UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0-32535
FIRST BANCTRUST CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
37-1406661
(IRS EMPLOYER IDENTIFICATION NO.)
206 SOUTH CENTRAL AVENUE
PARIS, ILLINOIS
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
61944
(ZIP CODE)
217-465-6381
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT). YES NO X
--- ---
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN
RULE 12b-2 OF THE EXCHANGE ACT). YES NO X
--- ---
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
AS OF NOVEMBER 10, 2005 THE REGISTRANT HAD OUTSTANDING 2,375,450
SHARES OF COMMON STOCK.
First BancTrust Corporation
Form 10-Q Quarterly Report
Index Page
PART I - Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Income - Nine
Months Ended 2
Condensed Consolidated Statements of Income - Three
Months Ended 4
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 3 Quantitative and Qualitative Disclosures About
Market Risk. 26
Item 4 Controls and Procedures 27
PART II - Other Information
Item 1 Legal Proceedings 28
Item 2 Unregistered Sales of Equity Securities and
Use of Proceeds 28
Item 3 Defaults Upon Senior Securities 29
Item 4 Submission of Matters to a Vote of Security
Holders 29
Item 5 Other Information 29
Item 6 Exhibits 29
SIGNATURES 30
CERTIFICATIONS 31
FIRST BANCTRUST CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of dollars except share data)
SEPTEMBER 30, DECEMBER 31,
2005 2004
(unaudited)
-------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 5,129 $ 6,371
Interest-bearing demand deposits 2,202 2,742
--------- ---------
Cash and cash equivalents 7,331 9,113
Available-for-sale securities 69,729 83,944
Held-to-maturity securities (fair value of $3,866 and $4,831) 3,928 4,778
Loans held for sale 480 138
Loans, net of allowance for loan losses of $2,396 and $2,300 137,107 117,448
Premises and equipment 3,991 3,088
Federal Home Loan Bank stock 4,426 4,256
Foreclosed assets held for sale, net 89 190
Interest receivable 2,234 2,179
Loan servicing rights, net of valuation allowance of $0 and $24 521 757
Cash surrender value of life insurance 4,657 4,523
Deferred income taxes 366 --
Escrow funds for acquisition of Rantoul First Bank, SB 4,220
Other assets 692 510
--------- ---------
Total assets $ 239,771 $ 230,924
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest bearing deposits $ 16,348 $ 17,885
Interest bearing deposits 142,057 141,586
--------- ---------
Total deposits 158,405 159,471
Federal funds purchased 7,000 2,000
Federal Home Loan Bank advances 40,500 40,500
Junior subordinated debentures 6,186 --
Pass through payments received on loans sold 109 60
Advances from borrowers for taxes and insurance 50 138
Deferred income taxes -- 110
Interest payable 189 136
Other 1,012 962
--------- ---------
Total liabilities 213,451 203,377
--------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 1,000,000 shares authorized
and unissued
Common stock, $.005 par value, 5,000,000 shares authorized;
3,041,750 shares issued; 2,375,450 and 2,494,850 shares
outstanding 15 15
Additional paid-in capital 14,955 14,803
Retained earnings 18,921 18,396
Unearned employee stock ownership plan shares -
106,504 and 129,310 shares (615) (747)
Unearned incentive plan shares - 74,848 and 85,126 shares (618) (702)
Accumulated other comprehensive income (loss) (201) 415
Treasury stock, at cost - 666,300 and 546,900 shares (6,137) (4,633)
--------- ---------
Total stockholders' equity 26,320 27,547
--------- ---------
Total liabilities and stockholders' equity $ 239,771 $ 230,924
========= =========
See notes to condensed consolidated financial statements.
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FIRST BANCTRUST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars except share data)
(unaudited)
NINE MONTHS ENDED SEPTEMBER 30 2005 2004
------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME
Loans
Taxable $ 6,613 $ 5,893
Tax exempt 47 48
Securities
Taxable 2,019 2,204
Tax exempt 343 285
Dividends on Federal Home Loan Bank stock 171 187
Deposits with financial institutions and other 77 31
------- -------
Total interest and dividend income 9,270 8,648
------- -------
INTEREST EXPENSE
Deposits 2,349 2,154
Federal Home Loan Bank advances and other debt 1,311 1,115
------- -------
Total interest expense 3,660 3,269
------- -------
NET INTEREST INCOME 5,610 5,379
Provision for loan losses 287 388
------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,323 4,991
------- -------
NONINTEREST INCOME
Customer service fees 681 660
Other service charges and fees 536 560
Net gains on loan sales 226 243
Net realized gains on sales of available-for-sale securities 118 64
Net loan servicing fees 374 532
Brokerage fees 55 62
Abstract and title fees 280 266
Other 230 235
------- -------
Total noninterest income 2,500 2,622
------- -------
Noninterest Expense
Salaries and employee benefits 3,471 3,468
Net occupancy expense 310 223
Equipment expense 600 580
Data processing fees 360 327
Professional fees 331 374
Foreclosed assets expense, net 62 68
Marketing expense 222 221
Printing and office supplies 113 124
Amortization of loan servicing rights 380 475
Recovery of impairment of loan servicing rights (24) (195)
Other expenses 764 650
------- -------
Total noninterest expense 6,589 6,315
------- -------
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INCOME BEFORE INCOME TAX $ 1,234 $ 1,298
Income tax expense 269 449
------- -------
NET INCOME $ 965 $ 849
======= =======
BASIC EARNINGS PER SHARE $ 0.43 $ 0.38
======= =======
DILUTED EARNINGS PER SHARE $ 0.40 $ 0.35
======= =======
DIVIDENDS PER SHARE $ 0.18 $ 0.17
======= =======
See notes to condensed consolidated financial statements.
-3-
FIRST BANCTRUST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars except share data)
(unaudited)
THREE MONTHS ENDED SEPTEMBER 30 2005 2004
------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME
Loans
Taxable $ 2,382 $ 1,933
Tax exempt 16 16
Securities
Taxable 622 700
Tax exempt 122 98
Dividends on Federal Home Loan Bank stock 54 61
Deposits with financial institutions and other 24 13
------- -------
Total interest and dividend income 3,220 2,821
------- -------
INTEREST EXPENSE
Deposits 849 692
Federal Home Loan Bank advances and other debt 508 389
------- -------
Total interest expense 1,357 1,081
------- -------
NET INTEREST INCOME 1,863 1,740
Provision for loan losses 99 126
------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,764 1,614
------- -------
NONINTEREST INCOME
Customer service fees 266 241
Other service charges and fees 184 199
Net gains on loan sales 86 87
Net realized gains on sales of available-for-sale securities 7 27
Net loan servicing fees 116 277
Brokerage fees 21 27
Abstract and title fees 92 94
Other 76 70
------- -------
Total noninterest income 848 1,022
------- -------
NONINTEREST EXPENSE
Salaries and employee benefits 1,168 1,146
Net occupancy expense 108 83
Equipment expense 189 220
Data processing fees 128 116
Professional fees 122 146
Foreclosed assets expense, net 23 22
Marketing expense 75 85
Printing and office supplies 32 43
Amortization of loan servicing rights 124 154
Recovery of impairment of loan servicing rights (2) (77)
Other expenses 338 233
------- -------
Total noninterest expense 2,305 2,171
------- -------
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INCOME BEFORE INCOME TAX $ 307 $ 465
Income tax expense 45 166
------- -------
NET INCOME $ 262 $ 299
======= =======
BASIC EARNINGS PER SHARE $ 0.12 $ 0.13
======= =======
DILUTED EARNINGS PER SHARE $ 0.11 $ 0.12
======= =======
DIVIDENDS PER SHARE $ 0.06 $ 0.06
======= =======
See notes to condensed consolidated financial statements.
-5-
FIRST BANCTRUST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
(unaudited)
NINE MONTHS ENDED SEPTEMBER 30 2005 2004
------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 965 $ 849
Items not requiring (providing) cash
Depreciation and amortization 296 213
Provision for loan losses 287 388
Investment securities amortization, net 58 166
Amortization of loan servicing rights 380 475
Recovery of impairment of loan servicing rights (24) (195)
Deferred income taxes (47) --
Net realized gains on available-for-sale securities (118) (64)
Net loss on sales of foreclosed assets 22 8
Net loss on sale of premises and equipment -- 6
Impairment of premises and equipment 62 --
Net gains on loan sales (226) (243)
Loans originated for sale (11,307) (13,548)
Proceeds from sales of loans originated for sale 11,071 13,277
Federal Home Loan Bank stock dividends (171) (187)
Compensation expense related to employee stock ownership plan 282 285
Compensation expense related to incentive plan 82 82
Changes in
Interest receivable (55) 123
Cash surrender value of life insurance (133) (74)
Other assets (183) 47
Interest payable 53 17
Other liabilities 51 256
-------- --------
Net cash provided by operating activities 1,345 1,881
-------- --------
INVESTING ACTIVITIES
Purchases of available-for-sale securities (6,321) (16,212)
Proceeds from maturities of available-for-sale securities 18,580 26,586
Proceeds from maturities of held-to-maturity securities 862 --
Proceeds from sales of available-for-sale securities 959 257
Net change in loans (20,108) (9,760)
Proceeds from sales of foreclosed assets 241 400
Proceeds from sales of premises and equipment -- 10
Purchases of premises and equipment (1,261) (699)
-------- --------
Net cash provided by (used in) by investing activities (7,048) 582
-------- --------
-6-
FINANCING ACTIVITIES
Net decrease in demand deposits, money market,
NOW and savings deposits $ (4,670) $ (2,868)
Net increase (decrease) in certificates of deposit 3,603 (1,507)
Net increase in federal funds purchased 5,000 2,000
Proceeds from the issuance of junior subordinated debentures 6,186 --
Pass through payments received on loans sold 49 (151)
Net decreases in advances by borrowers for taxes and insurance (88) (101)
Proceeds from stock options exercised 41 --
Purchase of treasury stock (1,541) --
Escrow funds for acquisition of Rantoul First Bank, SB (4,220) --
Dividends paid (439) (425)
-------- --------
Net cash provided by (used in) by financing activities 3,921 (3,052)
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (1,782) (589)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 9,113 10,294
-------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 7,331 $ 9,705
======== ========
SUPPLEMENTAL CASH FLOWS INFORMATION
Real estate acquired in settlement of loans $ 162 $ 527
Interest paid $ 3,607 $ 3,252
Income tax paid $ 290 $ 3
See notes to condensed consolidated financial statements.
-7-
FIRST BANCTRUST CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements
have been prepared pursuant to the rules and regulations for reporting on Form
10-Q. Accordingly, certain disclosures required by accounting principles
generally accepted in the United States of America are not included herein.
These interim statements should be read in conjunction with the audited
consolidated financial statements and notes thereto, included in the Company's
Form 10-KSB filed with the Securities and Exchange Commission.
Interim statements are subject to possible adjustments in connection with the
annual audit of the Company for the year ended December 31, 2005. In the opinion
of management of the Company, the accompanying unaudited interim condensed
consolidated financial statements reflect all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the consolidated
financial position and consolidated results of operations for the periods
presented. The results of operations for the three and nine months ended
September 30, 2005 are not necessarily indicative of the results to be expected
for the full year. The condensed consolidated balance sheet of the Company as of
December 31, 2004 has been derived from the audited consolidated balance sheet
of the Company as of that date.
The Company has a stock-based employee compensation plan, which is described
more fully in the Notes to Financial Statements included in the December 31,
2004 Annual Report to shareholders. The Company accounts for this plan under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under the
plan had an exercise price equal to the market value of the underlying common
stock on the grant date. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.
-8-
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
September 30, 2005 September 30, 2004 September 30, 2005 September 30, 2004
Net income, as reported $ 262 $ 299 $ 965 $ 849
Less: Total stock-based employee
compensation cost determined under
the fair value based method, net of
income taxes (33) (33) (99) (99)
------- ------- ------- -------
Pro forma net income $ 229 $ 266 $ 866 $ 750
======= ======= ======= =======
Earnings per share:
Basic - as reported $ 0.12 $ 0.13 $ 0.43 $ 0.38
Basic - pro forma $ 0.10 $ 0.12 $ 0.38 $ 0.33
Diluted - as reported $ 0.11 $ 0.12 $ 0.40 $ 0.35
Diluted - pro forma $ 0.10 $ 0.11 $ 0.36 $ 0.31
Note 2 - Junior Subordinated Debentures
Capital securities of $6.0 million were issued June 15, 2005 by a statutory
business trust, FBTC Statutory Trust I. The Company owns 100% of the common
equity of the trust, which is a wholly-owned subsidiary of the Company. The $6.0
million in proceeds from the trust preferred issuance and an additional $186,000
for the Company's investment in the common equity of the Trust, a total of
$6,186,000 was invested in the junior subordinated debentures of the Company. As
required by FIN 46R, the Company has not consolidated the investment in the
Trust. The trust was formed with the purpose of issuing trust preferred
securities and investing the proceeds from the sale of such trust preferred
securities in the debentures. The debentures held by the trust are the sole
assets of the trust. Distributions of the trust preferred securities are payable
at a variable rate of interest, which is equal to the interest rate being earned
by the trust on the debentures, and are recorded as interest expense by the
Company. The trust preferred securities are subject to mandatory redemption, in
whole or in part, upon repayment of the debentures.
The debentures are included as Tier I capital for regulatory capital purposes.
On March 1, 2005, the Federal Reserve Board adopted a final rule that allows the
continued limited inclusion of trust preferred securities in the calculation of
Tier 1 capital for regulatory purposes. The final rule provides a five-year
transition period, ending March 31, 2009, for application of the quantitative
limits to have an impact on its calculation of Tier 1 capital for regulatory
purposes or its classification as well-capitalized. The debentures issued are
first redeemable, in whole or part, by the Company, on June 15, 2010, and mature
on June 15, 2035. The funds were used for the acquisition of the common stock of
Rantoul First Bank and for the repurchase of First BancTrust Corporation common
stock. Interest is fixed at a rate of 5.80% for a period of five years, and then
converts to a floating rate. Interest payments are made quarterly beginning in
September, 2005.
-9-
Note 3 - Employee Stock Ownership Plan
The Company has an Employee Stock Ownership Plan ("ESOP") for the benefit of its
employees. The ESOP purchased required shares in the open market with funds
borrowed from the Company. The ESOP expense was $97,000 and $91,000 for the
three-month periods ended September 30, 2005 and 2004 and $282,000 and $285,000
for the nine-month periods ended September 30, 2005 and 2004.
Shares purchased by the ESOP are held in a suspense account and are allocated to
ESOP participants based on a pro rata basis as debt service payments are made to
the Company. The loan is secured by the shares purchased with the proceeds and
will be repaid by the ESOP with funds from the Company's discretionary
contributions to the ESOP and earnings on ESOP assets. Principal payments are
scheduled to occur over an eight-year period.
Note 4 - Earnings per Share
Basic earnings per share have been computed based upon the weighted average
common shares outstanding for the three month and nine month periods ended
September 30, 2005 and 2004. Diluted earnings per share reflect the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the Company.
Earnings per share were computed as follows (dollar amounts in thousands except
share data):
-10-
Weighted
Average Per Share
Income Shares Amount
---------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005:
Basic Earnings Per Share:
Income available to common stockholders $ 965 2,250,875 $ 0.43
Effect of Dilutive Securities:
Unearned recognition and retention plan shares 88,968
Stock Options 50,973
--------------------------------------
Diluted Earnings per Share:
Income available to common stockholders and
assumed conversions $ 965 2,390,816 $ 0.40
======================================
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004:
Basic Earnings Per Share:
Income available to common stockholders $ 849 2,260,285 $ 0.38
Effect of Dilutive Securities:
Unearned recognition and retention plan shares 104,452
Stock Options 56,165
--------------------------------------
Diluted Earnings per Share:
Income available to common stockholders and
assumed conversions $ 849 2,420,902 $ 0.35
======================================
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005:
Basic Earnings Per Share:
Income available to common stockholders $ 262 2,205,758 $ 0.12
Effect of Dilutive Securities:
Unearned recognition and retention plan shares 85,679
Stock Options 57,549
--------------------------------------
Diluted Earnings per Share:
Income available to common stockholders and
assumed conversions $ 262 2,348,986 $ 0.11
======================================
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004:
Basic Earnings Per Share:
Income available to common stockholders $ 299 2,271,313 $ 0.13
Effect of Dilutive Securities:
Unearned recognition and retention plan shares 100,044
Stock options 46,985
--------------------------------------
Diluted Earnings per Share:
Income available to common stockholders and
assumed conversions $ 299 2,418,342 $ 0.12
======================================
-11-
Note 5 - Comprehensive Income (Loss)
Comprehensive income (loss) for the three month and nine month periods ended
September 30, 2005 and 2004 is listed as follows:
NINE MONTHS ENDED SEPTEMBER 30
2005 2004
------------------------------------------------------------------------------------------------------------
NET INCOME $ 965 $ 849
------- -------
OTHER COMPREHENSIVE INCOME
Unrealized appreciation (depreciation) on available-for-sale securities (538) 93
Less: Reclassification adjustment for realized gains included
in net income 78 42
------- -------
(616) 51
------- -------
COMPREHENSIVE INCOME $ 349 $ 900
======= =======
THREE MONTHS ENDED SEPTEMBER 30
2005 2004
--------------------------------------------------------------------------------------------------------------
NET INCOME $ 262 $ 299
------- -------
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized appreciation (depreciation) on available-for-sale securities (114) 1,237
Less: Reclassification adjustment for realized gains included
in net income 5 18
------- -------
(119) 1,219
------- -------
COMPREHENSIVE INCOME $ 143 $ 1,518
======= =======
Note 6 - Stock Split
On April 19, 2004, the Board of Directors of the Company approved a two for one
stock split of the Company's common stock payable as a 100% stock dividend on
May 21, 2004 to shareholders of record on April 30, 2004. Prior period financial
information has been adjusted to reflect the stock split.
Note 7 - Authorized Share Repurchase Program
On April 18, 2005, the Board of Directors authorized the open-market stock
repurchase of up to 5%, or 124,850 shares of the Company's outstanding stock
over the next one-year period ending April 18, 2006 as, in the opinion of
management, market conditions warrant. As of September 30, 2005, the Company
had repurchased 103,600 shares, leaving 21,250 shares available to be
-12-
repurchased under this program. Previously, the Company had completed five other
repurchase programs for stock repurchases of 566,900 shares. The Company issued
2,200 shares of treasury stock for the redemption of stock options in February,
2005, and 2,000 shares of treasury stock for the redemption of stock options in
September, 2005. As of November 10, 2005, the Company owned a cumulative total
of 666,300 shares in treasury stock. The repurchased shares are held as treasury
stock and are available for general corporate purposes.
Note 8 - Commitments
The Company entered into a property exchange agreement with the City of Paris,
Illinois ("City") on May 10, 2005. As of September 30, 2005, the ownership of
the properties has not been transferred. The Company will acquire City property
housing the former City Hall, which is adjacent to Company property housing the
Operations Center of First Bank & Trust, and in return, the City will acquire
Company property which currently is the site of the main office of First Bank &
Trust. The City will pay cash for the difference between the appraisals to the
Bank. The City has also demolished the existing City Hall prior to the exchange
providing an acceptable, larger site for new construction. The Company has
agreed to provide financing for the city hall renovations if requested at a
market rate at the time of the request. The exchange of ownership is expected to
occur in the fourth quarter of this year. The economic value of this property
exchange results in a loss of approximately $62,000 to the Company. Accordingly,
the Company has recorded an impairment of $62,000 on premises and fixed assets.
Under this agreement, the Company will move its main office to the current
Operations Center by renovating and enlarging the existing building to
approximately 30,000 square feet on three levels. In addition, there will be a
free-standing drive up facility at the enlarged site with at least six lanes
that will accommodate more vehicles. This expansion will allow the Company to
relocate the main office of the Bank to this site, which will then house all
First Bank employees currently working in Paris at a single, convenient
location.
The Company selected a contractor to design and construct the new facility for
an amount not to exceed $5.6 million. The project is scheduled to be completed
by the third quarter of 2006. The project is proceeding on schedule, and is
approximately 20% completed.
Note 9 - Acquisition
On April 18, 2005, the Company entered into an Agreement and Plan of Merger with
Rantoul First Bank, S.B., ("Rantoul") an Illinois chartered savings bank whereby
the Company acquired all of the outstanding shares of common stock of Rantoul
First Bank. Shareholders of Rantoul received $22.10 per share in cash for each
share of common stock held. Rantoul shareholders approved this transaction at a
shareholder meeting on July 22, 2005. The transaction received approval from
regulatory authorities in August, and closed on October 1, 2005. As of September
30, 2005, funds in the amount of $4.2 million had been transferred to an escrow
agent and were remitted to the Rantoul shareholders on October 1, 2005. As of
September 30, 2005, Rantoul First Bank had shares outstanding of 190,961, total
assets of $29.5 million, total deposits of $26.7 million, and total
stockholders' equity of $1.7 million. During the fourth quarter of 2005, the
Company will merge Rantoul First Bank into First Bank & Trust. The purchase
price will be allocated based upon the fair value of the assets and liabilities
acquired.
-13-
Note 10 - Recent Accounting
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standards ("SFAS") No. 123R, Share-Based Payment, which
sets accounting requirements for "share-based" compensation to employees,
including employee-stock-purchase-plans (ESPPs) and provides guidance on
accounting for awards to non-employees. This Statement will require the Company
to recognize in the income statement the grant-date fair value of stock options
and other equity-based compensation issued to employees, but expresses no
preference for a type of valuation model. This Statement is effective for the
Company on January 1, 2006. The effect to the Company in 2006 is estimated to be
$131,000 based on the current stock options outstanding.
American Institute of Certified Public Accountants (AICPA) Statement of Position
(SOP) No. 03-3, "Accounting for Certain Loans or Debt Securities Acquired in a
Transfer." SOP 03-3 addresses accounting for differences between the contractual
cash flows of certain loans and debt securities and the cash flows expected to
be collected when loans or debt securities are acquired in a transfer and those
cash flow differences are attributable, at least in part, to credit quality. As
such, SOP 03-3 applies to loans and debt securities acquired individually, in
pools or as part of a business combination and does not apply to originated
loans. The application of SOP 03-3 limits the interest income, including
accretion of purchase price discounts, that may be recognized for certain loans
and debt securities. Additionally, SOP 03-3 does not allow the excess of
contractual cash flows over cash flows expected to be collected to be recognized
as an adjustment of yield, loss accrual or valuation allowance, such as the
allowance for possible loan losses. SOP 03-3 requires that increases in expected
cash flows subsequent to the initial investment be recognized prospectively
through adjustment of the yield on the loan or debt security over its remaining
life. Decreases in expected cash flows should be recognized as impairment. In
the case of loans acquired in a business combination where the loans show signs
of credit deterioration, SOP 03-3 represents a significant change from current
purchase accounting practice whereby the acquiree's allowance for loan losses is
typically added to the acquirer's allowance for loan losses. SOP 03-3 is
effective for loans and debt securities acquired by the Company beginning
January 1, 2005. The adoption of this new standard did not have a material
impact on the Company's financial statements.
-14-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995 as amended, and is including this statement for purposes of these
safe harbor provisions. Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies and expectations of the
Company, are generally identifiable by use of the words "believe," "expect,"
"intend," "anticipate," "estimate," "project," or similar expressions. The
Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
affect on the operations and future prospects of the Company and its
wholly-owned subsidiaries include, but are not limited to, changes in: interest
rates; general economic conditions; legislative/regulatory provisions; monetary
and fiscal policies of the U.S. Government, including policies of the U.S.
Treasury and the Federal Reserve Board; the quality of composition of the loan
or investment portfolios; demand for loan products; deposit flows; competition;
demand for financial services in the Company's market area; and accounting
principles, policies, and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. Further information concerning the Company and
its business, including additional factors that could materially affect the
Company's financial results, is included in the Company's filings with the
Securities and Exchange Commission.
The following discussion compares the financial condition of First BancTrust
Corporation (Company), First Bank & Trust, s.b. (Bank), First Charter Service
Corporation, and ECS Service Corporation at September 30, 2005 to its financial
condition at December 31, 2004 and the results of operations for the three-month
and nine-month periods ending September 30, 2005 to the same periods in 2004. In
May 2005, the Bank's wholly owned subsidiary, Community Finance Center, Inc.,
was dissolved as a corporation, and this activity was transferred to operate as
a division of the Bank. In prior years, First Charter Service Corporation
provided retail sales of uninsured investment products to customers of First
Bank & Trust. In late 2004, First Bank & Trust entered into an agreement with
First Advisors Financial Group LLC ("First Advisors") whereby First Advisors
will provide investment advisory and asset management services to Bank customers
in 2005. First Advisors rents office space from the Bank, and pays a percentage
of fees generated from transactions with Bank customers to the Bank. As a
result, First Charter Service Corporation has become inactive for 2005. This
discussion should be read in conjunction with the interim financial statements
and notes included herein.
FINANCIAL CONDITION
Total assets of the Company increased by $8.9 million or 3.8%, to $239.8 million
at September 30, 2005 from $230.9 million at December 31, 2004. The increase in
assets was primarily due to an
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increase in loans, net of allowance for loan losses of $19.7 million and an
increase in escrow funds for acquisition of Rantoul First Bank of $4.2 million,
partially offset by a decrease in available-for-sale securities of $14.2
million. The increase in assets resulted primarily from the issuance of junior
subordinated debentures and an increase in federal funds purchased.
The Company's cash and cash equivalents decreased by $1.8 million from $9.1
million at December 31, 2004 to $7.3 million at September 30, 2005. Cash and due
from banks decreased by $1.2 million or 19.5% to $5.1 million at September 30,
2005 from $6.4 million at December 31, 2004. Interest-bearing demand deposits
decreased by $540,000 or 19.7% to $2.2 million at September 30, 2005 compared to
$2.7 million at December 31, 2004.
Available-for-sale investment securities amounted to $69.7 million at September
30, 2005 compared to $83.9 million at December 31, 2004, a $14.2 million
decrease. The decrease primarily resulted from $18.6 million in investment calls
and maturities, primarily from payments on mortgage-backed securities and
maturities of a Federal Home Loan Bank ("FHLB") agency bond and a municipal
bond, sales of equity securities of $842,000 and a $1.0 million decrease in the
market valuation of the available-for-sale portfolio, partially offset by
investment purchases of $6.3 million. Held-to-maturity securities decreased by
$850,000 from $4.8 million at December 31, 2004 to $3.9 million at September 30,
2005, due to principal payments on mortgage-backed securities. Funds generated
by the decreases in investments were used to fund loan growth.
Loans held for sale increased by $342,000 from $138,000 at December 31, 2004 to
$480,000 at September 30, 2005. Single family residential loans for qualified
borrowers are originated and sold to Federal Home Mortgage Corporation ("FHLMC")
and to the Illinois Housing Development Authority ("IHDA"). Loans held for sale
at September 30, 2005 consisted of seven single-family residential loans to be
sold to FHLMC and IHDA.
The Company's net loan portfolio increased by $19.7 million to $137.1 million at
September 30, 2005 from $117.4 million at December 31, 2004. Gross loans
increased by $19.8 million while the allowance for loan losses increased by
$96,000. Commercial nonresidential real estate loans increased by $10.6 million
primarily a result of loan originations generated in the Savoy area. Loans
secured by 1-4 family residences increased by $3.5 million, primarily due to an
increase in home equity loans, and agricultural production loans increased by
$3.4 million, primarily due to an increase in originations. Loans secured by
farmland increased by $1.5 million, and consumer loans increased by $781,000.
At September 30, 2005, the allowance for loan losses was $2.4 million or 1.72%
of the total loan portfolio compared to the allowance for loan losses at
December 31, 2004 of $2.3 million or 1.92% of the total loan portfolio. During
the first nine months of 2005, the Company charged off $252,000 of loan losses,
$194,000 of which were consumer loans, and $58,000 of which pertained to five
loans secured by 1-4 family residential properties. The chargeoffs of $252,000
were partially offset by $61,000 in recoveries which included $54,000 in
recoveries from consumer loans, primarily vehicle loans, and $6,000 in
recoveries from agricultural related loans. The net chargeoffs of $191,000 for
the first nine months of 2005 decreased by $15,000 when compared to net
chargeoffs of $206,000 for the first nine months of 2004. The Company's
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nonperforming loans and troubled debt restructurings increased from $1.6 million
or 1.31% of total loans at December 31, 2004 compared to $2.4 million or 1.75%
as a percentage of total loans at September 30, 2005. This increase was
primarily a result of increased delinquencies 90 days and over and nonaccrual
loans from $443,000 at December 31, 2004 compared to $1.0 million at September
30, 2005, and the addition of a $494,000 commercial real estate loan to
restructured loans. The Company's troubled debt restructurings of $1.4 million
at September 30, 2005 consist primarily of restructured commercial and
agricultural loans. Included in the $1.4 million of troubled debt restructurings
are restructured agricultural loans of $884,000 which are 90% guaranteed for
$796,000 by the Farmers Home Administration, thereby limiting the Company's
exposure on those loans. Management reviews the adequacy of the allowance for
loan losses quarterly, and believes that its allowance is adequate; however, the
Company cannot assure that future chargeoffs and/or provisions will not be
necessary.
Premises and equipment have increased by $903,000 from $3.1 million at December
31, 2004 to $4.0 million at September 30, 2005, primarily due to expenditures
related to the major renovation and expansion project of the current Operations
Center which will result in an enlarged facility to house the main office of the
Bank.
Net foreclosed assets held for sale, totaling $89,000 at September 30, 2005
decreased $101,000, or 53.2%, compared to $190,000 at December 31, 2004. As of
September 30, 2005, the Company had real estate properties totaling $42,000
consisting of one single-family residential properties and other repossessed
assets of $47,000. Foreclosed assets are carried at lower of cost or net
realizable value.
Loan servicing rights declined by $236,000 from $757,000 at December 31, 2004 to
$521,000 at September 30, 2005. Gross loan servicing rights decreased by
$260,000 from $781,000 at December 31, 2004 to $521,000 at September 30, 2005
due to amortization of loan servicing rights of $380,000 offset by newly
capitalized assets of $120,000. As a result of current valuations of the loan
servicing rights, the valuation allowance decreased from $24,000 at December 31,
2004 to $0 at September 30, 2005, a full recovery of a previously identified
impairment.
Adjustments to deferred income taxes for the tax effect of the decrease in
market value of investment securities available for sale resulted in a deferred
tax asset of $366,000 at September 30, 2005 compared to a deferred tax liability
of $110,000 at December 31, 2004.
Escrow funds of $4.2 million for the acquisition of the outstanding shares of
Rantoul First Bank, SB were on deposit with the escrow agent at September 30,
2005. The purchase agreement required the Company to deposit the purchase price
funds into an escrow account which was disbursed upon consummation of the
acquisition of Rantoul First Bank, SB on October 1, 2005. Under the terms of the
agreement, each shareholder of Rantoul First Bank, SB received $22.10 for each
share of stock held.
The Company's total deposits amounted to $158.4 million at September 30, 2005
compared to $159.5 million at December 31, 2004, a decrease of $1.1 million. The
0.7% decrease in total deposits was due to a $1.5 million decrease in
non-interest bearing deposits, partially offset by a
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$471,000 increase in interest bearing deposits. The increase in interest bearing
deposits was a result of a $3.6 million increase in certificates of deposit and
a $290,000 increase in savings accounts, offset by a decrease of $3.4 million in
interest-bearing checking accounts. The increase of $3.6 million in certificates
of deposits was primarily the result of a promotion featuring short term
certificates of deposit in terms of five, eleven or twenty-one months with a
competitive rate in the 4% range during the third quarter.
Federal funds purchased increased by $5.0 million from a balance of $2.0 million
at December 31, 2004 to $7.0 million at September 30, 2005. Federal Home Loan
Bank advances remained constant at $40.5 million at December 31, 2004 and
September 30, 2005. The total average rate of all advances was 3.54% as of
September 30, 2005.
Capital securities of $6.0 million were issued June 15, 2005 by a statutory
business trust, FBTC Statutory Trust I. The Company owns 100% of the common
equity of the trust, which is a wholly-owned subsidiary of the Company. The $6.0
million in proceeds from the trust preferred issuance and an additional $186,000
for the Company's investment in the common equity of the Trust, a total of
$6,186,000, was invested in the junior subordinated debentures of the Company.
As required by FIN 46R, the Company has not consolidated the investment in the
Trust. The trust was formed with the purpose of issuing trust preferred
securities and investing the proceeds from the sale of such trust preferred
securities in the debentures. The debentures held by the trust are the sole
assets of the trust. Distributions of the trust preferred securities are payable
at a variable rate of interest, which is equal to the interest rate being earned
by the trust on the debentures, and are recorded as interest expense by the
Company. The trust preferred securities are subject to mandatory redemption, in
whole or in part, upon repayment of the debentures.
The debentures are included as Tier I capital for regulatory capital purposes.
On March 1, 2005, the Federal Reserve Board adopted a final rule that allows the
continued limited inclusion of trust preferred securities in the calculation of
Tier 1 capital for regulatory purposes. The final rule provides a five-year
transition period, ending March 31, 2009, for application of the quantitative
limits to have an impact on its calculation of Tier 1 capital for regulatory
purposes or its classification as well-capitalized. The debentures issued are
first redeemable, in whole or part, by the Company, on June 15, 2010, and mature
on June 15, 2035. The funds were used for the acquisition of the common stock of
Rantoul First Bank and for the repurchase of First BancTrust Corporation common
stock. Interest is fixed at a rate of 5.80% for a period of five years, and then
converts to a floating rate. Interest payments are made quarterly beginning in
September, 2005.
Stockholders' equity at September 30, 2005 was $26.3 million compared to $27.5
million at December 31, 2004, a decrease of $1.2 million. Treasury stock
increased by $1.5 million from $4.6 million at December 31, 2004 to $6.1 million
at September 30, 2005, due to the repurchase of 123,600 shares. Accumulated
comprehensive income (loss) decreased by $616,000 due to a decrease in the fair
value of securities available for sale, net of related tax effect. Retained
earnings increased by the amount of net income or $965,000, partially offset by
$439,000 in dividends declared and paid. As shares from the employee stock
ownership plan vested to participants from December 31, 2004 to September 30,
2005, stockholders' equity increased by
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$282,000, and as shares from the incentive plan were earned by participants for
the same period, stockholders' equity increased by $82,000.
RESULTS OF OPERATIONS
COMPARISON OF NINE MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004
Net income for the nine months ended September 30, 2005 increased by $116,000 or
13.6% from $849,000 for the nine months ended September 30, 2004 to $965,000 for
the nine months ended September 30, 2005. The increase in net income is
primarily due to increases in net interest income, and decreases in provision
for loan losses and income tax expense, partially offset by a decrease in
noninterest income and an increase in noninterest expense.
Net interest income increased $231,000 or 4.3% from $5.4 million for the nine
months ended September 30, 2004 to $5.6 million for the nine months ended
September 30, 2005. The primary reasons for the increase in net interest income
was an increase in total interest and dividend income of $622,000 partially
offset by an increase of $391,000 in interest expense. The Company's net
interest margin remained constant at 3.43% during the nine months ended
September 30, 2005 and 2004, respectively. Although net interest income
increased by $231,000, the net interest margin remained stable as a result of an
increase in the average balance of net interest-bearing assets. Interest spread,
which is the average interest rate earned on interest-bearing assets less the
average interest rate charged on interest-bearing liabilities, decreased
slightly from 3.12% for the nine months ended September 30, 2004 to 3.06% for
the nine months ended September 30, 2005. The decrease in interest spread was
primarily a result of a slight increase in interest rates charged on
interest-bearing liabilities.
Total interest and dividend income increased by $622,000 or 7.2% from $8.6
million for the nine months ended September 30, 2004 to $9.3 million for the
nine months ended September 30, 2005. The increase of $622,000 was primarily due
to increases in loan interest income and interest income from deposits with
financial institutions partially offset by decreased interest and dividend
income from securities. The increase of $719,000 in loan interest income was
primarily due to an increase in the average loan balance, partially offset by a
decrease in the average loan rate of 12 basis points. Interest and dividend
income from securities decreased by $127,000 primarily due to a decrease in the
average balance of available for sale investments, partially offset by an
increase in average interest rate of 9 basis points. Interest income from
deposits with financial institutions increased by $46,000 primarily due to an
increase in average rate of 179 basis points, partially offset by a decrease in
the average balance of deposits with financial institutions.
Interest expense increased by $391,000 or 12.0% from $3.3 million for the nine
months ended September 30, 2004 to $3.7 million for the nine months ended
September 30, 2005. This increase was primarily due to an increase of $195,000
in interest on deposits, and by a $196,000 increase in interest on Federal Home
Loan Bank advances and other debt. The $195,000 increase in interest expense on
deposits was primarily due to an increase in the average rate paid on deposits
of 21 basis points partially offset by a decrease in the average balance of
interest bearing deposits. The $196,000 increase in interest on Federal Home
Loan Bank advances and
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other debt was due to an increase in the average balance, partially offset by a
decrease in the average rate.
For the nine months ended September 30, 2005 and 2004, the provision for losses
on loans was $287,000 and $388,000, respectively. The provision for the nine
months ended September 30, 2005 was based on the Company's analysis of the
allowance for loan losses. Management meets on a quarterly basis to review the
adequacy of the allowance for loan losses by classifying loans in compliance
with regulatory classifications. Classified loans are individually reviewed to
arrive at specific reserve levels for those loans. Once the specific portion for
each loan is calculated, management calculates a historical portion for each
category based on a combination of loss history, current economic conditions,
and trends in the portfolio. While the Company cannot assure that future
chargeoffs and/or provisions will not be necessary, the Company's management
believes that, as of September 30, 2005, its allowance for loan losses was
adequate.
Noninterest income decreased $122,000 or 4.7% from $2.6 million for the nine
months ended September 30, 2004 to $2.5 million for the nine months ended
September 30, 2005. The decrease was primarily a result of decreases in net loan
servicing fees and net gains on loan sales offset by increases in net realized
gains on sales of available-for-sale securities and abstract and title fees. Net
loan servicing fees declined by $158,000 from $532,000 for the nine months ended
September 30, 2004 to $374,000 for the nine months ended September 30, 2005
primarily due to a reduction in servicing fees from agricultural loans. Net
gains on loan sales decreased by $17,000 from $243,000 for the nine months ended
September 30, 2004 to $226,000 for the nine months ended September 30, 2005.
This decrease occurred primarily due to decreases in the amount of capitalized
servicing fees and in the recognized gain on loan sales. Proceeds from loans
sold in the first nine months of 2005 totaled $11.1 million, compared to $13.3
million in proceeds from loan sales in the same period for 2004. Net realized
gains on sales of sales of available-for-sale securities increased by $54,000
from $64,000 for the nine months ended September 30, 2004 to $118,000 for the
nine months ended September 30, 2005, due to equity security sales of $959,000.
Abstracting and title fees increased by $14,000 from $266,000 for the nine
months ended September 30, 2004 to $280,000 for the nine months ended September
30, 2005, due to an increase in commissions from the sale of title insurance
fees.
Total noninterest expense was $6.6 million for the nine months ended September
30, 2005 as compared to $6.3 million for the nine months ended September 30,
2004. The primary reasons for the $274,000 increase were increases in net
occupancy expense, data processing expense, other expenses, and a reduction in
the amount of recovery of the previous impairment of loan servicing rights,
partially offset by reductions in the amortization of loan servicing rights and
professional fees.
Net occupancy expense increased by $87,000 from $223,000 for the nine months
ended September 30, 2004 compared to $310,000 for the nine months ended
September 30, 2005. This increase can be attributed to the Savoy branch which
moved into a permanent facility in August, 2004. Data processing fees increased
by $33,000 from $327,000 for the nine months ended September 30, 2004 to
$360,000 for the nine months ended September 30, 2005, due to an increase in
fees accessed by both the ATM processor and the core processor service bureaus.
Professional fees decreased by $43,000 from $374,000 for the nine months ended
September 30,
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2004 to $331,000 for the nine months ended September 30, 2005 due to a reduction
in consulting fees. Amortization of loan servicing rights decreased by $95,000
from $475,000 for the nine months ended September 30, 2004 to $380,000 for the
nine months ended September 30, 2005, as a result of a decrease in loan
prepayments. The recovery of impairment of loan servicing rights was $195,000
for the nine months ended September 30, 2004 compared to $24,000 for the nine
months ended September 30, 2005. The amount of the recovery or impairment is
determined by comparing the book value of the loan servicing rights to an
independent valuation based on a discounted cash flow methodology, utilizing
current prepayment speeds and discount rates. The amount of previous impairment
has now been fully recovered. Other expenses increased by $114,000 from $650,000
for the nine months ended September 30, 2004 to $764,000 for the nine months
ended September 30, 2005. The $114,000 increase was primarily due to an
impairment of $62,000 identified and recorded from the property exchange with
the City of Paris, an increase in examination fees paid to the State of
Illinois, increased charitable contributions resulting from a contribution to
the local hospital foundation, and increased fees paid to the Federal Reserve
for additional services.
Income tax expense was $269,000 for the nine months ended September 30, 2005 as
compared to $449,000 for the nine months ended September 30, 2004. The decrease
of $180,000 in income tax expense was due to an increase in permanent tax
differences.
COMPARISON OF THREE MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004
Net income for the three months ended September 30, 2005 decreased by $37,000 or
12.4% from $299,000 for the three months ended September 30, 2004 to $262,000
for the three months ended September 30, 2005. The decrease in net income is
primarily due to a decrease in noninterest income and an increase in noninterest
expense, partially offset by an increase in net interest income and decreases in
the provision for loan losses and income tax expense.
Net interest income increased $123,000 or 7.1% from $1.7 million for the three
months ended September 30, 2004 to $1.9 million for the three months ended
September 30, 2005. The primary reasons for the increase in net interest income
was an increase in total interest and dividend income of $399,000 partially
offset by an increase of $276,000 in interest expense. The Company's net
interest margin was 3.38% and 3.36% during the three months ended September 30,
2005 and 2004, respectively. The net interest margin increased slightly as a
result of an increase in the average balance of interest-bearing assets, while
the interest spread decreased slightly from 3.07% for the three months ended
September 30, 2004 to 3.04% for the three months ended September 30, 2005.
Total interest and dividend income increased by $399,000 or 14.1% from $2.8
million for the three months ended September 30, 2004 to $3.2 million for the
three months ended September 30, 2005. The increase of $399,000 was primarily
due to increases in loan interest income and interest income from deposits with
financial institutions partially offset by decreased interest and dividend
income from securities. The increase of $449,000 in loan interest income was
primarily due to a $20.1 million increase in the average loan balance and by an
increase in the average loan rate of 32 basis points. Interest and dividend
income from securities decreased by $54,000 primarily due to a decrease of $7.3
million in the average balance of investments, partially offset
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by an increase of 7 basis points in the average rate. Interest income from
deposits with financial institutions increased by $11,000 primarily due to an
increase in average rate of 169 basis points, in addition to an increase in the
average balance of deposits with financial institutions.
Interest expense increased by $276,000 or 25.5% from $1.1 million for the three
months ended September 30, 2004 to $1.4 million for the three months ended
September 30, 2005. This increase was primarily due to an increase of $157,000
in interest on deposits, and by a $119,000 increase in interest on Federal Home
Loan Bank advances and other debt. The $157,000 increase in interest expense on
deposits was primarily due to an increase in the average rate paid on deposits,
and by an increase in the average balance of interest bearing deposits. The
$119,000 increase in interest on Federal Home Loan Bank advances and other debt
was due to an increase in the average balance, partially offset by a slight
reduction in interest rate.
For the three months ended September 30, 2005 and 2004, the provision for losses
on loans was $99,000 and $126,000, respectively. The provision for the three
months ended September 30, 2005 was based on the Company's analysis of the
allowance for loan losses. Management meets on a quarterly basis to review the
adequacy of the allowance for loan losses by classifying loans in compliance
with regulatory classifications. Classified loans are individually reviewed to
arrive at specific reserve levels for those loans. Once the specific portion for
each loan is calculated, management calculates a historical portion for each
category based on a combination of loss history, current economic conditions,
and trends in the portfolio. While the Company cannot assure that future
chargeoffs and/or provisions will not be necessary, the Company's management
believes that, as of September 30, 2005, its allowance for loan losses was
adequate.
Noninterest income decreased $174,000 or 17.0% from $1.0 million for the three
months ended September 30, 2004 to $848,000 for the three months ended September
30, 2005. The decrease was primarily a result of decreases in other service fees
and charges, net loan servicing fees, and net realized gains on sales of
available-for-sale securities, partially offset by an increase in customer
service fees. Customer service fees increased by $25,000 from $241,000 for the
three months ended September 30, 2004 to $266,000 for the three months ended
September 30, 2005, primarily due to increased NSF and overdraft fees. Other
service charges and fees decreased by $15,000 from $199,000 for the three months
ended September 30, 2004 to $184,000 for the three months ended September 30,
2005, primarily due to a decrease in commissions earned on credit life and
disability insurance. Net realized gains on sales of available-for-sale
securities decreased to $7,000 for the three months ended September 30, 2005
from $27,000 in gains generated from the sales of equity securities for the
three months ended September 30, 2004. Net loan servicing fees income decreased
from $277,000 for the three months ended September 30, 2004 to $116,000 for the
three months ended September 30, 2005. The decrease was due to a reduction in
servicing fees from agricultural loans.
Total noninterest expenses were $2.3 million for the three months ended
September 30, 2005 as compared to $2.2 million for the three months ended
September 30, 2004. The primary reasons for the $134,000 increase were increases
in salaries and employee benefits, net occupancy expense, and other expenses and
a reduced amount of recovery of a previously identified impairment of loan
servicing rights, partially offset by reductions in equipment expense,
professional fees, and amortization of loan servicing rights. Salaries and
employee benefits
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increased by $22,000 from $1.15 million for the three months ended September 30,
2004 to $1.17 million for the three months ended September 30, 2005, as a result
of a slight increase in salaries and in health insurance expense. Net occupancy
expense increased by $25,000 from $83,000 for the three months ended September
30, 2004 compared to $108,000 for the three months ended September 30, 2005.
This increase can be attributed to the Savoy branch which moved into a permanent
facility in August, 2004.
Professional fees decreased by $24,000 from $146,000 for the three months ended
September 30, 2004 to $122,000 for the three months ended September 30, 2005,
primarily due to reduced legal and consulting fees in 2005. Amortization of loan
servicing rights decreased by $30,000 from $154,000 for the three months ended
September 30, 2004 to $124,000 for the three months ended September 30, 2005, as
a result of a decrease in loan prepayments. The recovery of impairment of loan
servicing rights was $77,000 for the three months ended September 30, 2004
compared to $2,000 for the three months ended September 30, 2005. As of
September 30, 2005, the impairment of loan servicing rights has been recovered
in its entirety. The amount of the recovery or impairment is determined by
comparing the book value of the loan servicing rights to an independent
valuation based on a discounted cash flow methodology, utilizing current
prepayment speeds and discount rates. Other expenses increased by $105,000 from
$233,000 for the three months ended September 30, 2004 to $338,000 for the three
months ended September 30, 2005. This increase was primarily attributable to the
recording an impairment of $62,000 recorded on property to be exchanged with the
City of Paris, to examination fees assessed by the State of Illinois for a
safety and soundness examination, and for increased fees for utilization of
additional services offered by the Federal Reserve Bank.
Income tax expense was $45,000 for the three months ended September 30, 2005 as
compared to $166,000 for the three months ended September 30, 2004. The decrease
of $121,000 in income tax expense was due to an increase in permanent tax
differences.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting standards
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and the related disclosure of contingent
assets and liabilities. Actual results could differ from those estimates under
different assumptions and conditions. Management believes that its critical
accounting policies and significant estimates include determining the allowance
for loan losses, the valuation of loan servicing rights, and the valuation of
foreclosed real estate.
Allowance for loan losses
The allowance for loan losses is a significant estimate that can and does change
based on management's assumptions about specific borrowers and current general
economic and business conditions, among other factors. Management reviews the
adequacy of the allowance for loan losses on at least a quarterly basis. The
evaluation by management includes consideration of past
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loss experience, changes in the composition of the loan portfolio, the current
condition and amount of loans outstanding, identified problem loans and the
probability of collecting all amounts due.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. A worsening or protracted economic
decline would increase the likelihood of additional losses due to credit and
market risk and could create the need for additional loss reserves.
Loan Servicing Rights
The Company recognizes the rights to service loans as separate assets on the
consolidated balance sheet. The total cost of loans when sold is allocated
between loans and loan servicing rights based on the relative fair values of
each. Loan servicing rights are subsequently carried at the lower of the initial
carrying value, adjusted for amortization, or fair value. Loan servicing rights
are evaluated for impairment based on the fair value of those rights. Factors
included in the calculation of fair value of the loan servicing rights include
estimating the present value of future net cash flows, market loan prepayment
speeds for similar loans, discount rates, servicing costs, and other economic
factors. Servicing rights are amortized over the estimated period of net
servicing revenue. It is likely that these economic factors will change over the
life of the loan servicing rights, resulting in different valuations of the loan
servicing rights. The differing valuations will affect the carrying value of the
loan servicing rights on the consolidated balance sheet, as well as the income
recorded from loan servicing in the income statement. As of September 30, 2005
and December 31, 2004, loan servicing rights had carrying values of $521,000 and
$757,000, respectively.
Foreclosed Assets Held for Sale
Foreclosed assets held for sale are carried at the lower of cost or fair value
less estimated selling costs. Management estimates the fair value of the
properties based on current appraisal information. Fair value estimates are
particularly susceptible to significant changes in the economic environment,
market conditions, and the real estate market. A worsening or protracted
economic decline would increase the likelihood of a decline in property values
and could create the need to write down the properties through current
operations.
LIQUIDITY
At September 30, 2005, the Company had outstanding commitments to originate $6.7
million in loans, and $10.3 million available to be drawn upon for open-end
lines of credit. For more information on the outstanding commitments, see the
discussion below the caption "Off-Balance Sheet Arrangements and Contractual
Commitments". As of September 30, 2005, the total amount of certificates
scheduled to mature in the following 12 months was $47.7 million. The Company
believes that it has adequate resources to fund all of its commitments. The
Company's most liquid assets are cash and cash equivalents. The level of cash
and cash equivalents is dependent on the Company's operating, financing, lending
and investing activities during any given period. The level of cash and cash
equivalents at September 30, 2005 was $7.3 million.
-24-
The Company's future short-term requirements for cash are not expected to
significantly change. In the event that the Company should require funds beyond
its capability to generate them internally, additional sources of funds are
available such as Federal Home Loan Bank advances.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL COMMITMENTS
At September 30, 2005, the Company had outstanding commitments to originate
loans of $6.7 million. The commitments extended over varying periods of time
with the majority being disbursed within a one-year period. Loan commitments at
fixed rates of interest amounted to $4.0 million, with the remainder at floating
rates. In addition, the Company had outstanding unused lines of credit to
borrowers aggregating $5.6 million for commercial lines of credit, and $4.7
million for consumer lines of credit. Outstanding commitments for letters of
credit at September 30, 2005 totaled $101,000. Since these commitments have
fixed expiration dates, and some will expire without being drawn upon, the total
commitment level may not necessarily represent future cash requirements.
The following table presents additional information about our unfunded
commitments as of September 30, 2005, which by their terms have contractual
maturity dates subsequent to September 30, 2005:
Next 12 13-36 37-60 More than
Months Months Months 60 Months Totals
------- ------- ------ --------- --------
(Dollars in thousands)
UNFUNDED COMMITMENTS:
Letters of credit $ 101 $ -- $ -- $ -- $ 101
Lines of credit 6,976 166 242 2,910 10,294
------- ------- ------- ------- -------
Totals $ 7,077 $ 166 $ 242 $ 2,910 $10,395
======= ======= ======= ======= =======
The Company also has a building commitment of $5.6 million for its building
expansion in Paris, Illinois, of which approximately $829,000 has been expended
as of September 30, 2005. The Company has no other signed commitments for
purchase obligations or long-term obligations.
-25-
CAPITAL RESOURCES
The Bank is subject to capital-to-asset requirements in accordance with Federal
bank regulations. The following table summarizes the Bank's regulatory capital
requirements, versus actual capital as of September 30, 2005:
----------------------------------------------------------------------------------------------------------------------------
REQUIRED FOR TO BE WELL
SEPTEMBER 30, 2005 ACTUAL ADEQUATE CAPITAL CAPITALIZED
---------------------------------------------------------------------------
Amount % Amount % Amount %
---------------------------------------------------------------------------
(Dollars in thousands)
----------------------------------------------------------------------------------------------------------------------------
Total capital (to risk-weighted assets) $27,932 19.99 $11,176 8.0 $13,970 10.0
----------------------------------------------------------------------------------------------------------------------------
Tier 1 capital (to risk-weighted assets) 26,178 18.74 5,588 4.0 8,382 6.0
----------------------------------------------------------------------------------------------------------------------------
Tier 1 capital (to average assets) 26,178 11.36 9,218 4.0 11,522 5.0
----------------------------------------------------------------------------------------------------------------------------
The Company's consolidated capital-to-asset requirements and actual capital as
of September 30, 2005 are summarized in the following table:
----------------------------------------------------------------------------------------------------------------------------
REQUIRED FOR TO BE WELL
SEPTEMBER 30, 2005 ACTUAL ADEQUATE CAPITAL CAPITALIZED
--------------------------------------------------------------------------
Amount % Amount % Amount %
--------------------------------------------------------------------------
(Dollars in thousands)
----------------------------------------------------------------------------------------------------------------------------
Total capital (to risk-weighted assets) $34,240 23.70 $11,557 8.0 -- N/A
----------------------------------------------------------------------------------------------------------------------------
Tier 1 capital (to risk-weighted assets) 32,427 22.45 5,779 4.0 -- N/A
----------------------------------------------------------------------------------------------------------------------------
Tier 1 capital (to average assets) 32,427 14.03 9,248 4.0 -- N/A
----------------------------------------------------------------------------------------------------------------------------
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Sources of market risk include interest rate risk, foreign currency exchange
risk, commodity price risk and equity price risk. The Company is only subject to
interest rate risk. The Company purchased no financial instruments for trading
purposes during the three months ended September 30, 2005 and 2004.
The principal objectives of the Company's interest rate risk management function
are: (i) to evaluate the interest rate risk included in certain balance sheet
accounts; (ii) to determine the level of risk appropriate given the Company's
business focus, operating environment, capital and liquidity requirements, and
performance objectives; (iii) to establish asset concentration
-26-
guidelines; and (iv) to manage the risk consistent with Board-approved
guidelines. Through such management, the Company seeks to reduce the
vulnerability of its operations to changes interest rates and to manage the
ratio of interest rate sensitive assets to interest rate sensitive liabilities
within specified maturity terms or repricing dates. The Company's Board of
Directors has established an Asset/Liability Committee consisting of directors
and senior management officers, which is responsible for reviewing the Company's
asset/liability policies and monitoring interest rate risk as such risk relates
to its operating strategies. The committee usually meets on a quarterly basis,
and at other times as dictated by market conditions, and reports to the Board of
Directors. The committee is responsible for reviewing Company activities and
strategies, and the effect of those strategies on the Company's net interest
margin, the market value of the portfolio and the effect that changes in the
interest will have on the Company's portfolio and exposure limits.
The Company's key interest rate risk management tactics consist primarily of:
(i) emphasizing the attraction and retention of core deposits, which tend to be
a more stable source of funding; (ii) emphasizing the origination of adjustable
rate mortgage loan products and short-term commercial and consumer loans for the
in-house portfolio, although this is dependent largely on the market for such
loans; (iii) selling longer-term fixed-rate one-to-four family mortgage loans in
the secondary market; and (iv) investing primarily in U.S. government agency
instruments and mortgage-backed securities.
The Company's interest rate and market risk profile has not materially changed
from the year ended December 31, 2004. Please refer to the Company's Form 10-KSB
for the year ended December 31, 2004 for further discussion of the Company's
market and interest risk.
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation as of September 30, 2005, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective. There were no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls during the quarter ended September 30, 2005.
Disclosure controls and procedures are the controls and other procedures of the
Company that are designed to ensure that the information required to be
disclosed by the Company in its reports filed or submitted under the Securities
Exchange Act of 1934, as amended (Exchange Act) is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by the Company in its reports filed under
the Exchange Act is accumulated and communicated to the Company's management,
including the principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
-27-
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and subsidiary are subject to claims and lawsuits which arise
primarily in the ordinary course of business, such as claims to enforce liens
and claims involving the making and servicing of real property loans and other
issues. It is the opinion of management that the disposition or ultimate
determination of such possible claims or lawsuits will not have a material
adverse effect on the consolidated financial position of the Company.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) The following table provides information about purchases of the Company's
common stock by the Company during the quarter ended September 30, 2005.
ISSUER PURCHASES OF EQUITY SECURITIES
--------------------------------------------------------------------------------------------------------
(d) Maximum
(c) Total Number Number of
of Shares Shares that May
Purchased as Yet Be
(a) Total Number (b) Average Part of Publicly Purchased Under
of Shares Price Paid Announced Plans the Plans
Period Purchased per Share or Programs or Programs
--------------------------------------------------------------------------------------------------------
07/01/05
to -- -- -- 54,750
07/31/05
--------------------------------------------------------------------------------------------------------
08/01/05
to 17,000 $12.92 17,000 37,750
08/31/05
--------------------------------------------------------------------------------------------------------
09/01/05
to 16,500 $12.94 16,500 21,250
09/30/05
--------------------------------------------------------------------------------------------------------
Total 33,500 $12.93 33,500
--------------------------------------------------------------------------------------------------------
(1) The board of directors approved the repurchase by us of 124,850 shares
over the one year period ending April 18, 2006.
-28-
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
(a) Exhibits
31.1 Certification of Terry J. Howard required by Rule 13a-14(a).
31.2 Certification of Ellen M. Litteral required by Rule 13a-14(a).
32.1 Certification of Terry J. Howard, Chief Executive Officer+
pursuant to Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. 1350).
32.2 Certification of Ellen M. Litteral, Chief Financial Officer
pursuant to Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. 1350).
-29-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST BANCTRUST CORPORATION
Date: November 10, 2005 /s/ Terry J. Howard
--------------------------------
Terry J. Howard
President and Chief Executive
Officer
Date: November 10, 2005 /s/ Ellen M. Litteral
--------------------------------
Ellen M. Litteral
Treasurer and Chief Financial
Officer
-30-