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 EXCAHNGE ACT 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-11132
FIRST BANKING CENTER, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1391327
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 Milwaukee Ave., Burlington, WI 53105
(Address of principal executive offices) (Zip Code)
(262) 763-3581
(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 the number of shares outstanding of each of the issuer's classes
of common stock, as of August 1, 2000. Common stock, $1.00 par value, 1,480,012
shares outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
FIRST BANKING CENTER, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, 2000 and December 31, 1999
(Dollars in thousands except per share data)
<CAPTION>
ASSETS 6/30/00 12/31/99
(Unaudited) (Audited)
<S> <C> <C>
Cash and due from banks $13,600 $19,123
Federal funds sold 0 4,242
Interest bearing deposits in banks 31 40
Available for sale securities - stated at fair value 57,951 54,952
Loans, less allowance for loan losses of $3,891 and
$3,581 in 2000 and 1999 respectively 307,535 295,143
Office buildings and equipment, net 9,563 9,429
Other assets 9,116 9,160
--------------------------------
TOTAL ASSETS $397,796 $392,089
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Demand $50,490 $51,610
Savings and NOW accounts 139,489 140,612
Time 120,738 113,922
--------------------------------
Total Deposits 310,717 306,144
Securities sold under repurchase agreements
and federal funds purchased 18,464 21,131
U S Treasury note account 100 100
Other borrowings 29,562 27,768
Other liabilities 3,745 3,529
--------------------------------
TOTAL LIABILITIES 362,588 358,672
--------------------------------
STOCKHOLDERS' EQUITY
Common Stock, $1.00 par value 3,000,000 shares authorized; 1,489,380 and
1,489,380 shares issued as of June 30, 2000
and December 31, 1999, respectively 1,489 1,489
Surplus 4,226 4,236
Retained Earnings 30,492 28,717
--------------------------------
36,207 34,442
Common stock in treasury, at cost-9,368 and 9,822 shares
for June 30, 2000 and December 31, 1999, respectively ($327) ($342)
Accumulated other comprehensive loss (672) (683)
--------------------------------
TOTAL STOCKHOLDERS' EQUITY $35,208 $33,417
--------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $397,796 $392,089
================================
</TABLE>
<PAGE>
<TABLE>
FIRST BANKING CENTER, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Six and three months ended June 30, 2000 and 1999
(Dollars in thousands, except per share data)
(Unaudited)
<CAPTION>
Quarter-to-Date Year-to-Date
6/30/00 6/30/99 6/30/00 6/30/99
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $6,804 $5,999 $13,215 $11,714
Interest and dividends on securities
Taxable 493 485 1,004 1,144
Tax-exempt 332 302 653 598
Interest on federal funds sold 16 28 56 69
Interest on deposits in banks 0 2 1 3
----------------------------------------------------------------
TOTAL INTEREST INCOME 7,645 6,816 14,929 13,528
----------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 2,982 2,415 5,779 4,850
Interest on federal funds purchased and securities
sold under repurchase agreements 237 290 498 628
Interest on U.S. Treasury Note Account 0 1 0 2
Interest on other borrowings 422 278 814 570
----------------------------------------------------------------
TOTAL INTEREST EXPENSE 3,641 2,984 7,091 6,050
----------------------------------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR
LOAN LOSSES 4,004 3,832 7,838 7,478
Provision for loan losses 90 82 180 165
----------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 3,914 3,750 7,658 7,313
----------------------------------------------------------------
NON-INTEREST INCOME
Trust 125 90 225 180
Service charges on deposit accounts 334 301 647 576
Investment securities gains (losses) 0 0 (5) 0
Other income 372 305 654 546
----------------------------------------------------------------
TOTAL NON-INTEREST INCOME 831 696 1,521 1,302
----------------------------------------------------------------
NON-INTEREST EXPENSE
Salary and employee benefits 1,691 1,576 3,347 3,139
Occupancy expenses 222 189 440 412
Equipment expenses 372 317 689 598
Data Processing services 154 166 308 294
Other expenses 667 553 1,298 1,162
----------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 3,106 2,801 6,082 5,605
----------------------------------------------------------------
INCOME BEFORE INCOME TAXES 1,639 1,645 3,097 3,010
Income taxes 462 515 847 930
----------------------------------------------------------------
NET INCOME $1,177 $1,130 $2,250 $2,080
================================================================
Basic earnings per share $0.80 $0.76 $1.52 $1.40
Diluted earnings per share $0.78 $0.75 $1.50 $1.39
Weighted average shares outstanding 1,480 1,489 1,480 1,489
</TABLE>
<PAGE>
<TABLE>
FIRST BANKING CENTER, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
Six months ended June 30, 2000 and 1999
(Dollars in thousands, except per share data)
(Unaudited)
<CAPTION>
Accumulated
other
Common Retained Treasury comprehensive
Stock Surplus Earnings Stock income(loss) Total
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE - December 31, 1998 $1,489 $4,312 $25,431 - $663 $31,895
-----------
Comprehensive income:
Net income - 1999 - - 2,080 - - $2,080
Change in net unrealized gain(loss)
on securities available for sale - - - - (1,327) (1,327)
Income tax effect - - - - 517 517
-----------
Total comprehensive income 1,270
-----------
Cash dividend paid-$0.29 per share - - (432) - - (432)
Issuance of 224 shares of stock under
stock option plan - 15 - - - 15
-----------------------------------------------------------------------------------------
BALANCE - JUNE 30, 1999 $1,489 $4,327 $27,079 - ($147) $32,748
=========================================================================================
BALANCE - December 31, 1999 $1,489 $4,236 $28,717 ($342) ($683) $33,417
-----------
Comprehensive income:
Net income - 2000 - - 2,250 - - 2,250
Change in net unrealized gain (loss)
on securities available for sale - - - - 23 23
Reclassification adjustment for gains
(losses) realized in net income - - - - (5) (5)
Income tax effect - - - - (7) (7)
-----------
Total comprehensive income 2,261
-----------
Purchase of 980 shares of treasury stock - - - (34) - (34)
Cash dividend paid-$0.32 per share - - (474) - - (474)
Reissuance of 1,434 shares of treasury stock
under stock option plan - (10) - 48 - 38
-----------------------------------------------------------------------------------------
BALANCE - June 30, 2000 $1,489 $4,226 $30,492 ($327) ($672) $35,208
=========================================================================================
</TABLE>
<PAGE>
<TABLE>
FIRST BANKING CENTER, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2000 and 1999
(Dollars in thousands)
(Unaudited)
<CAPTION>
6/30/00 6/30/99
--------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,250 $2,080
--------------------------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 434 452
Provision for loan losses 180 165
Gain on sale of loans (9) (8)
Amortization and accretion of bond
premiums and discounts - net 28 (56)
Amortization of excess cost over equity in
underlying net assets of subsidiary 52 52
Loss on sale of investment securities 5 0
Increase in other assets (111) (220)
Increase in accrued expenses and other liabilities 216 9
--------------------------------
TOTAL ADJUSTMENTS 795 394
--------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,045 2,474
--------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in interest-bearing deposits 9 2
Net decrease in federal funds sold 4,242 6,241
Activity in available for sale securities
Proceeds from sales of available for sale securities 8,669 3,096
Proceeds from maturities of available for sale securities 8,471 55,361
Purchase of available for sale securities (20,058) (50,724)
Proceeds from sale of loans 464 448
Net increase in loans (13,027) (18,821)
Purchase of office buildings and equipment (672) (433)
Proceeds from disposal of office building and equipment 104 0
--------------------------------
NET CASH USED IN INVESTING ACTIVITIES (11,798) (4,830)
--------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 4,573 4,534
Dividends paid (474) (432)
Proceeds from other borrowings 2,000 0
Payments on other borrowings (206) (1,090)
Net decrease in securities sold under
repurchase agreements and federal funds purchased (2,667) (5,793)
Proceeds from stock options exercised 0 15
Purchase of treasury stock (34) 0
Proceeds from reissuance of treasury stock under
stock option plan 38 0
--------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,230 (2,766)
--------------------------------
Net decrease in Cash and Due From Banks (5,523) (5,122)
Cash and Due From Banks-Beginning of Period 19,123 18,013
--------------------------------
Cash and Due From Banks-End of Period $13,600 $12,891
================================
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $7,117 $6,184
Income taxes $500 $836
</TABLE>
<PAGE>
FIRST BANKING CENTER, INC AND SUBSIDIARY
NOTES TO CONSOLIDATE FINANCIAL STATEMENTS
June 30, 2000
Note 1. Basis of Presentation
In the opinion of Management, the accompanying unaudited consolidated financial
statements reflect all adjustments which are necessary to present a fair
statement of the results for the interim periods.
The accounting policies followed by the registrant are set forth in Note 1 to
the registrant's financial statements in the 1999 First Banking Center, Inc.
(the "Company") annual report which is incorporated by reference herein (see
exhibit A).
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FIRST BANKING CENTER, INC AND SUBSIDIARY
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As of June 30, 2000
The following discussion provides additional analysis of the financial condition
and results of operations of the Company for the year-to-date ended June 30,
2000. This discussion focuses on the significant factors that affected the
Company's earnings so far in 2000, with comparisons to 1999. As of June 30,
2000, First Banking Center (the "Bank") was the only direct subsidiary of the
Company and its operations contributed nearly all of the revenue for the year.
The Company provides various support functions for the Bank and receives payment
from the Bank for these services. These inter-company payments are eliminated
for the purpose of these consolidated financial statements. The Bank has two
wholly owned subsidiaries, FBC Financial Services, Corp., a brokerage and
financial services subsidiary, and FBC Burlington, Inc., an investment
subsidiary located in Nevada.
Overview
As of June 30, 2000, total Company assets were $397.8 million increasing 1.5%
from $392.1 million as of December 31, 1999. Total income for the first six
months of 2000 was $ 2.3 million or $1.52 per share, increasing 9.5% from $2.1
million or $1.40 per share for the first six months of 1999. The significant
items resulting in the above-mentioned results are discussed below.
Balance sheet analysis
Loans
As of June 30, 2000, loans outstanding were $311.4 million for an increase of
$12.7 million or 4.2% from December 31, 1999. During this six-month period,
Residential Real Estate loans increased $15 million, and Commercial Real Estate
loans increased $2.3 million or 13.5% and 2.8% respectively. At June 30, 2000,
Construction and Land Development loans were at $36.1 million or 11.6% of total
loans, Residential Real Estate loans were at $125.8 million or 40.4% of total
loans, Commercial loans were at $29.4 million or 9.4% of total loans, and
Commercial Real Estate loans were at $85.9 million or 27.6% of total loans.
Allowance for Loan Losses
The allowance for possible loan losses was $3.9 million or 1.25% of gross loans
at June 30, 2000, compared with $3.6 million or 1.21% of gross loans at December
31, 1999. Net recoveries for the six-month period were $130 thousand or .042% of
gross loans, compared to net charge-offs of $170 thousand or .057% of gross
loans for 1999. As of June 30, 2000, loans on non-accrual status totaled $1.2
million or .39% of gross loans compared to $1.3 million or .44% of gross loans
at December 31, 1999. The non-accrual loans consisted primarily of $1 million of
residential real estate loans. At June 30, 2000, the ratio of non-accrual loans
to the allowance for loan losses was 30.8% compared to 36.1% at December 31,
1999.
The Bank evaluates the adequacy of the allowance for loan losses based on an
analysis of specific problem loans, as well as on an aggregate basis. Management
reviews a calculation of the allowance for loan losses on a quarterly basis and
feels that the allowance for loan losses is adequate. The allowance for loan
loss is maintained at a level management considers adequate to provide for
potential future losses. The level of the allowance is based on management's
periodic and comprehensive evaluation of the loan portfolio, including past loan
loss experience; current economic trends; the volume, growth and composition of
the loan portfolio, and other relevant factors. Management also considers
reports of examinations furnished by State and Federal banking authorities in
this regard.
Investments securities - Available for Sale
The securities available-for-sale portfolio increased $3 million or 5.5% from
December 31, 1999 to June 30, 2000. This increase was due primarily to increased
balances in a money market mutual fund.
Deposits and Borrowed Funds
As of June 30, 2000, total deposits were $310.7 million, which is an increase of
$4.6 million or 1.5% from December 31, 1999. Certificates of deposits increased
$6.8 million or 6.0% to $120.7 million. Money market savings and regular savings
deposits increased $3.6 million or 3.1% to $119 million. Demand Deposits
decreased $1.1 million or 2.2% to $50.5 million. Securities sold under agreement
to repurchase decreased $4 million or 18.9%. Federal Home Loan Borrowings
increased $594 thousand or 2.1% since December 31, 1999.
Capital resources
During the first six month of 2000, the Company's stockholders' equity increased
$1.8 million or 5.4%. Net income of $2.3 million was the primary reasons for the
increase in equity. Accumulated other comprehensive loss on available for sale
securities increased $11 thousand to a negative $672 thousand.
In December 1990, the Federal Reserve Board's risk-based guidelines became
effective. Under these guidelines capital is measured against the Company's
subsidiary bank's risk-weighted assets. The Company's tier 1 capital (common
stockholders' equity less goodwill) to risk-weighted assets was 10.9% at June
30, 2000, well above the 4% minimum required. Total capital to risk-adjusted
assets was 12.2%, also well above the 8% minimum requirement. The leverage ratio
was at 8.8% compared to the 4% minimum requirement.
According to FDIC capital guidelines, the Company is considered to be "well
capitalized."
Asset/liability management
The principal function of asset/liability management is to manage the balance
sheet mix, maturities, repricing characteristics and pricing components to
provide an adequate and stable net interest margin with an acceptable level of
risk over time and through interest rate cycles.
Interest-sensitive assets and liabilities are those that are subject to
repricing within a specific relevant time horizon. The Bank measures
interest-sensitive assets and liabilities, and their relationship with each
other at terms of immediate, quarterly intervals up to 1 year, and over 1 year.
Changes in net interest income, other than volume related, arise when interest
rates on assets reprice in a time frame or interest rate environment that is
different from the repricing period for liabilities. Changes in net interest
income also arise from changes in the mix of interest earning assets and
interest-bearing liabilities.
The Bank's strategy with respect to asset/liability management is to maximize
net interest income while limiting its exposure to a potential downward
movement. Strategy is implemented by the Bank's management, which takes action
based upon its analysis of the Bank's present positioning, its desired future
positioning, economic forecasts, and its goals. It is the Bank's desire to
maintain a cumulative GAP of positive or negative 15% of rate sensitive assets
at the one-year time frame. The current percentage is 5.8%, which compares to a
negative 4% as of December 31, 1999.
Liquidity
The liquidity position of the Company is managed to ensure that sufficient funds
are available to meet customers' needs for loans and deposit withdrawals.
Liquidity to meet demand is provided by maintaining marketable investment
securities, Federal Funds Sold, as well as, maintaining a full line of
competitively priced deposit and short-term borrowing products. The Bank is also
a member of the Federal Home Loan Bank system, which provides the Company with
an additional source of liquidity. The Bank is authorized to borrow up to 60% of
the book value of its 1-4 family real estate mortgages secured by a security
agreement pledging the Bank's 1-4 family real estate mortgages with a carrying
value of $125.8 million. During this six-month period of June 30, 2000, the
Company's loan to deposit ratio increased from 96% to 100%. This increase was
due to an increase in loans of $12.7 million or 4.2% while deposits increased
$4.6 million or 1.5%. The additional funding for the increase in loans came from
a decrease in cash and federal funds sold.
While liquidity within the banking industry continues to tighten management is
unaware of any recommendations by regulatory authorities, known trends, events
or uncertainties that will have or that are reasonably likely to have a material
effect on the Company's liquidity, capital resources, or operations.
Results of operations
Net Interest Income
Net interest income is the difference between interest income and fees on loans
and interest expense, and is the largest contributing factor to net income for
the Company. All discussions of rate are on a tax-equivalent basis, which
accounts for income earned on securities that are not fully subject to federal
taxes. Net interest income for the first six months of 2000 was $7.8 million,
increasing 4.8% over the 1999 level of $7.5 million. Net interest income as a
percentage of average earning assets was 4.52% for the first six month of 2000
versus 4.61% for the first six months of 1999.
Total interest income increased $1.4 million as average-earning assets increased
from $338.4 million to $364.5 million or 7.7%. The yields on interest earning
asset increased from 8.19% to 8.42%.
The increase in interest income in 2000 is due primarily to an increase in
interest and fees on loans. Interest and fees on loans increased to $13.3
million or 13.2% from $11.7. The increase in loan income was the result of a
$34.5 million or 12.8% increase in average balances outstanding.
Total interest expense increased $1.0 million. This increase was due to an
increase in average interest bearing deposits of $19.5 million or 8.3% and an
increase in average Federal Home Loan Borrowings of $7.8 million or 37.8%. The
cost of all interest bearing liabilities increased from 4.27% to 4.66%.
Provision for loan losses
The Bank has established the allowance for loan losses to reduce the gross level
of loans outstanding by an estimate of uncollectible loans. As loans are deemed
uncollectible, they are charged against the allowance. A provision for loan
losses is expensed against current income on a monthly basis. This provision
acts to replenish the allowance for loan losses to accommodate charge-offs and
growth in the loan portfolio, thereby maintaining the allowance at an adequate
level.
During the first six months of 2000 and 1999, $180 thousand and $165 thousand
respectively was charged to current earnings and added to the allowance for loan
losses.
Non-interest income
Non-interest income, during the first six months of 2000, increased $219
thousand or 16.8% from the first six months of 1999. This increase is due
primarily to increased income from service charges on deposit accounts, which
increased $71 thousand or 12.3%, Trust Department income which increased $45
thousand or 25.0%, and other income increased $45 thousand or 100%. This
increase in other income was the result of a penalty realized on a contract the
bank had with an equipment vendor.
Non-interest expense
Non-interest expense, during the first six months of 2000, increased from $5.6
million to $6.1 million an increase of $477 thousand or 8.5%. Salaries and
benefits increased $208 thousand or 6.6%, equipment expense increased $91
thousand or 15.2%, occupancy expense increased $28 thousand or 6.8%, advertising
expense increased $23 thousand or 21.9%, and data processing services increased
$14 thousand or 4.8%.
<PAGE>
Part II-OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
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 and Reports on Form 8-K
None
Exhibit A:
FIRST BANKING CENTER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999,1998, 1997
NOTE 1 Summary of Significant Accounting Policies
--------------------------------------------------------------------------------
A. Consolidation
The consolidated financial statements of First Banking Center, Inc. include the
accounts of its wholly owned subsidiary, First Banking Center. First Banking
Center includes the accounts of its wholly owned subsidiaries, FBC-Burlington,
Inc. and FBC Financial Services Corp. The consolidated financial statements have
been prepared in conformity with generally accepted accounting principles and
conform to general practices within the banking industry. All significant
intercompany accounts and transactions have been eliminated in the consolidated
financial statements.
B. Nature of banking activities
The consolidated income of First Banking Center, Inc. is principally from the
income of its wholly owned subsidiary. The subsidiary Bank grants agribusiness,
commercial, residential and consumer loans, accepts deposits and provides trust
services to customers primarily in southeastern and south central Wisconsin. The
subsidiary Bank is subject to competition from other financial institutions and
nonfinancial institutions providing financial products. Additionally the Company
and the subsidiary Bank are subject to the regulations of certain regulatory
agencies and undergo periodic examination by those regulatory agencies.
C. Use of estimates
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change in the near
term relate to the determination of the allowance for loan losses, and the
valuation of foreclosed real estate and deferred tax assets.
D. Cash and cash equivalents
For purposes of reporting cash flows, cash and cash equivalents are defined as
those amounts included in the balance sheet caption "cash and due from banks."
The subsidiary Bank maintains amounts due from banks, which, at times, may
exceed federally insured limits. The subsidiary Bank has not experienced any
losses in such accounts.
E. Available for sale securities
Securities classified as available for sale are those debt securities that the
subsidiary Bank intends to hold for an indefinite period of time, but not
necessarily to maturity. Any decision to sell a security classified as available
for sale would be based on various factors, including significant movements in
interest rates, changes in the maturity mix of the subsidiary Bank's assets and
liabilities, liquidity needs, regulatory capital consideration, and other
similar factors. Securities classified as available for sale are carried at fair
value. Unrealized gains or losses are reported as increases or decreases in
comprehensive income, net of the related deferred tax effect. Realized gains or
losses, determined on the basis of the cost of specific securities sold, are
included in earnings.
F. Loans
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or payoff is reported at the amount of unpaid
principal, reduced by the allowance for loan losses. Interest income is accrued
on the unpaid principal balance. The accrual of interest income on impaired
loans is discontinued when, in the opinion of management, there is reasonable
doubt as to the borrower's ability to meet payment of interest or principal when
they become due. When interest accrual is discontinued, all unpaid accrued
interest is reversed. Cash collections on impaired loans are credited to the
loan receivable balance and no interest income is recognized on those loans
until the principal balance is current. Accrual of interest is generally resumed
when the customer is current on all principal and interest payments and has been
paying on a timely basis for a period of time.
G. Mortgage loans held for sale
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized through a valuation allowance by charges to
income. All sales are made without recourse.
H. Allowance for loan losses
The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses when
management believes that the collectibility of the principal is unlikely. The
allowance for loan losses are adequate to cover probable credit losses relating
to specifically identified loans, as well as probable credit losses inherent in
the balance of the loan portfolio. In accordance with FASB Statements 5 and 114,
the allowance is provided for losses that have been incurred as of the balance
sheet date. The allowance is based on past events and current economic
conditions, and does not include the effects of expected losses on specific
loans or groups of loans that are related to future events or expected changes
in economic conditions. While management uses the best information available to
make its evaluation, future adjustments to the allowance may be necessary if
there are significant changes in economic conditions. Impaired loans are
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. A loan is impaired when it is probable the creditor will
be unable to collect all contractual principal and interest payments due in
accordance with the terms of the loan agreement.
In addition, various regulatory agencies periodically review the allowance for
loan losses. These agencies may require the bank to make additions to the
allowance for loan losses based on their judgments of collectibility based on
information available to them at the time of their examination.
I. Office buildings and equipment
Depreciable assets are stated at cost less accumulated depreciation. Provisions
for depreciation are computed on straight-line and accelerated methods over the
estimated useful lives of the assets, which range from 15 to 50 years for
buildings and 2 to 12 years for equipment.
J. Profit-sharing plan
The Company has established a trusteed contributory 401(k) profit-sharing plan
for qualified employees. The Company's policy is to fund contributions as
accrued.
K. Other real estate owned
Other real estate owned, acquired through partial or total satisfaction of loans
is carried at the lower of cost or fair value less cost to sell. At the date of
acquisition losses are charged to the allowance for loan losses. Revenue and
expenses from operations and changes in the valuation allowance are included in
loss on foreclosed real estate.
L. Income taxes
The Company files a consolidated federal income tax return and individual
subsidiary state income tax returns. Accordingly, amounts equal to tax benefits
of those companies having taxable federal losses or credits are reimbursed by
the other companies that incur federal tax liabilities.
Amounts provided for income tax expense are based on income reported for
financial statement purposes and do not necessarily represent amounts currently
payable under tax laws. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes. The differences relate principally to the reserve
for loan losses, nonaccrual loan income, deferred compensation, pension, fixed
assets and unrealized gains and losses on available for sale securities.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.
M. Off-balance-sheet financial instruments
In the ordinary course of business the subsidiary Bank has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit, commitments under credit card arrangements, commercial letters of credit
and standby letters of credit. Such financial instruments are recorded in the
financial statements when they are funded or related fees are incurred or
received.
N. Trust assets and fees
Property held for customers in fiduciary or agency capacities is not included in
the accompanying balance sheet, since such items are not assets of the Company.
In accordance with established industry practice, income from trust fees is
reported on the cash basis. Reporting of trust fees on an accrual basis would
have no material effect on reported income.
O. Earnings per share
Earnings per share are computed based upon the weighted average number of common
shares outstanding during each year. In the computation of diluted earnings per
share, all dilutive stock options are assumed to be exercised at the beginning
of each year and the proceeds are used to purchase shares of the Company's
common stock at the average market price during the year.
P. Fair value of financial instruments
Financial Accounting Standards Board Statement No. 107, "Disclosures About Fair
Value of Financial Instruments", requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. Statement No. 107 excludes certain
financial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
Carrying Amounts Approximate Fair Values for the Following Instruments
Cash and due from banks
Federal funds sold
Interest-bearing deposits in banks
Available for sale securities
Accrued interest receivable
Variable rate loans that reprice frequently where no significant
change in credit risk has occurred
Demand deposits
Variable rate money market accounts
Variable rate certificates of deposit
Accrued interest payable
U.S. Treasury Note account
Discounted Cash Flows
Using interest rates currently being offered on instruments with
similar terms and with similar credit quality:
All loans except variable rate loans described above
Fixed rate certificates of deposit
Other borrowings
Quoted fees currently being charged for similar instruments
Taking into account the remaining terms of the agreements and the
counterparties' credit standing:
Off-balance-sheet instruments
Guarantees
Letters of credit
Lending commitments
Since the majority of the Company's off-balance-sheet instruments consist of
nonfee-producing, variable rate commitments, the Company had determined it does
not have a distinguishable fair value.
Q. Reclassification
Certain 1997 and 1998 amounts have been reclassified to conform with the 1999
presentation. The reclassifications have no effect on reported amounts of net
income or equity.
<PAGE>
FIRST BANKING CENTER, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1943, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
First Banking Center, Inc.
July 31, 2000
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Date Brantly Chappell
Chief Executive Officer
July 31, 2000
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Date James Schuster
Chief Financial Officer
