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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2002 - Commission File Number 1-11823
_____________
PAB BANKSHARES, INC.
(A Georgia Corporation)
IRS Employer Identification Number: 58-1473302
3250 NORTH VALDOSTA ROAD, VALDOSTA, GEORGIA 31602
TELEPHONE NUMBER: (229) 241-2775
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 [ ]
The number of shares outstanding of the registrant's common stock at June 30,
2002 was 9,430,413 shares.
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TABLE OF CONTENTS
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Page
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PART I FINANCIAL INFORMATION
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Item 1. Consolidated Financial Statements (Unaudited)
Statements of Condition. . . . . . . . . . . . . . . . . . . . . 3
Statements of Income . . . . . . . . . . . . . . . . . . . . . . 4
Statements of Comprehensive Income . . . . . . . . . . . . . . . 5
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . 10
Item 3. Qualitative and Quantitative Disclosures About Market Risk . . . . 16
PART II OTHER INFORMATION
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Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . None
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . . . . . None
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . None
Item 4. Submissions of Matters to a Vote of Security Holders . . . . . . 17
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . None
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 18
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
-2-
PART I. FINANCIAL INFORMATION
PAB BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
AS OF JUNE 30, 2002 AND DECEMBER 31, 2001
- -----------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
2002 2001
------------- --------------
(UNAUDITED)
ASSETS
Cash and due from banks $ 30,422,848 $ 28,188,779
Interest-bearing deposits in other banks 1,616,285 15,940,115
Federal funds sold 14,982,000 24,205,000
Investment securities 89,502,589 113,454,135
Loans 590,344,157 637,825,571
Allowance for loan losses (15,736,397) (15,765,373)
------------- --------------
Net loans 574,607,760 622,060,198
------------- --------------
Premises and equipment 23,036,761 23,508,083
Goodwill 5,984,604 5,984,604
Cash value of bank-owned life insurance policies 9,706,166 9,471,936
Foreclosed assets 821,327 1,311,933
Other assets 13,812,454 15,018,471
------------- --------------
Total assets $764,492,794 $ 859,143,254
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 84,547,191 $ 81,493,517
Interest-bearing 544,379,715 638,904,142
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Total deposits 628,926,906 720,397,659
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Federal funds purchased and securities sold under
agreements to repurchase 14,392,192 15,708,621
Advances from the Federal Home Loan Bank 36,732,384 38,228,478
Guaranteed preferred beneficial interests in debentures
(trust preferred securities) 10,000,000 10,000,000
Other liabilities 6,298,317 9,436,613
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Total liabilities 696,349,799 793,771,371
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Stockholders' equity:
Preferred stock, no par value, 1,500,000 shares authorized,
no shares issued - -
Common stock, no par value, 98,500,000 shares authorized,
9,430,413 and 9,409,913 shares issued 1,217,065 1,217,065
Additional paid-in capital 28,785,476 28,657,351
Retained earnings 37,319,533 34,917,898
Accumulated other comprehensive income 820,921 579,569
------------- --------------
Total stockholders' equity 68,142,995 65,371,883
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Total liabilities and stockholders' equity $764,492,794 $ 859,143,254
============= ==============
See accompanying notes to consolidated financial statements.
-3-
PAB BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
INTEREST INCOME
Interest and fees on loans $10,688,056 $14,117,386 $22,132,465 $27,942,412
Interest and dividends on investment securities:
Taxable 1,299,852 1,465,211 2,654,845 2,652,627
Nontaxable 53,279 46,112 102,800 96,444
Other interest income 74,985 780,799 215,697 2,077,133
------------ ------------ ------------ ------------
Total interest income 12,116,172 16,409,508 25,105,807 32,768,616
------------ ------------ ------------ ------------
INTEREST EXPENSE
Interest on deposits 4,344,957 8,351,234 9,738,447 16,538,460
Interest on federal funds purchased and securities sold
under agreements to repurchase 70,769 130,081 149,146 276,248
Interest on Federal Home Loan Bank advances 565,301 874,466 1,012,227 1,816,882
Interest on other borrowings 169,109 123,090 319,343 259,385
------------ ------------ ------------ ------------
Total interest expense 5,150,136 9,478,871 11,219,163 18,890,975
------------ ------------ ------------ ------------
Net interest income 6,966,036 6,930,637 13,886,644 13,877,641
Provision for loan losses 518,834 301,000 974,834 580,667
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 6,447,202 6,629,637 12,911,810 13,296,974
------------ ------------ ------------ ------------
OTHER INCOME
Service charges on deposit accounts 1,346,012 1,473,312 2,639,450 2,725,843
Other fee income 468,267 378,008 926,847 729,075
Securities transactions, net 42,696 695 28,060 (19)
Equity in earnings of unconsolidated subsidiary - 111,893 - 254,006
Gain (loss) on disposal of assets (71,569) (2,010) (4,261) 13,997
Other noninterest income 187,649 483,149 569,290 633,695
------------ ------------ ------------ ------------
Total other income 1,973,055 2,445,047 4,159,386 4,356,597
------------ ------------ ------------ ------------
OTHER EXPENSES
Salaries and employee benefits 3,343,238 3,621,658 6,755,610 7,020,554
Occupancy expense of premises 413,058 374,093 818,262 761,016
Furniture and equipment expense 578,866 602,087 1,184,027 1,225,692
Amortization of goodwill and other intangibles - 88,340 - 233,308
Other noninterest expense 1,616,000 1,695,822 3,306,646 3,319,669
------------ ------------ ------------ ------------
Total other expenses 5,951,162 6,382,000 12,064,545 12,560,239
------------ ------------ ------------ ------------
Income before income tax expense 2,469,095 2,692,684 5,006,651 5,093,332
Income tax expense 768,731 853,515 1,568,606 1,574,282
------------ ------------ ------------ ------------
Net income $ 1,700,364 $ 1,839,169 $ 3,438,045 $ 3,519,050
============ ============ ============ ============
Earnings per common share:
Basic $ 0.18 $ 0.19 $ 0.36 $ 0.37
============ ============ ============ ============
Diluted $ 0.18 $ 0.19 $ 0.36 $ 0.37
============ ============ ============ ============
Weighted-average shares outstanding:
Basic 9,430,413 9,495,459 9,423,048 9,496,662
============ ============ ============ ============
Diluted 9,454,803 9,573,956 9,456,934 9,566,902
============ ============ ============ ============
Dividends declared per share $ - $ 0.11 $ 0.11 $ 0.22
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
-4-
PAB BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -----------------------
2002 2001 2002 2001
----------- ----------- ----------- ----------
Net income $1,700,364 $1,839,169 $3,438,045 $3,519,050
Other comprehensive income:
Unrealized holding gains arising during
the period, net of tax of $347,000 and $131,145 for
the quarter and $133,873 and $389,437 for the year 673,588 254,445 259,872 755,966
Reclassification adjustment for (gains) losses included in
net income, net of tax (benefit) of $14,517 and $236 for
the quarter and $9,540 and ($6) for the year (28,179) (459) (18,520) 13
----------- ----------- ----------- ----------
645,409 253,986 241,352 755,979
----------- ----------- ----------- ----------
Comprehensive income $2,345,773 $2,093,155 $3,679,397 $4,275,029
=========== =========== =========== ==========
See accompanying notes to consolidated financial statements.
-5-
PAB BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
- -----------------------------------------------------------------------------------------------
2002 2001
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,438,045 $ 3,519,050
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and accretion, net 1,397,178 1,375,046
Provision for loan losses 974,834 580,667
Net realized (gain) loss on securities transactions (28,061) 19
Net (gain) loss on disposal of assets 4,261 (13,997)
Net gain on sale of branch office (100,000) -
Equity in earnings of unconsolidated subsidiary - (254,006)
Dividends received from unconsolidated subsidiary - 125,000
Increase in cash value of bank-owned life insurance (234,230) (140,227)
Net decrease in accrued interest receivable, prepaid
expenses and other assets 717,812 856,130
Net decrease in accrued interest payable, accrued
expenses and other liabilities (2,091,715) (1,770,405)
------------- -------------
Net cash provided by operating activities 4,078,124 4,277,277
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in interest-bearing deposits in other banks 14,323,830 (1,860,629)
Decrease in Federal funds sold 9,223,000 14,074,000
Activities on securities available for sale:
Purchases (29,453,183) (39,664,768)
Proceeds from sales and calls 40,210,857 7,571,962
Proceeds from maturities and paydowns 13,735,334 10,952,346
Purchase of restricted and other equity securities (980,150) (29,100)
Redemption of restricted and other equity securities 540,500 85,000
Net (increase) decrease in loans 36,280,183 (38,219,888)
Net proceeds from sale of branch office 7,748,200 -
Purchase of premises and equipment (2,181,998) (1,958,487)
Proceeds from disposal of assets 777,441 686,102
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Net cash provided by (used in) investing activities 90,224,014 (48,363,462)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (87,306,371) 57,217,489
Net increase (decrease) in Federal funds purchased and
securities sold under repurchase agreements (1,316,429) 650,496
Advances from the Federal Home Loan Bank - 700,000
Payments on Federal Home Loan Bank advances (1,496,094) (6,985,533)
Dividends paid (2,077,300) (2,094,876)
Proceeds from the exercise of stock options 128,125 171,875
Acquisition of stock under stock repurchase plans - (281,610)
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Net cash provided by (used in) financing activities (92,068,069) 49,377,841
------------- -------------
Net increase in cash and due from banks 2,234,069 5,291,656
Cash and due from banks at beginning of period 28,188,779 29,697,335
------------- -------------
Cash and due from banks at end of period $ 30,422,848 $ 34,988,991
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 12,811,166 $ 18,072,366
============= =============
Taxes $ 2,398,993 $ 1,421,444
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NONCASH INVESTING AND FINANCING TRANSACTIONS:
Increase in unrealized gains on securities available for sale $ 365,466 $ 1,187,186
============= =============
See accompanying notes to consolidated financial statements.
-6-
PAB BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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NOTE 1. NATURE OF BUSINESS
PAB Bankshares, Inc. (the "Company") is a bank holding company whose
business is primarily conducted by its wholly-owned commercial bank
subsidiary, The Park Avenue Bank of Valdosta, Georgia (the "Bank"). Through
the Bank, the Company offers a broad range of commercial and consumer
banking products and services to customers located in the market areas
served by the Bank's 17 offices in Georgia and Florida. The Company and the
Bank are subject to the regulations of certain federal and state agencies
and are periodically examined by those regulatory agencies.
In addition to the Bank, the Company owns an investment advisory services
subsidiary, PAB Financial Services, LLC ("PAB Financial"). PAB Financial
offers brokerage, insurance, annuity, and investment planning services to
its customers.
On April 30, 2002, the Company completed its charter consolidation plan
with the merger of First Community Bank of Southwest Georgia into the Bank.
On May 20, 2002, the Board of Directors adopted a resolution requested by
the Federal Reserve Bank of Atlanta, which, among other things, restricts
the Company from redeeming its capital stock, paying dividends, modifying
existing debt agreements, or incurring additional debt without the prior
approval of its banking regulators. The resolution is the result of a
recent examination that found the Bank to be in less than satisfactory
condition due primarily to serious weaknesses identified in the asset
quality of the Bank's loan portfolio. This resolution shall remain in
effect until removed by the regulators.
NOTE 2. BASIS OF PRESENTATION
The accompanying consolidated financial information of the Company is
unaudited; however, such information reflects all adjustments (consisting
of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the financial position and results of
operations. The results of operations for the three months and six months
ended June 30, 2002 are not necessarily indicative of the results that may
be expected for the full year. These statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001.
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates. We believe that our determination of the
allowance for loan losses and the fair value of assets, including the
impairment of goodwill, affect our most significant judgments and estimates
used in the preparation of our consolidated financial statements. Estimates
and assumptions are reviewed periodically and the effects of revisions are
reflected in the consolidated financial statements in the period they are
determined to be necessary.
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Significant intercompany transactions and balances
are eliminated in consolidation.
Certain items in the consolidated financial statements as of and for the
three months and six months ended June 30, 2001 have been reclassified,
with no net effect on total assets, total stockholders' equity, or net
income, in order to be consistent with the classifications adopted with the
current year presentation.
-7-
PAB BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 3. STOCKHOLDERS' EQUITY
On February 25, 2002, the Company declared a cash dividend of $0.11 per
share payable to shareholders of record as of March 31, 2002. The dividends
were paid on April 15, 2002.
During the six months ended June 30, 2002, the Company received $128,125 on
the exercise of stock options for 20,500 shares of the Company's common
stock.
NOTE 4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Basic earnings per share:
Net income $1,700,364 $1,839,169 $3,438,044 $3,519,050
---------- ---------- ---------- ----------
Weighted average common shares outstanding 9,430,413 9,495,459 9,423,048 9,496,662
---------- ---------- ---------- ----------
Earnings per common share $ 0.18 $ 0.19 $ 0.36 $ 0.37
========== ========== ========== ==========
Diluted earnings per share:
Net income $1,700,364 $1,839,169 $3,438,044 $3,519,050
---------- ---------- ---------- ----------
Weighted average common shares outstanding 9,430,413 9,495,459 9,423,048 9,496,662
Effect of dilutive stock options 24,390 78,497 33,886 70,240
---------- ---------- ---------- ----------
Weighted average diluted common
shares outstanding 9,454,803 9,573,956 9,456,934 9,566,902
---------- ---------- ---------- ----------
Earnings per common share $ 0.18 $ 0.19 $ 0.36 $ 0.37
========== ========== ========== ==========
-8-
PAB BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 5. RECENT ACCOUNTING DEVELOPMENTS
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") 142, Goodwill and Other Intangible
Assets. Under the provisions of SFAS 142, goodwill and identified
intangible assets with indefinite useful lives are not subject to
amortization. Rather they are subject to impairment testing on an annual
basis, or more often if events or circumstances indicate that there may be
impairment. Identified intangible assets that have a finite useful life are
amortized over that life in a manner that reflects the estimated decline in
the economic value of the identified intangible asset and are reviewed for
impairment when events or circumstances indicate that there may be
impairment.
The Company adopted the provisions of SFAS 142 on January 1, 2002. Under
the provisions of SFAS 142, all amortization of goodwill and identified
intangible assets with indefinite useful lives ceased. Also under SFAS 142,
all goodwill and identified intangible assets with an indefinite useful
life must be tested for impairment as of January 1, 2002, and annually
thereafter. This test involves assigning tangible assets and liabilities,
identified intangible assets and goodwill to reporting units and comparing
the fair value of each reporting unit to its carrying value. If the fair
value is less than the carrying value, a further test is required to
measure the amount of goodwill impairment.
The Company's impairment evaluation as of January 1, 2002, under the new
standard indicated that none of the Company's goodwill was impaired. The
Company had $5,984,604 in goodwill recorded on its books at June 30, 2002.
NOTE 6. SUBSEQUENT EVENTS
On July 23, 2002, the Company's Board of Directors approved a plan of
reorganization wherein PAB Financial would be liquidated, and its assets,
liabilities, and business services would be assigned to the Bank. PAB
Financial would then become an operating division of the Bank. This plan of
reorganization is subject to required regulatory approval.
-9-
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements of PAB Bankshares, Inc. ("PAB", and also referred to in
this Report as "the Company", "we", "us", or "our") in this Quarterly Report on
Form 10-Q, including, without limitation, matters discussed under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operation," may constitute "forward-looking statements" within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements about the
competitiveness of the banking industry, potential regulatory obligations, our
charter consolidation plan, our entrance and expansion into higher growth
markets, our other business strategies and other statements that are not
historical facts. When we use words in this Report like "anticipate",
"believe", "intend", "expect", "estimate", "could", "should", "will" and similar
expressions, you should consider them as identifying forward-looking statements,
although we may use other phrasing. These forward-looking statements are based
upon management's beliefs as well as on assumptions by and data currently
available to management. These forward-looking statements are not guarantees of
future performance, and a variety of factors could cause the Company's actual
results to differ materially from the anticipated or expected results expressed
in these forward-looking statements. Factors that may cause actual results to
differ materially from those expressed or implied by such forward-looking
statements include, among others, the following possibilities: (1) competitive
pressures among depository and other financial institutions may increase
significantly; (2) changes in the interest rate environment may reduce margins;
(3) general economic conditions may be less favorable than expected, resulting
in, among other things, a deterioration in credit quality and/or a reduction in
demand for credit; (4) legislative or regulatory changes, including changes in
accounting standards, may adversely affect the businesses in which we are
engaged; (5) costs or difficulties related to the integration of our businesses,
including our charter consolidations, and our merger partners may be greater
than expected; (6) expected cost savings associated with mergers may not be
fully realized or realized within the expected time frame; (7) deposit
attrition, customer loss or revenue loss following mergers and charter
consolidations may be greater than expected; (8) competitors may have greater
financial resources and develop products that enable such competitors to compete
more successfully than us; (9) adverse changes may occur in the bond and equity
markets; and (10) restrictions or conditions imposed by our regulators on our
operations may make it more difficult for us to achieve our goals. Many of such
factors are beyond our ability to control or predict, and readers are cautioned
not to put undue reliance on such forward-looking statements. We disclaim any
obligation to update or revise any forward-looking statements contained in this
Report, whether as a result of new information, future events or otherwise.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The following discussion and analysis of the consolidated financial condition
and results of operations of the Company should be read in conjunction with the
Annual Consolidated Financial Statements and related Notes included in the
Company's 2001 Annual Report on Form 10-K, and is qualified in its entirety by
the foregoing and other more detailed financial information appearing elsewhere.
Historical results of operations and the percentage relationships among any
amounts included, and any trends which may appear to be inferred, should not be
taken as being necessarily indicative of trends in operations or results of
operations for any future periods.
FINANCIAL CONDITION
The Company's balance sheet has been in a period of contraction since the fourth
quarter of 2001. During the six months ended June 30, 2002, total assets have
declined $94.6 million, or 11.0%, from $859.1 million to $764.5 million. Total
loans have decreased $47.5 million, or 7.4%, and total deposits have decreased
$91.5 million, or 12.7%. The decline in loans has resulted from the combined
effects of a slow down in loan demand in most of our markets and the adoption of
a new loan policy with more conservative underwriting practices. In addition,
our residential mortgage portfolio has declined by $19.5 million, or 11.3%,
since year end due to the high level of mortgage refinancing activity during the
period.
-10-
With no loan growth and no attractive alternatives available in the bond market
to invest our funds in the near term due to low interest rates, we have allowed
a net $86.6 million in time deposits, or 20.1% of the total balance of time
deposits outstanding at year end, to either roll off the balance sheet or into
other deposit accounts at maturity. Excluding nearly $13 million in tax
deposits that were withdrawn from the Bank in early January, demand and savings
deposits would have increased by approximately $10 million, or 4.6%, since year
end. The loan-to-deposit ratio at quarter end was at 93.9% compared to 88.5% at
year end.
The $89.5 million investment portfolio had an amortized cost of $88.3 million
with a net unrealized gain of $1.2 million at quarter end. The amortized cost
of the investment portfolio is $24.3 million less than at year end due primarily
to the liquidation of investments to satisfy depositor demands and other
liquidity needs during the period. Advances from the Federal Home Loan Bank of
Atlanta (the "FHLB") totaled $36.7 million, a $1.5 million decrease since year
end. Total stockholders' equity was $68.1 million, or $7.23 per share, at
quarter end compared to $6.95 per share at year end.
RESULTS OF OPERATIONS
Net income for the second quarter of 2002 was $1,700,000, or 18 cents per
diluted share, compared to $1,839,000, or 19 cents per diluted share, during the
same period in 2001. Net interest income was $6,966,000 compared to $6,931,000
during the second quarter of 2001. The provision for loan losses was $519,000,
a 72.4% increase over the $301,000 provided during the same period in 2001.
Noninterest income was $1,973,000, a 19.3% decrease from $2,445,000 in 2001.
Noninterest expense was $5,951,000, a 6.8% decrease from $6,382,000 in 2001.
Income tax expense was $769,000, a 10.0% decrease from $854,000 in 2001.
For the year to date, net income was $3,438,000, or 36 cents per diluted share,
compared to $3,519,000, or 37 cents per diluted share, during the same period in
2001. Net interest income was $13,887,000 compared to $13,878,000 in 2001. The
provision for loan losses was $975,000, a 67.9% increase over the $581,000
provided during the same period in 2001. Noninterest income was $4,159,000, a
4.5% decrease from $4,356,000 in 2001. Noninterest expense was $12,064,000, a
3.9% decrease from $12,560,000 in 2001. Income tax expense was $1,569,000
compared to $1,574,000 in 2001.
The reasons for these changes are discussed in more detail below.
Net Interest Income
- -------------------
For the second quarter of 2002, net interest income (on a taxable-equivalent
basis) was $6.99 million, only a slight increase compared to the $6.95 million
earned during the same period last year. Total interest income (on a
taxable-equivalent basis) was $12.14 million, a 26.1% decrease compared to the
$16.4 million earned in 2001. The decrease in interest income was due primarily
to a drop in the average yields earned on our loan portfolio, from 9.31% in the
second quarter of 2001 to 7.15% in 2002. Total interest expense for the quarter
was $5.2 million, a 45.7% decrease compared to the $9.5 million paid in the
second quarter of 2001. The decrease in interest expense is the result of lower
volume and a decrease in average rates paid on interest bearing liabilities from
5.48% in the second quarter of 2001 to 3.32% for the same period in 2002.
The Company's net interest margin of 3.89% during the second quarter of 2002 was
at its highest quarterly level since the fourth quarter of 2000. This
improvement can be attributed primarily to higher priced, fixed-rate time
deposits and other borrowings maturing and/or repricing at substantially lower
rates during the first half of 2002. This downward repricing of our
interest-bearing liabilities is not expected to continue at the same pace in the
coming quarters. In addition, the reduced loan volume and lower interest rates
will have an impact on our ability to generate additional interest income during
the second half of 2002. Therefore, we believe that maintaining our net
interest margin will be a challenge in the next few quarters.
For the year to date, net interest income (on a taxable-equivalent basis) was
$13.94 million, only a slight increase compared to the $13.93 million earned
during the same period in 2001. Total interest income (on a taxable-equivalent
basis) was $25.16 million for the year to date, a 23.3% decrease compared to the
same period in 2001. Total interest expense was $11.22 million, a 40.6%
decrease compared to the same period in 2001.
-11-
The following tables illustrate the changes in interest income and interest
expense on a fully taxable-equivalent basis resulting from changes in volume and
changes in rates for each category of interest-earning assets and
interest-bearing liabilities. The change in interest attributable to rate has
been determined by applying the change in rate between periods to average
balances outstanding in the later period. The change in interest due to volume
has been determined by applying the rate from the earlier period to the change
in average balances outstanding between periods. Thus, changes that are not
solely due to volume have been consistently attributed to rate.
For the Quarter Ended June 30, 2002 vs. 2001
- ----------------------------------------------------------------------------------
Changes Due To
Increase ------------------
(Decrease) Rate Volume
- ----------------------------------------------------------------------------------
(Dollars In Thousands)
Increase (decrease) in:
Income from earning assets:
Loans $ (3,429) $(3,224) $ (205)
Taxable securities (357) (369) 12
Nontaxable securities 11 4 7
Other short-term investments (515) 69 (584)
- ----------------------------------------------------------------------------------
Total interest income (4,290) (3,520) (770)
- ----------------------------------------------------------------------------------
Expense from interest-bearing liabilities:
Demand deposits (374) (596) 222
Savings deposits (98) (126) 28
Time deposits (3,535) (2,047) (1,488)
FHLB advances (309) (13) (296)
Notes payable 46 9 37
Other short-term borrowings (59) (93) 34
- ----------------------------------------------------------------------------------
Total interest expense (4,329) (2,866) (1,463)
- ----------------------------------------------------------------------------------
Net interest income $ 39 $ (654) $ 693
==================================================================================
For the Six Months Ended June 30, 2002 vs. 2001
- ----------------------------------------------------------------------------------
Changes Due To
Increase ------------------
(Decrease) Rate Volume
- ----------------------------------------------------------------------------------
(Dollars In Thousands)
Increase (decrease) in:
Income from earning assets:
Loans $ (5,810) $(6,618) $ 808
Taxable securities (189) (533) 344
Nontaxable securities 10 3 7
Other short-term investments (1,670) (283) (1,387)
- ----------------------------------------------------------------------------------
Total interest income (7,659) (7,431) (228)
- ----------------------------------------------------------------------------------
Expense from interest-bearing liabilities:
Demand deposits (683) (1,196) 513
Savings deposits (191) (250) 59
Time deposits (5,926) (3,868) (2,058)
FHLB advances (805) (172) (633)
Notes payable 60 (19) 79
Other short-term borrowings (127) (213) 86
- ----------------------------------------------------------------------------------
Total interest expense (7,672) (5,718) (1,954)
- ----------------------------------------------------------------------------------
Net interest income $ 13 $(1,713) $ 1,726
==================================================================================
-12-
The following tables summarize the average balance of interest-earning assets
and interest-bearing liabilities, the amount of interest earned and paid, and
the average yields and rates. Federally tax-exempt income is presented on a
taxable-equivalent basis assuming a 34% Federal tax rate. Loan average balances
include loans on nonaccrual status.
For the Quarter Ended June 30, 2002 2001
- ----------------------------------------------------------------------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
- ----------------------------------------------------------------------------------------------------
(Dollars In Thousands)
Interest-earning assets:
Loans $599,539 $ 10,688 7.15% $608,354 $ 14,117 9.31%
Investment securities:
Taxable 99,466 1,108 4.47% 98,669 1,465 5.96%
Nontaxable 4,882 81 6.63% 4,424 70 6.33%
Other short-term investments 17,344 266 6.16% 68,924 781 4.54%
--------- ---------- -------- --------
Total interest-earning assets 721,231 12,143 6.75% 780,371 16,433 8.45%
--------- ---------- -------- --------
Interest-bearing liabilities:
Demand deposits $166,215 $ 600 1.45% $135,355 $ 974 2.88%
Savings deposits 38,913 108 1.11% 34,194 205 2.41%
Time deposits 355,362 3,637 4.11% 448,418 7,172 6.42%
FHLB advances 36,620 565 6.19% 55,337 874 6.34%
Notes payable 10,000 169 6.78% 7,667 123 6.39%
Other short-term borrowings 15,437 71 1.84% 12,222 130 4.29%
--------- ---------- -------- --------
Total interest-bearing liabilities 622,547 5,150 3.32% 693,193 9,478 5.48%
--------- ---------- -------- --------
Interest rate spread 3.43% 2.97%
======== =====
Net interest income $ 6,993 $ 6,955
========== =======
Net interest margin 3.89% 3.57%
======== =====
For the Six Months Ended June 30, 2002 2001
- ----------------------------------------------------------------------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
- ----------------------------------------------------------------------------------------------------
(Dollars In Thousands)
Interest-earning assets:
Loans $611,642 $ 22,132 7.30% $594,462 $ 27,942 9.48%
Investment securities:
Taxable 101,284 2,464 4.90% 89,646 2,653 5.97%
Nontaxable 4,779 156 6.57% 4,554 146 6.47%
Other short-term investments 27,243 407 3.01% 81,998 2,077 5.11%
--------- ---------- -------- --------
Total interest-earning assets 744,948 25,159 6.81% 770,660 32,818 8.59%
--------- ---------- -------- --------
Interest-bearing liabilities:
Demand deposits $167,684 $ 1,229 1.48% $132,238 $ 1,912 2.92%
Savings deposits 38,477 218 1.14% 33,610 409 2.46%
Time deposits 378,531 8,292 4.42% 442,589 14,217 6.48%
FHLB advances 37,199 1,012 5.49% 57,080 1,817 6.42%
Notes payable 10,000 319 6.44% 7,667 259 6.80%
Other short-term borrowings 16,107 149 1.87% 12,281 276 4.54%
--------- ---------- -------- --------
Total interest-bearing liabilities 647,998 11,219 3.49% 685,465 18,890 5.56%
--------- ---------- -------- --------
Interest rate spread 3.32% 3.03%
======== =====
Net interest income $ 13,940 $13,928
========== =======
Net interest margin 3.77% 3.64%
======== =====
-13-
Provision for Loan Losses
- -------------------------
For the quarter ended June 30, 2002, the provision for loan losses was $519,000,
a 72.4% increase compared to the same period in 2001. The increased provision
was made to cover an increase in nonperforming loans during the quarter and to
replenish the allowance for loan losses to an adequate level after charge-offs
were taken during the quarter. The allowance for loan losses was 2.67% of total
loans at quarter end, compared to 2.47% at year end.
Nonperforming loans have increased 31.9% to $16.1 million at quarter end from
$12.2 million at year end. As a percentage of total loans, nonperforming loans
were 2.72% and 1.91% as of June 30, 2002 and December 31, 2001, respectively.
The amount of nonperforming loans outstanding at each of the indicated quarter
ends is presented in the following table by category.
As of Quarter End (in thousands) Jun-2002 Mar-2002 Dec-2001 Sep-2001 Jun-2001
- ------------------------------------------------------------------------------------------------------------
Loans accounted for on a nonaccrual basis $ 16,058 $ 13,472 $ 10,581 $ 8,522 $ 2,014
Accruing loans which are contractually past due
90 days or more as to principal or interest
payments 2 94 1,598 2,116 1,647
Other impaired loans - - - 4,433 4,433
- ------------------------------------------------------------------------------------------------------------
Total nonperforming loans $ 16,060 $ 13,566 $ 12,179 $ 15,071 $ 8,094
============================================================================================================
Total nonperforming loans as a percentage of
total loans 2.72% 2.23% 1.91% 2.34% 1.31%
============================================================================================================
Net charge-offs of $1,004,000 during the first half of 2002 was a 91.2% increase
compared to the same period in 2001. However, when annualized, this level of
charge-offs equates to 0.33% of average loans, compared to 0.75% for the 2001
fiscal year.
We will continue to monitor and adjust the level of the allowance for loan
losses in relation to net charge-offs, nonperforming loans, the overall level of
the allowance for loan losses to loans outstanding, and our assessment of loan
losses inherent in the loan portfolio. We will adjust the level of the
allowance for loan losses as needed through the provision.
Other Income
- ------------
During the second quarter of 2002, total other income was $1.97 million, a 19.3%
decrease compared to $2.45 million during the same period in 2001. As a
percentage of total revenues, noninterest income (excluding securities
transactions and other nonrecurring gains and losses) represented 14.2% during
the second quarter compared to 13.0% during the second quarter of 2001.
Service charges and fees on deposit accounts decreased $127,000, or 8.6%. This
decrease is due primarily to a drop in net fees earned on NSF's and overdrafts
this quarter compared to 2001.
Other fee income increased $90,000, or 23.8%. Included in other fee income is
brokerage income generated through PAB Financial, which increased $59,000. PAB
Financial opened a second office and hired three additional brokers during the
fourth quarter of 2001 that is contributing to the generation of additional
revenue during 2002.
On November 30, 2001, we sold our interest in Empire Financial Services, Inc.,
and accordingly there will be no additional earnings recognized by us in the
future. We had $112,000 in earnings generated by this entity during the second
quarter of 2001.
Other noninterest income decreased $295,000, or 61.2%. During the second
quarter of 2001, PAB recognized a $162,000 nonrecurring rebate received from a
check printing service and a $173,000 nonrecurring accrual adjustment.
-14-
Other Expenses
- --------------
During the second quarter of 2002, total other expense was $5.95 million, a 6.8%
decrease compared $6.38 million for the same period in 2001. Annualized as a
percentage of average assets, total noninterest expense was 3.06% for the second
quarter of 2002 compared to 3.03% for the same period in 2001. Although it is
still considered high, our overall efficiency ratio did improve during the
second quarter to 66.2% from 68.0% during the previous quarter and 67.4% during
the second quarter of 2001.
Salaries and employee benefits decreased $278,000, or 7.7%. Over the past
twelve months, the number of full-time equivalent employees has decreased 2.2%
to 309 at quarter end. Of our 309 full-time equivalent employees at June 30,
2002, 86 (or 28%) were hired within the past twelve months. The new employees
were necessary to staff offices in new markets, to replace employee turnover,
and to staff new positions within the organization. With the contraction of our
balance sheet, the ratio of assets per employee declined from $2.68 million at
June 30, 2001 to $2.47 million at June 30, 2002.
With the adoption of SFAS No. 142, Goodwill and Other Intangible Assets, on
January 1, 2002, the prior straight-line amortization of our goodwill ceased.
We recorded $88,000 in amortization expense during the quarter ended June 30,
2001 compared to none during the same period in 2002.
Income Tax Expense
- ------------------
During the second quarter of 2002, income tax expense was 31.1% of pretax income
which is consistent in comparison to 31.7% during the same period in 2001.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is an important factor in our financial condition and affects our
ability to meet the borrowing needs and deposit withdrawal requirements of our
customers. Assets, consisting primarily of loans and investment securities, are
funded by customer deposits, borrowed funds, and retained earnings. Maturities
in the investment and loan portfolios also provide a steady flow of funds for
reinvestment. In addition, our liquidity continues to be enhanced by a
relatively stable core deposit base and the availability of additional funding
sources.
At June 30, 2002, our liquidity ratio was 14.9% and our dependency ratio was
15.2%, compared to 17.3% and 12.1%, respectively, at December 31, 2001.
Monitoring our loan-to-deposit ratio is another tool we use to assess our
liquidity levels. For the second quarter of 2002, our average loan-to-deposit
ratio was 93.2% compared to 88.0% during the same period in 2001. Management is
closely monitoring the slight tightening in our liquidity level.
Our financial statements do not reflect various commitments and contingent
liabilities that arise in the normal course of business. These off-balance
sheet financial instruments include commitments to extend credit and standby
letters of credit. Such financial instruments are included in the financial
statements when funds are distributed or the instruments become payable. Our
exposure to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit, standby letters of credit
and credit card commitments is represented by the contractual amount of those
instruments. We use the same credit policies in making commitments as we do for
on-balance sheet instruments. Although these amounts do not necessarily
represent future cash requirements, a summary of our commitments as of June 30,
2002 and December 31, 2001 are as follows:
Jun-2002 Dec-2001
----------- -----------
Commitments to extend credit $60,218,000 $61,674,000
Standby letters of credit $ 4,489,000 $ 4,189,000
At June 30, 2002, we had an outstanding commitment to construct, furnish and
equip a bank branch office in Hall County, Georgia for approximately $1 million.
Construction will begin in the third quarter and should be completed during the
first quarter of 2003. Management plans to fund this commitment with cash flows
provided from operations. Cash flows from operations totaled nearly $4.1
million during the six months ended June 30, 2002. There are no other binding
commitments for material cash expenditures outstanding.
-15-
Stockholders' Equity
- --------------------
The Company maintains a ratio of stockholders' equity to total assets that is
considered adequate according to industry standards. The Company's ratio of
stockholders' equity to total assets was 8.9% at June 30, 2002, compared to 7.6%
at December 31, 2001. The Company and the Bank are required to comply with
capital adequacy standards established by banking regulators.
On May 20, 2002, the Board of Directors adopted a resolution requested by the
Federal Reserve Bank of Atlanta, which, among other things, restricts the
Company from redeeming its capital stock, paying dividends, modifying existing
debt agreements, or incurring additional debt without the prior approval of its
banking regulators. The resolution is the result of a recent examination that
found the Bank to be in less than satisfactory condition due primarily to
serious weaknesses identified in the asset quality of the Bank's loan portfolio.
This resolution shall remain in effect until removed by the regulators.
The following table summarizes the regulatory capital ratios of the Company and
the Bank at June 30, 2002.
Park Minimum
Company Avenue Regulatory
Consolidated Bank Requirement
------------------------------------------------------------------------------------------
Total Capital to Risk Weighted Assets 13.3% 12.4% 8.0%
Tier 1 Capital to Risk Weighted Assets 12.0% 11.2% 4.0%
Tier 1 Capital to Average Assets (Leverage Ratio) 9.2% 8.6% 7.5% *
------------------------------------------------------------------------------------------
* Under the provisions of our resolution with the Federal Reserve Bank
of Atlanta, the Bank is required to maintain a minimum Tier 1 Leverage
Ratio of at least 7.5%.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to exposure to U.S. dollar interest rate changes and accordingly,
we manage our exposure by considering the possible changes in the net interest
margin. We do not engage in trading activity nor do we classify any portion of
the investment portfolio as held for trading. We do not engage in any hedging
activities or enter into any derivative instruments with a higher degree of risk
than mortgage-backed securities, which are commonly held pass through
securities. Finally, we have no material direct exposure to foreign currency
exchange rate risk, commodity price risk, and other market risks.
Interest rates play a major part in the net interest income of a financial
institution. The sensitivity to rate changes is known as "interest rate risk."
The repricing of interest earning assets and interest-bearing liabilities can
influence the changes in net interest income. As part of our asset/liability
management program, the timing of repriced assets and liabilities is referred to
as gap management. It is our policy to maintain a gap ratio in the one-year
time horizon between 0.80 and 1.20. However, with interest rates at
near-historic lows and the steep shape of the interest rate curve, the Company
has exceeded policy limits by adjusting the balance sheet to a more
asset-sensitive position.
The table below has two measures of gap; regulatory and management-adjusted.
The regulatory gap considers only contractual maturities or repricings. The
management-adjusted gap includes assumptions regarding prepayment speeds on
certain rate sensitive assets, the repricing frequency of interest-bearing
demand and savings accounts, and the stability of core deposit levels, all of
which are adjusted periodically as market conditions change. The
management-adjusted gap indicates we are highly asset sensitive in relation to
changes in market interest rates in the short-term. Being asset sensitive would
result in net interest income increasing in a rising rate environment and
decreasing in a declining rate environment.
-16-
CUMULATIVE GAP ANALYSIS
3-Month 6-Month 1-Year
----------------------------------------------------------------
(Dollars in thousands)
Regulatory Defined
Rate Sensitive Assets (RSA) $359,193 $381,549 $440,540
Rate Sensitive Liabilities (RSL) 316,786 398,730 513,995
----------------------------------------------------------------
RSA minus RSL (Gap) $ 42,407 $(17,181) $(73,455)
Gap Ratio (RSA/RSL) 1.13 0.96 0.86
Management-Adjusted
Rate Sensitive Assets (RSA) $442,305 $547,741 $652,005
Rate Sensitive Liabilities (RSL) 136,883 218,826 424,043
----------------------------------------------------------------
RSA minus RSL (Gap) $305,422 $328,915 $227,962
Gap Ratio (RSA/RSL) 3.23 2.50 1.54
We use simulation analysis to monitor changes in net interest income due to
changes in market interest rates. The simulation of rising, declining, and flat
interest rate scenarios allows us to monitor and adjust interest rate
sensitivity to minimize the impact of market interest rate swings. The analysis
of the impact on net interest income over a twelve-month period is subjected to
increases or decreases in market rates on net interest income and is monitored
on a quarterly basis. The following table shows the results of these
projections for net interest income expressed as a percentage change over net
interest income in a flat rate scenario for both a gradual change in market
interest rates over a twelve-month period and an immediate change, or "shock",
in market interest rates.
Market Effect on Net Interest Income
----------- -----------------------------
Rate Change Gradual Immediate
----------- -------- ----------
+300 bps 4.1% 5.8%
+200 bps 3.5% 3.8%
+100 bps 2.1% 2.5%
-100 bps -5.6% -7.5%
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of stockholders held on May 28, 2002, two items were
voted upon. The first item was the appointment of four directors to hold
office until the 2005 annual meeting of stockholders and until their
successors are dully elected and qualified or until their earlier death,
resignation, incapacity to serve, or removal:
Name Votes For Votes Against Votes Abstained
-------------------- --------- ------------- ---------------
R. Bradford Burnette 5,724,368 0 206,192
Thompson Kurrie, Jr. 5,741,878 0 188,682
Kennith D. McLeod 5,742,311 0 188,249
Paul E. Parker 5,732,242 0 198,318
The following directors will continue in office:
Michael E. Ricketson, Walter W. Carroll, II, James L. Dewar, Jr., Bill
J. Jones, F. Ferrell Scruggs, Sr., James B. Lanier, Jr., John M.
Simmons, and Joe P. Singletary, Jr.
The second item was approving the appointment of Mauldin & Jenkins LLC as
the Company's independent auditors for the fiscal year 2002. Mauldin &
Jenkins LLC was ratified as the independent auditors for fiscal year 2002
by a vote of 5,8750,750 in favor, 57,316 against, and 2,494 abstentions.
-17-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
99. CEO & CFO Certification Pursuant to Sec. 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. Sec. 1350)
(b) Reports on Form 8-K.
1. Press Release dated April 24, 2002 Announcing First Quarter 2002
Earnings and Suspension of Quarterly Dividend.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAB BANKSHARES, INC.
--------------------
Registrant
Date: August 14, 2002 By: /s/ Michael E. Ricketson
--------------- -------------------------------------
Michael E. Ricketson,
President and Chief Executive Officer
Date: August 14, 2002 By: /s/ Donald J. Torbert, Jr.
--------------- -------------------------------------
Donald J. Torbert, Jr.,
Senior Vice President, Chief
Financial Officer
-18-