UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended September 30, 2003
OR
For the transition period from to
Commission File Number 0-14384
BancFirst Corporation
(Exact name of registrant as specified in charter)
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 accelerate filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨.
As of October 31, 2003 there were 7,818,701 shares of the registrant’s Common Stock outstanding.
PART I – FINANCIAL INFORMATION
BANCFIRST CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited)
(Dollars in thousands)
ASSETS
Cash and due from banks
Interest-bearing deposits with banks
Federal funds sold
Securities (market value: $527,490, $567,705, and $567,717, 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
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing
Interest-bearing
Total deposits
Short-term borrowings
Long-term borrowings
Junior Subordinated Debentures
Accrued interest payable
Other liabilities
Minority interest
Total liabilities
Commitments and contingent liabilities
Stockholders’ equity:
Common stock, $1.00 par (shares issued: 7,815,364, 8,113,576 and 8,136,852, respectively)
Capital surplus
Retained earnings
Accumulated other comprehensive income, net of income tax of $5,636, $7,839 and $8,384, 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
(Dollars in thousands, except per share data)
INTEREST INCOME
Loans, including fees
Securities:
Taxable
Tax-exempt
Total interest income
INTEREST EXPENSE
Deposits
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
NONINTEREST INCOME
Trust revenue
Service charges on deposits
Securities transactions
Income from sales of loans
Other
Total noninterest income
NONINTEREST EXPENSE
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
Loss on early extinguishment of debt
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
NET INCOME PER COMMON SHARE
Basic
Diluted
3
CONSOLIDATED STATEMENT OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
INVESTING ACTIVITIES
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 used by investing activities
FINANCING ACTIVITIES
Net increase in demand, transaction and savings deposits
Net decrease in certificates of deposits
Net decrease in short-term borrowings
Net increase (decrease) in long-term borrowings
Issuance of common stock
Acquisition of common stock
Cash dividends paid
Net cash provided by financing activities
Net increase (decrease) 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
SUPPLEMENTAL DISCLOSURE
Cash paid during the period for interest
Cash paid during the period for income taxes
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements include the accounts of BancFirst Corporation, Century Life Assurance Company, Council Oak Capital, Inc., Council Oak Partners, LLC, and BancFirst and its subsidiaries. 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, 2002, the date of the most recent annual report. Certain amounts in the 2002 financial statements have been reclassified to conform to the 2003 presentation.
The preparation of financial statements in conformity with generally accepted accounting principles 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.
In December 2002, the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123.” This Statement amends SFAS No. 123, “Accounting for Stock-Based Compensation” to provide two additional transition methods for entities that adopt the fair value method of accounting for stock-based compensation. This Statement also prohibits the use of the prospective method of transition for changes to the fair value method made in fiscal years beginning after December 15, 2003. In addition, this Statement requires new disclosures about the effect of stock-based compensation on reported results and requires more prominent disclosures about stock-based compensation by prescribing specific tabular format and by requiring disclosure in the “Summary of Significant Accounting Policies.” The adoption of this new standard did not have a material effect on the Company’s consolidated financial statements, as the Company uses the intrinsic value method of accounting for stock-based compensation. Pro forma disclosures as if the Company adopted the cost recognition provisions of SFAS No. 123 in 1995 are presented below.
APB 25 charge
FAS 123 charge
Net income per share:
The effects of applying SFAS No. 123 to the pro forma disclosure are not indicative of future results. SFAS No. 123 does not apply to grants of options prior to 1995 and the Company anticipates making additional grants in the future.
In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (“FIN 46”) which provides guidance for determining when an entity should consolidate another entity that meets the definition of a variable interest entity. Special purpose entities and other types of entities are
5
assessed for consolidation under this new guidance. FIN 46 requires a variable interest entity to be consolidated if the company will absorb a majority of the expected losses, will receive a majority of the expected residual returns, or both. FIN 46 is effective immediately for interests in variable interest entities acquired after January 31, 2003. It applies in the first interim period after June 15, 2003 to interests in variable interest entities acquired before February 1, 2003. As of October 9, 2003, the FASB deferred compliance with FIN 46 from July 1, 2003 to the first period ending after December 15, 2003 for variable interest entities created prior to February 1, 2003. However, the Company adopted FIN 46 on July 1, 2003, as originally issued, and de-consolidated BFC Capital Trust I. The effect of this de-consolidation was to remove the $25,000 of 9.65% Capital Securities and the related interest expense from the Company’s Consolidated financial statements, and instead report the $25,000 of Junior Subordinated Debentures issued by BancFirst Corporation to the Trust, and the related interest expense thereon. A potential result of the de-consolidation of the Trust could be that the 9.65% Capital Securities would no longer be included in the Company’s Tier 1 capital. The Federal Reserve Board has issued interim guidance that allows such securities to continue to qualify as Tier 1 capital while the issue of de-consolidation continues under review.
In January 2003, BancFirst Corporation repurchased 320,000 shares of its common stock for $14,400. The shares were repurchased through a market-maker in the Company’s stock and the repurchase was not a part of the Company’s ongoing Stock Repurchase Program.
In September 2003, BancFirst entered into an agreement to acquire the Hobart and LoneWolf, Oklahoma branches of Gold Bank. As a result of the acquisition, BancFirst will purchase approximately $16,300 of loans and other assets, and assume approximately $40,900 of deposits, for a premium of approximately $2,800. The acquisition will be accounted for as a purchase. Accordingly, the effects of the acquisition will be included in the Company’s consolidated financial statements from the date of the acquisition forward. The acquisition is expected to be completed in the fourth quarter of 2003 and will not have a material effect on the results of operations of the Company for 2003.
In October 2003, BancFirst Corporation completed the acquisition of Lincoln National Bancorporation (“Lincoln”) of Oklahoma City, Oklahoma for cash of $16,949. Lincoln had consolidated total assets of approximately $107,673. As a result of the acquisition, Lincoln was merged into BancFirst Corporation, and Lincoln’s wholly-owned bank subsidiary, Lincoln National Bank, became a subsidiary of BancFirst Corporation. The acquisition will be accounted for as a purchase. Accordingly, the effects of the acquisition will be included in the Company’ consolidated financial statements from the date of the acquisition forward. The acquisition will not have a material effect on the results of operations of the Company for 2003.
The table below summarizes securities held for investment and securities available for sale.
December 31,
2002
Held for investment at cost (market value; $41,842, $60,579 and $57,585, respectively)
Available for sale, at market value
Total
6
In June 2003, the Company sold $71,176 of available for sale securities and recognized a gain of $2,487. The sale was a part of a plan to adjust the Company’s interest rate sensitivity. The proceeds from this sale was reinvested in securities with shorter maturity dates. 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
The following is a schedule of loans outstanding by category:
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.
7
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
Commercial, financial and other
Real estate – construction
Real estate – mortgage
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
The following is a summary of intangible assets:
Core deposit intangibles
Trademarks
8
Amortization of intangible assets and estimated amortization of intangible assets are as follows:
Amortization:
Three months ended September 30, 2003
Three months ended September 30, 2002
Nine months ended September 30, 2003
Nine months ended September 30, 2002
Year ended December 31, 2002
Estimated Amortization:
Year ended December 31,
2003
2004
2005
2006
2007
The following is a summary of goodwill by business segment:
Three Months Ended September 30, 2003 and 2002
Balance at beginning and end of period
Nine Months Ended September 30, 2003 and 2002
In June 2003, the Company retired $25,100 of Federal Home Loan Bank advances under its line of credit, and recognized a loss on early extinguishment of debt of $2,429. This early retirement of the advances was a part of a plan to adjust the Company’s interest rate sensitivity. These advances retired had fixed rates of from 3.47% to 7.87% and maturities of from 2008 to 2017.
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.
MinimumRequired
Tier 1 capital
Total capital
Risk-adjusted assets
Leverage ratio
Tier 1 capital ratio
Total capital ratio
9
To be “well capitalized” under federal bank regulatory agency definitions, a depository institution must have a leverage ratio of at least 5%, a Tier 1 ratio of at least 6%, and a combined total capital ratio of at least 10%. As of September 30, 2003 and 2002, and December 31, 2002, 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.
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 September 30, 2003 there were 250,701 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
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
10
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
Basic and diluted net income per common share are calculated as follows:
Three Months Ended September 30, 2003
Income available to common stockholders
Effect of stock options
Income available to common stockholders plus assumed exercises of stock options
Three Months Ended September 30, 2002
Nine Months Ended September 30, 2003
Nine Months Ended September 30, 2002
11
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.
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, electronic banking, trust services, insurance services, merchant banking and brokerage services. The executive, operations and support groups represent executive management, operational support and corporate functions that are not allocated to the other business units. The results of operations and selected financial information for the four business units are as follows:
Three Months Ended:
September 30, 2003
Net interest income (expense)
Noninterest income
September 30, 2002
Nine Months Ended:
Total Assets:
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.
12
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY
Net income for the third quarter ended September 30, 2003 was $7.39 million, compared to $8.86 million for the third quarter of 2002. Diluted net income per share was $0.93, compared to $1.07 for the third quarter of 2002. For the first nine months of 2003, net income was $24.1 million, compared to $25.2 million for the first nine months of 2002. Diluted net income per share for the first nine months was $3.02, compared to $3.05 for the first nine months of 2002.
Total assets at September 30, 2003 was $2.82 billion, up $23.2 million from December 31, 2002 and up $11.5 million from September 30, 2002. Stockholders’ equity was $251 million at September 30, 2003, down $576,000 from December 31, 2002, and up $6.65 million compared to September 30, 2002.
In January 2003, BancFirst Corporation repurchased 320,000 shares of its common stock for $14.4 million. The shares were repurchased through a market-maker in the Company’s stock and the repurchase was not a part of the Company’s ongoing Stock Repurchase Program.
In September 2003, BancFirst entered into an agreement to acquire the Hobart and Lone Wolf, Oklahoma branches of Gold Bank. As a result of the acquisition, BancFirst will purchase approximately $18.7 million of loans and other assets, and assume approximately $44.8 million of deposits, for a premium of approximately $3.4 million. The acquisition will be accounted for as a purchase. Accordingly, the effects of the acquisition will be included in the Company’s consolidated financial statements from the date of the acquisition forward. The acquisition is expected to be completed in the fourth quarter of 2003 and will not have a material effect on the results of operations of the Company for 2003.
In October 2003, BancFirst Corporation completed the acquisition of Lincoln National Bancorporation (“Lincoln”) of Oklahoma City, Oklahoma for cash of $16.9 million. Lincoln had consolidated total assets of approximately $108 million. As a result of the acquisition, Lincoln was merged into BancFirst Corporation, and Lincoln’s wholly-owned bank subsidiary, Lincoln National Bank, became a subsidiary of BancFirst Corporation. The acquisition will be accounted for as a purchase. Accordingly, the effects of the acquisition will be included in the Company’ consolidated financial statements from the date of the acquisition forward. The acquisition will not have a material effect on the results of operations of the Company for 2003.
RESULTS OF OPERATIONS
Third Quarter
Net interest income for the third quarter of 2003 was $27 million, down $1.05 million from the prior year. The net interest margin decreased to 4.22% from 4.51% for the third quarter of 2002. Earning asset growth between the third quarter of 2002 and the third quarter of 2003, primarily in loans, produced a positive volume variance that helped to offset a negative rate variance. In the current low interest rate environment, the value of the Company’s noninterest-bearing deposits is reduced, causing a decrease in the Company’s net interest margin. Assuming no change in this rate environment, or in the volume or mix of the Company’s loans and deposits, the Company’s net interest income would reasonably be expected to decline over the next several quarters. Also, in the second quarter of 2003, the Company adjusted its interest rate sensitivity by selling $71.2 million of securities and reinvesting the proceeds in shorter-term securities, and by retiring $25.1 million of long-term fixed-rate debt. As a result of this and other changes, the Company’s one-year negative interest sensitivity gap decreased to $611 million at September 30, 2003 from $689 million at December 31, 2003 and $673 million at September 30, 2002. This change in interest rate sensitivity may be expected to reduce net interest income in the near term, but the lower one-year negative gap better positions the Company for the possibility of rising interest rates, while the reduction in long-term borrowings better positions the Company for a continued low interest rate environment.
13
The Company provided $524,000 for loan losses in the third quarter of 2003, compared to $1.3 million for the same period of 2002. Net loan charge-offs were $638,000 for the third quarter of 2003, compared to $2.29 million for the third quarter of 2002. The net charge-offs represent an annualized rate of 0.14% of average total loans for the third quarter of 2003, compared to 0.51% for the third quarter of 2002.
Noninterest income decreased $484,000 compared to the third quarter of 2002. Trust revenue and gains on sales of loans increased, while other noninterest income decreased. Noninterest expense increased $1.65 million compared to the third quarter of 2002, due primarily to a $1.58 million provision to establish an allowance for uncollectibility of certain receivables carried in cash and due from banks. Noninterest expense excluding this loss increased $78,000, mainly due to higher salaries and employee benefits. Income tax expense decreased $980,000 compared to the third quarter of 2002. The effective tax rate on income before taxes was 32.30%, compared to 33.72% for the third quarter of 2002.
Year-To-Date
Net interest income for the first nine months of 2003 was $80.1 million, down $1.14 million from the prior year. The net interest margin decreased to 4.25% from 4.48% for the first nine months of 2002. Earning asset growth, primarily in loans, produced a positive volume variance that helped to offset a negative rate variance. As discussed for the third quarter above, the Company’s net interest income would reasonably be expected to decline over the next several quarters. Also, the change to the Company’s interest sensitivity may be expected to reduce net interest income in the near term, but better positions the Company for the possibility of rising interest rates.
The Company provided $2.37 million for loan losses in the first nine months of 2003, compared to $3.62 million for the same period of 2002. Net loan charge-offs were $1.85 million for the first nine months of 2003, compared to $4.45 million for the first nine months of 2002. The net charge-offs represent annualized rates of 0.14% and 0.34% of average total loans for the first nine months of 2003 and 2002, respectively.
Noninterest income increased $3.82 million compared to the first nine months of 2002, due primarily to gains from the sales of securities. Noninterest income excluding securities gains increased $782,000. Trust revenue, service charges on deposits and gains on sales of loans increased, while other noninterest income decreased. Noninterest expense increased $5.2 million compared to the first nine months of 2002, due primarily to the $1.58 million provision for uncollectible receivables in the third quarter of 2003, the 2.42 million loss on early extinguishment of debt in the second quarter of 2003, and an operational loss of $1.18 million recognized in the first quarter of 2003. Excluding these losses, noninterest expense increased $13,000. Income tax expense decreased $147,000 compared to the first nine months of 2002. The effective tax rate on income before taxes was 34.35%, up from 33.61% in the first nine months of 2002. The Company’s effective tax rate in 2003 has increased due to lower levels of tax exempt income and less tax credits.
FINANCIAL POSITION
Cash and due from banks, interest-bearing deposits with banks, and federal funds sold increased a combined total of $75 million from December 31, 2002, and $31.8 million from September 30, 2002. These increases were mainly from growth in deposits.
Total securities decreased $39.7 million compared to December 31, 2002 and $39.6 million compared to September 30, 2002. 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 gain on securities available for sale, before taxes, was $17.3 million at the end of the third quarter of 2003, compared to a gain of $24.3 million at December 31, 2002 and a gain of $23.9 million at September 30, 2002. The average taxable equivalent yield on the securities portfolio for the third quarter decreased to 4.26% from 5.30% for the same quarter of 2002.
14
Total loans decreased $13.9 million from December 31, 2002, and increased $15.1 million from September 30, 2002. The allowance for loan losses increased $523,000 from year-end 2002 and $1.18 million from the third quarter of 2002. The allowance as a percentage of total loans was 1.38%, 1.34% and 1.33% at September 30, 2003, December 31, 2002 and September 30, 2002, respectively. The allowance to nonperforming and restructured loans at the same dates was 154.43%, 175.16% and 179.54%, respectively.
Nonperforming and restructured loans totaled $16.1 million at September 30, 2003, compared to $13.9 million at December 31, 2002 and $13.2 million at September 30, 2002. The ratio of nonperforming and restructured loans to total loans for the same periods was 0.89%, 0.77% and 0.74%, respectively. The level of nonperforming loans and loan losses may rise over time as a result of economic and credit cycles.
Total deposits increased $56.8 million compared to December 31, 2002, and $39.8 million compared to September 30, 2002 due to internal growth. The Company’s deposit base continues to be comprised substantially of core deposits, with large denomination certificates of deposit being only 8.67% of total deposits at September 30, 2003, compared to 10.4% at December 31, 2002 and 11.08% at September 30, 2002.
Short-term borrowings decreased $7.11 million from December 31, 2002, and decreased $14.9 million from September 30, 2002. 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 $21.9 million from year-end 2002 and $18.9 million from the third quarter of 2002, due to the early retirement of $25.1 million Federal Home Loan Bank advances as a part of the Company’s adjustment to its interest sensitivity in the second quarter of 2003. The Company uses these borrowings primarily to match-fund long-term fixed-rate loans.
Stockholders’ equity decreased $576,000 from year-end 2002 due to the stock repurchase in the first quarter of 2003. Compared to September 30, 2002, stockholders’ equity increased $6.65 million due to accumulated earnings. Average stockholders’ equity to average assets for the first nine months of 2003 was 8.82%, compared to 8.41% for the first nine months of 2002. The Company’s leverage ratio and total risk-based capital ratio were 8.77% and 13.44%, respectively, at September 30, 2003, well in excess of the regulatory minimums.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
See note (2) of the Notes to Consolidated Financial Statements for a discussion of recently issued 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 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.
15
SELECTED CONSOLIDATED FINANCIAL DATA
Per Common Share Data
Net income – basic
Net income – diluted
Cash dividends
Performance Data
Return on average assets
Return on average stockholders’ equity
Cash dividend payout ratio
Net interest spread
Net interest margin
Efficiency ratio
Balance Sheet Data
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)
Asset Quality Ratios
Allowance for loan losses to total loans
Allowance for loan losses to nonperforming and restructured loans
16
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
9.65% Capital Securities
Total interest-bearing liabilities
Interest-free funds:
Noninterest-bearing deposits
Interest payable and other liabilities
Stockholders’ equity
Total interest free funds
17
18
There have been no significant changes in the Registrants disclosures regarding market risk since December 31, 2002, the date of its annual report to stockholders.
The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the Company’s disclosure controls and procedures as of a date within 90 days of the filing date of this report. 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, except as described below.
During the quarter ended September 30, 2003, management identified a significant deficiency in internal controls involving segregation of duties and other controls over reconciliations of due from banks accounts. This deficiency resulted in certain account outages not being fully researched and investigated, and certain receivables from the processing of cash letters and other transactions not being collected on a timely basis. Management has corrected this deficiency by reassigning the preparation, review and approval of the reconciliations, and the posting of general ledger entries, to persons independent of the processing and recording of the transactions to the due from banks accounts.
The Company has engaged a public accounting firm to conduct a review of its internal controls, disclosure controls and procedures, and its evaluation procedures, including its internal audit function. This firm will also assist management with future evaluations of the Company’s internal controls, financial reporting processes and disclosure controls and procedures as required by Sections 302 and 404 of the Sarbanes-Oxley Act of 2002, and by the FDIC Improvement Act. The preliminary review of internal controls has not been completed as of the filing of this report. When the review is completed, the public accounting firm may make recommendations which could result in significant changes in the Company’s internal controls or disclosure controls and procedures.
PART II – OTHER INFORMATION
(a) Exhibits
Exhibit
3.1
3.2
3.3
4.1
4.2
19
4.3
4.4
31.1*
31.2*
32.1*
32.2*
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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.
(Registrant)
Date November 14, 2003
(Signature)
Randy P. Foraker
Senior Vice President and Controller;
Assistant Secretary/Treasurer
(Principal Accounting Officer)
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