UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
| x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2007
| ¨ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
For the transition period from to
Commission file number 33-64520
BANK BUILDING CORPORATION
(Exact name of small business issuer as specified in its charter)
| Virginia | 54-1714800 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
1300 Kings Mountain Road, Martinsville, Virginia 24112
(Address of principal executive offices)
(276) 656-1776
(Issuer’s telephone number)
(Former name, former address and former fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
There are 398,244 shares of the issuer’s common stock outstanding as of August 14, 2007.
Transitional Small Business Disclosure Format (Check one): Yes ¨ No x
2
Part I - Financial Information
Item 1 - Financial Statements.
Consolidated Statements of Financial Condition
June 30, 2007 | December 31, 2006 | |||||
| (Unaudited) | ||||||
Assets | ||||||
Current assets | ||||||
Cash | $ | 60,098 | $ | 88,277 | ||
Accounts receivable | 172 | 54,242 | ||||
Property – net | 31,357,421 | 31,656,245 | ||||
Income taxes receivable | 29,321 | — | ||||
Other assets | 186,753 | 179,806 | ||||
Total assets | 31,633,765 | 31,978,570 | ||||
Liabilities and Stockholders’ Equity | ||||||
Current liabilities | ||||||
Accounts payable | — | 1,820 | ||||
Accrued interest | 223,108 | 196,452 | ||||
Current portion of long-term debt | 1,692,061 | 1,619,268 | ||||
Notes payable | 673,000 | 565,000 | ||||
Total current liabilities | 2,588,169 | 2,382,540 | ||||
Long-term liabilities | ||||||
Long-term debt - net of current portion | 27,499,444 | 28,146,414 | ||||
Deferred income taxes | 62,445 | 62,445 | ||||
Total long-term liabilities | 27,561,889 | 28,208,859 | ||||
Total liabilities | 30,150,058 | 30,591,399 | ||||
Stockholders’ equity | ||||||
Common Stock, no par value, 400,000 shares authorized; 398,244 shares issued and outstanding | ||||||
Retained earnings | 1,483,707 | 1,387,171 | ||||
Total stockholders’ equity | 1,483,707 | 1,387,171 | ||||
Total liabilities and stockholders’ equity | $ | 31,633,765 | $ | 31,978,570 | ||
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Income
(Unaudited)
Six Months Ended June 30 | Three Months Ended June 30 | |||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||
| (Unaudited) | (Unaudited) | |||||||||||
Income | ||||||||||||
Lease income | $ | 2,014,251 | $ | 1,937,089 | $ | 1,021,177 | $ | 954,966 | ||||
Gain on sale of property | — | — | — | — | ||||||||
Total income | 2,014,251 | 1,937,089 | 1,021,177 | 954,966 | ||||||||
Operating Expenses | ||||||||||||
Interest | 1,236,948 | 1,186,552 | 618,608 | 593,155 | ||||||||
Depreciation | 333,856 | 336,345 | 166,928 | 168,172 | ||||||||
Amortization | 8,457 | — | 8,457 | — | ||||||||
Taxes and insurance | 18,494 | — | 13,390 | — | ||||||||
Repairs | 129,703 | 101,546 | 60,570 | 62,264 | ||||||||
Professional fees | 63,308 | 34,081 | 50,724 | 9,188 | ||||||||
Other | 77,219 | 93,289 | 31,718 | 53,384 | ||||||||
Total operating expenses | 1,867,985 | 1,751,813 | 950,395 | 886,163 | ||||||||
Income before income taxes | 146,266 | 185,276 | 70,782 | 68,803 | ||||||||
Income taxes | 49,730 | 65,204 | 24,067 | 25,604 | ||||||||
Net income | $ | 96,536 | $ | 120,072 | $ | 46,715 | $ | 43,199 | ||||
Retained earnings, beginning of period | 1,387,171 | 1,161,719 | — | — | ||||||||
Retained earnings, end of period | 1,483,707 | 1,281,791 | $ | 46,715 | $ | 43,199 | ||||||
Basic and diluted earnings per share | $ | 0.24 | $ | 0.30 | $ | 0.11 | $ | 0.11 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Cash Flows
| Six Months ended June 30, | ||||||||
| 2007 | 2006 | |||||||
| (Unaudited) | ||||||||
Cash flows from operating activities | ||||||||
Net Income | $ | 96,536 | $ | 120,072 | ||||
Adjustments to reconcile to net cash from operating activities: | ||||||||
Depreciation | 333,856 | 336,345 | ||||||
Gain on sale of property | — | — | ||||||
Change in: | ||||||||
Income taxes receivable | (29,321 | ) | — | |||||
Other assets | (6,947 | ) | (15,804 | ) | ||||
Accounts payable | (1,820 | ) | (21 | ) | ||||
Income taxes payable | — | 64,749 | ||||||
Accounts Receivable | 54,070 | — | ||||||
Accrued interest | 26,656 | 2,435 | ||||||
Net cash from operating activities | 473,030 | 507,776 | ||||||
Cash flows from investing activities | ||||||||
Purchase of property | (35,032 | ) | (313 | ) | ||||
Net cash from investing activities | (35,032 | ) | (313 | ) | ||||
Cash flows from financing activities | ||||||||
Repayment of long-term debt | (574,177 | ) | (549,153 | ) | ||||
Proceeds from notes payable | 108,000 | — | ||||||
Net cash from financing activities | (466,177 | ) | (549,153 | ) | ||||
Net change in cash | (28,179 | ) | (41,690 | ) | ||||
Cash - beginning of period | 88,277 | 110,119 | ||||||
Cash - end of period | $ | 60,098 | $ | 68,429 | ||||
Supplemental disclosures of cash flow information | ||||||||
Cash paid for interest | $ | 1,208,534 | $ | 1,184,117 | ||||
Cash paid for income taxes | $ | 24,809 | $ | 455 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements
1. Presentation of Statements
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (all of which were normal recurring accruals) considered necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods.
The accompanying financial statements include the Corporation’s wholly-owned subsidiary, Blackstone Properties, LLC. All intercompany transactions between the Corporation and Blackstone Properties have been eliminated in these statements. Blackstone Properties owns a shopping center in southside Virginia and an office park in Roanoke, Virginia, and leases space to a number of retail tenants.
The results of operations for the interim period ended June 30, 2007 are not necessarily indicative of the results which may be expected for the full year ending December 31, 2007. These unaudited financial statements should be read in conjunction with the financial statements and footnotes thereto and accounting policies included in the Corporation’s 2006 Form 10-KSB filed with the Securities and Exchange Commission (SEC).
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and income and expenses during the reporting period. Actual results could differ from those estimates.
Item 2 - Management’s Discussion and Analysis or Plan of Operation.
This report contains statements concerning the Corporation’s expectations, plans, objectives, future financial performance and other statements that are not historical facts. These statements may constitute “forward-looking statements” as defined by federal securities laws. In some cases, readers can identify the forward-looking statements by the use of words such as “may,” “ will,” “should,” “could,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative or other variations of these words, or other comparable words or phrases. These statements may address issues that involve estimates and assumptions made by management, risks and uncertainties, and actual results could differ materially from historical results or those anticipated by such statements. Factors that could have a material adverse effect on the Corporation’s operations and future prospects include, but are not limited to: desired business strategies, general economic conditions, interest rates, developments in local and national markets, and other matters, which, by their nature, are subject to significant uncertainties. These risks and uncertainties should be considered in evaluating the forward-looking statements contained herein, and readers are cautioned not to place undue reliance on such statements, which speak only as of the date of this report.
General
The primary purpose of Bank Building Corporation (the Corporation) is to acquire and develop property for lease as bank offices to Carter Bank & Trust (the Bank). Carter Bank & Trust commenced business on December 29, 2006, with the concurrent merging of the following ten Banks (the Merger): Blue Ridge Bank, National Association, Floyd, Virginia; Central National Bank, Lynchburg, Virginia; Community National Bank, South Boston, Virginia; First National Bank, Rocky Mount, Virginia; First National Exchange Bank, Roanoke, Virginia; Mountain National Bank, Galax, Virginia; Patrick Henry National Bank, Bassett, Virginia; Patriot Bank, National Association, Fredericksburg, Virginia; Peoples National Bank, Danville, Virginia; and Shenandoah National Bank, Staunton, Virginia (collectively, the Merged Banks). The Corporation also acquires funds for site acquisition and development from banks other than the Bank.
Prior to the Merger, the primary purpose of the Corporation was to acquire and develop property for lease as bank offices to the Merged Banks. The Corporation intends to continue conducting its business in substantially the same manner as it did prior to the Merger.
The selection of sites and construction of the offices is performed by the Bank to insure the needs of the Bank are met. Should the Corporation decide to participate in the particular project, the site is titled in the name of the Corporation and all loans in connection with the site are made to the Corporation. There are, however, no commitments on the part of the Bank to present prospective office properties to the Corporation, nor are there any commitments on the part of the Corporation to accept any prospective office properties offered by the Bank.
Following construction of a bank branch, the property is leased to the Bank under a triple net operating lease. The Bank is responsible for all property taxes, insurance and maintenance costs on that office. It is anticipated that the lease payments and other costs approximate the cost which would have been experienced by the Bank had the office been developed by the Bank or leased from a third party. The lease payments cover all acquisition and loan costs and other costs associated with the site (just as though the Bank had acquired the site itself) plus a small additional fee to cover the accounting and processing costs.
In order to obtain the most desirable branch locations it is often necessary to acquire more property than will be required for an individual office. Currently, banking regulations restrict the ability of banks to acquire such property if it is not used for banking purposes. The Corporation is not subject to such restrictions and can acquire the most desirable property and either sell any excess property or develop it for subsequent sale or lease to other parties.
Regardless of the size of any given property purchased by the Corporation, the lease with the Bank includes only the portion of the property utilized for the branch. The allocation of costs between the branch site and other property is based on the relative size and market value of each segment. Any property other than that used for the branch will be developed, leased or sold by the Corporation. Any buildings or other developments on this property will be compatible with the design of the bank office and consistent with the conduct of the business of banking.
Both interest and depreciation expenses are incurred on each office as well as other, minimal operating costs. These expenses will result in net operating losses during the initial years of each project although adequate cash flow from rental payments is expected to be available to meet all cash needs. During the initial lease term, all leases will be structured for the adjustments to the monthly lease payments to track adjustments in the payments required by the underlying mortgage. After the initial period of the lease, terms will be renegotiated. Such terms could provide for lease payments in excess of or less than payments required by the underlying mortgage and operating expenses. Additionally, the Bank may determine not to renew its lease on a particular branch. Under these circumstances, such branch could be sold or leased to another tenant. Such sale or lease could be profitable, although there can be no assurance that this will occur.
While it is anticipated that renewed leases with the Bank will produce sufficient rental payments to cover mortgage payments and other costs, there can be no assurance that this will, in fact, be accomplished. Failure to obtain renewal lease payments sufficient to cover these costs may result in a forced sale or foreclosure of the particular branch at a loss.
The Corporation does not have any paid employees or directors. All of its accounting, other professional services, record keeping and other operational needs will be met by other organizations on a fee-for-service basis. It is contemplated that such fees will be based on time expended plus reimbursable expenses. It is anticipated that such costs and expenses will be covered by the lease payments from the lease of the bank branches. At the present time, Bank Services of Virginia, Inc. provides these services. Bank Services of Virginia, Inc. is a bank service corporation owned by the Bank that currently provides various bookkeeping and related services to the Bank. Bank Services of Virginia, Inc. is a subsidiary of The Mortgage Company of Virginia, which is the wholly-owned subsidiary of Carter Bank & Trust.
Critical Accounting Policies
As of June 30, 2007, there have been no significant changes with regard to the application of critical accounting policies and estimates disclosed in “Management’s Discussion and Analysis” in the Corporation’s annual report on Form 10-KSB for the fiscal year ended December 31, 2006. The policies disclosed included: Accounting for the Acquisition and Classification of Real Estate Assets and Accounting for Dispositions and Impairment of Real Estate.
Properties
As of June 30, 2007, the Corporation owned 46 offices that are leased to the Bank under triple net operating leases. The Bank is responsible for all property taxes, insurance and maintenance costs on each leased office. The Corporation incurs interest and depreciation expenses related to each office as well as other, minimal operating costs.
The Corporation also owns the Westlake Corner Shopping Center near Smith Mountain Lake. This center consists of 50,000 square feet of space on 29 acres. The anchor tenants for the center are Food Lion, Revco, and Family Dollar Store. First National Bank, Rocky Mount (one of the merged banks), Virginia opened an office on a portion of this property on June 5, 1998; this office is now a branch of Carter Bank & Trust.
The Corporation also owns Blackstone Properties, LLC, a wholly owned subsidiary. Blackstone Properties owns two properties: a shopping center in southside Virginia and Executive Office Park, an office complex located in Roanoke, Virginia. The shopping center maintains various retail tenants. Executive Office Park is an office complex consisting of six separate buildings containing approximately 54,000 square feet of space divided into 28 suites. The Corporation also owns a Golden Corral Restaurant in Raleigh, North Carolina, which is leased to a third party.
Operating Results
Net Income.For the first six months of 2007, the Corporation generated net income of $96,536 compared to $120,072 for the same period of the previous year, for a decrease of $23,536 or 24%. The decrease in net income is primarily attributable to the increase in repairs and professional fees. The increase in the repair expense is mainly due to work done on the shopping centers and Executive Park Office. Lease income was 100% of total income for the first six months of 2007 and 2006. Lease income has historically been the Corporation’s principal source of revenue.
Operating Expenses. Operating expenses for the first six months of 2007 were $1,867,985 as compared to $1,751,813 for the same period of 2006. This increase of $116,172 or 7%, is due to increases in all categories with the exception of other expense which decreased. Depreciation and interest expense have historically been the Corporation’s principal operating expenses.
Interest expense increased to $1,236,948 for the first six months of 2007 from $1,186,552 in the same period of 2006, for an increase of $50,396 or 4%. The increase in interest expense was due to an increase in interest rates under certain variable rate mortgages which repriced in the first quarter of 2007 and notes payable issued to the Mortgage Company of Virginia’s non-qualified plan for the benefit of the President and to C & C Realty.
Depreciation expense decreased slightly to $333,856 in the first six months of 2007 from $336,345 in the same period of 2006, for a decrease of $2,489 or 1%.
Other operating expenses increased to $297,181 for the first six months of 2007 from $228,916 in the same period of 2006, for an increase of $68,265 or 23%. All categories of the other operating expenses increased, with the exception of the category of other expense which decreased . Other expense consists largely of operational utilities and management fees for the shopping center.
Financial Condition, Liquidity and Capital Resources
Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of business operations. The Corporation’s main source of liquidity is lease income. Cash outflows consist of payments for operating expenses, interest expense, income taxes, and repayment of mortgage borrowings. The Corporation’s cash flow from operations was $473,031 for the first six months of 2007 compared to $507,776 for the same period of 2006.
As of June 30, 2007, the Corporation’s main source of liquidity consisted of $60,098 cash. In addition, the Corporation owns real estate having an aggregate book value of approximately $31,357,421. Management believes that its cash flow from operations and these other potential sources of cash will be sufficient to finance current and projected operations.
The Corporation has not paid dividends to its shareholders.
Off-Balance Sheet Arrangements
The Corporation does not have any off-balance sheet arrangements.
Recent Accounting Pronouncements
In February 2006, The FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No. 133 and 140.” This statement amends Statements No. 133 and 140 by: permitting fair value re-measurement for any hybrid financial instrument with an embedded derivative that otherwise would require bifurcation; clarifying which interest-only strips and principal-only strips are not subject to the requirements of Statement No. 133; establishing a requirement to evaluate interests in securitized financial assets to identify interest that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; clarifying that concentrations of credit risk in the form of subordination are not embedded derivatives; and amending Statement No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. The statement is effective for fiscal years beginning after September 15, 2006. The adoption of this standard is not anticipated to have a material impact on financial condition, result of operations or cash flows.
In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement 109,” which provides guidance on the measurement, recognition, and disclosure of tax positions taken or expected to be taken in a tax return. The interpretation also provides guidance on de-recognition, classification, interest and penalties, and disclosure, FIN 48 prescribes that a tax position should only be recognized if it is more-likely-than-not that the position will be sustained upon examination by the appropriate taxing authority. A tax position that meets this threshold is measured as the largest amount of benefit that is more likely than not (greater than 50 percent) realized upon ultimate settlement. The cumulative effect of applying FIN 48 is to be reported as an adjustment to the beginning balance of retained earnings in the period of adoption. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Corporation is assessing the impact, if any, that adoption may have on its financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” SFAS 157 establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”), and expands disclosures about fair value measurements. While the Statement applies under other accounting pronouncements that require or permit fair value measurements, it does not require any new fair value measurements. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. In addition, the Statement establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Lastly, SFAS No. 157 requires additional disclosures for each interim and annual period separately for each major category of assets and liabilities. The Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Management does not expect the adoption of this Statement to have a material impact on the Corporation’s financial statements.
In September 2006, the Securities and Exchange Commission (the “SEC”) released Staff Accounting Bulletin No. 108 (“SAB 108”), which provides detail in the quantification and correction of financial statement misstatements. SAB 108 specifies that companies should apply a combination of the “rollover” and “iron curtain” methodologies when making determinations of materiality. The rollover method quantifies a misstatement based on the amount of the error originating in the current year income statement. The iron curtain approach quantifies misstatements based on the effects of correcting the misstatement existing in the balance sheet at the end of the
current year, regardless of the year(s) of origination. SAB 108 instructs companies to quantify the misstatement under both methodologies and if either method results in the determination of a material error, then the Bank must adjust its financial statements to correct the error. SAB 108 also reminds preparers that a change from an accounting principle that is not generally accepted to a principle that is generally accepted is a correction of an error. The Bulletin is effective for annual financial statements covering the first fiscal year ending after November 15, 2006. Management does not expect the adoption of this Bulletin to have a material impact on the Corporation’s consolidated financial statements.
Item 3 - Controls and Procedures.
The Corporation maintains a system of disclosure controls and procedures that is designed to ensure that material information is accumulated and communicated to management, including the Corporation’s president and secretary and treasurer (who are currently the Corporation’s principal executive officer and principal financial officer, respectively), as appropriate to allow timely decisions regarding required disclosure. As required, during the preparation of this report, management, with the participation of the Corporation’s president and secretary and treasurer, evaluated the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures.
Based on this evaluation, the Corporation’s president and secretary and treasurer concluded that the Corporation’s disclosure controls and procedures were operating effectively as of the end of the period covered by this report.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the Corporation’s disclosure controls and procedures will detect or uncover every situation involving the failure of persons within the Corporation to disclose material information otherwise required to be set forth in the Corporation’s periodic reports.
The Corporation’s management is also responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
There were no changes in the Corporation’s internal control over financial reporting during the second quarter of 2007 that materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
There are no material pending legal proceedings to which the Corporation is a party or to which any of the Corporation’s property is subject.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds.
The Corporation did not sell or repurchase any of its equity securities during the period covered by this report.
Item 3 - Defaults Upon Senior Securities.
There have been no defaults on any securities.
Item 4 - Submission of Matters to a Vote of Security Holders.
There were no matters presented to a vote of security holders during the period covered by this report.
None.
Exhibits.
| 3.1 | Articles of Incorporation (incorporated by reference to Exhibit 3.1 to Form SB-2 filed with the SEC on June 16, 1993) | |
| 3.2 | Bylaws (incorporated by reference to Exhibit 3.2 to Form SB-2 filed with the SEC on June 16, 1993) | |
| 31.1 | Certification by principal executive officer pursuant to Rule 13a-14(a) | |
| 31.2 | Certification by principal financial officer pursuant to Rule 13a-14(a) | |
| 32 | Certification of principal executive officer and principal financial officer pursuant to 18 U.S.C. § 1350 | |
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| BANK BUILDING CORPORATION | ||||
| DATE: August 14, 2007 | BY: | /s/ Worth Harris Carter, Jr. | ||
| Worth Harris Carter, Jr. | ||||
| Chairman of the Board and President | ||||
| (principal executive officer) | ||||
| DATE: August 14, 2007 | BY: | /s/ Jane Ann Davis | ||
Jane Ann Davis Secretary and Treasurer | ||||
| (principal financial and accounting officer) | ||||
