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 JUNE 30, 2006
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.)
101 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 A LARGE ACCELERATED FILER, AN
ACCELERATED FILER, OR A NON-ACCELERATED FILER. SEE DEFINITION OF "ACCELERATED
FILER AND LARGE ACCELERATED FILER" IN RULE 12b-2 OF THE EXCHANGE ACT.
[ ] LARGE ACCELERATED FILER [ ] ACCELERATED FILER [X] NON-ACCELERATED FILER
INDICATE BY CHECKMARK 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 AUGUST 10, 2006 THE REGISTRANT HAD OUTSTANDING 2,349,200 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 --
Six Months Ended 2
Condensed Consolidated Statements of Income --
Three Months Ended 3
Condensed Consolidated Statements of Cash Flows 4
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3 Quantitative and Qualitative Disclosures About
Market Risk. 26
Item 4 Controls and Procedures 27
PART II - Other Information
Item 1 Legal Proceedings 27
Item 1A Risk Factors 27
Item 2 Unregistered Sales of Equity Securities and
Use of Proceeds 27
Item 3 Defaults Upon Senior Securities 28
Item 4 Submission of Matters to a Vote of Security
Holders 28
Item 5 Other Information 29
Item 6 Exhibits 29
SIGNATURES 29
CERTIFICATIONS 30
FIRST BANCTRUST CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of dollars except share data)
JUNE 30, DECEMBER 31,
2006 2005
(unaudited)
-------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 5,946 $ 7,338
Interest-bearing demand deposits 6,868 5,109
--------- ---------
Cash and cash equivalents 12,814 12,447
Available-for-sale securities 68,497 76,424
Held-to-maturity securities (fair value of $2,933 and $3,384) 3,150 3,437
Loans held for sale, net of unrealized loss of $9 and $5 1,128 642
Loans, net of allowance for loan losses of $2,630 and $2,662 178,322 156,885
Premises and equipment 10,376 6,386
Federal Home Loan Bank stock 4,724 6,608
Foreclosed assets held for sale, net 268 267
Interest receivable 2,171 2,416
Deferred income taxes 2,043 1,382
Loan servicing rights 412 462
Cash surrender value of life insurance 4,914 4,825
Goodwill 541 541
Core deposit intangibles 451 484
Other assets 446 659
--------- ---------
Total assets $ 290,257 $ 273,865
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest bearing deposits $ 22,551 $ 21,529
Interest bearing deposits 189,111 172,446
--------- ---------
Total deposits 211,662 193,975
Federal funds purchased -- 2,500
Federal Home Loan Bank advances 44,200 43,200
Junior subordinated debentures 6,186 6,186
Pass through payments received on loans sold 50 75
Advances from borrowers for taxes and insurance 523 189
Interest payable 444 245
Other 1,554 1,449
--------- ---------
Total liabilities 264,619 247,819
--------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 1,000,000 shares authorized
and unissued
Common stock, $.01 par value, 5,000,000 shares authorized;
3,041,750 shares issued; 2,349,200 and 2,367,450 shares outstanding 30 30
Additional paid-in capital 14,625 15,015
Retained earnings 19,287 19,062
Unearned incentive plan shares - 0 and 71,422 shares -- (589)
Unearned employee stock ownership plan shares -
83,698 and 98,902 shares (484) (572)
Accumulated other comprehensive loss (1,350) (665)
Treasury stock, at cost - 692,550 and 674,300 shares (6,470) (6,235)
--------- ---------
Total stockholders' equity 25,638 26,046
--------- ---------
Total liabilities and stockholders' equity $ 290,257 $ 273,865
========= =========
See Notes to Unaudited Condensed Consolidated Financial Statements.
-1-
FIRST BANCTRUST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars except share data)
(unaudited)
SIX MONTHS ENDED JUNE 30 2006 2005
----------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME
Loans
Taxable $ 5,903 $ 4,231
Tax exempt 30 31
Securities
Taxable 1,364 1,397
Tax exempt 262 221
Dividends on Federal Home Loan Bank stock 100 117
Deposits with financial institutions and other 58 53
------- -------
Total interest and dividend income 7,717 6,050
------- -------
INTEREST EXPENSE
Deposits 2,641 1,500
Federal Home Loan Bank advances and other debt 1,111 803
------- -------
Total interest expense 3,752 2,303
------- -------
NET INTEREST INCOME 3,965 3,747
PROVISION FOR LOAN LOSSES 95 188
------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,870 3,559
------- -------
NONINTEREST INCOME
Customer service fees 501 415
Other service charges and fees 454 352
Net gains on loan sales 123 140
Net realized gains on sales of available-for-sale securities 0 111
Net loan servicing fees 240 258
Brokerage fees 42 34
Abstract and title fees 160 188
Increase in cash surrender value of life insurance 104 103
Other 92 51
------- -------
Total noninterest income 1,716 1,652
------- -------
NONINTEREST EXPENSE
Salaries and employee benefits 2,633 2,303
Net occupancy expense 316 202
Equipment expense 490 411
Data processing fees 299 232
Professional fees 284 209
Foreclosed assets expense, net 41 39
Marketing expense 106 147
Printing and office supplies 88 81
Amortization of loan servicing rights 122 256
Recovery of impairment of loan servicing rights 0 (22)
Other expenses 562 426
------- -------
Total noninterest expense 4,941 4,284
------- -------
INCOME BEFORE INCOME TAX 645 927
INCOME TAX EXPENSE 137 224
------- -------
NET INCOME $ 508 $ 703
======= =======
BASIC EARNINGS PER SHARE $ 0.23 $ 0.31
======= =======
DILUTED EARNINGS PER SHARE $ 0.22 $ 0.29
======= =======
DIVIDENDS PER SHARE $ 0.12 $ 0.12
======= =======
See Notes to Unaudited Condensed Consolidated Financial Statements.
-2-
FIRST BANCTRUST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars except share data)
(unaudited)
THREE MONTHS ENDED JUNE 30 2006 2005
----------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME
Loans
Taxable $ 3,085 $ 2,194
Tax exempt 15 15
Securities
Taxable 630 677
Tax exempt 132 117
Dividends on Federal Home Loan Bank stock 50 59
Deposits with financial institutions and other 31 29
------- -------
Total interest and dividend income 3,943 3,091
------- -------
INTEREST EXPENSE
Deposits 1,448 769
Federal Home Loan Bank advances and other debt 547 414
------- -------
Total interest expense 1,995 1,183
------- -------
NET INTEREST INCOME 1,948 1,908
PROVISION FOR LOAN LOSSES 50 94
------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,898 1,814
------- -------
NONINTEREST INCOME
Customer service fees 272 223
Other service charges and fees 272 170
Net gains on loan sales 66 67
Net realized gains on sales of available-for-sale securities 0 79
Net loan servicing fees 112 118
Brokerage fees 21 19
Abstract and title fees 81 84
Increase in cash surrender value of life insurance 53 54
Other 54 28
------- -------
Total noninterest income 931 842
------- -------
NONINTEREST EXPENSE
Salaries and employee benefits 1,305 1,120
Net occupancy expense 171 99
Equipment expense 253 206
Data processing fees 151 117
Professional fees 125 98
Foreclosed assets expense, net 22 24
Marketing expense 45 76
Printing and office supplies 47 37
Amortization of loan servicing rights 62 132
Recovery of impairment of loan servicing rights 0 (4)
Other expenses 271 222
------- -------
Total noninterest expense 2,452 2,127
------- -------
INCOME BEFORE INCOME TAX 377 529
INCOME TAX EXPENSE 96 129
------- -------
NET INCOME $ 281 $ 400
======= =======
BASIC EARNINGS PER SHARE $ 0.13 $ 0.18
======= =======
DILUTED EARNINGS PER SHARE $ 0.12 $ 0.17
======= =======
DIVIDENDS PER SHARE $ 0.06 $ 0.06
======= =======
See Notes to Unaudited Condensed Consolidated Financial Statements.
-3-
FIRST BANCTRUST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
(unaudited)
SIX MONTHS ENDED JUNE 30 2006 2005
---------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 508 $ 703
Items not requiring (providing) cash
Depreciation and amortization 259 196
Provision for loan losses 95 188
Loss on foreclosed assets, net 16 4
Amortization of premiums and discounts on securities, net 23 39
Amortization of loan servicing rights 120 256
Recovery for impairment of loan servicing rights -- (22)
Deferred income taxes (227) (22)
Amortization of intangible assets 33 6
Net realized gains on available-for-sale securities -- (111)
Net gains on loan sales (123) (140)
Federal Home Loan Bank stock dividends -- (116)
Compensation expense related to ESOP and incentive plan 281 240
Loans originated for sale (7,058) (7,241)
Proceeds from sales of loans originated for sale 6,625 6,692
Changes in
Interest receivable 245 486
Cash surrender value of life insurance (89) (90)
Other assets 213 43
Interest payable 199 35
Other liabilities 105 42
-------- --------
Net cash provided by operating activities 1,225 1,188
-------- --------
INVESTING ACTIVITIES
Purchases of available-for-sale securities (5,878) (6,466)
Proceeds from maturities of available-for-sale securities 12,660 12,917
Proceeds from sales of available-for-sale securities -- 945
Proceeds from maturities of held-to-maturity securities 290 312
Net change in loans (21,742) (11,384)
Proceeds from sales of foreclosed assets 193 179
Purchases of premises and equipment (4,177) (510)
Capitalized interest (81) --
Redemption of Federal Home Loan Bank stock 1,884 --
Proceeds from sales of premises and equipment 9 --
-------- --------
Net cash used in investing activities (16,842) (4,007)
-------- --------
-4-
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, money market,
NOW and savings accounts $ (2,989) $ 2,639
Net increase (decrease) in certificates of deposit 20,676 (2,797)
Net decrease in short-term borrowings (2,500) (2,000)
Proceeds from Federal Home Bank advances 9,500 --
Repayment of Federal Home Loan Bank advances (8,500) --
Proceeds from the issuance of junior subordinated debentures -- 6,186
Net change in pass through payments received on loans sold (25) 66
Net change in advances from borrowers for taxes and insurance 334 41
Proceeds from stock options exercised 99 22
Purchase of treasury stock (328) (1,108)
Dividends paid (283) (296)
-------- --------
Net cash provided by financing activities 15,984 2,753
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 367 (66)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 12,447 9,113
-------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 12,814 $ 9,047
======== ========
SUPPLEMENTAL CASH FLOWS INFORMATION
Interest paid (net of capitalized interest) $ 3,553 $ 2,268
Income taxes paid (net of refunds) $ 310 $ 240
Real estate and other property acquired in settlement of loans $ 210 $ 118
See Notes to Unaudited Condensed Consolidated Financial Statements.
-5-
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-K 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, 2006. 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 six months ended June 30,
2006 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,
2005 has been derived from the audited consolidated balance sheet of the Company
as of that date.
Note 2 -- Newly Adopted Accounting Pronouncement
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,
2005 Annual Report to shareholders. Prior to January 1, 2006, the Company
accounted for the 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 was 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. During December
2005, the Company accelerated the vesting of 182,504 options on shares of the
Company's stock. The exercise price and remaining terms of each of the
accelerated options remained the same. As of December 31, 2005, all of the
Company's stock options were vested.
In December, 2004, the Financial Accounting Standards board ("FASB") issued
Statement No. 123 (revised 2004), "Share-Based Payment" ("SFAS No. 123R"), which
requires the cost resulting from stock options be measured at fair value and
recognized in earnings. This statement replaces Statement No. 123, "Accounting
for Stock-Based Compensation" (SFAS No. 123") and supersedes Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
("APB No. 25") which permitted the recognition of compensation expense using the
intrinsic value method.
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of SFAS No. 123 (R), using the modified prospective application
method. Under this method, the Statement
-6-
applied to new awards and to awards modified, repurchased, or cancelled after
the effective date. Additionally, compensation cost for a portion of awards for
which requisite services has not been rendered that are outstanding as of the
effective date shall be recognized as the requisite service is rendered or after
the effective date. Since all of the Company's stock options were vested at
December 31, 2005, there is no effect on the financial statements for the three
and six months ended June 30, 2006. 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
for the three and six months ended June 30, 2005.
Three Months Six Months
Ended Ended
June 30, 2005 June 30, 2005
Net income, as reported $ 400 $ 703
Less: Total stock-based employee
compensation cost determined under
the fair value based method, net of
income taxes (33) (66)
---------- ----------
Pro forma net income $ 367 $ 637
========== ==========
EARNINGS PER SHARE:
Basic - as reported $ 0.18 $ 0.31
Basic - pro forma $ 0.16 $ 0.28
Diluted - as reported $ 0.17 $ 0.29
Diluted - pro forma $ 0.15 $ 0.26
The Company also has a stock option award program or incentive plan which
provides for the award and issuance of up to 121,670 shares of the Company's
stock to members of the Board of Directors and management. At January 1, 2006,
119,576 shares had been awarded. In 2002, the Company awarded 65,576 shares
under the incentive plan which vests ratably over a five-year period, commencing
with the date of the award. An additional 54,000 shares were awarded in December
2005 to members of the Board of Directors and management which will vest
according to a defined schedule based on meeting defined financial performance
goals over the next five year period. Expense recognized under the incentive
plan totaled $98,000 and $55,000 for the six month periods ending June 30, 2006
and 2005, and $48,000 and $27,000 for the three month periods ending June 30,
2006 and 2005.
As a result of implementing the modified prospective application method, the
Company reclassified $589,000 and 71,422 unearned shares from a contra equity
account to additional paid-in capital as of January 1, 2006.
-7-
Note 3 -- 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 after June 15, 2010. Interest payments are made
quarterly beginning in September, 2005. Interest expense generated by the
debentures for the six months ended June 30, 2006 and 2005 totaled $179,000 and
$15,000, and for the three months ended June 30, 2006 and 2005 totaled $90,000
and $15,000.
Note 4 - 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 $184,000 and $185,000 for the
six month periods ended June 30, 2006 and 2005, and $90,000 and $93,000 for the
three month periods ended June 30, 2006 and 2005.
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 5 - Earnings per Share
Basic earnings per share have been computed based upon the weighted average
common shares outstanding for the three month and six month periods ended June
30, 2006 and 2005. Diluted
-8-
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):
-9-
Weighted
Average Per Share
Income Shares Amount
-----------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 2006:
--------------------------------------------------
Basic Earnings Per Share:
Income available to common stockholders $ 508 2,204,470 $ 0.23
Effect of Dilutive Securities:
Unearned recognition and retention plan shares 72,827
Stock Options 42,807
----------------------------------------
Diluted Earnings per Share:
Income available to common stockholders and
assumed conversions $ 508 2,320,104 $ 0.22
========================================
FOR THE SIX MONTHS ENDED JUNE 30, 2005:
--------------------------------------------------
Basic Earnings Per Share:
Income available to common stockholders $ 703 2,273,433 $ 0.31
Effect of Dilutive Securities:
Unearned recognition and retention plan shares 90,581
Stock Options 47,748
----------------------------------------
Diluted Earnings per Share:
Income available to common stockholders and
assumed conversions $ 703 2,411,762 $ 0.29
========================================
FOR THE THREE MONTHS ENDED JUNE 30, 2006:
--------------------------------------------------
Basic Earnings Per Share:
Income available to common stockholders $ 281 2,203,259 $ 0.13
Effect of Dilutive Securities:
Unearned recognition and retention plan shares 69,627
Stock Options 38,100
----------------------------------------
Diluted Earnings per Share:
Income available to common stockholders and
assumed conversions $ 281 2,310,986 $ 0.12
========================================
FOR THE THREE MONTHS ENDED JUNE 30, 2005:
--------------------------------------------------
Basic Earnings Per Share:
Income available to common stockholders $ 400 2,257,630 $ 0.18
Effect of Dilutive Securities:
Unearned recognition and retention plan shares 88,683
Stock options 47,916
----------------------------------------
Diluted Earnings per Share:
Income available to common stockholders and
assumed conversions $ 400 2,394,229 $ 0.17
========================================
-10-
Note 6 -- Comprehensive Income (Loss)
Comprehensive income (loss) for the three month and six month periods ended June
30, 2006 and 2005 is listed as follows:
SIX MONTHS ENDED JUNE 30
2006 2005
------------------------------------------------------------------------------------------------------------
NET INCOME $ 508 $ 703
----- -----
OTHER COMPREHENSIVE INCOME
Unrealized depreciation on available-for-sale securities (685) (424)
Less: Reclassification adjustment for realized gains included
in net income -- 73
----- -----
(685) (497)
----- -----
COMPREHENSIVE INCOME (LOSS) $(177) $ 206
===== =====
THREE MONTHS ENDED JUNE 30
2006 2005
-------------------------------------------------------------------------------------------------------------
NET INCOME $ 281 $ 400
----- -----
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized appreciation (depreciation) on available-for-sale securities (513) 112
Less: Reclassification adjustment for realized gains included
in net income -- 52
----- -----
(513) 60
----- -----
COMPREHENSIVE INCOME (LOSS) $(232) $ 460
===== =====
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. This repurchase program was completed on
April 13, 2006. On April 18, 2006, the Board of Directors authorized the
repurchase in open market transactions of 117,710 shares, or 5% or the Company's
outstanding shares prior to April 13, 2007. As of June 30, 2006, the Company had
repurchased 15,000 shares under this program, leaving 102,710 shares available
to be repurchased. Previously, the Company had completed five other repurchase
programs for stock repurchases of 566,900 shares. The Company issued 4,200
shares of treasury stock upon the exercise of stock options in 2005, and 10,000
shares of treasury stock upon the exercise of stock options in May, 2006. As of
August 10,
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2006, the Company owned a cumulative total of 692,550 shares in treasury stock.
The repurchased shares are held as treasury stock and are available for general
corporate purposes.
Note 8 -- Commitments
The Company is expanding and renovating its Operations Center in Paris, Illinois
to house its entire banking operations in Paris, Illinois. As a result of the
renovation and expansion, the Company entered into an agreement with a building
contractor to design and construct the new facility for an amount not to exceed
$5.6 million. The project, scheduled to be completed by the third quarter of
2006, is proceeding slightly ahead of schedule, and is approximately 85%
completed. The Company's remaining commitment to complete the project is
approximately $700,000.
Note 9 -- Recent Accounting Pronouncements
In February 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 155 (FAS 155), "Accounting for
Certain Hybrid Financial Instruments: an amendment of FASB Statements No. 133
and 140." FAS 155 permits fair value re-measurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would require
bifurcation, clarifies which interest-only strips and principal-only strips are
not subject to the requirements of Statement 133, establishes a requirement to
evaluate interests in securitized financial assets to identify interests that
are freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation, clarifies that
concentrations of credit risk in the form of subordination are not embedded
derivatives, and amends Statement 140 to eliminate the prohibition on a
qualifying special purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial
instrument. FAS 155 is effective for all financial instruments acquired or
issued after the beginning of an entity's first fiscal year that begins after
September 15, 2006. The Company does not expect the adoption of FAS 155 to have
a material effect on the results of operations or the statement of condition.
In March 2006, the FASB issued Statement of Financial Accounting Standards No.
156 (FAS 156), "Accounting for Servicing of Financial Assets: an amendment of
FASB Statement No. 140." FAS 140 establishes, among other things, the
accounting for all separately recognized servicing assets and servicing
liabilities. This Statement amends FAS 140 to require that all separately
recognized servicing assets and servicing liabilities be initially measured at
fair value, if practicable. This Statement permits, but does not require, the
subsequent measurement of separately recognized servicing assets and servicing
liabilities at fair value. Under this Statement, an entity can elect subsequent
fair value measurement to account for its separately recognized servicing assets
and servicing liabilities. Adoption of this Statement is required as of the
beginning of the first fiscal year that begins after September 15, 2006. The
Company does not expect the adoption of FAS 156 to have a material effect on the
results of operations or the statement of condition.
In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), "Accounting
for Uncertainty in Income Taxes -- an Interpretation of FASB Statement 109,"
which provides
-12-
guidance on the measurement, recognition, and disclosure of tax positions taken
or expected to be taken in a tax return. The Interpretation also provides
guidance on derecognition, classification, interest and penalties, and
disclosure. FIN 48 prescribes that a tax position should only be recognized if
it is more-likely-than-not that the position will be sustained upon examination
by the appropriate taxing authority. A tax position that meets this threshold is
measured as the largest amount of benefit that is greater than 50 percent likely
of being realized upon ultimate settlement. The cumulative effect of applying
the provisions of FIN 48 is to be reported as an adjustment to the beginning
balance of retained earnings in the period of adoption. FIN 48 is effective for
fiscal years beginning after December 15, 2006. The Company is currently
assessing the impact, if any, that the adoption of this Interpretation will have
on its financial statements.
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 June 30, 2006 to its financial
condition at December 31, 2005 and the results of operations for the three month
and six month periods ending June 30, 2006 to the same periods in 2005. In May
2005, the Bank's wholly owned subsidiary, Community Finance Center, Inc., was
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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 provides
investment advisory and asset management services to Bank customers beginning 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 became inactive in 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 $16.4 million or 6.0%, to $290.3
million at June 30, 2006 from $273.9 million at December 31, 2005. The increase
in assets was primarily due to an increase in loans, net of allowance for loan
losses of $21.4 million and an increase in premises and equipment of $4.0
million, partially offset by decreases in available-for-sale securities of $7.9
million and Federal Home Loan Bank stock of $1.9 million. The increase in assets
was primarily funded by an increase in deposits.
The Company's cash and cash equivalents increased by $367,000 from $12.4 million
at December 31, 2005 to $12.8 million at June 30, 2006, a 2.9% increase. Cash
and due from banks decreased by $1.4 million or 19.0% to $5.9 million at June
30, 2006 from $7.3 million at December 31, 2005. Interest-bearing demand
deposits increased by $1.8 million or 34.4% to $6.9 million at June 30, 2006
compared to $5.1 million at December 31, 2005.
Available-for-sale investment securities amounted to $68.5 million at June 30,
2006 compared to $76.4 million at December 31, 2005, a $7.9 million decrease.
The 10.4% decrease primarily resulted from $12.7 million in investment calls and
maturities, primarily from payments on mortgage-backed securities and Federal
Home Loan Bank bonds, and a $1.1 million decrease in the market valuation of the
available-for-sale portfolio, partially offset by investment purchases of $5.9
million. Held-to-maturity securities decreased by $287,000 from $3.4 million at
December 31, 2005 to $3.2 million at June 30, 2006, 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, net of unrealized loss, increased by $486,000 from $642,000
at December 31, 2005 to $1.1 million at June 30, 2006. Unrealized loss on loans
held for sale at June 30, 2006 were $9,000 compared to $5,000 at December 31,
2005. Loans held for sale are carried at the lower of cost or market. 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 June 30, 2006 consisted
of ten single-family residential loans to be sold to FHLMC and IHDA .
The Company's net loan portfolio increased by $21.4 million to $178.3 million at
June 30, 2006 from $156.9 million at December 31, 2005. Gross loans increased by
$21.4 million while the allowance for loan losses decreased by $32,000. Loans
secured by 1-4 family residences
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increased by $8.5 million, primarily due to an increase in first mortgages on
1-4 family homes in the Savoy market, and multi-family mortgage loans increased
by $1.9 million due to a large multi-family complex loan. Loans secured by
farmland increased by $4.4 million primarily due to new originations in the
Paris and Marshall branches, and agricultural production loans increased by $3.8
million in the normal cycle of crop production. Commercial nonresidential real
estate loans increased by $1.3 million with the majority of the loan
originations generated in the Savoy area. Consumer loans increased by $962,000
due to new originations.
At June 30, 2006, the allowance for loan losses was $2.6 million or 1.45% of the
total loan portfolio compared to the allowance for loan losses at December 31,
2005 of $2.7 million or 1.67% of the total loan portfolio. During the first six
months of 2006, the Company charged off $182,000 of loan losses, which included
$60,000 in consumer loan charge-offs, $60,000 from five loans secured by
one-to-four family residential properties, and $14,000 from an agricultural
production loan. The chargeoffs of $182,000 were partially offset by $55,000 in
recoveries from consumer loans, primarily vehicle loans. The net chargeoffs of
$127,000 for the first six months of 2006 were comparable to net chargeoffs of
$131,000 for the first six months of 2005. The Company's nonperforming loans and
troubled debt restructurings were $1.6 million or 0.86% of total loans at June
30, 2006 compared to $1.5 million or 0.95% as a percentage of total loans at
December 31, 2005. The Company's loans delinquent 90 days and over and
nonaccrual loans total $929,000, and include $134,000 in 1-4 family residential
loans, $408,000 in commercial loans, $164,000 in agricultural production loans,
and $117,000 in consumer loans. The Company's troubled debt restructurings of
$625,000 at June 30, 2006 consist primarily of restructured commercial and
agricultural 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 $4.0 million from $6.4 million at
December 31, 2005 to $10.4 million at June 30, 2006, 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. Additional progress payments made on the building
project since December 31, 2005 total $3.0 million, and the project is
approximately 85% complete. Other progress payments including disbursements for
furniture and fixtures, signage, phone system, and security systems for the new
facility in 2006 totaled $714,000. In May, 2006, the Company also completed
construction on a branch building located in Martinsville, Illinois.
Disbursements related to this building project during 2006 total $287,000.
Federal Home Loan Bank stock decreased by $1.9 million from $6.6 million at
December 31, 2005 to $4.7 million at June 30, 2006. This 28.5% reduction was a
result of the redemption of $1.9 million in stock by the Federal Home Loan Bank
in June, 2006.
Net foreclosed assets held for sale, totaling $268,000 at June 30, 2006 remained
stable, compared to $267,000 at December 31, 2005. As of June 30, 2006, the
Company had real estate properties totaling $219,000 consisting of approximately
a dozen singe-family residential properties and several vacant lots and other
repossessed assets of $49,000. Foreclosed assets are carried at lower of cost or
net realizable value.
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Interest receivable declined by $245,000 from $2.4 million at December 31, 2005
to $2.2 million at June 30, 2006, a 10.1% decrease. This reduction is seasonal,
as many agricultural loans are annual payment loans, with payments due at the
beginning of the year. Deferred income taxes increased by $661,000 from $1.4
million at December 31, 2005 to $2.0 million at June 30, 2006, primarily as a
result of the deferred income tax effect of the change in market valuation of
available-for-sale securities from December 31, 2005 to June 30, 2006.
Other assets declined by $213,000 from $659,000 at December 31, 2005 to $446,000
at June 30, 2006, a 32.3% decrease. The primary reason for this decrease was due
to a reduction of prepaid expenses.
The Company's total deposits amounted to $211.7 million at June 30, 2006
compared to $194.0 million at December 31, 2005, an increase of $17.7 million.
The 9.1% increase in total deposits was due to a $1.0 million increase in
non-interest bearing deposits, and by a $16.7 million increase in interest
bearing deposits. The increase in interest bearing deposits was a result of a
$20.7 million increase in certificates of deposit, and a $1.0 million increase
in savings accounts, partially offset by a $5.0 million decrease in
interest-bearing checking accounts. The $20.7 million increase in certificates
of deposit was primarily attributable to an increase in short-term certificates
of deposit. The Bank issued two brokered certificates of deposit for terms of 91
days and 4 months for a total of $7.9 million. Other short-term (for terms less
than one year) certificates of deposit increased by $16.1 million, while
certificates for terms greater than one year declined by $3.3 million.
Federal funds purchased declined by $2.5 million from a balance of $2.5 million
at December 31, 2005 to $0 at June 30, 2006. Federal Home Loan Bank advances
increased by $1.0 million from $43.2 million at December 31, 2005 to $44.2
million at June 30, 2006. The total average rate of all advances was 4.83% as of
June 30, 2006. The increase in borrowings was used to fund loan growth.
Junior subordinated debentures remained constant at $6.2 million at June 30,
2006 compared to December 31, 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.
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The debentures are included as Tier I capital for regulatory capital purposes.
The debentures issued are first redeemable, in whole or part, by the Company, on
June 15, 2010, and mature on June 15, 2035. Interest payments are made quarterly
beginning in September, 2005.
Advances from borrowers for taxes and insurance increased by $334,000 from
$189,000 at December 31, 2005 to $523,000 at June 30, 2006. The $334,000
increase is a normal trend, as escrows typically accumulate funds in the first
part of the year for the payment of real estate taxes later in the year.
Interest payable increased by $199,000 from $245,000 at December 31, 2005 to
$444,000 at June 30, 2006, primarily a result of deposit growth.
Stockholders' equity at June 30, 2006 was $25.6 million compared to $26.0
million at December 31, 2005, a decrease of $408,000. Retained earnings
increased by the amount of net income or $508,000, partially offset by $283,000
in dividends declared and paid. As shares from the employee stock ownership plan
vested to participants from December 31, 2005 to June 30, 2006, stockholders'
equity increased by $184,000, and as shares from the incentive plan were earned
by participants for the same period, stockholders' equity increased by $98,000.
Accumulated comprehensive loss increased by $685,000 due to a decrease in the
fair value of securities available for sale, net of related tax effect. The
Company reclassified $589,000 or 71,422 unearned incentive plan shares to
additional paid-in capital as of January 1, 2006 in accordance with SFAS No.
123(R). Treasury stock increased from $6.2 million at December 31, 2005 to $6.5
million at June 30, 2006 as a result of purchases of 28,250 shares of stock in
the open market for $329,000, partially offset by the issuance of 10,000 shares
as a result of stock option exercises.
RESULTS OF OPERATIONS
COMPARISON OF SIX MONTH PERIODS ENDED JUNE 30, 2006 AND 2005
Net income for the six months ended June 30, 2006 decreased by $195,000 or 27.7%
from $703,000 for the six months ended June 30, 2005 to $508,000 for the six
months ended June 30, 2006. The decrease in net income is primarily due to 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 $218,000 or 5.8% from $3.7 million for the six
months ended June 30, 2005 to $4.0 million for the six months ended June 30,
2006. The primary reasons for the increase in net interest income was an
increase in total interest and dividend income of $1.7 million partially offset
by an increase of $1.4 million in interest expense. The Company's net interest
margin was 3.19% and 3.46% during the six months ended June 30, 2006 and 2005,
respectively. The net interest margin decreased as a result of a decrease in
interest spread. Interest spread decreased by 16 basis points from 3.07% for the
six months ended June 30, 2005 to 2.91% for the six months ended June 30, 2006.
The average rate paid on interest bearing liabilities increased by 79 basis
points, while the average rate earned on interest bearing assets
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increased by 63 basis points. The average balances of interest bearing assets
for the six month period ending June 30, 2006 increased by $31.7 million to
$248.5 million compared to $216.8 million in average earning assets for the six
month period ending June 30, 2005. Interest bearing liabilities increased by
$43.6 million from $183.6 million for the six month period ended June 30, 2005
to $227.2 million for the six month period ended June 30, 2006. The increase in
interest bearing assets and liabilities was primarily due to the acquisition of
Rantoul First Bank in October, 2005.
Total interest and dividend income increased by $1.7 or 27.6% from $6.1 million
for the six months ended June 30, 2005 to $7.7 million for the six months ended
June 30, 2006. The increase of $1.7 million was primarily due to increases in
loan interest income and interest. The increase of $1.7 million in loan interest
income was primarily due to a $44.3 million increase in the average loan balance
and by an increase in the average loan rate of 18 basis points. Interest and
dividend income from securities increased by $8,000 due to an increase of 73
basis points in the average rate, partially offset by a decrease of $13.2
million in the average balance of investments. Interest income from deposits
with financial institutions increased by $5,000 primarily due to an increase in
average rate of 185 basis points, partially offset by a decrease of $1.5 million
in the average balance of deposits with financial institutions. Dividends on
Federal Home Loan Bank stock decreased by $17,000 from the six months ended June
30, 2005 to the six months ended June 30, 2006 due to a decrease in average rate
of 234 basis points, partially offset by an increase in the average balance of
$2.2 million.
Interest expense increased by $1.5 million or 62.9% from $2.3 million for the
six months ended June 30, 2005 to $3.8 million for the six months ended June 30,
2006. This increase was primarily due to an increase of $1.1 million in interest
on deposits, and by a $308,000 increase in interest on Federal Home Loan Bank
advances and other debt. The $1.1 million increase in interest expense on
deposits was primarily due to an increase of 76 basis points in the average rate
paid on deposits, and by an increase of $34.0 million in the average balance of
interest bearing deposits. The $308,000 increase in interest on Federal Home
Loan Bank advances and other debt was due to a $9.6 million increase in the
average balance as well as a 48 basis point increase in average interest rate.
For the six months ended June 30, 2006 and 2005, the provision for losses on
loans was $95,000 and $188,000, respectively. The provision for the six months
ended June 30, 2006 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
June 30, 2006, its allowance for loan losses was adequate.
Noninterest income increased $64,000 or 3.9% from $1.65 million for the six
months ended June 30, 2005 to $1.72 million for the six months ended June 30,
2006. The increase was primarily a result of increases in customer service fees,
other service charges and fees, and other income,
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partially offset by decreases in net realized gains on sales of
available-for-sale securities and abstract and title fees. Customer service fees
increased by $86,000 from $415,000 for the six months ended June 30, 2005 to
$501,000 for the six months ended June 30, 2006, primarily due to increased NSF
and overdraft fees. Other service charges and fees increased by $102,000 from
$352,000 for the six months ended June 30, 2005 to $454,000 for the six months
ended June 30, 2006 primarily due to an increase in debit card fees and fees
earned from commissions on gap insurance, which is an insurance product offered
to auto loan customers to provide coverage for the "gap" between insurance
coverage and loan payoff in the event of total loss on a vehicle. There were no
net realized gains on sales of available-for-sale securities for the six months
ended June 30, 2006 compared to $111,000 in gains generated from the sales of
equity securities for the six months ended June 30, 2005. Abstracting and title
fees decreased by $28,000 from $188,000 for the six months ended June 30, 2005
to $160,000 for the six months ended June 30, 2006, due to reduced dollar volume
of business in 2006.
Total noninterest expenses were $4.9 million for the six months ended June 30,
2006 as compared to $4.3 million for the six months ended June 30, 2005. The
primary reasons for the $657,000 increase were increases in salaries and
employee benefits, net occupancy expense, equipment expense, data processing
expense, professional expenses, and other expenses, partially offset by a
reduction in amortization of loan servicing rights. Salaries and employee
benefits increased by $330,000 from $2.3 million for the six months ended June
30, 2005 to $2.6 million for the six months ended June 30, 2006, as a result of
an increase in salaries, health insurance expense, and incentive plan expense. A
$258,000 increase in salaries was primarily a result of the addition of nine
full-time employees and one part-time employee as a result of the purchase of
Rantoul First Bank in October, 2005, and from the addition of three full-time
employees and one part-time employee from the addition of the Martinsville
branch which opened in May, 2006. Health insurance expense increased as a result
of an increase in premiums and the addition of the employees from Rantoul and
Martinsville. Incentive plan expense increased as a result of accruals related
to shares of Company stock awarded in December, 2005 to members of the Board of
Directors and management which will vest according to a defined schedule based
on meeting defined financial performance goals over the next five year period.
Net occupancy expense increased by $114,000 from $202,000 for the six months
ended June 30, 2005 compared to $316,000 for the six months ended June 30,
2006. This increase can be attributed to an increase in real estate taxes for
the Savoy branch, additional occupancy expenses associated with the addition of
the Rantoul location, as well as additional building rent expense in 2006. In
late 2005, the Company completed a property exchange to acquire the adjoining
property to the current Operations Center for the building currently housing the
main office of the Bank in Paris, Illinois. This exchange of property provided
the area needed for the expansion and renovation to convert the Operations
Center into the new main bank office in Paris, Illinois. As part of the
agreement, the Company will rent the building currently housing the main office
until completion of the construction project in early third quarter of 2006. The
move to the new facility was substantially complete at the end of July, 2006.
Equipment expense increased by $79,000 primarily as a result of upgrades in
equipment to the Company's ATM network, and increased software usage fees
associated with loan processing systems. Data processing fees increased by
$67,000 primarily due to increases in the number of accounts and
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transactions from the Rantoul acquisition, and an increase in billings
associated with ATM processing.
Professional fees increased by $75,000 from $209,000 for the six months ended
June 30, 2006 to $284,000 for the six months ended June 30, 2006, primarily due
to increased legal, accounting, and consulting fees in 2006. Amortization of
loan servicing rights decreased by $134,000 from $256,000 for the six months
ended June 30, 2005 to $122,000 for the six months ended June 30, 2006, as
result of the reduction in loan servicing assets. Other expenses increased by
$136,000 from $426,000 for the six months ended June 30, 2005 to $562,000 for
the six months ended June 30, 2006. This increase was primarily attributable to
an increase in loan origination expenses, increased supervisory fees from the
State of Illinois, an increase in postage, an increase in corporate filing fees,
and an increase in telephone expense due to the addition of the Rantoul branch.
Income tax expense was $137,000 for the six months ended June 30, 2006 as
compared to $224,000 for the six months ended June 30, 2005. The decrease of
$87,000 in income tax expense was primarily due to a reduction in income before
income taxes of $282,000 from $927,000 for the six months ended June 30, 2005
compared to $645,000 for the six months ended June 30, 2006.
COMPARISON OF THREE MONTH PERIODS ENDED JUNE 30, 2006 AND 2005
Net income for the three months ended June 30, 2006 decreased by $119,000 or
29.8% from $400,000 for the three months ended June 30, 2005 to $281,000 for the
three months ended June 30, 2006. The decrease in net income is primarily due to
an increase in noninterest expense, partially offset by increases in net
interest income and noninterest income, and decreases in the provision for loan
losses and income tax expense.
Net interest income increased $40,000 or 2.1% from $1.91 million for the three
months ended June 30, 2005 to $1.95 million for the three months ended June 30,
2006. The primary reasons for the increase in net interest income was an
increase in total interest and dividend income of $852,000 partially offset by
an increase of $812,000 in interest expense. The Company's net interest margin
was 3.08% and 3.41% during the three months ended June 30, 2006 and 2005,
respectively. The net interest margin decreased as a result of a decrease in
interest spread. Interest spread decreased by 16 basis points from 2.95% for the
three months ended June 30, 2005 to 2.79% for the three months ended June 30,
2006. The average rate paid on interest bearing liabilities increased by 88
basis points, while the average rate earned on interest bearing assets increased
by 71 basis points. The average balances of interest bearing assets for the
three month period ending June 30, 2006 increased by $29.0 million to $253.0
million compared to $224.0 million in average earning assets for the three month
period ending June 30, 2005. Interest bearing liabilities increased by $47.5
million from $184.5 million for the three month period ended June 30, 2005 to
$232.0 million for the three month period ended June 30, 2006. The increase in
interest bearing assets and liabilities was primarily due to the acquisition of
Rantoul First Bank in October, 2005.
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Total interest and dividend income increased by $852,000 or 27.6% from $3.1
million for the three months ended June 30, 2005 to $3.9 million for the three
months ended June 30, 2006. The increase of $852,000 was primarily due to an
increase in loan interest income, partially offset by slight decreases in
interest and dividend income from securities and dividends on Federal Home Loan
Bank stock. The increase of $891,000 in loan interest income was primarily due
to a $46.6 million increase in the average loan balance and by an increase in
the average loan rate of 19 basis points. Interest and dividend income from
securities decreased by $32,000 primarily due to a decrease of $18.1 million in
the average balance of investments, partially offset by an increase of 75 basis
points in the average rate. Interest income from deposits with financial
institutions increased by $2,000 primarily due to an increase in the average
rate of 193 basis points, offset by a decrease of $1.7 million in the average
balance of deposits with financial institutions. Dividends on Federal Home Loan
Bank stock decreased by $9,000 from the three months ended June 30, 2005 to the
three months ended June 30, 2006 due to a decrease in average rate of 230 basis
points, offset by an increase in the average balance of $2.0 million.
Interest expense increased by $812,000 or 68.6% from $1.2 million for the three
months ended June 30, 2005 to $2.0 million for the three months ended June 30,
2006. This increase was primarily due to an increase of $679,000 in interest on
deposits, and by a $133,000 increase in interest on Federal Home Loan Bank
advances and other debt. The $679,000 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 $133,000
increase in interest on Federal Home Loan Bank advances and other debt was due
to an increase in the average balance as well as an increase in average interest
rate.
For the three months ended June 30, 2006 and 2005, the provision for losses on
loans was $50,000 and $94,000, respectively. The provision for the three months
ended June 30, 2006 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
June 30, 2006, its allowance for loan losses was adequate.
Noninterest income increased $89,000 or 10.6% from $842,000 for the three months
ended June 30, 2005 to $931,000 for the three months ended June 30, 2006. The
increase was primarily a result of increases in customer service fees and other
service fees and charges, partially offset by a decrease in net realized gains
on sales of available-for-sale securities. Customer service fees increased by
$49,000 from $223,000 for the three months ended June 30, 2005 to $272,000 for
the three months ended June 30, 2006, primarily due to increased NSF and
overdraft fees. Other service charges and fees increased by $102,000 from
$170,000 for the three months ended June 30, 2005 to $272,000 for the three
months ended June 30, 2006, primarily due to an increase in debit card fees and
an increase in fees earned from commissions on gap insurance, which is an
insurance product offered to auto loan customers to provide coverage for the
"gap" between insurance coverage and loan payoff in the event of total loss on a
vehicle. There were no net
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realized gains on sales of available-for-sale securities for the three months
ended June 30, 2006 compared to $79,000 in gains generated from the sales of
equity securities for the three months ended June 30, 2005.
Total noninterest expenses were $2.5 million for the three months ended June 30,
2006 as compared to $2.1 million for the three months ended June 30, 2005. The
primary reasons for the $325,000 increase were increases in salaries and
employee benefits, net occupancy expense, equipment expense, data processing
expense, professional expenses, and other expenses, partially offset by a
reduction in marketing expense and amortization of loan servicing rights.
Salaries and employee benefits increased by $185,000 from $1.1 million for the
three months ended June 30, 2005 to $1.3 million for the three months ended June
30, 2006, as a result of an increase in salaries, health insurance expense, and
incentive plan expense. A $171,000 increase in salaries was primarily a result
of the addition of nine full-time and one part-time employees as a result of the
purchase of Rantoul First Bank in October, 2005, and the addition of three full
time and one part time employee with the opening of the Martinsville branch.
Health insurance expense increased as a result of an increase in premiums and
the addition of the employees from Rantoul and Martinsville. Incentive plan
expense increased due to the accrual associated with the award of shares in
December, 2005 based on meeting defined financial performance goals over a five
year vesting schedule.
Net occupancy expense increased by $72,000 from $99,000 for the three months
ended June 30, 2005 compared to $171,000 for the three months ended June 30,
2006. This increase can be attributed to additional occupancy expenses
associated with the addition of the Rantoul location, as well as additional
building rent expense in 2006, and a substantial increase in real estate taxes
for the Savoy branch. In late 2005, the Company completed a property exchange to
acquire the adjoining property to the current Operations Center for the building
currently housing the main office of the Bank in Paris, Illinois. This exchange
of property provided the area needed for the expansion and renovation to convert
the Operations Center into the new main bank office in Paris, Illinois. As part
of the agreement, the Company will rent the building currently housing the main
office until completion of the construction project in early third quarter of
2006. Equipment expense increased by $47,000 primarily as a result of upgrades
in equipment to the Company's ATM network, and increased usage fees associated
with loan processing and origination software. Data processing fees increased by
$34,000 primarily due to the Rantoul acquisition.
Professional fees increased by $27,000 from $98,000 for the three months ended
June 30, 2005 to $125,000 for the three months ended June 30, 2006, primarily
due to increased legal, accounting and audit, and consulting fees in 2006.
Marketing expense decreased by $31,000 from $76,000 for the three months ended
June 30, 2005, compared to $45,000 for the three months ended June 30, 2006.
This decrease is temporary, as several promotional events are scheduled to
coincide with the move to the new Bank home office facility in Paris during the
third quarter. Amortization of loan servicing rights decreased by $70,000 from
$132,000 for the three months ended June 30, 2005 to $62,000 for the three
months ended June 30, 2006, as result of the reduction in loan servicing assets.
Other expenses increased by $49,000 from $222,000 for the three months ended
June 30, 2005 to $271,000 for the three months ended June 30, 2006. This
increase was primarily attributable to an increase in loan origination expenses,
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increased supervisory fees from the State of Illinois, an increase in postage
expense, and an increase in telephone expense due to the addition of the Rantoul
and Martinsville branches.
Income tax expense was $96,000 for the three months ended June 30, 2006 as
compared to $129,000 for the three months ended June 30, 2005. The decrease of
$33,000 in income tax expense was primarily due to a reduction in income before
income taxes of $152,000 from $529,000 for the three months ended June 30, 2005
compared to $377,000 for the three months ended June 30, 2006.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting standards
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and the related disclosure of contingent
assets and liabilities. Actual results could differ from those estimates under
different assumptions and conditions. Management believes that its critical
accounting policies and significant estimates include determining the allowance
for loan losses, the valuation of loan servicing rights, and the valuation of
foreclosed real estate.
Allowance for loan losses
The allowance for loan losses is a significant estimate that can and does change
based on management's assumptions about specific borrowers and current general
economic and business conditions, among other factors. Management reviews the
adequacy of the allowance for loan losses on at least a quarterly basis. The
evaluation by management includes consideration of past loss experience, changes
in the composition of the loan portfolio, the current condition and amount of
loans outstanding, identified problem loans and the probability of collecting
all amounts due.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. A worsening or protracted economic
decline would increase the likelihood of additional losses due to credit and
market risk and could create the need for additional loss reserves.
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
-23-
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 June 30, 2006 and
December 31, 2005, loan servicing rights had carrying values of $412,000 and
$462,000, 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 June 30, 2006, the Company had outstanding commitments to originate $7.8
million in loans, and $12.2 million available to be drawn upon for open-end
lines of credit. In addition, unfunded commitments include $1.0 million in
checking accounts with specified amounts of overdraft protection, and $149,000
in letters of credit. For more information on the outstanding commitments, see
the discussion below the caption "Off-Balance Sheet Arrangements and Contractual
Commitments". As of June 30, 2006, the total amount of certificates scheduled to
mature in the following 12 months was $95.6 million. The Company believes that
it has adequate resources to fund all of its commitments. The Company's most
liquid assets are cash and cash equivalents. The level of cash and cash
equivalents is dependent on the Company's operating, financing, lending and
investing activities during any given period. The level of cash and cash
equivalents at June 30, 2006 was $12.8 million. The Company's future short-term
requirements for cash are not expected to significantly change. In the event
that the Company should require funds beyond its capability to generate them
internally, additional sources of funds are available such as Federal Home Loan
Bank advances.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL COMMITMENTS
At June 30, 2006, the Company had outstanding commitments to originate loans of
$7.8 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 $2.8 million, with the remainder at floating
rates. In addition, the Company had outstanding unused lines of credit to
borrowers aggregating $7.1 million for commercial lines of credit, $5.1 million
for consumer lines of credit, and $1.0 million for unused overdraft protection
on checking accounts. Outstanding commitments for letters of credit at June 30,
2006 totaled $149,000. Since these
-24-
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 June 30, 2006 which by their terms have contractual maturity
dates subsequent to June 30, 2006:
Next 12 13-36 37-60 More than
Months Months Months 60 Months Totals
------- ------- ------- --------- -------
(Dollars in thousands)
UNFUNDED COMMITMENTS:
Letters of credit $ 109 $ 40 $ -- $ -- $ 149
Lines of credit 8,282 126 416 3,362 12,186
Overdraft protection 1,036 -- -- -- 1,036
------- ------- ------- ------- -------
Totals $ 9,427 $ 166 $ 416 $ 3,362 $13,371
======= ======= ======= ======= =======
The Company has a building commitment of $5.6 million for its building expansion
in Paris, Illinois, of which approximately $4.9 million has been expended as of
June 30, 2006, which is 85% complete at June 30, 2006.
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 June 30, 2006:
----------------------------------------------------------------------------------------------------------------------
REQUIRED FOR TO BE WELL
JUNE 30, 2006 ACTUAL ADEQUATE CAPITAL CAPITALIZED
----------------------------------------------------------------------------------------------------------------------
Amount % Amount % Amount %
----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Total capital (to risk-weighted assets) $32,538 17.96 $14,492 8.0 $18,115 10.0
----------------------------------------------------------------------------------------------------------------------
Tier 1 capital (to risk-weighted assets) 30,269 16.71 7,246 4.0 10,869 6.0
----------------------------------------------------------------------------------------------------------------------
Tier 1 capital (to average assets) 30,269 10.84 11,171 4.0 13,964 5.0
----------------------------------------------------------------------------------------------------------------------
On February 27, 2006, the Federal Reserve Board announced the approval of a
final rule that expands the definition of a small bank holding company (BHC)
under the Board's Small Bank Holding Company Policy Statement. Under the revised
regulatory financial reporting
-25-
requirements, the Company will now qualify as a small BHC, and as such, will
only be required to file parent-only financial data on a semi-annual basis.
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 six months ended June 30, 2006 and 2005.
The principal objectives of the Company's interest rate risk management function
are: (i) to evaluate the interest rate risk included in certain balance sheet
accounts; (ii) to determine the level of risk appropriate given the Company's
business focus, operating environment, capital and liquidity requirements, and
performance objectives; (iii) to establish asset concentration guidelines; and
(iv) to manage the risk consistent with Board-approved guidelines. Through such
management, the Company seeks to reduce the vulnerability of its operations to
changes in interest rates and to manage the ratio of interest rate sensitive
assets to interest rate sensitive liabilities within specified maturity terms or
repricing dates. The Company's Board of Directors has established 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, 2005. Please refer to the Company's Form 10-K
for the year ended December 31, 2005 for further discussion of the Company's
market and interest risk.
-26-
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation as of June 30, 2006, 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
June 30, 2006.
Disclosure controls and procedures are the controls and other procedures of the
Company that are designed to ensure that the information required to be
disclosed by the Company in its reports filed or submitted under the Securities
Exchange Act of 1934, as amended (Exchange Act) is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by the Company in its reports filed under
the Exchange Act is accumulated and communicated to the Company's management,
including the principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and subsidiary are 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 1A. RISK FACTORS
There have been no material changes from the risk factors set forth in Part I,
Item 1A "Risk Factors" of the Company's Form 10-K for the year ended December
31, 2005. Please refer to that section of the Company's Form 10-K for
disclosures regarding risks and uncertainties related to the Company's business.
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 June 30, 2006.
-27-
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
-----------------------------------------------------------------------------------------------------
4/1/2006
to 14,250 11.28 14,250 116,710
4/30/2006
-----------------------------------------------------------------------------------------------------
5/1/2006
to 9,000 12.03 9,000 107,710
5/31/2006
-----------------------------------------------------------------------------------------------------
6/1/2006
to 5,000 11.91 5,000 102,710
6/30/2006
-----------------------------------------------------------------------------------------------------
Total 28,250 11.63 28,250 102,710
-----------------------------------------------------------------------------------------------------
(1) The board of directors approved the repurchase by the Company of 124,850
shares over the one year period ending April 18, 2006.
(2) The board of directors approved the repurchase by the Company of 117,710
shares over the one year period ending April 13, 2007.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. The Company's Annual Meeting of Shareholders was held on April 17,
2006.
b. Not applicable.
c. At such meeting, there were 2,367,450 shares of Common Stock
entitled to be voted. The shareholders approved the following
matters:
1. The election of the following individuals as Directors:
Votes For Votes Withheld Term
--------- -------------- -------
Joseph R. Schroeder 2,058,629 85,897 3 years
James D. Motley 2,090,390 54,136 3 years
Vick N. Bowyer 2,056,651 87,875 3 years
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The directors whose terms continued after the meeting were
David W. Dick, Terry J. Howard, Terry T. Hutchison, and John
W. Welborn.
2. The ratification of BKD, LLP as independent auditor of the
Company for the fiscal year ending December 31, 2006, as
reflected by 2,043,258 votes for, 900 votes against and
100,368 abstentions.
d. Not applicable.
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).
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: August 11, 2006 /s/ Terry J. Howard
---------------------------------------
Terry J. Howard
President and Chief Executive Officer
Date: August 11, 2006 /s/ Ellen M. Litteral
---------------------------------------
Ellen M. Litteral
Treasurer and Chief Financial Officer
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