SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2005
OR
| ¨ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT 1934 |
For the transition period from to
Commission File Number: 333-110127
Bainbridge Bancshares, Inc.
(Exact name of registrant as specified in its charter)
| Georgia | 20-0057499 | |
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
208 S. Russ St., Bainbridge, GA 39817
(Address of principal executive offices)
(229) 246-3131
(Registrant’s telephone number, including area code)
Not Applicable
(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 ¨
APPLICABLE ONLY TO CORPORATE ISSUERS:
There were 653,334 shares of the Registrant’s common stock outstanding as of May 13, 2005.
Transitional Small Business Disclosure Format (check one): Yes ¨ No x.
FORM 10-QSB
INDEX
| Page | ||||
PART I –FINANCIAL INFORMATION | ||||
ITEM 1. | ||||
| 3 | ||||
Consolidated Statement of Income and Comprehensive Income (unaudited) | 4 | |||
| 5 | ||||
| 6-8 | ||||
ITEM 2. | 9 and 10 | |||
ITEM 3. | 12 | |||
PART II –OTHER INFORMATION | ||||
ITEM 6. | 13 | |||
Consolidated Balance Sheet
March 31, 2005
(Unaudited)
Assets | ||||
Cash and due from bank | $ | 1,419,315 | ||
Federal funds sold | 5,010,000 | |||
Securities available for sale, at fair value | 3,737,648 | |||
Restricted securities | 222,300 | |||
Loans | 27,289,891 | |||
Less allowance for loan losses | (295,000 | ) | ||
Loans, net | 26,994,891 | |||
Premises and equipment, net | 1,344,519 | |||
Other assets | 365,360 | |||
| $ | 39,094,033 | |||
Liabilities and Shareholders’ Equity | ||||
Deposits | ||||
Noninterest-bearing demand | $ | 5,346,589 | ||
Interest-bearing demand and savings | 13,299,682 | |||
Time deposits | 14,364,170 | |||
Total deposits | 33,010,441 | |||
Other liabilities | 119,713 | |||
Total liabilities | 33,130,154 | |||
Shareholders’ equity | ||||
Preferred stock, no par value; 10,000,000 shares authorized; none issued | — | |||
Common stock, no par value, 10,000,000 shares authorized; 653,334 shares issued and outstanding | 6,487,176 | |||
Accumulated deficit | (487,025 | ) | ||
Accumulated other comprehensive loss | (36,272 | ) | ||
Total shareholders’ equity | 5,963,879 | |||
| $ | 39,094,033 | |||
See Notes to Consolidated Financial Statements.
3
Consolidated Statement of Income and Comprehensive Income
Three Months Ended March 31, 2005
(Unaudited)
Interest income | ||||
Interest and fees on loans | $ | 464,479 | ||
Interest on investment securities | 40,019 | |||
Interest on federal funds sold | 24,315 | |||
| 528,813 | ||||
Interest expense | ||||
Interest on deposits | 134,189 | |||
Net interest income | 394,624 | |||
Provision for loan losses | 45,000 | |||
Net interest income after provision for loan losses | 349,624 | |||
Other income | ||||
Service charges on deposit accounts | 39,080 | |||
Other fees and income | 3,950 | |||
| 43,030 | ||||
Other expenses | ||||
Salaries and employee benefits | 136,528 | |||
Premises and fixed assets | 39,419 | |||
Other expenses | 96,754 | |||
| 272,701 | ||||
Net income | 119,953 | |||
Other comprehensive loss: | ||||
Unrealized losses on securities available for sale, net of deferred tax of $10,171 | (29,915 | ) | ||
Comprehensive income | $ | 90,038 | ||
Basic and diluted earnings per share | $ | 0.18 | ||
See Notes to Consolidated Financial Statements.
4
Consolidated Statement of Cash Flows
Three Months Ended March 31, 2005
(Unaudited)
Cash flows from operating activities | ||||
Net income | $ | 119,953 | ||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||
Depreciation | 18,667 | |||
Provision for loan losses | 45,000 | |||
Increase in interest receivable | (22,919 | ) | ||
Decrease in interest payable | (44,246 | ) | ||
Other operating activities, net | 48,596 | |||
Net cash provided by operating activities | 165,051 | |||
Cash flows from investing activities | ||||
Purchase of investment securities | (1,496,081 | ) | ||
Proceeds from maturities of securities available for sale | 806,364 | |||
Net increase in federal funds sold | (1,230,000 | ) | ||
Net increase in loans | (2,974,601 | ) | ||
Purchase of premises and equipment | (380,015 | ) | ||
Purchases of restricted equity securities | (21,500 | ) | ||
Net cash used in investing activities | (5,295,833 | ) | ||
Cash flows from financing activities | ||||
Net increase in deposits | 2,816,054 | |||
Exercise of warrants | 33,340 | |||
Net cash provided by financing activities | 2,849,394 | |||
Net decrease in cash and due from banks | (2,281,388 | ) | ||
Cash and due from banks at beginning of year | 3,700,703 | |||
Cash and due from banks at end of period | $ | 1,419,315 | ||
See Notes to Consolidated Financial Statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Organization:
Bainbridge Bancshares, Inc. (the “Company”) was incorporated on June 25, 2003 to operate as a bank holding company pursuant to the Federal Holding Company Act of 1956, as amended, and to purchase 100% of the issued and outstanding capital stock of First National Bank of Decatur County (the “Bank”), an association organized under the laws of the United States, which conducts a general banking business in Bainbridge, Georgia. In March 2004, the Company obtained regulatory approval to become a registered bank holding company subject to regulation by the Board of Governors of the Federal Reserve System and the Georgia Department of Banking and Finance. In April 2004, the Bank was chartered as a national bank subject to regulations by the Office of the Comptroller of the Currency and commenced banking operations.
Basis of Presentation:
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments necessary for the fair presentation of the consolidated financial statements have been included. All adjustments are of a normal recurring nature.
The results of operations for the three month period ended March 31, 2005 are not necessarily indicative of the results to be expected for the full year.
Material Accounting Changes:
During the quarter ended March 31, 2005, there were no changes in the Company’s critical accounting policies. These policies are described in greater detail in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2004.
Income Taxes:
Deferred income tax assets and liabilities are determined using the balance sheet method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in the tax rates and laws.
Accounting Standards:
In the first quarter of 2005, the Financial Accounting Standards Board delayed the effective date of Statement No. 123R, Share-Based Payment, a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation, until the beginning of the first interim or annual reporting period that begins after December 15, 2005. This Statement applies to all awards granted or vesting after the required effective date and to awards modified, repurchased or cancelled after that date.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings Per Share:
Basis earnings per share are computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share are computed by dividing net income by the sum of the weighted average number of common shares outstanding and potential common shares. Potential common shares consist of stock options.
Presented below is a summary of the components used to calculate basic and diluted earnings per share:
| March 31, 2005 | |||
Net income | $ | 119,953 | |
Weighted average number of common shares outstanding | 650,296 | ||
Effect of dilutive options | — | ||
Weighted average number of common shares outstanding used to calculate dilutive earnings per share | 650,296 | ||
Stock Compensation Plans:
At March 31, 2005, the Company had a stock-based employee compensation plan, which is described in more detail in the Company’s Form 10-KSB for the year ended December 31, 2004. The Company accounts for the plan under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying stock on the date of grant. In addition, the FASB issued SFAS No. 148,Accounting for Stock-Based Compensation - Transition and Disclosure in December 2002. SFAS No. 148 amends SFAS No. 123,Accounting for Stock-Based Compensation, to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation. The Company has not elected to adopt the recognition provisions of this Statement for stock-based employee compensation and has elected to continue with accounting methodology in Opinion No. 25 as permitted by SFAS No. 123.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Compensation Plans: (Continued)
| Quarter Ended March 31, 2005 | |||
Net income, as reported | $ | 119,953 | |
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | — | ||
Pro forma net income | $ | 119,953 | |
Earnings per share: | |||
Basic - as reported | $ | .18 | |
Basic - pro forma | $ | .18 | |
Diluted - as reported | $ | .18 | |
Diluted - pro forma | $ | .18 | |
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Item 2.Management’s Discussion and Analysis or Plan of Operation
This discussion is intended to assist in an understanding of the Company’s financial condition and results of operations. This analysis should be read in conjunction with the financial statements and related notes appearing in this report and the financial statements and related notes and Management’s Discussion and Analysis appearing in the Company’s Form 10-KSB for the year ended December 31, 2004.
Overview
The Company was incorporated in Georgia in June 2003 to serve as a holding company for the Bank, a national banking association then in organization. For approximately the first ten months following its incorporation, the main activities of Bainbridge Bancshares centered on applying for a national bank charter, applying to become a bank holding company, preparing the banking facilities and premises, hiring and training Bank employees, and conducting an initial public offering of common stock to raise a minimum of $5.1 million to fund the startup of the Bank. Bainbridge Bancshares sold a total of $6.5 million of stock in the offering, the maximum amount offered, and in April 2004, the Bank commenced banking operations.
Critical Accounting Policies
The accounting and financial reporting policies of the Company conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Following is a description of the accounting policies applied by the Company that are deemed “critical”. Critical accounting policies are defined as policies that are very important to the presentation of the Company’s financial condition and results of operations, and that require management’s most difficult, subjective, or complex judgments. The Company’s financial results could differ significantly if different judgments or estimates are applied in the application of these policies.
Allowance for Loan Losses
The allowance for loan losses is established through provisions for loan losses charged to operations. Loans are charged against the allowance for loan losses when management believes that the collection of principal is unlikely. Subsequent recoveries are added to the allowance. Management’s evaluation of the adequacy of the allowance for loan losses is based on a formal analysis that assesses the risk within the loan portfolio. This analysis includes consideration of historical performance, current economic conditions, level of nonperforming loans, loan concentrations, and review of certain individual loans.
Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the subsidiary banks’ allowances for loan losses. Such agencies may require the bank to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination.
Considering current information and events regarding a borrower’s ability to repay its obligations, management considers a loan to be impaired when the ultimate collectibility of all amounts due, according to the contractual terms of the loan agreement, is in doubt. When a loan is considered to be impaired, the amount of impairment is measured based on the present value of expected future cash
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flows discounted at the loan’s effective interest rate. If the loan is collateral-dependent, the fair value of the collateral is used to determine the amount of impairment. Impairment losses are included in the allowance for loan losses through a charge to the provision for losses on loans.
Subsequent recoveries are credited to the allowance for loan losses. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreement. Cash receipts on impaired loans for which the accrual of interest has been discontinued are applied first to principal and then to interest income.
The accounting for impaired loans described above applies to all loans, except for large pools of smaller-balance, homogeneous loans that are collectively evaluated for impairment, loans that are measured at fair value or at the lower of cost or fair value, and debt securities. The allowance for loan losses for large pools of smaller-balance, homogeneous loans is established through consideration of such factors as changes in the nature and volume of the portfolio, overall portfolio quality, adequacy of the underlying collateral, loan concentrations, historical charge-off trends, and economic conditions that may affect the borrowers’ ability to pay.
Certain economic and interest rate factors could have a material impact on the determination of the allowance for loan losses. The depth, duration and dispersion of any economic recession all have an impact on the credit risk profile of the loan portfolio. Additionally, a rapidly rising interest rate environment that may cause rates to reach double digits could as well have a material impact on certain borrowers’ ability to pay.
Another factor that management has considered in the determination of the allowance for loan losses is loan concentrations to individual borrowers or industries. A substantial portion of the loan portfolio is in the commercial real estate and residential real estate sectors. Those loans are secured by real estate in the Company’s primary market area. Therefore, the ultimate collectibility of a substantial portion of our loan portfolio and the recovery of a substantial portion of the carrying amount of other real estate owned are susceptible to changes to market conditions in the Company’s primary market area.
The Company is closely monitoring certain portions of its loan portfolio that management believes have a higher credit risk profile under the current environment based solely upon their industry classification which includes commercial real estate. Based on current information, the Company has not identified any problem credits included in these categories at March 31, 2005, except for one $6,000 loan which the Company has classified as substandard.
Income Taxes
SFAS No. 109, “Accounting for Income Taxes,” requires the asset and liability approach for financial accounting and reporting for deferred income taxes. The Company uses the asset and liability method of accounting for deferred income taxes and provides deferred income taxes for all significant income tax temporary differences. See Note 9 to the Notes to Consolidated Financial Statements for additional details.
As part of the process of preparing its consolidated financial statements, the Company is required to estimate its income taxes in the jurisdiction which it operates. This process involves estimating its actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as depreciation and the provision for loan losses, for tax and financial reporting purposes.
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These differences result in deferred tax assets and liabilities that are included in the Company’s consolidated balance sheet.
The Company must also assess the likelihood that its deferred tax assets will be recovered from future taxable income, and to the extent the Company believes that recovery is not likely, the Company must establish a valuation allowance. Significant management judgment is required in determining the Company’s provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against its net deferred tax assets. To the extent the Company establishes a valuation allowance or adjust this allowance in a period, the Company must include an expense within the tax provisions in the statement of income.
Financial Condition
As of March 31, 2005, the Company’s total assets were $39,094,033, representing an increase of $2,973,935 or 8.2% from December 31, 2004. Earning assets consist of federal funds sold, investment securities and loans. These assets provide the majority of the Company’s earnings. The mix of earning assets reflects management’s philosophy regarding earnings versus risk.
Federal funds sold represent an overnight investment of funds and can be converted immediately to cash. At March 31, 2005, the Company had federal funds sold of $5,010,000 representing an increase of $1,230,000, or 32.5%, from December 31, 2004.
Investment securities consist of U.S. Government and Agency securities and mortgage-backed securities. These investments are used to provide liquidity, mitigate risk and secure large public fund deposits. During the first quarter of 2005, investment securities increased $644,390 due to purchases of securities. All securities are classified as available for sale and are carried at current market values.
The loan portfolio is the largest earning asset and is the primary source of earnings for the Company. At March 31, 2005, net loans were $26,994,891. The loan portfolio increased $2,929,601, or 12.2%, during the first quarter. At March 31, 2005, the allowance for loan losses was $295,000, or 1.08%, of total loans. Management believes this is an adequate, but not excessive amount based upon the composition of the current loan portfolio and current economic conditions. The relationship of the allowance to total loans will vary over time based upon management’s evaluation of the loan portfolio. Management evaluates the adequacy of the allowance on a monthly basis and adjusts it accordingly by a monthly charge to earnings using the provision for loan losses. During the first quarter of 2005, the provision for potential loan losses was $45,000, as a result of the growth of the loan portfolio.
Non-earning assets consist of premises and equipment and other assets. Premises and equipment increased during the quarter as a result of the construction costs for our permanent facility. Other assets consist primarily of accrued interest receivable and increased $68,484 as a result of the larger loan portfolio upon which to accrue interest.
The Company funds its assets primarily through deposits from customers. The Company must pay interest on the majority of these funds and attempts to price these funds competitively in the market place, but at a level that it can safely re-invest the funds profitably. At March 31, 2005, total deposits were $33,010,441 as compared to the year-end amount of $30,194,387. This is an increase of $2,816,054 or 9.3%. During the first quarter of 2005, the Company increased its overall deposits to fund future growth using the current low rate environment.
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Capital Adequacy
The following table presents the Bank’s regulatory capital position as of March 31, 2005.
Tier 1 Capital to Risk Weighted Assets, actual | 26.33 | % | |
Tier 1 Capital minimum requirement | 4.00 | % | |
Total Capital to Risk Weighted Assets, actual | 25.08 | % | |
Total Capital minimum requirement | 8.00 | % | |
Tier 1 Leverage Ratio | 14.71 | % | |
Tier 1 Leverage Ratio minimum requirement | 4.00 | % | |
The Bank’s ratios are well above the required regulatory minimums under capital adequacy guidelines and provide a sufficient basis to support future growth of the Bank.
Results of Operations
Net income for the three months ended March 31, 2005 was $119,953. Total interest income was $528,813 for the three months ended March 31, 2005. Interest expense for the three months ended March 31, 2005 was $134,189. Net interest income after the provision for loan losses was $349,624 for the three months ended March 31, 2005. This is the combined result of the increased level of earning assets. Management is currently pursuing growth in earning assets.
Non-interest expense was $272,701 for the quarter ended March 31, 2005. The largest non-interest expense item was salary and employee benefits, which was $136,528 in the current quarter.
Basic and diluted earnings per share for the three months ended March 31, 2005 was $0.18.
Forward-Looking Statements
This document contains statements that constitute “forward-looking statements” within the meaning of Sections 27A of the Securities Act of 1933, as amended, and Sections 21E of the Securities Exchange Act of 1934, as amended. The words “believe”, “estimate”, “expect”, “intend”, “anticipate” and similar expressions and variations thereof identify certain of such forward-looking statements, which speak only as of the dates that they were made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Users are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties that the actual results may differ materially from those indicated in the forward-looking statements as a result of various factors. Users are therefore cautioned not to place undue reliance on these forward-looking statements.
Item 3.Controls and Procedures
The Chief Executive Officer and Chief Financial Officer of the Company have evaluated the Company’s disclosure controls and procedures as of the end of the quarterly period covered by this Report on Form 10-QSB and have concluded that the Company’s disclosure controls and procedures are effective. During the quarter ended March 31, 2005, there were no changes in the Company’s internal control over financial reporting that have materially affected, or that are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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The following exhibits are filed with this report or incorporated herein by reference:
| 3.1 | Articles of Incorporation of the Company (filed as Exhibit 3.1 to the Company’s Form SB-2 previously filed with the SEC on October 31, 2003 and incorporated herein by reference) | |
| 3.2 | Bylaws of the Company (filed as Exhibit 3.2 to the Company’s Form SB-2 previously filed with the SEC on October 31, 2003 and incorporated herein by reference) | |
| 31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
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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.
| BAINBRIDGE BANCSHARES, INC. | ||
| Date: May 13, 2005 | /s/ Tracy A. Dixon | |
| Tracy A. Dixon, | ||
| President | ||
| (Principal executive officer) | ||
| Date: May 13, 2005 | /s/ Donna H. Kelley | |
| Donna H. Kelley | ||
| Chief Financial Officer | ||
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