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 JUNE 30, 2002
[ ] 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 AUGUST 12, 2002 THE REGISTRANT HAD OUTSTANDING 1,403,710 SHARES OF COMMON
STOCK.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): YES [ ] NO [X]
First BancTrust Corporation
Form 10-QSB Quarterly Report
Index Page
PART I - Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets 1
(As of June 30, 2002 and December 31, 2001)
Condensed Consolidated Statements of Income 2
(For the six months ended June 30, 2002 and 2001)
Condensed Consolidated Statements of Income 3
(For the three months ended June 30, 2002 and 2001)
Condensed Consolidated Statements of Cash Flows 4
(For the six months ended June 30, 2002 and 2001)
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II - Other Information
Item 1 Legal Proceedings 18
Item 2 Changes in Securities 18
Item 3 Defaults Upon Senior Securities 18
Item 4 Submission of Matters to a Vote of Security
Holders 18
Item 5 Other Information 19
Item 6 Exhibits and Reports on Form 8-K 19
SIGNATURES 20
FIRST BANCTRUST CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of dollars except share data)
JUNE 30, DECEMBER 31,
2002 2001
(unaudited)
------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 5,475 $ 7,308
Interest-bearing demand deposits 4,554 9,438
--------- ---------
Cash and cash equivalents 10,029 16,746
Available-for-sale securities 85,292 65,207
Loans held for sale 597 597
Loans, net of allowance for loans losses of $2,032 and $1,657 104,541 100,656
Premises and equipment 2,390 2,435
Foreclosed assets held for sale, net 616 807
Interest receivable 2,010 2,116
Loan servicing rights 2,059 2,095
Cash surrender value of life insurance 3,564 3,479
Federal Home Loan Bank stock 3,625 1,582
Other assets 313 317
--------- ---------
Total assets $ 215,036 $ 196,037
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest bearing $ 14,087 $ 13,963
Interest bearing 146,215 127,353
--------- ---------
Total deposits 160,302 141,316
Federal Home Loan Bank advances and other debt 25,508 25,516
Pass through payments received on loans sold 25 270
Advances from borrowers for taxes and insurance 75 140
Deferred income taxes 492 127
Interest payable 160 124
Other liabilities 600 826
--------- ---------
Total liabilities 187,162 168,319
--------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 1,000,000 shares authorized
and unissued
Common stock, $.01 par value, 5,000,000 shares
authorized; 1,520,875 shares issued and outstanding 15 15
Additional paid-in capital 14,410 14,382
Retained earnings 15,789 15,214
Accumulated other comprehensive income 764 247
--------- ---------
30,978 29,858
Unallocated employee stock ownership plan shares -
102,665 and 110,267 shares (1,187) (1,275)
Unearned recognition and retention plan shares -
16,858 and 0 shares (278)
Treasury stock, at cost - 111,000 and 62,600 shares (1,639) (865)
--------- ---------
Total stockholders' equity 27,874 27,718
--------- ---------
Total liabilities and stockholders' equity $ 215,036 $ 196,037
========= =========
See notes to condensed consolidated financial statements.
1
FIRST BANCTRUST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars except share data)
(unaudited)
SIX MONTHS ENDED JUNE 30 2002 2001
------------------------------------------------------------------------------------
INTEREST INCOME
Loans
Taxable $ 4,422 $ 5,068
Tax exempt 22 27
Investment securities
Taxable 1,755 1,315
Tax exempt 145 120
Deposits with financial institutions 69 206
FHLB stock dividends 61 51
------- -------
Total interest income 6,474 6,787
------- -------
INTEREST EXPENSE
Deposits 2,279 3,009
Federal Home Loan Bank advances and other debt 582 726
------- -------
Total interest expense 2,861 3,735
------- -------
NET INTEREST INCOME 3,613 3,052
Provision for loan losses 496 272
------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,117 2,780
------- -------
NONINTEREST INCOME
Service charges on deposit accounts 222 257
Loan servicing fees (364) 56
Other customer fees 434 415
Net gains on loan sales 596 384
Brokerage fees 90 12
Abstract and title fees 184 183
Other income 119 73
------- -------
Total noninterest income 1,281 1,380
------- -------
NONINTEREST EXPENSE
Salaries and employee benefits 1,961 1,686
Net occupancy expenses 91 95
Equipment expenses 292 318
Data processing fees 228 249
Advertising and promotion 83 78
Professional fees 180 160
Other expenses 438 318
------- -------
Total noninterest expense 3,273 2,904
------- -------
INCOME BEFORE INCOME TAX 1,125 1,256
Income tax expense 407 461
------- -------
NET INCOME 718 795
OTHER COMPREHENSIVE INCOME
Unrealized appreciation on available-for-sale securities 517 284
------- -------
COMPREHENSIVE INCOME $ 1,235 $ 1,079
======= =======
EARNINGS PER SHARE
Basic $ 0.54 $ N/A
======= =======
Diluted $ 0.54 $ N/A
======= =======
See notes to condensed consolidated financial statements.
2
FIRST BANCTRUST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars except share data)
(unaudited)
THREE MONTHS ENDED JUNE 30 2002 2001
--------------------------------------------------------------------------------------
INTEREST INCOME
Loans
Taxable $ 2,219 $ 2,515
Tax exempt 11 14
Investment securities
Taxable 891 690
Tax exempt 73 61
Deposits with financial institutions 34 139
FHLB stock dividends 41 25
------- -------
Total interest income 3,269 3,444
------- -------
INTEREST EXPENSE
Deposits 1,119 1,493
Federal Home Loan Bank advances and other debt 293 328
------- -------
Total interest expense 1,412 1,821
------- -------
NET INTEREST INCOME 1,857 1,623
Provision for loan losses 297 125
------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,560 1,498
------- -------
NONINTEREST INCOME
Service charges on deposit accounts 127 127
Loan servicing fees (220) 34
Other customer fees 211 239
Net gains on loan sales 432 215
Brokerage fees 88 7
Abstract and title fees 80 99
Other income 67 37
------- -------
Total noninterest income 785 758
------- -------
NONINTEREST EXPENSE
Salaries and employee benefits 1,044 871
Net occupancy expenses 46 47
Equipment expenses 137 154
Data processing fees 115 124
Advertising and promotion 43 39
Professional fees 88 72
Other expenses 217 179
------- -------
Total noninterest expense 1,690 1,486
------- -------
INCOME BEFORE INCOME TAX 655 770
Income tax expense 215 288
------- -------
NET INCOME 440 482
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized appreciation (depreciation) on available-for-sale
securities 888 (149)
------- -------
COMPREHENSIVE INCOME $ 1,328 $ 333
======= =======
EARNINGS PER SHARE
Basic $ 0.34 $ N/A
======= =======
Diluted $ 0.34 $ N/A
======= =======
See notes to condensed consolidated financial statements.
3
FIRST BANCTRUST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
(unaudited)
SIX MONTHS ENDED JUNE 30 2002 2001
-----------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 718 $ 795
Items not requiring (providing) cash
Depreciation and amortization 129 148
Provision for loan losses 496 272
Investment securities amortization (accretion), net -- (1)
Amortization of loan servicing rights 615 170
Deferred income taxes 4 (8)
Net gain on sales of foreclosed assets 4 10
Net gains on sales of premises and equipment - 2
Net gains on loan sales (596) (384)
Loans originated for sale (15,223) (12,529)
Proceeds from sales of loans originated for resale 15,241 11,581
Federal Home Loan Bank stock dividends (43) (56)
Compensation expense related to employee stock ownership plan 118 46
Compensation expense related to recognition and retention plan 18 --
Changes in
Interest receivable 106 113
Cash surrender value (85) (371)
Other assets 4 274
Interest payable 36 15
Other liabilities (227) 286
-------- --------
Net cash provided by operating activities 1,315 363
-------- --------
INVESTING ACTIVITIES
Net change in interest-bearing time deposits -- 50
Purchases of available-for-sale securities (29,574) (19,049)
Proceeds from maturities of available-for-sale securities 10,187 9,857
Proceeds from sales of available-for-sale securities 179 --
Purchase of Federal Home Loan Bank stock (2,000) --
Net collections (originations) in loans (4,753) 1,849
Proceeds from sales of foreclosed assets 559 351
Purchases of premises and equipment (84) (86)
Proceeds from sale of premises and equipment -- 1
-------- --------
Net cash used in investing activities (25,486) (7,027)
-------- --------
4
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, money market,
NOW and savings deposits $ 124 $ (1,261)
Net increase (decrease) in certificates of deposit 18,862 (1,923)
Net decrease in short-term borrowings -- (1,500)
Proceeds from the issuance of Federal Home Loan Bank advances -- 17,500
Repayment of Federal Home Loan Bank advances and other debt (8) (13,507)
Pass through payments received on loans sold (245) (233)
Net increases (decreases) in advances by borrowers for taxes and insurance (65) 233
Proceeds from stock issuance -- 14,379
Dividends paid (143) --
Purchase of employee stock ownership plan shares -- (1,405)
Purchase of treasury stock (774) --
Purchase of stock for recognition and retension plan (297) --
-------- --------
Net cash provided by financing activities 17,454 12,283
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,717) 5,619
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 16,746 9,146
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 10,029 $ 14,765
======== ========
SUPPLEMENTAL CASH FLOWS INFORMATION
Real estate and other assets acquired in settlement of loans $ 372 $ 1,008
Interest paid 2,825 2,986
Income tax paid 557 282
See notes to condensed consolidated financial statements.
5
FIRST BANCTRUST CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements
have been prepared pursuant to the rules and regulations for reporting on Form
10-QSB. Accordingly, certain disclosures required by generally accepted
accounting principles are not included herein. These interim statements should
be read in conjunction with the audited consolidated financial statements and
notes thereto, dated February 1, 2002, 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, 2002. In the opinion
of management of the Company, the accompanying unaudited interim condensed
consolidated financial statements reflect all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the consolidated
financial position and consolidated results of operations for the periods
presented. The results of operations for the three and six months ended June 30,
2002 and 2001 are not necessarily indicative of the results to be expected for
the full year.
6
Note 2 - Conversion to Stock Form of Ownership
On October 16, 2000 the Board of Directors of First Bank & Trust, sb (the
"Bank") adopted a Plan of Conversion to convert from an Illinois mutual savings
bank to an Illinois stock savings bank with the concurrent formation of a
holding company. First BancTrust Corporation (the "Company") was incorporated in
November 2000. A subscription offering of the shares of common stock, $0.01 par
value per share ("Common Stock"), of the Company was offered initially to
eligible deposit account holders of First Bank & Trust, sb. The Bank's
conversion from an Illinois mutual savings bank to an Illinois stock savings
bank was completed on April 18, 2001 (the "Conversion").
In connection with the Conversion, the Company issued 1,520,875 shares of Common
Stock to the public for gross proceeds of $15.2 million, $14.4 million net of
conversion costs. The Bank issued all of its outstanding capital stock to the
Company in exchange for one-half of the net proceeds of the offering, which
amounted to $7.2 million. The Company accounted for the purchase in a manner
similar to a pooling of interests, whereby assets and liabilities of the Bank
maintain their historical cost basis in the consolidated company.
Note 3 - Employee Stock Ownership Plan
In connection with the Conversion, the Bank established an Employee Stock
Ownership Plan ("ESOP") for the benefit of its employees. In the initial stock
offering, deposit account owners
7
purchased all available shares. The ESOP purchased required shares in the open
market subsequent to the conversion date for $1.4 million with funds borrowed
from the Company. The ESOP expense was $62,000 and $118,000 for the three-month
and six-month periods ended June 30, 2002, respectively.
Shares purchased by the ESOP with the loan proceeds are held in a suspense
account and are allocated to ESOP participants based on a pro rata basis as debt
service payments are made to the Company. The loan is secured by the shares
purchased with the proceeds and will be repaid by the ESOP with funds from the
Company's discretionary contributions to the ESOP and earnings on ESOP assets.
Principal payments are scheduled to occur over an eight-year period.
Note 4 - Earnings per Share
Amounts reported as earnings per common share reflect earnings available to
common stockholders for the period divided by the weighted average number of
common shares outstanding during the period. Earnings per share is calculated
beginning with the date of the conversion of April 18, 2001 and, therefore, no
earnings per share is reported for the three-month and six-month periods ended
June 30, 2001.
Earnings per share were computed as follows (dollar amounts in thousands except
share data):
Weighted
Average Per Share
Income Shares Amount
-------------------------------------
For the six months ended June 30, 2002:
--------------------------------------------------
Basic Earnings Per Share:
Income available to common stockholders $ 718 1,325,528 $ 0.54
-------------------------------
Effect of Dilutive Securities:
Unearned recognition and retention plan shares 2,726
-------------------------------
Diluted Earnings per Share:
Income available to common stockholders and
assumed conversions $ 718 1,328,254 $ 0.54
===============================
For the three months ended June 30, 2002:
--------------------------------------------------
Basic Earnings Per Share:
Income available to common stockholders $ 440 1,303,847 $ 0.34
Effect of Dilutive Securities:
Unearned recognition and retention plan shares 5,451
-------------------------------
Diluted Earnings per Share:
Income available to common stockholders and
assumed conversions $ 440 1,309,298 $ 0.34
===============================
8
Note 5 - Authorized Share Repurchase Program
On October 3, 2001 the Company announced that the Board of Directors authorized
the open-market stock repurchases of up to 5%, or 76,044 shares of the Company's
outstanding stock over the one-year period ending September 27, 2002. On April
18, 2002 the Company announced that the Board of Directors has authorized the
additional open-market stock repurchases of up to 5%, or 67,407 shares of the
Company's outstanding stock over the next one-year period ending March 14, 2003,
as in the opinion of management, market conditions warrant. As of August 12,
2002, the Company had repurchased 117,165 shares.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995 as amended, and is including this statement for purposes of these
safe harbor provisions. Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies and expectations of the
Company, are generally identifiable by use of the words "believe," "expect,"
"intend," "anticipate," "estimate," "project," or similar expressions. The
Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
affect on the operations and future prospects of the Company and its
wholly-owned subsidiaries include, but are not limited to, changes in: interest
rates; general economic conditions; legislative/regulatory provisions; monetary
and fiscal policies of the U.S. Government, including policies of the U.S.
Treasury and the Federal Reserve Board; the quality of composition of the loan
or investment portfolios; demand for loan products; deposit flows; competition;
demand for financial services in the Company's market area; and accounting
principles, policies, and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statement. Further information concerning the Company and
its business, including additional factors that could materially affect the
Company's financial results, is included in the Company's filings with the
Securities and Exchange Commission.
The following discussion compares the financial condition of First BancTrust
Corporation (Company), First Bank & Trust, s.b. (Bank), First Charter Service
Corporation, ECS Service Corporation, and the Bank's wholly owned subsidiary,
Community Finance Center, Inc. at June 30, 2002 to its financial condition at
December 31, 2001 and the results of operations for the three-month and
six-month periods ending June 30, 2002 to the same periods in 2001. In February
2002, the Company filed a declaration to become a financial holding company
which became effective March 16, 2002. Ownership of First Charter Service
Corporation and ECS Service Corporation has been transferred from the Bank to
the Company. This discussion should be read in conjunction with the interim
financial statements and notes included herein.
FINANCIAL CONDITION
Total assets of the Company increased by $19.0 million or 9.69%, to $215.0
million at June 30, 2002 from $196.0 million at December 31, 2001.
Available-for-sale securities increased by $20.0 million, loans net of allowance
for loan losses increased by $3.9 million, and Federal Home Loan Bank stock
increased by $2.0 million, partially offset by a $6.7 million decrease in cash
and cash equivalents and a $191,000 decrease in foreclosed assets held for sale.
10
The Company's cash and due from banks decreased by $1.8 million or 25.08% to
$5.5 million at June 30, 2002 from $7.3 million at December 31, 2001.
Interest-bearing demand deposits decreased $4.8 million or 51.75% to $4.6
million at June 30, 2002 compared to $9.4 million at December 31, 2001. The
decrease in cash and cash equivalents was primarily used to fund investment
purchases and loans. Investment securities available for sale amounted to $85.3
million at June 30, 2002 compared to $65.2 million at December 31, 2001, a $20.1
million or 30.80% increase. The increase resulted from $29.6 million in
investment purchases, primarily in mortgage-backed securities and Federal Home
Loan Bank ("FHLB") agency bonds and an increase of $877,000 in market value,
partially offset by calls, maturities, and principal repayments of $10.2 million
and sales of $179,000.
The Company's net loan portfolio increased by $3.9 million or 3.86% to $104.5
million at June 30, 2002 from $100.7 million at December 31, 2001. Gross loans
increased by $4.3 million while the allowance for loan losses increased by
$375,000. Non-farm non-residential real estate loans increased by $1.0 million,
agricultural production loans increased by $2.9 million, and consumer loans
increased by $1.3 million. Loans secured by 1-4 family residences decreased by
$600,000, construction loans declined by $170,000 as they were converted to
permanent financing, and farmland loans decreased by $300,000.
At June 30, 2002 the allowance for loan losses was $2.0 million or 1.91% of the
total loan portfolio compared to $1.7 million, or 1.62% at December 31, 2001.
The increase in the allowance for loan losses is primarily due to an increase in
classified assets and an additional amount set aside for one agricultural
credit. The Company determines classified assets into watch, substandard,
doubtful, and loss categories, as defined by federal regulation. Classified
assets at June 30, 2002 were $6.39 million compared to $5.10 million at December
31, 2001. The Company's nonperforming loans and troubled debt restructurings,
which are included in the classification asset total, as a percentage of total
loans increased from 2.17% or $2.2 million at December 31, 2001 to 3.05% or $3.2
million at June 30, 2002. The Company's nonperforming loans and troubled debt
restructurings of $3.2 million at June 30, 2002 consist of $2.8 million in
nonperforming loans primarily secured by agricultural production loans and 1-4
family residences and restructured loans of $400,000 secured by commercial and
agricultural loans. During the second quarter the Company identified an
additional exposure of $270,000 relating to one agricultural borrower on loans
secured by farm equipment. The Company's recoveries of $56,000 for the
six-months ended June 30, 2002 partially offset the charge-offs for the
six-months ended June 30, 2002 of $177,000. 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.
Foreclosed assets have decreased $191,000 to $616,000 at June 30, 2002, compared
to $807,000 at December 31, 2001. As of June 30, 2002 the Company had eight real
estate properties totaling $409,000 consisting of four single-family dwellings,
two commercial buildings, one multi-family dwelling and one farmland property,
and other repossessed assets of $207,000. Foreclosed assets are carried at lower
of cost or net realizable value.
Interest receivable declined by $106,000 or 5.01% from $2.1 million to $2.0
million primarily due to the receipt of annual payments on agricultural loans.
Federal Home Loan Bank stock increased by $2.0 million to $3.6 million at June
30, 2002 from $1.6 million at December 31, 2001. The increase was due to an
additional $2.0 million investment in the stock.
11
The Company's total deposits amounted to $160.3 million at June 30, 2002
compared to $141.3 million at December 31, 2001, an increase of $19.0 million.
The increase in total deposits was due to a $18.9 million increase in interest
bearing deposits. The increase in interest bearing deposits was a result of an
increase of $18.0 million in interest-bearing checking accounts, and a $1.6
million increase in savings accounts, partially offset by a $675,000 reduction
in certificates of deposit. Of the $18.0 million increase in interest-bearing
checking accounts, approximately $14.2 million is a business money market
account from one corporate depositor, and $2.8 million is from growth in the
Investor Checking product, which has a comparable rate to a money market account
without the transaction limitations. The $14.2 million business money market
account was opened in June 2002 and represents 8.91% of total deposits as of
June 30, 2002. The Company believes it has adequate resources to fund the
withdrawal of this deposit either through internal funding or Federal Home Loan
Bank advances.
Pass through payments received on loans sold declined by $245,000 from $270,000
at December 31, 2001 to $25,000 at June 30, 2002. Many agricultural loans sold
to investors in the secondary market have annual payments due at the end of the
year. As a result, the balance at December 31, 2001 related to payments received
by the Company which were in the process of being remitted to the investors.
Advances by borrowers for taxes and insurance decreased by $65,000 from $140,000
at December 31, 2001 to $75,000 at June 30, 2002. The decrease was due to real
estate taxes being paid in June 2002. Adjustments to deferred income taxes for
the tax effect of the change in market value of investment securities available
for sale resulted in an increase of $365,000 to $492,000 at June 30, 2002
compared to $127,000 at December 31, 2001. Other liabilities declined by
$226,000 from $826,000 at December 31, 2001 to $600,000 at June 30, 2002,
primarily due to payment of income taxes.
Stockholders' equity at June 30, 2002 was $27.9 million compared to $27.7
million at December 31, 2001, a decrease of $156,000. Accumulated comprehensive
income increased by $517,000, due to an increase in the fair value of securities
available for sale. Retained earnings increased by $575,000 from net income of
$718,000, partially offset by $143,000 in dividends declared and paid. Treasury
stock increased from $865,000 at December 31, 2001 to $1.6 million at June 30,
2002 due to open-market share repurchases amounting to $774,000. The recognition
and retention plan trust purchased $297,000 of Company stock with $18,000
allocated to participants.
RESULTS OF OPERATIONS
COMPARISON OF SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001
Net income for the six months ended June 30, 2002 decreased by $77,000 or 9.69%
from $795,000 for the six months ended June 30, 2001 to $718,000 for the six
months ended June 30, 2002. The decrease in net income is primarily due to
increases in non-interest expense and provision for loan losses, and a decrease
in noninterest income, partially offset by an increase in net interest income.
Net interest income increased $561,000 or 18.4% from $3.05 million for the six
months ended June 30, 2001 to $3.61 million for the six months ended June 30,
2002. The primary reason for the increase in net interest income was a decrease
in interest expense of $874,000 partially offset by a decrease of $313,000 in
interest income. The Company's net interest margin was 3.93% and 3.68% during
the six months ended June 30, 2002 and 2001, respectively. The net interest
margin increased as a result of an increase in the interest spread from 3.06%
for the six months ended June 30, 2001 to 3.49% for the six months ended June
30, 2002. The increase in interest
12
spread resulted from a decrease in rate on interest-bearing liabilities
partially offset by a decrease in rate on interest-earning assets.
Loan interest income for the six months ended June 30, 2002 declined by $651,000
to $4.4 million from $5.1 million for the six months ended June 30, 2001 due to
both a decrease in yield of 75 basis points and a decrease in the average
portfolio size of $5.6 million. Investment income increased by $465,000 to $1.8
million for the six months ended June 30, 2002 from $1.4 million for the six
months ended June 30, 2001 due to an increase of $22.0 million in the average
investment portfolio, which was partially offset by a decrease in average yield
by 66 basis points. Interest income earned on deposits with financial
institutions decreased by $137,000 due to a 3.69% decrease in the average rate
partially offset by an $834,000 increase in the average balance.
Interest expense declined by $874,000 from $3.7 million for the six months ended
June 30, 2001 to $2.9 million for the six months ended June 30, 2002. Interest
expense on deposits declined from $3.0 million for the six months ended June 30,
2001 to $2.3 million for the six months ended June 30, 2002 due to lower rates
paid on deposits which was partially offset by a higher volume in
interest-bearing checking accounts. Interest expense on Federal Home Loan Bank
advances and other borrowed money has declined by $144,000 due to a lower
average balance in borrowings as well as lower interest rates.
For the six months ended June 30, 2002 and 2001 the provision for losses on
loans was $496,000 and $272,000, respectively, an increase of $224,000. The
provision for the six months ended June 30, 2002 was based on the Company's
analysis of the classification of assets and allowance for loan losses.
Nonperforming loans and troubled debt restructurings are included in the
classification of assets, as well as other loans identified with an inherent
weakness or potential for loss. Management meets on at least a quarterly basis
to review the adequacy of the allowance for loan losses by classifying loans in
compliance with regulatory classifications. Classified loans are individually
reviewed to arrive at specific reserve levels for those loans. Once the specific
portion for each loan is calculated, management calculates a historical portion
for each category based on a combination of loss history, current economic
conditions, and trends in the portfolio. While the Company cannot assure that
future chargeoffs and/or provisions will not be necessary, the Company's
management believes that, as of June 30, 2002, its allowance for loan losses was
adequate.
Noninterest income decreased $99,000 or 7.17% from $1.38 million for the six
months ended June 30, 2001 to $1.28 million for the six months ended June 30,
2002. The decrease was primarily a result of a reduction in loan servicing fees
of $420,000 partially offset by increased net gains on loan sales of $212,000
and increased brokerage fees of $78,000.
Loan servicing fees declined from $56,000 for the six months ended June 30, 2001
to a negative $364,000 for the six months ended June 30, 2002. This decline was
primarily due to the accelerated amortization of servicing assets resulting from
refinanced loans due to a decrease in loan interest rates, and an identification
of a servicing asset impairment. Loans sold for the six months ended June 30,
2002 were $15.2 million, the majority being loans secured by residential real
estate and farmland. Many loans which were refinanced had existing servicing
assets which were written off as the original loan was paid off. When the
refinanced loans were sold into the secondary market, servicing assets relating
to these loans are included in the gain on the sale of
13
loans as required by generally accepted accounting principles. Amortization of
servicing assets increased from $169,000 for the six months ended June 30, 2001
as compared to $510,000 for the six months ended June 30, 2002. An additional
$105,000 was amortized in June, 2002 due to the identification of an impaired
servicing asset. Servicing assets are revalued periodically, and if the
valuation is lower than book value on servicing assets, an impairment exists,
and is required to be charged off.
Net gains on loan sales increased by $212,000 from $384,000 for the six months
ended June 30, 2001 to $596,000 for the six months ended June 30, 2002,
primarily due to gains related to capitalized servicing assets. Capitalized
servicing assets were $578,000 for the six months ended June 30, 2002 compared
to $345,000 for the six months ended June 30, 2001. Brokerage fees from First
Charter Service Corporation, a wholly owned subsidiary of the Company, increased
$78,000 from $12,000 for the six months ended June 30, 2001 to $90,000 for the
six months ended June 30, 2002. The increase was a result of a newly established
representative for Primevest Financial Services and a new referral program to
generate annuity sales.
Total noninterest expenses were $3.3 million for the six months ended June 30,
2002 as compared to $2.9 million for the six months ended June 30, 2001, an
increase of $369,000 or 12.7%. The primary reason for the increase was an
increase in salaries and employee benefits of $275,000 and an increase in other
expenses of $120,000. Salaries and employee benefits increased by $275,000 from
$1.69 million for the six months ended June 30, 2001 to $1.96 million for the
six months ended June 30, 2002 due to increased salaries expense, director fees,
employee stock ownership expense and training expense. Salaries expense
increased by $138,000 due primarily to normal pay increases, the addition of
three full-time employees and one part-time employee, and increased commissions
paid to brokerage employees due to higher sales volume. Employee stock ownership
expense increased by $78,000 due to six months expense for 2002 compared to
three months expense for 2001, as the Employee Stock Ownership Plan was adopted
in April, 2001. The Recognition and Retention Plan received shareholder approval
in April 2002, and the expense for the six months ended June 30, 2002 was
$17,000.
Other expenses increased by $120,000 from $318,000 for the six months ended June
30, 2001 to $438,000 for the six months ended June 30, 2002. The increase in
other expense is primarily due to increases in holding company expenses and
increased expenses related to disposition of foreclosed assets. Holding company
expenses increased by $39,000 due to increased corporate franchise tax and
filing fees, costs associated with the printing and distribution of the annual
reports and proxies, and other shareholder services. Expenses for disposition of
foreclosed assets increased by $38,000 for the six months ended June 30, 2002 as
foreclosed assets were liquidated.
Income tax expense was $407,000 for the six months ended June 30, 2002 as
compared to $461,000 for the six months ended June 30, 2001. The effective tax
rates were 36.2% and 36.7%, respectively, for the six months ended June 30, 2002
and 2001.
COMPARISON OF THREE MONTH PERIODS ENDED JUNE 30, 2002 AND 2001
Net income for the three months ended June 30, 2002 decreased by $42,000 or
8.71% from $482,000 for the three months ended June 30, 2001 to $440,000 for the
three months ended June 30, 2002. The decrease in net income is primarily due to
increases in noninterest expense and provision for loan losses, partially offset
by an increase in net interest income and a decrease in income tax expense.
Net interest income increased $234,000 or 14.4% from $1.62 million for the three
months ended June 30, 2001 to $1.86 million for the three months ended June 30,
2002. The primary reason for
14
the increase in net interest income was a decrease in interest expense of
$409,000 partially offset by a decrease of $175,000 in interest income. The
Company's net interest margin was 4.11% and 3.97% during the three months ended
June 30, 2002 and 2001, respectively. The net interest margin increased as a
result of an increase in the interest spread from 3.39% for the three months
ended June 30, 2001 to 3.66% for the three months ended June 30, 2002. The
increase in interest spread resulted from a decrease in rate on interest-bearing
liabilities partially offset by a decrease in rate on interest-earning assets.
Loan interest income decreased by $299,000 from $2.5 million for the three
months ended June 30, 2001 to $2.2 million for the three months ended June 30,
2002. The decrease is primarily due to a $6.2 million decrease in average
portfolio size as well as a 61 basis point decrease in yield. Income from
investment securities for the three months ended June 30, 2002 increased by
$213,000 due to a $21.1 million increase in the average investment portfolio,
partially offset by a 95 basis point decrease in average yield. Interest income
on deposits held with financial institutions decreased by $105,000 for the three
months ended June 30, 2002 compared to the same period in 2001 due primarily to
a rate decline of 5.38%.
Interest expense declined by $409,000 for the three months ended June 30, 2002
compared to the three months ended June 30, 2001 due to a decrease in rates paid
on deposits. Interest expense on deposits for the three months ended June 30,
2002 was $1.1 million compared to $1.5 million for the three months ended June
30, 2001, a reduction of $374,000 due to a decrease in rates paid of 1.72%
partially offset by an increase in the average balance of $15.3 million.
Interest on Federal Home Loan Bank advances and other borrowed money declined by
$35,000 due to reduced rates on borrowings.
For the three months ended June 30, 2002 and 2001 the provision for losses on
loans was $297,000 and $125,000, respectively, an increase of $172,000. The
provision for the three months ended June 30, 2002 was based on the Company's
analysis of the allowance for loan losses. Management meets on at least a
quarterly basis to review the adequacy of the allowance for loan losses by
classifying loans in compliance with regulatory classifications. Classified
loans are individually reviewed to arrive at specific reserve levels for those
loans. Once the specific portion for each loan is calculated, management
calculates a historical portion for each category based on a combination of loss
history, current economic conditions, and trends in the portfolio. While the
Company cannot assure that future chargeoffs and/or provisions will not be
necessary, the Company's management believes that, as of June 30, 2002, its
allowance for loan losses was adequate.
Noninterest income increased $27,000 or 3.56% from $758,000 for the three months
ended June 30, 2001 to $785,000 for the three months ended June 30, 2002. The
increase was primarily a result of increased net gains on loan sales of $217,000
and increased brokerage fees of $81,000 partially offset by a reduction in loan
servicing fees of $254,000.
Loan servicing fees declined from $34,000 for the three months ended June 30,
2001 to a negative $220,000 for the three months ended June 30, 2002. This
decline was primarily due to the accelerated amortization of servicing assets
resulting from increased principal reductions on the related loans, and an
impairment of servicing assets. Loans sold for the three months ended June 30,
2002 were $8.3 million, the majority being loans secured by residential real
estate and farmland. Many loans which were refinanced had existing servicing
assets which were written
15
off as the original loans paid off. When the refinanced loans were sold into the
secondary market, servicing assets relating to these loans are calculated and
included in the gain on the sale of loans as required by generally accepted
accounting principles. Amortization of servicing assets increased from $40,000
for the three months ended June 30, 2001 compared to $164,000 for the three
months ended June 30, 2002. An additional $105,000 was amortized in June 2002
due to an impairment of servicing assets. Servicing assets are revalued
periodically, and if the valuation is lower than the book value on servicing
assets, an impairment exists, and is required to be charged off.
Net gains on loan sales increased from $215,000 for the three months ended June
30, 2001 to $432,000 for the three months ended June 30, 2002, an increase of
$217,000. This increase was primarily a result of gains recognized on servicing
assets of $409,000 for the three months ended June 30, 2002 compared to $188,000
for the three months ended June 30, 2001. Brokerage fees from First Charter
Service Corporation, a wholly owned subsidiary of the Company, increased from
$7,000 for the three months ended June 30, 2001 to $88,000 for the three months
ended June 30, 2002. The increase was a result of a new established
representative for Primevest Financial Services and a newly referral program to
generate annuity sales.
Total noninterest expenses were $1.7 million for the three months ended June 30,
2002 as compared to $1.5 million for the three months ended June 30, 2001. The
primary reason for the increase was an increase in salaries and employee
benefits of $173,000 and an increase in other expenses of $38,000. Salaries and
employee benefits increased by $173,000 from $871,000 for the three months ended
June 30, 2001 to $1.0 million for the three months ended June 30, 2002. Salaries
increased by $110,000 due to normal pay increases, the addition of three
full-time employees and one part-time employee, and increased commissions paid
to brokerage employees due to higher sales volume. Employee stock ownership plan
expense increased by $20,000 due to a higher average stock price. Director fees
increased by $10,000 and recognition and retention expense increased by
$17,000.
Income tax expense was $215,000 for the three months ended June 30, 2002 as
compared to $288,000 for the three months ended June 30, 2001. The effective tax
rates were 32.8% and 37.4%, respectively, for the three months ended June 30,
2002 and 2001. The decrease in the effective rate was due to changes in
permanent tax differences.
CRITICAL ACCOUNTING POLICIES
The notes to the consolidated financial statements contain a summary of the
Company's significant accounting policies presented on pages 28 through 32 of
the Annual Report to Shareholders for the year ended December 31, 2001. Certain
of these policies are important to the portrayal of the Company's financial
condition, since they require management to make difficult, complex or
subjective judgements, some of which may relate to matters that are inherently
uncertain. Management believes that its critical accounting policies include
determining the allowance for loan losses, the valuation of loan servicing
rights, and the valuation of foreclosed assets held for sale.
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 June 30, 2002 and
December 31, 2001, mortgage servicing rights had carrying values of $2,059,000
and $2,095,000, respectively.
Foreclosed Assets Held for Sale
Foreclosed assets held for sale are carried at the lower of cost or fair value
less estimated selling costs. Management estimates the fair value of the
properties based on current appraisal information. Fair value estimates are
particularly susceptible to significant changes in the economic environment,
market conditions, and the real estate market. A worsening or protracted
economic decline would increase the likelihood of a decline in property values
and could create the need to write down the properties through current
operations.
LIQUIDITY
At June 30, 2002, the Company had outstanding commitments to originate $3.2
million in loans. In addition, open-end line of credit loans had $5.5 million
available to be drawn upon. As of June 30, 2002, the total amount of
certificates scheduled to mature in the following 12 months was $46.7 million.
The Company believes that it has adequate resources to fund all of its
commitments and that it can adjust the rate on certificates of deposit to retain
deposits in changed interest environments. If the Company requires funds beyond
its internal funding capabilities, advances from the Federal Home Loan Bank of
Chicago are available as an additional source of funds.
16
Capital Resources
The Bank is subject to capital-to-asset requirements in accordance with Federal
bank regulations. The following table summarizes the Bank's regulatory capital
requirements, versus actual capital as of June 30, 2002:
-------------------------------------- -------------------------- ------------------------- --------------------------
JUNE 30, 2002 ACTUAL REQUIRED FOR TO BE WELL
ADEQUATE CAPITAL CAPITALIZED
-------------------------------------- -------------------------- ------------------------- --------------------------
Amount % Amount % Amount %
-------------------------------------- ------------ ------------- ------------ ------------ ------------- ------------
(Dollars in thousands)
-------------------------------------- -------------------------------------------------------------------------------
Total capital (to risk-weighted $22,939 19.92 $9,213 8.0 $11,516 10.0
assets)
-------------------------------------- ------------ ------------- ------------ ------------ ------------- ------------
Tier 1 capital (to risk-weighted 21,493 18.66 4,607 4.0 6,910 6.0
assets)
-------------------------------------- ------------ ------------- ------------ ------------ ------------- ------------
Tier 1 capital (to average assets) 21,493 11.10 7,747 4.0 9,684 5.0
-------------------------------------- ------------ ------------- ------------ ------------ ------------- ------------
The Company's consolidated capital-to-asset requirements and actual capital as
of June 30, 2002 are summarized in the following table:
-------------------------------------- -------------------------- ------------------------- --------------------------
JUNE 30, 2002 ACTUAL REQUIRED FOR TO BE WELL
ADEQUATE CAPITAL CAPITALIZED
-------------------------------------- -------------------------- ------------------------- --------------------------
Amount % Amount % Amount %
-------------------------------------- ------------ ------------- ------------ ------------ ------------- ------------
(Dollars in thousands)
-------------------------------------- -------------------------------------------------------------------------------
Total capital (to risk-weighted $28,193 24.25 $9,300 8.0 --- N/A
assets)
-------------------------------------- ------------ ------------- ------------ ------------ ------------- ------------
Tier 1 capital (to risk-weighted 26,733 23.00 4,650 4.0 --- N/A
assets)
-------------------------------------- ------------ ------------- ------------ ------------ ------------- ------------
Tier 1 capital (to average assets) 26,733 13.75 7,778 4.0 --- N/A
-------------------------------------- ------------ ------------- ------------ ------------ ------------- ------------
CURRENT ACCOUNTING ISSUES
In June 2001, Statement of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations" was issued establishing accounting and reporting
standards requiring all business combinations initiated after June 30, 2001 to
be accounted for using the purchase method. SFAS No. 141 is effective for the
Company for the fiscal quarter beginning July 1, 2001. The impact of this
statement is dependent on future acquisition activity.
Also in June 2001, SFAS No. 142 "Goodwill and Other Intangible Assets" was
issued effective for the first period of all fiscal years beginning after March
15, 2001. SFAS No. 142 addresses how acquired intangible assets should be
accounted for in financial statements upon their acquisition, and also how
goodwill and other intangible assets should be accounted for after they
17
have been initially recognized in the financial statements. In general,
non-goodwill intangible assets are to be amortized in accordance with their
useful lives. In addition, amortization of goodwill has been eliminated, with
capitalized goodwill now being subjected to at least an annual assessment for
impairment. A two-step process is to be used to determine, first whether an
impairment exists, and then whether an adjustment is required. The Company has
no goodwill or intangible assets; therefore, the adoption of this standard has
not had an impact on the Company.
In July 2001, SFAS No. 143, "Accounting for Asset Retirement Obligations" was
issued. SFAS No. 143 establishes standards for accounting and reporting of
obligations associated with the retirement of tangible long-lived assets and
associated asset retirement costs. SFAS No. 143 is effective beginning June 15,
2002. The adoption of this standard did not have an impact on the Company.
In October 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" was issued. Under SFAS No. 144, long-lived assets to be sold
within one year must be separately identified and carried at the lower of
carrying value or fair value less costs to sell.
Long-lived assets expected to be held longer than one year are subject to
depreciation and must be written down to fair value upon impairment. Long-lived
assets no longer expected to be sold within one year, such as some foreclosed
real estate, must be written down to the lower of current fair value or fair
value at the date of foreclosure adjusted to reflect depreciation since
acquisition. SFAS No. 144 had to be implemented by January 1, 2002. The adoption
of this statement had no impact on the Company.
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. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
a. The Company's Annual Meeting of Shareholders was held on April 22,
2002.
18
b. Not applicable.
c. At such meeting there were 1,458,275 shares of Common Stock entitled
to be voted.
The shareholders approved the following matters:
1. The election of the following individuals as Directors;
Votes For Votes Withheld Term
David W. Dick 1,334,372 25,617 3 years
Terry J. Howard 1,334,168 25,821 3 years
2. The adoption of the 2002 Stock Option Plan which reserves 152,087
shares of Common Stock for future issuance, as reflected by
777,593 votes for, 168,176 votes against, and 46,970 abstentions.
There were 367,250 broker non-votes.
3. The adoption of the 2002 Recognition and Retention Plan and Trust
Agreement which authorizes the Trust established to purchase
60,835 shares, as reflected by 668,501 votes for, 304,911 votes
against, and 19,327 abstentions. There were 367,250 broker
non-votes.
4. The ratification of BKD, LLP as independent auditor of the Company
for the fiscal year ending December 31, 2002, as reflected by
1,326,933 votes for, 24,490 votes against and 8,566 abstentions.
d. Not applicable.
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
99.1 Certification of Terry J. Howard, Chief Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
99.2 Certification of Ellen M. Litteral, Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. 1350).
(b) No Form 8-K reports were filed during the quarter.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST BANCTRUST CORPORATION
Date: August 12, 2002 /s/ Terry J. Howard
-----------------------------------
Terry J. Howard
Chief Executive Officer and President
Date: August 12, 2002 /s/ Ellen M. Litteral
-----------------------------------
Ellen M. Litteral
Chief Financial Officer and Treasurer
20