by calls and maturities of $7.3 million.
Loans held for sale decreased by $137,000 from $453,000 at December 31, 2003 to
$316,000 at March 31, 2004, a decrease of 30.2%. The 1-4 family refinancings
have slowed significantly compared to last year, due to slightly rising interest
rates compared to last year's historic low interest rates. During the first
quarter of 2004, residential loans originated for resale into the secondary
market totaled $3.0 million compared to $11.9 million in the first quarter of
2003. Loans held for sale at March 31, 2004 consisted entirely of single-family
residential loans.
The Company's net loan portfolio increased by $468,000 to $106.9 million at
March 31, 2004 from $106.4 million at December 31, 2003. Gross loans increased
by $556,000 while the allowance for loan losses increased by $88,000. Loans
secured by 1-4 family residences decreased by $1.2 million, although home equity
loans increased by $228,000 and second mortgages secured by 1-4 family
residences increased by $12,000. Farmland loans increased by $2.0 million and
nonfarm nonresidential real estate loans increased by $300,000, while
agricultural production loans decreased by $284,000 and consumer loans decreased
$191,000. Other loans decreased by $138,000 and commercial loans decreased by
$101,000.
At March 31, 2004 the allowance for loan losses was $2.2 million or 2.03% of the
total loan portfolio compared to $2.1 million, or 1.96% at December 31, 2003.
During the first quarter of 2004, the Company charged off $100,000 of loan
losses, of which $37,000 were consumer loans, $30,000 related to one commercial
loan, $20,000 pertained to three 1-4 family residential loans, and $13,000 was a
loss from a commercial real estate loan. The chargeoffs of $100,000 were
partially offset by $38,000 in recoveries. The Company's nonperforming loans and
troubled debt restructurings as a percentage of total loans decreased from 2.35%
or $2.5 million at December 31, 2003 compared to 1.99% or $2.2 million at March
31, 2004. This decrease was primarily a result of reduced delinquencies 90 days
and over from $1.1 million at December 31, 2003 compared to $457,000 at March
31, 2004. The Company's troubled debt restructurings of $1.7 million at March
31, 2004 consists primarily of restructured commercial and agricultural loans.
Included in the $1.7 million of troubled debt restructurings are restructured
agricultural loans of $1.1 million which are 90% guaranteed for $947,000 by the
Farmers Home Administration, thereby limiting the Company's exposure on those
loans. Management reviews the adequacy of the allowance for loan losses
quarterly, and believes that its allowance is adequate; however, the Company
cannot assure that future chargeoffs and/or provisions will not be necessary.
11
Net foreclosed assets held for sale, totaling $147,000 at March 31, 2004
increased $52,000, compared to $95,000 at December 31, 2003. As of March 31,
2004 the Company had three real estate properties totaling $106,000 consisting
of three single-family residential properties and other repossessed assets of
$41,000. Foreclosed assets are carried at lower of cost or net realizable value.
Interest receivable declined by $389,000 or 17.4% from $2.2 million to $1.8
million primarily due to annual payments received on agricultural loans. Federal
Home Loan Bank stock increased by $65,000 due to the receipt of dividends in the
form of stock.
Loan servicing rights declined by $102,000 from $964,000 at December 31, 2003 to
$862,000 at March 31, 2004. Gross loan servicing rights decreased by $129,000
from $1.2 million at December 31, 2003 to $1.1 million at March 31, 2004 due to
amortization of loan servicing rights of $155,000 offset by newly capitalized
assets of $26,000. The valuation allowance decreased from $267,000 at December
31, 2003 to $240,000 at March 31, 2004, a $27,000 recovery of a previous
impairment as a result of current valuations.
The Company's total deposits amounted to $164.6 million at March 31, 2004
compared to $163.0 million at December 31, 2003, an increase of $1.6 million.
The 1.0% increase in total deposits was due to a $797,000 increase in
non-interest bearing deposits, and a $801,000 increase in interest bearing
deposits. The increase in interest bearing deposits was a result of an increase
of $1.2 million in interest-bearing checking accounts, a $674,000 increase in
savings accounts, partially offset by a $1.1 million decrease in certificates of
deposit.
Federal Home Loan Bank advances and other debt remained constant at $26.5
million at December 31, 2003 and March 31, 2004. The total average rate of all
advances was 4.04% as of March 31, 2004.
Advances from borrowers for taxes and insurance increased by $131,000 from
$109,000 at December 31, 2003 to $240,000 at March 31, 2004. Adjustments to
deferred income taxes for the tax effect of the increase in market value of
investment securities available for sale resulted in a deferred tax liability of
$336,000 at March 31, 2004 compared to a deferred tax asset of $37,000 at
December 31, 2003.
Stockholders' equity at March 31, 2004 was $27.2 million compared to $26.4
million at December 31, 2003, an increase of $760,000. Retained earnings
increased by the amount of net income or $226,000, partially offset by $125,000
in dividends declared and paid. Accumulated comprehensive income increased by
$536,000 due to an increase in the fair value of securities available for sale,
net of tax.
12
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTH PERIODS ENDED MARCH 31, 2004 AND 2003
Net income for the three months ended March 31, 2004 decreased by $286,000 or
55.9% from $512,000 for the three months ended March 31, 2003 to $226,000 for
the three months ended March 31, 2004. The decrease in net income is primarily
due to decreases in net interest income and noninterest income, and an increase
in noninterest expense, partially offset by a slight decrease in the provision
for loan losses.
Net interest income decreased $145,000 or 7.5% from $1.94 million for the three
months ended March 31, 2003 to $1.80 million for the three months ended March
31, 2004. The primary reason for the decrease in net interest income was a
decrease in interest and dividend income of $183,000 partially offset by a
decrease of $38,000 in interest expense. The Company's net interest margin was
3.48% and 4.14% during the three months ended March 31, 2004 and 2003,
respectively. The net interest margin decreased as a result of a decrease in
interest rates on interest-bearing assets, partially offset by a decrease in
interest rates on interest-bearing liabilities.
Total interest and dividend income decreased by $183,000 or 5.9% from $3.10
million for the three months ended March 31, 2003 to $2.92 million for the three
months ended March 31, 2004. The decrease was primarily due to a decrease in
loan interest income partially offset by increased interest income on securities
available for sale. The decrease of $253,000 in loan interest income was
primarily due to a decrease in the average loan rate of 107 basis points,
partially offset by an increase in average loans. Interest and dividend income
from available for sale securities increased by $67,000 primarily due to an
increase in the average balance of available for sale investments, partially
offset by a decrease in average interest rate of 48 basis points.
Interest expense declined by $38,000 or 3.3% from $1.16 million for the three
months ended March 31, 2003 to $1.12 million for the three months ended March
31, 2004. This decline was primarily due to a decrease of $86,000 in interest on
deposits, partially offset by $48,000 increase in interest on Federal Home Loan
Bank advances. The $86,000 decrease in interest expense on deposits was
primarily due to a decrease of 53 basis points in the average interest rate on
deposits, partially offset by an increase in the average balance of deposits.
The $48,000 increase in interest on Federal Home Loan Bank advances was due to
an increase in the average balance, partially offset by a 14 basis point
reduction in interest rate.
For the three months ended March 31, 2004 and 2003 the provision for losses on
loans was $150,000 and $164,000, respectively. The provision for the three
months ended March 31, 2004 was based on the Company's analysis of the allowance
for loan losses. Management meets on a quarterly basis to review the adequacy of
the allowance for loan losses by classifying loans in compliance with regulatory
classifications. Classified loans are individually reviewed to arrive at
specific reserve levels for those loans. Once the specific portion for each loan
is calculated, management calculates a historical portion for each category
based on a combination of loss history, current economic conditions, and trends
in the portfolio. While the Company cannot
13
assure that future chargeoffs and/or provisions will not be necessary, the
Company's management believes that, as of March 31, 2004, its allowance for loan
losses was adequate.
Noninterest income decreased $143,000 or 16.1% from $890,000 for the three
months ended March 31, 2003 to $747,000 for the three months ended March 31,
2004. The decrease was primarily a result of decreases in net gains on loan
sales and other service fees and charges, decreases in brokerage fees and
abstracting income, partially offset by an increase in net realized gains on
sales of available for sale securities and increased customer service fees. Net
gains on loan sales decreased by $106,000 from $166,000 for the three months
ended March 31, 2003 to $60,000 for the three months ended March 31, 2004. This
decline occurred as loan sales decreased from $11.9 million loans sold in the
first quarter 2003 to $3.2 million loans sold in the first quarter 2004. Loan
refinancings have slowed significantly compared to last year, due to slightly
rising interest rates compared to last year's historic low interest rates. Other
service charges and fees decreased by $43,000 from $212,000 for the three months
ended March 31, 2003 to $169,000 for the three months ended March 31, 2004
primarily due to a decrease in fees associated with residential loans sold into
the secondary market resulting from the reduced loan volume. Abstracting and
title fees also declined by $22,000 from $105,000 for the three months ended
March 31, 2003 to $83,000 for the three months ended March 31, 2004, due to the
high level of refinancing activity in 2003. Net realized gains on sales of
available for sale securities of $37,000 for the three months ended March 31,
2004 resulted from the sale of equity securities.
Total noninterest expenses were $2.05 million for the three months ended March
31, 2004 as compared to $1.92 million for the three months ended March 31, 2003.
The primary reason for the $127,000 increase was an increase in salaries and
employee benefits of $140,000, an increase in professional fees of $41,000, and
a reduction in the recovery of a previously identified impairment of loan
servicing rights of $57,000, partially offset by a reduction of $107,000 in
amortization of loan servicing rights. Salaries and employee benefits increased
by $140,000 from $1.03 million for the three months ended March 31, 2003 to
$1.17 million for the three months ended March 31, 2004. The salary increase was
$94,000 which was primarily due to normal pay increases and the addition of four
full-time employees and one part-time employee. The majority of the employee
additions are a result of the branch expansion into Savoy. The increase in
employee benefits of $45,000 was primarily due to increased health insurance
expense and increased Employee Stock Ownership Plan ("ESOP") expense. Health
insurance expense was $99,000 for the three months ended March 31, 2004 compared
to $80,000 for the three months ended March 31, 2003, a $19,000 increase as a
result a higher premiums. ESOP expense increased due to a higher average share
price. The monthly expense for the ESOP is determined by the average share price
in the open market for the month, and as the monthly average share price
increases, the ESOP expense increases accordingly.
Professional fees increased by $41,000 from $75,000 for the three months ended
March 31, 2003 to $116,000 for the same period in 2004. The increase was
primarily a result of higher legal fees in 2004, primarily related to the
expansion into Savoy, and increased consulting fees, primarily from the
retention of an investors relations consulting firm. Amortization of loan
servicing rights decreased from $262,000 for the three months ended March 31,
2003 to $155,000 for the three months ended March 31, 2004, as a result of a
decrease in loan prepayments. The recovery of impairment of loan servicing
rights was $84,000 for the three months ended March 31, 2003
14
compared to $27,000 for the three months ended March 31, 2004. The amount of the
recovery or impairment is determined by comparing the book value of the loan
servicing rights to an independent valuation based on a discounted cash flow
methodology, utilizing current prepayment speeds and discount rates.
Income tax expense was $120,000 for the three months ended March 31, 2004 as
compared to $235,000 for the three months ended March 31, 2003. The decrease of
$115,000 in income tax expense was due to a decrease in income before taxes of
$401,000. The effective tax rates were 34.7% and 31.5%, respectively, for the
three months ended March 31, 2004 and 2003.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting standards
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and the related disclosure of contingent
assets and liabilities. Actual results could differ from those estimates under
different assumptions and conditions. Management believes that its critical
accounting policies and significant estimates include determining the allowance
for loan losses, the valuation of loan servicing rights, and the valuation of
foreclosed real estate.
Allowance for loan losses
The allowance for loan losses is a significant estimate that can and does change
based on management's assumptions about specific borrowers and current general
economic and business conditions, among other factors. Management reviews the
adequacy of the allowance for loan losses on at least a quarterly basis. The
evaluation by management includes consideration of past loss experience, changes
in the composition of the loan portfolio, the current condition and amount of
loans outstanding, identified problem loans and the probability of collecting
all amounts due.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. A worsening or protracted economic
decline would increase the likelihood of additional losses due to credit and
market risk and could create the need for additional loss reserves.
Loan Servicing Rights
The Company recognizes the rights to service loans as separate assets in the
consolidated balance sheet. The total cost of loans when sold is allocated
between loans and loan servicing rights based on the relative fair values of
each. Loan servicing rights are subsequently carried at the lower of the initial
carrying value, adjusted for amortization, or fair value. Loan servicing rights
are evaluated for impairment based on the fair value of those rights. Factors
included in the calculation of fair value of the loan servicing rights include
estimating the present value of future net cash flows, market loan prepayment
speeds for similar loans, discount rates, servicing costs, and other economic
factors. Servicing rights are amortized over the estimated period of net
servicing revenue. It is likely that these economic factors will change over the
life of the loan
15
servicing rights, resulting in different valuations of the loan servicing
rights. The differing valuations will affect the carrying value of the loan
servicing rights on the consolidated balance sheet as well as the income
recorded from loan servicing in the income statement. As of March 31, 2004 and
December 31, 2003, mortgage servicing rights had carrying values of $862,000 and
$964,000, respectively.
Foreclosed Assets Held for Sale
Foreclosed assets held for sale are carried at the lower of cost or fair value
less estimated selling costs. Management estimates the fair value of the
properties based on current appraisal information. Fair value estimates are
particularly susceptible to significant changes in the economic environment,
market conditions, and the real estate market. A worsening or protracted
economic decline would increase the likelihood of a decline in property values
and could create the need to write down the properties through current
operations.
LIQUIDITY
At March 31, 2004, the Company had outstanding commitments to originate $6.8
million in loans. In addition, open-end line of credit loans had $9.1 million
available to be drawn upon. As of March 31, 2004, the total amount of
certificates scheduled to mature in the following 12 months was $41.8 million.
The Company believes that it has adequate resources to fund all of its
commitments and that it can adjust the rate on certificates of deposit to retain
deposits in changed interest environments. If the Company requires funds beyond
its internal funding capabilities, advances from the Federal Home Loan Bank of
Chicago are available as an additional source of funds.
CAPITAL RESOURCES
The Bank is subject to capital-to-asset requirements in accordance with Federal
bank regulations. The following table summarizes the Bank's regulatory capital
requirements, versus actual capital as of March 31, 2004:
REQUIRED FOR TO BE WELL
ACTUAL ADEQUATE CAPITAL CAPITALIZED
------------------------------------------------------------------------
Amount % Amount % Amount %
------------------------------------------------------------------------
MARCH 31, 2004 (Dollars in thousands)
-------------- ------------------------------------------------------------------------
Total capital (to risk-weighted
assets) $25,331 22.10 $9,171 8.0 $11,464 10.0
Tier 1 capital (to risk-weighted
assets) 23,889 20.84 4,586 4.0 6,879 6.0
Tier 1 capital (to average assets) 23,889 10.73 8,909 4.0 11,136 5.0
16
The Company's consolidated capital-to-asset requirements and actual capital as
of March 31, 2004 are summarized in the following table:
REQUIRED FOR TO BE WELL
ACTUAL ADEQUATE CAPITAL CAPITALIZED
------------------------------------------------------------------------
Amount % Amount % Amount %
------------------------------------------------------------------------
MARCH 31, 2004 (Dollars in thousands)
-------------- ------------------------------------------------------------------------
Total capital (to risk-weighted
assets) $27,603 23.80 $9,278 8.0 --- N/A
Tier 1 capital (to risk-weighted
assets) 26,144 22.54 4,639 4.0 --- N/A
Tier 1 capital (to average assets) 26,144 11.66 8,968 4.0 --- N/A
ITEM 3. CONTROLS AND PROCEDURES
The Company carried out an evaluation as of March 31, 2004, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective. There were no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls during the quarter ended March 31, 2004.
Disclosure controls and procedures are the controls and other procedures of the
Company that are designed to ensure that the information required to be
disclosed by the Company in its reports filed or submitted under the Securities
Exchange Act of 1934, as amended (Exchange Act) is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by the Company in its reports filed under
the Exchange Act is accumulated and communicated to the Company's management,
including the principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company and subsidiary are also subject to claims and lawsuits which arise
primarily in the ordinary course of business, such as claims to enforce liens
and claims involving the making and servicing of real property loans and other
issues. It is the opinion of management that the disposition or ultimate
determination of such possible claims or lawsuits will not have a material
adverse effect on the consolidated financial position of the Company.
17
ITEM 2. CHANGES IN SECURITIES AND ISSUER PURCHASES OF EQUITY SECURITITES
(e) The following table provides information about purchases of the Company's
common stock by the Company during the quarter ended March 31, 2004.
ISSUER PURCHASES OF EQUITY SECURITIES
(c) TOTAL
NUMBER OF (d) MAXIMUM
SHARES NUMBER OF
PURCHASED AS SHARES THAT MAY
(a) TOTAL PART OF PUBLICLY YET BE
NUMBER OF (b) AVERAGE ANNOUNCED PURCHASED
SHARES PRICE PAID PER PLANS OR UNDER THE PLANS
PERIOD PURCHASED SHARE PROGRAMS OR PROGRAMS
-----------------------------------------------------------------------------------------------------
01/01/04 - - - - 62,272
01/31/04
02/01/04 - - - - 62,272
02/29/04
03/01/04 - - - - 62,272
03/31/04
Total - - - 62,272
(1) We did not repurchase any shares of our common stock pursuant to the
repurchase program that we announced on May 15, 2003 (the "Program").
(2) Our board of directors approved the repurchase by us of 5%, or 62,272
shares pursuant to the Program. The expiration date of this Program is May
15, 2004. Unless terminated earlier by resolution of our board of
directors, the Program will expire on the earlier of such expiration date
or when we have repurchased all shares authorized for repurchase under the
Program.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
18
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Terry J. Howard required by Rule 13a-14(a).
31.2 Certification of Ellen M. Litteral required by Rule 13a-14(a).
32.1 Certification of Terry J. Howard, Chief Executive Officer pursuant
to Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. 1350).
32.2 Certification of Ellen M. Litteral, Chief Financial Officer pursuant
to Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. 1350).
(b) The Company filed a Current Report on Form 8-K on February 17, 2004
related to its news release to report financial results for the year
ended December 31, 2003.
SIGNATURES
Pursuant to the requirements 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 BANCTRUST CORPORATION
Date: May 13, 2004 /s/ Terry J. Howard
-------------------------------------
Terry J. Howard
President and Chief Executive Officer
Date: May 13, 2004 /s/ Ellen M. Litteral
-------------------------------------
Ellen M. Litteral
Treasurer and Chief Financial Officer
19