UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0-32535
FIRST BANCTRUST CORPORATION
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
37-1406661
(IRS EMPLOYER IDENTIFICATION NO.)
206 SOUTH CENTRAL AVENUE
PARIS, ILLINOIS
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
61944
(ZIP CODE)
217-465-6381
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
CHECK WHETHER THE ISSUER: (1) FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15(d) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS (OR FOR SUCH
SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2)
HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST
90 DAYS. YES _X_ NO ___
STATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON EQUITY AS OF THE LATEST PRACTICABLE DATE.
AS OF NOVEMBER 12, 2002 THE REGISTRANT HAD OUTSTANDING 1,397,710 SHARES OF
COMMON STOCK.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): YES [ ] NO [X]
First BancTrust Corporation
Form 10-QSB Quarterly Report
Index Page
PART I - Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets 1
(As of September 30, 2002 and December 31, 2001)
Condensed Consolidated Statements of Income 2
(For the nine months ended September 30, 2002 and 2001)
Condensed Consolidated Statements of Income 3
(For the three months ended September 30, 2002 and 2001)
Condensed Consolidated Statements of Cash Flows 4
(For the nine months ended September 30, 2002 and 2001)
Notes to Condensed Consolidated Financial Statements 5
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3 Controls and Procedures 20
PART II - Other Information
Item 1 Legal Proceedings 20
Item 2 Changes in Securities 20
Item 3 Defaults Upon Senior Securities 20
Item 4 Submission of Matters to a Vote of Security
Holders 20
Item 5 Other Information 21
Item 6 Exhibits and Reports on Form 8-K 21
SIGNATURES 22
CERTIFICATIONS 22
FIRST BANCTRUST CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of dollars except share data)
SEPTEMBER 30, DECEMBER 31,
2002 2001
(unaudited)
---------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 4,383 $ 7,308
Interest-bearing demand deposits 3,774 9,438
--------------- --------------
Cash and cash equivalents 8,157 16,746
Available-for-sale securities 77,302 65,207
Loans held for sale 1,329 597
Loans, net of allowance for loan losses of $2,027 and $1,657 107,864 100,656
Premises and equipment 2,654 2,435
Foreclosed assets held for sale, net 410 807
Interest receivable 2,373 2,116
Loan servicing rights, net of valuation allowance of $802 and $0 1,208 2,095
Cash surrender value of life insurance 3,607 3,479
Federal Home Loan Bank stock 3,666 1,582
Other assets 541 317
--------------- --------------
Total assets $ 209,111 $ 196,037
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest bearing $ 12,451 $ 13,963
Interest bearing 138,650 127,353
--------------- --------------
Total deposits 151,101 141,316
Federal Home Loan Bank advances and other debt 29,505 25,516
Pass through payments received on loans sold 154 270
Advances from borrowers for taxes and insurance 25 140
Deferred income taxes 648 127
Interest payable 149 124
Other liabilities 257 826
--------------- --------------
Total liabilities 181,839 168,319
--------------- --------------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 1,000,000 shares authorized
and unissued
Common stock, $.01 par value, 5,000,000 shares
authorized; 1,520,875 shares issued and outstanding 15 15
Additional paid-in capital 14,428 14,382
Retained earnings 15,777 15,214
Accumulated other comprehensive income 989 247
--------------- --------------
31,209 29,858
Unallocated employee stock ownership plan shares -
98,864 and 110,267 shares (1,143) (1,275)
Unearned recognition and retention plan shares -
57,980 and 0 shares (957) --
Treasury stock, at cost - 123,165 and 62,600 shares (1,837) (865)
--------------- --------------
Total stockholders' equity 27,272 27,718
--------------- --------------
Total liabilities and stockholders' equity $ 209,111 $ 196,037
=============== ==============
See notes to condensed consolidated financial statements.
1
FIRST BANCTRUST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars except share data)
(unaudited)
NINE MONTHS ENDED SEPTEMBER 30 2002 2001
------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans
Taxable $ 6,660 $ 7,436
Tax exempt 34 40
Investment securities
Taxable 2,694 2,029
Tax exempt 219 190
Deposits with financial institutions 81 307
FHLB stock dividends 107 75
------------- -------------
Total interest income 9,795 10,077
------------- -------------
INTEREST EXPENSE
Deposits 3,373 4,393
Federal Home Loan Bank advances and other debt 884 1,028
------------- -------------
Total interest expense 4,257 5,421
------------- -------------
NET INTEREST INCOME 5,538 4,656
Provision for loan losses 663 438
------------- -------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,875 4,218
------------- -------------
NONINTEREST INCOME
Service charges on deposit accounts 370 376
Loan servicing fees (costs), net (403) 134
Impairment of loan servicing rights (802) 0
Other customer fees 697 634
Net realized gains on sales of available-for-sale securities 120 0
Net gains on loan sales 760 596
Brokerage fees 141 19
Abstract and title fees 282 275
Other income 159 125
------------- -------------
Total noninterest income 1,324 2,159
------------- -------------
NONINTEREST EXPENSE
Salaries and employee benefits 2,949 2,515
Net occupancy expenses 142 136
Equipment expenses 452 484
Data processing fees 349 367
Advertising and promotion 144 128
Professional fees 245 203
Other expenses 679 501
------------- -------------
Total noninterest expense 4,960 4,334
------------- -------------
INCOME BEFORE INCOME TAX 1,239 2,043
Income tax expense 462 738
------------- -------------
NET INCOME 777 1,305
OTHER COMPREHENSIVE INCOME
Unrealized appreciation on available-for-sale securities 742 617
------------- -------------
COMPREHENSIVE INCOME $ 1,519 $ 1,922
============= =============
EARNINGS PER SHARE
Basic $ 0.59 $ N/A
============= =============
Diluted $ 0.59 $ N/A
============= =============
See notes to condensed consolidated financial statements.
2
FIRST BANCTRUST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars except share data)
(unaudited)
THREE MONTHS ENDED SEPTEMBER 30 2002 2001
------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans
Taxable $ 2,238 $ 2,368
Tax exempt 12 13
Investment securities
Taxable 939 714
Tax exempt 74 70
Deposits with financial institutions 12 101
FHLB stock dividends 46 24
------------- -------------
Total interest income 3,321 3,290
------------- -------------
INTEREST EXPENSE
Deposits 1,094 1,384
Federal Home Loan Bank advances and other debt 302 302
------------- -------------
Total interest expense 1,396 1,686
------------- -------------
NET INTEREST INCOME 1,925 1,604
Provision for loan losses 167 166
------------- -------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,758 1,438
------------- -------------
NONINTEREST INCOME
Service charges on deposit accounts 148 119
Loan servicing fees (costs), net (39) 78
Impairment of loan servicing rights (802) 0
Other customer fees 263 219
Net realized gains on sales of available-for-sale securities 120 0
Net gains on loan sales 164 212
Brokerage fees 51 7
Abstract and title fees 98 92
Other income 40 52
------------- -------------
Total noninterest income 43 779
------------- -------------
NONINTEREST EXPENSE
Salaries and employee benefits 988 829
Net occupancy expenses 51 41
Equipment expenses 160 166
Data processing fees 121 118
Advertising and promotion 61 50
Professional fees 65 43
Other expenses 241 183
------------- -------------
Total noninterest expense 1,687 1,430
------------- -------------
INCOME BEFORE INCOME TAX 114 787
Income tax expense 55 277
------------- -------------
NET INCOME 59 510
OTHER COMPREHENSIVE INCOME
Unrealized appreciation on available-for-sale securities 225 332
------------- -------------
COMPREHENSIVE INCOME $ 284 $ 842
============= =============
EARNINGS PER SHARE
Basic $ 0.05 $ 0.36
============= =============
Diluted $ 0.05 $ 0.36
============= =============
See notes to condensed consolidated financial statements.
3
FIRST BANCTRUST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
(unaudited)
NINE MONTHS ENDED SEPTEMBER 30 2002 2001
-----------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 777 $ 1,305
Items not requiring (providing) cash
Depreciation and amortization 203 222
Provision for loan losses 663 438
Investment securities amortization (accretion), net 103 (10)
Amortization of loan servicing rights 782 219
Impairment of loan servicing rights 802 --
Deferred income taxes 6 --
Net losses on sales of foreclosed assets 46 11
Net losses on sales of premises and equipment -- 2
Net gains on loan sales (761) (596)
Loans originated for sale (25,919) (18,161)
Proceeds from sales of loans originated for resale 25,251 18,280
Investment securities gains (120) --
Federal Home Loan Bank stock dividends (84) (80)
Compensation expense related to employee stock ownership plan 179 96
Compensation expense related to recognition and retention plan 46 --
Changes in
Interest receivable (257) (250)
Cash surrender value (128) (397)
Other assets (224) (201)
Interest payable 25 (6)
Other liabilities (569) 32
------------- -------------
Net cash provided by operating activities 821 904
------------- -------------
INVESTING ACTIVITIES
Net change in interest-bearing time deposits -- 50
Purchases of available-for-sale securities (32,062) (28,880)
Proceeds from maturities of available-for-sale securities 20,651 17,977
Proceeds from sales of available-for-sale securities 590 --
Purchase of Federal Home Loan Bank stock (2,000) --
Net collections (originations) in loans (8,337) 2,835
Proceeds from sales of foreclosed assets 817 1,151
Purchases of premises and equipment (422) (88)
Proceeds from sale of premises and equipment -- 1
------------- -------------
Net cash used in investing activities (20,763) (6,954)
------------- -------------
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, money market,
NOW and savings deposits (1,512) 1,067
Net increase in certificates of deposit 11,297 1,259
Net decrease in short-term borrowings -- (1,500)
Proceeds from the issuance of Federal Home Loan Bank advances 8,000 22,500
Repayment of Federal Home Loan Bank advances and other debt (4,011) (18,510)
Pass through payments received on loans sold (116) --
Net decreases in advances by borrowers for taxes and insurance (115) (127)
Proceeds from stock issuance -- 14,378
Dividends paid (213) --
Purchase of employee stock ownership plan shares -- (1,406)
Purchase of treasury stock (973) --
Purchase of stock for recognition and retention plan (1,004) --
------------- -------------
Net cash provided by financing activities 11,353 17,661
------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (8,589) 11,611
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 16,746 9,146
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,157 $ 20,757
============= =============
SUPPLEMENTAL CASH FLOWS INFORMATION
Real estate and other assets acquired in settlement of loans $ 466 $ 1,977
Interest paid 4,232 5,402
Income tax paid 897 550
See notes to condensed consolidated financial statements.
4
FIRST BANCTRUST CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements
have been prepared pursuant to the rules and regulations for reporting on Form
10-QSB. Accordingly, certain disclosures required by generally accepted
accounting principles are not included herein. These interim statements should
be read in conjunction with the audited consolidated financial statements and
notes thereto, dated February 1, 2002, included in the Company's Form 10-KSB
filed with the Securities and Exchange Commission.
Interim statements are subject to possible adjustments in connection with the
annual audit of the Company for the year ended December 31, 2002. In the opinion
of management of the Company, the accompanying unaudited interim condensed
consolidated financial statements reflect all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the consolidated
financial position and consolidated results of operations for the periods
presented. The results of operations for the three and nine months ended
September 30, 2002 and 2001 are not necessarily indicative of the results to be
expected for the full year.
Note 2 - Conversion to Stock Form of Ownership
On October 16, 2000 the Board of Directors of First Bank & Trust, sb (the
"Bank") adopted a Plan of Conversion to convert from an Illinois mutual savings
bank to an Illinois stock savings bank with the concurrent formation of a
holding company. First BancTrust Corporation (the "Company") was incorporated in
November 2000. A subscription offering of the shares of common stock, $0.01 par
value per share ("Common Stock"), of the Company was offered initially to
eligible deposit account holders of First Bank & Trust, sb. The Bank's
conversion from an Illinois mutual savings bank to an Illinois stock savings
bank was completed on April 18, 2001 (the "Conversion").
In connection with the Conversion, the Company issued 1,520,875 shares of Common
Stock to the public for gross proceeds of $15.2 million, $14.4 million net of
conversion costs. The Bank issued all of its outstanding capital stock to the
Company in exchange for one-half of the net proceeds of the offering, which
amounted to $7.2 million. The Company accounted for the purchase in a manner
similar to a pooling of interests, whereby assets and liabilities of the Bank
maintain their historical cost basis in the consolidated company.
Note 3 - Employee Stock Ownership Plan
In connection with the Conversion, the Bank established an Employee Stock
Ownership Plan ("ESOP") for the benefit of its employees. In the initial stock
offering, deposit account owners purchased all available shares. The ESOP
purchased required shares in the open market subsequent to the conversion date
for $1.4 million with funds borrowed from the Company. The
5
ESOP expense was $61,000 and $179,000 for the three-month and nine-month periods
ended September 30, 2002, respectively.
Shares purchased by the ESOP with the loan proceeds are held in a suspense
account and are allocated to ESOP participants based on a pro rata basis as debt
service payments are made to the Company. The loan is secured by the shares
purchased with the proceeds and will be repaid by the ESOP with funds from the
Company's discretionary contributions to the ESOP and earnings on ESOP assets.
Principal payments are scheduled to occur over an eight-year period.
Note 4 - Earnings per Share
Basic earnings per share have been computed based upon the weighted average
common shares outstanding for the nine and three months ended September 30, 2002
and for the three months ended September 30, 2001. 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. Earnings per share is calculated beginning with the date of the
conversion of April 18, 2001 and, therefore, no earnings per share is reported
for the nine-month period ended September 30, 2001.
6
Earnings per share were computed as follows (dollar amounts in thousands except
share data):
Weighted
Average Per Share
Income Shares Amount
---------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002:
---------------------------------------------
Basic Earnings Per Share:
Income available to common stockholders $ 777 1,298,028 $ 0.59
Effect of Dilutive Securities:
Unearned recognition and retention plan shares 21,371
---------------------------------------
Diluted Earnings per Share:
Income available to common stockholders and
assumed conversions $ 777 1,319,399 $ 0.59
=======================================
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002:
----------------------------------------------
Basic Earnings Per Share:
Income available to common stockholders $ 59 1,243,028 $ 0.05
Effect of Dilutive Securities:
Unearned recognition and retention plan shares 58,662
---------------------------------------
Diluted Earnings per Share:
Income available to common stockholders and
assumed conversions $ 59 1,301,690 $ 0.05
=======================================
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001:
----------------------------------------------
Basic Earnings Per Share:
Income available to common stockholders $ 510 1,405,540 $ 0.36
=======================================
Note 5 - Current Accounting Issues
In July 2001, SFAS No. 143, "Accounting for Asset Retirement Obligations" was
issued. SFAS No. 143 establishes standards for accounting and reporting of
obligations associated with the retirement of tangible long-lived assets and
associated asset retirement costs. SFAS No. 143 is effective for years beginning
after June 15, 2002. Management does not expect the adoption of this standard to
have a material impact on the Company.
In October 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" was issued. Under SFAS No. 144, long-lived assets to be sold
within one year must be separately identified and carried at the lower of
carrying value or fair value less costs to sell.
Long-lived assets expected to be held longer than one year are subject to
depreciation and must be written down to fair value upon impairment. Long-lived
assets no longer expected to be sold
7
within one year, such as some foreclosed real estate, must be written down to
the lower of current fair value or fair value at the date of foreclosure
adjusted to reflect depreciation since acquisition. SFAS No. 144 had to be
implemented by January 1, 2002. The adoption of this statement had no impact on
the Company.
Note 6 - Authorized Share Repurchase Program
On October 3, 2001 the Company announced that the Board of Directors authorized
the open-market stock repurchases of up to 5%, or 76,044 shares of the Company's
outstanding stock over the one-year period ending September 27, 2002. On April
18, 2002 the Company announced that the Board of Directors has authorized the
additional open-market stock repurchases of up to 5%, or 67,407 shares of the
Company's outstanding stock over the next one-year period ending March 14, 2003,
as in the opinion of management, market conditions warrant. As of November 12,
2002, the Company had repurchased 123,165 shares.
8
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 September 30, 2002 to its financial condition
at December 31, 2001 and the results of operations for the three-month and
nine-month periods ending September 30, 2002 to the same periods in 2001. In
February 2002, the Company filed a declaration to become a financial holding
company which became effective March 16, 2002. Ownership of First Charter
Service Corporation and ECS Service Corporation has been transferred from the
Bank to the Company. This discussion should be read in conjunction with the
interim financial statements and notes included herein.
FINANCIAL CONDITION
Total assets of the Company increased by $13.1 million or 6.67%, to $209.1
million at September 30, 2002 from $196.0 million at December 31, 2001. The
increase was funded by increased deposits and Federal Home Loan Bank borrowings.
Available-for-sale securities increased by $12.1 million, loans net of allowance
for loan losses increased by $7.2 million, Federal Home Loan Bank stock
increased by $2.1 million, loans held for sale increased by $732,000, interest
9
receivable increased by $257,000, premises and equipment increased by $219,000,
and other assets increased by $224,000. These increases were partially offset by
a $8.6 million decrease in cash and cash equivalents, a decrease in loan
servicing rights of $887,000 and a $397,000 decrease in foreclosed assets held
for sale.
The Company's cash and due from banks decreased by $2.9 million or 40.02% to
$4.4 million at September 30, 2002 from $7.3 million at December 31, 2001.
Interest-bearing demand deposits decreased $5.7 million or 60.01% to $3.8
million at September 30, 2002 compared to $9.4 million at December 31, 2001. The
decrease in cash and cash equivalents was primarily used to fund investment
purchases and loans. Investment securities available for sale amounted to $77.3
million at September 30, 2002 compared to $65.2 million at December 31, 2001, a
$12.1 million or 18.55% increase. The increase resulted from $32.1 million in
investment purchases, primarily in mortgage-backed securities and Federal Home
Loan Bank ("FHLB") agency bonds and an increase of $1.3 million in market value,
partially offset by calls, maturities, and principal repayments of $20.7 million
and sales of $590,000.
Loans held for sale increased by $732,000 to $1.3 million at September 30, 2002
from $597,000 at December 31, 2001. Loans held for sale at September 30, 2002
consisted entirely of one-to-four family loans committed for sale in the
secondary market to the Federal Home Loan Mortgage Corporation.
The Company's net loan portfolio increased by $7.2 million or 7.16% to $107.9
million at September 30, 2002 from $100.7 million at December 31, 2001. Gross
loans increased by $7.6 million while the allowance for loan losses increased by
$370,000. Non-farm non-residential real estate loans increased by $2.1 million,
agricultural production loans increased by $4.2 million, consumer loans
increased by $1.3 million, farmland loans increased by $937,000, and one-to-four
family open-end lines of credit increased by $165,000. Construction loans
declined by $363,000 as they were converted to permanent financing, one-to-four
family junior liens decreased by $302,000, and commercial loans decreased by
$479,000.
At September 30, 2002 the allowance for loan losses was $2.0 million or 1.85% of
the total loan portfolio compared to $1.7 million, or 1.62% at December 31,
2001. The increase in the allowance for loan losses is primarily due to an
increase in classified assets and an additional amount set aside for one
agricultural credit. The Company classifies assets into watch, substandard,
doubtful, and loss categories, as defined by federal regulation. Classified
assets at September 30, 2002 were $6.6 million compared to $5.10 million at
December 31, 2001. The Company's nonperforming loans and troubled debt
restructurings, which are included in the classification asset total, as a
percentage of total loans increased from 2.17% or $2.2 million at December 31,
2001 to 2.87% or $3.2 million at September 30, 2002. The Company's nonperforming
loans and troubled debt restructurings of $3.2 million at September 30, 2002
consist of $2.6 million in nonperforming loans primarily agricultural production
loans, commercial real estate loans and 1-4 family residence loans. Restructured
loans of $553,000 were commercial and agricultural loans. Included in the $3.2
million of nonperforming loans and troubled debt restructurings are agricultural
loans of $632,000 which are 90% guaranteed for $569,000 by the Farmers Home
Administration, thereby limiting the Company's exposure. During the second
quarter of 2002 the Company identified an additional exposure for loss of
10
$270,000 relating to one agricultural borrower on loans secured by farm
equipment. The Company charged off $387,000, primarily consumer and commercial
loans, for the nine-months ended September 30, 2002, which was partially offset
by recoveries of $94,000 for the same time period. Management reviews the
adequacy of the allowance for loan losses quarterly, and believes that its
allowance is adequate; however, the Company cannot assure that future chargeoffs
and/or provisions will not be necessary.
Foreclosed assets held for sale, net decreased $397,000 to $410,000 at September
30, 2002, compared to $807,000 at December 31, 2001. As of September 30, 2002
the Company had three real estate properties totaling $226,000 consisting of one
single-family dwelling, one commercial building, and one multi-family dwelling,
and other repossessed assets of $184,000. Foreclosed assets are carried at lower
of cost or net realizable value.
Loan servicing rights declined by $887,000 from $2.1 million at December 31,
2001 to $1.2 million at September 30, 2002. The decline was due to $782,000 of
accelerated amortization of loan servicing rights, and an identified impairment
of $802,000, partially offset by newly capitalized assets of $698,000. 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 of $802,000 was charged against current earnings. At September 30,
2002 loans serviced for others included $59.1 million in one-to-four family
residential home mortgages and $18.1 million in agricultural loans secured by
farmland and equipment.
Interest receivable increased by $257,000 or 12.15% from $2.1 million at
December 31, 2001 to $2.4 million at September 30, 2002 primarily due to the
accrual of interest on annual payment agricultural loans due at year-end.
Federal Home Loan Bank stock increased by $2.1 million to $3.7 million at
September 30, 2002 from $1.6 million at December 31, 2001. The increase was due
to an additional $2.0 million investment in the stock, and dividends of $83,000
paid in the form of additional stock.
The Company's total deposits amounted to $151.1 million at September 30, 2002
compared to $141.3 million at December 31, 2001, an increase of $9.8 million.
The increase in total deposits was due to a $11.3 million increase in interest
bearing deposits, partially offset by a decrease of $1.5 million in non-interest
bearing deposits. The increase in interest bearing deposits was a result of an
increase of $11.1 million in interest bearing checking accounts, and a $987,000
increase in savings accounts, partially offset by a $758,000 reduction in
certificates of deposit. Of the $11.1 million increase in interest bearing
checking accounts, $10.0 million is from growth in business money market
accounts, and $1.4 million is from growth in the Investor Checking product,
which has a comparable rate to a money market account without the transaction
limitations. Of the $10.0 million increase in business money market accounts,
approximately $6.5 million is from a single account from one corporate
depositor. The Company believes it has adequate resources to fund the withdrawal
of this deposit, either through internal funding or Federal Home Loan Bank
advances. This growth was partially offset by a reduction in other
11
interest bearing checking accounts of $365,000. Noninterest bearing deposits
decreased by $1.5 million from $14.0 million at December 31, 2001 to $12.5
million at September 30, 2002.
Federal Home Loan Bank advances and other debt increased by $4.0 million from
$25.5 million at December 31, 2001 to $29.5 million at September 30, 2002. The
$4.0 million net increase was a result of use of the Company's open end line of
credit at the Federal Home Loan Bank to fund investment purchases. The open end
line of credit has a variable daily interest rate which was 2.22% at September
30, 2002. The line of credit will be repaid as other investments are called,
prepay, or mature.
Pass through payments received on loans sold declined by $116,000 from $270,000
at December 31, 2001 to $154,000 at September 30, 2002. Many agricultural loans
sold to investors in the secondary market have annual payments due at the end of
the year. As a result, the balance at December 31, 2001 related to payments
received by the Company which were in the process of being remitted to the
investors. Advances by borrowers for taxes and insurance decreased by $115,000
from $140,000 at December 31, 2001 to $25,000 at September 30, 2002. The
decrease was primarily due to an increase in escrow accounts on investor loans
which are required to be held in a custodial deposit account. Adjustments to
deferred income taxes for the tax effect of the change in market value of
investment securities available for sale resulted in an increase of $521,000 to
$648,000 at September 30, 2002 compared to $127,000 at December 31, 2001. Other
liabilities declined by $569,000 from $826,000 at December 31, 2001 to $257,000
at September 30, 2002, primarily due to payment of income taxes and reduction in
income tax accruals.
Stockholders' equity at September 30, 2002 was $27.3 million compared to $27.7
million at December 31, 2001, a decrease of $446,000. Accumulated comprehensive
income increased by $742,000, due to an increase in the fair value of securities
available for sale. Retained earnings increased by $563,000 from net income of
$777,000, partially offset by $213,000 in dividends declared and paid. Treasury
stock increased from $865,000 at December 31, 2001 to $1.8 million at September
30, 2002 due to open-market stock repurchases amounting to $972,000. The
recognition and retention plan trust purchased $1.0 million of Company stock
with $46,000 allocated to participants.
RESULTS OF OPERATIONS
COMPARISON OF NINE MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2001
Net income for the nine months ended September 30, 2002 decreased by $528,000 or
40.46% from $1.3 million for the nine months ended September 30, 2001 to
$777,000 for the nine months ended September 30, 2002. The decrease in net
income was primarily due to a decrease in noninterest income, and increases in
non-interest expense and provision for loan losses, partially offset by an
increase in net interest income and a decrease in income tax expense.
Net interest income increased $882,000 or 18.94% from $4.7 million for the nine
months ended September 30, 2001 to $5.5 million for the nine months ended
September 30, 2002. The primary
12
reason for the increase in net interest income was a decrease in interest
expense of $1.2 million partially offset by a decrease of $282,000 in interest
income. The Company's net interest margin was 3.95% and 3.71% during the nine
months ended September 30, 2002 and 2001, respectively. The net interest margin
increased as a result of an increase in the interest spread from 3.12% for the
nine months ended September 30, 2001 to 3.48% for the nine months ended
September 30, 2002. The increase in interest spread resulted from a decrease in
rate on interest-bearing liabilities partially offset by a decrease in rate on
interest-earning assets.
Loan interest income for the nine months ended September 30, 2002 declined by
$782,000 to $6.7 million from $7.5 million for the nine months ended September
30, 2001 due to both a decrease in yield of 69 basis points and a decrease in
the average portfolio size of $3.4 million. Investment income increased by
$694,000 to $2.9 million for the nine months ended September 30, 2002 from $2.2
million for the nine months ended September 30, 2001 due to an increase of $24.6
million in the average investment portfolio, which was partially offset by a
decrease in average yield of 85 basis points. Interest income earned on deposits
with financial institutions decreased by $226,000 due to a 285 basis point
decrease in the average rate and by a $3.0 million decrease in the average
balance.
Interest expense declined by $1.1 million from $5.4 million for the nine months
ended September 30, 2001 to $4.3 million for the nine months ended September 30,
2002. Interest expense on deposits declined from $4.4 million for the nine
months ended September 30, 2001 to $3.4 million for the nine months ended
September 30, 2002 due to lower rates paid on deposits which was partially
offset by a higher volume in interest-bearing checking accounts and savings
accounts. Interest expense on Federal Home Loan Bank advances and other borrowed
money has declined by $144,000 due to a lower average balance in borrowings as
well as lower interest rates.
For the nine months ended September 30, 2002 and 2001 the provision for losses
on loans was $663,000 and $438,000, respectively, an increase of $225,000. The
provision for the nine months ended September 30, 2002 was based on the
Company's analysis of the classification of assets and allowance for loan
losses. Nonperforming loans and troubled debt restructurings are included in the
classification of assets, as well as other loans identified with an inherent
weakness or potential for loss. Management meets on at least a quarterly basis
to review the adequacy of the allowance for loan losses by classifying loans in
compliance with regulatory classifications. Classified loans are individually
reviewed to arrive at specific reserve levels for those loans. Once the specific
portion for each loan is calculated, management calculates a historical portion
for each category based on a combination of loss history, current economic
conditions, and trends in the portfolio. While the Company cannot assure that
future chargeoffs and/or provisions will not be necessary, the Company's
management believes that, as of September 30, 2002, its allowance for loan
losses was adequate.
Noninterest income decreased $835,000 or 38.68% from $2.2 million for the nine
months ended September 30, 2001 to $1.3 million for the nine months ended
September 30, 2002. The decrease was primarily a result of a reduction in loan
servicing fees of $537,000 and an identified impairment on loan servicing assets
of $802,000, partially offset by increased net
13
gains on loan sales of $164,000, increased brokerage fees of $122,000, and net
realized gains on sales of available-for-sale securities of $120,000.
Loan servicing fees declined from $134,000 for the nine months ended September
30, 2001 to a negative $403,000 for the nine months ended September 30, 2002.
This decline was primarily due to the accelerated amortization of servicing
assets resulting from refinanced loans due to a decrease in loan interest rates.
Loans sold for the nine months ended September 30, 2002 were $25.2 million, the
majority being loans secured by residential real estate and farmland. Many loans
which were refinanced had existing servicing assets which were written off as
the original loan was paid off. When the refinanced loans were sold into the
secondary market, servicing assets relating to these loans are included in the
gain on the sale of loans as required by accounting principles generally
accepted in the United States of America. Amortization of servicing assets
increased from $219,000 for the nine months ended September 30, 2001 to $782,000
for the nine months ended September 30, 2002. The decline in interest rates has
resulted in increased prepayments, which shortens the expected average life of
the servicing assets. When the servicing rights 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 of $802,000 which was charged against current earnings. At
September 30, 2002, loans serviced for others totaled $77.2 million, and the net
value of the loan servicing rights totaled $1.2 million, net of a valuation
allowance of $802,000.
Net gains on loan sales increased by $164,000 from $596,000 for the nine months
ended September 30, 2001 to $760,000 for the nine months ended September 30,
2002, primarily due to gains related to capitalized servicing assets. Gains on
loan sales from capitalized servicing assets were $698,000 for the nine months
ended September 30, 2002 compared to $529,000 for the nine months ended
September 30, 2001. Brokerage fees from First Charter Service Corporation, a
wholly owned subsidiary of the Company, increased $122,000 from $19,000 for the
nine months ended September 30, 2001 to $141,000 for the nine months ended
September 30, 2002. The increase was a result of a newly established
representative for Primevest Financial Services and a new referral program to
generate annuity sales. Net realized gains on sales of available-for-sale
securities increased $120,000 due to the sale of equity securities.
Total noninterest expenses were $5.0 million for the nine months ended September
30, 2002 as compared to $4.3 million for the nine months ended September 30,
2001, an increase of $626,000 or 14.44%. The primary reason for the increase was
an increase in salaries and employee benefits of $434,000 and an increase in
other expenses of $178,000. Salaries and employee benefits increased by $434,000
from $2.52 million for the nine months ended September 30, 2001 to $2.95 million
for the nine months ended September 30, 2002 due to increased salaries expense,
director fees, Employee Stock Ownership Plan ("ESOP") expense, recognition and
retention plan expense, and training expense. Salaries expense increased by
$240,000 due primarily to normal pay increases, the addition of three full-time
employees and one part-time employee, increased overtime, and increased
commissions paid to brokerage employees due to a higher sales volume. ESOP
expense increased by $93,000 due to nine months of expense for 2002 compared to
six months of expense for 2001, as the ESOP was adopted in April, 2001. The
monthly expense for the ESOP is determined by the average share price in the
open market for the month, and as the monthly average share price increases, the
14
ESOP expense increases accordingly. The Recognition and Retention Plan received
shareholder approval in April 2002, and the expense for the nine months ended
September 30, 2002 was $46,000.
Other expenses increased by $178,000 from $501,000 for the nine months ended
September 30, 2001 to $679,000 for the nine months ended September 30, 2002. The
increase in other expense was primarily due to increased expenses related to
disposition of foreclosed assets, increases in printing and office supplies
expense, increases in holding company expenses, and increases in other expenses.
Expenses for disposition of foreclosed assets increased by $86,000 for the nine
months ended September 30, 2002 as foreclosed assets were liquidated. Printing
and office supplies expenses increased by $28,000 primarily a result of updating
brochures and disclosures. Holding company expenses increased by $24,000 due to
increased corporate franchise tax and filing fees, costs associated with the
printing and distribution of the annual reports and proxies, and other
shareholder services. Other expenses increased due to increases in check losses,
trust department expenses, insurance expense, and correspondent bank fees.
Income tax expense was $462,000 for the nine months ended September 30, 2002 as
compared to $738,000 for the nine months ended September 30, 2001. The reduction
of $276,000 was due to a decrease in income before income tax of $804,000,
primarily due to the recognition of the $802,000 impairment of the loan
servicing rights. The effective tax rates were 37.3% and 36.1%, respectively,
for the nine months ended September 30, 2002 and 2001.
COMPARISON OF THREE MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2001
Net income for the three months ended September 30, 2002 decreased by $451,000
or 88.43% from $510,000 for the three months ended September 30, 2001 to $59,000
for the three months ended September 30, 2002. The decrease in net income is
primarily due to a decrease in noninterest income and an increase in noninterest
expense, partially offset by an increase in net interest income and a decrease
in income tax expense.
Net interest income increased $321,000 or 20.01% from $1.60 million for the
three months ended September 30, 2001 to $1.93 million for the three months
ended September 30, 2002. The primary reason for the increase in net interest
income was a decrease in interest expense of $290,000. The Company's net
interest margin was 3.89% and 3.54% during the three months ended September 30,
2002 and 2001, respectively. The net interest margin increased as a result of an
increase in the interest spread from 3.00% for the three months ended September
30, 2001 to 3.31% for the three months ended September 30, 2002. The increase in
interest spread resulted from a decrease in interest expense which resulted from
a decrease in rate on interest-bearing liabilities, partially offset by an
increase in average volume of interest-bearing liabilities.
Loan interest income decreased by $131,000 from $2.4 million for the three
months ended September 30, 2001 to $2.2 million for the three months ended
September 30, 2002. The decrease is primarily due to a 57 basis point decrease
in yield partially offset by an increase of $1.2 million in average loan
portfolio size. Income from investment securities for the three months ended
September 30, 2002 increased by $229,000 due to a $30.0 million increase in the
15
average investment portfolio, partially offset by a 116 basis point decrease in
average yield. Interest income on deposits held with financial institutions
decreased by $89,000 for the three months ended September 30, 2002 compared to
the same period in 2001 due primarily to both a decrease in average balance and
a rate decline of 263 basis points.
Interest expense declined by $290,000 for the three months ended September 30,
2002 compared to the three months ended September 30, 2001 due to a decrease in
rates paid on deposits of 1.49%, partially offset by an increase in average
deposits of $11.3 million. Interest expense on deposits for the three months
ended September 30, 2002 was $1.1 million compared to $1.4 million for the three
months ended September 30, 2001. Interest on Federal Home Loan Bank advances and
other borrowed money remained level due to reduced rates on borrowings offset by
additional borrowings.
For the three months ended September 30, 2002 and 2001 the provision for losses
on loans was level at $167,000 and $166,000, respectively. The provision for the
three months ended September 30, 2002 was based on the Company's analysis of the
allowance for loan losses. Management meets on at least a quarterly basis to
review the adequacy of the allowance for loan losses by classifying loans in
compliance with regulatory classifications. Classified loans are individually
reviewed to arrive at specific reserve levels for those loans. Once the specific
portion for each loan is calculated, management calculates a historical portion
for each category based on a combination of loss history, current economic
conditions, and trends in the portfolio. While the Company cannot assure that
future chargeoffs and/or provisions will not be necessary, the Company's
management believes that, as of September 30, 2002, its allowance for loan
losses was adequate.
Noninterest income decreased $736,000 from $779,000 for the three months ended
September 30, 2001 to $43,000 for the three months ended September 30, 2002. The
decrease was primarily a result of 117,000 reduction in loan servicing fees, an
identified impairment of loan servicing rights of $802,000, and a decrease in
net gains on loans sales of $48,000, partially offset by an increase of $120,000
in net realized gains on sales of available-for-sale securities, increased
brokerage fees of $44,000 and increased other customer fees of $44,000.
Loan servicing fees declined from $78,000 for the three months ended September
30, 2001 to a negative $39,000 for the three months ended September 30, 2002.
This decline was primarily due to the accelerated amortization of servicing
assets resulting from increased principal reductions on the related loans. Loans
sold for the three months ended September 30, 2002 were $10.0 million, the
majority being loans secured by residential real estate and farmland. Many loans
which were refinanced had existing servicing assets which were written off as
the original loans paid off. When the refinanced loans were sold into the
secondary market, servicing assets relating to these loans are calculated and
included in the gain on the sale of loans as required by generally accepted
accounting principles. Amortization of servicing assets increased from $49,000
for the three months ended September 30, 2001 to $167,000 for the three months
ended September 30, 2002. An $802,000 impairment was identified on September 30,
2002 due to a reduction in the fair market value of servicing assets. Servicing
assets are revalued periodically, and if the valuation is lower than the book
value on servicing assets, an impairment exists, and is required to be charged
against current earnings. Due to the current low interest rate environment,
16
prepayments on loans have accelerated, resulting in shorter estimated lives for
the loan servicing assets. When these loan servicing assets were valued on
September 30, 2002 using the shorter estimated lives, the fair value was
substantially less than the book value of the loan servicing assets, which
required an impairment allowance to be recorded. The impairment of $802,000 was
charged against loan servicing fee income to establish a valuation allowance.
Net gains on loan sales decreased from $212,000 for the three months ended
September 30, 2001 to $164,000 for the three months ended September 30, 2002, a
decrease of $48,000. This decrease was primarily a result of gains recognized on
creation of servicing assets of $184,000 for the three months ended September
30, 2001 compared to $120,000 for the three months ended September 30, 2002. Net
realized gains on sales of available-for-sale securities increased by $120,000
for the three months ended September 30, 2002 compared to no net realized gain
for the three months ended September 30, 2001 due to the sale of equity
securities. Brokerage fees from First Charter Service Corporation, a wholly
owned subsidiary of the Company, increased from $7,000 for the three months
ended September 30, 2001 to $51,000 for the three months ended September 30,
2002. The increase was a result of a newly established representative for
Primevest Financial Services and a new referral program to generate annuity
sales. Other customer fees increased from $219,000 for the three months ended
September 30, 2001 to $263,000 for the three months ended September 30, 2002,
primarily due to loan fees assessed on a higher volume of loans sold in the
secondary market.
Total noninterest expenses were $1.7 million for the three months ended
September 30, 2002 as compared to $1.4 million for the three months ended
September 30, 2001, an increase of $257,000. The primary reason for the increase
was an increase in salaries and employee benefits of $159,000 and increases in
professional fees of $22,000 and other expenses of $58,000. Salaries and
employee benefits increased by $159,000 from $829,000 for the three months ended
September 30, 2001 to $988,000 for the three months ended September 30, 2002.
Salaries increased by $83,000 due to normal pay increases, the addition of three
full-time employees and one part-time employee, increased overtime, and
increased commissions paid to brokerage employees due to higher sales volume.
The Recognition and Retention Plan received shareholder approval in April 2002,
and the expense for the three months ended September 30, 2002 was $29,000. ESOP
expense increased by $16,000 due to a higher average stock price, directors'
fees increased by $8,000, and training expenses increased by $8,000. Other
expenses increased by $58,000 from $183,000 for the three months ended September
30, 2001 to $241,000 for the three months ended September 30, 2002. The increase
was primarily a result of $47,000 increased expenses related to the disposition
of foreclosed assets as foreclosed assets were liquidated.
Income tax expense was $55,000 for the three months ended September 30, 2002 as
compared to $277,000 for the three months ended September 30, 2001. The decrease
in income tax expense was due to a reduction of income before income taxes of
$673,000. The effective tax rates were 48.2% and 35.2%, respectively, for the
three months ended September 30, 2002 and 2001.
CRITICAL ACCOUNTING POLICIES
The notes to the consolidated financial statements, on pages 28 through 32 of
the Annual Report to Shareholders for the year ended December 31, 2001 contain a
summary of the Company's
17
significant accounting policies, including significant estimates. Certain of
these policies are important to the portrayal of the Company's financial
condition, since they require management to make difficult, complex or
subjective judgements, some of which may relate to matters that are inherently
uncertain. Management believes that its critical accounting policies and
significant estimates include determining the allowance for loan losses, the
valuation of loan servicing rights, and the valuation of foreclosed assets held
for sale.
Allowance for loan losses
The allowance for loan losses is a significant estimate that can and does change
based on management's assumptions about specific borrowers and current general
economic and business conditions, among other factors. Management reviews the
adequacy of the allowance for loan losses on at least a quarterly basis. The
evaluation by management includes consideration of past loss experience, changes
in the composition of the loan portfolio, the current condition and amount of
loans outstanding, identified problem loans and the probability of collecting
all amounts due.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. A worsening or protracted economic
decline would increase the likelihood of additional losses due to credit and
market risk and could create the need for additional loss reserves.
Loan Servicing Rights
The Company recognizes the rights to service loans as separate assets in the
consolidated balance sheet. The total cost of loans when sold is allocated
between loans and loan servicing rights based on the relative fair values of
each. Loan servicing rights are subsequently carried at the lower of the initial
carrying value, adjusted for amortization, or fair value. Loan servicing rights
are evaluated for impairment based on the fair value of those rights. Factors
included in the calculation of fair value of the loan servicing rights include
estimating the present value of future net cash flows, market loan prepayment
speeds for similar loans, discount rates, servicing costs, and other economic
factors. Servicing rights are amortized over the estimated period of net
servicing revenue. It is likely that these economic factors will change over the
life of the loan servicing rights, resulting in different valuations of the loan
servicing rights. The differing valuations will affect the carrying value of the
loan servicing rights on the consolidated balance sheet as well as the income
recorded from loan servicing in the income statement. As of September 30, 2002
and December 31, 2001, mortgage servicing rights had carrying values of
$1,208,000 and $2,095,000, respectively.
Foreclosed Assets Held for Sale
Foreclosed assets held for sale are carried at the lower of cost or fair value
less estimated selling costs. Management estimates the fair value of the
properties based on current appraisal information. Fair value estimates are
particularly susceptible to significant changes in the economic environment,
market conditions, and the real estate market. A worsening or protracted
economic decline would increase the likelihood of a decline in property values
and could create the need to write down the properties through current
operations.
18
LIQUIDITY
At September 30, 2002, the Company had outstanding commitments to originate $1.7
million in loans. In addition, open-end line of credit loans had $3.6 million
available to be drawn upon, and there were two outstanding letters of credit for
a combined total of $29,000. As of September 30, 2002, the total amount of
certificates scheduled to mature in the following 12 months was $43.9 million.
The Company believes that it has adequate resources to fund all of its
commitments and that it can adjust the rate on certificates of deposit to retain
deposits in changed interest environments. If the Company requires funds beyond
its internal funding capabilities, advances from the Federal Home Loan Bank of
Chicago are available as an additional source of funds.
CAPITAL RESOURCES
The Bank is subject to capital-to-asset requirements in accordance with Federal
bank regulations. The following table summarizes the Bank's regulatory capital
requirements, versus actual capital as of September 30, 2002:
-------------------------------------- -------------------------- ------------------------- --------------------------
SEPTEMBER 30, 2002 REQUIRED FOR TO BE WELL
ACTUAL ADEQUATE CAPITAL CAPITALIZED
-------------------------------------- -------------------------- ------------------------- --------------------------
Amount % Amount % Amount %
-------------------------------------- ------------ ------------- ------------ ------------ ------------- ------------
(Dollars in thousands)
Total capital (to risk-weighted $22,381 19.16 $9,346 8.0 $11,682 10.0
assets)
Tier 1 capital (to risk-weighted 20,914 17.90 4,673 4.0 7,009 6.0
assets)
Tier 1 capital (to average assets) 20,914 10.33 8,100 4.0 10,124 5.0
The Company's consolidated capital-to-asset requirements and actual capital as
of September 30, 2002 are summarized in the following table:
-------------------------------------- -------------------------- ------------------------- --------------------------
SEPTEMBER 30, 2002 REQUIRED FOR TO BE WELL
ACTUAL ADEQUATE CAPITAL CAPITALIZED
-------------------------------------- -------------------------- ------------------------- --------------------------
Amount % Amount % Amount %
-------------------------------------- ------------ ------------- ------------ ------------ ------------- ------------
(Dollars in thousands)
Total capital (to risk-weighted $27,446 23.25 $9,443 8.0 --- N/A
assets)
Tier 1 capital (to risk-weighted 25,964 22.00 4,721 4.0 --- N/A
assets)
Tier 1 capital (to average assets) 25,964 12.60 8,241 4.0 --- N/A
19
ITEM 3. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this quarterly report, the Company carried
out an evaluation, 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 subsequent to the date of their evaluation.
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. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
20
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
99.1 Certification of Terry J. Howard, Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. 1350).
99.2 Certification of Ellen M. Litteral, Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. 1350).
(b) No Form 8-K reports were filed during the quarter.
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: November 12, 2002 /s/ Terry J. Howard
-------------------------------------
Terry J. Howard
Chief Executive Officer and President
Date: November 12, 2002 /s/ Ellen M. Litteral
-------------------------------------
Ellen M. Litteral
Chief Financial Officer and Treasurer
CERTIFICATIONS
SECTION 302 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
I, Terry J. Howard, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of FIRST BANCTRUST
CORPORATION (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
22
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of Registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and report
financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 12, 2002 /s/ Terry J. Howard
------------------ ---------------------------------
TERRY J. HOWARD
Chief Executive Officer and President
SECTION 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Ellen M. Litteral, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of FIRST BANCTRUST
CORPORATION (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
23
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of Registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and report
financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 12, 2002 /s/ Ellen M. Litteral
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ELLEN M. LITTERAL
Chief Financial Officer and Treasurer
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