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 SEPTEMBER 30, 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 NOVEMBER 10, 2004 THE REGISTRANT HAD OUTSTANDING 2,500,450 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
Condensed Consolidated Statements of Income 2
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Cash Flows 6
Item 2 Management's Discussion and Analysis of
Financial Condition or Plan of Operation 14
Item 3 Controls and Procedures 25
PART II - Other Information
Item 1 Legal Proceedings 25
Item 2 Unregistered Sales of Equity Securities and
Use of Proceeds 25
Item 3 Defaults Upon Senior Securities 26
Item 4 Submission of Matters to a Vote of Security
Holders 26
Item 5 Other Information 26
Item 6 Exhibits 26
SIGNATURES 27
CERTIFICATIONS 28
FIRST BANCTRUST CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of dollars except share data)
SEPTEMBER 30,
2004 DECEMBER 31,
(unaudited) 2003
------------- ------------
ASSETS
Cash and due from banks $ 5,994 $ 6,581
Interest-bearing demand deposits 3,711 3,713
------------- ----------
Cash and cash equivalents 9,705 10,294
Available-for-sale securities 83,097 93,742
Loans held for sale 834 453
Loans, net of allowance for loan losses of $2,305 and $2,124 115,256 106,411
Premises and equipment 3,251 2,781
Federal Home Loan Bank stock 4,193 4,006
Foreclosed assets held for sale, net 214 95
Interest receivable 2,115 2,238
Loan servicing rights, net of valuation allowance of $71 and $267 817 964
Cash surrender value of life insurance 4,420 4,346
Deferred income taxes 1 37
Other assets 780 827
------------- ----------
Total assets $ 224,683 $ 226,194
============= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest bearing deposits $ 15,288 $ 15,495
Interest bearing deposits 143,365 147,533
------------- ----------
Total deposits 158,653 163,028
Federal Home Loan Bank advances 35,500 35,500
Short-term borrowings 2,000 --
Pass through payments received on loans sold 111 262
Advances from borrowers for taxes and insurance 8 109
Interest payable 144 127
Other 1,033 777
------------- ----------
Total liabilities 197,449 199,803
------------- ----------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Preferred stock, $.005 par value; 1,000,000 shares authorized
and unissued
Common stock, $.005 par value, 5,000,000 shares authorized;
3,041,750 shares issued and 2,500,450 shares outstanding 15 15
Additional paid-in capital 14,730 14,579
Retained earnings 18,168 17,743
Unearned employee stock ownership plan shares -
136,912 and 159,718 shares (791) (923)
Unearned incentive plan shares - 88,552 and 98,830 shares (731) (815)
Accumulated other comprehensive income 407 356
Treasury stock, at cost - 541,300 shares (4,564) (4,564)
------------- ----------
Total stockholders' equity 27,234 26,391
------------- ----------
Total liabilities and stockholders' equity $ 224,683 $ 226,194
============= ==========
See notes to condensed consolidated financial statements.
1
FIRST BANCTRUST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
(in thousands of dollars-except share data)
(unaudited)
NINE MONTHS ENDED SEPTEMBER 30 2004 2003
------------------------------ ----------- ---------
INTEREST AND DIVIDEND INCOME
Loans
Taxable $ 5,893 $ 6,398
Tax exempt 48 27
Securities
Taxable 2,204 1,996
Tax exempt 285 249
Dividends on Federal Home Loan Bank stock 187 159
Deposits with financial institutions and other 31 51
---------- ---------
Total interest and dividend income 8,648 8,880
---------- ---------
INTEREST EXPENSE
Deposits 2,154 2,422
Federal Home Loan Bank advances and other debt 1,103 1,046
Short-term borrowings 12 --
---------- ---------
Total interest expense 3,269 3,468
---------- ---------
NET INTEREST INCOME 5,379 5,412
Provision for loan losses 388 484
---------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,991 4,928
---------- ---------
NONINTEREST INCOME
Customer service fees 660 575
Other service charges and fees 560 677
Net gains on loan sales 243 660
Net realized gains on sales of available-for-sale securities 64 133
Net loan servicing fees 532 392
Brokerage fees 62 60
Abstract and title fees 266 337
Other 235 211
---------- ---------
Total noninterest income 2,622 3,045
---------- ---------
NONINTEREST EXPENSE
Salaries and employee benefits 3,468 3,170
Net occupancy expense 223 161
Equipment expense 580 494
Data processing fees 327 319
Professional fees 374 204
Foreclosed assets expense, net 68 85
Marketing expense 221 193
Amortization of loan servicing rights 475 668
Recovery of impairment of loan servicing rights (195) (316)
2
Other expenses 774 687
---------- ---------
Total noninterest expense 6,315 5,665
---------- ---------
INCOME BEFORE INCOME TAX 1,298 2,308
Income tax expense 449 801
---------- ---------
NET INCOME $ 849 $ 1,507
========== =========
BASIC EARNINGS PER SHARE $ 0.38 $ 0.65
========== =========
DILUTED EARNINGS PER SHARE $ 0.35 $ 0.62
========== =========
DIVIDENDS PER SHARE $ 0.17 $ 0.125
========== =========
See notes to condensed consolidated financial statements.
3
FIRST BANCTRUST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THREE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
(in thousands of dollars-except share data)
(unaudited)
THREE MONTHS ENDED SEPTEMBER 30 2004 2003
------------------------------- ----------- ---------
INTEREST AND DIVIDEND INCOME
Loans
Taxable $ 1,933 $ 2,058
Tax exempt 16 9
Securities
Taxable 700 632
Tax exempt 98 94
Dividends on Federal Home Loan Bank stock 61 16
Deposits with financial institutions and other 13 52
---------- ---------
Total interest and dividend income 2,821 2,861
---------- ---------
INTEREST EXPENSE
Deposits 692 768
Federal Home Loan Bank advances and other debt 377 366
Short-term borrowings 12 --
---------- ---------
Total interest expense 1,081 1,134
---------- ---------
NET INTEREST INCOME 1,740 1,727
Provision for loan losses 126 151
---------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,614 1,576
---------- ---------
NONINTEREST INCOME
Customer service fees 241 209
Other service charges and fees 199 231
Net gains on loan sales 87 239
Net realized gains on sales of available-for-sale securities 27 133
Net loan servicing fees 277 129
Brokerage fees 27 3
Abstract and title fees 94 110
Other 70 72
---------- ---------
Total noninterest income 1,022 1,126
---------- ---------
NONINTEREST EXPENSE
Salaries and employee benefits 1,146 1,119
Net occupancy expense 83 59
Equipment expense 220 157
Data processing fees 116 113
Professional fees 146 56
Foreclosed assets expense, net 22 24
Marketing expense 85 81
Amortization of loan servicing rights 154 201
Recovery of impairment of loan servicing rights (77) (179)
Other expenses 276 236
---------- ---------
4
Total noninterest expense 2,171 1,867
---------- ---------
INCOME BEFORE INCOME TAX 465 835
Income tax expense 166 299
---------- ---------
NET INCOME $ 299 $ 536
========== =========
BASIC EARNINGS PER SHARE $ 0.13 $ 0.24
========== =========
DILUTED EARNINGS PER SHARE $ 0.12 $ 0.22
========== =========
DIVIDENDS PER SHARE $ 0.06 $ 0.05
========== =========
See notes to condensed consolidated financial statements.
5
FIRST BANCTRUST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
(unaudited)
NINE MONTHS ENDED SEPTEMBER 30 2004 2003
------------------------------ ----------- ---------
OPERATING ACTIVITIES
Net income $ 849 $ 1,507
Items not requiring (providing) cash
Depreciation and amortization 213 205
Provision for loan losses 388 484
Investment securities amortization, net 166 389
Amortization of loan servicing rights 475 668
Recovery of impairment of loan servicing rights (195) (316)
Deferred income taxes -- (6)
Net realized gains on available-for-sale securities (64) (133)
Net loss on sales of foreclosed assets 8 28
Net loss (gain) on sale of premises and equipment 6 (5)
Net gains on loan sales (243) (660)
Loans originated for sale (13,548) (41,034)
Proceeds from sales of loans originated for sale 13,277 41,179
Federal Home Loan Bank stock dividends (187) (159)
Compensation expense related to employee stock ownership plan 285 224
Compensation expense related to incentive plan 82 82
Changes in
Interest receivable 123 205
Cash surrender value of life insurance (74) (129)
Other assets 47 (181)
Interest payable 17 28
Other liabilities 256 (96)
----------- ---------
Net cash provided by operating activities 1,881 2,280
----------- ---------
INVESTING ACTIVITIES
Purchases of available-for-sale securities (16,212) (83,833)
Proceeds from maturities of available-for-sale securities 26,586 67,597
Proceeds from sales of available-for-sale securities 257 417
Net change in loans (9,760) (2,636)
Proceeds from sales of foreclosed assets 400 457
Proceeds from sales of premises and equipment 10 5
Purchases of premises and equipment (699) (199)
Net cash received from purchase of deposits (plus cash acquired) 3,192
----------- ---------
Net cash provided (used) by investing activities 582 (15,000)
----------- ---------
6
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, money market,
NOW and savings deposits $ (2,868) $ 12,427
Net decrease in certificates of deposit (1,507) (704)
Proceeds from the issuance of Federal Home Loan Bank advances -- 18,000
Repayment of Federal Home Loan Bank advances and other debt -- (9,001)
Proceeds from short-term borrowings 4,000 --
Repayment of short-term borrowings (2,000) --
Pass through payments received on loans sold (151) (201)
Net decreases in advances by borrowers for taxes and insurance (101) (119)
Dividends paid (425) (324)
Purchase of treasury stock -- (1,954)
----------- ---------
Net cash provided (used) by financing activities (3,052) 18,124
----------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (589) 5,404
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 10,294 10,453
----------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 9,705 $ 15,857
=========== =========
SUPPLEMENTAL CASH FLOWS INFORMATION
Real estate acquired in settlement of loans $ 527 $ 391
Interest paid $ 3,252 $ 3,421
Income tax paid $ 3 $ 975
See notes to condensed consolidated financial statements.
7
FIRST BANCTRUST CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(table dollar amounts in thousands of dollars-except share data)
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 and nine months ended
September 30, 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.
8
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, 2004 September 30, 2003 September 30, 2004 September 30, 2003
Net income, as reported $ 299 $ 536 $ 849 $1,507
Less: Total stock-based employee
compensation cost determined under
the fair value based method, net of
income taxes (33) (33) (99) (49)
----- ----- ----- ------
Pro forma net income $ 266 $ 503 $ 750 $1,458
===== ===== ===== ======
EARNINGS PER SHARE:
Basic - as reported $0.13 $0.24 $0.38 $ 0.65
Basic - pro forma $0.12 $0.22 $0.33 $ 0.63
Diluted - as reported $0.12 $0.23 $0.35 $ 0.62
Diluted - pro forma $0.11 $0.21 $0.31 $ 0.60
Note 2 - Employee Stock Ownership Plan
The Bank 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 $91,000 and $83,000 for the
three-month periods ended September 30, 2004 and 2003 and $285,000 and $224,000
for the nine-month periods ended September 30, 2004 and 2003.
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 3 - Earnings per Share
Basic earnings per share have been computed based upon the weighted average
common shares outstanding for the three month and nine month periods ended
September 30, 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:
9
Weighted
Average Per Share
Income Shares Amount
------ --------- ---------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004:
Basic Earnings Per Share:
Income available to common stockholders $ 849 2,260,285 $ 0.38
Effect of Dilutive Securities:
Unearned recognition and retention plan shares 104,452
Stock Options 56,165
------ --------- ------
Diluted Earnings per Share:
Income available to common stockholders and
assumed conversions $ 849 2,420,902 $ 0.35
====== ========= ======
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003:
Basic Earnings Per Share:
Income available to common stockholders $1,507 2,303,118 $ 0.65
Effect of Dilutive Securities:
Unearned recognition and retention plan shares 111,802
Stock Options 14,460
------ --------- ------
Diluted Earnings per Share:
Income available to common stockholders and
assumed conversions $1,507 2,429,380 $ 0.62
====== ========= ======
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004:
Basic Earnings Per Share:
Income available to common stockholders $ 299 2,271,313 $ 0.13
Effect of Dilutive Securities:
Unearned recognition and retention plan shares 100,044
Stock Options 46,985
------ --------- ------
Diluted Earnings per Share:
Income available to common stockholders and
assumed conversions $ 299 2,418,342 $ 0.12
====== ========= ======
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003:
Basic Earnings Per Share:
Income available to common stockholders $ 536 2,260,434 $ 0.24
Effect of Dilutive Securities:
Unearned recognition and retention plan shares 109,618
Stock options 31,248
------ --------- ------
Diluted Earnings per Share:
Income available to common stockholders and
assumed conversions $ 536 2,401,300 $ 0.22
====== ========= ======
10
Note 4 - Comprehensive Income (Loss)
Comprehensive income (loss) for the three month and nine month periods ended
September 30, 2004 and 2003 is listed as follows:
NINE MONTHS ENDED SEPTEMBER 30
2004 2003
------------------------------
NET INCOME $ 849 $ 1,507
----------- -----------
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized appreciation (depreciation) on available-for-sale securities 93 (1,022)
Less: Reclassification adjustment for realized gains included
in net income 42 78
----------- -----------
51 (1,100)
----------- -----------
COMPREHENSIVE INCOME $ 900 $ 407
=========== ===========
THREE MONTHS ENDED SEPTEMBER 30
2004 2003
-------------------------------
NET INCOME $ 299 $ 536
----------- -----------
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized appreciation (depreciation) on available-for-sale securities 1,237 (1,012)
Less: Reclassification adjustment for realized gains included
in net income 18 78
----------- -----------
1,219 (1,090)
----------- -----------
COMPREHENSIVE INCOME (LOSS) $ 1,518 $ (554)
=========== ===========
Note 5 - 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.
11
Note 6 - 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. The Company has not yet purchased any of
these shares. Previously, the Company had completed four other repurchase
programs for stock repurchases of 541,300 shares. As of November 12, 2004, the
Company owned a cumulative total of 541,300 shares in treasury stock.
Note 7 - Recent Accounting Pronouncements
SEC Staff Accounting Bulletin (SAB) No. 105, "Application of Accounting
Principles to Loan Commitments." SAB 105 summarizes the views of the staff of
the SEC regarding the application of generally accepted accounting principles to
loan commitments accounted for as derivative instruments. SAB 105 provides that
the fair value of recorded loan commitments that are accounted for as
derivatives under SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities," should not incorporate the expected future cash flows related to
the associated servicing of the future loan. In addition, SAB 105 requires
registrants to disclose their accounting policy for loan commitments. The
provisions of SAB 105 must be applied to loan commitments accounted for as
derivatives that are entered into after March 31, 2004. The adoption of this
accounting standard did not have a material impact on the Company's financial
statements.
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 a FASB Staff Position (FSP) to provide additional
implementation guidance. Currently, the FASB expects to issue the FSP no later
than December 2004.
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
12
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 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 is not expected to have a
material impact on the Company's financial statements.
13
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 and 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 September 30, 2004 to its financial condition
at December 31, 2003 and the results of operations for the three-month and
nine-month periods ending September 30, 2004 to the same periods 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. The move to a new permanent
facility located in a prime commercial area in Savoy was completed in August
2004. This discussion should be read in conjunction with the interim financial
statements and notes included herein.
FINANCIAL CONDITION
Total assets of the Company decreased by $1.5 million or 0.7%, to $224.7 million
at September 30, 2004 from $226.2 million at December 31, 2003. The decrease in
assets was primarily due to decreases in available-for-sale securities of $10.6
million, cash and cash equivalents of $589,000, partially offset by an increase
in loans, net of allowance for loan losses of $8.8 million, loans held
14
for sale of $381,000, and premises and equipment of $470,000. The decrease in
assets was due primarily to a decrease in deposits.
The Company's cash and due from banks decreased by $587,000 or 8.9% to $6.0
million at September 30, 2004 from $6.6 million at December 31, 2003.
Interest-bearing demand deposits remained constant at $3.7 million at both
September 30, 2004 and December 31, 2003.
Available-for-sale investment securities amounted to $83.1 million at September
30, 2004 compared to $93.7 million at December 31, 2003, a $10.6 million
decrease. The decrease primarily resulted from investment calls and maturities
of $26.6 million, primarily in mortgage-backed securities and Federal Home Loan
Bank ("FHLB") agency bonds, and sales of equity securities of $257,000,
partially offset by investment purchases of $16.2 million.
Loans held for sale increased by $381,000 from $453,000 at December 31, 2003 to
$834,000 at September 30, 2004, an increase of 84.1%. Loans held for sale at
September 30, 2004 consisted entirely of single-family residential loans.
The Company's net loan portfolio increased by $8.8 million or 8.3% to $115.3
million at September 30, 2004 from $106.4 million at December 31, 2003. Gross
loans increased by $9.0 million while the allowance for loan losses increased by
$181,000. Agricultural production loans increased by $4.1 million and farmland
loans increased by $2.5 million while nonfarm nonresidential real estate loans
increased by $2.7 million and commercial loans increased by $326,000. Loans
secured by 1-4 family residences decreased by $1.0 million and second mortgages
on 1-4 family residences decreased by $259,000, although home equity loans
increased by $1.9 million. Consumer loans decreased $487,000 and construction
loans decreased by $654,000.
At September 30, 2004, the allowance for loan losses was $2.3 million or 1.96%
of the total loan portfolio compared to $2.1 million, or 1.96% at December 31,
2003. During the first nine months of 2004, the Company charged off $355,000 of
loan losses, of which $149,000 were consumer loans, $70,000 related to three
commercial loans, $66,000 pertained to ten 1-4 family residential loans, $57,000
was a loss from four commercial real estate loans and $14,000 related to one
agricultural production loan. The chargeoffs of $355,000 were partially offset
by $149,000 in recoveries, $68,000 of which pertained to one agricultural
production loan. 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 to 1.75% or $2.1 million at September 30, 2004.
This percentage decrease was primarily a result of reduced delinquencies 90 days
and over from $1.1 million at December 31, 2003 to $431,000 at September 30,
2004. The Company's troubled debt restructurings of $1.6 million at September
30, 2004 consists primarily of restructured commercial and agricultural loans.
Included in the $1.6 million of troubled debt restructurings are restructured
agricultural loans of $1.1 million which are 90% guaranteed for $953,000 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.
15
Premises and equipment increased by $470,000, primarily due to leasehold
improvements and furniture and equipment purchases for the new Savoy facility.
Interest receivable declined by $123,000 or 5.5% from $2.2 million to $2.1
million primarily due to annual payments received on agricultural loans. Federal
Home Loan Bank stock increased by $187,000 due to the receipt of dividends in
the form of stock.
Net foreclosed assets held for sale, totaling $214,000 at September 30, 2004
increased $119,000, compared to $95,000 at December 31, 2003. As of September
30, 2004, the Company had five real estate properties totaling $126,000
consisting of three single-family residential properties and two nonresidential
real estate properties and other repossessed assets of $88,000. Foreclosed
assets are carried at lower of cost or net realizable value.
Loan servicing rights declined by $147,000 from $964,000 at December 31, 2003 to
$817,000 at September 30, 2004. Gross loan servicing rights decreased by
$343,000 from $1.2 million at December 31, 2003 to $888,000 at September 30,
2004 due to amortization of loan servicing rights of $475,000 offset by newly
capitalized assets of $132,000. The valuation allowance decreased from $267,000
at December 31, 2003 to $71,000 at September 30, 2004, due to a $196,000
recovery of a previous impairment as a result of current valuations.
The Company's total deposits totaled $158.6 million at September 30, 2004
compared to $163.0 million at December 31, 2003, a decrease of $4.4 million. The
2.7% decrease in total deposits was due to a $207,000 decrease in non-interest
bearing deposits, and a $4.2 million decrease in interest bearing deposits. The
decrease in interest bearing deposits was a result of a decrease of $6.1 million
in interest-bearing checking accounts, partially offset by a $1.5 million
increase in certificates of deposit and by a $341,000 increase in savings
accounts. The decline in interest-bearing checking accounts was primarily due to
a reduction of $5.1 million in investor checking accounts from 102 fewer
accounts at September 30, 2004 compared to December 31, 2003. The investor
checking product is similar to a traditional money market account without the
withdrawal restrictions, paying a slightly lower interest rate.
Federal Home Loan Bank advances and other debt remained constant at $35.5
million at December 31, 2003 and September 30, 2004. The total average rate of
all advances was 4.04% as of September 30, 2004. Other short-term borrowings
increased to $2.0 million at September 30, 2004, and were primarily used to fund
loans and deposit withdrawals. The current rate of interest at September 30,
2004 on the short-term borrowings which reprice daily was 2.03%.
Stockholders' equity at September 30, 2004 was $27.2 million compared to $26.4
million at December 31, 2003, an increase of $843,000. Retained earnings
increased by the amount of net income or $849,000, partially offset by $425,000
in dividends declared and paid. As shares from the employee stock ownership plan
vested to participants from December 31, 2003 to September 30, 2004,
stockholders' equity increased by $285,000, and as shares from the incentive
plan were earned by participants for the same period, stockholders' equity
increased by $82,000. Accumulated comprehensive income increased by $51,000 due
to a increase in the fair value of securities available for sale, net of tax.
16
RESULTS OF OPERATIONS
COMPARISON OF NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
Net income for the nine months ended September 30, 2004 decreased by $658,000 or
43.7% from $1.5 million for the nine months ended September 30, 2003 to $849,000
for the nine months ended September 30, 2004. The decrease in net income is
primarily due to decreases in noninterest income, and an increase in noninterest
expense, partially offset by decreases in the provision for loan losses and
income tax expense.
Net interest income decreased $33,000 or 0.6% from $5.41 million for the nine
months ended September 30, 2003 to $5.38 million for the nine months ended
September 30, 2004. The primary reason for the decrease in net interest income
was a decrease in interest and dividend income of $232,000 partially offset by a
decrease of $199,000 in interest expense. The Company's net interest margin was
3.43% and 3.68% during the nine months ended September 30, 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 $232,000 or 2.6% from $8.9
million for the nine months ended September 30, 2003 to $8.6 million for the
nine months ended September 30, 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 $484,000 in loan interest
income was primarily due to a decrease in the average loan rate of 93 basis
points, partially offset by an increase in average loans. Interest and dividend
income from available for sale securities increased by $244,000 primarily due to
an increase in the average balance of available for sale investments, partially
offset by a decrease in average interest rate of 6 basis points.
Interest expense declined by $199,000 or 5.7% from $3.5 million for the nine
months ended September 30, 2003 to $3.3 million for the nine months ended
September 30, 2004. This decline was primarily due to a decrease of $268,000 in
interest on deposits, partially offset by $57,000 increase in interest on
Federal Home Loan Bank advances. The $268,000 decrease in interest expense on
deposits was primarily due to a decrease of 29 basis points in the average
interest rate on deposits, partially offset by an increase in the average
balance of deposits. The $57,000 increase in interest on Federal Home Loan Bank
advances was due to an increase in the average balance, as well as by an
increase in interest rate of 52 basis points.
For the nine months ended September 30, 2004 and 2003 the provision for losses
on loans was $388,000 and $484,000, respectively. The provision for the nine
months ended September 30, 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
17
cannot assure that future chargeoffs and/or provisions will not be necessary,
the Company's management believes that, as of September 30, 2004, its allowance
for loan losses was adequate.
Noninterest income decreased $423,000 or 13.9% from $3.0 million for the nine
months ended September 30, 2003 to $2.6 million for the nine months ended
September 30, 2004. The decrease was primarily a result of decreases in net
gains on loan sales and other service charges and fees, abstracting income, and
net realized gains on sales of available for sale securities partially offset by
an increase in net loan servicing fees and increased customer service fees. Net
gains on loan sales decreased by $417,000 from $660,000 for the nine months
ended September 30, 2003 to $243,000 for the nine months ended September 30,
2004. This decline occurred as loan sales decreased from $41.0 million loans
sold in the first nine months of 2003 to $13.5 million loans sold in the first
nine months of 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
$117,000 from $677,000 for the nine months ended September 30, 2003 to $560,000
for the nine months ended September 30, 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 $71,000
from $337,000 for the nine months ended September 30, 2003 to $266,000 for the
nine months ended September 30, 2004, due to the high level of refinancing
activity in 2003.
Net loan servicing fees increased by $140,000 from $392,000 for the nine months
ended September 30, 2003 to $532,000 for the nine months ended September 30,
2004, as the nine-month average portfolio of loans serviced for others increased
by $6.2 million from 2003 to 2004. Customer service fees increased by $85,000
from $575,000 for the nine months ended September 30, 2003 to 660,000 for the
nine months ended September 30, 2004, primarily a result of increased
non-sufficient funds and overdraft fees associated with checking accounts. Net
realized gains on sales of available for sale securities decreased by $69,000
from $133,000 for the nine months ended September 30, 2003 to $64,000 for the
nine months ended September 30, 2004. Proceeds from the sales of equity
securities totaled $417,000 for the nine months ended September 30, 2003
compared to proceeds of $257,000 from the sale of equity securities for the nine
months ended September 30, 2004.
Total noninterest expenses were $6.3 million for the nine months ended September
30, 2004 as compared to $5.7 million for the nine months ended September 30,
2003. The primary reason for the $650,000 increase was an increase in salaries
and employee benefits of $298,000, an increase in professional fees of $170,000,
an increase in other expenses of $87,000, an increase in equipment expense of
$86,000, an increase in net occupancy expense of $62,000, and a reduction in the
recovery of impairment of loan servicing rights of $121,000, partially offset by
a reduction of $193,000 in amortization of loan servicing rights.
Salaries and employee benefits increased by $298,000 from $3.2 million for the
nine months ended September 30, 2003 to $3.5 million for the nine months ended
September 30, 2004. The salary increase was $189,000 which was primarily due to
normal pay increases and the addition of eight full-time employees and five
part-time employees. The majority of the employee additions are a result of the
branch expansion into Savoy. The increase in employee benefits of $109,000 was
primarily due to increased health insurance expense and increased Employee
18
Stock Ownership Plan ("ESOP") expense. Health insurance expense was $303,000 for
the nine months ended September 30, 2004 compared to $266,000 for the nine
months ended September 30, 2003, a $37,000 increase as a result a higher
premiums. ESOP expense increased by $59,000 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.
Net occupancy expense increased by $62,000 from $161,000 for the nine months
ended September 30, 2003 compared to $223,000 for the nine months ended
September 30, 2004 primarily due to the branch expansion into Savoy. Equipment
expense increased by $86,000 from $494,000 for the nine months ended September
30, 2003 to $580,000 for the nine months ended September 30, 2004 primarily due
to the leasing of both check imaging equipment to upgrade the check imaging
process and other computer components to update computer networks and operating
systems. Professional fees increased by $170,000 from $204,000 for the nine
months ended September 30, 2003 to $374,000 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 $668,000 for the nine
months ended September 30, 2003 to $475,000 for the nine months ended September
30, 2004, as a result of a decrease in loan prepayments. The recovery of
impairment of loan servicing rights for the nine months ended September 30, 2003
totaled $316,000 compared to $195,000 for the nine months ended September 30,
2004. The recovery of the previously identified impairment is based on periodic
independent valuation of the loan servicing rights, which indicate the market
value of the loan servicing rights as of the valuation date. Other expenses
increased by $87,000 from $687,000 for the nine months ended September 30, 2004
to $774,000 for the nine months ended September 30, 2004. The primary reason for
this increase is an increase in office supplies expense, an increase in
supervision fees from the Bank's primary regulator and an increase in insurance
expense due to higher premiums.
Income tax expense was $449,000 for the nine months ended September 30, 2004 as
compared to $801,000 for the nine months ended September 30, 2003. The decrease
of $352,000 in income tax expense was due to a decrease in income before taxes
of $1.0 million. The effective tax rates were 34.6% and 34.7%, respectively, for
the nine months ended September 30, 2004 and 2003.
COMPARISON OF THREE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
Net income for the three months ended September 30, 2004 decreased by $237,000
or 44.2% from $536,000 for the three months ended September 30, 2003 to $299,000
for the three months ended September 30, 2004. The decrease in net income is
primarily due to a decrease in noninterest income, and an increase in
noninterest expense, partially offset by a slight increase in net interest
income and decreases in the provision for loan losses and income tax expense.
Net interest income increased $13,000 or 0.8% from $1.73 million for the three
months ended September 30, 2003 to $1.74 million for the three months ended
September 30, 2004. The
19
primary reason for the slight increase in net interest income was a decrease of
$53,000 in interest expense, partially offset by a decrease of $40,000 in
interest and dividend income. The Company's net interest margin was 3.36% and
3.46% during the three months ended September 30, 2004 and 2003, respectively.
The net interest margin decreased slightly as a result of an increase in the
average interest earning assets.
Total interest and dividend income decreased slightly by $40,000 from $2.86
million for the three months ended September 30, 2003 to $2.82 million for the
three months ended September 30, 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 $118,000 in loan interest
income was primarily due to a decrease in the average loan rate of 92 basis
points, partially offset by an increase in average loans. Interest and dividend
income from available for sale securities increased by $72,000 due to increases
in both the average rate and the average balance of available for sale
investments.
Interest expense declined by $53,000 or 4.7% from $1.13 million for the three
months ended September 30, 2003 to $1.08 million for the three months ended
September 30, 2004. This decline was primarily due to a decrease of $76,000 in
interest on deposits. The $76,000 decrease in interest expense on deposits was
primarily due to a decrease of 30 basis points in the average interest rate on
deposits, partially offset by an increase in the average balance of deposits.
Federal Home Loan Bank advance interest and interest on short-term borrowings
both increased slightly due to an increase in average balance.
For the three months ended September 30, 2004 and 2003 the provision for losses
on loans was $126,000 and $151,000, respectively. The provision for the three
months ended September 30, 2004 was based on the Company's analysis of the
allowance for loan losses.
Noninterest income decreased $104,000 or 9.2% from $1.1 million for the three
months ended September 30, 2003 to $1.0 million for the three months ended
September 30, 2004. The decrease was primarily a result of decreases in net
gains on loan sales and net realized gains on sales of available-for-sale
securities, a decrease in other service fees and charges, and a decrease in
abstracting income, partially offset by increased net loan servicing fees and
customer service fees.
Net gains on loan sales decreased by $152,000 from $239,000 for the three months
ended September 30, 2003 to $87,000 for the three months ended September 30,
2004. This decline occurred as loan sales decreased from $13.9 million loans
sold in the third quarter 2003 to $4.9 million loans sold in the third 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. Net realized gain on sales of available-for-sale securities declined by
$106,000 from $133,000 for the three months ended September 30, 2003 compared to
$27,000 for the three months ended September 30, 2004. The $133,000 gain from
securities sales in the third quarter of 2003 related to sales proceeds of
$417,000, while the $27,000 gain from securities in the third quarter in 2004
related to sales proceeds of $122,000.
20
Net loan servicing fees increased by $148,000 from $129,000 for the three months
ended September 30, 2003 to $277,000 for the three months ended September 30,
2004 due to an increase in the loans serviced for others portfolio. Other
service charges and fees decreased by $32,000 from $231,000 for the three months
ended September 30, 2003 to $199,000 for the three months ended September 30,
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 $16,000 from $110,000 for the three months ended
September 30, 2003 to $94,000 for the three months ended September 30, 2004, due
to the high level of refinancing activity in 2003. Customer service fees
increased from $209,000 for the three months ended September 30, 2003 to
$241,000 for the three months ended September 30, 2004. The $32,000 increase was
primarily due to increased non-sufficient funds and overdraft fees.
Total noninterest expenses were $2.2 million for the three months ended
September 30, 2004 as compared to $1.9 million for the three months ended
September 30, 2003. The primary reason for the $304,000 increase was an increase
in professional fees of $90,000, an increase in equipment expense of $63,000, an
increase in salaries and employee benefits of $27,000, an increase of $40,000 in
other expenses, and a reduction of the recovery of impairment of loan servicing
rights of $102,000, partially offset by a reduction of $47,000 in amortization
of loan servicing rights.
Salaries and employee benefits increased by $27,000 from $1.12 million for the
three months ended September 30, 2003 to $1.15 million for the three months
ended September 30, 2004 which was primarily due to the addition of six
full-time employees and three part-time employees. The majority of the employee
additions are a result of the branch expansion into Savoy.
Equipment expense increased by $63,000 from $157,000 for the three months ended
September 30, 2003 to $220,000 for the three months ended September 30, 2004,
primarily due to the leasing of check and document imaging equipment, and other
computer system upgrades. Professional fees increased by $90,000 from $56,000
for the three months ended September 30, 2003 to $146,000 for the same period in
2004. The increase was primarily a result of increased legal fees primarily
relating to corporate matters and consulting fees, primarily from the retention
of an investors relations consulting firm. The recovery of impairment of loan
servicing rights was $179,000 for the three months ended September 30, 2003
compared to $77,000 for the three months ended September 30, 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.
Amortization of loan servicing rights decreased by $47,000 from $201,000 for the
three months ended September 30, 2003 to $154,000 for the three months ended
September 30, 2004, as a result of a decrease in loan prepayments. Other
expenses increased by $40,000 from $236,000 for the three months ended September
30, 2003 to $276,000 for the three months ended September 30, 2004, primarily
due to increased office supplies expense and postage, an increase in insurance
expense due to higher premiums, and increased regulatory fees.
Income tax expense was $166,000 for the three months ended September 30, 2004 as
compared to $299,000 for the three months ended September 30, 2003. The decrease
of $133,000 in
21
income tax expense was due to a decrease in income before taxes of $370,000. The
effective tax rates were 35.7% and 35.8%, respectively, for the three months
ended September 30, 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 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 September 30, 2004
and December 31, 2003, loan servicing rights had carrying values of $817,000 and
$964,000, respectively.
22
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 September 30, 2004, the Company had outstanding commitments to originate $5.4
million in loans, and $7.3 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". As of September
30, 2004, the total amount of certificates scheduled to mature in the following
12 months was $45.6 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. The level of cash and cash equivalents at September 30, 2004 was
$9.7 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
At September 30, 2004, the Company had outstanding commitments to originate
loans of $5.4 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 $2.5 million, with the remainder at floating
rates. In addition, the Company had outstanding unused lines of credit to
borrowers aggregating $4.1 million for commercial lines of credit, and $3.2
million for consumer lines of credit. Outstanding commitments for letters of
credit at September 30, 2004 totaled $45,000. 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 September 30, 2004, which by their terms have contractual
maturity dates subsequent to September 30, 2004:
23
Next 12 13-36 37-60 More than
Months Months Months 60 Months Totals
------- ------ ------ --------- ------
UNFUNDED COMMITMENTS:
Letters of credit $ 45 $ -- $ -- $ -- $ 45
Lines of credit 5,083 56 96 2,091 7,326
------- ------ ------ --------- ------
Totals $ 5,128 $ 56 $ 96 $ 2,091 $7,371
======= ====== ====== ========= ======
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 September 30, 2004:
REQUIRED FOR TO BE WELL
ACTUAL ADEQUATE CAPITAL CAPITALIZED
----------------- ---------------- ---------------
SEPTEMBER 30, 2004 Amount % Amount % Amount %
-------------------------- --------- ----- ------- ------- --------- ----
(Dollars in thousands)
Total capital (to risk-
weighted assets) $ 26,013 22.03 $ 9,444 8.0 $ 11,806 10.0
Tier 1 capital (to risk-
weighted assets) 24,528 20.78 4,722 4.0 7,084 6.0
Tier 1 capital (to average
assets) 24,528 10.95 8,961 4.0 11,202 5.0
The Company's consolidated capital-to-asset requirements and actual capital as
of September 30, 2004 are summarized in the following table:
REQUIRED FOR TO BE WELL
ACTUAL ADEQUATE CAPITAL CAPITALIZED
----------------- ---------------- ---------------
SEPTEMBER 30, 2004 Amount % Amount % Amount %
--------- ----- ------- ------- --------- ----
(Dollars in thousands)
Total capital (to risk-
weighted assets) $ 28,221 23.65 $ 9,548 8.0 -- N/A
Tier 1 capital (to risk-
weighted assets) 26,720 22.39 4,774 4.0 -- N/A
Tier 1 capital (to average
assets) 26,720 11.85 9,021 4.0 -- N/A
24
ITEM 3. CONTROLS AND PROCEDURES
The Company carried out an evaluation as of September 30, 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 September 30, 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.
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 September 30, 2004.
25
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
----------- --------- -------------- ---------------- ---------------
07/01/04 -
07/31/04 -- -- -- 100,000
08/01/04 -
08/31/04 -- -- -- 100,000
09/01/04 -
09/30/04 -- -- -- 100,000
--- --- --- -------
Total -- -- -- 100,000
--- --- --- -------
(1) Our board of directors approved the repurchase by us of 100,000 shares
over the one-year period ending May 13, 2005. None of these shares have
been repurchased.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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
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Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. 1350).
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: November 12, 2004 /s/ Terry J. Howard
--------------------------------------
Terry J. Howard
President and Chief Executive Officer
Date: November 12, 2004 /s/ Ellen M. Litteral
--------------------------------------
Ellen M. Litteral
Treasurer and Chief Financial Officer
27