FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
For the quarterly period ended March 31, 2006
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 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 ¨
Indicated by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of April 30, 2006 there were 15,687,842 shares of the registrant’s Common Stock outstanding.
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
BANCFIRST CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share data)
December 31,
2005
ASSETS
Cash and due from banks
Interest-bearing deposits with banks
Federal funds sold
Securities (market value: $428,369, $531,882, and $456,469, 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: 15,687,842, 15,576,494 and 15,637,170, respectively
Capital surplus
Retained earnings
Accumulated other comprehensive income (loss), net of income tax (benefit) of $(2,144), $(1,065) and $(1,600), respectively
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF 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
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 included in net income
Comprehensive income
Basic
Diluted
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited)
Three Months Ended
March 31
Issued at beginning of period
Shares issued
Shares acquired and canceled
Issued at end of period
Balance at beginning of period
Common stock issued
Balance at end of period
Dividends on common stock ($0.16, $0.14 per share, respectively)
Common stock acquired and canceled
Unrealized gains on securities:
Net change
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
March 31,
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) decrease in loans
Purchases of premises, equipment and other
Proceeds from the sale of other real estate owned, repossessed assets and other
Net cash (used in) provided by investing activities
Net increase in demand, transaction and savings deposits
Net (decrease) increase in certificates of deposits
Net (decrease) increase in short-term borrowings
Net decrease in long-term borrowings
Issuance of common stock
Acquisition of common stock
Cash dividends paid
Net cash provided 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
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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, Citibank Insurance Agency, Inc., BancFirst Agency, Inc., Lenders Collection Corporation, BancFirst Community Development Corporation, Council Oak Real Estate, Inc. and PremierSource LLC. 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, 2005, the date of the most recent annual report. Certain amounts in the 2005 financial statements have been reclassified to conform to the 2006 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.
Prior to the issuance of the Company’s consolidated financial statements for the year ended December 31, 2005, management determined that the Company’s consolidated statements of cash flows for 2004 should be restated to reclassify certain disbursements from “Net other increase in loans” in Investing Activities to Operating Activities, as such amounts relate to cash disbursements of mortgage loans originated for sale. The consolidated statement of cash flow for the quarter ended March 31, 2005 has been restated to reclassify disbursements of $19.8 million from “Net other increase in loans” in Investing Activities to Operating Activities. The restatement does not affect the net change in cash and due from banks for the quarter ended March 31, 2005 and has no impact on the Company’s March 31, 2005 consolidated balance sheet or the consolidated statements of income and related net income per share amounts or on the consolidated statements of stockholders’ equity or on the Company’s liquidity for the quarter ended March 31, 2005.
In January 2006, the Company approved a two-for-one split for shares of common stock to be issued in the form of a stock dividend. As a result of the stock split, the Company’s stockholders received one additional share of the Company’s common stock for each share of common stock held of record on February 16, 2006. The additional shares of our common stock were distributed on March 1, 2006. All share and per share amounts in these consolidated financial statements and related notes have been retroactively adjusted to reflect this stock split for all periods presented.
(2) 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 FSP 03-1-a but will issue a final FSP codifying the existing accounting guidance rather than changing the accounting. In November 2005, the FASB issued FSP 115-1 and 124-1 which addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. The FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The FSP amends FASB Statements No. 115 “Accounting for Certain Investments in Debt and Equity Securities”, and No. 124 “Accounting for Certain Investments Held by Not-for-Profit Organizations”, and APB Opinion No. 18 “the Equity Method of Accounting for Investments in Common Stock”. The adoption of this standard is not expected to have a material effect on the Company’s consolidated financial statements.
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(3) RECENT DEVELOPMENTS; MERGERS, ACQUISITIONS AND DISPOSALS
In September 2005, the Company organized a Community Development Entity known as BancFirst Community Development Corporation and funded the entity with $1 million of equity. The entity was organized to make certain investments in low to moderate income communities and to apply for an allocation of New Markets Tax Credits designed to assist in the development of communities in accordance with the guidelines established for Community Development Entities. The Company is currently waiting for a determination of funds to be allocated which is expected to occur in June of 2006.
In December 2005, BancFirst Corporation completed the acquisition of Park State Bank (Park State), Nicoma Park, Oklahoma for cash of approximately $11 million. Park State had total assets of approximately $44 million. As a result of the acquisition, Park State became a wholly-owned subsidiary of BancFirst Corporation and was merged into BancFirst in February 2006. The acquisition was accounted for as a purchase. Accordingly, the effects of the acquisition are included in the Company’s consolidated financial statements from the date of the acquisition forward. The acquisition did not have a material effect on the results of operations of the Company for 2005.
In March 2006, the Company organized an investment company known as Council Oak Real Estate, Inc. and funded the entity with $4.5 million of equity. The entity was organized to make certain investments in real estate.
In April 2006, the Company entered into an agreement to acquire First Bartlesville Bank, Bartlesville, Oklahoma. First Bartlesville Bank has approximately $44 million in total assets, $36 million in loans, $40 million in deposits, and $3.7 million in equity capital. The acquisition will be accounted for as a purchase. The bank will operate as a wholly-owned subsidiary of the Company until it is merged into BancFirst, which is expected to occur during the fourth quarter of 2006. The Company expects to close on the acquisition during the second quarter of 2006 subject to regulatory approval.
(4) SECURITIES
The table below summarizes securities held for investment and securities available for sale (dollars in thousands).
Held for investment at cost (market value; $39,627, $32,364 and $30,781, respectively)
Available for sale, at market value
Total
The table below summarizes the maturity of securities (dollars in thousands).
Contractual maturity of debt securities:
Within one year
After one year but within five years
After five years
Total debt securities
Equity securities
The Company held 107 and 141 debt securities available for sale that had unrealized gains as of March 31, 2006 and 2005, respectively. These securities had a market value totaling $30.6 million and $190.9 million, respectively, and unrealized gains totaling $339,000 and $2.2 million, respectively. The Company also held 246 and 89 debt securities available for sale that had unrealized losses, respectively. These securities had a market value totaling $347.6 and $292.6 million and unrealized losses totaling $7.5 and $5.6 million, respectively. 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 debt securities until the unrealized losses are recovered.
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(5) LOANS AND ALLOWANCE FOR LOAN LOSSES
The following is a schedule of loans outstanding by category (dollars in thousands):
December 31
Commercial and industrial
Oil & Gas Production & Equipment
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 (dollars in thousands):
Charge-offs
Recoveries
Net charge-offs
Provisions charged to operations
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The net charge-offs by category are summarized as follows (dollars in thousands):
Commercial, financial and other
Real estate – construction
Real estate – mortgage
(6) NONPERFORMING AND RESTRUCTURED ASSETS
Below is a summary of nonperforming and restructured assets (dollars in thousands):
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
(7) INTANGIBLE ASSETS AND GOODWILL
The following is a summary of intangible assets (dollars in thousands):
Core deposit intangibles
Customer relationship intangibles
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Amortization of intangible assets and estimated amortization of intangible assets are as follows (dollars in thousands):
Three months ended March 31, 2006
Three months ended March 31, 2005
Year ended December 31, 2005
Year ended December 31,
2006
2007
2008
2009
2010
The following is a summary of goodwill by business segment (March 31, 2005 amounts have been reclassified for the realignment of regional executive responsibilities for certain bank locations as described in note 14, Segment Information, dollars in thousands):
Adjustments
Balance at beginning of period, as presented
Reclassification for realignment
Balance at beginning and end of period, as reclassified
Acquisitions
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(8) 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 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
As of March 31, 2006 and 2005, and December 31, 2005, BancFirst was considered to be “well capitalized”. There are no conditions or events since the most recent notification of BancFirst’s capital category that management believes would change its category.
(9) STOCK REPURCHASE PLAN
In November 1999, the Company adopted a new Stock Repurchase Program (the “SRP”) authorizing management to repurchase up to 600,000 shares of the Company’s common stock. The SRP was amended in May 2001 to increase the shares authorized to be purchased by 555,832 shares and was amended again in August 2002 to increase the number of shares authorized to be purchased by 364,530 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 March 31, 2006 there were 296,052 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
(10) SHARE-BASED COMPENSATION
BancFirst Corporation adopted a nonqualified incentive stock option plan (the “BancFirst ISOP”) in May 1986. In 2004, the Company amended the BancFirst ISOP to increase the number of shares to be issued under the plan to 2,400,000. The BancFirst ISOP will terminate December 31, 2011. The options are exercisable beginning four years from the date of grant at the rate of 25% per year for four years. Options granted prior to 1996 expire at the end of eleven years from the date of the grant. Options granted after January 1, 1996 expire at the end of fifteen years from the date of grant. Options outstanding as of March 31, 2006 will become exercisable through the year 2013. The option price must be no less than 100% of the fair market value of the stock relating to such option at the date of grant.
In June 1999, the Company adopted the BancFirst Corporation Non-Employee Directors’ Stock Option Plan (the “BancFirst Directors’ Stock Option Plan”). A total of 150,000 shares may be issued under the plan. Each non-employee director is granted an option for 10,000 shares. The options are exercisable beginning one year from the date of grant at the rate of 25% per year for four years, and expire at the end of fifteen years from the date of grant. Options outstanding as of March 31, 2006 will become exercisable through the year 2008. The option price must be no less than 100% of the fair value of the stock relating to such option at the date of grant.
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Below is a summary of the activity under both the BancFirst ISOP and the BancFirst Directors’ Stock Option Plan (dollars in thousands, except per share data):
Outstanding at January 1, 2006
Options granted
Options exercised
Options canceled
Outstanding at March 31, 2006
Exercisable at March 31, 2006
Below is additional information regarding options granted and options exercised under both the BancFirst ISOP and the BancFirst Directors’ Stock Option Plan (dollars in thousands, except per share data):
Weighted average grant-date fair value per share of options granted
Total intrinsic value of options exercised
Cash received from options exercised
Tax benefit realized from options exercised
Effective January 1, 2006 the Company adopted, on a modified prospective basis, the fair value provisions of Statement of Financial Accounting Standards No 123 (Revised 2004), “Share-Based Payment” (FAS 123(R)). The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model and is based on certain assumptions including risk-free rate of return, dividend yield, stock price volatility, and the expected term. The fair value of each option is expensed over its vesting period.
For the three months ended March 31, 2006, the Company recorded share-based employee compensation expense of approximately $142,000 net of tax ($0.01 per share, basic and diluted). The Company will continue to amortize the remaining fair value of these stock options of approximately $2.1 million, net of tax, over the remaining vesting period of approximately seven years. Share-based employee compensation expense under the fair value method was measured using the following assumptions for the options granted:
Risk-free interest rate
Dividend yield
Stock price volatility
Expected term
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Prior to January 1, 2006, the Company applied Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and related interpretations in accounting for its stock options granted. Had compensation expense for the options issues prior to January 1, 2006 been recorded consistent with the fair value provisions of SFAS 123 for those periods, net income and earnings per share would have been reduced to the pro forma amounts indicated below (dollars in thousands, except per share data):
Three Months EndedMarch 31,
Net Income
As reported
Stock-based compensation cost, net of tax
Pro forma net income
Earnings per share
As reported:
Pro forma:
(11) 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, net of tax, in accumulated other comprehensive income is summarized below.
Unrealized gain (loss) on securities:
Beginning balance
Current period change
Ending balance
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(12) NET INCOME PER COMMON SHARE
Basic and diluted net income per common share are calculated as follows, (dollars in thousands, except per share data):
Three Months Ended March 31, 2006
Income available to common stockholders
Effect of stock options
Income available to common stockholders plus assumed exercises of stock options
Below is the number and average exercise prices of 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.
Three Months Ended March 31, 2005
(13) 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 realigned 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 March 31, 2005 reporting period has been reclassified for this realignment of metropolitan and community banks management responsibilities.
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The results of operations and selected financial information for the four business units are as follows(dollars in thousands):
Net interest income (expense)
Noninterest income
As originally presented:
As reclassified:
March 31, 2006
March 31, 2005:
As originally presented
As reclassified
December 31, 2005
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.
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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 first quarter of 2006 and 2005 was $10.9 million. Diluted net income per share was $0.68 for the first quarter of 2006 and 2005.
Net interest income of $34.6 million increased $2.9 million, or 9.1%, over the first quarter of 2005. The increase resulted from loan growth combined with rising interest rates. The Company’s net interest margin (on a tax equivalent basis) was 4.77%, up from 4.67% for the same period a year ago. The Company’s provision for loan losses was $681,000, a decrease of $111,000 compared to the same period a year ago. Noninterest income of $13.4 million was up 8.6% over the same period in 2005. Non-interest expense totaled $30.3 million versus $27.0 million for the first quarter of 2005, an increase of $3.3 million, or 12.3%, decreasing the Company’s efficiency ratio to 63.09%, from 61.2% in the first quarter of 2005. The Company’s effective tax rate was 36.1% for the first quarter of 2006 compared to 33.1% in the first quarter of 2005. The reduction in the Company’s 2005 tax rate was a result in part to tax credits generated from certain loan transactions that decreased the Company’s income taxes for the first quarter of 2005.
Total assets at March 31, 2006 increased to $3.4 billion, up $134.7 million from December 31, 2005 and up $289.5 million from March 31, 2005. Total loans were $2.31 billion, down $11.1 million from December 31, 2005 and up $158.8 million from March 31, 2005. Total deposits were $2.93 billion, up $130.5 million from December 31, 2005 and up $260.1 million from March 31, 2005. Stockholders’ equity was $311 million at March 31, 2006, up $8 million from December 31, 2005 and up $33 million compared to March 31, 2005.
RESULTS OF OPERATIONS
Net interest income for the first quarter of 2006 was $34.6 million, up $2.9 million from the first quarter of 2005. The net interest margin in 2006 increased to 4.77% from 4.67% for the first quarter of 2005. The change in mix of earning assets between the first quarter of 2005 and the first quarter of 2006 combined with increasing rates produced 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 $681,000 for loan losses in the first quarter of 2006, compared to $792,000 for the same
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period of 2005. The Company continues to maintain high credit quality. Net loan charge-offs were $409,000 for the first quarter of 2006, compared to $282,000 for the first quarter of 2005. The net charge-offs represent an annualized rate of 0.07% of average total loans for the first quarter of 2006 compared to 0.05% for the first quarter of 2005.
Noninterest income for the first quarter of 2006 increased $1 million compared to the first quarter of 2005, due to an increase in trust, service charges, and electronic banking revenues which are included in other income. Noninterest expense increased $3.3 million compared to the first quarter of 2005 primarily due to the increase in salary and employee benefits, and the company’s marketing campaign. Income tax expense increased $759,000 compared to the first quarter of 2005. The effective tax rate on income before taxes was 36.1%, compared to 33.1% for the first quarter of 2005. The reduction in the Company’s 2005 tax rate was due in part to tax credits from certain loan transactions that reduced the Company’s income taxes for the first quarter of 2005.
FINANCIAL POSITION
The aggregate of cash and due from banks, interest-bearing deposits with banks, and federal funds sold increased $168 million from December 31, 2005, and $221 million from March 31, 2005. These increases were mainly from deposit growth in late 2005 and early 2006.
Total securities decreased $28.0 million compared to December 31, 2005 and $103.1 million compared to March 31, 2005. 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 very liquid securities portfolio to provide funds for loan growth. The net unrealized loss on securities available for sale, before taxes, was $6.12 million at the end of the first quarter of 2006, compared to an unrealized loss of $4.57 million at December 31, 2005 and an unrealized loss of $2.44 million at March 31, 2005. The average taxable equivalent yield on the securities portfolio for the first quarter of 2006 increased to 4.67% from 4.52% for the same quarter of 2005.
Total loans decreased $11.1 million from December 31, 2005, and increased $158.8 million from March 31, 2005. The decrease compared to year end 2005 was due primarily to decreases in agriculture loan volume due to drought conditions in certain banking markets combined with paydowns on commercial loans and refinancings on real estate construction loans. The increase from first quarter of 2005 was due to internal growth and the Park State Bank acquisition. The allowance for loan losses increased $272,000 from year-end 2005 and $1.5 million from the first quarter of 2005. The allowance as a percentage of total loans was 1.20%, 1.19% and 1.22% at March 31, 2006, December 31, 2005 and March 31, 2005, respectively. The allowance to nonperforming and restructured loans at the same dates was 273.46%, 236.59% and 293.36%, respectively.
Nonperforming and restructured loans totaled $10.2 million at March 31, 2006, compared to $9.4 million at December 31, 2005 and $11.1 million at March 31, 2005. The ratio of nonperforming and restructured loans to total loans for the same periods was 0.44%, 0.40% and 0.52%, respectively. The level of nonperforming loans and loan losses may rise over time as a result of economic and credit cycles.
Total deposits increased $130.5 million compared to December 31, 2005, and $260.1 million compared to March 31, 2005 due to internal growth and the acquisition of Park State in December 2005. The Company’s deposit base continues to be comprised substantially of core deposits, with large denomination certificates of deposit being only 8.75% of total deposits at March 31, 2006, compared to 8.61% at December 31, 2005 and 8.48% at March 31, 2005.
Short-term borrowings decreased $7.09 million from December 31, 2005, and increased $1.35 million from March 31, 2005. 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 $767,000 from year-end 2005 and $3.28 million from the first quarter of 2005. The decrease compared to the first quarter of 2005 was due to scheduled principal payments. The Company uses these borrowings primarily to match-fund long-term fixed-rate loans.
Stockholders’ equity increased $8.4 million from year-end 2005 and $33.1 million from the first quarter of 2005, due to accumulated earnings. Average stockholders’ equity to average assets for the first quarter of 2006 was 9.50%, compared to 9.17% for the first quarter of 2005. The Company’s leverage ratio and total risk-based capital ratio were 9.95% and 13.98%, respectively, at March 31, 2006, well in excess of the regulatory minimums.
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NEW AND FUTURE APPLICATION OF ACCOUNTING STANDARDS
See notes (2) and (10) of the Notes to Consolidated Financial Statements for a discussion of recently issued and newly adopted accounting pronouncements.
SEGMENT INFORMATION
See note (13) 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 Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 with respect to earnings, credit quality, corporate objectives, interest rates and other financial and business matters. Forward-looking statements include estimates and give management’s current expectations or forecasts of future events. 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
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, 2005, 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, Senior Vice President of Corporate Finance, 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 effective 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 changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation.
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PART II – OTHER INFORMATION
Item 6. Exhibits.
Exhibit
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SIGNATURES
Pursuant to the requirements of the Securities and 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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