10-Q 1 sept10q.txt SEPTEMBER 2003 10Q 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 EXCAHNGE ACT 1934 For the quarterly period ended September 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-11132 FIRST BANKING CENTER, INC. (Exact name of registrant as specified in its charter) Wisconsin 39-1391327 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 400 Milwaukee Ave., Burlington, WI 53105 (Address of principal executive offices) (Zip Code) (262) 763-3581 (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 define in Rule 12b-2 of the act). Yes [ ] No [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of November 3, 2003, Common stock, $1.00 par value, 1,495,623 shares outstanding. FIRST BANKING CENTER, INC AND SUBSIDIARY INDEX September 30, 2003 Page ---- Part I Financial Information Item 1 Consolidated Financial Statements Unaudited Consolidated Balance Sheets, 3 September 30, 2003 and December 31, 2002 Unaudited Consolidated Statements of Income, 4 For the three and nine month periods ended September 30, 2003 and 2002 Unaudited Consolidated Statements of Cash Flows, 5 For the nine months ended September 30, 2003 and 2002 Notes to Unaudited Consolidated Financial Statements 6-8 Item 2 Management's Discussion and Analysis of 9-16 Financial Condition and Results of Operations Item 3 Quantitative and Qualitative Disclosures about Market 16-17 Risk Item 4 Controls and Procedures 17 Part II Other Information Item 1 Legal Proceedings 18 Item 2 Changes in Securities and Use of Proceeds 18 Item 3 Defaults upon Senior Securities 18 Item 4 Submission of Matters to a Vote of Security Holders 18 Item 5 Other Information 18 Item 6 Exhibits and Reports on Form 8-K 18 Signatures 19-23 Page 2 PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements FIRST BANKING CENTER, INC. AND SUBSIDIARY UNAUDITED CONSOLIDATED BALANCE SHEETS

Page 3 FIRST BANKING CENTER, INC. AND SUBSIDIARY UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

Page 4 FIRST BANKING CENTER, INC. AND SUBSIDIARY UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

Page 5 FIRST BANKING CENTER, INC AND SUBSIDIARY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2003 NOTE 1 - Basis of Presentation The unaudited consolidated financial statements include the accounts of First Banking Center, Inc. (the "Company") and First Banking Center, its wholly owned subsidiary. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial position, results of operation and cash flows for the interim periods have been made. The results of operations for the three and nine months ended September 30, 2003 are not necessarily indicative of the results to be expected for the entire fiscal year. The unaudited interim financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and industry practice. Certain information in footnote disclosure normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America and industry practice has been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's December 31, 2002 audited financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of income and expenses during the reported periods. Actual results could differ from those estimates. NOTE 2 - Earnings Per Share The following information calculates the computation of earnings per share on a basic and diluted basis.

NOTE 3 - Comprehensive Income The following table presents our comprehensive income.

Page 6 NOTE 4 - Stock-based Compensation Plan: For the nine months ended September 30, 2003 and 2002, the Company had one stock-based key officer and employee compensation plan. The Company accounts for this plan under the recognitions 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 the income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Financial Accounting Standards Board (FASB) Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

In determining compensation cost using the fair value method prescribed in Statement No. 123, the value of each grant is estimated at the grant date with the following weighted-average assumptions used for grants on September 30, 2003 and 2002, respectively: dividend yield of 1.7 percent and 1.6 percent; expected price volatility of 5.2 percent and 5.2 percent, blended risk-free interest rates of 4.22 percent and 4.27 percent; and expected lives of 10 years, respectively. NOTE 5 - Commitments and Contingencies In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the consolidated financial statements. The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, financial guarantees, and standby letters of credit. They involve, to varying degrees, elements of credit risk in excess of amounts recognized on the consolidated balance sheets. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and issuing letters of credit as they do for on-balance-sheet instruments. Page 7 A summary of the contract or notional amount of the Company's exposure to off-balance-sheet risk as of September 30 is as follows:

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third-party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties. Credit card commitments are unsecured. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third-party. Those guarantees are primarily issued to support public and private borrowing arrangements and, generally, have terms of one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds collateral, which may include accounts receivable, inventory, property, equipment, and income-producing properties, supporting those commitments if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third-party, the Bank would be required to fund the commitment. The maximum potential amount of future payments the Bank could be required to make is represented by the contractual amount shown in the summary on the previous page. If the commitment is funded the Bank would be entitled to seek recovery from the customer. At September 30, 2003 and December 31, 2002, no amounts have been recorded as liabilities for the Bank's potential obligations under these guarantees. Page 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations FIRST BANKING CENTER, INC AND SUBSIDIARY MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As of September 30, 2003 The following discussion provides additional analysis of the financial condition and results of operations of the Company for the three and nine months ended September 30, 2003. This discussion focuses on the significant factors that affected the Company's earnings so far in 2003, with comparisons to 2002. As of September 30, 2003, First Banking Center (the "Bank") was the only direct subsidiary of the Company and its operations contributed nearly all of the revenue for the year. The Company provides various support functions for the Bank and receives payment from the Bank for these services. These intercompany payments are eliminated for the purpose of these consolidated financial statements. The Bank has three wholly owned subsidiaries, FBC Financial Services, Corp., a brokerage and financial services subsidiary, FBC-Burlington, Inc., an investment subsidiary located in Nevada and Burco Holdings, LLC, a real estate subsidiary for the purpose of holding and liquidating property acquired as other real estate. Overview As of September 30, 2003, total Company assets were $512.8 million decreasing 1.02% from $518.2 million as of December 31, 2002. Total income, for the nine months ended September 30, 2003, was $4.9 million or $3.26 per share, increasing $15 thousand or .3% from $4.9 million or $3.30 per share in 2002. The significant items resulting in the above-mentioned results are discussed below. Financial Condition Loans Loans outstanding were $381.3 million and $372.1 million on September 30, 2003 and December 31, 2002 respectively. This represents an increase of $9.1 million or 2.5%. The following table summarizes the changes to date in the major loan classifications.

Allowance for Loan Losses The allowance for loan losses was $4.7 million or 1.24% of gross loans on September 30, 2003, compared with $5.0 million or 1.34% of gross loans on December 31, 2002. Net charge-offs were $351 thousand or .09% of gross loans and $97 thousand or .03% for the nine months ended September 30, 2003 and 2002 respectively. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. The allowance for loan losses is adequate to cover probable credit losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio. In accordance with FASB Statements 5 and 114, Page 9 the allowance is provided for losses that have been incurred as of the balance sheet date. The allowance is based on past events and current economic conditions, and does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. Management reviews a calculation of the allowance for loan losses on a quarterly basis. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. A loan is impaired when it is probable the company will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. In addition, various regulatory agencies periodically review the allowance for loan losses. These agencies may require the bank to make additions to the allowance for loan losses based on their judgments of collectibility based on information available to them at the time of their examination. For the nine months ending September 30, 2003, $90 thousand was charged to current earnings and added to the allowance for loan losses compared to $271 thousand during the first nine months of 2002. The bank charged less to earnings during 2003 versus 2002 because management determined the allowance to be adequate as of September 30, 2003. Non-accrual, Past Due and Renegotiated Loans

The policy of the Company is to place a loan on non-accrual status if: (a) payment in full of interest and principal is not expected, or (b) principal or interest has been in default for a period of 90 days or more unless the obligation is both in the process of collection and well secured. Well secured is defined as collateral with sufficient market value to repay principal and all accrued interest. A debt is in the process of collection if collection of the debt is proceeding in due course either through legal action, including judgement enforcement procedures, or in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to current status. The non-accrual loans consisted primarily of $314 thousand of commercial real estate loans, $1.2 million of residential real estate loans and $87 thousand of agricultural real estate. On September 30, 2003, the ratio of non-accrual loans to the allowance for loan losses was 35% compared to 40.4% on December 31, 2002. The company believes it has an adequate allowance for any anticipated losses for these loans. As of September 30, 2003, the Company had loans totaling $21.3 million in addition to those listed as non-accrual, past due or restructured that were identified by the Banks' internal asset rating systems as classified assets and loans which management has determined require additional monitoring. This represents a decrease of $2.9 million or 12.2% from December 31, 2002. Management is not aware of any significant loans, group of loans or segments of the loan portfolio not included above, where full collectibility cannot reasonably be expected. Management has committed resources and is focusing on efforts designed to control the amount of classified assets. The company does not have a substantial portion of its loans concentrated in one or a few industries nor does it have any foreign loans outstanding as of September 30, 2003. The company's loans are concentrated geographically in the Wisconsin counties of Racine, Walworth, Kenosha, Lafayette and Green. Page 10 Investments securities - Available for Sale The fair value of the securities available-for-sale portfolio decreased $7.8 million or 8.9% from December 31, 2002. For the purposes of this discussion, changes in investment security balances are based on amortized costs. The decrease came from four areas of the portfolio. The company purchased $41.5 million of U.S. Government Agency Discount Notes, $7.6 million of U.S. mortgage-backed securities, $4.7 million of municipal securities and $.5 of Corporate Bonds. The company sold $9.1 million of U.S. Government Agency Discount Notes. The company had $34.0 million of U.S. Government Agency Discount Notes and $1.7 million of municipal securities mature. There were $.5 million of U.S. Government Agency Discount Notes, $.7 million of U.S. mortgage-backed securities and $1.6 million of municipal securities called. Deposits and Borrowed Funds Total deposits and borrowed funds were $456.6 million on September 30, 2003 compared to $465.6 million on December 31, 2002. This is a decrease of $9.0 million or 1.9%. The decrease is mainly due to seasonal fluctuations in Money Market and Savings accounts. The following table summarizes the changes in the major classifications of deposits and borrowed funds. Most of this change was the result of a new interest bearing checking account which was offered in September, 2003. Customers have been switching from a non-interest bearing checking account to this new interest bearing account.

Capital resources As of September 30, 2003, the Company's stockholders' equity increased $4.1 million or 8.5% from December 31, 2002. Net income of $4.9 million was the primary reason for the increase. The company purchased $112 thousand and sold $102 thousand of treasury stock during the first nine months of 2003. Accumulated other comprehensive income decreased $224 thousand from $1.6 million to $1.3 million. Dividends were paid in June 2003 in the amount of $583 thousand. In December 1990, the Federal Reserve Board's risk-based guidelines became effective. Under these guidelines capital is measured against the Company's subsidiary bank's risk-weighted assets. The Company's tier 1 capital (common stockholders' equity less goodwill) to risk-weighted assets was 13.0% at September 30, 2003, well above the 4% minimum required. Total capital to risk-adjusted assets was 14.3%, also well above the 8% minimum requirement. The leverage ratio was at 9.8% compared to the 4% minimum requirement. According to FDIC capital guidelines, the Company's subsidiary bank is considered to be "well capitalized." Asset/liability management The principal function of asset/liability management is to manage the balance sheet mix, maturities, repricing characteristics and pricing components to provide an adequate and stable net interest margin with an acceptable level of risk over time and through interest rate cycles. Page 11 Interest-sensitive assets and liabilities are those that are subject to repricing within a specific relevant time horizon. The Bank measures interest-sensitive assets and liabilities, and their relationship with each other at terms of immediate, quarterly intervals up to 1 year, and over 1 year. Changes in net interest income, other than volume related, arise when interest rates on assets reprice in a time frame or interest rate environment that is different from the repricing period for liabilities. Changes in net interest income also arise from changes in the mix of interest earning assets and interest-bearing liabilities. The Bank's strategy with respect to asset/liability management is to maximize net interest income while limiting its exposure to a potential downward movement. Strategy is implemented by the Bank's management, which takes action based upon its analysis of the Bank's present positioning, its desired future positioning, economic forecasts, and its goals. It is the Bank's desire to maintain a cumulative GAP of positive or negative 15% of rate sensitive assets at the 1-year time frame. The current percentage is a positive 22%, which compares to a positive 20% as of December 31, 2002. Although these ratios are outside the Bank's target range, the Bank's management feels the ratios are appropriate at this time due to management's projection for future interest rates. Liquidity Liquidity measures the ability of First Banking Center to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund its operations, and to provide for customers' credit needs. One source of liquidity is cash and short-term assets, such as interest-bearing deposits in other banks and federal funds sold, which totaled $22.6 million at September 30, 2003, compared with $33.7 million at December 31, 2002. The Bank has a variety of sources of short-term liquidity available to it, including federal funds purchased from correspondent banks, sales of securities available for sale, FHLB advances, lines of credit and loan participations or sales. First Banking Center also generates liquidity from the regular principal payments and prepayments made on its portfolio of loans and mortgage-backed securities. The liquidity of First Banking Center is comprised of three primary classifications: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Net cash provided by operating activities was $6.5 million. Net cash used in investing activities was $3.9 million. Net cash used in financing activities was $9.6 million, for the nine months ended September 30, 2003. For the nine months ending September 30, 2002, net cash provided by operating activities was $5.8 million. Net cash used in investing activities was $14.9 million. Net cash provided by financing activities was $5.5 million. Impact of Inflation and Changing Prices The consolidated financial statements and the accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollar amounts without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of First Banking Center's operations. Unlike industrial companies, nearly all of the assets and liabilities of First Banking Center are monetary in nature. As a result, interest rates have a greater impact on First Banking Center's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. Forward Looking Statements- 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. First Banking Center intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995, and is including this statement for purposes of these safe harbor Page 12 provisions. Forward-looking statements, which are based on certain assumptions and describe First Banking Center's future plans, strategies and expectations are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions. First Banking Center'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 First Banking Center's operations and future prospects include, but are not limited to, changes in: interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in our market area, our implementation of new technologies, First Banking Center's ability to develop and maintain secure and reliable electronic systems 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. Current Accounting Developments Financial Accounting Standards Board Interpretation (FIN) No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others - an Interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34". FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002, and were adopted in the Company's financial statements for the year ended December 31, 2002. Implementation of the remaining provisions of FIN 45 on January 1, 2003 did not have a significant impact on the Company's financial statements. The Financial Accounting Standards Board has issued Statement 149, "Amendment of Statement 133 on Derivative Instruments and Hedging". This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. The Statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. Implementation of the Statement did not have a material impact on the financial statements. The Financial Accounting Standards Board has issued Statement 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and requires that certain freestanding financial instruments be reported as liabilities in the balance sheet. Depending on the type of financial instrument, it is required to be accounted for at either fair value or the present value of future cash flows determined at each balance sheet date with the change in that value reported as interest expense in the income statement. Prior to the application of Statement No. 150, either those financial instruments were not required to be recognized, or if recognized were reported in the balance sheet as equity and changes in the value of those instruments were normally not recognized in net income. For the Company, the Statement was effective July 1, 2003 and implementation did not have a material impact on the consolidated financial statements. Results of operations Net Interest Income Net interest income is the difference between interest income and fees on loans and interest expense, and is the largest contributing factor to net income for the Company. All discussions of rate are on an annualized tax-equivalent basis, which accounts for income earned on nontaxable loans and securities that are not fully subject to federal taxes. Net interest income was $16.4 million and $15.4 million for the nine months ended September 30, 2003 and 2002. Net interest margin as a percentage of average earning assets (includes loans placed on nonaccrual status) was 4.56% and 4.73% for the nine months ended September 30, 2003 and 2002. Page 13 The major component of interest income and fees on loans is the income generated by loans. Interest income and fees on loans decreased due to decreased rates on increasing average balances. The rates earned decreased from 7.09% to 6.66%. As of September 30, 2003 average balances outstanding increased, however, rates paid for liabilities decreased causing a decrease in interest expense. The major components of interest expense are interest paid on Certificates of Deposit (Time Deposits) and on Money Market Deposits. Interest expense on Time Deposits decreased due to decreased rates paid on increasing average balances. The rates paid decreased from 2.83% to 2.24%, for the nine months ended September 30, 2002 and 2003 respectively. Interest expense on Money Market Deposits decreased as a result of decreased rates on decreased average balances. The rates paid decreased from 1.33% to .66%, for the nine months ended September 30, 2002 and 2003 respectively. The following table summarizes the changes and reasons for the changes in interest earned and paid during the three and nine months ended September 30, 2003 and 2002.

Page 14

Non-interest income Non-interest income increased $81 thousand or 7.7% for the three months ended September 30, 2003 compared to the three months ended September 30, 2002. The increase was primarily due to gains in the sale of securities. Non-interest income decreased overall $48 thousand or 1.6% for the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002. The decrease was primarily the result of a decline in brokerage annuity sales. Non-interest expense Non-interest expense increased $328 thousand or 8.8% and $982 thousand or 9.1% for the three and nine months ended September 30, 2003 compared to the three and nine months ended September 30, 2002. Salaries and benefits accounted for $144 thousand and $493 thousand of the increase for the three and nine months ended September 30, 2003 compared to the three and nine months ended September 30, 2002. The increase in salaries and benefits is due to normal wage increases and increased health insurance costs as well as additional expenses due to the opening of a branch and the acquisition of a branch during the second quarter. Occupancy expense increased $97 thousand for the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002 due primarily to increases in real estate taxes, depreciation and utilities. Advertising and marketing expense increased $24 thousand and $175 thousand while other expenses increased $167 thousand and $192 thousand for the three and nine months ended September 30, 2003 compared to the three and nine months ended September 30, 2002, some of which can be attributed to the opening of a branch and the acquisition of a branch during the second quarter. Critical Accounting Policies Allowance for Loan Losses Management believes the allowance for loan losses accounting policy is critical to the portrayal and understanding of our financial condition and results of operations. As such, selection and application of this "critical accounting policy" involves judgments, estimates, and uncertainties that are susceptible to change. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results or operations is a reasonable likelihood. Page 15 Income Taxes See Note 1 of the notes to our audited consolidated financial statements for the year ended December 31, 2002 for our income tax accounting policy. Income tax expense recorded in the consolidated income statement involves interpretation and application of certain accounting pronouncements and federal and state tax codes, and is, therefore, considered a critical accounting policy. We undergo examinations by various regulatory taxing authorities. Such agencies may require that changes in the amount of tax expense or valuation allowance be recognized when their interpretations differ from those of management, based on their judgments about information available to them at the time of their examinations. See Note 11 of the notes to our audited consolidated financial statements for the year ended December 31, 2002 for more income tax information. Item 3. Quantitative and Qualitative Disclosures about Market Risk First Banking Center, like other financial institutions, is subject to direct and indirect market risk. Direct market risk exists from changes in interest rates. First Banking Center's net income is dependent on its net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than interest-earning assets. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net income. In an attempt to manage its exposure to changes in interest rates, management monitors First Banking Center's interest rate risk. The Asset/Liability Committee meets quarterly to review First Banking Center's interest rate risk position and profitability, and to make or recommend adjustments for consideration by the Board of Directors. Management also reviews the Bank's securities portfolio, formulates investment strategies, and oversees the timing and implementation of transactions to assure attainment of the Board's objectives in the most effective manner. Notwithstanding First Banking Center's interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income. In adjusting First Banking Center's asset/liability position, the Board and management attempt to manage First Banking Center's interest rate risk while maintaining or enhancing net interest margins. At times, depending on the level of general interest rates, the relationship between long-term and short-term interest rates, market conditions and competitive factors, the Board and management may decide to increase First Banking Center's interest rate risk position somewhat in order to increase its net interest margin. First Banking Center's results of operations and net portfolio values remain vulnerable to increases in interest rates and to fluctuations in the difference between long-term and short-term interest rates. One approach used to quantify interest rate risk is the net portfolio value ("NPV") analysis. In essence, this analysis calculates the difference between the present value of liabilities and the present value of expected cash flows from assets and off-balance-sheet contracts. The most recent NPV analysis, as of September 30, 2003, projects that net portfolio value would decrease by approximately 5.82% if interest rates would rise 200 basis points and would decrease by approximately 3.01% if interest rates would rise 100 basis points over the next year. It projects an increase in net portfolio value of approximately 7.65% if interest rates would drop 200 basis points and an increase of approximately 3.16% if interest rates would drop 100 basis points. Both simulations are within board-established policy limits. The Company has not experienced any material changes to its market risk position since December 31, 2002, as disclosed in the Company's 2002 Form 10K Annual Report. First Banking Center's policy is to limit the effect of a 200 basis point rate shock to plus or minus 20% of projected net interest income and to minus 20% of the market value of portfolio equity. Page 16 First Banking Center does not currently engage in trading activities or use derivative instruments to control interest rate risk. Even though such activities may be permitted with the approval of the Board of Directors, First Banking Center does not intend to engage in such activities in the immediate future. Interest rate risk is the most significant market risk affecting First Banking Center. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of First Banking Center's business activities. Item 4. Controls and Procedures Within the 90 days prior to the date of this report, the Company's Chief Executive Officer and Chief Financial Officer carried out an evaluation, with the participation of other members of management as they deemed appropriate, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as contemplated by Exchange Act Rule 13a-14. Based upon, and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective, in all material respects, in timely alerting them to material information relating to the Company (and its consolidated subsidiaries) required to be included in the periodic reports the Company is required to file and submit to the SEC under the Exchange Act. There have been no significant changes to the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date that the internal controls were most recently evaluated. There were no significant deficiencies or material weaknesses identified in that evaluation and, therefore, no corrective actions were taken. Page 17 Part II-OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 31.1 Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15(d)-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (exhibit is being filed herewith). 31.2 Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15(d)-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (exhibit is being filed herewith). 32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (exhibit is being filed herewith). 32.2 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (exhibit is being filed herewith). (b) Reports on Form 8-K None Page 18 FIRST BANKING CENTER, INC AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1943, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. First Banking Center, Inc. November 14, 2003 /s/ Brantly Chappell Date -------------------- Brantly Chappell Chief Executive Officer November 14, 2003 /s/ James Schuster Date ------------------ James Schuster Chief Financial Officer Page 19 Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Brantly Chappell, Chief Executive Officer, certify that: 1) I have reviewed this quarterly report on Form 10-Q of First Banking Center, Inc.; 2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and Date: November 14, 2003 /s/ Brantly Chappell -------------------- Brantly Chappell Chief Executive Officer Page 20 Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, James Schuster, Chief Financial Officer, certify that: 1) I have reviewed this quarterly report on Form 10-Q of First Banking Center, Inc.; 2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and Date: November 14, 2003 /s/ James Schuster ------------------ James Schuster Chief Financial Officer Page 21 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The following certification is provided by the undersigned Chief Executive Officer of First Banking Center, Inc. on the basis of such officer's knowledge and belief for the sole purpose of complying with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. CERTIFICATION In connection with the Quarterly Report of First Banking Center, Inc. (the "Company") on Form 10-Q for the period ended September 30, 2003 as filed with the Securities and Exchange Commission on November 14, 2003 (the "Report"), I, Brantly Chappell, Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/Brantly Chappell ------------------------------ Name: Brantly Chappell Title: Chief Executive Officer Date: November 14, 2003 Page 22 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The following certification is provided by the undersigned Chief Financial Officer of First Banking Center, Inc. on the basis of such officer's knowledge and belief for the sole purpose of complying with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. CERTIFICATION In connection with the Quarterly Report of First Banking Center, Inc. (the "Company") on Form 10-Q for the period ended September 30, 2003 as filed with the Securities and Exchange Commission on November 14, 2003 (the "Report"), I, James Schuster, Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/James Schuster ------------------------------ Name: James Schuster Title: Chief Financial Officer Date: November 14, 2003 Page 23

FIRST BANKING CENTER INC 10-Q