UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0-32535
FIRST BANCTRUST CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
37-1406661
(IRS EMPLOYER IDENTIFICATION NO.)
206 SOUTH CENTRAL AVENUE
PARIS, ILLINOIS
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
61944
(ZIP CODE)
217-465-6381
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT). YES [ ] NO [X]
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
AS OF MAY 12, 2005 THE REGISTRANT HAD OUTSTANDING 2,497,050 SHARES OF COMMON
STOCK.
First BancTrust Corporation
Form 10-Q Quarterly Report
Index Page
PART I - Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Income 2
Condensed Consolidated Statements of Cash Flows 4
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operation 11
Item 3 Quanitative and Qualitative Disclosures About
Market Risk. 19
Item 4 Controls and Procedures 20
PART II - Other Information
Item 1 Legal Proceedings 20
Item 2 Unregistered Sales of Equity Securities and
Use of Proceeds 20
Item 3 Defaults Upon Senior Securities 21
Item 4 Submission of Matters to a Vote of Security
Holders 21
Item 5 Other Information 21
Item 6 Exhibits 21
SIGNATURES 22
CERTIFICATIONS 23
FIRST BANCTRUST CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of dollars except share data)
MARCH 31, DECEMBER 31,
2005 2004
(unaudited)
------------------ ---------------
ASSETS
Cash and due from banks $ 5,669 $ 6,371
Interest-bearing demand deposits 4,995 2,742
------------------ ---------------
Cash and cash equivalents 10,664 9,113
Available-for-sale securities 79,860 83,944
Held-to-maturity securities (fair value of $4,758 and $4,831) 4,762 4,778
Loans held for sale 447 138
Loans, net of allowance for loan losses of $2,325 and $2,300 118,510 117,448
Premises and equipment 3,041 3,088
Federal Home Loan Bank stock 4,314 4,256
Foreclosed assets held for sale, net 119 190
Interest receivable 1,749 2,179
Loan servicing rights, net of valuation allowance of $6 and $24 691 757
Cash surrender value of life insurance 4,566 4,523
Deferred income taxes 300 --
Other assets 461 510
------------------ ---------------
Total assets $ 229,484 $ 230,924
================== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest bearing deposits $ 17,216 $ 17,885
Interest bearing deposits 142,792 141,586
------------------ ---------------
Total deposits 160,008 159,471
Federal funds purchased -- 2,000
Federal Home Loan Bank advances 40,500 40,500
Pass through payments received on loans sold 146 60
Advances from borrowers for taxes and insurance 297 138
Deferred income taxes -- 110
Interest payable 154 136
Other 1,094 962
------------------ ---------------
Total liabilities 202,199 203,377
------------------ ---------------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 1,000,000 shares authorized
and unissued
Common stock, $.005 par value, 5,000,000 shares authorized; 3,041,750
shares issued; 2,497,050 and 2,494,850 shares outstanding 15 15
Additional paid-in capital 14,853 14,803
Retained earnings 18,550 18,396
Unearned employee stock ownership plan shares - 121,708 and 129,310 shares (703) (747)
Unearned incentive plan shares - 81,700 and 85,126 shares (674) (702)
Accumulated other comprehensive income (loss) (142) 415
Treasury stock, at cost - 544,700 and 546,900 shares (4,614) (4,633)
------------------ ---------------
Total stockholders' equity 27,285 27,547
------------------ ---------------
Total liabilities and stockholders' equity $ 229,484 $ 230,924
================== ===============
See notes to condensed consolidated financial statements.
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FIRST BANCTRUST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars except share data)
(unaudited)
THREE MONTHS ENDED MARCH 31 2005 2004
--------------------------- -------------- ---------------
INTEREST AND DIVIDEND INCOME
Loans
Taxable $ 2,037 $ 1,972
Tax exempt 16 16
Securities
Taxable 720 763
Tax exempt 104 93
Dividends on Federal Home Loan Bank stock 58 65
Deposits with financial institutions and other 24 11
-------------- ---------------
Total interest and dividend income 2,959 2,920
-------------- ---------------
INTEREST EXPENSE
Deposits 731 761
Federal Home Loan Bank advances and other debt 389 363
-------------- ---------------
Total interest expense 1,120 1,124
-------------- ---------------
NET INTEREST INCOME 1,839 1,796
Provision for loan losses 94 150
-------------- ---------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,745 1,646
-------------- ---------------
NONINTEREST INCOME
Customer service fees 192 186
Other service charges and fees 182 169
Net gains on loan sales 73 60
Net realized gains on sales of available-for-sale securities 32 37
Net loan servicing fees 140 131
Brokerage fees 15 8
Abstract and title fees 104 83
Other 72 73
-------------- ---------------
Total noninterest income 810 747
-------------- ---------------
NONINTEREST EXPENSE
Salaries and employee benefits 1,183 1,169
Net occupancy expense 103 74
Equipment expense 205 146
Data processing fees 115 103
Professional fees 111 116
Foreclosed assets expense, net 15 28
Marketing expense 71 46
Printing and office supplies 44 48
Amortization of loan servicing rights 124 155
Recovery of impairment of loan servicing rights (18) (27)
Other expenses 204 189
-------------- ---------------
Total noninterest expense 2,157 2,047
-------------- ---------------
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INCOME BEFORE INCOME TAX $ 398 $ 346
Income tax expense 95 120
--------- ---------
NET INCOME 303 $ 226
========= =========
BASIC EARNINGS PER SHARE $ 0.13 $ 0.10
========= =========
DILUTED EARNINGS PER SHARE $ 0.12 $ 0.09
========= =========
DIVIDENDS PER SHARE $ 0.06 $ 0.05
========= =========
See notes to condensed consolidated financial statements.
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FIRST BANCTRUST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
(unaudited)
THREE MONTHS ENDED MARCH 31 2005 2004
---------------------------------------------------------------------- ------------ ------------
OPERATING ACTIVITIES
Net income $ 303 $ 226
Items not requiring (providing) cash
Depreciation and amortization 97 72
Provision for loan losses 94 150
Investment securities amortization, net 22 82
Amortization of loan servicing rights 124 155
Recovery of impairment of loan servicing rights (18) (27)
Deferred income taxes (21) --
Net realized gains on available-for-sale securities (32) (37)
Net loss on sales of foreclosed assets 8 14
Net loss on sale of premises and equipment -- 6
Net gains on loan sales (73) (60)
Loans originated for sale (3,440) (3,033)
Proceeds from sales of loans originated for sale 3,164 3,204
Federal Home Loan Bank stock dividends (58) (65)
Compensation expense related to employee stock ownership plan 92 96
Compensation expense related to incentive plan 27 27
Changes in
Interest receivable 430 389
Cash surrender value of life insurance (43) 13
Other assets 49 68
Interest payable 18 23
Other liabilities 132 (140)
------------ ------------
Net cash provided by operating activities 875 1,163
------------ ------------
INVESTING ACTIVITIES
Purchases of available-for-sale securities (3,046) (7,197)
Proceeds from maturities of available-for-sale securities 5,936 7,284
Proceeds from sales of available-for-sale securities 275 135
Net change in loans (1,223) (740)
Proceeds from sales of foreclosed assets 130 56
Proceeds from sales of premises and equipment -- 10
Purchases of premises and equipment (50) (11)
------------ ------------
Net cash provided by (used in) investing activities 2,022 (463)
------------ ------------
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FINANCING ACTIVITIES
Net increase in demand deposits, money market,
NOW and savings deposits $ 288 $ 2,652
Net increase (decrease) in certificates of deposit 249 (1,054)
Net decrease in short-term borrowings (2,000) --
Pass through payments received on loans sold 86 (18)
Net increases in advances by borrowers for taxes and insurance 159 131
Proceeds from stock options exercised 22 --
Dividends paid (150) (125)
------------ ------------
Net cash provided by (used in) by financing activities (1,346) 1,586
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 1,551 2,286
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 9,113 10,294
------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 10,664 $ 12,580
============ ============
SUPPLEMENTAL CASH FLOWS INFORMATION
Real estate acquired in settlement of loans $ 67 $ 122
Interest paid $ 1,102 $ 1,101
Income tax paid $ 0 $ 0
See notes to condensed consolidated financial statements.
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FIRST BANCTRUST CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements
have been prepared pursuant to the rules and regulations for reporting on Form
10-Q. Accordingly, certain disclosures required by accounting principles
generally accepted in the United States of America are not included herein.
These interim statements should be read in conjunction with the audited
consolidated financial statements and notes thereto, included in the Company's
Form 10-KSB filed with the Securities and Exchange Commission.
Interim statements are subject to possible adjustments in connection with the
annual audit of the Company for the year ended December 31, 2005. In the opinion
of management of the Company, the accompanying unaudited interim condensed
consolidated financial statements reflect all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the consolidated
financial position and consolidated results of operations for the periods
presented. The results of operations for the three months ended March 31, 2005
are not necessarily indicative of the results to be expected for the full year.
The Company has a stock-based employee compensation plan, which is described
more fully in the Notes to Financial Statements included in the December 31,
2004 Annual Report to shareholders. The Company accounts for this plan under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under the
plan had an exercise price equal to the market value of the underlying common
stock on the grant date. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.
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Three Months Three Months
Ended Ended
March 31, 2005 March 31, 2004
Net income, as reported $ 303 $ 226
Less: Total stock-based employee
compensation cost determined under
the fair value based method, net of
income taxes (33) (33)
------ ------
Pro forma net income $ 270 $ 193
====== ======
EARNINGS PER SHARE:
Basic - as reported $ 0.13 $ 0.10
Basic - pro forma $ 0.12 $ 0.09
Diluted - as reported $ 0.12 $ 0.09
Diluted - pro forma $ 0.11 $ 0.08
Note 2 - Employee Stock Ownership Plan
The Company has an Employee Stock Ownership Plan ("ESOP") for the benefit of its
employees. The ESOP purchased required shares in the open market with funds
borrowed from the Company. The ESOP expense was $92,000 and $96,000 for the
three-month periods ended March 31, 2005 and 2004, respectively.
Shares purchased by the ESOP are held in a suspense account and are allocated to
ESOP participants based on a pro rata basis as debt service payments are made to
the Company. The loan is secured by the shares purchased with the proceeds and
will be repaid by the ESOP with funds from the Company's discretionary
contributions to the ESOP and earnings on ESOP assets. Principal payments are
scheduled to occur over an eight-year period.
Note 3 - Earnings per Share
Basic earnings per share have been computed based upon the weighted average
common shares outstanding for the three month periods ended March 31, 2005 and
2004. Diluted earnings per share reflect the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company.
Earnings per share were computed as follows (dollar amounts in thousands except
share data):
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Weighted
Average Per Share
Income Shares Amount
------ --------- ---------
FOR THE THREE MONTHS ENDED MARCH 31, 2005:
Basic Earnings Per Share:
Income available to common stockholders $ 303 2,289,236 $ 0.13
Effect of Dilutive Securities:
Unearned recognition and retention plan shares 94,091
Stock Options 47,411
Diluted Earnings per Share:
Income available to common stockholders and ------ --------- ---------
assumed conversions $ 303 2,430,738 $ 0.12
====== ========= =========
FOR THE THREE MONTHS ENDED MARCH 31, 2004:
Basic Earnings Per Share:
Income available to common stockholders $ 226 2,249,254 $ 0.10
Effect of Dilutive Securities:
Unearned recognition and retention plan shares 101,092
Stock Options 52,154
Diluted Earnings per Share:
Income available to common stockholders and ------ --------- ---------
assumed conversions $ 226 2,402,500 $ 0.09
====== ========= =========
Note 4 - Comprehensive Income (Loss)
Comprehensive income (loss) for the three month periods ended March 31, 2005 and
2004 is listed as follows:
THREE MONTHS ENDED MARCH 31
2005 2004
------ ------
NET INCOME $ 303 $ 226
------ ------
OTHER COMPREHENSIVE INCOME
Unrealized appreciation (depreciation) on available-for-sale
securities, net of tax (528) 560
Less: Reclassification adjustment for realized gains included
in net income, net of tax 21 24
------ ------
(549) 536
------ ------
COMPREHENSIVE INCOME $ (246) $ 762
====== ======
-8-
Note 5 - Stock Split
On April 19, 2004, the Board of Directors of the Company approved a two for one
stock split of the Company's common stock payable as a 100% stock dividend on
May 21, 2004 to shareholders of record on April 30, 2004. Prior period financial
information has been adjusted to reflect the stock split.
Note 6 - Authorized Share Repurchase Program
On May 13, 2004, the Board of Directors authorized the open-market stock
repurchases of up to 100,000 shares of the Company's outstanding stock over the
one-year period ending May 13, 2005. The Company has purchased 5,600 of these
shares in the open market. Previously, the Company had completed four other
repurchase programs for stock repurchases of 541,300 shares. As of May 12, 2005,
the Company owned a cumulative total of 544,700 shares in treasury stock. Twenty
two hundred shares of treasury stock were used in the redemption of stock
options in February, 2005.
Note 7 - Subsequent Event
On April 18, 2005, the Company entered into an Agreement and Plan of Merger with
Rantoul First Bank, S.B., an Illinois chartered savings bank whereby the Company
will acquire all of the outstanding shares of common stock of Rantoul First
Bank. Shareholders of Rantoul First Bank will receive $22.10 per share in cash
for each share of common stock held. The transaction is subject to approval by
regulatory authorities and Rantoul First Bank shareholders and is expected to
close in the third quarter of 2005.
On April 18, 2005 the Board of Directors authorized the open-market stock
repurchase of up to 5%, or 124,850 shares of the Company's outstanding stock
over the next one-year period ending April 18, 2006 as, in the opinion of
managements, market conditions warrant. The repurchased shares will be held as
treasury stock and will be available for general corporate purposes.
Note 8 - Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, which sets
accounting requirements for "share-based" compensation to employees, including
employee-stock-purchase-plans (ESPPs) and provides guidance on accounting for
awards to non-employees. This Statement will require the Company to recognize in
the income statement the grant-date fair value of stock options and other
equity-based compensation issued to employees, but expresses no preference for a
type of valuation model. This Statement is effective for the Company on January
1, 2006. The effect to the Company in 2006 is estimated to be $131,000 based on
the current stock options outstanding.
Emerging Issues Task Force (EITF) Issue 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments."
EITF 03-1 provides guidance for determining when an investment is considered
impaired, whether impairment is other-than-temporary, and measurement of an
impairment loss. An investment is considered impaired if the fair value of the
investment is less than its cost. Generally, an impairment is considered other-
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than-temporary unless: (i) the investor has the ability and intent to hold an
investment for a reasonable period of time sufficient for an anticipated
recovery of fair value up to (or beyond) the cost of the investment; and (ii)
evidence indicating that the cost of the investment is recoverable within a
reasonable period of time outweighs evidence to the contrary. If impairment is
determined to be other-than-temporary, then an impairment loss should be
recognized equal to the difference between the investment's cost and its fair
value. Certain disclosure requirements of EITF 03-1 were adopted in 2003 and the
Company began presenting the new disclosure requirements in its consolidated
financial statements for the year ended December 31, 2003. The recognition and
measurement provisions were initially effective for other-than-temporary
impairment evaluations in reporting periods beginning after June 15, 2004.
However, in September 2004, the effective date of these provisions was delayed
until the finalization of a FASB Staff Position (FSP) to provide additional
implementation guidance.
American Institute of Certified Public Accountants (AICPA) Statement of Position
(SOP) No. 03-3, "Accounting for Certain Loans or Debt Securities Acquired in a
Transfer." SOP 03-3 addresses accounting for differences between the contractual
cash flows of certain loans and debt securities and the cash flows expected to
be collected when loans or debt securities are acquired in a transfer and those
cash flow differences are attributable, at least in part, to credit quality. As
such, SOP 03-3 applies to loans and debt securities acquired individually, in
pools or as part of a business combination and does not apply to originated
loans. The application of SOP 03-3 limits the interest income, including
accretion of purchase price discounts, that may be recognized for certain loans
and debt securities. Additionally, SOP 03-3 does not allow the excess of
contractual cash flows over cash flows expected to be collected to be recognized
as an adjustment of yield, loss accrual or valuation allowance, such as the
allowance for possible loan losses. SOP 03-3 requires that increases in expected
cash flows subsequent to the initial investment be recognized prospectively
through adjustment of the yield on the loan or debt security over its remaining
life. Decreases in expected cash flows should be recognized as impairment. In
the case of loans acquired in a business combination where the loans show signs
of credit deterioration, SOP 03-3 represents a significant change from current
purchase accounting practice whereby the acquiree's allowance for loan losses is
typically added to the acquirer's allowance for loan losses. SOP 03-3 is
effective for loans and debt securities acquired by the Company beginning
January 1, 2005. The adoption of this new standard did not have a material
impact on the Company's financial statements.
-10-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995 as amended, and is including this statement for purposes of these
safe harbor provisions. Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies and expectations of the
Company, are generally identifiable by use of the words "believe," "expect,"
"intend," "anticipate," "estimate," "project," or similar expressions. The
Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
affect on the operations and future prospects of the Company and its
wholly-owned subsidiaries include, but are not limited to, changes in: interest
rates; general economic conditions; legislative/regulatory provisions; monetary
and fiscal policies of the U.S. Government, including policies of the U.S.
Treasury and the Federal Reserve Board; the quality of composition of the loan
or investment portfolios; demand for loan products; deposit flows; competition;
demand for financial services in the Company's market area; and accounting
principles, policies, and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statement. Further information concerning the Company and
its business, including additional factors that could materially affect the
Company's financial results, is included in the Company's filings with the
Securities and Exchange Commission.
The following discussion compares the financial condition of First BancTrust
Corporation (Company), First Bank & Trust, s.b. (Bank), First Charter Service
Corporation, ECS Service Corporation, and the Bank's wholly owned subsidiary,
Community Finance Center, Inc. at March 31, 2005 to its financial condition at
December 31, 2004 and the results of operations for the three-month period
ending March 31, 2005 to the same period in 2004. In prior years First Charter
Service Corporation provided retail sales of uninsured investment products to
customers of First Bank & Trust. In late 2004, First Bank & Trust entered into
an agreement with First Advisors Financial Group LLC ("First Advisors") whereby
First Advisors will provide investment advisory and asset management services to
Bank customers in 2005. First Advisors will rent office space from the Bank, and
will pay a percentage of fees generated from transactions with Bank customers to
the Bank. As a result, First Charter Service Corporation has become inactive for
2005. This discussion should be read in conjunction with the interim financial
statements and notes included herein.
FINANCIAL CONDITION
Total assets of the Company decreased by $1.4 million or 0.6%, to $229.5 million
at March 31, 2005 from $230.9 million at December 31, 2004. The decrease in
assets was primarily due to a decrease in available-for-sale securities of $4.1
million and a decrease in interest receivable of
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$430,000 partially offset by increases in cash and cash equivalents of $1.6
million, in loans, net of allowance for loan losses, of $1.1 million, and
$309,000 in loans held for sale. The decrease in assets was due primarily to a
decrease in federal funds purchased.
The Company's cash and due from banks decreased by $702,000 or 11.02% to $5.7
million at March 31, 2005 from $6.4 million at December 31, 2004. This decrease
was more than offset by an increase in interest-bearing demand deposits of $2.3
million or 82.2% to $5.0 million at March 31, 2005 compared to $2.7 million at
December 31, 2004. The net increase in cash and cash equivalents of $1.6 million
was primarily a result of a decrease in available-for-sale securities and an
increase in deposits.
Available-for-sale investment securities amounted to $80.0 million at March 31,
2005 compared to $84.0 million at December 31, 2004, a $4.0 million decrease.
The decrease resulted from $5.9 million in investment calls and maturities,
primarily from payments on mortgage-backed securities and a maturity of a
Federal Home Loan Bank ("FHLB") agency bond, sales of equity securities of
$243,000 and a $930,000 decrease in the market valuation of the
available-for-sale portfolio, partially offset by investment purchases of $3.0
million.
Loans held for sale increased by $309,000 from $138,000 at December 31, 2004 to
$447,000 at March 31, 2005. Single family residential loans for qualified
borrowers are originated and sold to Federal Home Mortgage Corporation ("FHLMC")
and to the Illinois Housing Development Authority ("IHDA"). Loans held for sale
at March 31, 2005 consisted entirely of single-family residential loans to be
sold to FHLMC and IHDA.
The Company's net loan portfolio increased by $1.1 million to $118.5 million at
March 31, 2005 from $117.4 million at December 31, 2004. Gross loans increased
by $1.1 million while the allowance for loan losses increased by $25,000.
Commercial nonresidential real estate loans increased by $948,000 primarily a
result of loan originations generated in the Savoy area. Loans secured by 1-4
family residences increased by $538,000, primarily due to an increase in home
equity loans, and farmland loans increased by $331,000. Commercial loans
decreased by $236,000 and agricultural production loans decreased by $499,000
due to a seasonal fluctuation, while consumer loans increased by $383,000.
At March 31, 2005, the allowance for loan losses was $2.3 million or 1.92% of
the total loan portfolio which was equal to the allowance for loan losses at
December 31, 2004 of $2.3 million or 1.92% of the total loan portfolio. During
the first quarter of 2005, the Company charged off $91,000 of loan losses,
$53,000 of which were consumer loans, and $38,000 pertained to three loans
secured by 1-4 family residential properties. The chargeoffs of $91,000 were
partially offset by $21,000 in recoveries on consumer loans, primarily vehicle
loans. The Company's nonperforming loans and troubled debt restructurings
decreased from $1.6 million at December 31, 2004 compared to $1.4 million or
1.18% as a percentage of total loans at March 31, 2005. This decrease was
primarily a result of reduced delinquencies 90 days and over from $443,000 at
December 31, 2004 compared to $349,000 at March 31, 2005. The Company's troubled
debt restructurings of $1.4 million at March 31, 2005 consists primarily of
restructured commercial and agricultural loans. Included in the $1.4 million of
troubled debt restructurings are restructured agricultural loans of $870,000
which are 90% guaranteed for $783,000 by the
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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.
Net foreclosed assets held for sale, totaling $119,000 at March 31, 2005
decreased $71,000, or 37.4%, compared to $190,000 at December 31, 2004. As of
March 31, 2005, the Company had real estate properties totaling $51,000
consisting of three single-family residential properties and other repossessed
assets of $68,000. Foreclosed assets are carried at lower of cost or net
realizable value.
Interest receivable declined by $430,000 or 19.7% from $2.2 million to $1.7
million primarily due to annual payments received on agricultural loans. Federal
Home Loan Bank stock increased by $58,000 due to the receipt of dividends in the
form of stock.
Loan servicing rights declined by $66,000 from $757,000 at December 31, 2004 to
$691,000 at March 31, 2005. Gross loan servicing rights decreased by $84,000
from $781,000 at December 31, 2004 to $697,000 at March 31, 2005 due to
amortization of loan servicing rights of $124,000 offset by newly capitalized
assets of $40,000. The valuation allowance decreased from $24,000 at December
31, 2004 to $6,000 at March 31, 2005, an $18,000 recovery of a previous
impairment as a result of current valuations.
Adjustments to deferred income taxes for the tax effect of the decrease in
market value of investment securities available for sale resulted in a deferred
tax asset of $300,000 at March 31, 2005 compared to a deferred tax liability of
$110,000 at December 31, 2004.
The Company's total deposits amounted to $160.0 million at March 31, 2005
compared to $159.5 million at December 31, 2004, an increase of $537,000. The
0.3% increase in total deposits was due to a $1.2 million increase in interest
bearing deposits, partially offset by a $669,000 decrease in non-interest
bearing deposits. The increase in interest bearing deposits was a result of a
$763,000 increase in savings accounts, a $248,000 increase in certificates of
deposit, and an increase of $195,000 in interest-bearing checking accounts.
Federal funds purchased decreased by $2.0 million from a balance of $2.0 million
at December 31, 2004 to zero at March 31, 2005. Federal Home Loan Bank advances
remained constant at $40.5 million at December 31, 2004 and March 31, 2005. The
total average rate of all advances was 3.54% as of March 31, 2005.
Advances from borrowers for taxes and insurance increased by $159,000 from
$138,000 at December 31, 2004 to $297,000 at March 31, 2005. Pass through
payments received on loans sold increased by $86,000 from $60,000 at December
31, 2004 to $146,000 at March 31, 2005. Other liabilities increased by $132,000
from $962,000 at December 31, 2004 to $1.1 million at March 31, 2005, primarily
due to an increase in accounts payable.
Stockholders' equity at March 31, 2005 was $27.3 million compared to $27.5
million at December 31, 2005, a decrease of $262,000. Accumulated comprehensive
income (loss)
-13-
decreased by $557,000 due to a decrease in the fair value of securities
available for sale, net of related tax effect. Retained earnings increased by
the amount of net income or $303,000, partially offset by $150,000 in dividends
declared and paid. As shares from the employee stock ownership plan vested to
participants from December 31, 2004 to March 31, 2005, stockholders' equity
increased by $92,000, and as shares from the incentive plan were earned by
participants for the same period, stockholders' equity increased by $27,000.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTH PERIODS ENDED MARCH 31, 2005 AND 2004
Net income for the three months ended March 31, 2005 increased by $77,000 or
34.1% from $226,000 for the three months ended March 31, 2004 to $303,000 for
the three months ended March 31, 2005. The increase in net income is primarily
due to increases in net interest income and noninterest income, and decreases in
provision for loan losses and income tax expense, partially offset by an
increase in noninterest expense.
Net interest income increased $43,000 or 2.4% from $1.80 million for the three
months ended March 31, 2004 to $1.84 million for the three months ended March
31, 2005. The primary reasons for the increase in net interest income was an
increase in total interest and dividend income of $39,000 and a slight decrease
of $4,000 in interest expense. The Company's net interest margin was 3.51% and
3.48% during the three months ended March 31, 2005 and 2004, respectively. The
net interest margin increased slightly as a result of an increase in the average
balance of interest-bearing assets, and a decrease in the average balance of
interest-bearing liabilities.
Total interest and dividend income increased by $39,000 or 1.3% from $2.92
million for the three months ended March 31, 2004 to $2.96 million for the three
months ended March 31, 2005. The increase of $39,000 was primarily due to
increases in loan interest income and interest income from deposits with
financial institutions partially offset by decreased interest and dividend
income from securities. The increase of $65,000 in loan interest income was
primarily due to an increase in the average loan balance, partially offset by a
decrease in the average loan rate of 50 basis points. Interest and dividend
income from securities decreased by $32,000 primarily due to a decrease in the
average balance of available for sale investments, partially offset by an
increase in average interest rate of 19 basis points. Interest income from
deposits with financial institutions increased by $13,000 primarily due to an
increase in average rate, partially offset by a decrease in the average balance
of deposits with financial institutions.
Interest expense declined by only $4,000 or 0.4% from $1.12 million for the
three months ended March 31, 2004 to $1.12 million for the three months ended
March 31, 2005. This slight decline was primarily due to a decrease of $30,000
in interest on deposits, partially offset by $26,000 increase in interest on
Federal Home Loan Bank advances. The $30,000 decrease in interest expense on
deposits was primarily due to a decrease in the average balance of deposits. The
$26,000 increase in interest on Federal Home Loan Bank advances was due to an
increase in the average balance, partially offset by a 26 basis point reduction
in interest rate.
-14-
For the three months ended March 31, 2005 and 2004, the provision for losses on
loans was $94,000 and $150,000, respectively. The provision for the three months
ended March 31, 2005 was based on the Company's analysis of the allowance for
loan losses. Management meets on a quarterly basis to review the adequacy of the
allowance for loan losses by classifying loans in compliance with regulatory
classifications. Classified loans are individually reviewed to arrive at
specific reserve levels for those loans. Once the specific portion for each loan
is calculated, management calculates a historical portion for each category
based on a combination of loss history, current economic conditions, and trends
in the portfolio. While the Company cannot assure that future chargeoffs and/or
provisions will not be necessary, the Company's management believes that, as of
March 31, 2005, its allowance for loan losses was adequate.
Noninterest income increased $63,000 or 8.4% from $747,000 for the three months
ended March 31, 2004 to $810,000 for the three months ended March 31, 2005. The
increase was primarily a result of increases in other service fees and charges,
net gains on loan sales, net loan servicing fees, and abstract and title fees.
Other service charges and fees increased by $13,000 from $169,000 for the three
months ended March 31, 2004 to $182,000 for the three months ended March 31,
2005, primarily due to an increase in commissions earned on credit life,
accident and health insurance premiums. Net gains on loan sales increased by
$13,000 from $60,000 for the three months ended March 31, 2004 to $73,000 for
the three months ended March 31, 2005. This increase occurred primarily due to
an increase in the amount of capitalized servicing fees. Although the $3.2
million of loans sold in the first quarter of 2005 was level with sales in the
first quarter of 2004, the capitalized servicing is valued at current estimated
lives of the associated loans. With interest rates on the rise, the expected
life of the associated loans sold increases, which in turn increases the value
of the servicing right associated with those loans. Net loan servicing fees
increased by $9,000 from $131,000 for the three months ended March 31, 2004 to
$140,000 for the three months ended March 31, 2005. Abstracting and title fees
also increased by $21,000 from $83,000 for the three months ended March 31, 2004
to $104,000 for the three months ended March 31, 2005, due to an increase in
commissions from the sale of title insurance and to increased abstracting fees.
Total noninterest expenses were $2.16 million for the three months ended March
31, 2005 as compared to $2.05 million for the three months ended March 31, 2004.
The primary reasons for the $110,000 increase were increases in equipment
expense, net occupancy expense, marketing expense, salaries and employee
benefits expense, and other expenses, partially offset by a reduction in the
amortization of loan servicing rights. Salaries and employee benefits increased
by $14,000 from $1.17 million for the three months ended March 31, 2004 to $1.18
million for the three months ended March 31, 2005, primarily due to increases in
payroll tax expense. Net occupancy expense increased by $29,000 from $74,000 for
the three months ended March 31, 2004 compared to $103,000 for the three months
ended March 31, 2005. This increase can be attributed to the Savoy branch which
moved into a permanent facility in August, 2004. Equipment expense increased by
$59,000 from $146,000 for the three months ended March 31, 2004 to $205,000 for
the three months ended March 31, 2005. The $59,000 increase is primarily due to
an increase in lease expense resulting from the origination of several operating
leases in 2004 for furniture and office equipment for the Savoy branch,
upgrading check imaging equipment, and for updating computer networks and
operating systems.
-15-
Marketing expense increased by $25,000 from $46,000 for the three months ended
March 31, 2004 to $71,000 for the three months ended March 31, 2005. The
increase in marketing expense in 2005 is primarily due to the development of a
cohesive marketing program to promote bank products and services. Amortization
of loan servicing rights decreased by $31,000 from $155,000 for the three months
ended March 31, 2004 to $124,000 for the three months ended March 31, 2005, as a
result of a decrease in loan prepayments. The recovery of impairment of loan
servicing rights was $27,000 for the three months ended March 31, 2004 compared
to $18,000 for the three months ended March 31, 2005. The amount of the recovery
or impairment is determined by comparing the book value of the loan servicing
rights to an independent valuation based on a discounted cash flow methodology,
utilizing current prepayment speeds and discount rates. Other expenses increased
by $15,000 from $189,000 for the three months ended March 31, 2004 to $204,000
for the three months ended March 31, 2005, primarily due to increased charitable
contributions and to a lesser extent an increase in debit card charge offs. The
increase in charitable contributions was due to a contribution to the local
hospital foundation for a capital campaign to fund an expansion project.
Income tax expense was $95,000 for the three months ended March 31, 2005 as
compared to $120,000 for the three months ended March 31, 2004. The decrease of
$25,000 in income tax expense was due to an increase in permanent tax
differences. The effective tax rates were 23.9% and 34.7%, respectively, for the
three months ended March 31, 2005 and 2004.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting standards
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and the related disclosure of contingent
assets and liabilities. Actual results could differ from those estimates under
different assumptions and conditions. Management believes that its critical
accounting policies and significant estimates include determining the allowance
for loan losses, the valuation of loan servicing rights, and the valuation of
foreclosed real estate.
Allowance for loan losses
The allowance for loan losses is a significant estimate that can and does change
based on management's assumptions about specific borrowers and current general
economic and business conditions, among other factors. Management reviews the
adequacy of the allowance for loan losses on at least a quarterly basis. The
evaluation by management includes consideration of past loss experience, changes
in the composition of the loan portfolio, the current condition and amount of
loans outstanding, identified problem loans and the probability of collecting
all amounts due.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. A worsening or protracted economic
decline would increase the likelihood of additional losses due to credit and
market risk and could create the need for additional loss reserves.
-16-
Loan Servicing Rights
The Company recognizes the rights to service loans as separate assets on the
consolidated balance sheet. The total cost of loans when sold is allocated
between loans and loan servicing rights based on the relative fair values of
each. Loan servicing rights are subsequently carried at the lower of the initial
carrying value, adjusted for amortization, or fair value. Loan servicing rights
are evaluated for impairment based on the fair value of those rights. Factors
included in the calculation of fair value of the loan servicing rights include
estimating the present value of future net cash flows, market loan prepayment
speeds for similar loans, discount rates, servicing costs, and other economic
factors. Servicing rights are amortized over the estimated period of net
servicing revenue. It is likely that these economic factors will change over the
life of the loan servicing rights, resulting in different valuations of the loan
servicing rights. The differing valuations will affect the carrying value of the
loan servicing rights on the consolidated balance sheet, as well as the income
recorded from loan servicing in the income statement. As of March 31, 2005 and
December 31, 2004, mortgage servicing rights had carrying values of $691,000 and
$757,000, respectively.
Foreclosed Assets Held for Sale
Foreclosed assets held for sale are carried at the lower of cost or fair value
less estimated selling costs. Management estimates the fair value of the
properties based on current appraisal information. Fair value estimates are
particularly susceptible to significant changes in the economic environment,
market conditions, and the real estate market. A worsening or protracted
economic decline would increase the likelihood of a decline in property values
and could create the need to write down the properties through current
operations.
LIQUIDITY
At March 31, 2005, the Company had outstanding commitments to originate $11.6
million in loans, and $10.6 million available to be drawn upon for open-end
lines of credit. For more information on the outstanding commitments, see the
discussion below the caption "Off-Balance Sheet Arrangements and Contractual
Commitments". As of March 31, 2005, the total amount of certificates scheduled
to mature in the following 12 months was $45.6 million. The Company believes
that it has adequate resources to fund all of its commitments. The Company's
most liquid assets are cash and cash equivalents. The level of cash and cash
equivalents is dependent on the Company's operating, financing, lending and
investing activities during any given period. The level of cash and cash
equivalents at March 31, 2005 was $10.7 million. The Company's future short-term
requirements for cash are not expected to significantly change. In the event
that the Company should require funds beyond its capability to generate them
internally, additional sources of funds are available such as Federal Home Loan
Bank advances.
-17-
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL COMMITMENTS
At March 31, 2005, the Company had outstanding commitments to originate loans of
$11.6 million. The commitments extended over varying periods of time with the
majority being disbursed within a one-year period. Loan commitments at fixed
rates of interest amounted to $6.1 million, with the remainder at floating
rates. In addition, the Company had outstanding unused lines of credit to
borrowers aggregating $7.6 million for commercial lines of credit, and $3.0
million for consumer lines of credit. Outstanding commitments for letters of
credit at March 31, 2005 totaled $56,000. Since these commitments have fixed
expiration dates, and some will expire without being drawn upon, the total
commitment level may not necessarily represent future cash requirements.
The following table presents additional information about our unfunded
commitments as of March 31, 2005, which by their terms have contractual maturity
dates subsequent to March 31, 2005:
Next 12 13-36 37-60 More than
Months Months Months 60 Months Totals
-------- -------- -------- --------- --------
UNFUNDED COMMITMENTS:
Letters of credit $ 56 $ --- $ --- $ --- $ 56
--------
Lines of credit 7,766 168 292 2,389 10,615
-------- -------- -------- --------- --------
Totals $ 7,822 $ 168 $ 292 $ 2,389 $ 10,671
======== ======== ======== ========= ========
CAPITAL RESOURCES
The Bank is subject to capital-to-asset requirements in accordance with Federal
bank regulations. The following table summarizes the Bank's regulatory capital
requirements, versus actual capital as of March 31, 2005:
REQUIRED FOR TO BE WELL
ACTUAL ADEQUATE CAPITAL CAPITALIZED
------------------ ---------------- -----------------
MARCH 31, 2005 Amount % Amount % Amount %
-------------- -------- ----- -------- --- -------- ----
(Dollars in thousands)
Total capital (to risk-weighted assets) $ 26,855 21.81 $ 9,850 8.0 $ 12,312 10.0
Tier 1 capital (to risk-weighted assets) 25,307 20.55 4,925 4.0 7,387 6.0
Tier 1 capital (to average assets) 25,307 11.11 9,113 4.0 11,390 5.0
-18-
The Company's consolidated capital-to-asset requirements and actual capital as
of March 31, 2005 are summarized in the following table:
REQUIRED FOR TO BE WELL
ACTUAL ADEQUATE CAPITAL CAPITALIZED
------------------ ---------------- -----------------
MARCH 31, 2005 Amount % Amount % Amount %
-------------- -------- ----- -------- --- -------- ----
(Dollars in thousands)
Total capital (to risk-weighted assets) $ 28,884 23.26 $ 9,934 8.0 --- N/A
Tier 1 capital (to risk-weighted assets) 27,323 22.00 4,967 4.0 --- N/A
Tier 1 capital (to average assets) 27,323 11.93 9,159 4.0 --- N/A
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Sources of market risk include interest rate risk, foreign currency exchange
risk, commodity price risk and equity price risk. The Company is only subject to
interest rate risk. The Company purchased no financial instruments for trading
purposes during the three months ended March 31, 2005 and 2004.
The principal objectives of the Company's interest rate risk management function
are: (i) to evaluate the interest rate risk included in certain balance sheet
accounts; (ii) to determine the level of risk appropriate given the Company's
business focus, operating environment, capital and liquidity requirements, and
performance objectives; (iii) to establish asset concentration guidelines; and
(iv) to manage the risk consistent with Board-approved guidelines. Through such
management, the Company seeks to reduce the vulnerability of its operations to
changes interest rates and to manage the ratio of interest rate sensitive assets
to interest rate sensitive liabilities within specified maturity terms or
repricing dates. The Company's Board of Directors has established an
Asset/Liability Committee consisting of directors and senior management
officers, which is responsible for reviewing the Company's asset/liability
policies and monitoring interest rate risk as such risk relates to its operating
strategies. The committee usually meets on a quarterly basis, and at other times
as dictated by market conditions, and reports to the Board of Directors. The
committee is responsible for reviewing Company activities and strategies, and
the effect of those strategies on the Company's net interest margin, the market
value of the portfolio and the effect that changes in the interest will have on
the Company's portfolio and exposure limits.
The Company's key interest rate risk management tactics consist primarily of:
(i) emphasizing the attraction and retention of core deposits, which tend to be
a more stable source of funding; (ii) emphasizing the origination of adjustable
rate mortgage loan products and short-term commercial and consumer loans for the
in-house portfolio, although this is dependent largely on the market for such
loans; (iii) selling longer-term fixed-rate one-to-four family mortgage loans
-19-
in the secondary market; and (iv) investing primarily in U.S. government agency
instruments and mortgage-backed securities.
The Company's interest rate and market risk profile has not materially changed
from the year ended December 31, 2004. Please refer to the Company's Form 10-KSB
for the year ended December 31, 2004 for further discussion of the Company's
market and interest risk.
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation as of March 31, 2005, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective. There were no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls during the quarter ended March 31, 2005.
Disclosure controls and procedures are the controls and other procedures of the
Company that are designed to ensure that the information required to be
disclosed by the Company in its reports filed or submitted under the Securities
Exchange Act of 1934, as amended (Exchange Act) is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by the Company in its reports filed under
the Exchange Act is accumulated and communicated to the Company's management,
including the principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and subsidiary are also subject to claims and lawsuits which arise
primarily in the ordinary course of business, such as claims to enforce liens
and claims involving the making and servicing of real property loans and other
issues. It is the opinion of management that the disposition or ultimate
determination of such possible claims or lawsuits will not have a material
adverse effect on the consolidated financial position of the Company.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) The following table provides information about purchases of the Company's
common stock by the Company during the quarter ended March 31, 2005.
-20-
ISSUER PURCHASES OF EQUITY SECURITIES
(d) Maximum
(c) Total Number Number of
of Shares Shares that May
Purchased as Yet Be
(a)Total Number (b) Average Part of Publicly Purchased Under
of Shares Price Paid Announced Plans the Plans
Period Purchased per Share or Programs or Programs
--------- --------------- ----------- ---------------- ---------------
1/1/2005
to --- --- --- 94,400
1/31/2005
2/1/2005
to --- --- --- 94,400
2/28/2005
3/1/2005
to --- --- --- 94,400
3/31/2005
(1) Our board of directors approved the repurchase by us of 100,000 shares over
the one year period ending May 13, 2005.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
(a) Exhibits
31.1 Certification of Terry J. Howard required by Rule 13a-14(a).
31.2 Certification of Ellen M. Litteral required by Rule
13a-14(a).
32.1 Certification of Terry J. Howard, Chief Executive Officer
pursuant to Rule 13a-14(b) and Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
32.2 Certification of Ellen M. Litteral, Chief Financial Officer
pursuant to Rule 13a-14(b) and Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
-21-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST BANCTRUST CORPORATION
Date: May 12, 2005 /s/ Terry J. Howard
----------------------------------
Terry J. Howard
President and Chief Executive Officer
Date: May 12, 2005 /s/ Ellen M. Litteral
----------------------------------
Ellen M. Litteral
Treasurer and Chief Financial Officer
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