(FBTC LOGO)
ANNUAL REPORT
2002
TABLE OF CONTENTS
Page
----
President's Letter to Stockholders ................................... i
Management's Discussion and Analysis ................................. 1
Independent Accountants' Report ...................................... 21
Consolidated Financial Statements:
Consolidated Balance Sheets ................................. 22
Consolidated Statements of Income ........................... 24
Consolidated Statements of Stockholders' Equity ............. 26
Consolidated Statements of Cash Flows ....................... 28
Notes to Consolidated Financial Statements .................. 30
Shareholder Information .............................................. 52
Directors ............................................................ 54
Executive Officers ................................................... 54
Banking Locations .................................................... 54
To Our Stockholders, Customers, and Friends:
I am pleased to present our second Annual Report to Stockholders for
First BancTrust Corporation, parent company of First Bank & Trust, S.B., for the
year ended December 31, 2002. The year 2002, from an economic perspective, was a
continuation of 2001. Interest rates proceeded to decline to historically low
levels, interest margins were further compressed, the economic recovery forecast
for 2002 did not materialize, and the market for equity securities remained the
domain of "bears". As a result interest rates on new loans fell to the lowest
recorded in nearly forty years and prepayments on existing loans swelled to
historically unprecedented levels.
Our net income for the year ended December 31, 2002, stood at $1.3
million, or $1.00 per share, fully diluted. This compares to $1.9 million for
the previous year. On an operating basis, our net interest income for the year
actually increased by $920,000, from $6.6 million to $7.5 million, a 14%
increase. However, the interest rate environment I described resulted in
increased amortization of and a provision for valuation allowance to our loan
servicing assets, because of the historically high level of refinancing activity
during the period. These charges resulted in a reduction of the total loan sales
and servicing fees and gains of approximately $1.5 million from 2001 to 2002. As
a result, our non-interest income was reduced by nearly $980,000 as compared
with 2001. Non-interest expense also increased to $6.8 million for the year
ended December 31, 2002, compared to $6.0 million for the prior year, due
primarily to compensation related expenses.
Our fundamental operations continued to improve during the year. In
addition to the increased net interest income from our lending and deposit
receiving activities, loans, net of allowance for losses, grew to $105.2 million
at December 31, 2002, an increase of $4.5 million. Deposits grew by $6.0 million
to $147.3 million -- a strong showing, especially considering the low interest
rate environment. Our existing deposit products and services accounted for most
of this growth, but our newest products, "Pay Yourself First" and "Signature"
savings accounts, attracted nearly 25 % of the total increase.
We also continued to originate and sell loans into the secondary market
at record levels. Approximately $41.2 million in loans were sold during 2002, as
compared to $31.3 million in 2001. We continue to maintain a strong presence in
the loan servicing field for loans we originate for sale. In fact, the balances
of loans we service for others are now about three-quarters of the total
balances of loans we hold in our own portfolio. By selling into the secondary
market, retaining servicing, and reinvesting sale proceeds, we not only put our
deposit dollars to work again, we also benefit from fees others pay us to
service loans we no longer own.
The confidence we at First BancTrust Corporation have in our service to
the community is matched by the trust our customers place in us: the residents,
small businesses and farmers of the communities we serve. We intend to keep that
trust.
On behalf of the Board of Directors, officers, and employees, I would
like to thank you for your continued interest in the Company. We all would like
to take this opportunity to specially thank those of you who are customers of
the Bank. I am grateful for the continued confidence of our shareholders and our
customers in the communities we serve. I will always appreciate your support.
Sincerely,
/s/ Terry J. Howard
-------------------------
Terry J. Howard
President and
Chief Executive Officer
i
FIRST BANCTRUST CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
(TABLE DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
On October 16, 2000 the Board of Directors of First Bank & Trust, s.b. (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 of the
Company was offered initially to eligible deposit account holders of First Bank
& Trust, s.b. The Bank's conversion from an Illinois mutual savings bank to an
Illinois stock savings bank (the "Conversion") was completed on April 18, 2001.
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.
The Company originates loans and solicits deposits through the Bank, but
otherwise conducts no significant business, except through the Bank, the Bank's
subsidiary, Community Finance Center, Incorporated, and the Company's
subsidiaries First Charter Service Corporation and ECS Service Corporation.
Community Finance Center, Incorporated provides retail consumer lending to the
Bank's market area. First Charter Service Corporation provides securities
brokerage services through a third-party broker-dealer, PrimeVest Financial
Services, Inc., and also engages in the sale of tax deferred annuities. ECS
Service Corporation, doing business as Edgar County Title, provides abstracting
services and title insurance for the Bank's market area. All references to the
Company include the Bank and subsidiaries, unless otherwise indicated.
"SAFE HARBOR" STATEMENT
In addition to historical information, forward-looking statements are contained
herein that are subject to risks and uncertainties that could cause actual
results to differ materially from those reflected in the forward-looking
statements. Factors that could cause future results to vary from current
expectations, include, but are not limited to, the impact of economic conditions
(both generally and more specifically in the markets in which the Company
operates), the impact of competition for the Company's customers from other
providers of financial services, the impact of government legislation and
regulation (which changes from time to time and over which the Company has no
control), and other risks detailed in this Annual Report and in the Company's
other Securities and Exchange Commission filings. Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
management's analysis only as of the date hereof. The Company undertakes no
obligation to publicly revise these forward-looking statements, to reflect
events or
- 1 -
circumstances that arise after the date hereof. Readers should carefully review
the risk factors described in other documents the Company files from time to
time with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
General
Net income for the year ended December 31, 2002 decreased by $548,000, or 29.45%
from $1,861,000 for the year ended December 31, 2001 to $1,313,000 for the year
ended December 31, 2002. The decrease in net income is primarily due to a
decrease in noninterest income and increases in noninterest expense and an
increase in the provision for loan losses, partially offset by an increase in
net interest income and a decrease in income tax expense. Return on average
assets decreased to 0.64% for the year ended December 31, 2002 from 0.99% for
the year ended December 31, 2001. Return on average equity was 4.77% and 7.66%
for the years ended December 31, 2002 and 2001, respectively.
Net Interest Income
Net interest income increased by $922,000 or 14.0% from $6.6 million for the
year ended December 31, 2001 to $7.5 million for the year ended December 31,
2002. The primary reason for the increase in net interest income is a decrease
in interest expense of $1.46 million partially offset by a decrease in interest
income of $542,000. The Company's net interest margin was 4.02% for the year
ended December 31, 2002 compared to 3.92% for the year ended December 31, 2001.
The net interest margin increased as a result of increases in earning assets and
earning liabilities, and an increase in the interest spread from 3.31% for the
year ended December 31, 2001 to 3.57% for the year ended December 31, 2002. The
increase in earning assets was primarily due to the additional investment in
securities, while the increase in earning liabilities was primarily due to
deposit growth. The proceeds from the stock conversion were invested in earning
assets, primarily investment securities during the latter part of 2001. The
increase in the interest spread resulted from a decrease in rate on
interest-bearing liabilities partially offset by a decrease in rate on
interest-earning assets.
Interest Income - Total interest income was $13.0 million for the year 2002, a
decrease of $542,000, or 4.0% from $13.6 million reported in 2001. Interest
income from loans decreased by $1.0 million from $10.0 million in 2001 to $9.1
million in 2002, and interest income from deposits with financial institutions
decreased by $285,000 from $383,000 in 2001 to $98,000 in 2002, while investment
income increased by $639,000 from $3.0 million in 2001 to $3.7 million in 2002,
and dividend income from Federal Home Loan Bank stock increased from $106,000 in
2001 to $164,000 in 2002.
- 2 -
The following schedule compares average total loan balances by major categories
for the years 2002 and 2001:
Average Balance
----------------------- %
2002 2001 Change Change
--------- --------- --------- ---------
Real Estate Loans
One-to-four family $ 41,058 $ 44,753 (3,695) -8.26%
Multi-family 302 277 25 9.03%
Commercial 8,946 8,021 925 11.53%
Construction 653 692 (39) -5.64%
Agricultural 12,239 11,991 248 2.07%
--------- --------- --------- --------
Total real estate loans 63,198 65,734 (2,536) -3.86%
Agricultural production finance 9,850 8,226 1,624 19.74%
Commercial and industrial loans 7,527 8,889 (1,362) -15.32%
Consumer loans 26,512 25,831 681 2.64%
--------- --------- --------- --------
Total loans 107,087 108,680 (1,593) -1.47%
Allowance for loan losses (1,916) (1,972) 56 -2.84%
--------- --------- --------- --------
Net loans 105,171 106,708 (1,537) -1.44%
========= ========= ========= ========
The average net loan portfolio decreased by $1.5 million or 1.44% from $106.7
million in 2001 to $105.2 million in 2002. This was primarily a result of a
decrease in the average one-to-four family residential loans of $3.7 million,
and a decrease of $1.4 million in commercial and industrial loans, partially
offset by an increase of $1.6 million in agricultural production finance loans,
an increase of $925,000 in commercial real estate loans, and an increase of
$681,000 in the average consumer loans.
The decrease in the average one-to-four family residential loans resulted from
increased refinancing in 2002 due to lower interest rates available on
fixed-rate mortgages. Borrowers with adjustable rate loans converted to
fixed-rate products which in turn were sold into the secondary market.
Commercial and industrial loans decreased due to fewer originations in 2002. The
Company's agricultural production finance loans increased by $1.6 million from
$8.2 million average balance for 2001 compared to $9.8 million average balance
for 2002, as the number of loans outstanding increased, as did the average
balance per loan. Commercial real estate loans increased due to several new
large loans in this area, which raised the average balance per loan in this
category. Consumer loans increased due to higher demand for vehicle loans.
The decrease in loan interest income of $1.0 million from 2001 to 2002 was
primarily due to a decrease in the average rate earned on outstanding loans. The
average yield on loans receivable decreased by 77 basis points from 9.41% in
2001 to 8.64% in 2002. The decrease in loan yields was due to a general decline
in interest rates during 2002.
- 3 -
Income from investments increased by $639,000 from $3.0 million in 2001 to $3.7
million in 2002. Average total investment securities were $72.1 million during
2002, a $22.4 million increase over the 2001 total of $49.7 million. The
increase in average investments was funded by deposit growth and the liquidation
of interest-bearing deposits with financial institutions to invest in higher
yielding mortgage-backed securities. This growth was the primary reason for the
increase in interest income from securities, which was partially offset by a
decrease in the average rate of 103 basis points, from 6.13% average rate in
2001 to 5.10% average rate in 2002.
Interest income earned on deposits with financial institutions decreased
$285,000 or 74.3% from $383,000 in 2001 to $98,000 in 2002. The average balance
maintained at the Federal Home Loan Bank of Chicago in a cash management account
decreased during 2002, from $10.0 million in 2001 to $6.2 million during 2002.
The interest-bearing demand deposit account maintained by the Company is used
for short-term cash needs. The cash proceeds from the stock conversion and funds
generated by security calls and repayments on mortgage-backed securities kept
the demand deposit account at higher than normal levels during 2001. In 2002,
the discount rate remained at historic low levels, from a high of 1.8% to a low
point in the latter part of 2002 of 1.30%. During 2001, the Federal Open Market
committee or "FOMC," the governing body that establishes the federal funds rate
and the discount rate, lowered these key interest rates a total of eleven times.
The federal fund rates dropped from a high of 6.50% in January, 2001 to 1.75% in
2001. As a result, the average rate earned on deposits with financial
institutions for 2002 was 1.58% as compared to an average rate of 3.83% for
2001.
Interest Expense - Interest expense decreased from $7.0 million in 2001 to $5.5
million in 2002, a decrease of $1.5 million or 20.95%. Interest expense on
deposits declined from $5.6 million in 2001 to $4.3 million in 2002, a reduction
of $1.3 million or 23.45% . Interest expense on certificates of deposit
decreased by $1.1 million, or 27.35%, from $4.0 million in the year 2001 to $2.9
million in the year 2001 primarily due to a decline in the average rate. The
average rate paid on certificates for 2002 declined by 141 basis points from
5.45% in 2001 to 4.04% in 2002. The average balance of certificate of deposits
has declined by $1.3 million from $72.4 million in 2001 to $71.1 million in
2002.
Demand deposits, which are largely Investor Checking Accounts, increased on the
average from $40.6 million in 2001 to $56.3 million in 2002, a $15.7 million or
a 38.7% increase, while the associated interest expense paid on demand deposits
decreased by $273,000 from $1.3 million in 2001 to $1.6 million in 2002. The
average rate on demand deposits decreased from 3.87% in 2001, to 2.31% in 2002.
The average balance of Investor Checking Accounts increased by $7.3 million from
$34.6 million in 2001 to $41.9 million for 2002. Investor Checking Accounts have
comparable rates to a money market product without the transaction limitations.
Rates on the Investor Checking Account reprice monthly off of an index tied to
the 90-day Treasury bill rate. Average money market accounts increased from an
average of $2.2 million during 2001 to $8.8 million average balance for 2002.
The $6.6 million increase in average balance was primarily due to a single
business money market account from one
- 4 -
corporate investor opened in June 2002, whose account had an average balance of
$5.7 million for 2002.
Interest expense on Federal Home Loan Bank (FHLB) advances and other debt for
2002 was $1.2 million compared to $1.3 million in 2001. The average balance of
borrowings for 2002 was $26.2 million compared to $26.4 million for 2001.
Borrowings at the FHLB typically consist of fixed-term notes, and an open-end
line of credit. At December 31, 2002, $25.5 million in advances were fixed rate
and fixed term, with convertible options to variable rate loans, and the
remaining $1.0 million was drawn against the open-end line of credit. The
average rate on average FHLB advances and other debt decreased from 5.01% in
2001 to 4.53% in 2002.
The average interest rate earned on interest-earning assets declined from 8.08%
in 2001 to 6.98%, while the average balances increased from $168.0 million in
2001 to $186.6 million in 2002. The average rate of interest-bearing liabilities
decreased from 4.77% in 2001 to 3.41% in 2002, due to the declining rate
environment. The average balance of interest-bearing liabilities increased from
$146.5 million in 2001 to $162.0 million in 2001. Interest rate spread for 2002
improved to 3.57% from 3.31% in 2001.
Average Balance Sheet
The following table presents the average balance sheet for the Company for the
years ended December 31, 2002, 2001, and 2000, the interest on interest-earning
assets and interest-bearing liabilities and the related average yield or cost.
The yields or costs are calculated by dividing income or expense by the average
balance of assets or liabilities, respectively, for the years shown. The yields
and costs include fees, which are considered adjustments to yields.
- 5 -
As of Year Ended
December 31, 2002 December 31, 2002
--------------------------- -----------------------------------------
Ending Average Average Average
Balance Yield/Rate Balance Interest Yield/Rate
----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
INTEREST-EARNING ASSETS
Loans receivable, net(1) $ 105,778 8.08% $ 105,171 $ 9,089 8.64%
Investments securities 72,748 5.34% 72,150 3,681 5.10%
Deposits with financial institutions(2) 3,458 1.03% 6,193 98 1.58%
Federal Home Loan Bank stock 3,712 6.00% 3,067 164 5.35%
----------- -------- ----------- ----------- --------
Total interest-earning assets 185,696 6.83% 186,581 13,032 6.98%
-------- ----------- --------
Non-interest-earning assets 17,029 17,176
----------- -----------
Total assets $ 202,725 $ 203,757
=========== ===========
INTEREST-BEARING LIABILITIES
Deposits:
Demand $ 50,867 1.92% $ 56,329 $ 1,299 2.31%
Savings 8,657 1.64% 8,337 167 2.00%
Certificates of deposits of $100,000 or more 14,992 3.77% 15,080 600 3.98%
Other certificates 55,524 3.52% 56,069 2,271 4.05%
Borrowings 26,501 4.43% 26,205 1,188 4.53%
-------- ----------- ----------- --------
Total interest-bearing liabilities 156,541 3.07% 162,020 5,525 3.41%
-------- ----------- --------
Non-interest-bearing demand accounts 17,296 12,277
Non-interest-bearing liabilities 1,582 1,919
----------- -----------
Total liabilities 175,419 176,216
Total equity capital(3) 27,306 27,541
----------- -----------
Total liabilities and equity capital $ 202,725 $ 203,757
=========== ===========
Net average interest-earning assets $ 29,155 $ 24,561
=========== ===========
Net interest income; interest rate spread(4) $ 7,507 3.57%
=========== ========
Net interest margin(5) 4.02%
========
Average interest-earning assets to average
interest-bearing liabilities 115.16%
===========
-----------------
(1) Includes loans held for sale and nonaccruing loans.
(2) Includes interest-bearing demand deposits and other interest bearing
deposits.
(3) Includes retained earnings and accumulated other comprehensive income
(loss).
(4) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average rate on
interest-bearing liabilities.
(5) Net interest margin is net interest income divided by net average
interest-earning assets.
- 6 -
Year ended December 31,
-------------------------------------------------------------------------
2001 2000
----------------------------------- ----------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
-------- -------- ---------- -------- -------- ----------
(Dollars in thousands)
INTEREST-EARNING ASSETS
Loans receivable, net(1) $106,708 $ 10,043 9.41% $109,700 $ 9,882 9.01%
Investments securities 49,724 3,042 6.12% 38,385 2,365 6.16%
Deposits with financial institutions(2) 10,006 383 3.83% 2,966 173 5.84%
Federal Home Loan Bank stock 1,543 106 6.87% 1,453 108 7.43%
-------- -------- -------- -------- -------- --------
Total interest-earning assets 167,981 13,574 8.08% 152,504 12,528 8.21%
-------- -------- -------- --------
Non-interest-earning assets 20,135 15,304
-------- --------
Total assets $188,116 $167,808
======== ========
INTEREST-BEARING LIABILITIES
Deposits:
Demand $ 40,629 $ 1,572 3.87% $ 29,943 $ 1,557 5.20%
Savings 7,010 142 2.03% 8,383 169 2.02%
Certificates of deposits of $100,000 or more 15,606 795 5.09% 16,328 945 5.79%
Other certificates 56,843 3,157 5.55% 60,470 3,249 5.37%
Borrowings:
Long-term 26,360 1,321 5.01% 21,902 1,238 5.65%
Short-term 48 3 6.25% 3,150 205 6.50%
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities 146,496 6,990 4.77% 140,176 7,363 5.25%
-------- -------- -------- --------
Non-interest-bearing demand accounts 13,125 11,793
Non-interest-bearing liabilities 4,194 3,359
-------- --------
Total liabilities 163,815 155,328
Total equity capital(3) 24,301 12,480
-------- --------
Total liabilities and equity capital $188,116 $167,808
======== ========
Net average interest-earning assets $ 21,485 $ 12,328
======== ========
Net interest income; interest rate spread(4) $ 6,584 3.31% $ 5,165 2.96%
======== ======== ======== ========
Net interest margin(5) 3.92% 3.39%
======== ========
Average interest-earning assets to average
interest-bearing liabilities 114.67% 108.79%
======== ========
-----------------
(1) Includes loans held for sale and nonaccruing loans.
(2) Includes interest-bearing demand deposits and other interest bearing
deposits.
(3) Includes retained earnings and accumulated other comprehensive income
(loss).
(4) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average rate on
interest-bearing liabilities.
(5) Net interest margin is net interest income divided by net average
interest-earning assets.
- 7 -
Rate/Volume Analysis
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and expense during the
periods indicated. Information is provided in each category with respect to (i)
changes attributable to changes in volume (changes in volume multiplied by prior
rate); (ii) changes attributable to changes in rate (change in rate multiplied
by prior volume); and (iii) the net change. The changes attributable to the
combined impact of volume and rate have been allocated proportionately to the
changes due to volume and the changes due to rate.
Year Ended 12/31/2002 Year Ended 12/31/2001
Compared to Compared to
Year Ended 12/31/2001 Year Ended 12/31/2000
------------------------------- -------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------- -------------------
Volume Rate Net Volume Rate Net
------- ------- ------- ------- ------- -------
(in thousands)
Interest-earning assets:
Interest-bearing demand deposits $ (143) $ (811) $ (954) $ (274) $ 436 $ 162
Investment securities, net 1,207 (575) 632 696 (11) 685
Loans, net (112) (173) (285) 287 (77) 210
FHLB stock 84 (18) 66 6 (16) (10)
------- ------- ------- ------- ------- -------
Total interest-earning assets 1,411 (1,952) (541) 1,254 (208) 1,046
Interest-bearing liabilities:
Demand accounts 487 (760) (273) 473 (458) 15
Savings accounts 27 (2) 25 (28) 1 (27)
Certificates of deposit (26) (169) (195) (239) (3) (242)
Long-term borrowings (42) (844) (886) 234 (151) 83
Short-term borrowings (10) (126) (136) (194) (8) (202)
------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities 683 (2,148) (1,465) 322 (695) (373)
------- ------- ------- ------- ------- -------
Net change in net interest
income $ 728 $ 196 $ 924 $ 932 $ 487 $ 1,419
======= ======= ======= ======= ======= =======
Provision for Loan Losses
The provision for loan losses for the year ended December 31, 2002 was $718,000
compared to $607,000 for the year ended December 31, 2001, an increase of
$111,000 or 18.29%. The provision for both periods reflects management's
analysis of the Company's loan portfolio based on the information which was
available to it at such time. In particular, 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
- 8 -
portion for each loan is calculated, management calculates a historical portion
for each category based on a combination of loss history adjusted for current
national and local economic conditions, trends in delinquencies and charge-offs,
trends in volume and term of loans, changes in underwriting standards, and
industry conditions. Chargeoffs for 2002 were $526,000 compared to $1.3 million
for the year 2001. Chargeoffs in 2002 included $77,000 relating to the
liquidation of business assets of a commercial borrower, and $54,000 to another
commercial borrower on an unsecured commercial loan. Chargeoffs on vehicle loans
increased from $190,000 in 2001 to $212,000 in 2002, while chargeoffs on
consumer finance loans increased from $47,000 in 2001 to $67,000 in 2002. While
Company management believes that the allowance for loan losses is sufficient
based on information currently available, no assurances can be made that future
events, conditions, or regulatory directives will not result in increased
provisions for loan losses or additional chargeoffs which may adversely affect
net income.
Noninterest Income
Noninterest income totaled $1.9 million in 2002, compared to $2.9 million in
2001, a decrease of 983,000 or 33.9%, primarily due to a decreases in loan
servicing fees (cost) and net gains on loan sales, partially offset by increases
in other service charges and fees, brokerage fees, and net realized gains on
sales of available-for-sale securities.
Loan servicing fees (cost) declined by $1.1 million from the year ended December
31, 2001 to the year ended December 31, 2002. This decline was primarily due to
the accelerated amortization of servicing assets, and the identification of an
impairment which resulted in the establishment of a valuation allowance.
Amortization of servicing assets for 2002 was $895,000 compared to $432,000 for
2001, an increase of $463,000. The higher amortization in 2002 resulted from
loans refinanced at lower interest rates, which accelerated prepayment speeds.
Loans sold during 2002 amounted to $41.2 million in 2002 compared to $31.3
million in 2001. Of the $41.2 million loans sold in 2002, many were refinances
of existing loans, which had existing servicing assets which were then written
off. When the refinanced loans were sold into the secondary market, servicing
assets relating to these loans were calculated and recorded as required by
accounting principles generally accepted in the United States of America. The
new servicing assets were created using current estimated lives and prepayment
assumptions, which resulted in a lower asset value. The decline in interest
rates has resulted in increased prepayments, which shortens the expected average
life of the servicing assets. When the existing servicing assets were valued
with the estimated shorter lives due to the lower interest rate environment, the
calculated value was substantially less than the book value of the servicing
assets, identifying an impairment. The impairment of $683,000 was charged
against current year earnings, and a valuation allowance established for this
amount. As of December 31, 2002 loans serviced for others totaled $80.8 million,
and the net value of the loan servicing rights totaled $950,000, net of a
valuation allowance of $683,000.
Net gains on loan sales decreased $339,000 from $925,000 for the year ended
December 31, 2001 to $586,000 for the year ended December 31, 2002. Although
loans sold during 2002
- 9 -
increased by $9.9 million from $31.3 million in 2001 to $41.2 million in 2002,
the associated capitalized servicing asset created for the loans sold in 2002
was $433,000 compared to $824,000 in 2001. The servicing assets are created
using the same assumptions in valuing the existing servicing assets. In 2002,
the decline in interest rates and accelerated prepayment speeds shortened the
estimated lives of servicing assets. As a result, the servicing assets
recognized in 2002 were calculated with a shorter estimated useful life than
servicing assets recognized in 2001.
Other service charges and fees increased by $83,000 due to an increase in loan
fees of $58,000 and increased debit card fees of $25,000. Loan fees increased as
a result of continued refinancing activity in one-to-four family residential
loans and an overall fee increase for the consumer loans. Income from debit and
ATM cards increased due to a bank-wide promotion to increase the number of cards
in use.
Net realized gains on sales of available-for-sale securities for the year ended
December 31, 2002 increased by $120,000 from 2001. Equity securities of $378,000
were sold during 2002 generating recognized income of $120,000.
Brokerage fees increased by $154,000 from $22,000 in 2001 to $177,000 in 2002
due to the employment of a new brokerage service representative for First
Charter Service Corporation, one of the Company's wholly-owned subsidiaries.
Other income increased $77,000 from $207,000 in 2001 to $284,000 in 2002,
primarily due to an increase in earnings on cash surrender value of bank owned
life insurance of $80,000 due to the purchase of additional policies of $1.1
million in December, 2001.
Noninterest Expense
Total noninterest expense increased from $6.0 million in 2001 to $6.8 million in
2002, an increase of $731,000 or 12.1% due primarily to increases in salaries
and employee benefits and other expenses. Salaries and employee benefits totaled
$3.5 million in 2001 and $3.9 million in 2002, an increase of $431,000. The
increase in salaries and employee benefits was primarily due to increases in
salaries, employee stock ownership plan expense, and recognition and retention
plan expense. Salaries and wages increased by $204,000 due to normal pay
increases, the addition of three full-time employees, and increased commissions
paid to brokerage employees due to a higher sales volume. In connection with the
Conversion, the Company established an Employee Stock Ownership Plan ("ESOP") in
April, 2001. The ESOP expense for 2002 was $240,000 compared to $150,000 for
2001. The increase was due to a full year of expense for 2002 compared to nine
months of expense for 2001, and an increase in the average stock price in 2002.
The ESOP expense each month is calculated on a fixed number of shares at the
average share price for the month, and as the monthly average share price
increases, the ESOP expense increases accordingly. In April, 2002 at the annual
stockholders' meeting, the stockholders approved the adoption of the 2002
Recognition and Retention Plan and Trust Agreement (the "RRP"). In February,
2002 the Committee of the Board of Directors which administers the plan approved
the grant of
- 10 -
34,246 shares of restricted stock that will vest over a five-year period. The
associated expense for 2002 for the RRP was $73,000.
Other expenses increased $166,000 from $626,000 in 2001 to $792,000 in 2001, an
increase of 26.6%. Office supplies and printing expense increased by $42,000
from $90,000 in 2001 to $132,000 in 2002 primarily due to updating brochures and
disclosures and costs associated with the printing of the annual reports and
proxies in 2002. Filing fees for the Company increased by $27,000 due to
increased corporate franchise tax and fees associated with filing regulatory
reports with the Securities and Exchange Commission. Charitable contributions
increased by $17,000 primarily due to the establishment of a foundation to fund
scholarships to area college students. Dues expense increased due to additional
memberships in banking organizations, while postage expense increased due to an
overall increase in postage rates. Other expenses also increased due to
increases in check losses, insurance expense, and correspondent bank fees.
Income Tax Expense
Total income tax expense was $613,000 in 2002, compared to $968,000 in 2001, a
decrease of $355,000 or 36.7%. The decrease of $355,000 is attributable to lower
taxable income in 2002 of $1.9 million compared to $2.8 million in 2001. The
effective tax rates for the years ended December 31, 2002 and December 31, 2001
were 31.8% and 34.2%, respectively. The decrease in the effective tax rate from
2001 to 2002 was due to an increase in the cash surrender value of life
insurance.
FINANCIAL CONDITION
Total assets of the Company increased by $6.7 million or 3.4% to $202.7 million
at December 31, 2002 from $196.0 million at December 31, 2001. The growth in
total assets was due primarily to a $7.5 million increase in investment
securities available for sale, a $4.5 million increase in loans, net of
allowance for loan losses, and a $2.1 million increase in Federal Home Loan Bank
stock, partially offset by an $6.3 million decrease in cash and cash equivalents
and a $1.1 decrease in loan servicing rights, net of valuation allowance. The
overall increase in total assets was funded by increases in deposits and Federal
Home Loan Bank advances.
The Company's cash and cash equivalents decreased by $6.3 million, from $16.7
million at December 31, 2001 to $10.5 million at December 31, 2002.
Interest-bearing demand deposits with banks decreased by $6.0 million from $9.4
million at December 31, 2001 to $3.5 million at December 31, 2002. Cash and due
from banks also decreased by $312,000 from December 31, 2001 to December 31,
2002. Cash and cash equivalents decreased due to less liquidity as excess cash
was invested in higher yielding investments.
Investment securities available for sale totaled to $72.7 million at December
31, 2002 compared to $65.2 million at December 31, 2001, an increase of $7.5
million. The increase
- 11 -
in securities available for sale was due to the investment of excess cash and
cash equivalents in higher yielding assets, and funds provided by deposit
growth.
The Company's net loan portfolio increased by $4.5 million or 4.5%, from $100.7
million at December 31, 2001 to $105.1 million at December 31, 2002. Gross loans
increased by $4.8 million, offset by a increase in the allowance for loan loss
of $306,000. Loans secured by 1-4 family residences decreased by $1.4 million
from December 31, 2001 to December 31, 2002. Low fixed mortgage rates have
resulted in higher loan volume with many borrowers refinancing adjustable rate
loans to fixed rate to take advantage of the lower rates. These fixed rate
residential loans are sold into the secondary market. Farmland loans have
increased by $1.3 million, due to a higher average balance per loan, and
agricultural production loans have increased by $3.3 million, due to higher
volume of loans as well as a higher average balance per loan. Commercial real
estate loans have increased by $1.8 million primarily due to several large loans
originated in 2002 which were underwritten with guarantees by the Small Business
Administration. Vehicle loans have increased by $1.7 million due to a higher
number of loans.
At December 31, 2002, the allowance for loan losses was $2.0 million or 1.83% of
the total loan portfolio compared to $1.7 million or 1.62% at December 31, 2001.
The Company's net chargeoffs were $412,000 for 2002 compared to $1.2 million for
2001. The Company's loans delinquent 90 days or more at December 31, 2002 were
$1.5 million or 1.42% of total loans, compared to $1.2 million or 1.12% of total
loans at December 31, 2001. Nonperforming assets and troubled debt
restructurings as of percentage of total loans increased slightly from 2.17% at
December 31, 2001 to 2.25% at December 31, 2002. The Company's nonperforming
assets and troubled debt restructurings of $2.6 million at December 31, 2002
consist primarily of restructured commercial and agricultural loans and
nonperforming loans primarily secured by residences and farming assets and
foreclosed assets held for sale. Included in the $2.6 million of nonperforming
loans and troubled debt restructurings are agricultural loans of $340,000 which
are 90% guaranteed for $306,000 by the Farmers Home Administration, thereby
limiting the Company's exposure on those loans. Management reviews the adequacy
of the allowance for loan losses quarterly, and believes that its allowance is
adequate; however, the Company cannot assure that future chargeoffs and/or
provisions will not be necessary.
Premises and equipment increased by $336,000 from $2.4 million at December 31,
2001 to $2.8 million at December 31, 2002, primarily due to the expansion at the
Bank's branch in Marshall, Illinois. An additional 2000 square feet was added to
the facility in a main floor addition with a finished basement.
Foreclosed assets have decreased by $622,000 from $807,000 at December 31, 2001
to $185,000 at December 31, 2002. As of December 31, 2002, the Company had two
foreclosed real estate properties totaling $92,000 including a single family
residence and one commercial property. Other repossessed assets consisted of
$93,000, primarily repossessed vehicles. Foreclosed assets are carried at lower
or cost or net realizable value. When
- 12 -
foreclosed assets are acquired, any required adjustment is charged to the
allowance for loan losses. All subsequent activity is included in current
operations.
Interest receivable increased by $240,000 from $2.1 million as of December 31,
2001 to $2.4 million as of December 31, 2002. The increase was a primarily a
result of the increase in agricultural related loans, the majority of which are
annual payment loans.
Loan servicing rights decreased $1.1 million from $2.1 million at December 31,
2001 to $950,000 at December 31, 2002. The decline was due to accelerated
amortization of loan servicing rights, and an identified impairment of $683,000,
partially offset by newly capitalized assets. Both the accelerated amortization
and impairment were a result of increased prepayments due to decreases in
interest rates. The decline in long-term interest rates resulted in an increase
in the projected rate at which loans serviced for others are expected to prepay,
thereby shortening their expected average lives. When the loan servicing rights
were valued in the current environment with shorter lives, the assets had less
value, and an impairment was identified. The impairment was charged against
current earnings as a valuation allowance was established for the impaired
amount. Total loans sold in 2002 were $41.2 million compared to $31.3 million
during 2001. The related servicing rights capitalized did not increase at the
same percentage increase as loans sold from 2001 to 2002 due to the new assets
being established used current estimated prepayment speeds and estimated lives.
Capitalized servicing assets for 2002 were $433,000 compared to $824,000 for
2001. Amortization of servicing rights amounted to $895,000 in 2002 compared to
$432,000 in 2001. In addition, in 2002 a provision for the valuation allowance
of $683,000 was recorded. The original amount capitalized is recognized as a
gain and is included as gain on sale of loans in the income statement.
Capitalized servicing rights are amortized in proportion to and over the period
of estimated servicing revenues. The amortization of and the provision for
valuation allowance on the capitalized servicing rights are offset by the
servicing fees (costs) received and is included as loan service fees in the
income statement.
Cash surrender of life insurance increased from $3.5 million at December 31,
2001 to $3.7 million at December 31, 2002. The increase of $188,000 was due
increase in the cash surrender value of bank owned life insurance.
Federal Home Loan Bank stock increased from $1.6 million at December 31, 2001 to
$3.7 million at December 31, 2002. The increase of $2.1 million was due to $2.0
million purchases of additional stock and $130,000 in dividends paid in the form
of stock. Other assets declined by $212,000 from $317,000 at December 31, 2001
to $105,000 at December 31, 2002.
The Company's total deposits increased from $141.3 million at December 31, 2001
to $147.3 million at December 31, 2002, an increase of $6.0 million or 4.3%. The
increase in total deposits was due to a $3.3 million increase in non-interest
bearing demand deposits, a $3.5 million increase in interest-bearing demand
accounts, and a $1.3 million increase in savings accounts, partially offset by a
$2.1 million decrease in certificates of deposits. At December
- 13 -
31, 2002, time deposits $100,000 or more totaled $15.0 million compared to $15.7
million at December 31, 2001.
Investor Checking, the largest component of interest-bearing demand deposits
were $41.0 million at December 31, 2001 compared to $39.4 million at December
31, 2001. Investor Checking has comparable rates to money market accounts,
without withdrawal restrictions. Business money market accounts have grown $2.3
million in 2002, from eight accounts totaling $1.7 million at December 31, 2001
to twenty-two accounts totaling $4.0 million at December 31, 2002. Regular NOW
accounts declined by $340,000 from $5.5 million at December 31, 2001 to $5.2
million at December 31, 2002.
Savings accounts have grown from $7.4 million at December 31, 2001 to $8.7
million at December 31, 2002. This can be partially attributed to a new savings
product introduced in September 2001. "Pay Yourself First" savings accounts are
structured so interest is paid on a tiered basis, with the requirement of an
automatic transfer from a bank checking account at least monthly. At December
31, 2002, "Pay Yourself First" savings accounts had grown to $1.4 million
compared to $729,000 at December 31, 2001, an increase of $681,000. Signature
savings accounts, a more traditional savings product, had growth of $405,000 to
$6.9 million at December 31, 2002.
Certificates of deposit have declined by $2.1 million from $72.6 million at
December 31, 2001 to $70.5 million at December 31, 2002. Continued low rates
discourage account holders from investing in term products, although the Bank
continues to offer a competitive "special" to attract term deposits. At December
31, 2002, the special certificate of deposit offered was a 2.20% certificate of
deposit for an eleven-month term or a 2.65% certificate of deposit for a
twenty-one month term. At December 31, 2002 the weighted average rate on
certificates of deposits was 3.57% compared to 4.75% at December 31, 2001.
Federal Home Loan Bank advances and other debt at December 31, 2002 was $26.5
million, an increase of $1.0 million over the December 31, 2001 balance of $25.5
million. At December 31, 2002, borrowings consisted of $1.0 million drawn on the
open end line-of-credit, and $25.5 million in long-term fixed rate advances. The
long-term advances are all convertible advances with specific lock-out periods,
usually two to three years, after which the Federal Home Loan Bank has the
option to convert the advance to a quarterly adjustable rate loan, with the
option of prepayment at the conversion date, or on any future date of rate
adjustment. At December 31, 2002 the average rate on Federal Home Loan Bank
advances was fairly level at 4.43% compared to 4.54% at December 31, 2001.
Stockholder's equity at December 31, 2002 was $27.3 million compared to $27.7
million at December 31, 2001, a decrease of 412,000. The decrease was a result
of treasury stock and incentive plan purchases, offset by increases in retained
earnings and accumulated other comprehensive income. Retained earnings increased
by $1.0 million due to net income of $1.3 million offset by dividends paid of
$283,000. The change in accumulated other comprehensive income was due to
unrealized appreciation on available-for-sale securities from December 31, 2001
to December 31, 2002 of $817,000 partially offset by a
- 14 -
reclassification adjustment of $70,000 for realized gains included in net
income, net of income tax expense. The change of $176,000 in unallocated
employee stock ownership plan shares was due to the allocation of 15,204 shares
to plan participants. In 2002, stockholders approved the adoption of the
Recognition and Retention Plan and Trust Agreement which authorized the Company
to purchase 60,835 shares of Common Stock for the Trust. In 2002, 34,246 shares
were granted to directors and executive officers that will vest over a five-year
period. The 60,835 shares were purchased for a cost of $1.0 million, which was
partially offset by $75,000 for the shares earned in 2002. Treasury stock
increased by $1.5 million from $865,000 at December 31, 2001 to $2.4 million at
December 31, 2002. The Company purchased 92,565 shares for a cost of $1.5
million. All repurchased shares will be held as treasury shares to be used for
general corporate purposes.
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of the Company are in accordance with
accounting principles generally accepted in the United States and conform to
general practices within the banking industry. The Company's significant
accounting policies are described in detail in the notes to the Company's
consolidated financial statements for the year ended December 31, 2002. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions. The
financial position and results of operations can be affected by these estimates
and assumptions and are integral to the understanding of reported results.
Critical accounting policies are those policies that management believes are the
most important to the portrayal of the Company's financial condition and
results, and they require management to make estimates that are difficult,
subjective, or complex.
Allowance for Loan Losses - The allowance for loan losses provides coverage for
probable losses inherent in the Company's loan portfolio. Management evaluates
the adequacy of the allowance for credit losses each quarter based on changes,
if any, in underwriting activities, the loan portfolio composition (including
product mix and geographic, industry or customer-specific concentrations),
trends in loan performance, regulatory guidance and economic factors. This
evaluation is inherently subjective, as it requires the use of significant
management estimates. Many factors can affect management's estimates of specific
and expected losses, including volatility of default probabilities, rating
migrations, loss severity and economic and political conditions. The allowance
is increased through provisions charged to operating earnings and reduced by net
charge-offs.
The Company determines the amount of the allowance based on relative risk
characteristics of the loan portfolio. The allowance recorded for commercial
loans is based on reviews of individual credit relationships and an analysis of
the migration of commercial loans and actual loss experience. The allowance
recorded for homogeneous consumer loans is based on an analysis of loan mix,
risk characteristics of the portfolio, fraud loss and bankruptcy experiences,
and historical losses, adjusted for current trends, for each homogenous category
or group of loans. The allowance for credit losses relating to impaired loans is
based on the
- 15 -
loan's observable market price, the collateral for certain collateral-dependent
loans, or the discounted cash flows using the loan's effective interest rate.
Regardless of the extent of the Company's analysis of customer performance,
portfolio trends or risk management processes, certain inherent but undetected
losses are probable within the loan portfolio. This is due to several factors
including inherent delays in obtaining information regarding a customer's
financial condition or changes in their unique business conditions, the
judgmental nature of individual loan evaluations, collateral assessments and the
interpretation of economic trends. Volatility of economic or customer-specific
conditions affecting the identification and estimation of losses for larger
non-homogeneous credits and the sensitivity of assumptions utilized to establish
allowances for homogeneous groups of loans are among other factors. The Company
estimates a range of inherent losses related to the existence of the exposures.
The estimates are based upon the Company's evaluation of imprecision risk
associated with the commercial and consumer allowance levels and the estimated
impact of the current economic environment.
Mortgage Servicing Rights - Mortgage servicing rights ("MSRs") associated with
loans originated and sold, where servicing is retained, are capitalized and
included in the consolidated balance sheet. The value of the capitalized
servicing rights represents the present value of the future servicing fees
arising from the right to service loans in the portfolio. Critical accounting
policies for MSRs relate to the initial valuation and subsequent impairment
tests. The methodology used to determine the valuation of MSRs requires the
development and use of a number of estimates, including anticipated principal
amortization and prepayments of that principal balance. Events that may
significantly affect the estimates used are changes in interest rates, mortgage
loan prepayment speeds and the payment performance of the underlying loans. The
carrying value of the MSRs is periodically reviewed for impairment based on a
determination of fair value. For purposes of measuring impairment, the servicing
rights are compared to a valuation prepared based on a discounted cash flow
methodology, utilizing current prepayment speeds and discount rates. Impairment,
if any, is recognized through a valuation allowance and included in net loan
fees (costs) in the income statement.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, the Company had outstanding commitments to originate $3.2
million in loans. In addition, the Company had outstanding unused lines of
credit to borrowers aggregating $4.8 million for commercial lines, and $850,000
for consumer lines of credit. As of December 31, 2002, the total amount of
certificates scheduled to mature in the following 12 months was $44.4 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 December 31, 2002 was $10.5 million. The
Company's future short-term requirements for cash are not expected to
significantly change. However, in the event that the Company should require
funds beyond its ability to generate them internally, additional
- 16 -
sources of funds are available, such as Federal Home Loan Bank advances. With no
parent company debt and sound capital levels, the Company has several options
for longer-term cash needs, such as for future expansion and acquisitions.
A review of the Consolidated Statement of Cash Flows included in the
accompanying financial statements shows that the Company's cash and cash
equivalents ("cash") decreased by $6.3 million in 2002 and increased $7.6
million in the year ended December 31, 2001. Cash decreased in 2002 due to net
cash used by investing activities of $13.7 million, partially offset by net cash
provided by operating activities of $3.2 million and net cash provided by
financing activities of $4.2 million. Cash provided by operating activities
included net income of $1.3 million, plus non cash adjustments to net income
including the proceeds from sales of loans originated for sale of $41.2 million
offset by $41.0 million of loans originated for sale and net gain on loan sales
of $586,000, the provision for loan losses of $718,000, depreciation and
amortization of $268,000, amortization of loan servicing rights of $895,000, the
provision for valuation allowance for loan servicing rights of $683,000, and
compensation related to employee stock ownership and incentive plans of
$313,000.
Net cash used by investing activities included $41.0 million in purchases of
available-for-sale securities, the purchase of Federal Home Loan Bank stock of
$2.0 million, net originations of loans of $5.7 million, and the purchase of
premised and equipment of $604,000, offset by proceeds from maturities of
available-for-sale securities of $34.2 million, proceeds from sales of
foreclosed assets of $986,000, and proceeds from sales of available-for-sale
securities of $378,000. Cash provided by financing activities included a net
increase in demand deposits, money market, NOW and savings accounts of $8.1
million and $1.0 million proceeds for the issuance of Federal Home Loan Bank
advances offset by a decrease in certificates of deposit of $2.1 million, the
purchase of incentive plan shares of $1.0 million, and the purchase of treasury
stock of $1.5 million.
Cash increased in 2001 due to net cash provided by operating activities of $3.0
million and net cash provided by financing activities of $21.7 million, offset
by net cash used by investing activities of $17.1 million. Cash provided by
operating activities included net income of $1.9 million, plus non cash
adjustments to net income including the proceeds from sales of loans originated
for sale of $31.3 million offset by $31.1 million of loans originated for sale
and net gain on loan sales of $925,000, the provision for loan losses of
$607,000, depreciation and amortization of $300,000, amortization of loan
servicing rights of $432,000, deferred income tax expense of $245,000 and
compensation related to Employee Stock Ownership Plan. Net cash used by
investing activities included $46.9 million in purchases of available-for-sale
securities and the purchase of bank owned life insurance of $1.4 million offset
by proceeds from maturities of available-for-sale securities of $23.4 million,
net originations of loans of $7.0 million, and proceeds from sales of foreclosed
assets of $1.1 million. Cash provided by financing activities included $22.5
proceeds for the issuance of Federal Home Loan Bank advances, proceeds from the
sale of stock of $14.4 million, and net increase in demand deposits, money
market, NOW and savings accounts of $8.9 million offset by repayment of Federal
Home Loan Bank advances and other debt of $20.0 million, a
- 17 -
decrease in certificates of deposit of $1.6 million, and purchase of Employee
Stock Ownership Plan shares of $1.4 million.
For a discussion of commitments and credit risk, see note 20 to the consolidated
financial statements.
The Bank is required to maintain regulatory capital sufficient to meet tier I
leverage, tier I risk-based and total risk-based capital ratios of at least
4.0%, 4.0% and 8.0%, respectively. At December 31, 2002, the Bank exceeded each
of its capital requirements with ratios of 10.7%, 19.2% and 20.4%, respectively.
MANAGEMENT OF INTEREST RATE RISK
The principal objectives of the Company's interest rate risk management function
are: (i) to evaluate the interest rate risk included in certain balance sheet
accounts; (ii) to determine the level of risk appropriate given the Company's
business focus, operating environment, capital and liquidity requirements, and
performance objectives; (iii) to establish asset concentration guidelines; and
(iv) to manage the risk consistent with Board-approved guidelines. Through such
management, the Company seeks to reduce the vulnerability of its operations to
changes in interest rates and to manage the ratio of interest rate sensitive
assets to interest rate sensitive liabilities within specified maturity terms or
repricing dates. The Company's Board of Directors has established as
Asset/Liability Committee consisting of directors and senior management
officers, which is responsible to reviewing the Company's asset/liability
policies and interest rate risk position. Such committee generally meets on a
quarterly basis, and at other times as dictated by market conditions, and
reports to the Board of Directors.
The Company's interest rate risk strategy primarily consists of: (i) emphasizing
the attraction and retention of core deposits, which tend to be a more stable
source of funding; (ii) emphasizing the origination of adjustable rate mortgage
loan products and short-term commercial and consumer loans for the in-house
portfolio, although this is dependent largely on the market for such loans;
(iii) selling longer-term fixed-rate one-to-four family mortgage loans into the
secondary market; and (iv) investing primarily in U.S. government agency
investments and mortgage-backed securities.
Our ability to maintain net interest income depends upon earning a higher yield
on assets than the rates we pay on deposits and borrowings and sustaining this
positive interest rate spread during the fluctuations in prevailing interest
rates. Interest rate sensitivity is a measure of the difference between amounts
of interest-earning assets and interest-bearing liabilities that either re-price
or mature within a given period of time. The difference, or the interest rate
repricing "gap", provides an indication of how an institution's interest rate
spread will be affected by changes in interest rates. A gap is considered
positive when the amount of interest-rate sensitive assets exceeds the amount of
interest-rate sensitive assets, and is considered negative when the amount of
interest-rate sensitive liabilities exceeds the amount of interest-rate
sensitive assets. Generally, during a period of rising interest rates, a
negative gap within shorter maturities would adversely affect net interest
income, while a
- 18 -
positive gap within shorter maturities would result in an increase in net
interest income. During a period of falling interest rates, a negative gap
within shorter maturities would result in an increase in net interest income
while a positive gap within shorter maturities would have the opposite effect.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 2002, which mature or
re-price in the periods shown. Except as stated in the table, the amount of
assets and liabilities shown which re-price or mature during a particular period
were determined in accordance with the earlier of term to repricing or
contractual maturity. As of December 31, 2002, the amount of the Company's
interest-earning assets which were estimated to mature or re-price within one
year exceeded the Company's interest-bearing liabilities with the same
characteristics by $21.9 million or 10.78% of the Company's total assets.
Daily 1 to 3 3 to 12 1 to 3 3 to 5 Over 5
Reprice Months Months Years Years Years Total
-------- -------- -------- -------- -------- -------- --------
(in thousands)
Interest-earning Assets:
Loans receivable, net (1,5,6) $ 0 $ 19,141 $ 25,842 $ 39,821 $ 18,276 $ 4,661 $107,741
Investment Securities (2,3,5,6) 0 9,980 14,669 21,598 16,277 10,224 72,748
Interest-bearing Due From 3,458 0 0 0 0 0 3,458
-------- -------- -------- -------- -------- -------- --------
TOTAL 3,458 29,121 40,511 61,419 34,553 14,885 183,947
-------- -------- -------- -------- -------- -------- --------
Interest-bearing Liabilities
Deposits (4) 0 9,656 40,570 43,670 21,695 14,449 130,040
Borrowings 1,000 1 0 0 7,678 17,822 26,501
-------- -------- -------- -------- -------- -------- --------
TOTAL 1,000 9,657 40,570 43,670 29,373 32,271 156,541
-------- -------- -------- -------- -------- -------- --------
Gap 2,458 19,464 (59) 17,749 5,180 (17,386) 27,406
-------- -------- -------- -------- -------- -------- --------
Cumulative Gap $ 2,458 $ 21,922 $ 21,863 $ 39,612 $ 44,792 $ 27,406 $ 27,406
======== ======== ======== ======== ======== ======== ========
Cumulative Gap as a %
of Total Assets 1.21% 10.81% 10.78% 19.54% 22.09% 13.52% 13.52%
-------- -------- -------- -------- -------- -------- --------
(1) Fixed rate loans are slotted according to their final maturity date.
Adjustable rate loans are slotted according to their next reprice date.
The cash flows Residential R/E, Commercial R/E and Consumer Installment
Loans all receive an amortizing treatment. The cash flows for Residential
R/E are accelerated to reflect assumptions for prepayments.
(2) Reflects re-pricing, contractual maturity, or anticipated call date.
(3) All securities are classified as available for sale.
(4) Adjusted to reflect various decay rate assumptions.
(5) The cash flows for MBS receive an amortizing treatment.
(6) The cash flows for MBS are accelerated to reflect assumptions for
prepayments.
The Company tends to be asset sensitive due to the levels of assets that
re-price daily, investment that mature within twelve months, and loans that
mature or re-price within twelve months. The effect of interest rate increases
on loans, since they are subject to competitive pressure, tends to lag behind
change in market rates. This lag generally lessens the positive impact on net
interest income during a period of rising interest rates. Based on information
- 19 -
provided in the table, assuming no significant impact from competitive pressure,
the effect of an increase in interest rates of 100 basis points would be an
increase in annualized net interest income of approximately $218,000. A decrease
in interest rates would have the opposite effect.
Management believes that the assumptions used to evaluate interest rate
sensitivity approximate actual experience and considers this method a reasonable
tool; however, the interest rate sensitivity of the Company's assets and
liabilities and the estimated effect of changes in interest rates on net
interest income could vary substantially if different assumptions were used or
actual experience differs from the historical experiences on which these
assumptions were based.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements of the Company and related notes presented
herein have been prepared in accordance with generally accepted accounting
principles, which generally require the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
relative purchasing power over time due to inflation. Unlike most industrial
companies, virtually all of the Bank's assets and liabilities are monetary in
nature. As a result, interest rates generally have a more significant impact on
the Bank's performance than does the effect of inflation. Interest rates do not
necessarily move in the same direction or in the same magnitude as the prices of
goods and services, since such prices are affected by inflation to a larger
extent than interest rates.
- 20 -
INDEPENDENT ACCOUNTANTS' REPORT
To the Stockholders
and Board of Directors
First BancTrust Corporation and Subsidiaries
Paris, Illinois
We have audited the accompanying consolidated balance sheets of First BancTrust
Corporation and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements described above present
fairly, in all material respects, the consolidated financial position of First
BancTrust Corporation and subsidiaries as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
/s/ BKD, LLP
Decatur, Illinois
January 17, 2003
- 21 -
FIRST BANCTRUST CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
ASSETS
2002 2001
------------ ------------
Cash and due from banks $ 6,995,804 $ 7,307,519
Interest-bearing deposits with financial institutions 3,457,568 9,438,412
------------ ------------
Cash and cash equivalents 10,453,372 16,745,931
------------ ------------
Available-for-sale securities 72,747,550 65,206,819
Loans held for sale 596,565 596,908
Loans, net of allowance for loan losses of $1,962,551 and
$1,656,946 at December 31, 2002 and 2001, respectively 105,181,804 100,656,122
Premises and equipment 2,771,616 2,435,118
Foreclosed assets held for sale, net 185,083 807,334
Interest receivable 2,356,771 2,116,322
Loan servicing rights, net of valuation allowance of $683,087
and $0 at December 31, 2002 and 2001, respectively 949,580 2,094,510
Cash surrender value of life insurance 3,666,926 3,478,641
Federal Home Loan Bank stock 3,711,600 1,582,100
Other 104,543 317,217
------------ ------------
Total assets $202,725,410 $196,037,022
============ ============
See Notes to Consolidated Financial Statements
- 22 -
LIABILITIES AND STOCKHOLDERS' EQUITY
2002 2001
------------- -------------
LIABILITIES
Noninterest-bearing deposits $ 17,295,781 $ 13,962,936
Interest-bearing deposits
Demand 50,866,975 47,346,402
Savings 8,656,922 7,378,727
Time 70,515,703 72,627,646
------------- -------------
Total deposits 147,335,381 141,315,711
------------- -------------
Federal Home Loan Bank advances and other debt 26,501,230 25,515,573
Pass through payments received on loans sold 260,753 270,522
Advances from borrowers for taxes and insurance 132,885 140,548
Deferred income taxes 267,765 126,712
Interest payable 105,651 123,760
Other 816,021 826,399
------------- -------------
Total liabilities 175,419,686 168,319,225
------------- -------------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized and unissued -
1,000,000 shares
Common stock, $.01 par value; authorized 5,000,000 shares;
issued and outstanding - 1,520,875 shares 15,209 15,209
Additional paid-in capital 14,444,010 14,381,726
Retained earnings 16,243,149 15,213,625
Accumulated other comprehensive income
Unrealized appreciation on available-for-sale securities,
net of income taxes 2002 - $695,280, 2001 - $171,359 993,257 246,590
------------- -------------
31,695,625 29,857,150
Unallocated employee stock ownership plan; 2002 - 95,063
shares, 2001 - 110,267 shares (1,098,766) (1,274,498)
Unearned incentive plan shares; 2002 - 56,267 shares (928,538) --
Treasury stock, at cost
Common; 2002 - 155,165 shares, 2001 - 62,600 shares (2,362,597) (864,855)
------------- -------------
Total stockholders' equity 27,305,724 27,717,797
------------- -------------
Total liabilities and stockholders' equity $ 202,725,410 $ 196,037,022
============= =============
- 23 -
FIRST BANCTRUST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
------------ ------------
INTEREST AND DIVIDEND INCOME
Loans
Taxable $ 9,044,909 $ 9,990,947
Tax exempt 43,952 52,477
Available-for-sale securities
Taxable 3,387,666 2,778,226
Tax exempt 293,145 263,297
Deposits with financial institutions 98,337 383,150
Dividends on Federal Home Loan Bank stock and other 163,752 105,848
------------ ------------
Total interest and dividend income 13,031,761 13,573,945
------------ ------------
INTEREST EXPENSE
Deposits 4,337,536 5,665,970
Federal Home Loan Bank advances and other debt 1,188,340 1,324,190
------------ ------------
Total interest expense 5,525,876 6,990,160
------------ ------------
NET INTEREST INCOME 7,505,885 6,583,785
PROVISION FOR LOAN LOSSES 718,000 607,000
------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,787,885 5,976,785
------------ ------------
NONINTEREST INCOME
Customer service fees 544,041 495,018
Other service charges and fees 877,746 794,579
Net gains on loan sales 585,934 925,289
Net realized gains on sales of available-for-sale securities 119,654 --
Net loan servicing fees (cost) (1,079,756) 48,293
Brokerage fees 176,739 22,415
Abstract and title fees 406,247 405,430
Other 284,059 206,662
------------ ------------
Total noninterest income 1,914,664 2,897,686
------------ ------------
See Notes to Consolidated Financial Statements
- 24 -
2002 2001
---------- ----------
NONINTEREST EXPENSE
Salaries and employee benefits $3,939,395 $3,508,830
Net occupancy expense 191,794 189,922
Equipment expense 644,102 658,928
Data processing fees 475,410 487,141
Advertising and promotion expense 206,239 186,571
Professional fees 313,937 251,122
Foreclosed assets expense, net 214,268 137,950
Other 791,909 625,538
---------- ----------
Total noninterest expense 6,777,054 6,046,002
---------- ----------
INCOME BEFORE INCOME TAXES 1,925,495 2,828,469
PROVISION FOR INCOME TAXES 612,788 967,689
---------- ----------
NET INCOME 1,312,707 1,860,780
---------- ----------
OTHER COMPREHENSIVE INCOME
Unrealized appreciation on available-for-sale securities, net
of income taxes of $573,320 and $216,799, for 2002 and 2001,
respectively 816,922 311,983
Less: reclassification adjustment for realized gains included
in net income, net of income tax expense of $49,399 and $0
for 2002 and 2001, respectively 70,255 --
---------- ----------
746,667 311,983
---------- ----------
COMPREHENSIVE INCOME $2,059,374 $2,172,763
========== ==========
BASIC EARNINGS PER SHARE $ 1.02 N/A
========== ==========
DILUTED EARNINGS PER SHARE $ 1.00 N/A
========== ==========
- 25 -
FIRST BANCTRUST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002 AND 2001
ADDITIONAL PAID
COMMON STOCK -IN CAPITAL
--------------- ---------------
BALANCE, JANUARY 1, 2001 $ -- $ --
Net income -- --
Dividends on common stock, $.05 per share -- --
Change in unrealized appreciation on available-for-sale
securities, net of income taxes of $216,799 -- --
Sale of stock (1,520,875 shares) 15,209 14,363,747
Employee stock ownership plan shares purchased
(121,670 shares) -- --
Employee stock ownership plan shares allocated (11,403 shares) -- 17,979
Purchase of treasury stock (62,600 shares) -- --
--------------- ---------------
BALANCE, DECEMBER 31, 2001 15,209 14,381,726
Net income -- --
Dividends on common stock, $.20 per share -- --
Change in unrealized appreciation on available-for-sale
securities, net of income taxes of $523,921 -- --
Employee stock ownership plan shares allocated (15,204 shares) -- 64,274
Incentive plan shares purchased (60,835 shares) -- --
Incentive plan shares allocated (4,568 shares) -- (1,990)
Purchase of treasury stock (92,565 shares) -- --
--------------- ---------------
BALANCE, DECEMBER 31, 2002 $ 15,209 $ 14,444,010
=============== ===============
See Notes to Consolidated Financial Statements
- 26 -
ACCUMULATED UNALLOCATED
OTHER EMPLOYEE STOCK UNEARNED
RETAINED COMPREHENSIVE OWNERSHIP INCENTIVE
EARNINGS INCOME (LOSS) PLAN SHARES PLAN SHARES
------------ ------------ ------------ ------------
BALANCE, JANUARY 1, 2001 $ 13,428,894 $ (65,393) $ -- $ --
Net income 1,860,780 -- -- --
Dividends on common stock, $.05 per share (76,049) -- -- --
Change in unrealized appreciation on available-for-sale
securities, net of income taxes of $216,799 -- 311,983 -- --
Sale of stock (1,520,875 shares) -- -- --
Employee stock ownership plan shares purchased
(121,670 shares) -- -- (1,406,297) --
Employee stock ownership plan shares allocated (11,403 shares) -- -- 131,799 --
Purchase of treasury stock (62,600 shares) -- -- -- --
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2001 15,213,625 246,590 (1,274,498) --
Net income 1,312,707 -- -- --
Dividends on common stock, $.20 per share (283,183) -- -- --
Change in unrealized appreciation on available-for-sale
securities, net of income taxes of $523,921 -- 746,667 -- --
Employee stock ownership plan shares allocated (15,204 shares) -- -- 175,732 --
Incentive plan shares purchased (60,835 shares) -- -- -- (1,003,888)
Incentive plan shares allocated (4,568 shares) -- -- -- 75,350
Purchase of treasury stock (92,565 shares) -- -- -- --
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2002 $ 16,243,149 $ 993,257 $ (1,098,766) $ (928,538)
============ ============ ============ ============
TREASURY
STOCK TOTAL
------------ ------------
BALANCE, JANUARY 1, 2001 $ -- $ 13,363,501
Net income -- 1,860,780
Dividends on common stock, $.05 per share -- (76,049)
Change in unrealized appreciation on available-for-sale
securities, net of income taxes of $216,799 -- 311,983
Sale of stock (1,520,875 shares) -- 14,378,956
Employee stock ownership plan shares purchased
(121,670 shares) -- (1,406,297)
Employee stock ownership plan shares allocated (11,403 shares) -- 149,778
Purchase of treasury stock (62,600 shares) (864,855) (864,855)
------------ ------------
BALANCE, DECEMBER 31, 2001 (864,855) 27,717,797
Net income -- 1,312,707
Dividends on common stock, $.20 per share -- (283,183)
Change in unrealized appreciation on available-for-sale
securities, net of income taxes of $523,921 -- 746,667
Employee stock ownership plan shares allocated (15,204 shares) -- 240,006
Incentive plan shares purchased (60,835 shares) -- (1,003,888)
Incentive plan shares allocated (4,568 shares) -- 73,360
Purchase of treasury stock (92,565 shares) (1,497,742) (1,497,742)
------------ ------------
BALANCE, DECEMBER 31, 2002 $ (2,362,597) $ 27,305,724
============ ============
- 27 -
FIRST BANCTRUST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
------------ ------------
OPERATING ACTIVITIES
Net income $ 1,312,707 $ 1,860,780
Items not requiring (providing) cash
Depreciation and amortization 267,618 299,969
Provision for loan losses 718,000 607,000
Amortization (accretion) of premiums and discounts on
securities, net 257,207 (18,365)
Amortization of loan servicing rights 894,553 432,297
Provision for impairment of loan servicing rights 683,087 --
Deferred income taxes (382,868) 244,648
Net realized gains on available-for-sale securities (119,654) --
Net loss on sales of foreclosed assets 75,644 9,239
Net gain on sales of premises and equipment -- (2,448)
Net gain on loan sales (585,934) (925,289)
Federal Home Loan Bank stock dividends (129,500) (104,500)
Compensation related to employee stock ownership and
incentive plans 313,366 149,778
Changes in
Loans originated for sale (41,039,245) (31,068,814)
Proceeds from sales of loans originated for resale 41,192,812 31,304,234
Interest receivable (240,449) (171,807)
Cash surrender value (188,285) (136,697)
Other assets 212,674 368,418
Interest payable (18,109) (70,463)
Other liabilities (10,378) 259,611
------------ ------------
Net cash provided by operating activities 3,213,246 3,037,591
------------ ------------
INVESTING ACTIVITIES
Change in interest-bearing time deposits -- 50,310
Purchases of available-for-sale securities (40,973,822) (46,881,104)
Proceeds from maturities of available-for-sale securities 34,188,402 23,363,561
Proceeds from sales of available-for-sale securities 377,724 --
Purchase of bank owned life insurance -- (1,440,000)
Purchase of Federal Home Loan Bank stock (2,000,000) --
Net (originations) collections of loans (5,682,690) 6,955,521
Proceeds from sales of foreclosed assets 985,615 1,053,435
Purchase of premises and equipment (604,116) (250,170)
Proceeds from sales of premises and equipment -- 6,013
------------ ------------
Net cash used in investing activities (13,708,887) (17,142,434)
------------ ------------
See Notes to Consolidated Financial Statements
- 28 -
2002 2001
------------ ------------
FINANCING ACTIVITIES
Net increase in demand deposits, money market, NOW and
savings accounts $ 8,131,613 $ 8,846,488
Net decrease in certificates of deposit (2,111,943) (1,605,078)
Proceeds from the issuance of Federal Home Loan Bank advances
and other debt 1,000,000 22,500,000
Repayment of Federal Home Loan Bank advances and other debt (14,343) (20,013,599)
Pass through payments received on loans sold (9,769) (49,231)
Net increases in advances from borrowers for taxes and insurance (7,663) (5,950)
Proceeds from sale of stock -- 14,378,956
Purchase of incentive plan shares (1,003,888) (1,406,297)
Dividends paid (283,183) (76,049)
Purchase of treasury stock (1,497,742) (864,855)
------------ ------------
Net cash provided by financing activities 4,203,082 21,704,385
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,292,559) 7,599,542
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 16,745,931 9,146,389
------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 10,453,372 $ 16,745,931
============ ============
SUPPLEMENTAL CASH FLOWS INFORMATION
Interest paid $ 5,543,985 $ 7,060,623
Income taxes paid (net of refunds) $ 780,008 $ 593,203
Real estate acquired in settlement of loans $ 439,008 $ 1,413,309
- 29 -
FIRST BANCTRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
First BancTrust Corporation (Company) and its wholly-owned subsidiaries,
First Bank & Trust, S.B. (Bank), ECS Service Corporation, and First
Charter Service Corporation, are primarily engaged in providing a full
range of banking and mortgage services to individual and corporate
customers in East Central Illinois. The Company also provides other
services, such as brokerage and abstract and title services through its
subsidiaries, ECS Service Corporation and First Charter Service
Corporation. The Bank's subsidiary, Community Finance Center, Inc.,
provides retail consumer loans to the Company's customers. The Company
is subject to competition from other financial institutions. The Company
is a financial holding company and the Bank is an Illinois chartered
savings bank. The Company and Bank are subject to the regulation of
certain federal and state agencies and undergo periodic examinations by
those regulatory authorities.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and Bank and their subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the 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 relate to the determination of the allowance for loan losses, the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans and loan servicing rights. In connection with the
determination of the allowance for loan losses and the valuation of
foreclosed assets held for sale, management obtains independent
appraisals for significant properties. Management estimates loan
servicing rights taking into consideration changes in interest rates,
current prepayment rates and expected future cash flows and obtains an
independent valuation for the asset.
CASH EQUIVALENTS
The Company considers all liquid investments with original maturities of
three months or less to be cash equivalents. At December 31, 2002 and
2001, cash equivalents consisted of interest-bearing deposits with
financial institutions.
See Notes to Consolidated Financial Statements
- 30 -
FIRST BANCTRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
SECURITIES
Available-for-sale securities, which include any security for which the
Company has no immediate plan to sell but which may be sold in the
future, are carried at fair value. Realized gains and losses, based on
amortized cost of the specific security, are included in noninterest
income. Unrealized gains and losses are recorded, net of related income
tax effects, in stockholders' equity. Premiums and discounts are
amortized and accreted, respectively, to interest income using the
level-yield method over the period to maturity.
Interest and dividends on investments in debt and equity securities are
included in income when earned.
LOANS HELD FOR SALE
The Company sells one-to-four family residential loans, real estate
loans and agricultural loans, including farmland and agricultural
production finance, to various investors. The agricultural loans are
underwritten to carry a government guarantee that covers 90% of any loss
on the loan. The guaranteed portion is sold to the various investors
with servicing retained.
Loans held for sale are carried at the lower of cost or fair value,
determined using an aggregate basis. Write-downs to fair value are
recognized as a charge to earnings at the time the decline in value
occurs and are recognized through a valuation allowance. Gains and
losses resulting from sales of loans are recognized when the respective
loans are sold to investors. Gains and losses are determined by the
difference between the selling price and the carrying amount of the
loans sold, net of discounts collected or paid and considering a normal
servicing rate.
LOANS
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoffs are reported at their
outstanding principal balances adjusted for any charge-offs and net of
the allowance for loan losses. Interest income is reported on the
interest method. Generally, loans are placed on non-accrual status at
ninety days past due and interest is considered a loss, unless the loan
is well-secured and in the process of collection.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to earnings.
Loan losses are charged against the allowance when management believes
the uncollectibility of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance.
- 31 -
FIRST BANCTRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of historical experience, the
nature and volume of the loan portfolio, adverse situations that may
affect the borrower's ability to repay, estimated value of any
underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes
available.
A loan is considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status, collateral
value and the probability of collecting scheduled principal and interest
payments when due. Loans that experience insignificant payment delays
and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the
length of the delay, the reasons for the delay, the borrower's prior
payment record and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan-by-loan
basis for commercial and construction loans by either the present value
of expected future cash flows discounted at the loan's effective
interest rate, the loan's obtainable market price or the fair value of
the collateral if the loan is collateral dependent.
Large groups of smaller balance homogenous loans are collectively
evaluated for impairment. Accordingly, the Company does not separately
identify individual consumer and residential loans for impairment
disclosures.
PREMISES AND EQUIPMENT
Depreciable assets are stated at cost less accumulated depreciation.
Depreciation is charged to expense using the straight-line method over
the estimated useful lives of the assets. Leasehold improvements are
capitalized and depreciated using the straight-line method over the
terms of the respective leases or the estimated useful lives of the
improvements, whichever is shorter.
FEDERAL HOME LOAN BANK STOCK
Federal Home Loan Bank stock is stated at cost and is a required
investment for institutions that are members of the Federal Home Loan
Bank system. The required investment in the common stock is based on a
predetermined formula. The Federal Home Loan Bank stock is recognized
based on the price at which it may be resold to the Federal Home Loan
Bank.
- 32 -
FIRST BANCTRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
FORECLOSED ASSETS HELD FOR SALE
Assets acquired through, or in lieu of, loan foreclosure are held for
sale and are initially recorded at fair value at the date of
foreclosure, establishing a new cost basis. Subsequent to foreclosure,
valuations are periodically performed by management and the assets are
carried at the lower of carrying amount or fair value less cost to sell.
Revenue and expenses from operations and changes in the valuation
allowance are included in net expenses from foreclosed assets expense.
FEE INCOME
Loan origination fees, net of direct origination costs, are recognized
as income using the level-yield method over the term of the loans.
Loan servicing income, net of the amortization of loan servicing rights
and provision for valuation allowance, represents net fees earned (costs
incurred) for servicing real estate and agricultural loans owned by
various investors. Abstract and title fees represent fees earned as the
real estate abstracting and title services are performed for customers
in Edgar and Clark counties in Illinois.
LOAN SERVICING
Loan servicing rights on originated loans that have been sold are
capitalized by allocating the total cost of the loans between the loan
servicing rights and the loans based on their relative fair values.
Capitalized servicing rights are amortized in proportion to and over the
period of estimated servicing revenues. Impairment of loan servicing
rights is assessed based on the fair value of those rights. Fair values
are estimated using either an independent valuation or by discounted
cash flows based on a current market interest rate. For purposes of
measuring impairment, the rights are stratified based on the predominant
risk characteristics of the underlying loans. The predominant
characteristic currently used for stratification is type of loan. The
amount of impairment recognized is the amount by which the capitalized
loan servicing rights for a stratum exceed their fair value.
INCENTIVE PLAN
The Company accounts for its stock award program or incentive plan in
accordance with Accounting Principals Board Opinion (APB) No. 25,
Accounting for Stock Issued to Employees. The aggregate purchase price
of all shares owned by the incentive plan is reflected as a reduction of
stockholders' equity. Compensation expense is based on the market price
of the Company's stock on the date the shares are granted and is
recorded over the vesting period. The difference between the aggregate
purchase price and the fair value on the date granted of the shares
earned is recorded as an adjustment to paid-in capital.
- 33 -
FIRST BANCTRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
EMPLOYEE STOCK OWNERSHIP PLAN
The Company accounts for its employee stock ownership plan (ESOP) in
accordance with American Institute of Certified Public Accountants
(AICPA) Statement of Position 93-6. The cost of shares issued to the
ESOP but not yet allocated to participants are presented in the
consolidated balance sheet as a reduction of stockholders' equity.
Compensation expense is recorded based on the market price of the shares
as they are committed to be released for allocation to participant
accounts. The difference between the market price and the cost of shares
committed to be released is recorded as an adjustment to paid-in
capital. Dividends on allocated ESOP shares are recorded as a reduction
of retained earnings; dividends on unallocated ESOP shares are reflected
as a reduction of debt.
Shares are considered outstanding for earnings per share calculations
when they are committed to be released; unallocated shares will not
considered outstanding.
STOCK OPTIONS
At December 31, 2002, the Company authorized a stock-based employee
compensation plan, which is described more fully in Note 16. The Company
will account 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 will be reflected in net income, as all options
granted under those plans will have an exercise price equal to the
market value of the underlying common stock on the grant date.
INCOME TAXES
Deferred tax liabilities and assets are recognized for the tax effects
of differences between the financial statement and tax bases of assets
and liabilities. The Company files consolidated income tax returns with
its subsidiaries.
TREASURY STOCK
Treasury stock is stated at cost. Cost is determined by the first-in,
first-out method.
EARNINGS PER SHARE
Basic earnings per shares have been computed based upon the weighted
average common shares outstanding during each year. Diluted earnings per
share reflects 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. The Bank converted to a stock
savings bank in April 2001. Earnings per share for 2001 are not
meaningful and are therefore not presented.
- 34 -
FIRST BANCTRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
RECLASSIFICATIONS
Certain reclassifications have been made to the 2001 financial
statements to conform to the 2002 financial statement presentation.
These classifications had no effect on net earnings.
NOTE 2: CONVERSION TO STOCK OWNERSHIP
On April 18, 2001, the Bank consummated its conversion from a state
chartered mutual savings bank to a state chartered stock savings bank
pursuant to the Bank's plan of conversion. Concurrent with the formation
of the Company, the Company acquired 100% of the stock of the Bank and
issued 1,520,875 shares of Company common stock, with $.01 par value, at
$10 per share. Net proceeds of the Company's stock issuance, after
costs, were $14,378,956.
NOTE 3: RESTRICTION ON CASH AND DUE FROM BANKS
The Company is required to maintain reserve funds in cash and/or on
deposit with the Federal Reserve Bank. The reserve required at December
31, 2002 was $2,418,000.
NOTE 4: SECURITIES
The amortized cost and approximate fair values of securities classified
as available for sale are as follows:
DECEMBER 31, 2002
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAINS (LOSSES) FAIR VALUE
------------ ------------ ------------ ------------
U.S. government
agencies $ 9,497,724 $ 150,385 $ -- $ 9,648,109
Mortgage-backed
securities 53,168,583 1,213,022 (181,016) 54,200,589
State and political
subdivisions 6,872,582 430,907 -- 7,303,489
Equity securities 1,520,124 75,239 -- 1,595,363
------------ ------------ ------------ ------------
$ 71,059,013 $ 1,869,553 $ (181,016) $ 72,747,550
============ ============ ============ ============
- 35 -
FIRST BANCTRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
DECEMBER 31, 2001
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAINS (LOSSES) FAIR VALUE
------------ ------------ ------------ ------------
U.S. government
agencies $ 12,480,958 $ 50,499 $ (236,829) $ 12,294,628
Mortgage-backed
securities 44,560,750 701,044 (213,157) 45,048,637
State and political
subdivisions 6,707,645 107,459 (31,556) 6,783,548
Equity securities 1,039,517 40,489 -- 1,080,006
------------ ------------ ------------ ------------
$ 64,788,870 $ 899,491 $ (481,542) $ 65,206,819
============ ============ ============ ============
The amortized cost and fair value of available-for-sale debt securities
at December 31, 2002, by contractual majority, are shown below. Expected
maturities will differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
AMORTIZED APPROXIMATE
COST FAIR VALUE
----------- -----------
One year or less $ 10,000 $ 10,000
After one through five years 10,538,648 10,741,551
After five through ten years 3,721,329 3,981,392
After ten years 2,100,329 2,218,655
Mortgage-backed securities not due on a single maturity date 53,168,583 54,200,589
----------- -----------
$69,538,889 $71,152,187
=========== ===========
The book value of securities pledged as collateral, to secure public
deposits, Federal Home Loan Bank advances and for other purposes,
amounted to $21,262,260 at December 31, 2002 and $19,157,259 at December
31, 2001. The approximate fair value of pledged securities amounted to
$21,874,713 at December 31, 2002 and $19,366,764 at December 31 2001.
Gross gains of $119,654 resulting from sales of available-for-sale
securities were realized for 2002. There were no sales of
available-for-sale securities for 2001. Income tax expense of $49,399
was recognized on the sales of available-for-sale securities during
2002.
- 36 -
FIRST BANCTRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
With the exception of securities of U.S. government agencies and
corporations, the Company did not hold any securities of a single
issuer, payable from and secured by the same source of revenue or taxing
authority, the book value of which exceeded 10% of stockholder's equity
at December 31, 2002.
NOTE 5: LOANS AND ALLOWANCE FOR LOAN LOSSES
Categories of loans at December 31, 2002 and 2001, include:
2002 2001
------------- -------------
Commercial and industrial $ 6,044,968 $ 6,290,894
Agricultural production financing 11,570,334 8,303,760
Real estate construction 724,021 937,136
Commercial and agricultural real estate 22,325,759 19,527,702
Residential real estate 39,935,439 41,297,999
Consumer 26,584,209 25,432,233
Other 901,464 1,073,191
------------- -------------
Total loans 108,086,194 102,862,915
Less
Unearned discount and fees (613,534) (364,465)
Undisbursed loans in process (328,305) (185,382)
Allowance for loan losses (1,962,551) (1,656,946)
------------- -------------
Net loans $ 105,181,804 $ 100,656,122
============= =============
Activity in the allowance for loan losses was as follows:
2002 2001
------------- -------------
Balance, beginning of year $ 1,656,946 $ 2,221,982
Provision charged to expense 718,000 607,000
Losses charged off, net of recoveries of $113,680 for
2002 and $160,759 for 2001 (412,395) (1,172,036)
------------- -------------
Balance, end of year $ 1,962,551 $ 1,656,946
============= =============
- 37 -
FIRST BANCTRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
Impaired loans totaled $6,300,019 and $5,144,791 at December 31, 2002
and 2001, respectively. An allowance for loan losses of $1,057,232 and
$754,419 relates to impaired loans of $4,449,318 and $3,465,063, at
December 31, 2002 and 2001, respectively. At December 31, 2002 and 2001,
impaired loans of $1,850,701 and $1,679,728 had no related allowance for
loan losses.
Interest of $351,033 and $372,469 was recognized on average impaired
loans of $5,857,487 and $4,255,800 for 2002 and 2001. Interest of
$313,228 and $261,525 was recognized on impaired loans on a cash basis
during 2002 and 2001.
At December 31, 2002 and 2001, accruing loans delinquent 90 days or more
totaled $1,511,000 and $1,150,000, respectively. Non-accruing loans at
December 31, 2002 and 2001 were $9,000 and $374,000, respectively.
NOTE 6: PREMISES AND EQUIPMENT
Major classifications of premises and equipment, stated at cost, are as
follows:
2002 2001
----------- -----------
Land $ 495,702 $ 488,052
Buildings and improvements 2,748,817 2,254,730
Leasehold improvements 5,946 5,946
Equipment 3,682,896 3,580,517
----------- -----------
6,933,361 6,329,245
Less accumulated depreciation (4,161,745) (3,894,127)
----------- -----------
Net premises and equipment $ 2,771,616 $ 2,435,118
=========== ===========
- 38 -
FIRST BANCTRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 7: LOAN SERVICING
Loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of serviced
loans consist of the following:
2002 2001
----------- -----------
One-to-four family residential loans
FHLMC $55,651,739 $44,113,736
IHDA 7,971,222 9,455,604
Other 127,827 581,146
----------- -----------
63,750,788 54,150,486
----------- -----------
Agricultural loans
Farmer Mac 706,540 1,125,885
GSC Group 16,376,428 16,239,573
----------- -----------
$80,833,756 $71,515,944
=========== ===========
Custodial escrow balances maintained in connection with the foregoing
loan servicing, and included in demand deposits, were approximately
$144,272 and $119,253 at December 31, 2002 and 2001, respectively.
The aggregate fair value of capitalized loan servicing rights at
December 31, 2002 and 2001 totaled $949,580 and $2,094,510,
respectively. Comparable market values and a valuation model that
calculates the present value of future cash flows were used to estimate
fair value. For purposes of measuring impairment, risk characteristics
including product type, and interest rate, were used to stratify the
originated loan servicing rights.
2002 2001
----------- -----------
Loan Servicing Rights
Balance, beginning of year $ 2,094,510 $ 1,702,846
Servicing rights capitalized 432,710 823,961
Amortization of servicing rights (894,553) (432,297)
----------- -----------
1,632,667 2,094,510
Valuation allowance (683,087) --
----------- -----------
Balance, end of year $ 949,580 $ 2,094,510
=========== ===========
- 39 -
FIRST BANCTRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
Activity in the valuation allowance for loan servicing rights was as
follows:
2002 2001
----------- -----------
Balance, beginning of year $ -- $ --
Additions 683,087 --
Deletions -- --
Direct write-downs -- --
----------- -----------
Balance, end of year $ 683,087 $ --
=========== ===========
NOTE 8: DEPOSITS
Deposits in denominations of $100,000 or more were $38,046,681 on
December 31, 2002, and $29,819,774 on December 31, 2001.
At December 31, 2001, the scheduled maturities of time deposits are as
follows:
2003 $44,437,493
2004 13,939,411
2005 4,551,427
2006 1,848,434
2007 2,733,810
Thereafter 3,005,128
-----------
$70,515,703
===========
NOTE 9: INCOME TAXES
The provision for income taxes includes these components:
2002 2001
----------- -----------
Taxes currently payable
Federal $ 829,342 $ 619,232
State 166,314 103,809
Deferred income taxes
Federal (318,540) 203,543
State (64,328) 41,105
----------- -----------
Income tax expense $ 612,788 $ 967,689
=========== ===========
- 40 -
FIRST BANCTRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
A reconciliation of income tax expense at the statutory rate to the
Company's actual income tax expense is shown below:
2002 2001
----------- -----------
Computed at the statutory rate (34%) $ 654,668 $ 961,679
Increase (decrease) resulting from
Tax exempt interest (97,197) (82,852)
State income taxes 67,311 95,643
Increase in cash surrender value of life insurance (69,592) (38,099)
Other 57,598 31,318
----------- -----------
Actual tax expense $ 612,788 $ 967,689
=========== ===========
The tax effects of temporary differences related to deferred taxes
shown on the balance sheets were:
2002 2001
----------- -----------
Deferred tax assets
Allowance for loan losses $ 784,783 $ 659,485
Reserve for uncollected interest 45,042 26,375
Deferred compensation 49,747 35,553
Other 45,906 85,867
----------- -----------
925,478 807,280
----------- -----------
Deferred tax liabilities
Depreciation (174,539) (200,063)
Unrealized gains on available-for-sale securities (695,280) (171,359)
Federal Home Loan Bank stock dividends (162,687) (95,652)
Capitalized loan servicing rights (66,938) (466,472)
Other (93,799) (446)
----------- -----------
(1,193,243) (933,992)
----------- -----------
Net deferred tax liability $ (267,765) $ (126,712)
=========== ===========
- 41 -
FIRST BANCTRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
Retained earnings at December 31, 2002 and 2001, include approximately
$2,000,000 for which no deferred federal income tax liability has been
recognized. These amounts represent an allocation of income to bad debt
deductions for tax purposes only. Reduction of amounts so allocated for
purposes other than tax bad debt losses or adjustments arising from
carryback of net operating losses would create income for tax purposes
only, which would be subject to the then-current corporate income tax
rate. The deferred income tax liabilities on the preceding amounts that
would have been recorded if they were expected to reverse into taxable
income in the foreseeable future were approximately $800,000 at December
31, 2002 and 2001.
NOTE 10: FEDERAL HOME LOAN BANK ADVANCES AND OTHER DEBT
Federal Home Loan Bank advances and other debt consisted of the
following components:
2002 2001
----------- -----------
Federal Home Loan Bank open line of credit, variable
rate, 1.48% at December 31, 2002 $ 1,000,000 $ --
Federal Home Loan Bank advances, fixed and variable
rates ranging from 3.12% to 5.32% at December 31,
2002, due at various dates through September 2011 25,500,000 25,500,000
Other debt 1,230 15,573
----------- -----------
Total Federal Home Loan Bank advances and
other debt $26,501,230 $25,515,573
=========== ===========
Aggregate annual maturities of long-term debt at December 31, 2002, are:
2003 $ 1,230
2008 and thereafter 26,500,000
-----------
$26,501,230
===========
The Federal Home Loan Bank advances are secured by first-mortgage loans,
certain mortgage and other investment securities, and all Federal Home
Loan Bank stock owned by the Company. Advances are subject to
restrictions or penalties in the event of prepayment. The Company's
Federal Home Loan Bank borrowings as of December 31, 2002 are callable.
These callable advances are subject to being called as follows: 2003 -
$15,500,000 and 2004 - $10,000,000.
Other debt consists of contract for deed related to the purchase of real
estate, payable in equal monthly installments of $1,230, including
interest at a fixed rate of 5.53% per annum. Final payment is due
January 15, 2003.
- 42 -
FIRST BANCTRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 11: REGULATORY MATTERS
The Company and Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Company's
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company and Bank
must meet specific capital guidelines that involve quantitative measures
of assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The capital amounts
and classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital
(as defined) to average assets (as defined). Management believes, as of
December 31, 2002 and 2001, that the Company and Bank meet all capital
adequacy requirements to which they are subject.
As of December 31, 2002, the most recent notification from the
regulatory agencies categorized the Company and Bank as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Company and Bank must maintain
capital ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
Company and Bank's category.
- 43 -
FIRST BANCTRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
The Company and Bank's actual capital amounts and ratios are also
presented in the following table.
TO BE WELL CAPITALIZED
FOR CAPITAL ADEQUACY UNDER PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------- ------- ------- ------- -------
As of December 31, 2002
Total Capital
(to Risk-Weighted Assets)
Consolidated $27,527 24.2% $ 9,118 8.0% N/A
Bank 23,044 20.4 9,021 8.0 $11,276 10.0
Tier I Capital
(to Risk-Weighted Assets)
Consolidated 26,096 22.9 4,559 4.0 N/A
Bank 21,628 19.2 4,511 4.0 6,765 6.0
Tier I Capital
(to Average Assets)
Consolidated 26,096 12.8 8,167 4.0 N/A
Bank 21,628 10.7 8,105 4.0 10,132 5.0
As of December 31, 2001
Total Capital
(to Risk-Weighted Assets)
Consolidated $28,574 26.1% $ 8,761 8.0% N/A
Bank 22,207 20.4 8,708 8.0 $10,886 10.0
Tier I Capital
(to Risk-Weighted Assets)
Consolidated 27,161 24.8 4,380 4.0 N/A
Bank 20,843 19.1 4,354 4.0 6,531 6.0
Tier I Capital
(to Average Assets)
Consolidated 27,161 14.0 7,712 4.0 N/A
Bank 20,843 10.8 7,689 4.0 9,612 5.0
The Bank is permitted to pay dividends to the Company in an amount equal
to its net profits in any fiscal year; however, in the event that
capital is less than 6% to total assets, the Bank can pay up to 50% of
its net profits for that year without prior approval of the State of
Illinois Office of Banks and Real Estate. In addition, the Bank is
unable to pay dividends in an amount which would reduce its capital
below the greater of (i) the amount required by the FDIC or (ii) the
amount required by the Bank's liquidation account. The FDIC and the
Commissioner also have the authority to prohibit the payment of any
dividends by the Bank if they determine that the distribution would
constitute an unsafe or unsound practice.
- 44 -
FIRST BANCTRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 12: RELATED PARTY TRANSACTIONS
At December 31, 2002 and 2001, the Company had loans outstanding to
executive officers, directors and companies in which the Company's
executive officers or directors were principal owners.
In management's opinion, such loans and other extensions of credit were
made in the ordinary course of business and were made on substantially
the same terms (including interest rates and collateral) as those
prevailing at the time for comparable transactions with other persons.
Further, in management's opinion, these loans did not involve more than
normal risk of collectibility or present other unfavorable features.
The aggregate amount of loans, as defined, to such related parties were
as follows:
Balance, January 1, 2002 $ 498,962
New loans, including renewals 246,596
Payment, etc., including renewals (273,217)
---------
Balance, December 31, 2002 $ 472,341
=========
NOTE 13: EMPLOYEE BENEFIT PLANS
The Company has a retirement savings 401(k) covering substantially all
employees. The Company may contribute to the plan at the discretion of
the Board of Directors. Employer contributions charged to expense for
2002 and 2001 were $7,913 and $16,308, respectively.
The Company also maintains a voluntary employee's benefit association
(VEBA) for the benefit of substantially all of its full-time employees.
Those benefits available under the VEBA include major medical, life,
accidental death and dismemberment, and disability insurance. These
benefits are available to all employees who have attained a minimum age
and length of service. The VEBA is funded through voluntary
contributions from employees and contributions of the Company. Employer
contributions totaled $319,000 and $312,000 for the years ended December
31, 2002 and 2001. The VEBA has been determined to be a tax-exempt
organization with its fiscal year ending December 31.
- 45 -
FIRST BANCTRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
The Company has a defined-benefit deferred director fee plan covering
certain directors whereby each director may elect to defer their annual
fees. For the years ended December 31, 2002 and 2001, fees deferred and
interest expense related to the plan totaled $69,011 and $41,760,
respectively. The liability related to these plans was $144,227 and
$75,216 as of December 31, 2002 and 2001.
NOTE 14: EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the conversion to stock ownership during April 2001,
the Company established an employee stock ownership plan (ESOP) covering
substantially all employees who work 20 or more hours per week. The ESOP
borrowed $1,406,297 from the Company and used those funds to acquire
121,670 shares of the Company's common stock at an average price of
$11.56.
Shares issued to the ESOP are allocated to ESOP participants based on
principal repayments made by the ESOP on the loan from the Company. The
loan is secured by shares purchased with the loan proceeds and will be
repaid by the ESOP with funds from the Bank's discretionary
contributions to the ESOP and earnings on ESOP assets. Dividends on
unallocated ESOP shares will be applied to reduce the loan. Principal
payments are scheduled to occur in even annual amounts over an eight
year period. However, in the event contributions exceed the minimum debt
service requirements, additional principal payments will be made.
Stock totaling 15,204 and 11,403 shares with an average fair value of
$15.79 and $13.13 were committed to be released, resulting in ESOP
compensation expense of $240,006 and $149,778 for 2002 and 2001,
respectively. The ESOP shares as of December 31 were as follows:
2002 2001
---------- ----------
Allocated shares committed to be released 26,607 11,403
Shares released for allocation -- --
Unreleased shares 95,063 110,267
---------- ----------
Total ESOP shares 121,670 121,670
========== ==========
Fair value of unreleased shares at December 31 $1,585,651 $1,654,005
========== ==========
The Company is obligated at the option of each beneficiary to repurchase
shares of the ESOP upon the beneficiary's termination or after
retirement.
- 46 -
FIRST BANCTRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 15: INCENTIVE PLAN
During 2002, the Company adopted a stock-based compensation program
which included a stock award program or incentive plan. The incentive
plan covers key employees and directors and was authorized to acquire
and grant 60,835 shares of the Company's common stock. The Company
granted 34,246 shares during April 2002. The shares were purchased in
fiscal year 2002. Participants in the incentive plan vest over five
years.
As of December 31, 2002, no shares were distributed and 750 shares were
forfeited. For the year December 31, 2002, $73,360 was recorded as
compensation expense under the plan.
NOTE 16: STOCK OPTION PLAN
During 2002, the Company authorized a stock option plan authorizing the
grant of options up to 152,000 shares of the Company's stock. The stock
option plan will have a vesting period of five years and will expire ten
years from the date of grant. As of December 31, 2002, no shares under
the stock option plan have been granted. The Company will account 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 will be
reflected in net income, as all options granted under those plans will
have an exercise price equal to the market value of the underlying
common stock on the grant date.
NOTE 17: EARNINGS PER SHARE
Earnings per share (EPS) were computed as follows:
YEAR ENDED DECEMBER 31, 2002
WEIGHTED PER SHARE
INCOME -AVERAGE SHARES AMOUNT
---------- --------------- ----------
Net income $1,312,707 $1,281,573 $ 1.02
----------
Effect of dilutive securities
Unearned incentive plan shares -- 30,281
---------- ----------
Diluted earnings per share
Income available to common
stockholders and assumed conversions $1,312,707 $1,311,854 $ 1.00
========== ========== ==========
The Bank converted to a stock savings bank in April 2001. Earnings per
share for 2001 are not meaningful.
- 47 -
FIRST BANCTRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 18: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents estimated fair values of the Company's
financial instruments. The fair values of certain of these instruments
were calculated by discounting expected cash flows, which method
involves significant judgments by management and uncertainties. Fair
value is the estimated amount at which financial assets or liabilities
could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Because no market exists for
certain of these financial instruments and because management does not
intend to sell these financial instruments, the Company does not know
whether the fair values shown below represent values at which the
respective financial instruments could be sold individually or in the
aggregate.
DECEMBER 31, 2002 DECEMBER 31, 2001
---------------------------- ----------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
Financial assets
Cash and cash equivalents $ 10,453,372 $ 10,453,372 $ 16,745,931 $ 16,745,931
Available-for-sale
securities 72,747,550 72,747,550 65,206,819 65,206,819
Loans held for sale 596,565 596,565 596,908 596,908
Loans, net allowance of
loan losses 105,181,804 105,295,137 100,656,122 99,138,197
Interest receivable 2,356,771 2,356,771 2,116,322 2,116,322
Federal Home Loan Bank
stock 3,711,600 3,711,600 1,582,100 1,582,100
Financial liabilities
Deposits 147,335,381 147,934,033 141,315,711 141,650,491
Federal Home Loan Bank
advances and other debt 26,501,230 26,321,428 25,515,573 25,697,889
Interest payable 105,651 105,651 123,760 123,760
Pass through payments
received on loans sold 260,753 260,753 270,522 270,522
Advances by borrowers
for taxes and insurance 132,885 132,885 140,548 140,548
Unrealized financial
instruments (net of
contract amount)
Commitments to extend
credit 0 0 0 0
Lines of credit 0 0 0 0
- 48 -
FIRST BANCTRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments.
CASH AND CASH EQUIVALENTS
For these short-term instruments, the carrying amount approximates fair
value.
INVESTMENT SECURITIES
Fair values for investment securities equal quoted market prices, if
available. If quoted market prices are not available, fair value is
estimated based on quoted market prices of similar securities.
LOANS HELD FOR SALE
For homogeneous categories of loans, such as loans held for sale, fair
value is estimated using the quoted market prices for securities backed
by similar loans, adjusted for differences in loans characteristics.
LOANS
The fair value of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities. Loans with similar characteristics were aggregated for
purposes of the calculations. The carrying amount of accrued interest
approximates its fair value.
FEDERAL HOME LOAN BANK STOCK
Fair value of Federal Home Loan Bank stock is based on the price at
which it may be resold to the Federal Home Loan Bank.
DEPOSITS
The fair value of demand deposits, savings accounts, NOW accounts, and
certain money market deposits is the amount payable on demand at the
reporting date, i.e., their carrying amount. The fair value of
fixed-maturity time deposits is estimated using a discounted cash flow
calculation that applies the rates currently offered for deposits of
similar remaining maturities. The carrying amount of accrued interest
payable approximates its fair value.
- 49 -
FIRST BANCTRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
FEDERAL HOME LOAN BANK ADVANCES AND OTHER DEBT
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.
PASS THROUGH PAYMENTS RECEIVED ON LOAN SOLD
The fair value approximates the carrying value.
ADVANCE PAYMENTS BY BORROWERS FOR TAXES AND INSURANCE
The fair value approximates the carrying value.
COMMITMENTS TO EXTEND CREDIT AND LINES OF CREDIT
The fair value of commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of
the counterparties. The fair value of lines of credit is based on fees
currently charged for similar agreements or on the estimated cost to
terminate or otherwise settle the obligations with the counterparties at
the reporting date.
NOTE 19: SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles require disclosure of certain
significant estimates and current vulnerabilities due to certain
concentrations. Estimates related to the allowance for loan losses, loan
servicing rights, and foreclosed assets held for sale are reflected in
the footnotes regarding loans, loan servicing rights, and foreclosed
assets held for sale. Current vulnerabilities due to certain
concentrations of credit risk are discussed in the footnote on
commitments and credit risk.
- 50 -
FIRST BANCTRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 20: COMMITMENTS AND CREDIT RISK
The Company generates commercial, mortgage and consumer loans and
receives deposits from customers located primarily in Edger and Clark
counties as well as the surrounding communities. The Company's loans are
generally secured by specific items of collateral including real
property, consumer assets and business assets. Although the Company has
a diversified loan portfolio, a substantial portion of its debtors'
ability to honor their contracts is dependent upon economic conditions
in the agricultural industry.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since a portion of
the commitments may expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. Each customer's creditworthiness is evaluated on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary, is based on management's credit evaluation of the
counterparty. Collateral held varies, but may include accounts
receivable, inventory, property, plant and equipment, commercial real
estate and residential real estate.
At December 31, 2002 and 2001, the Company had outstanding commitments
to originate loans aggregating approximately $3,245,665 and $5,636,029,
respectively. The commitments extended over varying periods of time with
the majority being disbursed within a one-year period. Loan commitments
at fixed rates of interest amounted to $3,001,765 and $4,327,029 at
December 31, 2002 and 2001, respectively, with the remainder at floating
market rates.
Lines of credit are agreements to lend to a customer as long as there is
no violation of any condition established in the contract. Lines of
credit generally have fixed expiration dates. Since a portion of the
line may expire without being drawn upon, the total unused lines do not
necessarily represent future cash requirements. Each customer's
creditworthiness is evaluated on a case-by-case basis. The amount of
collateral obtained, if deemed necessary, is based on management's
credit evaluation of the counterparty. Collateral held varies but may
include accounts receivable, inventory, property, plant and equipment,
commercial real estate and residential real estate. Management uses the
same credit policies in granting lines of credit as it does for
on-balance-sheet instruments.
At December 31, 2002, the Company had granted unused lines of credit to
borrowers aggregating approximately $4,771,472 and $847,644 for
commercial lines and open-end consumers lines, respectively. At December
31, 2001, unused lines of credit to borrowers aggregated approximately
$7,173,045 for commercial lines and $400,692 for open-end consumer
lines.
The Company had a concentration of funds on deposit with the Federal
Home Loan Bank totaling $3,577,334 and $9,344,000 at December 31, 2002
and 2001.
The Company and Subsidiaries are subject to claims and lawsuits which
arise primarily in the ordinary course of business. It is the opinion of
management that the disposition or ultimate resolution of such claims
and lawsuits will not have a material adverse effect on the consolidated
financial position of the Company.
- 51 -
FIRST BANCTRUST CORPORATION
SHAREHOLDER INFORMATION
STOCK LISTING AND PRICE INFORMATION
The Company's common stock trades on the Nasdaq SmallCap Market under the symbol
"FBTC". At March 14, 2003, 386,456 shares of the Company's common stock were
held of record by 479 persons or entities, not including the number of persons
or entities holding stock in nominee or street name through various brokers or
banks.
The following schedule shows the high and low bid prices for each of the
quarters in 2001 and 2002, following the April 18, 2001 date of conversion:
Quarter Ended: High Low
-------------- ------ ------
June 30, 2001 $13.05 $11.25
September 30, 2001 13.50 12.00
December 31, 2001 15.80 12.00
March 31, 2002 15.10 14.65
June 30, 2002 16.70 14.91
September 30, 2002 16.55 15.40
December 31, 2002 16.75 15.74
At March 14, 2003 the closing price of a common share was $17.50. Such prices do
not necessarily reflect retail markups, markdowns, or commissions. During the
years ended December 31, 2001 and 2002, the Company declared dividends as
follows:
Date Declared Record Date Payment Date Amount
------------- ----------- ------------ ------
September 27, 2001 October 11, 2001 October 25, 2001 $0.05
February 7, 2002 February 19, 2002 February 28, 2002 $0.05
May 9, 2002 May 23, 2002 May 31, 2002 $0.05
August 9, 2002 August 22, 2002 August 30, 2002 $0.05
November 14, 2002 November 27, 2002 December 6, 2002 $0.05
Stockholders, investors and analysts interested in additional information may
contact:
Ellen M. Litteral
Chief Financial Officer
First BancTrust Corporation
101 S. Central Avenue
Paris, IL 61944-0880
- 52 -
Annual Report on Form 10-KSB
A copy of the annual report on Form 10-KSB for the fiscal year ended December
31, 2002, filed with the Securities and Exchange Commission is available to
stockholders (excluding exhibits) at no charge, upon written request to Ellen M.
Litteral, Chief Financial Officer, at the above address.
SPECIAL REGULATORY COUNSEL
Elias, Matz, Tiernan & Herrick L.L.P.
12th Floor
734 15th Street, N.W.
Washington, D.C. 20005
INDEPENDENT ACCOUNTANTS
BKD, LLP
225 North Water Street
Suite 400
Decatur, IL 62525-1580
ANNUAL MEETING OF STOCKHOLDERS
The Annual Meeting of Stockholders of First BancTrust Corporation will be held
at 10:00 a.m. April 21, 2003 at:
Human Resources Center
118 E. Court Street
Paris, Illinois 61944
TRANSFER AGENT
Inquiries regarding stock transfer, registration, lost certificates or changes
in name and address should be directed to the transfer agent:
Illinois Stock Transfer Company
209 W. Jackson Boulevard
Suite 903
Chicago, Illinois 60606
(312) 427-2953
- 53 -
DIRECTORS
TERRY T. HUTCHISON JOHN W. WELBORN
Chairman of the Board; Self-employed Retired Former Facilities Manager,
Business Consultant in Paris, Illinois TRW, Inc., Marshall, Illinois
JOSEPH R. SCHROEDER DAVID W. DICK
Attorney in private practice with law Insurance Agent for Country
firm of Bennett, Schroeder & Wieck, Companies Insurance, Bloomington,
Marshall, Illinois Illinois
MARY ANN TUCKER TERRY J. HOWARD
Retired former retailer in Paris, President and Chief Executive
Illinois Officer of the Company and First
Bank
JAMES D. MOTLEY
Self employed Certified Public
Accountant, Accounting and Tax
Preparation, Paris, Illinois
EXECUTIVE OFFICERS
TERRY J. HOWARD DAVID F. SULLIVAN
Director, President and Chief Vice President of the Company and
Executive Officer of the Company Senior Vice President - Lending of
and First Bank First Bank
ELLEN M. LITTERAL LARRY W. STROHM
Chief Financial Officer and Vice President of the Company and
Treasurer of the Company and Senior Senior Vice President - Branch
Vice President and Controller of Manager of First Bank
First Bank
JACK R. FRANKLIN
Vice President of the Company and
Senior Vice President - Operations
and Marketing of First Bank
BANKING LOCATIONS
MAIN OFFICE
206 South Central Avenue
Paris, Illinois 61944
(217) 465-6381
OPERATIONS CENTER
101 South Central Avenue
Paris, Illinois 61944
BRANCH OFFICE
610 North Michigan Avenue
Marshall, Illinois 62441
(217) 826-6308
- 54 -
[FBTC LOGO]
First BancTrust Corporation
206 S. Central Ave. P.O. Box 880 Paris, Illinois 61944
Phone 217-465-6381 800-228-6381 Fax 217-465-0234