UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 000-32535
FIRST BANCTRUST CORPORATION
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(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE 37-1406661
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(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
206 SOUTH CENTRAL AVENUE 61944
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PARIS, ILLINOIS (ZIP CODE)
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: 217-465-6381
SECURITIES REGISTERED UNDER SECTION 12 (b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12 (g) OF THE EXCHANGE ACT:
COMMON STOCK (PAR VALUE $0.01 PER SHARE)
(TITLE OF CLASS)
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 [ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year: $11,096,923
As of March 14, 2004, the aggregate value of the 1,164,708 shares of Common
Stock of the Registrant outstanding on such date, which excludes 85,517 shares
held by all directors and executive officers as a group, was approximately $27.7
million. This figure is based on the last known trade price of $23.75 per share
of the Registrant's Common Stock on March 12, 2004.
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF MARCH 14, 2004: 1,250,225
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): YES [ ] NO [X]
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and
the Part of the Form 10-KSB into which the document is incorporated:
(1) Portions of the Annual Report to Stockholders for the fiscal year ended
December 31, 2003 are incorporated into Parts II and III.
(2) Portions of the definitive proxy statement for the Annual Meeting of
Stockholders are incorporated into Part III.
INDEX
PAGE
PART I
Item 1. Description of Business 1
Item 2. Description of Property 31
Item 3. Legal Proceedings 32
Item 4. Submission of Matters to a Vote of Security Holders 32
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 32
Item 6. Management's Discussion and Analysis or Plan of Operation 33
Item 7. Financial Statements 33
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure 33
Item 8A. Controls and Procedures 34
PART III
Item 9. Directors and Executive Officers of the Registrant 34
Item 10. Executive Compensation 34
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 34
Item 12. Certain Relationships and Related Transactions 35
Item 13. Exhibits and Reports on Form 8-K 35
Item 14. Principal Accountant Fees and Services 37
SIGNATURES
PART I
Item 1. Description of Business.
In addition to historical information, this filing may include certain forward-
looking statements based on current management expectations. The Company's
actual results could differ materially from those management expectations.
Factors that could cause future results to vary from current management
expectations include, but are not limited to, general economic conditions,
legislative and regulatory changes, monetary and fiscal policies of the federal
government, changes in tax policies, rates and regulations of federal, state,
and local tax authorities, changes in interest rates, deposit flows, the cost of
funds, demand for loan products, demand for financial services, competition,
changes in the quality of competition, changes in the quality or composition of
the Company's loan and investment portfolios, changes in accounting principles,
policies, or guidelines, and other economic, competitive, governmental and
technological factors affecting the Company's operations, markets, products,
services and prices.
General
First BancTrust Corporation (the "Company") was incorporated in November 2000
under Delaware law. On April 18, 2001, the Company acquired all of the
outstanding shares of common stock of First Bank & Trust, s.b. of Paris,
Illinois, ("First Bank" or the "Bank") upon the Bank's conversion from an
Illinois chartered mutual savings bank to an Illinois chartered stock savings
bank (the "Conversion"). The Company purchased 100% of the outstanding capital
stock of the Bank using 50% of the net proceeds from the Company's initial stock
offering which was completed on April 18, 2001. The Company sold 1,520,875
shares of common stock in the initial offering at $10 per share. The Company
began trading on the Nasdaq Small Cap Market on April 19, 2001 under the symbol
"FBTC". At December 31, 2003, the Company had consolidated total assets,
liabilities and stockholders' equity of $226.2 million, $199.8 million, and
$26.4 million, respectively.
The Company's assets on an unconsolidated basis at December 31, 2003 consisted
primarily of the investment in the Bank of $23.9 million, investment in First
Charter Service Corporation of $82,000 and investment in ECS Service Corporation
doing business as Edgar County Title of $388,000, interest-bearing demand
deposits of $192,000, an Employee Stock Ownership Plan ("ESOP") loan to the Bank
of $923,000, and available-for-sale securities of $983,000. The Company
originates loans and solicits deposits through the Bank, but otherwise conducts
no significant business except through the Bank, the Bank's subsidiary, and the
Company's other non-bank subsidiaries.
The Bank was founded in 1887, and continued as an Illinois mutual savings and
loan, until January, 1990 when it was merged with First Federal Bank, a federal
mutual savings bank. In June, 1995, the charter was converted to an Illinois
mutual savings bank, and the name modified to First Bank & Trust, s.b. As
previously stated, First Bank converted to an Illinois stock savings bank in
April, 2001. The Bank conducts business out of its main office and its
operations office, both in Paris, Illinois, and one branch office in
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Marshall, Illinois. The primary market areas of Clark and Edgar counties are
located in east central Illinois, just west of Terre Haute, Indiana, and are
both rural counties where agriculture is responsible for a large share of the
local economy. In September, 2003, the Bank began operations in a temporary
facility in Savoy, Illinois. Permanent facilities are under construction in a
prime commercial area, which should be completed in mid-2004. The Savoy market
area is immediately adjacent to the large urban markets of Champaign and Urbana,
and shows strong demographic characteristics. The community has experienced
higher than average population growth, resulting in new housing construction.
The Savoy market is characterized by a younger population, due to its proximity
to the University of Illinois in Champaign-Urbana. The majority of the labor
force in this area is employed in managerial or professional occupations.
As of December 31, 2003, the Bank had total assets of $223.8 million, total
liabilities of $199.9 million, and total equity of $23.9 million. Total assets
grew by $23.3 million, the majority from an increase in available-for-sale
securities, which was primarily funded by deposit growth and an additional
Federal Home Loan Bank advance. Net income in 2003 increased by $496,000 or
35.9% which was primarily attributable to an increase in other income due to
increases in customer service charges and fees and net gains on loan sales, and
a decrease in noninterest expense due to the recovery of a significant portion
of a valuation allowance for loan servicing rights established during the year
ended December 31, 2002.
Business of the Company
The Company's principal business consists primarily of attracting deposits from
the general public and using those funds to originate loans secured by one-to
four-family residential properties, commercial real estate loans, agricultural
real estate loans, commercial and industrial loans, agricultural production
finance loans, consumer loans and other loans. A substantial number of single
family residential mortgage loans and agricultural loans are sold into the
secondary market, and the Company retains servicing rights to those loans. At
December 31, 2003, the Company's loan portfolio including loans held for sale,
totaled $109.0 million. In addition, at December 31, 2003 the Company serviced
$89.9 million in loans ($75.7 million of residential loans and $14.2 million of
agricultural loans). The Company also invests in U.S. government securities,
municipal securities, and mortgage-backed securities. At December 31, 2003, the
Company's securities portfolio totaled $93.7 million, which are all designated
as available for sale. The Company also had $3.7 million invested in
interest-bearing demand deposits at December 31, 2003.
The Company's revenues are derived principally from interest on its mortgage,
consumer, agriculture and commercial loans, interest on its securities, gains on
loan sales, loan servicing fees, abstract and title fees, service charges on
deposits, and other customer fees. The Company's primary sources of funds are
deposits, loan repayments, sales of loans in the secondary market and advances
(loans) from the Federal Home Loan Bank ("FHLB").
The Company's ability to earn a profit depends on net interest income, which is
the difference between the interest income earned on interest-earning assets,
such as
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mortgage, commercial and consumer loans, and the interest expense paid on
interest-bearing liabilities, such as deposits and borrowings. The Company's
profitability depends on its ability to manage assets and liabilities during
periods of changing interest rates. To a lesser extent, the Company's
profitability depends on the ability to continue to generate noninterest income
from services provided to its customers.
Lending Activities
GENERAL. At December 31, 2003, the net loan portfolio before allowance for loan
losses, including loans held for sale, of the Company totaled $109.0 million,
representing 48.2% of total assets at that date. One of the principal lending
activities of the Company is the origination of one-to-four family (which are
also known as single-family) residential loans. At December 31, 2003,
single-family residential loans amounted to $36.5 million or 33.4% of the total
loan portfolio. Of this amount, $2.4 million consisted of second mortgage or
home equity loans. In addition, the Company originates commercial real estate
loans, agricultural real estate loans, commercial and industrial loans,
agricultural production finance loans, consumer loans and tax-exempt loans. On a
limited basis, the Company offers multi-family loans and construction loans.
The types of loans the Company may originate are subject to federal and state
laws and regulations. Interest rates charged on loans are affected principally
by the demand for such loans and the supply of money available for lending
purposes and the rates offered by competitors. These factors are, in turn,
affected by general and economic conditions, the monetary policy of the federal
government, including the Federal Reserve Board, legislative and tax policies,
and governmental budgetary matters.
LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition of
the Company's loan portfolio by type of loan at the dates indicated.
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December 31, 2003 December 31, 2002 December 31, 2001
------------------- ------------------- -------------------
Amount Percent Amount Percent Amount Percent
-------- -------- -------- -------- -------- --------
(In Thousands)
Real estate loans:
One-to-four family $ 36,513 33.38% $ 39,635 36.68% $ 41,298 40.15%
Multi-family 266 0.24% 300 0.28% 260 0.25%
Commercial 10,124 9.25% 9,756 9.03% 7,980 7.76%
Construction 2,275 2.08% 724 0.67% 937 0.91%
Agricultural loans 13,908 12.71% 12,570 11.63% 11,288 10.98%
Commercial and industrial 6,417 5.87% 6,045 5.59% 6,291 6.12%
Agricultural production finance 12,357 11.29% 11,570 10.70% 8,304 8.07%
Consumer loans:
Vehicle 21,035 19.23% 21,968 20.32% 20,279 19.71%
Consumer finance 823 0.75% 1,005 0.93% 1,071 1.04%
Share 533 0.49% 736 0.68% 780 0.76%
Other 3,169 2.90% 2,875 2.66% 3,302 3.21%
Other loans 1,983 1.81% 902 0.83% 1,073 1.04%
-------- -------- -------- -------- -------- --------
Total loans receivable 109,403 100.00% 108,086 100.00% 102,863 100.00%
======== ======== ========
Less:
Undisbursed portion of loans 23 328 185
Unearned discount and fees 845 614 365
Allowance for loan losses 2,124 1,962 1,657
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Loans receivable, net $106,411 $105,182 $100,656
======== ======== ========
Loans held for sale at December 31, 2003 amounted to $453,000, and are not
included in the above table. These loans are single family dwellings committed
for sale to the Federal Home Loan Mortgage Corporation and Illinois Housing
Development Authority.
ORIGINATION OF LOANS. The lending activities of the Company are subject to the
written underwriting standards and loan origination procedures established by
the Board of Directors and management. Loan originations are obtained through a
variety of procedures, including referrals from real estate brokers, builders
and existing customers. The loan officers also supervise the procurement of
credit reports, appraisals, and other documentation involved with loan
originations. Property valuations on loans over $250,000 are performed by
independent outside appraisers approved by the Board of Directors of the
Company. A written evaluation is required for all real estate loans in the
amount of less than $250,000 by a qualified individual.
Under the real estate lending policy of the Company, a title opinion or a title
insurance policy must be obtained for each real estate loan, as well as fire and
extended casualty insurance. Flood insurance is required when the property is in
a flood hazard area designated by the Department of Housing and Urban
Development. The Company does not require borrowers to advance funds to an
escrow account for the payment of real estate taxes or hazard insurance
premiums.
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The Company's loan approval process is intended to assess the borrower's ability
to repay the loan, the viability of the loan and the adequacy of the collateral
that will secure the loan. The Company's loan policy assigns aggregate lending
limits to officers of the Company depending on the type of loan and whether the
loan is secured or unsecured. Executive officers may combine their lending
authority provided that any aggregate extension of credit over $300,000 requires
approval by the Loan Committee of the Board of Directors. Generally, the Loan
Committee is authorized to approve aggregate extensions of credit up to
$800,000. Any extension of credit that will cause the aggregate loan balance to
one borrower to exceed $800,000 must be approved by three executive officers,
the Loan Committee and the Board of Directors.
Although federal laws and regulations permit savings institutions to originate
and purchase loans secured by real estate located throughout the United States,
the Company concentrates its lending activity to its primary market area of
Edgar, Clark, and Champaign counties, Illinois. A savings institution generally
may not make loans to one borrower and related entities in an amount which
exceeds the greater of (i) 20% of its unimpaired capital and surplus, although
loans in an amount equal to an additional 10% of unimpaired capital and surplus
may be made to a borrower if the loans are fully secured by readily marketable
securities, and (ii) $500,000. As an Illinois-chartered savings bank, the Bank
is permitted to invest without limitation as a percentage of assets in
residential mortgage loans and up to 400% of its capital in loans secured by
non-residential or commercial real estate. The Bank may also invest in secured
and unsecured consumer loans in an amount not exceeding 35% of total assets.
This 35% limitation may be exceeded for certain types of consumer loans such as
home equity and property improvement loans secured by residential real property.
In addition, the Bank may invest up to 10% of its total assets in secured and
unsecured loans for commercial, corporate, business or agricultural purposes.
The Bank has received a waiver from the Illinois Office of Banks and Real Estate
regarding its ability to exceed this 10% limit. The Bank is subject to its
internal loans-to-one borrower limitation of 15% of unimpaired capital.
MATURITY OF LOAN PORTFOLIO. The following table presents certain information at
December 31, 2003, regarding the dollar amount of loans maturing in the
Company's portfolio based on their contractual terms to maturity or scheduled
amortization, but does not include potential prepayments. Demand loans, loans
having no stated schedule of repayments and no stated maturity, and overdrafts
are reported as becoming due within one year. Loan balances do not include
undisbursed loan proceeds, net deferred origination costs and allowance for loan
losses.
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At December 31, 2003
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Commercial Agricultural
and Production Other Total
Real Estate Industrial Finance Consumer Loans Loans
------------ ------------ ------------ ------------ ------------ ------------
(In Thousands)
AMOUNTS DUE IN:
One year or less $ 4,808 $ 2,651 $ 7,325 $ 1,989 $ 186 $ 16,959
More than one year to five years 5,324 2,593 3,941 22,436 34,294
More than five years 52,954 1,173 1,091 1,135 1,797 58,150
------------ ------------ ------------ ------------ ------------ ------------
Total amount due $ 63,086 $ 6,417 $ 12,357 $ 25,560 $ 1,983 $ 109,403
============ ============ ============ ============ ============ ============
The following table sets forth the dollar amount of all loans, before net items,
due after December 31, 2004 which have fixed interest rates or which have
floating or adjustable rates.
Fixed-Rates Floating or Adjustable-Rates Total
------------- ---------------------------- -------------
(In Thousands)
Real estate loans:
One-to-four family $ 3,996 $ 31,940 (1) $ 35,936
Multi-family 33 233 266
Commercial 1,037 7,442 8,479
Construction 31 31
Agricultural loans 4,953 8,613 13,566
Commercial and industrial 2,125 1,641 3,766
Agricultural production finance 3,462 1,570 5,032
Consumer loans:
Vehicle 20,216 20,216
Consumer finance 694 8 702
Share 27 27
Other 2,622 4 2,626
Other loans 1,797 1,797
------------- ------------- -------------
Total loans receivable $ 39,165 $ 53,279 $ 92,444
============= ============= =============
(1) Includes the Bank's residential loan product with a fixed rate for the
first three years which adjusts on an annual basis thereafter.
Scheduled contractual maturities of loans do not necessarily reflect the actual
expected term of the loan portfolio. The average life of mortgage loans is
substantially less than their average contractual terms because of prepayments.
The average life of mortgage loans tends to increase when current mortgage rates
are higher than rates on existing mortgage loans and, conversely, decrease when
rates on current mortgage loans are lower than existing mortgage loan rates (due
to refinancing of adjustable-rate and fixed-rate loans at lower rates). Under
the latter circumstance, the weighted average yield on loans decreases as higher
yielding loans are repaid or refinanced at lower rates.
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ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LOANS. One of the primary lending
activities of the Company is the origination of loans secured by single-family
residences. At December 31, 2003, $36.5 million or 33.4% of the total loan
portfolio consisted of single-family residential loans. Of this amount, $2.4
million consisted of second mortgage or home equity loans.
The Company's present lending policy on one-to-four family residential mortgage
loans generally limits the maximum loan-to-value to 80% of the lesser of the
appraised value or purchase price of the property. If the Company originates a
residential mortgage loan with a loan-to-value in excess of 80%, the Company
typically requires the borrower to obtain private mortgage insurance.
Residential mortgage loans are typically amortized on a monthly basis with
principal and interest due each month.
The Company's residential mortgage loans have either fixed rates of interest or
interest rates which adjust periodically during the term of the loan. Fixed-rate
loans generally have maturities from 10 to 30 years and are fully amortizing
with monthly payments sufficient to repay the total amount of the loan with
interest by the end of the loan term. The Company's fixed-rate loans generally
are originated under terms, conditions and documentation which permit them to be
sold to U.S. government-sponsored agencies, such as the Federal Home Loan
Mortgage Corporation, and other investors in the secondary market for mortgages.
The Company sells substantially all fixed-rate loans with terms greater than 15
years in the secondary market. At December 31, 2003, $6.9 million, or 18.9% of
the Company's single-family residential mortgage loans were fixed-rate loans.
The adjustable-rate single-family residential mortgage loans currently offered
by the Company have interest rates which adjust every one, three or five years
in accordance with a designated index such as one-, three-, or five-year U.S.
Treasury obligations adjusted to a constant maturity, plus a stipulated margin.
In addition, the Company offers an adjustable mortgage loan with a fixed-rate
for the first three years which adjusts on an annual basis thereafter. The
Company's adjustable-rate single-family residential real estate loans generally
have a cap of 2% on any increase or decrease in the interest rate at any
adjustment date, and include a specified cap on the maximum interest rate over
the life of the loan, which is generally 6% above the initial rate. Such loans
generally are underwritten based on the initial rate. The Company's
adjustable-rate loans require that any payment adjustment resulting from a
change in the interest rate of an adjustable-rate loan be sufficient to result
in full amortization of the loan by the end of the loan term, and thus, do not
permit any of the increased payment to be added to the principal amount of the
loan, or so-called negative amortization. At December 31, 2003, $29.6 million or
81.1% of the Company's single-family residential mortgage loans were
adjustable-rate loans.
At December 31, 2003, the Company's second mortgage or home equity loans
amounted to $2.4 million or 2.2% of the total loan portfolio. These loans are
secured by the underlying equity in the borrower's residence, and accordingly,
are reported with the one-to-four family real estate loans. As a result, the
Company generally requires loan-to-value ratios of 90% or less after taking into
consideration the first mortgage held by the Company. If the Company does not
own or service the first mortgage, it will limit the
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total loan-to-value ratio to 80%. These loans typically have ten-year terms with
an interest rate adjustment after three or five years.
Adjustable-rate loans decrease the risks associated with changes in interest
rates but involve other risks, primarily because as interest rates increase, the
loan payment by the borrower increases to the extent permitted by the terms of
the loan, thereby increasing the potential for default. Moreover, as with
fixed-rate loans, as interest rates increase, the marketability of the
underlying collateral property may be adversely affected by higher interest
rates. The Company believes that these risks, which have not had a material
adverse effect on the Company to date, generally are less than the risks
associated with holding fixed-rate loans in an increasing interest rate
environment.
COMMERCIAL REAL ESTATE LOANS. The Company's commercial real estate portfolio
primarily consists of loans secured by office buildings, warehouses, production
facilities, recreational facilities, retail stores and restaurants located
within the Company's market area. Commercial real estate loans amounted to $10.1
million or 9.3% of the total loan portfolio as of December 31, 2003 with an
average loan balance of approximately $82,000.
The Company's commercial real estate loans typically have a loan-to-value ratio
of 80% or less and generally have higher interest rates than single-family
residential loans. Loans secured by raw land cannot exceed 65% of the appraised
value, and loans secured by real estate to be used for land development can not
exceed 75% loan-to-value. The maximum term of the Company's commercial real
estate loans is 10 years based on an amortization schedule not to exceed 30
years.
Commercial real estate lending is generally considered to involve a higher
degree of risk than one-to-four family residential lending. Such lending
typically involves large loan balances concentrated in a single borrower or
groups of related borrowers for rental or business purposes. In addition, the
payment experience on loans secured by income-producing properties is typically
dependent on the success of the operation of the related project and thus is
typically affected by adverse conditions in the real estate market and in the
economy. The Company generally attempts to mitigate the risks associated with
its commercial real estate lending by, among other things, lending primarily in
its market area and using low loan-to-value ratios in the underwriting process.
AGRICULTURAL REAL ESTATE LOANS. At December 31, 2003 the Company's agricultural
loans amounted to $13.9 million or 12.7% of the total loan portfolio. The
Company's agricultural loans are primarily secured by farmland located in its
market area and other counties in Illinois and Indiana contiguous to its market
area. The Company's agricultural real estate loans have interest rates which
adjust every one, three or five years in accordance with a designated index and
are generally amortized over 20 years. A portion of these loans also include a
balloon payment after 10 years. The Company's lending policies on agricultural
loans originated for its portfolio generally limit the maximum loan-to-value
ratio to 80% of the lesser of the appraised value or purchase price of the
property.
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The Company's agricultural real estate loans generally are originated under
terms, conditions and documentation which permit them to be sold to a variety of
investors in the secondary market. These loans are also underwritten to carry a
government guarantee that covers 90% of any loss on the loan. By way of example,
assume that the Company originates a conforming $100,000 agricultural loan and
subsequently sells $90,000 of the loan in the secondary market with servicing
retained. Assume that the borrower defaults on the loan, and the value of the
property is $50,000. The Company would purchase the $90,000 portion from the
investor, foreclose on the loan, and sell the property for $50,000. This would
result in an initial loss to the Company of $50,000. However, as a result of the
government guarantee, the Company would be reimbursed $45,000, representing 90%
of its loss of $50,000. The Company's out of pocket loss in this example would
be $5,000. If the Company originates an agricultural loan to be sold in the
secondary market, it may originate the loan with a loan-to-value of 90% of the
lesser of the appraised value or purchase price of the property.
COMMERCIAL AND INDUSTRIAL LOANS. At December 31, 2003, the Company's commercial
and industrial loans amounted to $6.4 million or 5.9% of the Company's loan
portfolio. The Company's commercial and industrial loans have a term of up to
five years and may have either floating rates tied to the Company's internal
prime rate or fixed rates of interest. The Company's commercial and industrial
loans are made to small to medium-sized businesses within the Company's market
area. A substantial portion of the Company's small business loans are secured by
perfected security interest in accounts receivable and inventory or other
corporate assets such as equipment. The Company also generally obtains personal
guarantees from the principals of the borrower with respect to all commercial
and industrial loans. In addition, the Company may extend loans for a commercial
business purpose which are secured by a mortgage on the proprietor's home or
business property. Commercial and industrial loans generally are deemed to
involve a greater degree of risk than single-family residential mortgage loans.
AGRICULTURAL PRODUCTION FINANCE LOANS. At December 31, 2003 the Company's
agricultural production finance loans amounted to $12.4 million or 11.3% of the
total loan portfolio. Generally these loans are extended to farmers in the
Company's market area and other counties in Illinois and Indiana contiguous to
its market area for the purchase of equipment, seed, fertilizer, insecticide and
other purposes in connection with agricultural production. The Company's
agricultural production finance loans generally have terms of one, three or five
years. The interest rate is increased with respect to the three and five year
loans due to the rate exposure of these loans. The amount of the commitment is
based on management's review of the borrower's business plan, prior performance,
marketability of crops, and current market prices. The Company requires a
minimum current ratio of 1.1. These loans are secured by crops, equipment,
accounts receivable, inventory, and second mortgages on the farmland.
The Company's agricultural production finance loans may be originated under
terms, conditions and documentation which allow them to be sold to a variety of
investors in the secondary market. These loans also carry a government guarantee
of up to 90% of any loss. If the Company originates an agricultural production
finance loan to be sold in the secondary market, it will extend the term of the
loan to seven years.
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CONSUMER LOANS. The Company is authorized to make loans for a wide variety of
personal consumer purposes. At December 31, 2003 $25.6 million or 23.4% of the
Company's total loan portfolio consisted of consumer loans.
The Company originates consumer loans in order to provide a full range of
financial services to its customers and because such loans generally have
shorter terms and higher interest rates than residential mortgage loans. The
consumer loans offered by the Company include vehicle loans, consumer finance
loans, loans secured by deposit accounts in the Company and other miscellaneous
loans.
The Company offers vehicle loans on both new and used vehicles, with a
significant portion of the loans secured by recent model used vehicles at the
time of origination. The vehicle loans offered by the Company have fixed
interest rates and terms of up to six years for new vehicles or used vehicles
2001 and newer and up to five years for older used vehicles. Vehicle loans
amounted to $21.0 million or 19.2% of the total loan portfolio at December 31,
2003. All of the Company's vehicle loans are directly underwritten by the
Company. The Company does not purchase any indirect vehicle loans.
At December 31, 2003 the Company's consumer finance loans amounted to $823,000
or 0.8% of the total loan portfolio. These loans are typically secured by
household items such as furniture and electronic appliances and equipment. These
loans are primarily underwritten based on the collateral and debt to income
ratios. The Company generally limits the terms of these loans to five years with
a fixed interest rate.
The Company offers loans secured by deposit accounts in the Company, which
amounted to $533,000 or 0.5% of the Company's total loan portfolio at December
31, 2003. Such loans are originated for up to 90% of the account balance, with a
hold placed on the account restricting the withdrawal of the account balance.
These loans mature on or before the maturity date of the underlying certificate
of deposit.
Other consumer loans consist primarily of unsecured personal loans. These loans
amounted to $3.2 million or 2.9% of the total loan portfolio at December 31,
2003.
Consumer loans generally have shorter terms and higher interest rates than
mortgage loans but generally involve more credit risk than mortgage loans
because of the type and nature of the collateral and, in certain cases, the
absence of collateral. In addition, consumer lending collections are dependent
on the borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness, and personal bankruptcy. In
some cases, repossessed collateral for a defaulted consumer loan will not
provide full repayment of the outstanding loan balance because of improper
repair and maintenance of the underlying security. The remaining deficiency may
not warrant further substantial collection efforts against the borrower. The
Company believes that the generally higher yields earned on consumer loans
compensate for the increased credit risk associated with such loans and that
consumer loans are important to its efforts to increase rate sensitivity,
shorten the average maturity of its loan portfolio and provide a full range of
services to its customers.
- 10 -
REAL ESTATE CONSTRUCTION LOANS. At December 31, 2003, the Company had
approximately $2.3 million or 2.1% of total loans in single-family residential
construction loans. The construction loans of the Company are comprised largely
of loans made to borrowers to construct individual pre-sold homes. Generally,
the construction loan and the permanent mortgage loan are originated at one
closing as a construction/permanent loan. Interest-only payments are required
during the construction period, which is typically six months.
Construction lending is generally considered to involve a higher degree of risk
of loss than long-term financing on improved, owner-occupied real estate because
of the uncertainties of construction, including the possibility of costs
exceeding the initial estimates and the need to obtain a tenant or purchaser if
the property will not be owner-occupied. The Company generally attempts to
mitigate the risks associated with construction lending by, among other things,
lending in its market area, using conservative underwriting guidelines, and
monitoring the construction process.
MULTI-FAMILY RESIDENTIAL LOANS. The Company also has a relatively small amount
of multi-family (over four units) residential loans. The multi-family
residential mortgage loans are underwritten on substantially the same basis as
its commercial real estate loans, although loan-to-value ratios may be up to
80%. At December 31, 2003, the Company had $266,000 in multi-family residential
mortgage loans which amounted to 0.2% of the total portfolio.
OTHER LOANS. The Company's other loans amounted to $2.0 million or 1.8% of the
total loan portfolio at December 31, 2003. The majority of this balance
represents a participation interest in an industrial revenue bond for a local
hospital.
LOAN ORIGINATION AND OTHER FEES. In addition to interest earned on loans, the
Company receives loan origination fees or "points" for originating loans. Loan
points are a percentage of the principal amount of the mortgage loan and are
charged to the borrower in connection with the origination of the loan.
LOAN SERVICING. The Company also services loans for others. Loan servicing
includes collecting and remitting loan payments, accounting for the principal
and interest, making inspections as required of mortgaged premises, contacting
delinquent borrowers, supervising foreclosures and property dispositions in the
event of unremedied defaults, making certain insurance and tax payments on
behalf of the borrowers and generally administering the loans. At December 31,
2003, the Company was servicing $89.9 million of loans for others. Of this
amount, $75.7 million were single family residential loans sold to the Federal
Home Loan Mortgage Corporation and the Illinois Housing Development Authority.
Agricultural land and equipment loans serviced for others were $14.2 million.
Asset Quality
GENERAL. The Company mails delinquent notices to borrowers when a borrower fails
to make a required payment within 15 days of the due date. Additional notices
are sent out when a loan becomes 30 days or 60 days past due. If a loan becomes
90 days past due,
- 11 -
the Company mails a notice indicating that the Company will refer it to an
attorney within 30 days to commence foreclosure. In most cases, deficiencies are
cured promptly. While the Company generally prefers to work with borrowers to
resolve such problems, the Company will institute foreclosure or other
collection proceedings when necessary to minimize any potential loss.
Loans are placed on non-accrual status when management believes the probability
of collection of interest is insufficient to warrant further accrual. When a
loan is placed on non-accrual status, previously accrued but unpaid interest is
deducted from interest income. As a matter of policy, the Company generally
places loans on non-accrual status at ninety days past due and interest is
considered a loss, unless the loan is well-secured and in the process of
collection.
Real estate and other assets acquired by the Company as a result of foreclosure
or by deed-in-lieu of foreclosure are classified as real estate owned until
sold. The Company had $96,000 of real estate owned and other assets at December
31, 2003. This category consists primarily of commercial real estate,
one-to-four residential properties, and vehicles.
DELINQUENT LOANS. The following table sets forth information concerning
delinquent loans at December 31, 2003, in dollar amounts and as a percentage of
the Bank's total loan portfolio. The amounts presented represent the total
outstanding principal balances of the related loans, rather than the actual
payment amounts which are past due.
December 31, 2003
---------------------------------------------------------------
30-59 Days 60-89 Days 90 or More Days
Overdue Overdue Overdue(1)
------------------- ------------------- -------------------
Percent Percent Percent
of Total of Total of Total
Amount Loans Amount Loans Amount Loans
-------- -------- -------- -------- -------- --------
(In Thousands)
Real estate loans:
One-to-four family $ 73 0.07% $ 981 0.90% $ 567 0.52%
Commercial 7 0.01% 124 0.11% 302 0.28%
Construction 113 0.10%
Agricultural loans 179 0.16%
Commercial and industrial 92 0.08% 26 0.02%
Agricultural production finance 20 0.02% 32 0.03%
Consumer loans:
Vehicle 310 0.28% 81 0.07% 89 0.08%
Consumer finance 8 0.01% 15 0.01%
Other 23 0.02% 8 0.01%
-------- -------- -------- -------- -------- --------
Total loans $ 692 0.63% $ 1,232 1.12% $ 1,126 1.03%
======== ======== ======== ======== ======== ========
----------
(1) All loans 90 days or more delinquent are placed on non-accrual.
NON-PERFORMING ASSETS. The following table presents information with respect to
the Bank's nonperforming assets at the dates indicated.
- 12 -
At December 31,
--------------------------------
2003 2002 2001
-------- -------- --------
(Dollars in Thousands)
NON-PERFORMING LOANS:
Non-accrual Loans:
Real estate loans:
One-to-four family $ 567 $ 692 $ 931
Commercial 302 236
Construction 113 114
Agricultural loans 71
Commercial and industrial 12 188
Agricultural production finance 32 577 7
Consumer loans:
Vehicle 89 97 54
Consumer finance 15 19 3
Other 8 9 22
-------- -------- --------
Total non-performing loans 1,126 1,520 1,512
-------- -------- --------
Real estate owned (1) 96 185 807
-------- -------- --------
Total nonperforming assets (2) 1,222 1,705 2,319
Troubled debt restructurings 1,403 888 723
-------- -------- --------
Troubled debt restructurings and total
nonperforming assets $ 2,625 $ 2,593 $ 3,042
======== ======== ========
Total nonperforming loans and troubled debt
restructurings as a percentage of total loans 2.35% 2.25% 2.17%
Total nonperforming assets and troubled debt
restructurings as a percentage of total assets 1.16% 1.28% 1.55%
(1) Real estate owned includes other repossessed assets and the balances are
shown net of related valuation allowances.
(2) Nonperforming assets consist of nonperforming loans, other repossessed
assets and real estate owned.
CLASSIFIED ASSETS. Federal regulations require that each insured savings
institution classify its assets on a regular basis. In addition, in connection
with examinations of insured institutions, federal examiners have authority to
identify problem assets and, if appropriate, classify them. There are three
classifications for problem assets: "substandard," "doubtful" and "loss."
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the insured institution will sustain loss if the
deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a higher possibility of loss.
An asset classified loss is considered uncollectible and of such little value
that continuance as an asset of the institution is not warranted. Another
category designated "special mention" also must be established and maintained
for assets which do not currently expose an insured institution to a sufficient
degree of risk to warrant classification as substandard, doubtful, or loss.
Assets classified as substandard or doubtful require the institution to
establish general
- 13 -
allowances for loan losses. If an asset or portion thereof is classified loss,
the insured institution must either establish specific allowances for loan
losses in the amount of 100% of the portion of the asset-classified loss, or
charge off such amount. General loss allowances established to cover possible
losses related to assets classified substandard or doubtful may be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses do not qualify as regulatory capital. Federal
examiners may disagree with an insured institution's classification and amounts
reserved.
The Company's total classified loans, which include impaired loans, at December
31, 2003 amounted to $12.8 million, $7.7 million of which was classified as
substandard, $222,000 of which was classified doubtful, $111,000 of which was
classified loss, and $4.7 million which was classified as special mention or
potential problem loans. Classified loans at December 31, 2002 were $6.8
million, $3.8 million of which was classified substandard, $357,000 of which was
classified doubtful, $378,000 of which was classified loss, and $2.3 million
which was classified special mention or potential problem loans. Of the $12.8
million classified assets at December 31, 2003, $1.1 million were nonperforming
loans as of December 31, 2003. The remaining $11.7 million relate to potential
problem loans due to various circumstances such as prior problem history with
the customer or insufficient collateral value.
The Company had specific reserves totaling $1.4 million on classified loans as
of December 31, 2003. Included in the classified loans of $12.8 million were
agricultural production finance loans totaling $3.1 million, commercial loans of
$3.1 million, farmland loans of $1.9 million, nonresidential real estate loans
of $2.3 million, one-to-four family real estate loans of $1.8 million, and
consumer loans of $679,000. Of the $3.1 million in classified agricultural
production loans, $1.9 million in agricultural finance loans had guarantees by
the Farmers Home Administration in the amount of $1.7 million. Also included in
classified loans were farmland loans of $1.0 million which had guarantees by the
Farmers Home Administration in the amount of $877,000.
RESERVE POLICY AND METHODOLOGY. The Company maintains an allowance for credit
losses to absorb losses inherent in the loan portfolio. The allowance is based
on ongoing, quarterly assessments of the probable estimated losses inherent in
the loan portfolio. The allowance is increased by the provision for credit
losses, which is charged against current period operating results and decreased
by the amount of charge-offs, net of recoveries. In calculating the allowance
for credit losses, the Company segments the loan portfolio into two groups,
loans evaluated individually and loans evaluated collectively. The methodology
for assessing the appropriateness of the allowance account consists of a formula
allowance for loans evaluated collectively and specific allowances for loans
evaluated individually.
The specific allowances are calculated by applying loss factor percentages to
outstanding loans included in the classification of assets, based on the
classification category of each loan. Changes in risk grades of these loans
affect the amount of the specific allowance. Loss factors for the formula
allowance are based on our historical loss experience and may be adjusted for
significant factors that, in management's judgement, affect the collectibility
of the portfolio as of the evaluation date. The adjustments to the historical
loss experience are based on an evaluation of national and local economic
trends, trends
- 14 -
in delinquencies and charge-offs, trends in volume and terms of loans, changes
in underwriting standards, and industry conditions.
Specific allowances are established in cases where management has identified
significant conditions or circumstances related to a credit that management
believes indicate the probability that a loss has been incurred in excess of the
amount determined by the application of the formula allowance.
While management believes the allowance for loan losses is sufficient to cover
losses inherent in its loan portfolio at this time, no assurances can be given
that the level of the allowance for loan losses will be sufficient to cover
future loan losses incurred or that future adjustments to the allowance for loan
losses will not be necessary if economic and other conditions differ
substantially from the economic and other conditions used by management to
determine the current level of the allowance for loan losses. As of December 31,
2003 and 2002, the allowance for loan losses was 1.96% and 1.83%, respectively,
of total loans. Management will continue to monitor and modify the allowance for
loan losses as conditions dictate.
The following table sets forth information concerning the allocation of the
Company's allowance for loan losses by loan categories at the dates indicated.
December 31,
---------------------------------------------------------------------------------
2003 2002 2001
------------------------- ------------------------- -------------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Each Each Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
----------- ----------- ----------- ----------- ----------- -----------
Allocated:
Real estate loans:
One-to-four family $ 154 33.38% $ 207 36.68% $ 370 39.91%
Multi-family 2 0.24% 2 0.28% 4 0.25%
Commercial 349 9.25% 332 9.03% 259 7.71%
Construction 60 2.08% 2 0.67% 7 0.91%
Agricultural loans 91 12.71% 89 11.63% 110 11.08%
Commercial and industrial 351 5.87% 230 5.59% 250 6.32%
Agricultural production finance 503 11.29% 496 10.70% 244 8.03%
Consumer loans:
Vehicle 505 19.23% 479 20.32% 315 19.78%
Consumer finance 41 0.75% 55 0.93% 34 1.04%
Share 0.49% 0.68% 0.75%
Other 68 2.90% 70 2.66% 64 3.40%
Other loans 1.81% 0.83% 0.82%
Unallocated: --- --- --- --- --- ---
----------- ----------- ----------- ----------- ----------- -----------
$ 2,124 100.00% $ 1,962 100.00% $ 1,657 100.00%
=========== =========== =========== =========== =========== ===========
- 15 -
The following table sets forth an analysis of the Company's allowance for loan
losses during the periods indicated.
Year Ended December 31,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
Total loans outstanding $ 108,535 $ 107,144 $ 102,313
Average loans outstanding, net 105,773 105,171 106,708
Balance at beginning of period 1,963 1,657 2,222
CHARGE-OFFS:
Real estate loans:
One-to-four family 118 31 90
Multi-family
Commercial 3 147
Construction
Agricultural loans 2 84
Commercial and industrial 35 140 599
Agricultural production finance 234 36
Consumer loans:
Vehicle 214 211 190
Consumer finance 10 67 47
Share
Other 48 72 140
------------ ------------ ------------
Total charge-offs 659 526 1,333
------------ ------------ ------------
RECOVERIES:
Real estate loans:
One-to-four family 6 15
Multi-family
Commercial 1 42
Construction
Agricultural loans 28 45
Commercial and industrial 5 13 17
Agricultural production finance 11 11
Consumer loans:
Vehicle 47 46 16
Consumer finance 23 15 6
Share
Other 7 5 9
------------ ------------ ------------
Total recoveries 93 114 161
------------ ------------ ------------
Net charge-offs (566) (412) (1,172)
Provision for loan losses 728 718 607
------------ ------------ ------------
Balance at end of period $ 2,125 $ 1,963 $ 1,657
============ ============ ============
Allowance for loan losses as a
percent of total loans outstanding 1.96% 1.83% 1.62%
============ ============ ============
Allowance for loan losses as a
percent of total non-performing loans 188.72% 129.83% 109.59%
============ ============ ============
Ratio of net charge-offs to
average loans outstanding 0.54% 0.39% 1.10%
============ ============ ============
- 16 -
Investment Securities
The Company has authority to invest in various types of securities, including
mortgage-backed securities, U.S. Treasury obligations, securities of various
federal agencies and of state and municipal governments, certificates of
deposits at federally-insured banks and savings institutions, certain bankers'
acceptances and federal funds. The Company's investment strategy is established
by the Investment Committee which currently consists of directors and officers
of the Company. The Investment Committee meets on a quarterly basis and the
strategy established by the committee is implemented by the Company's President
and Chief Financial Officer. The Company has obtained the services of an
independent consultant to provide data regarding the bank's investments as well
as potential investments. Any material deviations from the investment strategy
require approval by the Investment Committee.
The following table sets forth information relating to the amortized cost and
fair value of the Company's securities all of which are classified available for
sale.
December 31,
---------------------------------------------------------------------
2003 2002 2001
--------------------- --------------------- ---------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
(In Thousands)
U.S. Treasuries $ 3,803 $ 3,792 $ 0 $ 0 $ 0 $ 0
Federal agencies 7,504 7,517 9,498 9,648 12,481 12,295
State and municipal 9,489 9,904 6,873 7,304 6,708 6,784
Mortgage-backed securities 70,759 70,814 53,168 54,201 44,561 45,049
Other securities 1,599 1,715 1,520 1,595 1,039 1,079
--------- --------- --------- --------- --------- ---------
Total $ 93,154 $ 93,742 $ 71,059 $ 72,748 $ 64,789 $ 65,207
========= ========= ========= ========= ========= =========
The following table sets forth the amount of the Company's debt securities which
mature during each of the periods indicated and the weighted average yields for
each range of maturities at December 31, 2003. The table does not include equity
securities as they have no stated maturity. The amounts reflect fair value of
the Company's debt securities at December 31, 2003.
Contractually Maturing
-------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted
Under 1 Average Average 5-10 Average Over 10 Average
Year Yield 1-5 Years Yield Years Yield Years Yield Total
-------------------------------------------------------------------------------------------
(In Thousands)
U.S. Treasuries $ 0 $ 2,524 3.75% $1,268 4.25% $ 0 $ 3,792
Federal agencies 0 6,547 4.05% 970 3.00% 0 7,517
State and municipal 61 3.40% 1,892 3.49% 6,325 3.71% 1,626 3.88% 9,904
------- --------- ------ ------- -------
Total $ 61 $ 10,963 $8,563 $ 1,626 $21,213
======= ========= ====== ======= =======
- 17 -
Mortgage-backed securities represent a participation interest in a pool of one-
to four-family or multi-family mortgages. The mortgage originators use
intermediaries (generally U.S. Government agencies and government-sponsored
enterprises) to pool and repackage the participation interests in the form of
securities, with investors receiving the principal and interest payments on the
mortgages. Such U.S. Government agencies and government-sponsored enterprises
guarantee the payment of principal and interest to investors.
Mortgage-backed securities are typically issued with stated principal amounts,
and the securities are backed by pools of mortgages that have loans with
interest rates that are within a range and have varying maturities. The
underlying pool of mortgages, i.e., fixed-rate or adjustable-rate, as well as
prepayment risk, are passed on to the certificate holder. The life of a
mortgage-backed pass-through security approximates the life of the underlying
mortgages. However, prepayment of principal allows the Bank to re-invest at
current rates. This is beneficial in a rising interest rate environment.
Interest rates declined in 2003 which resulted in accelerated prepayments, which
in turn resulted in accelerated amortization of investment premiums. During
2003, proceeds generated from repayments and maturities of available-for-sale
securities totaled $68.5 million compared to $34.2 million 2002. Of the $68.5
million, repayments on mortgage-backed securities amounted to $57.9 million. Due
to the accelerated repayments, net amortization of premiums and discounts on
securities increased to $$887,000 in 2003 compared to $257,000 in 2002.
Mortgage-backed securities generally yield less than the loans which underlie
such securities because of their payment guarantees or credit enhancements which
offer nominal credit risk. However, these securities generally yield more than
other debt instruments available from U.S. Government Agencies. In addition,
mortgage-backed securities are more liquid than individual mortgage loans and
may be used to collateralize borrowings or other obligations of the Company.
The Company's increased investment in mortgage-backed securities resulted in
higher yields than were generally available from other securities of comparable
credit risk. At the same time yields were only marginally less than those
generally available on comparable real estate mortgages, without the inherent
credit risk.
Sources of Funds
GENERAL. Deposits are the primary source of the Company's funds for lending and
other investment purposes. In addition to deposits, principal and interest
payments on loans and mortgage-backed securities are a source of funds. Loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows are significantly influenced by general interest rates and money market
conditions. Borrowings may also be used on a short-term basis to compensate for
reductions in the availability of funds and other sources and on a longer-term
basis for general business purposes. For a discussion of commitments and credit
risk, see note 20 to the consolidated financial statements.
DEPOSITS. Deposits are attracted by the Company principally from within its
primary market area. Deposit account terms vary, with the principal differences
being the
- 18 -
minimum balance required, the time periods the funds must remain on deposit and
the interest rate.
The Company obtains deposits primarily from residents in Illinois and Indiana.
The Company seeks to attract deposit accounts by offering a variety of products,
competitive rates and terms.
Interest rates paid, maturity terms, service fees and withdrawal penalties are
established on a periodic basis. Management determines the rates and terms based
on rates paid by competitors, the need for funds or liquidity, growth goals and
federal and state regulations. The Company attempts to control the flow of
deposits by pricing its accounts to remain generally competitive with other
financial institutions in its market area.
The following table shows the distribution of and certain other information
relating to the Company's average deposits for the year ended by the type of
deposits indicated.
December 31, 2003 December 31, 2002
------------------------------ ------------------------------
Percent Percent
of Total Weighted of Total Weighted
Average Average Average Average Average Average
Balance Deposits Rate Balance Deposits Rate
-------- -------- -------- -------- -------- --------
(dollars in thousands)
Money market deposits $ 8,091 5.31% 1.56% $ 8,820 5.96% 2.31%
Savings deposits 9,944 6.53% 1.31% 8,337 5.63% 2.00%
NOW and other demand deposits 48,279 31.68% 1.41% 47,509 32.08% 2.31%
Non-interest bearing deposits 14,599 9.58% 0.00% 12,277 8.29% 0.00%
-------- -------- -------- -------- -------- --------
Total 80,913 53.10% 1.16% 76,943 51.96% 1.91%
Certificate accounts
Three months or less 399 0.26% 1.64% 820 0.55% 2.16%
Over three through six months 2,201 1.44% 1.43% 2,705 1.83% 2.19%
Over six through twelve months 24,790 16.26% 2.11% 27,857 18.80% 3.18%
Over one to three years 23,599 15.49% 3.23% 22,490 15.19% 4.46%
Over three to five years 13,832 9.08% 4.76% 13,800 9.32% 5.32%
Over five years 6,662 4.37% 4.64% 3,477 2.35% 5.07%
-------- -------- -------- -------- -------- --------
Total certificates 71,483 46.90% 3.20% 71,149 48.04% 4.04%
Total average deposits $152,396 100.00% 2.12% $148,092 100.00% 2.93%
======== ======== ======== ======== ======== ========
The following table shows the interest rate and maturity information for the
Company's certificates of deposits at December 31, 2003.
- 19 -
Maturity Date
----------------------------------------------------
One Year Over 1-2 Over 2-3 Over 3
Interest Rate or Less Years Years Years Total
-------- -------- -------- -------- --------
0.00% - 1.99% $ 24,499 $ 2,820 $ 50 $ $ 27,369
2.00% - 3.99% 19,133 6,051 579 4,277 30,040
4.00% - 5.99% 1,662 1,881 1,999 10,251 15,793
6.00% - 7.99% 647 1,881 4 3 2,535
-------- -------- -------- -------- --------
$ 45,941 $ 12,633 $ 2,632 $ 14,531 $ 75,737
======== ======== ======== ======== ========
As of December 31, 2003, the aggregate amount of outstanding time certificates
of deposit at the Company in amounts greater than or equal to $100,000, was
approximately $19.7 million. The following table presents the maturity of these
time certificates of deposits at December 31, 2003.
December 31, 2003
-----------------
(In thousands)
3 months or less $ 2,840
Over 3 months through 6 months 2,355
Over 6 months through 12 months 5,039
Over 12 months 9,475
----------
Total $ 19,709
==========
RETURN ON EQUITY AND ASSETS
2003 2002
----- -----
Return on assets (net income divided by
average total assets) 0.90% 0.64%
Return on equity (net income divided by
average equity) 7.38% 4.77%
Dividend payout ratio (dividends per share
divided by net income per share (1) 20.59% 19.61%
Equity to assets ratio (average equity
divided by average total assets) 12.19% 13.52%
(1) The ratio was calculated by dividing total dividends paid per share by
basic earnings per share.
BORROWINGS. The Company may obtain advances from the Federal Home Loan Bank
("FHLB") of Chicago upon the security of the common stock it owns in that bank
and certain of its residential mortgage loans and mortgage-backed and other
investment securities, provided certain standards related to creditworthiness
have been met. These
- 20 -
advances are made pursuant to several credit programs, each of which has its own
interest rate and range of maturities. FHLB advances are generally available to
meet seasonal and other withdrawals of deposit accounts and to permit increased
lending.
At December 31, 2003, the Company had $35.5 million of long-term FHLB advances
secured by first mortgage loans, FHLB stock, and investment securities. Some of
the long-term advances are "rate-locked" for a determined time period, between
two and five years, and then are convertible quarterly thereafter by the Federal
Home Bank to a quarterly adjustable rate advance. Of the $25.5 million in fixed
term advances, $15.5 million has passed the "rate-lock" period, but is still a
fixed rate advance, and $10.0 million are "rate-locked" until 2004. The
remaining $10.0 million advances are fixed term advances.
The following schedule presents FHLB advances at December 31, 2003 by maturity
date:
Interest Fixed or Maturity "Rate-lock" Amount
Date of Advance Rate Variable Date Date (in thousands)
February, 1998 5.05% Fixed February, 2008 February, 2001 $ 1,500
February, 1998 5.32% Fixed February, 2008 February, 2003 1,500
January, 2001 4.80% Fixed January, 2011 January, 2003 7,500
February, 2001 4.86% Fixed February, 2011 February, 2004 10,000
September, 2001 3.12% Fixed September, 2011 September, 2003 5,000
February, 2003 2.62% Fixed February, 2006 8,000
March, 2003 3.35% Fixed March, 2008 2,000
------------
$ 35,500
============
Market Area
The Company is headquartered in Paris, Illinois, with one regular branch in
Marshall, Illinois, and a newly established branch in Savoy, Illinois. The
Company's primary retail market area encompasses all of Clark and Edgar Counties
where the Company's two offices are located, as well as Champaign County where
the new branch at Savoy is located. The Company's primary market area represents
its source for deposit gathering and loan originating, however, the Company also
originates loans to borrowers outside of the market area. Clark and Edgar
Counties are located in east central Illinois, just west of Terre Haute,
Indiana, and are both rural counties where agriculture is responsible for a much
higher share of employment than in Illinois, as a whole. Champaign County is
located in central Illinois and includes the urban markets of Champaign and
Urbana, as well as the University of Illinois. The workforce in this area is
primarily employed in professional, managerial, and sales positions.
Both Clark and Edgar Counties have similar economic characteristics with
population levels of less than 20,000 in each county in 1990 and 2000. Overall,
the demographic characteristics of Clark and Edgar Counties are weaker than
Illinois or the U.S. with regard to income levels, housing values and growth
trends. On the contrary, the Savoy area has experienced an above-average
population growth, with strong new-housing construction, and above-average home
values.
- 21 -
Competition
The Company faces significant competition in attracting deposits and making
loans. Its most direct competition for deposits has come historically from
commercial banks, credit unions, and other savings institutions located in its
primary market area, including many large financial institutions which have
greater financial and marketing resources available to them. In addition, the
Company faces significant competition for investors' funds from short-term money
market securities, mutual funds and other corporate and government securities.
The Company does not rely upon any individual group or entity for a material
portion of its deposits. The ability of the Company to attract and retain
deposits depends on its ability to generally provide a rate of return, liquidity
and risk comparable to that offered by competing investment opportunities.
The Company's competition for real estate loans comes principally from mortgage
banking companies, commercial banks, other savings institutions and credit
unions. The Company competes for loan originations primarily through the
interest rates and loan fees it charges, and the efficiency and quality of
services it provides borrowers. Factors which affect competition include general
and local economic conditions, current interest rate levels and volatility in
the mortgage markets. Competition may increase as a result of the continuing
reduction of restrictions on the interstate operations of financial institutions
and the anticipated slowing of refinancing activity.
Personnel
As of December 31, 2003 the Company, including the Bank and the Bank's
subsidiary, Community Finance Center, Inc. and Company subsidiaries ECS Service
Corporation and First Charter Service Corporation, had 83 full-time and 5
part-time employees. None of the employees are represented by a collective
bargaining agent, and the Company believes that it enjoys good relations with
its personnel.
Subsidiaries
At December 31, 2003 the Company had three subsidiaries, the Bank, ECS Service
Corporation and First Charter Service Corporation, and the Bank had one
subsidiary, Community Finance Center, Incorporated.
Community Finance Center, Incorporated is an Illinois chartered corporation
which provides retail consumer loans to the Company's customers. Community
Finance Center generated net income of $76,000 for the year ended December 31,
2003 compared to a net loss of $6,000 for the year ended December 31, 2002.
ECS Service Corporation is an Illinois chartered corporation which provides real
estate abstracting and title insurance services for Edgar and Clark Counties,
Illinois primarily to the Company's customers. ECS Service Corporation generated
net income of approximately $133,000 and $89,000 for the years ended December
31, 2003 and December 31, 2002, respectively.
- 22 -
First Charter Service Corporation is an Illinois chartered corporation which
provides retail sales of uninsured investment products to the Company's
customers. First Charter generated a net loss of $21,000 and $16,000 for the
years ended December 31, 2003 and 2002, respectively.
Regulation
The following discussion of certain laws and regulations which are applicable to
the Company and the Bank as well as descriptions of laws and regulations
contained elsewhere herein, summarizes the aspects of such laws and regulations
which are deemed to be material to the Company and the Bank. However, the
summary does not purport to be complete and is qualified in its entirety by
reference to applicable laws and regulations.
FIRST BANCTRUST CORPORATION
GENERAL. The Company is a bank holding company and a financial holding company,
and as such, is registered with the Federal Reserve Board. Under the Bank
Holding Company Act, the Company will be subject to periodic examination by the
Federal Reserve Board and will be required to file periodic reports of its
operations and such additional information as the Federal Reserve Board may
require. Because First Bank is chartered under Illinois law, the Company will
also be subject to regulation by the Illinois Office of Banks and Real Estate
under the Illinois Savings Bank Act.
A bank holding company is a legal entity separate and distinct from its
subsidiary bank or other banks. Normally, the major source of a holding
company's revenue is dividends it receives from its subsidiary banks. The right
of a bank holding company to participate as a stockholder in any distribution of
assets of its subsidiary banks upon their liquidation or reorganization or
otherwise is subject to the prior claims of creditors of such subsidiary banks.
The subsidiary banks are subject to claims by creditors for long-term and
short-term debt obligations, including obligations for Federal funds purchased
and securities sold under repurchase agreements, as well as deposit liabilities.
Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989,
in the event of a loss suffered by the FDIC in connection with a banking
subsidiary of a bank holding company (whether due to a default or the provision
of FDIC assistance), other banking subsidiaries of the holding company could be
assessed for such loss.
SARBANES-OXLEY ACT OF 2002. On July 30, 2002, the President signed into law the
Sarbanes-Oxley Act of 2002 implementing legislative reforms intended to address
corporate and accounting fraud. In addition to the establishment of a new
accounting oversight board which will enforce auditing, quality control and
independence standards and will be funded by fees from all publicly traded
companies, the bill restricts provision of both auditing and consulting services
by accounting firms. To ensure auditor independence, any non-audit services
being provided to an audit client will require preapproval by the company's
audit committee members. In addition, the audit partners must be rotated. The
bill requires chief executive officers and chief financial officers, or their
equivalent, to certify to the accuracy of periodic reports filed with the SEC,
subject
- 23 -
to civil and criminal penalties if they knowingly or willfully violate this
certification requirement. In addition, under the Act, counsel will be required
to report evidence of a material violation of the securities laws or a breach of
fiduciary duty by a company to its chief executive officer or its chief legal
officer, and, if such officer does not appropriately respond, to report such
evidence to the audit committee or other similar committee of the board of
directors or the board itself.
Longer prison terms will also be applied to corporate executives who violate
Federal securities laws, the period during which certain types of suits can be
brought against a company or its officers has been extended, and bonuses issued
to top executives prior to restatement of a company's financial statements are
now subject to disgorgement if such restatement was due to corporate misconduct.
Executives are also prohibited from insider trading during retirement plan
"blackout" periods, and loans to company executives are restricted. In addition,
a provision directs that civil penalties levied by the SEC as a result of any
judicial or administrative action under the Act be deposited to a fund for the
benefit of harmed investors. The Federal Accounts for Investor Restitution
("FAIR") provision also requires the SEC to develop methods of improving
collection rates. The legislation accelerates the time frame for disclosures by
public companies as they must immediately disclose any material changes in their
financial condition or operations. Directors and executive officers must also
provide information for most changes in ownership in a company's securities
within two business days of the change.
The Act also increases the oversight of, and codifies certain requirements
relating to audit committees of public companies and how they interact with the
company's "registered public accounting firm" ("RPAF"). Audit committee members
must be independent and are barred from accepting consulting, advisory or other
compensatory fees from the issuer. In addition, companies must disclose whether
at least one member of the committee is a "financial expert" (as such term will
be defined by the SEC) and if not, why not. Under the Act, a RPAF is prohibited
from performing statutorily mandated audit services for a company if such
company's chief executive officer, chief financial officer, comptroller, chief
accounting officer or any person serving in equivalent positions has been
employed by such firm and participated in the audit of such company during the
one-year period preceding the audit initiation date. The Act also prohibits any
officer or director of a company or any other person acting under their
direction from taking any action to fraudulently influence, coerce, manipulate
or mislead any independent public or certified accountant engaged in the audit
of the company's financial statements for the purpose of rendering the financial
statement's materially misleading. The Act also requires the SEC to prescribe
rules requiring inclusion of an internal control report and assessment by
management in the annual report to shareholders. The Act requires the RPAF that
issues the audit report to attest to and report on management's assessment of
the company's internal controls. In addition, the Act requires that each
financial report required to be prepared in accordance with (or reconciled to)
generally accepted accounting principles and filed with the SEC reflect all
material correcting adjustments that are identified by a RPAF in accordance with
generally accepted accounting principles and the rules and regulations of the
SEC.
- 24 -
ACQUISITIONS. The Bank Holding Company Act requires a bank holding company to
obtain the prior approval of the Federal Reserve Board before acquiring
ownership or control of more than 5% of the voting shares or all or
substantially all of the assets of any bank or merging or consolidating with any
other bank holding company. The Bank Holding Company Act also prohibits a bank
holding company, with certain exceptions, from acquiring more than 5% of the
voting share of any company that is not a bank and from engaging in any business
other than banking or managing or controlling banks. A bank holding company that
becomes a financial holding company, such as the Company, is permitted to engage
in activities that are financial in nature or incidental to such financial
activities. Effective March 11, 2000, the Gramm-Leach-Bliley Act permitted bank
holding companies to become financial holding companies and thereby affiliate
with securities firms and insurance companies and engage in other activities
that are financial in nature. A bank holding company may become a financial
holding company if each of its subsidiary banks is well capitalized under the
Federal Deposit Insurance Corporation Improvement Act of 1991 prompt corrective
action provisions, is well managed and has at least a satisfactory rating under
the Community Reinvestment Act by filing a declaration with the Federal Reserve
Board that the bank holding company seeks to become a financial holding company.
No regulatory approval is required for a financial holding company to acquire a
company, other than a bank or savings association, engaged in activities that
are financial in nature or incidental to activities that are financial in
nature, as determined by the Federal Reserve Board.
The Gramm-Leach-Bliley Act, enacted in 1999, defines "financial in nature" to
include securities underwriting, dealing and market making; providing financial
or investment advice; insurance underwriting and agency; merchant banking
activities; and activities that the Federal Reserve Board has determined to be
closely related to banking. Subsidiary banks of a financial holding company must
continue to be well capitalized and well managed in order to continue to engage
in activities that are financial in nature without regulatory actions or
restrictions, which could include divestiture of the financial in nature
subsidiary or subsidiaries. In addition, a financial holding company or a bank
may not acquire a company that is engaged in activities that are financial in
nature unless each of the subsidiary banks of the financial holding company or
the bank has a Community Reinvestment Act rating of satisfactory or better.
The Company became a financial holding company under the Bank Holding Company
Act effective March 16, 2002, and the Company owns subsidiaries engaged in real
estate title and securities brokerage activities.
"SOURCE OF STRENGTH" POLICY. According to Federal Reserve Board policy, bank
holding companies are expected to act as a source of financial strength to each
subsidiary bank and to commit resources to support each such subsidiary. This
support may be required at times when a bank holding company may not be able to
provide such support.
CAPITAL REQUIREMENTS. The Federal Reserve Board has adopted capital adequacy
guidelines for bank holding companies (on a consolidated basis) substantially
similar to those of the FDIC for the Bank. See "Regulation - First Bank & Trust
- Capital Requirements." The Company's Tier I and total capital significantly
exceed the Federal Reserve Board's capital adequacy requirements. Refer to
Company capital amounts and
- 25 -
ratios in Footnote 11 of the consolidated financial statements for the Company's
capital ratios.
RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between a savings
bank and its "affiliates" are subject to quantitative and qualitative
restrictions under Sections 23A and 23B of the Federal Reserve Act and FDIC
regulations. Affiliates of a savings bank include, among other entities, the
savings bank's holding company and companies that are controlled by or under
common control with the savings bank.
In general, the extent to which a savings bank or its subsidiaries may engage in
certain "covered transactions" with affiliates is limited to an amount equal to
10% of the institution's capital and surplus, in the case of covered
transactions with any one affiliate, and to an amount equal to 20% of such
capital and surplus, in the case of covered transactions with all affiliates. In
addition, a savings bank and its subsidiaries may engage in covered transactions
and certain other transactions with affiliates only on terms and under
circumstances that are substantially the same, or at least as favorable to the
savings bank or its subsidiary, as those prevailing at the time for comparable
transactions with nonaffiliated companies. A "covered transaction" is defined to
include a loan or extension of credit to an affiliate; a purchase of investment
securities issued by an affiliate; a purchase of assets from an affiliate, with
certain exceptions; the acceptance of securities issued by an affiliate as
collateral for a loan or extension of credit to any party; or the issuance of a
guarantee, acceptance or letter of credit on behalf of an affiliate.
In addition, Sections 22(h) and (g) of the Federal Reserve Act place
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer and
to a greater than 10% stockholder of a bank, and certain related interests of
such person generally may not exceed 15% of the bank's unimpaired capital and
surplus for loans that are not fully secured and an additional 10% of the bank's
unimpaired capital and surplus for loans fully secured by readily marketable
collateral. Section 22(h) also requires that loans to directors, executive
officers and principal stockholders be made on terms substantially the same as
offered in comparable transactions to other persons and requires prior board
approval for certain loans. In addition, the aggregate amount of extensions of
credit by a bank to all insiders cannot exceed the institution's unimpaired
capital and surplus. Furthermore, Section 22(g) places additional restrictions
on loans to executive officers.
TAXATION. The Company is subject to those rules of federal income taxation
generally applicable to corporations under the Internal Revenue Code. The
Company and its subsidiaries, as members of an affiliated group of corporations
within the meaning of Section 1504 of the Internal Revenue Code, file a
consolidated federal income tax return, which has the effect of eliminating or
deferring the tax consequences of inter-company distributions, including
dividends, in the computation of consolidated taxable income.
The Company also is subject to various forms of state taxation under the laws of
Illinois as a result of the business which it conducts in Illinois.
- 26 -
FIRST BANK & TRUST
GENERAL. First Bank is an Illinois-chartered savings bank, the deposit accounts
of which are insured by the Savings Association Insurance Fund of the FDIC. As a
Savings Association Insurance Fund insured, Illinois-chartered savings bank, the
Savings Bank is subject to examination, supervision, reporting and enforcement
requirements of the Illinois Office of Banks and Real Estate, as the chartering
authority for Illinois savings banks, and the FDIC, as administrator of the
Savings Association Insurance Fund, and to the statutes and regulations
administered by the Illinois Office of Banks and Real Estate and the FDIC
governing such matters as capital standards, mergers, establishment of branch
offices, subsidiary investments and activities and general investment authority.
The Bank is required to file reports with the Illinois Office of Banks and Real
Estate and the FDIC concerning its activities and financial condition and will
be required to obtain regulatory approvals prior to entering into certain
transactions, including mergers with, or acquisitions of, other financial
institutions.
The Illinois Office of Banks and Real Estate and the FDIC have extensive
enforcement authority over Illinois-chartered savings banks, such as First Bank.
This enforcement authority includes, among other things, the ability to issue
cease-and-desist or removal orders, to assess civil money penalties and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe and unsound
practices.
The Illinois Office of Banks and Real Estate has established a schedule for the
assessment of "supervisory fees" upon all Illinois savings banks to fund the
operations of the Illinois Office of Banks and Real Estate. These supervisory
fees are computed on the basis of each savings bank's total assets (including
consolidated subsidiaries) and are payable at the end of each calendar quarter.
A schedule of fees has also been established for certain filings made by
Illinois savings banks with the Illinois Office of Banks and Real Estate. The
Illinois Office of Banks and Real Estate also assesses fees for examinations
conducted by the Illinois Office of Banks and Real Estate's staff, based upon
the number of hours spent by the staff performing the examination. During the
year ended December 31, 2003, First Bank paid approximately $25,200 in
supervisory fees.
INSURANCE OF ACCOUNTS. The deposits of the Bank are insured to the maximum
extent permitted by the Savings Association Insurance Fund, which is
administered by the Federal Deposit Insurance Corporation. As insurer, the FDIC
is authorized to conduct examinations of, and to require reporting by,
FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious threat to the FDIC. The FDIC also has the authority to initiate
enforcement actions against savings banks.
Savings Association Insurance Fund insured institutions are assigned to one of
three capital groups which are based solely on the level of an institution's
capital--"well-capitalized," "adequately capitalized," and "undercapitalized."
These capital levels are defined in the same manner as under the prompt
corrective action system discussed below. These three groups are then divided
into three subgroups which reflect varying levels of supervisory concern, from
those banks which are considered to be healthy to
- 27 -
those which are considered to be of substantial supervisory concern. The matrix
so created results in nine assessment risk classifications, with rates currently
ranging from .00% for well capitalized healthy institutions, to .27% for
undercapitalized institutions with substantial supervisory concerns.
In addition to the assessment for deposit insurance, institutions are required
to make payments on bonds issued in the late 1980's by the Financing Corporation
("FICO") to recapitalize the predecessor to the Savings Association Insurance
Fund. During 2003, FICO payments for Savings Association Insurance Fund member
approximated 1.61 basis points and the premium paid by the Bank for this period
was $23,700.
The FDIC may terminate the deposit insurance of any insured depositary
institution, including First Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals,
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of First Bank's deposit insurance.
CAPITAL REQUIREMENTS. The Bank is subject to various regulatory capital
requirements administered by the FDIC. FDIC regulations establish a minimum 3.0%
Tier I leverage capital requirement for the most highly-rated state-chartered,
non-member banks, with an additional cushion of at least 100 to 200 basis points
for all other state-chartered, non-member banks, which effectively will increase
the minimum Tier I leverage ratio for such other banks to 4.0% to 5.0% or more.
Under FDIC regulations, the highest-rated banks are those that the FDIC
determines are not anticipating or experiencing significant growth and have well
diversified risk, including no undue interest risk exposure, excellent asset
quality, high liquidity, good earnings and, in general, which are considered a
strong banking organization, rated composite 1 under the Uniform Financial
Institutions Rating System. Tier I or core capital is defined as the sum of
common stockholders' equity (including retained earnings), noncumulative
perpetual preferred stock, and related surplus, and minority interests in
consolidated subsidiaries, minus all intangible assets other than certain
qualifying supervisory goodwill, and certain purchased mortgage servicing rights
and purchased credit and relationships.
FDIC regulations also require that savings banks meet a risk-based capital
standard. The risk-based capital standard for savings banks requires the
maintenance of total capital, which is defined as Tier I capital and
supplementary (Tier 2 capital), to risk weighted assets of 8% of which at least
4% must be Tier I capital. In determining the amount of risk-weighted assets,
all assets, plus certain off balance sheet assets, are multiplied by a
risk-weight of 0% to 100%, based on the risks the federal regulators believe are
inherent in the type of asset.
- 28 -
Refer to Bank capital amounts and ratios in Footnote 11 of the consolidated
financial statements for the Bank's capital ratios.
DIVIDENDS. The Bank is subject to various general regulatory policies and
requirements relating to the payment of dividends, including requirements to
maintain capital above regulatory minimums. The FDIC or the Illinois Office of
Banks and Real Estate is authorized to determine under certain circumstances
relating to the financial condition of the Bank or the Company that the payment
of dividends would be an unsafe or unsound practice and to prohibit payment
thereof. Restrictions on the payment of dividends by the Bank are more fully
described below.
Under the Illinois Savings Bank Act, no dividends may be declared when total
capital of a savings bank is less than that required by Illinois law. Dividends
may be paid by a savings bank out of its net profits. Written approval of the
Illinois Office of Banks and Real Estate is required if a savings bank has total
capital of less than 6% of total assets and the dividend to be declared in any
year exceeds 50% of the savings bank's net profits for the year. The approval of
the Illinois Office of Banks and Real Estate also is required before dividends
may be declared that exceed a savings bank's net profits in any year. In 2003,
First Bank declared and paid dividends to the Company of $500,000.
SAFETY AND SOUNDNESS GUIDELINES. The FDIC and the other federal banking agencies
have established guidelines for safety and soundness, addressing operational and
managerial standards, as well as compensation matters for insured financial
institutions. Institutions failing to meet these standards are required to
submit compliance plans to their appropriate federal regulators. The FDIC and
the other agencies have also established guidelines regarding asset quality and
earnings standards for insured institutions. The Bank believes that it is in
compliance with these guidelines and standards.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the Federal Home Loan
Bank of Chicago, which is one of 12 regional Federal Home Loan Banks that
administers the home financing credit function of savings institutions. Each
Federal Home Loan Bank serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the Federal Home Loan Bank System. It
makes loans to members (i.e. advances) in accordance with policies and
procedures established by the Board of Directors of the Federal Home Loan Bank.
At December 31, 2003, the Bank had $35.5 million of Federal Home Loan Bank
advances. See Note 8 to Financial Statements.
As a member, the Bank is required to purchase and maintain stock in the Federal
Home Loan Bank of Chicago in an amount equal to at least 1% of its aggregate
unpaid residential mortgage loans or similar obligations at the beginning of
each year. At December 31, 2003, the Bank had $4.0 million in Federal Home Loan
Bank stock, which was in compliance with this requirement.
The Federal Home Loan Banks are required to provide funds for the resolution of
troubled savings institutions and to contribute to affordable housing programs
through direct loans or interest subsidies on advances targeted for community
investment and
- 29 -
low- and moderate-income housing projects. These contributions have adversely
affected the level of Federal Home Loan Bank dividends in the past and could do
so in the future. These contributions also could have an adverse effect on the
value of Federal Home Loan Bank stock in the future. The average dividend yield
on the Bank's stock was 6.16% in 2003 and 5.35% in 2002.
COMMUNITY INVESTMENT AND CONSUMER PROTECTION LAWS. In connection with its
lending activities, First Bank, is subject to a variety of federal laws designed
to protect borrowers and promote lending to various sectors of the economy and
population. Included among these are the federal Home Mortgage Disclosure Act,
Real Estate Settlement Procedures Act, Truth-in-Lending Act, Equal Credit
Opportunity Act, Fair Credit Reporting Act and Community Reinvestment Act.
The Community Reinvestment Act requires insured institutions to define the
communities that they serve, identify the credit needs of those communities and
adopt and implement a "Community Reinvestment Act Statement" pursuant to which
they offer credit products and take other actions that respond to the credit
needs of the community. The responsible federal banking regulator must conduct
regular Community Reinvestment Act examinations of insured financial
institutions and assign to them a Community Reinvestment Act rating of
"outstanding," "satisfactory," "needs improvement" or "unsatisfactory." In 1999,
the Community Reinvestment Act rating of the Bank was satisfactory.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all depository
institutions to maintain reserves against their transaction accounts (primarily
NOW and Super NOW checking accounts) and non-personal time deposits. As of
December 31, 2003, no reserves were required to be maintained on the first $6.6
million of net transaction accounts, reserves of 3% were required to be
maintained against the next $38.8 million of net transaction accounts, and
reserves of 10% were required to be maintained on net transaction accounts over
$45.4 million. At December 31, 2003 total reserves required to be maintained by
the Federal Reserve Board were $2.6 million. The above dollar amounts and
percentages are subject to periodic adjustment by the Federal Reserve Board.
Because required reserves must be maintained in the form of vault cash or a
noninterest-bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce an institution's earning assets and constrain
its ability to lend.
RECENT ACCOUNTING PRONOUNCEMENTS.
In December 2003, the FASB issued FASB Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities, which addresses how a
business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, which was issued in January 2003.
The Company will be required to apply FIN 46R to all entities subject to this
Interpretation no later than the end of the first reporting period that end
after December 15, 2004. This interpretation must be applied to those entities
that are considered to be special-purpose entities no later than as of the end
of the first reporting period that ends after December 15, 2003.
- 30 -
For any variable interest entities (VIE's) that must be consolidated under FIN
46R that were created before January 1, 2004, the assets, liabilities and
noncontrolling interests of the VIE initially would be measured at their
carrying amounts with any difference between the net amount added to the balance
sheet and previously recognized interest being recognized as the cumulative
effect of an accounting change. If determining the carrying amounts is not
practicable, fair value at the date FIN 46R first applies may be used to measure
the assets, liabilities, and noncontrolling interest of the VIE. The application
of this Interpretation is not expected to have a material effect on the
Company's consolidated financial statements.
In May, 2003 the FASB issued FASB Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. The provisions of this
Statement are effective for financial instruments entered into or modified after
May 31, 2003, and otherwise are effective at the beginning of the first interim
period beginning after June 15, 2003. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for financial
instruments created before May 15, 2003 and still existing at the beginning of
the interim period of adoption. The adoption of this new standard is not
expected to have an impact on the consolidated financial position or results of
operations of the Company.
In May 2004, the Securities and Exchange Commission (the "SEC") issued Staff
Accounting Bulletin ("SAB") No. 105, Loan Commitments Accounted for as
Derivative Instruments, providing guidance on the accounting for loan
commitments that relate to the origination of mortgage loans that will be held
for resale pursuant to FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which was released in 1998 and FASB
Statement No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" which was issued in 2003. The SEC staff have expressed their
view that loan commitments that relate to the origination of mortgage loans that
will be held for resale are written options from the perspective of the
prospective lender. Thus, upon the origination of a loan commitment, the SEC
staff believes that the fair value of the loan commitment should be recorded as
a liability with the offset to expense to the extent consideration has not been
received. The written option would remain a liability until the expiration or
culmination of the contract. The provisions of SAB 105 are effective for
derivatives entered into after March 31, 2004. Retroactive application is not
required. The Company does not expect the adoption of this staff accounting
bulletin to materially impact the Company's financial statements or results of
operations.
Item 2. Description of Property.
The following table sets forth information relating to the Bank's offices at
December 31, 2003.
- 31 -
Net Book Value of
Property and
Lease Leasehold
Owned or Expiration Improvements at Deposits as of
Location Leased Date December 31, 2003 December 31, 2003
-------------------------- ------------------------ ----------------- -----------------
101 South Central Avenue Owned -- $ 387 $ ---
Paris Illinois 61944
206 South Central Avenue Owned -- 866 99,740
Paris, Illinois 61944
610 North Michigan Avenue Owned -- 687 60,207
Marshall, Illinois 62441
407 North Dunlap Avenue Leased 10/1/2004 -- 3,081
Savoy, Illinois 61874
Item 3. Legal Proceedings.
The Company and Bank 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 and results of operations
of the Company and Bank.
Item 4. Submission of Matters to a Vote of Security Holders.
During the quarter ended December 31, 2003, no matters were submitted to a vote
of security holders through a solicitation of proxies or otherwise.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Information relating to the market for Registrant's common stock and related
stockholder matters is under "Shareholder Information" in the 2003 Annual Report
to Stockholders attached hereto as Exhibit 13 ("2003 Annual Report to
Stockholders") on page 68 and is incorporated herein by reference.
The Company's Board of Directors has the authority to declare dividends on the
Common Stock, subject to statutory and regulatory requirements. The Company
currently intends to pay quarterly cash dividends on the common stock at an
annual rate of $0.40 per share. However, the rate of such dividends and the
continued payment thereof will depend upon a number of factors, including the
amount of net proceeds retained by us in the Conversion, investment
opportunities available to us, capital requirements, our financial condition and
results of operations, tax considerations,
- 32 -
statutory and regulatory limitations, and general economic conditions. No
assurances can be given that any dividends will be paid or that, if paid, will
not be reduced or eliminated in future periods. Special cash dividends or stock
dividends may be paid in addition to, or in lieu of, regular cash dividends.
Dividends from us may eventually depend, in part, upon receipt of dividends from
the Bank, because the Company initially has no material source of income other
than dividends from the Bank, earnings from the investment of proceeds from the
sale of common stock retained by us, and interest payments with respect to our
loan to our ESOP. See "Item 1. Description of Business. Regulation-First Bank &
Trust-Dividends."
Any payment of dividends by the Bank to the Company which would be deemed to be
drawn out of the Bank's bad debt reserves would require a payment of taxes at
the then-current tax rate by the Bank on the amount of earnings deemed to be
removed from the reserves for such distribution. The Bank does not intend to
make any distribution to the Company that would create such a Federal tax
liability.
Unlike the Bank, the Company is not subject to the above regulatory restrictions
on the payment of dividends to our stockholders, although the source of such
dividends may eventually depend, in part, upon dividends from the Bank in
addition to the net proceeds retained by us and earnings thereon. The Company
is, however, subject to the requirements of Delaware law, which generally
permits the payment of dividends out of surplus, except when (1) the corporation
is insolvent or would thereby be made insolvent, or (2) the declaration or
payment thereof would be contrary to any restrictions contained in the
certificate of incorporation. If there is no surplus available for dividends, a
Delaware corporation may pay dividends out of its net profits for the then
current or the preceding fiscal year or both, except that no dividend may be
paid if the corporation's assets are exceeded by its liabilities or if its net
assets are less than the amount which would be needed, under certain
circumstances, to satisfy any preferential rights of stockholders.
Item 6. Management's Discussion and Analysis or Plan of Operation.
The above captioned information appears under the caption "Management's
Discussion and Analysis" in the 2003 Annual Report to Stockholders on pages 4 to
29 and is incorporated herein by reference.
Item 7. Financial Statements
The Consolidated Financial Statements of First BancTrust Corporation as of
December 31, 2003 and 2002, together with the report of BKD, LLP appears in the
2003 Annual Report to Stockholders on pages 30 to 66 and is incorporated herein
by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
- 33 -
Item 8A. Controls and Procedures.
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 as of
December 31, 2003. 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 December 31, 2003.
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 III
Item 9. Directors and Executive Officers of the Registrant.
The information required by this item is incorporated herein by reference from
the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be
held on April 19, 2004 ("Proxy Statement"), filed on March 19, 2004 with the
Securities and Exchange Commission, under the captions "Election of Directors",
"Audit Committee Financial Expert", "The Audit Committee", "Compliance With
Section 16", and "Code of Ethics."
Item 10. Executive Compensation
The information relating to executive compensation is incorporated herein by
reference from the Registrant's Proxy Statement under the captions "Executive
Compensation", "Directors' Compensation", and "Other Compensation Arrangements."
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information relating to security ownership of certain beneficial owners and
management and related stockholder matters is incorporated herein by reference
from the Registrant's Proxy Statement under the captions "Security Ownership of
Directors, Nominees For Directors, Most Highly Compensated Executive Officers
and All Directors
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and Executive Officers as a Group" and "Security Ownership of Shareholders
Holding 5% or More."
EQUITY COMPENSATION PLAN INFORMATION. The following table sets forth certain
information for all equity compensation plans and individual compensation
arrangements (whether with employees or non-employees, such as directors), in
effect as of December 31, 2003.
EQUITY COMPENSATION PLAN INFORMATION
Number of securities to be Weighted-average Number of securities remaining
issued upon exercise of exercise price of available for future issuance under
outstanding options, warrants outstanding options, equity compensation plans (excluding
and rights warrants and rights securities reflected in the first column)
----------------------------- ------------------- -----------------------------------------
Equity compensation plans approved
by security holders 152,087 $19.74 26,589 (1)
Equity compensation plans not
approved by security holders -- -- --
------- ------ ------
Total 152,087 $19.74 26,589 (1)
======= ====== ======
(1) As of December 31, 2003, 34,246 shares of restricted stock had been granted,
which are excluded from the total.
Item 12. Certain Relationships and Related Transactions
The information relating to certain relationships and related transactions is
incorporated herein by reference from the Registrant's Proxy Statement under the
caption "Transactions With Certain Related Parties."
Item 13. Exhibits and Reports on Form 8-K
(a) The following documents are filed as a part of this report:
(1) Financial Statements
Consolidated Financial Statements of the Registrant are
incorporated by reference from the following indicated pages
of the 2003 Annual Report to Stockholders.
Independent Accountants' Report 30
Consolidated Balance Sheets as of
December 31, 2003 and 2002 31-32
Consolidated Statements of Income for the years
ended December 31, 2003 and 2002 33-34
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 2003 and 2002 35-36
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Consolidated Statements of Cash Flows for the years
ended December 31, 2003 and 2002 37-38
Notes to Consolidated Financial Statements 39-66
The remaining information appearing in the 2003 Annual Report to Stockholders is
not deemed to be filed as part of this report, except as expressly provided
herein.
(2) Schedules
All schedules are omitted because they are not required or applicable, or the
required information is shown in the consolidated financial statements or the
notes thereto.
(3)(a) Exhibits
The following exhibits are filed as part of this report, and this list includes
the Exhibit Index.
No. Description
--- -----------
3.1 Certificate of Incorporation of First BancTrust Corporation*
3.2 Amended and Restated Bylaws of First BancTrust Corporation **
4.0 Form of Stock Certificate of First BancTrust Corporation*
10.1 Employment Agreement between First BancTrust Corporation, First
Bank & Trust, s.b. and Terry J. Howard**(1)
10.2 2002 Stock Option Plan***(1)
10.3 2002 Recognition and Retention Plan and Trust Agreement***(1)
10.4 First BancTrust Corporation Deferred Compensation Plan (****)(1)
10.5 Amendment Number One to First BancTrust Corporation Deferred
Compensation Plan (****)(1)
13.0 2003 Annual Report to Stockholders (filed herewith)
14.0 Code of Ethics (Filed herewith)
21.0 Subsidiary information is incorporated herein by reference to
"Part I - Subsidiaries"
23.0 Consent of BKD, LLP (filed herewith)
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).
- 36 -
--------------
* Incorporated herein by reference from the Registration Statement on Form
SB-2, as amended, filed on December 15, 2000, Registration No. 333-51934.
** Incorporated herein by reference from the Registrant's Form 10-KSB filed on
April 1, 2002.
*** Incorporated herein by reference from the Registrant's definitive proxy
statement filed on March 22, 2002.
**** Incorporated herein by reference from the Registrant's Form 10-KSB filed on
March 28, 2003.
(1) Management contract or compensatory plan or arrangement.
(3)(b) Reports on Form 8-K.
None
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference from the
Registrant's Proxy Statement under the caption "Item 2. Ratification of
Auditors."
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 25, 2004 /s/ Terry J. Howard
-----------------------------------------
Terry J. Howard
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Date: March 25, 2004 /s/ Terry J. Howard
-----------------------------------------
Terry J. Howard
President, Chief Executive Officer
and Director (Principal Executive Officer)
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Date: March 25 2004 /s/ Terry T. Hutchison
---------------------------------
Terry T. Hutchison
Chairman of the Board of Directors
Date: March 25, 2004 /s/ Vick N. Bowyer
----------------------------------
Vick N. Bowyer, Director
Date: March 25, 2004 /s/David W. Dick
----------------------------------
David W. Dick, Director
Date: March 25, 2004 /s/ James D. Motley
-------------------------------
James D. Motley, Director
Date: March 25, 2004 /s/ Joseph R. Schroeder
---------------------------------
Joseph R. Schroeder, Director
Date: March 25, 2004 /s/ John W. Welborn
----------------------------------
John W. Welborn, Director
Date: March 25, 2004 /s/ Ellen M. Litteral
----------------------------------
Ellen M. Litteral, Chief Financial
Officer and Treasurer (Principal
Accounting and Financial
Officer
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