UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended June 30, 2005
OR
For the transition period from to
Commission File Number 0-14384
BancFirst Corporation
(Exact name of registrant as specified in charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
101 N. Broadway, Oklahoma City, Oklahoma
73102-8401
(Address of principal executive offices)
(Zip Code)
(405) 270-1086
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
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 checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
As of July 31, 2005 there were 7,802,497 shares of the registrant’s Common Stock outstanding.
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
BANCFIRST CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited)
(Dollars in thousands)
December 31,
2004
Cash and due from banks
Interest-bearing deposits with banks
Federal funds sold
Securities (market value: $523,774, $571,575 and $561,242, respectively)
Loans:
Total loans (net of unearned interest)
Allowance for loan losses
Loans, net
Premises and equipment, net
Other real estate owned
Intangible assets, net
Goodwill
Accrued interest receivable
Other assets
Total assets
Deposits:
Noninterest-bearing
Interest-bearing
Total deposits
Short-term borrowings
Accrued interest payable
Other liabilities
Long-term borrowings
Junior subordinated debentures
Minority interest
Total liabilities
Commitments and contingent liabilities
Stockholders’ equity:
Senior preferred stock, $1.00 par; 10,000,000 shares authorized; none issued
Cumulative preferred stock, $5.00 par; 900,000 shares authorized; none
issued
Common stock, $1.00 par, 20,000,000 shares authorized; shares issued and
outstanding: 7,801,647, 7,825,923 and 7,840,796, respectively
Capital surplus
Retained earnings
Accumulated other comprehensive income, net of income tax of $61,
$1,364 and $1,187, respectively
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
2
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
(Dollars in thousands, except per share data)
INTEREST INCOME
Loans, including fees
Securities:
Taxable
Tax-exempt
Total interest income
Deposits
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Trust revenue
Service charges on deposits
Securities transactions
Income from sales of loans
Insurance commissions and premiums
Other
Total noninterest income
Salaries and employee benefits
Occupancy and fixed assets expense, net
Depreciation
Amortization of intangible assets
Data processing services
Net expense from other real estate owned
Marketing and business promotion
Total noninterest expense
Income before taxes
Income tax expense
Net income
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities
Reclassification adjustment for (gains) losses included in net income
Comprehensive income
Basic
Diluted
3
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended
June 30,
Purchases of securities:
Held for investment
Available for sale
Maturities of securities:
Proceeds from sales and calls of securities:
Net (increase) decrease in federal funds sold
Purchases of loans
Proceeds from sales of loans
Net other increase in loans
Purchases of premises and equipment
Proceeds from the sale of other real estate owned and repossessed assets
Other, net
Net cash provided (used) by investing activities
Net increase (decrease) in demand, transaction and savings deposits
Net decrease in certificates of deposits
Net increase in short-term borrowings
Net decrease in long-term borrowings
Issuance of junior subordinated debentures
Issuance of common stock
Acquisition of common stock
Cash dividends paid
Net cash provided (used) by financing activities
Net (decrease) increase in cash and due from banks
Cash and due from banks at the beginning of the period
Cash and due from banks at the end of the period
Cash paid during the period for interest
Cash paid during the period for income taxes
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) GENERAL
The accompanying consolidated financial statements include the accounts of BancFirst Corporation, Century Life Assurance Company, Council Oak Partners, LLC, Wilcox & Jones, Inc., and BancFirst and its subsidiaries (the “Company”). The operating subsidiaries of BancFirst are Council Oak Investment Corporation, Citibanc Insurance Agency, Inc., BancFirst Agency, Inc., Lenders Collection Corporation, and PremierSource LLC. Three other operating subsidiaries of BancFirst, Mojave Asset Management Company, Desert Asset Management Company, and Delamar Asset Limited Partnership, were liquidated and dissolved in August 2004. One other operating subsidiary of BancFirst, Express Financial Corporation, was liquidated and dissolved in December 2004. All significant intercompany accounts and transactions have been eliminated. Assets held in a fiduciary or agency capacity are not assets of the Company and, accordingly, are not included in the consolidated financial statements.
The unaudited interim financial statements contained herein reflect all adjustments which are, in the opinion of management, necessary to provide a fair statement of the financial position and results of operations of the Company for the interim periods presented. All such adjustments are of a normal and recurring nature. There have been no significant changes in the accounting policies of the Company since December 31, 2004, the date of the most recent annual report. Certain amounts in the 2004 financial statements have been reclassified to conform to the 2005 presentation.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States inherently involves the use of estimates and assumptions that affect the amounts reported in the financial statements and the related disclosures. These estimates relate principally to the determination of the allowance for loan losses, income taxes and the fair values of financial instruments. Such estimates and assumptions may change over time and actual amounts realized may differ from those reported.
(2) STOCK-BASED COMPENSATION
The Company uses the intrinsic value method, as described in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations, for accounting for its stock-based compensation. Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“FAS 123”), as amended by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123,” which, if fully adopted by the Company, would change the method the Company applies in recognizing the cost of these plans to the fair value method. Adoption of the cost recognition provisions of FAS 123 is optional and the Company has not adopted such provisions. However, pro forma disclosures as if the Company adopted the cost recognition provisions of FAS 123 in 1995 are required and are presented below.
As
Reported
APB 25 charge
FAS 123 charge
Net income per share:
The effects of applying FAS No. 123 to the pro forma disclosure are not indicative of future results. FAS No. 123 does not apply to grants of options prior to 1995 and the Company anticipates making additional grants in the future.
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(3) RECENT ACCOUNTING PRONOUNCEMENTS
In March 2004, the Financial Accounting Standards Board (FASB) Emerging Issues Task Force (EITF) released Issue 03-01, “Meaning of Other Than Temporary Impairment,” which addressed other-than-temporary impairment for certain debt and equity investments. The recognition and measurement requirements of Issue 03-01, and other disclosure requirements not already implemented, were effective for periods beginning after June 15, 2004. In September 2004, the FASB staff issued FASB Staff Position (FSP) 03-1-a, which delayed the effective date for certain measurement and recognition guidance contained in Issue 03-01. The FSP requires the application of pre-existing other-than-temporary guidance during the period of delay until a final consensus is reached. In July 2005, the FASB decided to retain the accounting for certain debt securities and will not make the changes proposed in Issue 03-01 but will issue a final FSP codifying the existing accounting guidance rather than changing the accounting.
In December 2004, the FASB revised FAS 123, “Accounting for Stock-Based Compensation” (FAS 123R). FAS 123R establishes accounting requirements for share-based compensation to employees and carries forward prior guidance on accounting for awards to nonemployees. This statement applies to all awards granted after the required effective date and to awards modified, repurchased or cancelled after that date. The cumulative effect of initially applying this statement, if any, is recognized as of the required effective date. This statement requires a public entity to measure and recognize the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of those instruments. If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. As of the required effective date, all public entities that used the fair-value based method for either recognition or disclosure under FAS No. 123 will apply this statement using a modified version of prospective application. Under that transition method, compensation cost is recognized on or after the required effective date for the portion of outstanding awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under FAS No. 123 for either recognition or pro forma disclosures. For periods prior to the required effective date, those entities may elect to apply a modified version of retrospective application under which financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods by FAS No. 123. Adoption of FAS No. 123(R) is required for public entities as of the beginning of the first fiscal year beginning after June 15, 2005. The Company will adopt this new standard effective January 1, 2006. The adoption of this standard is not expected to have a material effect on the Company’s consolidated financial statements.
In May 2005, the FASB issued FAS No. 154, “Accounting Changes and Error Corrections-a replacement of APB Opinion No. 20 and FASB Statement No. 3”. The provisions of this statement will be effective for accounting changes made in fiscal years beginning after December 15, 2005. FAS 154 requires the retrospective application for voluntary changes in accounting principles unless it is impracticable to do so, replacing the current requirement to recognize the voluntary changes in the current period of the change by including in net income the cumulative effect of changing to the new accounting principle. The Company will adopt this new standard effective January 1, 2006. The adoption of this standard is not expected to have a material effect on the Company’s consolidated financial statements.
(4) RECENT DEVELOPMENTS; MERGERS, ACQUISITIONS AND DISPOSALS
In January 2004, BancFirst Corporation established BFC Capital Trust II (“BFC II”), a trust formed under the Delaware Business Trust Act. BancFirst Corporation owns all of the common securities of BFC II. In February 2004, BFC II issued $25,000 of aggregate liquidation amount of 7.20% Cumulative Trust Preferred Securities (the “Trust Preferred Securities”) to other investors. In March 2004, BFC II issued an additional $1,000 in Trust Preferred Securities through the execution of an over-allotment option. The proceeds from the sale of the Trust Preferred Securities and the common securities of BFC II were invested in $26,804 of 7.20% Junior Subordinated Debentures of BancFirst Corporation. Interest payments on the 7.20% Junior Subordinated Debentures are payable January 15, April 15, July 15 and October 15 of each year. Such interest payments may be deferred for up to twenty consecutive quarters. The stated maturity date of the 7.20% Junior Subordinated Debentures is March 31, 2034, but they are subject to mandatory redemption pursuant to optional prepayment terms. The Trust Preferred Securities represent an undivided interest in the 7.20% Junior Subordinated Debentures, are guaranteed by BancFirst Corporation, and qualify as Tier 1 regulatory capital. During any deferral period or during any event of default, BancFirst Corporation may not declare or pay any dividends on any of its capital stock.
6
In October 2004, the Company completed the acquisition of Wilcox & Jones, Inc., an independent insurance agency headquartered in Tulsa, Oklahoma for $4.8 million. The purchase price included $4.0 million in cash and $800 in notes payable. As a result of the acquisition, Wilcox & Jones was merged into the Company and became a wholly-owned subsidiary of BancFirst Corporation. The acquisition was accounted for as a purchase. Accordingly, the effects of the acquisition have been included in the Company’s consolidated financial statements from the date of the acquisition forward.
(5) SECURITIES
The table below summarizes securities held for investment and securities available for sale.
Held for investment at cost (market value; $32,878, $34,236 and $33,168, respectively)
Available for sale, at market value
Total
The table below summarizes the maturity of securities.
Contractual maturity:
Within one year
After one year but within five years
After five years
Total debt securities
Equity securities
At June 30, 2005, the Company held 66 securities available for sale that had unrealized losses. These securities had a market value totaling $223,396 and unrealized losses totaling $2,446. These unrealized losses occurred due to increases in interest rates and spreads and not as a result of a decline in credit quality. The Company has both the intent and ability to hold these securities until the unrealized losses are recovered.
7
(6) LOANS AND ALLOWANCE FOR LOAN LOSSES
The following is a schedule of loans outstanding by category:
December 31
Commercial and industrial
Agriculture
State and political subdivisions:
Real Estate:
Construction
Farmland
One to four family residences
Multifamily residential properties
Commercial
Consumer
Total loans
Loans held for sale (included above)
The Company’s loans are mostly to customers within Oklahoma and over half of the loans are secured by real estate. Credit risk on loans is managed through limits on amounts loaned to individual borrowers, underwriting standards and loan monitoring procedures. The amounts and types of collateral obtained to secure loans are based upon the Company’s underwriting standards and management’s credit evaluation. Collateral varies, but may include real estate, equipment, accounts receivable, inventory, livestock and securities. The Company’s interest in collateral is secured through filing mortgages and liens, and in some cases, by possession of the collateral. The amount of estimated loss due to credit risk in the Company’s loan portfolio is provided for in the allowance for loan losses. The amount of the allowance required to provide for all existing losses in the loan portfolio is an estimate based upon evaluations of loans, appraisals of collateral and other estimates which are subject to rapid change due to changing economic conditions and the economic prospects of borrowers. It is reasonably possible that a material change could occur in the estimated allowance for loan losses in the near term.
Changes in the allowance for loan losses are summarized as follows:
Balance at beginning of period
Charge-offs
Recoveries
Net charge-offs
Provisions charged to operations
Balance at end of period
8
The net charge-offs by category are summarized as follows:
Three Months Ended
Commercial, financial and other
Real estate – construction
Real estate – mortgage
(7) NONPERFORMING AND RESTRUCTURED ASSETS
Below is a summary of nonperforming and restructured assets:
Past due over 90 days and still accruing
Nonaccrual
Restructured
Total nonperforming and restructured loans
Other real estate owned and repossessed assets
Total nonperforming and restructured assets
Nonperforming and restructured loans to total loans
Nonperforming and restructured assets to total assets
(8) INTANGIBLE ASSETS AND GOODWILL
The following is a summary of intangible assets:
Gross
Carrying
Amount
Accumulated
Amortization
Core deposit intangibles
Customer relationship intangibles
Amortization of intangible assets and estimated amortization of intangible assets are as follows:
Three months ended June 30, 2005
Three months ended June 30, 2004
Six months ended June 30, 2005
Six months ended June 30, 2004
Year ended December 31, 2004
9
Year ended December 31,
2005
2006
2007
2008
2009
The following is a summary of goodwill by business segment (2004 amounts have been restated for the realignment of regional executive responsibilities for certain bank locations as described in footnote 14, Segment Information):
OtherFinancial
Services
June 30, 2005
Balance at beginning of period, as presented
Restatement for realignment
Balance at beginning of period, as restated
Acquisitions, as restated
June 30, 2004
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(9) LONG-TERM BORROWINGS
The Company borrows under a line of credit from the Federal Home Loan Bank of Topeka, Kansas in order to match-fund certain long-term fixed rate loans. Such advances are at rates from 5.25% to 7.86% and mature from 2005 through 2008. Interest payments on the advances are due monthly. The Company’s assets, including residential first mortgages, are pledged as collateral for the borrowings under the line of credit.
In October 2004, the Company issued two promissory notes related to the acquisition of Wilcox & Jones, Inc., an independent insurance agency, totaling $800. The notes are payable to the prior principals who remain in management positions with the agency. The notes mature in three equal annual installments with the first installment of $267 due in October 2005. The notes have a six month adjustable interest rate equal to the 180 day Treasury Bill. At June 30, 2005 the effective interest rate was 3.09%.
(10) CAPITAL
The Company is subject to risk-based capital guidelines issued by the Board of Governors of the Federal Reserve System. These guidelines are used to evaluate capital adequacy and involve both quantitative and qualitative evaluations of the Company’s assets, liabilities, and certain off-balance-sheet items calculated under regulatory practices. Failure to meet the minimum capital requirements can initiate certain mandatory or discretionary actions by the regulatory agencies that could have a direct material effect on the Company’s consolidated financial statements. The required minimums and the Company’s respective ratios are shown below.
Minimum
Required
Tier 1 capital
Total capital
Risk-adjusted assets
Leverage ratio
Tier 1 capital ratio
Total capital ratio
To be “well capitalized” under federal bank regulatory agency definitions, a depository institution must have a Tier 1 Ratio of at least 6%, a combined Tier 1 and Tier 2 ratio of at least 10%, and a leverage ratio of at least 5%. As of June 30, 2005 and 2004, and December 31, 2004, the Company was considered to be “well capitalized”. There are no conditions or events since the most recent notification of the Company’s capital category that management believes would change its category.
(11) STOCK REPURCHASE PLAN
In November 1999, the Company adopted a new Stock Repurchase Program (the “SRP”) authorizing management to repurchase up to 300,000 shares of the Company’s common stock. The SRP was amended in May 2001 to increase the shares authorized to be purchased by 277,916 shares and was amended again in August 2002 to increase the number of shares authorized to be purchased by 182,265 shares. The SRP may be used as a means to increase earnings per share and return on equity, to purchase treasury stock for the exercise of stock options or for distributions under the Deferred Stock Compensation Plan, to provide liquidity for optionees to dispose of stock from exercises of their stock options, and to provide liquidity for shareholders wishing to sell their stock. The timing, price and amount of stock repurchases under the SRP may be determined by management and must be approved by the Company’s Executive Committee. At June 30, 2005 there were 143,026 shares remaining that could be repurchased under the SRP. Below is a summary of the shares repurchased under the program.
Number of shares repurchased
Average price of shares repurchased
11
(12) COMPREHENSIVE INCOME
The only component of comprehensive income reported by the Company is the unrealized gain or loss on securities available for sale. The amount of this unrealized gain or loss, net of tax, has been presented in the statement of income for each period as a component of other comprehensive income. Below is a summary of the tax effects of this unrealized gain or loss.
Unrealized gain (loss) during the period:
Before-tax amount
Tax (expense) benefit
Net-of-tax amount
The amount of unrealized gain or loss included in accumulated other comprehensive income is summarized below.
Unrealized gain (loss) on securities:
Beginning balance
Current period change
Ending balance
12
Basic and diluted net income per common share are calculated as follows:
Income
(Numerator)
Per Share
Income available to common stockholders
Effect of stock options
Income available to common stockholders plus assumed exercises of stock options
As of June 30, 2005 and 2004, there were no options that were excluded from the computation of diluted net income per share for each period because the options’ exercise prices were greater than the average market price of the common shares.
13
(14) SEGMENT INFORMATION
The Company evaluates its performance with an internal profitability measurement system that measures the profitability of its business units on a pre-tax basis. The four principal business units are metropolitan banks, community banks, other financial services, and executive, operations and support. Metropolitan and community banks offer traditional banking products such as commercial and retail lending, and a full line of deposit accounts. Metropolitan banks consist of banking locations in the metropolitan Oklahoma City and Tulsa areas. Community banks consist of banking locations in communities throughout Oklahoma. Other financial services are specialty product business units including guaranteed small business lending, guaranteed student lending, residential mortgage lending, trust services, securities brokerage, electronic banking and insurance. The executive, operations and support groups represent executive management, operational support and corporate functions that are not allocated to the other business units.
In May 2005, the Company announced a realignment of the responsibilities of its regional executives whereby four bank locations previously reported as metropolitan banks were now assigned to community bank regional executives. All comparative results of operations and selected information for the 2004 reporting periods has been restated for this realignment of metropolitan and community banks management responsibilities.
The results of operations and selected financial information for the four business units are as follows:
Net interest income (expense)
Noninterest income
As originally presented:
As restated:
June 30, 2004:
As originally presented
As restated
14
The financial information for each business unit is presented on the basis used internally by management to evaluate performance and allocate resources. The Company utilizes a transfer pricing system to allocate the benefit or cost of funds provided or used by the various business units. Certain revenues related to other financial services are allocated to the banks whose customers receive the services and, therefor, are not reflected in the income for other financial services. Certain services provided by the support group to other business units, such as item processing, are allocated at rates approximating the cost of providing the services. Eliminations are adjustments to consolidate the business units and companies.
(15) COMMITMENTS AND CONTINGENT LIABILITIES
In June 2005 the Company reported a loss due to the discovery of a cash shortfall at one of its branches. The Company has notified the Fidelity Bond carrier of the loss. The amount of the bond claim is approximately $3.3 million and the Company expects to recover the full amount of the loss less the deductible on the insurance policy. In the second quarter of 2005, the Company has recorded as an expense its deductible of $250,000 under the policy and has recorded at June 30, 2005 a receivable for the bond claim of approximately $3.0 million. As of the date of this report, the Company is preparing its claim to its Fidelity Bond carrier. If the Fidelity Bond carrier should determine that the loss or a portion of the loss is not covered by the policy, the Company could recognize an additional expense.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY
Net income for the second quarter of 2005 was $11.2 million, compared to $8.6 million for the second quarter of 2004. Diluted net income per share was $1.40, compared to $1.08 for the second quarter of 2004. For the first six months of 2005, net income was $22.1 million, compared to $16.8 million for the first six months of 2004. Diluted net income per share for the first six months was $2.76 compared to $2.11 for the first six months of 2004.
Total assets at June 30, 2005 increased to $3.1 billion, up $14.8 million from December 31, 2004 and up $27.0 million from June 30, 2004. Stockholders’ equity was $289 million at June 30, 2005, up $12 million from December 31, 2004 and up $28 million compared to June 30, 2004.
In January 2004, the Company established BFC Capital Trust II (“BFC II”), a trust formed under the Delaware Business Trust Act. The Company owns all of the common securities of BFC II. In February 2004, BFC II issued $25.0 million of aggregate liquidation amount of 7.20% Cumulative Trust Preferred Securities (the “Trust Preferred Securities”) to other investors. In March 2004, BFC II issued an additional $1.0 million in Trust Preferred Securities through the execution of an over-allotment option. The proceeds from the sale of the Trust Preferred Securities and the common securities of BFC II were invested in $26.8 million of 7.20% Junior Subordinated Debentures of BancFirst Corporation. Interest payments on the 7.20% Junior Subordinated Debentures are payable January 15, April 15, July 15 and October 15 of each year. The stated maturity date of the 7.20% Junior Subordinated Debentures is March 31, 2034, but they are subject to mandatory redemption pursuant to optional prepayment terms.
In October 2004, the Company completed the acquisition of Wilcox & Jones, Inc., an independent insurance agency headquartered in Tulsa, Oklahoma for $4.8 million. As a result of the acquisition, Wilcox & Jones was merged into the Company and became a wholly owned subsidiary of BancFirst Corporation. The acquisition was accounted for as a purchase. Accordingly, the effects of the acquisition have been included in the Company’s consolidated financial statements from the date of the acquisition forward.
RESULTS OF OPERATIONS
Second Quarter
Net interest income for the second quarter of 2005 was $32.9 million, up $4.6 million from the second quarter of 2004. The net interest margin in 2005 improved to 4.81% from 4.12% for the second quarter of 2004. An increase in earning assets related to loan growth between the second quarter of 2004 and the second quarter of 2005 produced a positive volume variance complimented by a positive rate variance. In a rising rate environment, the benefit of the Company’s noninterest-bearing funds is increased, resulting in an increase in the Company’s net interest margin over time. As a result of a rising rate environment, and assuming no change in the volume or mix of the Company’s loans and deposits, the Company’s net interest income would be reasonably expected to continue to slightly increase over the next several quarters.
The Company provided $1.3 million for loan losses in the second quarter of 2005, compared to $201,000 for the same period of 2004. The increase in the provision for loan losses resulted primarily from loan growth of $75 million in the second quarter. The Company’s nonperforming and restructured loans were unchanged from a year ago at $11.0 million at June 30, 2005. The percentage coverage of loan loss reserve to total nonperforming and restructured loans increased from 231.46% at June 30, 2004 to 246.67% at June 30, 2005. Net loan charge-offs were $410,000 for the second quarter of 2005, compared to $683,000 for the second quarter of 2004. The net charge-offs represent an annualized rate of 0.08% of average total loans for the second quarter of 2005 versus 0.14% for the second quarter of 2004.
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Noninterest income of $13.7 million, excluding securities transactions, increased $0.8 million compared to the second quarter of 2004 due to an increase in cash management and electronic banking services and sales of insurance products. There was a gain of $81,000 on securities transactions in the second quarter of 2005, while a loss of $148,000 was recognized in the second quarter of 2004. Noninterest expense increased $0.9 million to $28.4 million compared to the second quarter of 2004. The majority of this increase was due to the additional costs for the increased sales of insurance products. The Company’s efficiency ratio (total noninterest expenses divided by total revenues) improved from 67.1% for the second quarter of 2004 to 60.9% for the same period of 2005. Income tax expense increased $1.1 million compared to the second quarter of 2004. The effective tax rate on income before taxes was 34.0%, compared to 35.1% for the second quarter of 2004.
Year-To-Date
Net interest income for the first six months of 2005 was $64.6 million, up $8.4 million over the first six months of 2004. The net interest margin increased to 4.74% for the first six months of 2005 compared to 4.16% for the same period of 2004. While average earning assets increased by $26.5 million between the first six months of 2005 and the first six months of 2004, average loans increased by $213.2 million in the same period, producing a positive volume variance that was complimented by a positive rate variance. In a rising rate environment, the benefit of the Company’s noninterest-bearing funds is increased, resulting in an increase in the Company’s net interest margin over time.
The Company provided $2.1 million for loan losses in the first six months of 2005, compared to $0.9 million for the same period of 2004. The increase in the provision for loan losses resulted largely from loan growth of $129 million in the first six months of 2005. Net loan charge-offs were $0.7 million for the first six months of 2005, compared to $1.1 million for the first six months of 2004. The net charge-offs represent an annualized rate of 0.6% of average total loans for the first six months of 2005 versus 0.12% for the first six months of 2004.
Noninterest income of $26.0 million, excluding securities transactions, for the first six months of 2005 increased $1.4 million compared to the same period in 2004 due to an increase in cash management and electronic banking services and sales of insurance products. There was a gain of $81,000 on securities transactions in the first six months of 2005, while losses of $148,000 were recognized in the first six months of 2004. Noninterest expense increased $1.7 million to $55.4 million compared to the first six months of 2004. The Company’s efficiency ratio (total noninterest expenses divided by total revenues) improved from 66.6% for the first six months of 2004 to 61.1% for the same period of 2005. Income tax expense increased $2.0 million compared to the first six months of 2004. The effective tax rate on income before taxes decreased to 33.6% compared to 35.3% for the first six months of 2004; the decrease was principally due to the recognition of tax credits on qualified loans during the 2005 period.
FINANCIAL POSITION
The aggregate of cash and due from banks, interest-bearing deposits with banks, and federal funds sold decreased $84 million from December 31, 2004, and $191 million from June 30, 2004. The decreases resulted from growth in loans of $129 million since December 31, 2004 and $259 million since June 30, 2004.
Total securities decreased $37 million compared to December 31, 2004 and $47 million compared to June 30, 2004. The size of the Company’s securities portfolio is a function of liquidity management and excess funds available for investment. The Company has maintained a short maturity on its securities portfolio to provide funds for loan growth. The net unrealized gain on securities available for sale, before taxes, was $0.8 million at the end of the second quarter of 2005, compared to an unrealized gain of $4.3 million at December 31, 2004 and a gain of $4.6 million at June 30, 2004. The average taxable equivalent yield on the securities portfolio for the second quarter of 2005 increased to 4.29% from 4.02% for the same quarter of 2004.
Total loans increased $129 million from December 31, 2004, and increased $259 million from June 30, 2004. The increases were due to an increase in the loan-to-deposit ratio of 84.3% compared to 73.6% at June 30, 2004. The allowance for loan losses increased $1.4 million from year-end 2004 and increased $1.2 million from the second quarter of 2004. The allowance as a percentage of total loans was 1.22%, 1.23% and 1.32% at June 30, 2005, December 31, 2004 and June 30, 2004, respectively. The allowance to nonperforming and restructured loans at the same dates was 246.67%, 211.05% and 231.46%, respectively.
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Nonperforming and restructured loans totaled $11.0 million at June 30, 2005, compared to $12.2 million at December 31, 2004 and $11.1 million at June 30, 2004. The ratio of nonperforming and restructured loans to total loans for the same periods was 0.50%, 0.58% and 0.57%, respectively. The level of nonperforming loans and loan losses may rise over time as a result of economic and credit cycles.
Total deposits decreased slightly by $19 million compared to December 31, 2004, and by $30 million compared to June 30, 2004. The Company’s deposit base continues to be comprised substantially of core deposits, with large denomination certificates of deposit being only 8.76% of total deposits at June 30, 2005, compared to 8.38% at December 31, 2004 and 8.34% at June 30, 2004.
Short-term borrowings increased $25 million from December 31, 2004, and $32 million from June 30, 2004. Fluctuations in short-term borrowings are a function of federal funds purchased from correspondent banks, customer demand for repurchase agreements and liquidity needs of the bank.
Long-term borrowings decreased $2.0 million from year-end 2004 and $2.8 million from the second quarter of 2004. The Company uses these borrowings primarily to match-fund, long-term fixed rate loans.
In the second quarter of 2005, the Company reported a loss due the discovery of a cash shortfall at one of its branches. The Company has notified the Fidelity Bond carrier of the loss. The amount of the bond claim is approximately $3.3 million and the Company expects to recover the full amount of the loss less the deductible on the insurance policy. During the second quarter, the Company has recorded as an expense its deductible of $250,000 under the policy and at June 30, 2005 has recorded a receivable for the bond claim in the amount of $3.0 million. As of the date of this report, the Company is preparing its claim to its Fidelity Bond carrier. If the Fidelity Bond carrier should determine that the loss or a portion of the loss is not covered by the policy, the Company could recognize an additional expense.
Stockholders’ equity increased $12 million from year-end 2004 and $28 million from the second quarter of 2004, due to accumulated earnings offset by dividends and a decrease in unrealized gains in securities. Average stockholders’ equity to average assets for the second quarter of 2005 was 9.21%, compared to 8.82% for the second quarter of 2004. The Company’s leverage ratio and total risk-based capital ratio were 10.18% and 13.78%, respectively, at June 30, 2005, well in excess of the regulatory minimums.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
See note (3) of the Notes to Consolidated Financial Statements for a discussion of recently issued accounting pronouncements.
SEGMENT INFORMATION
See note (14) of the Notes to Consolidated Financial Statements for disclosures regarding business segments.
FORWARD LOOKING STATEMENTS
The Company may make forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) with respect to earnings, credit quality, corporate objectives, interest rates and other financial and business matters. The Company cautions readers that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, including economic conditions, the performance of financial markets and interest rates; legislative and regulatory actions and reforms; competition; as well as other factors, all of which change over time. Actual results may differ materially from forward-looking statements.
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SELECTED CONSOLIDATED FINANCIAL DATA
Net income – basic
Net income – diluted
Cash dividends
Return on average assets
Return on average stockholders’ equity
Cash dividend payout ratio
Net interest spread
Net interest margin
Efficiency ratio
Net charge-offs to average total loans
Book value per share
Tangible book value per share
Average loans to deposits (year-to-date)
Average earning assets to total assets (year-to-date)
Average stockholders’ equity to average assets (year-to-date)
Allowance for loan losses to total loans
Allowance for loan losses to nonperforming and restructured loans
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CONSOLIDATED AVERAGE BALANCE SHEETS AND INTEREST MARGIN ANALYSES
Taxable Equivalent Basis (Dollars in thousands)
Earning assets:
Loans (1)
Securities - taxable
Securities - tax exempt
Total earning assets
Nonearning assets:
Interest receivable and other assets
Total nonearning assets
Interest-bearing liabilities:
Transaction deposits
Savings deposits
Time deposits
Total interest-bearing liabilities
Interest-free funds:
Noninterest-bearing deposits
Interest payable and other liabilities
Stockholders’ equity
Total interest free funds
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no significant changes in the Registrant’s disclosures regarding market risk since December 31, 2004, the date of its annual report to stockholders.
Item 4. Controls and Procedures.
The Company’s Chief Executive Officer and Chief Financial Officer and Disclosure Committee, which includes the Company’s Chief Risk Officer, Chief Asset Quality Control Officer, Chief Internal Auditor, Holding Company Controller, Bank Controller and General Counsel, have evaluated, as of the last day of the period covered by this report, the Company’s disclosure controls and procedures. Based on their evaluation they concluded that the disclosure controls and procedures of the Company are adequate to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation.
PART II – OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There were no equity securities of the Registrant sold without registration during the quarter covered by this report.
Stock repurchases by the Registrant during the quarter were as follows:
Period
Total Number
of Shares
Purchased as
Part of Publicly
AnnouncedPlans orPrograms (1)
Month #1 (beginning April 1, 2005 and ending April 30, 2005)
Month #2 (beginning May 1, 2005 and ending May 31, 2005)
Month #3 (beginning June 1, 2005 and ending June 30, 2005)
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Item 4. Submission of Matters to a Vote of Security Holders.
At the Company’s Annual Meeting of Stockholders held on May 26, 2005, the following matters were voted upon, with the votes indicated below:
Description of Proposal
Broker
non-votes
Proposal No. 1-Election of Directors
Class I Directors
Dennis L. Brand
C.L. Craig, Jr.
John C. Hugon
J. Ralph McCalmont
Ronald J. Norick
David E. Ragland
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Item 6. Exhibits.
Exhibit
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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.
/s/ Joe T. Shockley, Jr.
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