FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
For the quarterly period ended September 30, 2004
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 October 31, 2004 there were 7,833,496 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,
2003
ASSETS
Cash and due from banks
Interest-bearing deposits with banks
Federal funds sold
Securities (market value: $559,776, $527,490 and $566,461, 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
Accrued interest payable
Other liabilities
Long-term borrowings
Junior subordinated debentures
Minority interest
Total liabilities
Commitments and contingent liabilities
Stockholders’ equity:
Common stock, $1.00 par (shares issued and outstanding: 7,830,008, 7,815,364 and 7,822,637, respectively)
Capital surplus
Retained earnings
Accumulated other comprehensive income, net of income tax of $2,576, $5,636 and $5,128, 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 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
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
NET INCOME PER COMMON SHARE
Basic
Diluted
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CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended
September 30,
CASH FLOWS FROM OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities:
Held for investment
Available for sale
Maturities of securities:
Proceeds from sales and calls of securities:
Net increase 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
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand, transaction and savings deposits
Net decrease in certificates of deposits
Net decrease 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 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
SUPPLEMENTAL DISCLOSURE
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, 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, Express Financial Corporation, and PremierSource LLC. Three other operating subsidiaries of BancFirst, Mojave Asset Management Company, Desert Asset Management Company, and Delamar Asset Management Limited Partnership, were liquidated and dissolved in August 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, 2003, the date of the most recent annual report. Certain amounts in the 2003 financial statements have been reclassified to conform to the 2004 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 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.
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(3) RECENT ACCOUNTING PRONOUNCEMENTS
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 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 was effective immediately for interests in variable interest entities acquired after January 31, 2003. It applied 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. In December 2003, the FASB issued a revision of FIN 46 (“Revised FIN 46”) that codified the proposed modifications and other decisions previously issued through certain FASB Staff Positions, made other revisions, and superceded the original FIN 46. 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 as part 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 and the 7.20% Cumulative Trust Preferred Securities described in note (4) 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 May 2004, the Federal Reserve Board requested public comment on a proposed rule that would retain trust preferred securities in Tier 1 capital, but with stricter limits.
In May 2003, the FASB issued FAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement is effective for all new and modified financial instruments beginning with the first interim period beginning after June 15, 2003. FAS No. 150 changes the accounting for certain financial instruments that, under previous guidance, could be accounted for as equity and requires that those instruments be classified as liabilities, or assets in certain circumstances. The adoption of this new standard did not have a material effect on the Company’s consolidated financial statements.
In March 2004, the FASB ratified EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” (“EITF 03-1”) which provides guidance on recognizing other-than-temporary impairments on certain investments. The Issue is effective for other-than-temporary impairment evaluations for investments accounted for under FAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” as well as non-marketable equity securities accounted for under the cost method for reporting periods beginning after June 15, 2004. The adoption of this new standard did not have a material effect on the Company’s consolidated financial statements.
(4) RECENT DEVELOPMENTS; MERGERS, ACQUISITIONS AND DISPOSALS
In January 2003, the Company 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 October 2003, the Company 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 the Company, and Lincoln’s wholly-owned bank subsidiary, Lincoln National Bank, became a subsidiary of the Company and was merged into BancFirst in February 2004. 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.
In November 2003, BancFirst completed the acquisition of the Hobart and Lone Wolf, Oklahoma branches of Gold Bank. As a result of the acquisition, BancFirst purchased approximately $16,256 of loans and other assets, and assumed approximately $40,465 of deposits, for a premium of approximately $2,731. 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.
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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 currently qualify as Tier 1 regulatory capital but could potentially be excluded in the future as discussed in note (3). 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.
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 will be included in the Company’s consolidated financial statements from the date of the acquisition forward.
Also, in October 2004, the Company sold a minority interest it owned in a community bank and recognized a one-time gain of approximately $2.4 million.
(5) SECURITIES
The table below summarizes securities held for investment and securities available for sale.
Held for investment at cost (market value; $33,616, $41,842 and $40,191, respectively)
Available for sale, at market value
Total
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 were 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
At September 30, 2004, the Company held 205 securities available for sale that had unrealized gains. These securities had a market value totaling $417,048 and unrealized gains totaling $8,847. The Company also held 33 securities available for sale that had unrealized losses. These securities had a market value totaling $92,671 and unrealized losses totaling $830. 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.
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(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
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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
Trademarks
Amortization of intangible assets and estimated amortization of intangible assets are as follows:
Amortization:
Three months ended September 30, 2004
Three months ended September 30, 2003
Nine months ended September 30, 2004
Nine months ended September 30, 2003
Year ended December 31, 2003
Estimated Amortization:
Year ended December 31,
2004
2005
2006
2007
2008
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The following is a summary of goodwill by business segment:
OtherFinancial
Services
Three Months Ended September 30, 2004
Adjustments
Three Months Ended September 30, 2003
Balance at beginning and end of period
Nine Months Ended September 30, 2004
Acquisitions
Nine Months Ended September 30, 2003
(9) LONG-TERM BORROWINGS
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 part of a plan to adjust the Company’s interest rate sensitivity. These retired advances had fixed rates from 3.47% to 7.87% and maturities from 2008 to 2017.
(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.
Tier 1 capital
Total capital
Risk-adjusted assets
Leverage ratio
Tier 1 capital ratio
Total capital ratio
10
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 September 30, 2004 and 2003, and December 31, 2003, 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 September 30, 2004 there were 208,126 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
(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
11
(13) NET INCOME PER COMMON SHARE
Basic and diluted net income per common share are calculated as follows:
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.
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(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. The results of operations and selected financial information for the four business units are as follows:
Three Months Ended: September 30, 2004
Net interest income (expense)
Noninterest income
September 30, 2003
Nine Months Ended: September 30, 2004
Total Assets:
September 30, 2004
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 third quarter of 2004 was $9.31 million, compared to $7.39 million for the third quarter of 2003. Diluted net income per share was $1.17, compared to $0.93 for the third quarter of 2003. For the first nine months of 2004, net income was $26.1 million, compared to $24.1 million for the first nine months of 2003. Diluted net income per share for the first nine months was $3.27, compared to $3.02 for the first nine months of 2003.
Total assets at September 30, 2004 increased to $3.04 billion, up $115 million from December 31, 2003 and up $217 million from September 30, 2003. Stockholders’ equity was $271 million at September 30, 2004, up $15.2 million from December 31, 2003 and up $19.6 million compared to September 30, 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 and was merged into BancFirst in February 2004. 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.
In November 2003, BancFirst completed the acquisition of the Hobart and Lone Wolf, Oklahoma branches of Gold Bank. As a result of the acquisition, BancFirst purchased approximately $16.3 million of loans and other assets, and assumed approximately $40.5 million of deposits, for a premium of approximately $2.73 million. 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.
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 $25.0 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 of Trust Preferred Securities pursuant to the 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.
RESULTS OF OPERATIONS
Third Quarter
Net interest income for the third quarter of 2004 was $29.8 million, up $2.83 million from the third quarter of 2003. The net interest margin increased to 4.34% from 4.22% for the third quarter of 2003. An increase in earning assets between the third quarter of 2004 and the third quarter of 2003, primarily in loans, produced a positive volume variance.
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The Company provided $879,000 for loan losses in the third quarter of 2004, compared to $524,000 for the same period of 2003. The increase in the provision for loan losses resulted from overall loan growth during the quarter. The Company’s nonperforming loans decreased $5.64 million from a year ago to $10.5 million at September 30, 2004. The percentage coverage of allowance for loan losses to total nonperforming loans increased from 154.43% at September 30, 2003 to 244.06% at September 30, 2004. Net loan charge-offs were $1.23 million for the third quarter of 2004, compared to $638,000 for the third quarter of 2003. The net charge-offs represent an annualized rate of 0.25% of average total loans for the third quarter of 2004 versus 0.14% for the third quarter of 2003.
Noninterest income, excluding securities transactions, increased $987,000 compared to the third quarter of 2003 due to an increase in trust revenue, service charges on deposits, cash management and electronic banking services, and sales of insurance products. Noninterest expense increased $206,000 compared to the third quarter of 2003. During the third quarter of 2003, the Company incurred a $1.58 million provision to establish an allowance for uncollectibility of certain receivables carried in cash and due from banks. Excluding this provision, the increase in noninterest expense compared to the third quarter of 2003 was $1.79 million. The majority of this increase was due to the acquisitions of Lincoln and the Gold Bank branches in the fourth quarter of 2003, and also annual salaries increases that were effective in January 2004. Income tax expense increased $1.34 million compared to the third quarter of 2003. The effective tax rate on income before taxes was 34.3%, compared to 32.3% for the third quarter of 2003.
Year-To-Date
Net interest income for the first nine months of 2004 was $86.1 million, up $5.31 million from the first nine months of 2003. The net interest margin decreased to 4.22% for the first nine months of 2004 compared to 4.25% for the same period of 2003. An increase in earning assets between the first nine months of 2004 and the first nine months of 2003, primarily in loans, produced a positive volume variance that offset a negative rate variance. In addition, interest expense decreased $5.04 million from the first nine months of 2003 due to the repricing of interest bearing liabilities in the lower interest rate environment.
The Company provided $1.80 million for loan losses in the first nine months of 2004, compared to $2.37 million for the same period of 2003. The decrease in the provision for loan losses resulted from a decrease in nonperforming loans. The Company’s nonperforming loans decreased $5.64 million from a year ago to $10.5 million at September 30, 2004. The percentage coverage of allowance for loan losses to total nonperforming loans increased from 154.43% at September 30, 2003 to 244.06% at September 30, 2004. Net loan charge-offs were $2.38 million for the first nine months of 2004, compared to $1.85 million for the first nine months of 2003. The net charge-offs represent an annualized rate of 0.16% of average total loans for the first nine months of 2004 versus 0.14% for the first nine months of 2003.
Noninterest income, excluding securities transactions, for the first nine months of 2004 increased $2.90 million compared to the same period in 2003 due to an increase in service charges on deposits, cash management and electronic banking services, sales of insurance products and a gain of $421,000 on the sale of a minority interest in a community bank, offset by lower income from sales of loans. There was a loss of $146,000 on securities transactions in the first nine months of 2004, while gains of $3.08 million were recognized in the first nine months of 2003. Noninterest expense increased $2 million compared to the first nine months of 2003. The Company incurred a $1.58 million provision for uncollectible receivables in the third quarter of 2003, a $2.43 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, the increase in noninterest expense compared to the first nine months of 2003 was $7.19 million. The majority of this increase was due to the acquisitions of Lincoln and the Gold Bank branches in the fourth quarter of 2003, and also annual salaries increases that were effective in January 2004. Income tax expense increased $1.47 million compared to the first nine months of 2003. The effective tax rate on income before taxes was 35.0%, compared to 34.4% for the first nine months of 2003.
FINANCIAL POSITION
The aggregate of cash and due from banks, interest-bearing deposits with banks, and federal funds sold increased $32.4 million from December 31, 2003, and decreased $72.8 million from September 30, 2003. The increase from December 31, 2003 was mainly from an increase in deposits, while the decrease from September 30, 2003 resulted from growth in loans and securities.
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Total securities decreased $6.27 million compared to December 31, 2003 and increased $32.9 million compared to September 30, 2003. 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 $8.18 million at the end of the third quarter of 2004, compared to an unrealized gain of $15.0 million at December 31, 2003 and a gain of $17.3 million at September 30, 2003. The average taxable equivalent yield on the securities portfolio for the third quarter of 2004 decreased to 4.16% from 4.26% for the same quarter of 2003.
Total loans increased $88.8 million from December 31, 2003, and increased $235 million from September 30, 2003. The increase compared to the third quarter of 2003 was due to the acquisitions of Lincoln and the Gold Bank branches in the fourth quarter of 2003 and internal growth. The allowance for loan losses decreased $580,000 from year-end 2003 and increased $678,000 from the third quarter of 2003. The allowance as a percentage of total loans was 1.26%, 1.34% and 1.38% at September 30, 2004, December 31, 2003 and September 30, 2003, respectively. The allowance to nonperforming and restructured loans at the same dates was 244.06%, 158.76% and 154.43%, respectively.
Nonperforming and restructured loans totaled $10.5 million at September 30, 2004, compared to $16.5 million at December 31, 2003 and $16.1 million at September 30, 2003. The ratio of nonperforming and restructured loans to total loans for the same periods was 0.51%, 0.85% and 0.89%, respectively. The level of nonperforming loans and loan losses may rise over time as a result of economic and credit cycles.
Total deposits increased $79.1 million compared to December 31, 2003, and increased $179 million compared to September 30, 2003, due to the acquisitions of Lincoln and the Gold Bank branches in the fourth quarter of 2003 and internal growth. The Company’s deposit base continues to be comprised substantially of core deposits, with large denomination certificates of deposit being only 8.17% of total deposits at September 30, 2004, compared to 8.96% at December 31, 2003 and 8.67% at September 30, 2003.
Short-term borrowings decreased $427,000 from December 31, 2003, and decreased $1.16 million from September 30, 2003. 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 $3.17 million from year-end 2003 and $4.26 million from the third quarter of 2003 due to scheduled principal payments. The Company uses these borrowings primarily to match-fund, long-term fixed rate loans.
Junior subordinated debentures increased $26.8 million in the first nine months of 2004 due to the issuance of the 7.20% Junior Subordinated Debentures to BFC Capital Trust II.
Stockholders’ equity increased $15.2 million from year-end 2003 and $19.6 million from the third quarter of 2003, due to accumulated earnings offset by a decrease in unrealized gains in securities. Average stockholders’ equity to average assets for the third quarter of 2004 was 8.81%, compared to 8.82% for the third quarter of 2003. The Company’s leverage ratio and total risk-based capital ratio were 9.53% and 13.85%, respectively, at September 30, 2004, 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.
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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
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
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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, 2003, the date of its annual report to stockholders.
Item 4. Controls and Procedures.
The Company’s Chief Executive Officer, Chief Financial Officer and Disclosure Committee, which includes the Company’s Chief Risk Officer, Chief Asset Quality 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. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.
On May 27, 2004, the Registrant amended its Amended and Restated Certificate of Incorporation to increase the number of shares of common stock that the Registrant has the authority to issue from 15,000,000 shares to 20,000,000 shares.
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
Month #1 (beginning July 1, 2004 and ending July 31, 2004)
Month #2 (beginning August 1, 2004 and ending August 31, 2004)
Month #3 (beginning September 1, 2004 and ending September 30, 2004)
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Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number
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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/ Randy P. Foraker
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