UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0-32535
FIRST BANCTRUST CORPORATION
(EXACT NAME OF REGISTRANT 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
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT). YES [ ] NO [X]
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
AS OF AUGUST 11, 2005 THE REGISTRANT HAD OUTSTANDING 2,406,950 SHARES OF
COMMON STOCK.
First BancTrust Corporation
Form 10-Q Quarterly Report
Index Page
PART I - Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Income 2
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operation 15
Item 3 Quantitative and Qualitative Disclosures About
Market Risk. 26
Item 4 Controls and Procedures 27
PART II - Other Information
Item 1 Legal Proceedings 28
Item 2 Unregistered Sales of Equity Securities and
Use of Proceeds 28
Item 3 Defaults Upon Senior Securities 28
Item 4 Submission of Matters to a Vote of Security
Holders 29
Item 5 Other Information 29
Item 6 Exhibits 29
SIGNATURES 30
CERTIFICATIONS 31
FIRST BANCTRUST CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of dollars except share data)
JUNE 30,
2005 DECEMBER 31,
(unaudited) 2004
------------ ------------
ASSETS
Cash and due from banks $ 5,704 $ 6,371
Interest-bearing demand deposits 3,343 2,742
------------ ------------
Cash and cash equivalents 9,047 9,113
Available-for-sale securities 75,770 83,944
Held-to-maturity securities (fair value of $4,426 and $4,831) 4,472 4,778
Loans held for sale 750 138
Loans, net of allowance for loan losses of $2,357 and $2,300 128,526 117,448
Premises and equipment 3,402 3,088
Federal Home Loan Bank stock 4,372 4,256
Foreclosed assets held for sale, net 125 190
Interest receivable 1,693 2,179
Loan servicing rights, net of valuation allowance of $2 and $24 600 757
Cash surrender value of life insurance 4,613 4,523
Deferred income taxes 258 --
Other assets 461 510
------------ ------------
Total assets $ 234,089 $ 230,924
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest bearing deposits $ 18,665 $ 17,885
Interest bearing deposits 140,648 141,586
------------ ------------
Total deposits 159,313 159,471
Federal funds purchased -- 2,000
Federal Home Loan Bank advances 40,500 40,500
Junior subordinated debentures 6,186 --
Pass through payments received on loans sold 126 60
Advances from borrowers for taxes and insurance 179 138
Deferred income taxes -- 110
Interest payable 171 136
Other 1,004 962
------------ ------------
Total liabilities 207,479 203,377
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 1,000,000 shares authorized
and unissued
Common stock, $.005 par value, 5,000,000 shares authorized;
3,041,750 shares issued; 2,406,950 and 2,494,850
shares outstanding 15 15
Additional paid-in capital 14,901 14,803
Retained earnings 18,803 18,396
Unearned employee stock ownership plan shares -
114,106 and 129,310 shares (659) (747)
Unearned incentive plan shares - 78,274 and 85,126 shares (646) (702)
Accumulated other comprehensive income (loss) (82) 415
Treasury stock, at cost - 634,800 and 546,900 shares (5,722) (4,633)
------------ ------------
Total stockholders' equity 26,610 27,547
------------ ------------
Total liabilities and stockholders' equity $ 234,089 $ 230,924
============ ============
See notes to condensed consolidated financial statements.
- 1 -
FIRST BANCTRUST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars except share data)
(unaudited)
SIX MONTHS ENDED JUNE 30 2005 2004
------------------------ ------------ ------------
INTEREST AND DIVIDEND INCOME
Loans
Taxable $ 4,231 $ 3,960
Tax exempt 31 32
Securities
Taxable 1,397 1,504
Tax exempt 221 187
Dividends on Federal Home Loan Bank stock 117 125
Deposits with financial institutions and other 53 19
------------ ------------
Total interest and dividend income 6,050 5,827
------------ ------------
INTEREST EXPENSE
Deposits 1,500 1,462
Federal Home Loan Bank advances and other debt 803 726
------------ ------------
Total interest expense 2,303 2,188
------------ ------------
NET INTEREST INCOME 3,747 3,639
Provision for loan losses 188 262
------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,559 3,377
------------ ------------
NONINTEREST INCOME
Customer service fees 415 419
Other service charges and fees 352 361
Net gains on loan sales 140 156
Net realized gains on sales of available-for-sale securities 111 37
Net loan servicing fees 258 255
Brokerage fees 34 35
Abstract and title fees 188 172
Other 154 165
------------ ------------
Total noninterest income 1,652 1,600
------------ ------------
NONINTEREST EXPENSE
Salaries and employee benefits 2,303 2,322
Net occupancy expense 202 140
Equipment expense 411 360
Data processing fees 232 211
Professional fees 209 228
Foreclosed assets expense, net 39 46
Marketing expense 147 136
Printing and office supplies 81 80
Amortization of loan servicing rights 256 321
Recovery of impairment of loan servicing rights (22) (118)
Other expenses 426 418
------------ ------------
Total noninterest expense 4,284 4,144
------------ ------------
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INCOME BEFORE INCOME TAX $ 927 $ 833
Income tax expense 224 283
------------ ------------
NET INCOME $ 703 $ 550
============ ============
BASIC EARNINGS PER SHARE $ 0.31 $ 0.24
============ ============
DILUTED EARNINGS PER SHARE $ 0.29 $ 0.23
============ ============
DIVIDENDS PER SHARE $ 0.12 $ 0.11
============ ============
See notes to condensed consolidated financial statements.
- 3 -
FIRST BANCTRUST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars except share data)
(unaudited)
THREE MONTHS ENDED JUNE 30 2005 2004
-------------------------- ------------ ------------
INTEREST AND DIVIDEND INCOME
Loans
Taxable $ 2,194 $ 1,988
Tax exempt 15 16
Securities
Taxable 677 741
Tax exempt 117 94
Dividends on Federal Home Loan Bank stock 59 60
Deposits with financial institutions and other 29 8
------------ ------------
Total interest and dividend income 3,091 2,907
------------ ------------
INTEREST EXPENSE
Deposits 769 701
Federal Home Loan Bank advances and other debt 414 363
------------ ------------
Total interest expense 1,183 1,064
------------ ------------
NET INTEREST INCOME 1,908 1,843
Provision for loan losses 94 112
------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,814 1,731
------------ ------------
NONINTEREST INCOME
Customer service fees 223 233
Other service charges and fees 170 192
Net gains on loan sales 67 96
Net realized gains on sales of available-for-sale securities 79 --
Net loan servicing fees 118 124
Brokerage fees 19 27
Abstract and title fees 84 89
Other 82 92
------------ ------------
Total noninterest income 842 853
------------ ------------
NONINTEREST EXPENSE
Salaries and employee benefits 1,120 1,153
Net occupancy expense 99 66
Equipment expense 206 214
Data processing fees 117 108
Professional fees 98 112
Foreclosed assets expense, net 24 18
Marketing expense 76 90
Printing and office supplies 37 32
Amortization of loan servicing rights 132 166
Recovery of impairment of loan servicing rights (4) (91)
Other expenses 222 229
------------ ------------
Total noninterest expense 2,127 2,097
------------ ------------
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INCOME BEFORE INCOME TAX $ 529 $ 487
Income tax expense 129 163
------------ ------------
NET INCOME $ 400 $ 324
============ ============
BASIC EARNINGS PER SHARE $ 0.18 $ 0.14
============ ============
DILUTED EARNINGS PER SHARE $ 0.17 $ 0.13
============ ============
DIVIDENDS PER SHARE $ 0.06 $ 0.06
============ ============
See notes to condensed consolidated financial statements.
- 5 -
FIRST BANCTRUST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
(unaudited)
SIX MONTHS ENDED JUNE 30 2005 2004
------------------------ ------------ ------------
OPERATING ACTIVITIES
Net income $ 703 $ 550
Items not requiring (providing) cash
Depreciation and amortization 196 140
Provision for loan losses 188 262
Investment securities amortization, net 39 132
Amortization of loan servicing rights 256 321
Recovery of impairment of loan servicing rights (22) (118)
Deferred income taxes (22) --
Net realized gains on available-for-sale securities (111) (37)
Net loss on sales of foreclosed assets 4 4
Net loss on sale of premises and equipment -- 6
Net gains on loan sales (140) (156)
Loans originated for sale (7,241) (8,675)
Proceeds from sales of loans originated for sale 6,692 8,417
Federal Home Loan Bank stock dividends (116) (125)
Compensation expense related to employee stock ownership
plan 185 194
Compensation expense related to incentive plan 55 55
Changes in
Interest receivable 486 637
Cash surrender value of life insurance (90) (32)
Other assets 49 (120)
Interest payable 35 14
Other liabilities 42 (23)
------------ ------------
Net cash provided by operating activities 1,188 1,446
------------ ------------
INVESTING ACTIVITIES
Purchases of available-for-sale securities (6,466) (11,993)
Proceeds from maturities of available-for-sale securities 12,917 17,876
Proceeds from maturities of held-to-maturity securities 312 --
Proceeds from sales of available-for-sale securities 945 135
Net change in loans (11,384) (5,146)
Proceeds from sales of foreclosed assets 179 209
Proceeds from sales of premises and equipment -- 10
Purchases of premises and equipment (510) (81)
------------ ------------
Net cash provided by (used in) by investing activities (4,007) 1,010
------------ ------------
- 6 -
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, money market,
NOW and savings deposits $ 2,639 $ (660)
Net decrease in certificates of deposit (2,797) (3,562)
Net decrease in federal funds purchased (2,000) --
Proceeds from the issuance of junior subordinated debentures 6,186 --
Pass through payments received on loans sold 66 (127)
Net increases in advances by borrowers for taxes and insurance 41 37
Proceeds from stock options exercised 22 --
Purchase of treasury stock (1,108) --
Dividends paid (296) (275)
------------ ------------
Net cash provided by (used in) by financing activities 2,753 (4,587)
------------ ------------
DECREASE IN CASH AND CASH EQUIVALENTS (66) (2,131)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 9,113 10,294
------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 9,047 $ 8,163
============ ============
SUPPLEMENTAL CASH FLOWS INFORMATION
Real estate acquired in settlement of loans $ 118 $ 275
Interest paid $ 2,268 $ 2,174
Income tax paid $ 240 $ 0
See notes to condensed consolidated financial statements.
- 7 -
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-Q. 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, 2005. 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 and six months ended June 30,
2005 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,
2004 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.
- 8 -
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
------------- ------------- ------------- -------------
Net income, as reported $ 400 $ 324 $ 703 $ 550
Less: Total stock-based employee
compensation cost determined under
the fair value based method, net of
income taxes (33) (33) (66) (66)
----- ----- ----- -----
Pro forma net income $ 367 $ 291 $ 637 $ 484
===== ===== ===== =====
EARNINGS PER SHARE:
Basic - as reported $0.18 $0.14 $0.31 $0.24
Basic - pro forma $0.16 $0.13 $0.28 $0.21
Diluted - as reported $0.17 $0.13 $0.29 $0.23
Diluted - pro forma $0.15 $0.12 $0.26 $0.20
Note 2 - Junior Subordinated Debentures
Junior subordinated debentures of $6.2 million in capital securities were issued
June 15, 2005 by a statutory business trust, FBTC Statutory Trust I. The Company
owns 100% of the common equity of the trust, which is a wholly-owned subsidiary
of the Company. The $6.0 million in proceeds from the trust preferred issuance
and an additional $186,000 for the Company's investment in the common equity of
the Trust, a total of $6,186,000 was invested in the junior subordinated
debentures of the Company. As required by FIN 46R, the Company has not
consolidated the investment in the Trust. The trust was formed with the purpose
of issuing trust preferred securities and investing the proceeds from the sale
of such trust preferred securities in the debentures. The debentures held by the
trust are the sole assets of the trust. Distributions of the trust preferred
securities are payable at a variable rate of interest, which is equal to the
interest rate being earned by the trust on the debentures, and are recorded as
interest expense by the Company. The trust preferred securities are subject to
mandatory redemption, in whole or in part, upon repayment of the debentures.
The debentures are included as Tier I capital for regulatory capital purposes.
On March 1, 2005, the Federal Reserve Board adopted a final rule that allows the
continued limited inclusion of trust preferred securities in the calculation of
Tier 1 capital for regulatory purposes. The final rule provides a five-year
transition period, ending March 31, 2009, for application of the quantitative
limits to have an impact on its calculation of Tier 1 capital for regulatory
purposes or its classification as well-capitalized. The debentures issued are
first redeemable, in whole or part, by the Company, on June 15, 2010, and mature
on June 15, 2035. The funds will be used for the acquisition of the common stock
of Rantoul First Bank and for the repurchase of First BancTrust Corporation
common stock. Interest is fixed at a rate of 5.80% for a period of five years,
and then converts to a floating rate. Interest payments will be made quarterly
beginning in September, 2005.
Note 3 - Employee Stock Ownership Plan
The Company has an Employee Stock Ownership Plan ("ESOP") for the benefit of its
employees. The ESOP purchased required shares in the open market with funds
borrowed from the Company. The ESOP expense was $93,000 and $98,000 for the
three-month periods ended June 30, 2005 and 2004 and $185,000 and $194,000 for
the six-month periods ended June 30, 2005 and 2004.
Shares purchased by the ESOP 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 and six month periods ended June
30, 2005 and 2004. 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):
- 9 -
Weighted
Average Per Share
Income Shares Amount
------ --------- ---------
FOR THE SIX MONTHS ENDED JUNE 30, 2005:
Basic Earnings Per Share:
Income available to common stockholders $ 703 2,273,433 $ 0.31
Effect of Dilutive Securities:
Unearned recognition and retention plan shares 90,581
Stock Options 47,748
------ --------- ---------
Diluted Earnings per Share:
Income available to common stockholders and
assumed conversions $ 703 2,411,762 $ 0.29
====== ========= =========
FOR THE SIX MONTHS ENDED JUNE 30, 2004:
Basic Earnings Per Share:
Income available to common stockholders $ 550 2,254,770 $ 0.24
Effect of Dilutive Securities:
Unearned recognition and retention plan shares 106,596
Stock Options 52,099
------ --------- ---------
Diluted Earnings per Share:
Income available to common stockholders and
assumed conversions $ 550 2,413,465 $ 0.23
====== ========= =========
FOR THE THREE MONTHS ENDED JUNE 30, 2005:
Basic Earnings Per Share:
Income available to common stockholders $ 400 2,257,630 $ 0.18
Effect of Dilutive Securities:
Unearned recognition and retention plan shares 88,683
Stock Options 47,916
------ --------- ---------
Diluted Earnings per Share:
Income available to common stockholders and
assumed conversions $ 400 2,394,229 $ 0.17
====== ========= =========
FOR THE THREE MONTHS ENDED JUNE 30, 2004:
Basic Earnings Per Share:
Income available to common stockholders $ 324 2,260,285 $ 0.14
Effect of Dilutive Securities:
Unearned recognition and retention plan shares 105,085
Stock options 59,059
------ --------- ---------
Diluted Earnings per Share:
Income available to common stockholders and
assumed conversions $ 324 2,424,429 $ 0.13
====== ========= =========
- 10 -
Note 5 - Comprehensive Income (Loss)
Comprehensive income (loss) for the for the three month and six month periods
ended June 30, 2005 and 2004 is listed as follows:
SIX MONTHS ENDED JUNE 30
2005 2004
---------- -----------
NET INCOME $ 703 $ 550
---------- -----------
OTHER COMPREHENSIVE INCOME
Unrealized depreciation on available-for-sale securities (424) (1,144)
Less: Reclassification adjustment for realized gains included
in net income 73 24
---------- -----------
(497) (1,168)
---------- -----------
COMPREHENSIVE INCOME (LOSS) $ 206 $ (618)
========== ===========
THREE MONTHS ENDED JUNE 30
2005 2004
---------- -------------
NET INCOME $ 400 $ 324
---------- -------------
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized appreciation (depreciation) on available-for-sale securities 112 (1,704)
Less: Reclassification adjustment for realized gains included
in net income 52 ----
---------- -------------
60 (1,704)
---------- -------------
COMPREHENSIVE INCOME (LOSS) $ 460 $ (1,380)
========== =============
Note 6 - Stock Split
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. Prior period financial
information has been adjusted to reflect the stock split.
Note 7 - Authorized Share Repurchase Program
On May 13, 2004, the Board of Directors authorized the open-market stock
repurchases of up to 100,000 shares of the Company's outstanding stock over the
one-year period ending May 13, 2005. When this plan expired on May 13, 2005, the
Company had repurchased 25,600 shares under this repurchase plan. On April 18,
2005, the Board of Directors authorized the open-market
- 11 -
stock repurchase of up to 5%, or 124,850 shares of the Company's outstanding
stock over the next one-year period ending April 18, 2006 as, in the opinion of
managements, market conditions warrant. As of June 30, 2005, the Company had
repurchased 70,100 shares, leaving 54,750 shares available to be repurchased
under this program. Previously, the Company had completed four other repurchase
programs for stock repurchases of 541,300 shares. The Company issued 2,200
shares of treasury stock for the redemption of stock options in February, 2005.
As of August 11, 2005, the Company owned a cumulative total of 634,800 shares in
treasury stock. The repurchased shares are held as treasury stock and are
available for general corporate purposes.
Note 8 - Commitments
The Company entered into a property exchange agreement with the City of Paris,
Illinois ("City") on May 10, 2005. As of June 30, 2005, the ownership of the
properties has not been transferred. The Company will acquire City property
currently housing City Hall, which is adjacent to Company property housing the
Operations Center of First Bank & Trust, and in return, the City will acquire
Company property which currently is the site of the main office of First Bank &
Trust. The City will pay cash for the difference between the appraisals to the
Bank. The City will also demolish the existing City Hall prior to the exchange
providing an acceptable, larger site for new construction. The Company has
agreed to provide financing for the city hall renovations if requested at a
market rate at the time of the request. The exchange of ownership is expected to
occur in the third or fourth quarter of this year. At that time, the economic
value of this transaction will be recognized on the Company's financial
statements upon transfer of the properties.
Under this agreement, the Company will move its main office to the current
Operations Center by renovating and enlarging the existing building to
approximately 30,000 square feet on three levels. In addition, there will be a
free-standing drive up facility at the enlarged site with at least six lanes
that will accommodate more vehicles. This expansion will allow the Company to
relocate the main office of the Bank to this site, which will then house all
First Bank employees currently working in Paris at a single, convenient
location.
The Company selected a contractor to design and construct the new facility for
an amount not to exceed $5.6 million. The project is scheduled to be completed
by the fourth quarter of 2006. The project is in the initial phase of
construction, with the survey and excavation portions nearly completed.
Note 9 - Acquisition
On April 18, 2005, the Company entered into an Agreement and Plan of Merger with
Rantoul First Bank, S.B., ("Rantoul") an Illinois chartered savings bank whereby
the Company will acquire all of the outstanding shares of common stock of
Rantoul First Bank. Shareholders of Rantoul will receive $22.10 per share in
cash for each share of common stock held. Rantoul shareholders approved this
transaction at a shareholder meeting on July 22, 2005. The transaction is
subject to approval by regulatory authorities and is expected to close in the
fourth quarter of 2005.
- 12 -
Note 10 - Recent Accounting
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standards ("SFAS") No. 123R, Share-Based Payment, which
sets accounting requirements for "share-based" compensation to employees,
including employee-stock-purchase-plans (ESPPs) and provides guidance on
accounting for awards to non-employees. This Statement will require the Company
to recognize in the income statement the grant-date fair value of stock options
and other equity-based compensation issued to employees, but expresses no
preference for a type of valuation model. This Statement is effective for the
Company on January 1, 2006. The effect to the Company in 2006 is estimated to be
$131,000 based on the current stock options outstanding.
Emerging Issues Task Force (EITF) Issue 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments."
EITF 03-1 provides guidance for determining when an investment is considered
impaired, whether impairment is other-than-temporary, and measurement of an
impairment loss. An investment is considered impaired if the fair value of the
investment is less than its cost. Generally, an impairment is considered
other-than-temporary unless: (i) the investor has the ability and intent to hold
an investment for a reasonable period of time sufficient for an anticipated
recovery of fair value up to (or beyond) the cost of the investment; and (ii)
evidence indicating that the cost of the investment is recoverable within a
reasonable period of time outweighs evidence to the contrary. If impairment is
determined to be other-than-temporary, then an impairment loss should be
recognized equal to the difference between the investment's cost and its fair
value. Certain disclosure requirements of EITF 03-1 were adopted in 2003 and the
Company began presenting the new disclosure requirements in its consolidated
financial statements for the year ended December 31, 2003. The recognition and
measurement provisions were initially effective for other-than-temporary
impairment evaluations in reporting periods beginning after June 15, 2004.
However, in September 2004, the effective date of these provisions was delayed
until the finalization of FASB Staff Position (FSP) 03-1-a to provide additional
implementation guidance. On June 29, 2005, the Financial Accounting Standards
Board gave direction that the proposed FSP Issue 03-1-a be issued as final thus
nullifying paragraphs 10-18 of EITF 03-1. The measurement, disclosure, and
subsequent accounting for debt securities guidance, as well as the evaluation of
whether a cost method investment (as defined in Issue 03-1) is impaired, would
remain in effect. Management continues to closely monitor and evaluate how the
provisions of EITF 03-1 and proposed FSP Issue 03-1-a will affect the Company.
American Institute of Certified Public Accountants (AICPA) Statement of Position
(SOP) No. 03-3, "Accounting for Certain Loans or Debt Securities Acquired in a
Transfer." SOP 03-3 addresses accounting for differences between the contractual
cash flows of certain loans and debt securities and the cash flows expected to
be collected when loans or debt securities are acquired in a transfer and those
cash flow differences are attributable, at least in part, to credit quality. As
such, SOP 03-3 applies to loans and debt securities acquired individually, in
pools or as part of a business combination and does not apply to originated
loans. The application of SOP 03-3 limits the interest income, including
accretion of purchase price discounts, that may be recognized for certain loans
and debt securities. Additionally, SOP 03-3 does not allow the excess of
contractual cash flows over cash flows expected to be collected to be recognized
as an adjustment of yield, loss accrual or valuation allowance, such as the
allowance for possible loan losses. SOP 03-3
- 13 -
requires that increases in expected cash flows subsequent to the initial
investment be recognized prospectively through adjustment of the yield on the
loan or debt security over its remaining life. Decreases in expected cash flows
should be recognized as impairment. In the case of loans acquired in a business
combination where the loans show signs of credit deterioration, SOP 03-3
represents a significant change from current purchase accounting practice
whereby the acquiree's allowance for loan losses is typically added to the
acquirer's allowance for loan losses. SOP 03-3 is effective for loans and debt
securities acquired by the Company beginning January 1, 2005. The adoption of
this new standard did not have a material impact on the Company's financial
statements.
- 14 -
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 statements. 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, and ECS Service Corporation at June 30, 2005 to its financial
condition at December 31, 2004 and the results of operations for the three-month
and six-month periods ending June 30, 2005 to the same periods in 2004. In May
2005, the Bank's wholly owned subsidiary, Community Finance Center, Inc., was
dissolved as a corporation, and this activity was transferred to operate as a
division of the Bank. In prior years, First Charter Service Corporation provided
retail sales of uninsured investment products to customers of First Bank &
Trust. In late 2004, First Bank & Trust entered into an agreement with First
Advisors Financial Group LLC ("First Advisors") whereby First Advisors will
provide investment advisory and asset management services to Bank customers in
2005. First Advisors rents office space from the Bank, and pays a percentage of
fees generated from transactions with Bank customers to the Bank. As a result,
First Charter Service Corporation has become inactive for 2005. 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 $3.2 million or 1.4%, to $234.1 million
at June 30, 2005 from $230.9 million at December 31, 2004. The increase in
assets was primarily due to an increase
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in loans, net of allowance for loan losses of $11.1 million, partially offset by
a decrease in available-for-sale securities of $8.2 million. The increase in
assets resulted primarily from the issuance of junior subordinated debentures.
The Company's cash and cash equivalents decreased by $66,000 from $9.1 million
at December 31, 2005 to $9.0 million at June 30, 2005. Cash and due from banks
decreased by $667,000 or 10.5% to $5.7 million at June 30, 2005 from $6.4
million at December 31, 2004. This decrease was partially offset by an increase
in interest-bearing demand deposits of $601,000 or 21.9% to $3.3 million at June
30, 2005 compared to $2.7 million at December 31, 2004.
Available-for-sale investment securities amounted to $75.8 million at June 30,
2005 compared to $84.0 million at December 31, 2004, an $8.2 million decrease.
The decrease primarily resulted from $12.9 million in investment calls and
maturities, primarily from payments on mortgage-backed securities and maturities
of a Federal Home Loan Bank ("FHLB") agency bond and a municipal bond, sales of
equity securities of $834,000 and an $842,000 decrease in the market valuation
of the available-for-sale portfolio, partially offset by investment purchases of
$6.5 million. Held-to-maturity securities decreased by $306,000 from $4.8
million at December 31, 2004 to $4.5 million at June 30, 2005, due to principal
payments on mortgage-backed securities.
Loans held for sale increased by $612,000 from $138,000 at December 31, 2004 to
$750,000 at December 31, 2005. Single family residential loans for qualified
borrowers are originated and sold to Federal Home Mortgage Corporation ("FHLMC")
and to the Illinois Housing Development Authority ("IHDA"). Loans held for sale
at June 30, 2005 consisted of seven single-family residential loans to be sold
to IHDA.
The Company's net loan portfolio increased by $11.1 million to $128.5 million at
June 30, 2005 from $117.4 million at December 31, 2004. Gross loans increased by
$11.1 million while the allowance for loan losses increased by $57,000.
Commercial nonresidential real estate loans increased by $6.1 million primarily
a result of loan originations generated in the Savoy area. Loans secured by 1-4
family residences increased by $1.7 million, primarily due to an increase in
home equity loans, and agricultural production loans increased by $2.3 million,
primarily due to seasonal fluctuations.
At June 30, 2005, the allowance for loan losses was $2.4 million or 1.80% of the
total loan portfolio compared to the allowance for loan losses at December 31,
2004 of $2.3 million or 1.92% of the total loan portfolio. During the first six
months of 2005, the Company charged off $173,000 of loan losses, $121,000 of
which were consumer loans, and $52,000 of which pertained to five loans secured
by 1-4 family residential properties. The chargeoffs of $173,000 were partially
offset by $42,000 in recoveries on consumer loans, primarily vehicle loans. The
net chargeoffs of $131,000 for the first six months of 2005 decreased by $54,000
when compared to net chargeoffs of $185,000 for the first six months of 2004.
The Company's nonperforming loans and troubled debt restructurings increased
from $1.6 million or 1.31% of total loans at December 31, 2004 compared to $2.2
million or 1.68% as a percentage of total loans at June 30, 2005. This increase
was primarily a result of increased delinquencies 90 days and over from $443,000
at December 31, 2004 compared to $607,000 at June 30, 2005, and the addition of
a $494,000 commercial real estate loan to restructured loans. The Company's
troubled debt restructurings of $1.6 million at
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June 30, 2005 consist primarily of restructured commercial and agricultural
loans. Included in the $1.6 million of troubled debt restructurings are
restructured agricultural loans of $870,000 which are 90% guaranteed for
$783,000 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.
Premises and equipment have increased by $314,000 from $3.1 million at December
31, 2004 to $3.4 million at June 30, 2005, primarily due to expenditures related
to the major renovation and expansion project of the current Operations Center
which will result in an enlarged facility to house the main office of the Bank.
Net foreclosed assets held for sale, totaling $125,000 at June 30, 2005
decreased $65,000, or 34.2%, compared to $190,000 at December 31, 2004. As of
June 30, 2005, the Company had real estate properties totaling $86,000
consisting of three single-family residential properties and other repossessed
assets of $39,000. Foreclosed assets are carried at lower of cost or net
realizable value.
Interest receivable declined by $486,000 or 22.3% from $2.2 million to $1.7
million primarily due to annual payments received on agricultural loans. Federal
Home Loan Bank stock increased by $116,000 due to the receipt of dividends in
the form of stock.
Loan servicing rights declined by $157,000 from $757,000 at December 31, 2004 to
$600,000 at June 30, 2005. Gross loan servicing rights decreased by $179,000
from $781,000 at December 31, 2004 to $602,000 at June 30, 2005 due to
amortization of loan servicing rights of $256,000 offset by newly capitalized
assets of $77,000. The valuation allowance decreased from $24,000 at December
31, 2004 to $2,000 at June 30, 2005, a $22,000 recovery of a previous impairment
as a result of current valuations.
Adjustments to deferred income taxes for the tax effect of the decrease in
market value of investment securities available for sale resulted in a deferred
tax asset of $258,000 at June 30, 2005 compared to a deferred tax liability of
$110,000 at December 31, 2004. Other assets decreased by $49,000 from $510,000
at December 31, 2004 to $461,000 at June 30, 2005.
The Company's total deposits amounted to $159.3 million at June 30, 2005
compared to $159.5 million at December 31, 2004, a decrease of $158,000. The
0.1% decrease in total deposits was due to a $938,000 decrease in interest
bearing deposits, partially offset by a $780,000 increase in non-interest
bearing deposits. The decrease in interest bearing deposits was a result of a
$2.8 million decrease in certificates of deposit, offset by an increase of $1.8
million in interest-bearing checking accounts and a $55,000 increase in savings
accounts. The reduction of $2.8 million in certificates of deposits was
primarily due to the maturing of some significant certificates of deposits,
mostly brokered funds.
Federal funds purchased decreased by $2.0 million from a balance of $2.0 million
at December 31, 2004 to zero at June 30, 2005. Federal Home Loan Bank advances
remained constant at
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$40.5 million at December 31, 2004 and June 30, 2005. The total average rate of
all advances was 3.54% as of June 30, 2005.
Junior subordinated debentures of $6.2 million in capital securities were issued
June 15, 2005 by a statutory business trust, FBTC Statutory Trust I. The Company
owns 100% of the common equity of the trust, which is a wholly-owned subsidiary
of the Company. The $6.0 million in proceeds from the trust preferred issuance
and an additional $186,000 for the Company's investment in the common equity of
the Trust, a total of $6,186,000 was invested in the junior subordinated
debentures of the Company. As required by FIN 46R, the Company has not
consolidated the investment in the Trust. The trust was formed with the purpose
of issuing trust preferred securities and investing the proceeds from the sale
of such trust preferred securities in the debentures. The debentures held by the
trust are the sole assets of the trust. Distributions of the trust preferred
securities are payable at a variable rate of interest, which is equal to the
interest rate being earned by the trust on the debentures, and are recorded as
interest expense by the Company. The trust preferred securities are subject to
mandatory redemption, in whole or in part, upon repayment of the debentures.
The debentures are included as Tier I capital for regulatory capital purposes.
On March 1, 2005, the Federal Reserve Board adopted a final rule that allows the
continued limited inclusion of trust preferred securities in the calculation of
Tier 1 capital for regulatory purposes. The final rule provides a five-year
transition period, ending March 31, 2009, for application of the quantitative
limits to have an impact on its calculation of Tier 1 capital for regulatory
purposes or its classification as well-capitalized. The debentures issued are
first redeemable, in whole or part, by the Company, on June 15, 2010, and mature
on June 15, 2035. The funds will be used for the acquisition of the common stock
of Rantoul First Bank and for the repurchase of First BancTrust Corporation
common stock. Interest is fixed at a rate of 5.80% for a period of five years,
and then converts to a floating rate. Interest payments will be made quarterly
beginning in September, 2005.
Pass through payments received on loans sold increased by $66,000 from $60,000
at December 31, 2004 to $126,000 at June 30, 2005. Advances from borrowers for
taxes and insurance increased by $41,000 from $138,000 at December 31, 2004 to
$179,000 at June 30, 2005. Interest payable increased by $35,000 from $136,000
at December 31, 2004 to $179,000 at June 30, 2005. Other liabilities increased
by $42,000 from $962,000 at December 31, 2004 to $1.0 million at June 30, 2005,
primarily due to an increase in accounts payable.
Stockholders' equity at June 30, 2005 was $26.6 million compared to $27.5
million at December 31, 2004, a decrease of $937,000. Treasury stock increased
by $1.1 million from $4.6 million at December 31, 2004 to $5.7 million at June
30, 2005, due to the repurchase of 90,100 shares. Accumulated comprehensive
income (loss) decreased by $497,000 due to a decrease in the fair value of
securities available for sale, net of related tax effect. Retained earnings
increased by the amount of net income or $703,000, partially offset by $296,000
in dividends declared and paid. As shares from the employee stock ownership plan
vested to participants from December 31, 2004 to June 30, 2005, stockholders'
equity increased by $185,000, and as shares from the incentive plan were earned
by participants for the same period, stockholders' equity increased by $55,000.
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RESULTS OF OPERATIONS
COMPARISON OF SIX MONTH PERIODS ENDED JUNE 30, 2005 AND 2004
Net income for the six months ended June 30, 2005 increased by $153,000 or 27.8%
from $550,000 for the six months ended June 30, 2004 to $703,000 for the six
months ended June 30, 2005. The increase in net income is primarily due to
increases in net interest income and noninterest income, and decreases in
provision for loan losses and income tax expense, partially offset by an
increase in noninterest expense.
Net interest income increased $108,000 or 3.0% from $3.6 million for the six
months ended June 30, 2004 to $3.7 million for the six months ended June 30,
2005. The primary reasons for the increase in net interest income was an
increase in total interest and dividend income of $223,000 partially offset by
an increase of $115,000 in interest expense. The Company's net interest margin
was 3.46% and 3.47% during the six months ended June 30, 2005 and 2004,
respectively. Although net interest income increased by $108,000, the net
interest margin remained stable as a result of an increase in the average
balance of net interest-bearing assets. Interest spread, which is the average
interest rate earned on interest-bearing assets less the average interest rate
charged on interest-bearing liabilities, decreased slightly from 3.16% for the
six months ended June 30, 2004 to 3.07% for the six months ended June 30, 2005.
The decrease in interest spread was primarily a result of a slight increase in
interest rates charged on interest-bearing liabilities.
Total interest and dividend income increased by $223,000 or 3.8% from $5.8
million for the six months ended June 30, 2004 to $6.1 million for the six
months ended June 30, 2005. The increase of $223,000 was primarily due to
increases in loan interest income and interest income from deposits with
financial institutions partially offset by decreased interest and dividend
income from securities. The increase of $270,000 in loan interest income was
primarily due to an increase in the average loan balance, partially offset by a
decrease in the average loan rate of 36 basis points. Interest and dividend
income from securities decreased by $73,000 primarily due to a decrease in the
average balance of available for sale investments, partially offset by an
increase in average interest rate of 10 basis points. Interest income from
deposits with financial institutions increased by $34,000 primarily due to an
increase in average rate of 176 basis points, partially offset by a decrease in
the average balance of deposits with financial institutions.
Interest expense increased by $115,000 or 5.3% from $2.2 million for the six
months ended June 30, 2004 to $2.3 million for the six months ended June 30,
2005. This increase was primarily due to an increase of $38,000 in interest on
deposits, and by a $77,000 increase in interest on Federal Home Loan Bank
advances and other debt. The $38,000 increase in interest expense on deposits
was primarily due to an increase in the average rate paid on deposits. The
$77,000 increase in interest on Federal Home Loan Bank advances and other debt
was due to an increase in the average balance, partially offset by a decrease in
the average rate.
For the six months ended June 30, 2005 and 2004, the provision for losses on
loans was $188,000 and $262,000, respectively. The provision for the six months
ended June 30, 2005
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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 assure that future chargeoffs and/or
provisions will not be necessary, the Company's management believes that, as of
June 30, 2005, its allowance for loan losses was adequate.
Noninterest income increased $52,000 or 3.3% from $1.60 million for the six
months ended June 30, 2004 to $1.65 million for the six months ended June 30,
2005. The increase was primarily a result of increases in net realized gains on
sales of available-for-securities and abstract and title fees, partially offset
by decreases in net gains on loan sales and other income. Net realized gains on
sales of sales of available-for-sale securities increased by $74,000 from
$37,000 for the six months ended June 30, 2004 to $111,000 for the six months
ended June 30, 2005, due to equity security sales of $945,000. Abstracting and
title fees increased by $16,000 from $172,000 for the six months ended June 30,
2004 to $188,000 for the six months ended June 30, 2005, due to an increase in
commissions from the sale of title insurance and to increased abstracting fees.
Net gains on loan sales decreased by $16,000 from $156,000 for the six months
ended June 30, 2004 to $140,000 for the six months ended June 30, 2005. This
decrease occurred primarily due to decreases in the amount of capitalized
servicing fees and in the recognized gain on loan sales. Proceeds from loans
sold in the first six months of 2005 totaled $6.7 million, compared to $8.4
million in proceeds from loan sales in the same period for 2004. Other income
decreased $11,000 from $165,000 for the six months ended June 30, 2004 to
$154,000 for the six months ended June 30, 2004.
Total noninterest expenses were $4.28 million for the six months ended June 30,
2005 as compared to $4.14 million for the six months ended June 30, 2004. The
primary reasons for the $140,000 increase were increases in net occupancy
expense, equipment expense, data processing expense, and a reduction in the
amount of recovery of the previous impairment of loan servicing rights,
partially offset by reductions in the amortization of loan servicing rights,
salaries and employee benefits expense and professional fees. Salaries and
employee benefits decreased by $19,000 from $2.32 million for the six months
ended June 30, 2004 to $2.30 million for the six months ended June 30, 2005,
primarily due to reduced ESOP expense. ESOP expense decreased as a result of a
decrease in the average share price for the six months ended June 30, 2005
compared to the six month period ended June 30, 2004. 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 from 2004 to 2005 decreased, the
ESOP expense decreased accordingly.
Net occupancy expense increased by $62,000 from $140,000 for the six months
ended June 30, 2004 compared to $202,000 for the six months ended June 30, 2005.
This increase can be attributed to the Savoy branch which moved into a permanent
facility in August, 2004. Equipment expense increased by $51,000 from $360,000
for the six months ended June 30, 2004 to $411,000 for the six months ended June
30, 2005. The $51,000 increase is primarily due to an increase in lease expense
resulting from the origination of several operating leases in 2004 for
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furniture and office equipment for the Savoy branch, upgrading check imaging
equipment, and for updating computer networks and operating systems.
Data processing fees increased by $21,000 from $211,000 for the six months ended
June 30, 2004 to $232,000 for the six months ended June 30, 2005, due to an
increase in fees accessed by both the ATM processor and the core processor
service bureaus. Professional fees decreased by $19,000 from $228,000 for the
six months ended June 30, 2004 to $209,000 for the six months ended June 30,
2005 due to a reduction in consulting fees. Amortization of loan servicing
rights decreased by $65,000 from $321,000 for the six months ended June 30, 2004
to $256,000 for the six months ended June 30, 2005, as a result of a decrease in
loan prepayments. The recovery of impairment of loan servicing rights was
$118,000 for the six months ended June 30, 2004 compared to $22,000 for the six
months ended June 30, 2005. 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 $224,000 for the six months ended June 30, 2005 as
compared to $283,000 for the six months ended June 30, 2004. The decrease of
$59,000 in income tax expense was due to an increase in permanent tax
differences.
COMPARISON OF THREE MONTH PERIODS ENDED JUNE 30, 2005 AND 2004
Net income for the three months ended June 30, 2005 increased by $76,000 or
23.5% from $324,000 for the three months ended June 30, 2004 to $400,000 for the
three months ended June 30, 2005. The increase in net income is primarily due to
an increase in net interest income, and decreases in the provision for loan
losses and income tax expense, partially offset by a slight decrease in
noninterest income and an increase in noninterest expense.
Net interest income increased $65,000 or 3.5% from $1.84 million for the three
months ended June 30, 2004 to $1.91 million for the three months ended June 30,
2005. The primary reasons for the increase in net interest income was an
increase in total interest and dividend income of $184,000 partially offset by
an increase of $119,000 in interest expense. The Company's net interest margin
was 3.41% and 3.47% during the three months ended June 30, 2005 and 2004,
respectively. The net interest margin decreased slightly as a result of an
increase in the average balance of interest-bearing assets, while the interest
spread decreased by 16 basis points from 3.11% for the three months ended June
30, 2004 to 2.95% for the three months ended June 30, 2005.
Total interest and dividend income increased by $184,000 or 6.3% from $2.9
million for the three months ended June 30, 2004 to $3.1 million for the three
months ended June 30, 2005. The increase of $184,000 was primarily due to
increases in loan interest income and interest income from deposits with
financial institutions partially offset by decreased interest and dividend
income from securities. The increase of $205,000 in loan interest income was
primarily due to a $15.4 million increase in the average loan balance, partially
offset by a decrease in the average loan rate of 23 basis points. Interest and
dividend income from securities decreased by $41,000 primarily due to a decrease
of $5.1 million in the average balance of investments. Interest
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income from deposits with financial institutions increased by $21,000 primarily
due to an increase in average rate of 176 basis points, as well as an increase
in the average balance of deposits with financial institutions.
Interest expense increased by $119,000 or 11.2% from $1.1 million for the three
months ended June 30, 2004 to $1.2 million for the three months ended June 30,
2005. This increase was primarily due to an increase of $68,000 in interest on
deposits, and by a $51,000 increase in interest on Federal Home Loan Bank
advances and other debt. The $68,000 increase in interest expense on deposits
was primarily due to an increase in the average rate paid on deposits, partially
offset by a decrease in the average balance of deposits. The $51,000 increase in
interest on Federal Home Loan Bank advances and other debt was due to an
increase in the average balance, partially offset by a slight reduction in
interest rate.
For the three months ended June 30, 2005 and 2004, the provision for losses on
loans was $94,000 and $112,000, respectively. The provision for the three months
ended June 30, 2005 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 assure that future chargeoffs and/or
provisions will not be necessary, the Company's management believes that, as of
June 30, 2005, its allowance for loan losses was adequate.
Noninterest income decreased $11,000 or 1.3% from $853,000 for the three months
ended June 30, 2004 to $842,000 for the three months ended June 30, 2005. The
decrease was primarily a result of decreases in customer service fees, other
service fees and charges, net gains on loan sales, and other income, partially
offset by an increase in net realized gain on sales of available for sale
securities. Customer service fees decreased by $10,000 from $233,000 for the
three months ended June 30, 2004 to $223,000 for the three months ended June 30,
2005, primarily due to reduced NSF and overdraft fees. Other service charges and
fees decreased by $22,000 from $192,000 for the three months ended June 30, 2004
to $170,000 for the three months ended June 30, 2005, primarily due to a
decrease in loan related fees, as a result from reduced loan sales in the
secondary market. Net gains on loan sales decreased by $29,000 from $96,000 for
the three months ended June 30, 2004 to $67,000 for the three months ended June
30, 2005. This decrease also occurred due to a decrease in volume of loans sold
in the secondary market. In the three months ended June 30, 2005 proceeds from
loan sales totaled $4.1 million compared to $5.5 million proceeds for the same
period in 2004. Net realized gains on sales of available-for-sale securities
increased to $79,000 from $670,000 in proceeds generated from the sales of
equity securities for the three months ended June 30, 2005. There were no sales
of securities in the three months ended June 30, 2004. Other income decreased by
$10,000 from $92,000 for the three months ended June 30, 2004 to $82,000 for the
three months ended June 30, 2005, primarily as a result of a reduced amount of
fees generated from the trust department.
Total noninterest expenses were $2.13 million for the three months ended June
30, 2005 as compared to $2.10 million for the three months ended March 31, 2004.
The primary reasons for
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the $30,000 increase were increases in net occupancy expense and reduced amount
of recovery of a previously identified impairment of loan servicing rights,
partially offset by reductions in salaries and employee benefits, professional
fees, marketing expense, and amortization of loan servicing rights. Salaries and
employee benefits decreased by $33,000 from $1.15 million for the three months
ended June 30, 2004 to $1.12 million for the three months ended June 30, 2005,
as a result of a slight reduction in salaries and FICA expense, and a reduction
in health insurance expense due to a change in medical coverage offered to
employees. Net occupancy expense increased by $33,000 from $66,000 for the three
months ended June 30, 2004 compared to $99,000 for the three months ended June
30, 2005. This increase can be attributed to the Savoy branch which moved into a
permanent facility in August, 2004.
Professional fees decreased by $14,000 from $112,000 for the three months ended
June 30, 2004 to $98,000 for the three months ended June 30, 2005, primarily due
to reduced consulting fees in 2005. Marketing expense decreased by $14,000 from
$90,000 for the three months ended June 30, 2004 to $76,000 for the three months
ended June 30, 2005, due to a reduction of general advertising. Amortization of
loan servicing rights decreased by $34,000 from $166,000 for the three months
ended June 30, 2004 to $132,000 for the three months ended June 30, 2005, as a
result of a decrease in loan prepayments. The recovery of impairment of loan
servicing rights was $91,000 for the three months ended June 30, 2004 compared
to $4,000 for the three months ended June 30, 2005. 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. Other expenses decreased
by $7,000 from $229,000 for the three months ended June 30, 2004 to $222,000 for
the three months ended June 30, 2005.
Income tax expense was $129,000 for the three months ended June 30, 2005 as
compared to $163,000 for the three months ended June 30, 2004. The decrease of
$34,000 in income tax expense was due to an increase in permanent tax
differences.
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
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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 on 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 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 June 30, 2005 and
December 31, 2004, loan servicing rights had carrying values of $600,000 and
$757,000, 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 June 30, 2005, the Company had outstanding commitments to originate $4.5
million in loans, and $10.7 million available to be drawn upon for open-end
lines of credit. For more information on the outstanding commitments, see the
discussion below the caption "Off-Balance Sheet Arrangements and Contractual
Commitments". As of June 30, 2005, the total amount of certificates scheduled to
mature in the following 12 months was $43.9 million. The Company believes that
it has adequate resources to fund all of its commitments. The Company's most
liquid assets are cash and cash equivalents. The level of cash and cash
equivalents is dependent on the Company's operating, financing, lending and
investing activities during any given period.
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The level of cash and cash equivalents at June 30, 2005 was $9.0 million. The
Company's future short-term requirements for cash are not expected to
significantly change. In the event that the Company should require funds beyond
its capability to generate them internally, additional sources of funds are
available such as Federal Home Loan Bank advances.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL COMMITMENTS
At June 30, 2005, the Company had outstanding commitments to originate loans of
$4.5 million. The commitments extended over varying periods of time with the
majority being disbursed within a one-year period. Loan commitments at fixed
rates of interest amounted to $3.3 million, with the remainder at floating
rates. In addition, the Company had outstanding unused lines of credit to
borrowers aggregating $6.5 million for commercial lines of credit, and $4.2
million for consumer lines of credit. Outstanding commitments for letters of
credit at June 30, 2005 totaled $91,000. Since these commitments have fixed
expiration dates, and some will expire without being drawn upon, the total
commitment level may not necessarily represent future cash requirements.
The following table presents additional information about our unfunded
commitments as of June 30, 2005, which by their terms have contractual maturity
dates subsequent to June 30, 2005:
Next 12 13-36 37-60 More than
Months Months Months 60 Months Totals
------- ------ ------ --------- --------
(Dollars in thousands)
UNFUNDED COMMITMENTS:
Letters of credit $ 91 $ --- $ --- $ --- $ 91
Lines of credit 7,763 70 235 2,606 10,674
------- ------ ------ --------- --------
Totals $ 7,854 $ 70 $ 235 $ 2,606 $ 10,765
======= ====== ====== ========= ========
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 June 30, 2005:
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REQUIRED FOR TO BE WELL
ACTUAL ADEQUATE CAPITAL CAPITALIZED
--------------- ---------------------- --------------
Amount % Amount % Amount %
------- ----- ------- --- ------- ----
JUNE 30, 2005 (Dollars in thousands)
------------- ---------------------------------------------------------
Total capital (to risk-weighted $27,350 20.73 $10,554 8.0 $13,192 10.0
assets)
Tier 1 capital (to risk-weighted 25,693 19.48 5,277 4.0 7,915 6.0
assets)
Tier 1 capital (to average assets) 25,693 11.24 9,145 4.0 11.432 5.0
The Company's consolidated capital-to-asset requirements and actual capital as
of June 30, 2005 are summarized in the following table:
REQUIRED FOR TO BE WELL
ACTUAL ADEQUATE CAPITAL CAPITALIZED
--------------- ---------------------- -------------
Amount % Amount % Amount %
------- ----- ------- --- ------ ---
JUNE 30, 2005 (Dollars in thousands)
------------- --------------------------------------------------------
Total capital (to risk-weighted $34,258 25.87 $10,594 8.0 --- N/A
assets)
Tier 1 capital (to risk-weighted 32,594 24.61 5,298 4.0 --- N/A
assets)
Tier 1 capital (to average assets) 32,594 14.18 9,194 4.0 --- N/A
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Sources of market risk include interest rate risk, foreign currency exchange
risk, commodity price risk and equity price risk. The Company is only subject to
interest rate risk. The Company purchased no financial instruments for trading
purposes during the three months ended June 30, 2005 and 2004.
The principal objectives of the Company's interest rate risk management function
are: (i) to evaluate the interest rate risk included in certain balance sheet
accounts; (ii) to determine the level of risk appropriate given the Company's
business focus, operating environment, capital and liquidity requirements, and
performance objectives; (iii) to establish asset concentration guidelines; and
(iv) to manage the risk consistent with Board-approved guidelines. Through such
management, the Company seeks to reduce the vulnerability of its operations to
changes interest rates and to manage the ratio of interest rate sensitive assets
to interest rate sensitive liabilities within specified maturity terms or
repricing dates. The Company's Board of Directors has established an
Asset/Liability Committee consisting of directors and senior management
- 26 -
officers, which is responsible for reviewing the Company's asset/liability
policies and monitoring interest rate risk as such risk relates to its operating
strategies. The committee usually meets on a quarterly basis, and at other times
as dictated by market conditions, and reports to the Board of Directors. The
committee is responsible for reviewing Company activities and strategies, and
the effect of those strategies on the Company's net interest margin, the market
value of the portfolio and the effect that changes in the interest will have on
the Company's portfolio and exposure limits.
The Company's key interest rate risk management tactics consist primarily of:
(i) emphasizing the attraction and retention of core deposits, which tend to be
a more stable source of funding; (ii) emphasizing the origination of adjustable
rate mortgage loan products and short-term commercial and consumer loans for the
in-house portfolio, although this is dependent largely on the market for such
loans; (iii) selling longer-term fixed-rate one-to-four family mortgage loans in
the secondary market; and (iv) investing primarily in U.S. government agency
instruments and mortgage-backed securities.
The Company's interest rate and market risk profile has not materially changed
from the year ended December 31, 2004. Please refer to the Company's Form 10-KSB
for the year ended December 31, 2004 for further discussion of the Company's
market and interest risk.
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation as of June 30, 2005, 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
June 30, 2005.
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.
- 27 -
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and subsidiary are 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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) The following table provides information about purchases of the Company's
common stock by the Company during the quarter ended June 30, 2005.
ISSUER PURCHASES OF EQUITY SECURITIES
(d) Maximum
(c) Total Number Number of
of Shares Shares that May
Purchased as Yet Be
(a) Total Number (b) Average Part of Publicly Purchased Under
of Shares Price Paid Announced Plans the Plans
Period Purchased per Share or Programs or Programs
--------- ---------------- ----------- ---------------- ----------------
4/1/2005
to --- --- --- 94,400
4/30/2005
5/31/2005
to 40,000 $12.29 40,000 104,850
5/31/2005
6/1/2005
to 50,100 $12.31 50,100 54,750
6/30/2005
TOTAL 90,100 $12.30 90,100
(1) Our board of directors approved the repurchase by us of 100,000 shares
over the one year period ending May 13, 2005. The board of directors
approved the repurchase by us of 124,850 shares over the one year period
ending April 18, 2006.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. The Company's Annual Meeting of Shareholders was held on April 18,
2005.
b. Not applicable.
c. At such meeting, there were 2,497,050 shares of Common Stock
entitled to be voted. The shareholders approved the following
matters:
1. The election of the following individuals as Directors:
Votes For Votes Withheld Term
--------- -------------- ----
Terry J. Howard 2,239,356 34,934 3 years
David W. Dick 2,176,990 97,300 3 years
The directors whose terms continued after the meeting were
Vick N. Bowyer, Terry T. Hutchison, James D. Motley, Joseph R.
Schroeder, and John W. Welborn.
2. The ratification of BKD, LLP as independent auditor of the
Company for the fiscal year ending December 31, 2005, as
reflected by 2,212,762 votes for, 34,304 votes against and
27,224 abstentions.
d. Not applicable.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
(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).
- 29 -
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: August 12, 2005 /s/ Terry J. Howard
---------------------------------
Terry J. Howard
President and Chief Executive Officer
Date: August 12, 2005 /s/ Ellen M. Litteral
---------------------------------
Ellen M. Litteral
Treasurer and Chief Financial Officer
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