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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-Q
 

[ X ]
Quarterly Report Under Section 13 or 15(d)
 
Of the Securities Exchange Act of 1934 for
 
The Quarterly Period Ended September 30, 2004
   
 
                                or
   
[    ]
Transition Report Pursuant to Section 13 or 15(d)
 
Of the Securities Exchange Act of 1934
 
For the Transition Period from ______ to ______
   

Commission File Number: 000-50904
 
SNB BANCSHARES, INC.
(Exact name of registrant as specified in charter)
 
 
TEXAS
  
76-0472829
(State or other jurisdiction
of incorporation)
  
(IRS Employer
Identification No.)
14060 Southwest Freeway
Sugar Land, Texas 77478
(Address of Principal executive office)
 
(281) 269-7200
(Registrant's telephone number)
 
 
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES
X
  
No
  
 
 
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
 
YES
  
No
  
 
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
Common and Class B Stock Outstanding: 12,431,853 as of November 1, 2004
 
 
     
Table of Contents

 
SNB Bancshares, Inc. and Subsidiaries
Form 10-Q
Table of Contents
 
 
   
Part I. Financial Information  
     
 
 
 
 
 
 
 
 
 
   
     
 
     
 
     
 

 
 
Part II. Other Information  
     
 
     
 
     
 
     
 
     
 
     
 Item 6      Exhibits  
 
 
 
 

 
     
Table of Contents
 
PART I - FINANCIAL INFORMATION
 
         
           
 

SNB BANCSHARES, INC. AND SUBSIDIARIES
  
 
(Unaudited)
  
   
September 30,
  
December 31,
  
   
2004
  
2003
  
   
(In thousands, except share data)
  
             
ASSETS
              
Cash and cash equivalents
  
$
15,871
  
$
27,928
  
Federal funds sold
    
1,735
    
3,195
  
Available for sale securities, at fair value (amortized cost of $497,217 and $415,269 at September 30, 2004
              
and December 31, 2003, respectively)
    
492,370
    
412,620
  
Held to maturity securities, at amortized cost (fair value of $11,319 at September 30, 2004)
    
11,214
    
-
 
Loans
    
553,185
    
424,479
  
Less allowance for loan losses
    
(7,473
)
  
(5,650
)
Net Loans
   
545,712
    
418,829
  
       
Premises and equipment - Net
    
13,837
    
12,691
  
Accrued interest receivable
   
4,905
    
3,500
  
Other assets
    
8,892
    
5,078
  
TOTAL
  
$
1,094,536
  
$
883,841
  
               
LIABILITIES AND SHAREHOLDERS' EQUITY
              
LIABILITIES:
              
Deposits:
              
Noninterest-bearing
 
$
103,007
  
$
101,749
  
Interest-bearing
    
712,190
    
632,222
  
Total Deposits
    
815,197
    
733,971
  
Other borrowings
    
151,500
    
77,800
  
Accrued interest payable
    
2,250
    
2,089
  
Junior subordinated debentures
    
38,250
    
38,250
  
Other liabilities
    
1,286
    
964
  
Total liabilities
    
1,008,483
    
853,074
  
SHAREHOLDERS' EQUITY
              
             
Preferred stock, $0.01 par value - 20,000,000 shares authorized, no shares issued or outstanding
    
-
   
-
 
Common stock, $0.01 par value - 50,000,000 shares authorized, 9,750,312 and 3,735,523 shares issued
             
and oustanding at September 30, 2004 and December 31, 2003, respectively
    
97
    
37
  
Class B stock, $0.01 par value - 3,216,781 shares authorized, 2,680,041 and 3,258,466 shares issued
             
and outstanding at September 30, 2004 and December 31, 2003, respectively
    
27
    
33
  
Capital surplus
   
66,162
    
13,974
  
Accumulated other comprehensive income (loss) - net unrealized gain (loss) on available-for-sale
              
securities - net of taxes
    
(3,198
)
  
(1,748
)
Retained earnings
    
22,965
    
18,471
  
Total shareholders' equity
    
86,053
    
30,767
  
TOTAL
 
$
1,094,536
  
$
883,841
  
               
See notes to interim consolidated financial statements.
  

 
 
     
Table of Contents
 

SNB BANCSHARES, INC. AND SUBSIDIARIES
  
 
(Unaudited)
  
                   
   
Three Months Ended
  
Nine Months Ended
  
   
September 30,
  
September 30,
  
   
2004
  
2003
  
2004
  
2003
  
   
(In thousands, except per share data)
  
                   
INTEREST INCOME:
                  
Loans-including fees
  
$
8,031
  
$
6,224
  
$
21,617
  
$
17,829
  
Securities:
                          
Taxable
    
4,184
    
2,338
    
11,535
    
5,927
  
Nontaxable
    
50
    
24
    
91
    
74
  
Federal funds sold and earning deposits
    
14
    
3
    
135
    
31
  
Total interest income
    
12,279
    
8,589
    
33,378
    
23,861
  
                           
INTEREST EXPENSE:
                          
Demand deposits
    
1,215
    
606
    
3,190
    
2,038
  
Certificates and other time deposits
    
2,179
    
1,788
    
6,708
    
4,594
  
Other borrowings
    
1,319
    
742
    
2,812
    
1,779
  
Total interest expense
    
4,713
    
3,136
    
12,710
    
8,411
  
                           
NET INTEREST INCOME
    
7,566
    
5,453
    
20,668
    
15,450
  
PROVISION FOR LOAN LOSSES
   
625
    
660
    
2,275
    
2,101
  
                           
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    
6,941
    
4,793
    
18,393
    
13,349
  
                           
NONINTEREST INCOME:
                          
Service charges on deposit accounts
    
193
    
210
    
623
    
674
  
Gain on sale of securities
    
27
    
0
    
27
    
0
  
Loss on sale of securities
    
170
    
(1
)
  
673
    
880
  
Gain (loss) on sale of securities-net
    
197
    
(1
)
  
700
    
880
  
Other
    
153
    
147
    
453
    
423
  
Total noninterest income
    
543
    
356
    
1,776
    
1,977
  
                           
NONINTEREST EXPENSE:
                          
Salaries and employee benefits
    
2,944
    
2,347
    
8,386
    
6,839
  
Net occupancy expense
    
483
    
407
    
1,350
    
1,215
  
Data processing
    
284
    
284
    
841
    
871
  
Legal and professional fees
    
158
    
139
    
448
    
419
  
FDIC deposit insurance premium
    
31
    
20
    
84
    
61
  
Other
    
831
    
648
    
2,253
    
1,954
  
Total noninterest expense
    
4,731
    
3,845
    
13,362
    
11,359
  
                           
EARNINGS BEFORE INCOME TAXES
    
2,753
    
1,304
    
6,807
    
3,967
  
PROVISION FOR INCOME TAXES
    
935
    
443
    
2,313
    
1,349
  
NET EARNINGS
  
$
1,818
  
$
861
  
$
4,494
  
$
2,618
  
                           
EARNINGS PER SHARE:
                          
Basic
   $ 
0.20
  $
0.12
  $ 
0.58
  $ 
0.37
 
Diluted
    
0.19
   
0.12
   
0.57
   
0.37
 
                           
See notes to interim consolidated financial statements.
  

 
     
Table of Contents
 

SNB BANCSHARES, INC. AND SUBSIDIARIES
  
 
(Unaudited)
  
                           
   
Common Stock
  
Class B Stock
  
Capital Surplus
  
Accumulated Other Comprehensive Income (Loss)
  
Retained Earnings
  
Total Shareholders' Equity
  
   
(In thousands, except per share data)
  
                           
BALANCE -- December 31, 2002
  
$
37
 
$
33
 
$
13,974
 
$
1,331
 
$
15,054
 
$
30,429
 
                                       
Change in unrealized gain (loss) on available-for-sale securities--net
                      
(2,499
)
        
(2,499
)
                                       
Less reclassification adjustment for gains included in net earnings--                                      
net of tax
                      
(580
)
        
(580
)
                                       
Net Earnings
                            
3,417
   
3,417
 
                                       
Total comprehensive income
                                  
338
 
                                       
Conversion of 47,645 shares of Class B stock into 47,645 shares                                      
of common stock
    
-
   
-
                     
-
 
                                       
BALANCE -- December 31, 2003
  
$
37
 
$
33
 
$
13,974
 
$
(1,748
)
$
18,471
 
$
30,767
 
                                       
Change in unrealized gain (loss) on available-for-sale securities--net
                      
(988
)
        
(988
)
                                       
Less reclassification adjustment for gains included in net earnings--                                        
net of tax
                      
(462
)
        
(462
)
                                       
Net Earnings
                            
4,494
   
4,494
 
                                       
Total comprehensive income
                                  
3,044
 
                                       
Conversion of 578,480 shares of Class B stock into 578,480                                      
shares of common stock
    
6
   
(6
)
                    
-
 
                                       
Issuance of 5,436,364 shares of common stock
    
54
         
52,188
               
52,242
 
                                       
                                       
BALANCE -- September 30, 2004
  
$
97
 
$
27
 
$
66,162
 
$
(3,198
)
$
22,965
 
$
86,053
 
                                       
See notes to interim consolidated financial statements.
  

 
     
Table of Contents


SNB BANCSHARES, INC. AND SUBSIDIARIES
  
 
(Unaudited)
  
           
   
Nine Months
  
   
Ended September 30,
  
   
2004
  
2003
  
   
(In thousands)
  
CASH FLOWS FROM OPERATING ACTIVITIES:
          
 Net Earnings
  
$
4,494
 
$
2,618
 
 Adjustments to reconcile net earnings to net cash provided by operating activities:
              
 Depreciation and amortization
    
949
   
1,074
 
 Provision for loan losses
    
2,275
   
2,101
 
 Net amortization and accretion of premiums and discounts on investment securities
    
670
   
1,360
 
 Gain on sales of securities
    
(700
)
  
(886
)
 Increase in accrued interest receivable
    
(1,405
)
  
(1,405
)
 Decrease (Increase) in other assets
    
25
   
(1,676
)
 Increase in accrued interest payable
    
161
   
220
 
 Increase (Decrease) in other liabilities
    
322
   
(603
)
 Net cash provided by operating activities
    
6,791
   
2,803
 
CASH FLOWS FROM INVESTING ACTIVITIES:
              
Purchases of held-to-maturity securities
    
(11,214
)
  
-
 
Purchases of available-for-sale securities
    
(293,844
)
  
(519,320
)
Sales of available-for-sale securities
    
180,250
   
271,381
 
Maturities, calls and principal repayments of available-for-sale securities
    
31,676
   
51,278
 
Net increase in loans
    
(132,122
)
  
(66,155
)
Net change in federal funds sold
    
1,460
   
44
 
Purchase of bank premises and equipment
    
(2,222
)
  
(2,965
)
Net cash used in investing activities
    
(226,016
)
  
(265,737
)
CASH FLOWS FROM FINANCING ACTIVITIES:
              
Net increase in deposits
    
81,226
   
148,049
 
Net increase in other borrowings
    
73,700
   
68,402
 
Issuance of junior subordinated debt
    
-
   
30,930
 
Proceeds from sale of common stock
    
52,242
   
-
 
Net cash provided by financing activities
    
207,168
   
247,381
 
DECREASE IN CASH AND CASH EQUIVALENTS
    
(12,057
)
  
(15,553
)
CASH AND EQUIVALENTS -- Beginning of year
    
27,928
   
44,190
 
CASH AND EQUIVALENTS -- End of period
  
$
15,871
 
$
28,637
 
               
SUPPLEMENTAL DISCLOSURES:
              
Interest paid
  
$
13,201
 
$
11,139
 
Income taxes paid
    
2,976
   
2,399
 
Other real estate owned acquired through foreclosure
    
2,964
   
736
 
               
See notes to interim consolidated financial statements.
  
 

 
     
Table of Contents

SNB BANCSHARES, INC. AND SUBSIDIARIES
(Unaudited)
 


(1) Summary of Significant Accounting Policies

Basis of Presentation
The consolidated financial statements include the accounts of SNB Bancshares, Inc. ("Bancshares") and its wholly-owned subsidiary, SNB Corporation (collectively the "Company"). SNB Corporation’s wholly-owned subsidiaries are Southern National Bank of Texas (the "Bank") and Commerce Green Realty. All significant intercompany balances and transactions have been eliminated in consolidation.

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all disclosures necessary for a complete presentation of financial condition, results of operations, comprehensive income and cash flows in conformity with accounting principles generally accepted in the United States of America. All adjustments, which are, in the opinion of management, of a normal recurring nature and are necessary for a fair presentation of the interim financial statements, have been included. These financial statements and the notes thereto should be read in conjunction with the Company’s audited financial statements as of and for the year ended December 31, 2003. The results of operations for the period ended September 30, 2004 are not necessarily indicative of the results that may be expected for the entire fiscal year or any other interim period.

Stock Based Compensation
The Company accounts for its stock-based employee compensation plan using the intrinsic value-based method of accounting, as permitted, and discloses pro forma information as if accounted for using the fair value-based method as prescribed by accounting principles and has been determined as if the Company accounted for its employee stock option plan under the fair value method. No stock-based compensation expense is reflected in net income, because all stock options granted had an exercise price equal to the market value of the underlying common stock on the date of grant.

If compensation cost for the Company’s stock-based compensation plan had been determined on the fair value method at the grant dates for awards, there would have been no material impact on the Company’s reported net income or earnings per share. Pro forma information regarding net income and earnings per share is required under accounting principles and has been determined as if the Company accounted for its employee stock option plan under the fair value method. The fair value of options was estimated using the Black-Scholes option pricing model. Because employee stock options have differing characteristics and changes in the subjective input assumptions can materially affect the fair value estimate, the Black-Scholes valuation model does not necessarily provide a reliable measure of the fair value employee stock options. The following table shows information related to stock-based compensation in both the reported and pro forma earnings per share amounts:
 

   
 
   Three Months Ended      Nine Months Ended   
      September 30,       September 30,  
      2004     

 2003

      2004      2003  
     

 (In thousands, except per share data)

  
Net earning-as reported
        
$
1,818
        
$
861
        
$
4,494
        
$
2,618
  
Less total stock-based employee compensation expense determined under
                                            
the fair value based method - net of related tax effects
          
43
         
15
         
73
         
45
 
         
$
1,775
        
$
846
        
$
4,421
        
$
2,573
  
Earnings per share:
                                                  
Basic:
                                                  
As reported
        
$
0.20
        
$
0.12
        
$
0.58
        
$
0.37
  
Pro forma
        
$
0.19
        
$
0.12
        
$
0.57
        
$
0.37
  
                                                   
Diluted:
                                                  
As reported
        
$
0.19
        
$
0.12
        
$
0.57
        
$
0.37
  
Pro forma
        
$
0.19
        
$
0.12
        
$
0.57
        
$
0.37
  

 
     

SNB BANCSHARES, INC. AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
September 30, 2004
(Unaudited)


Recent Accounting Standards
In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46, Consolidation of Variable Entities (FIN 46), to address perceived weaknesses in accounting for entities commonly known as special-purpose or off-balance-sheet. In addition to numerous FASB Staff Positions written to clarify and improve the application of FIN 46, the FASB recently announced a deferral for certain entities, and an amendment to FIN 46 entitled FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (FIN 46R).

FIN 46 establishes consolidation criteria for entities for which "control" is not easily discernable under Accounting Research Bulletin 51, Consolidated Financial Statements, which is based on the premise that holders of the equity of an entity control the entity by virtue of voting rights. FIN 46 provides guidance for identifying the party with a controlling financial interest resulting from arrangements or financial interests rather than from voting interest. FIN 46 defines the term "variable interest entity" (VIE) and is based on the premise that if a business enterprise absorbs a majority of the VIE’s expected losses and/or receives a m ajority of its expected residual returns (measures of risk and reward), that enterprise (the primary beneficiary) has a controlling financial interest in the VIE. The assets, liabilities, and results of the activities of the VIE should be included in the consolidated financial statements of the primary beneficiary.

On January 1, 2004, the Company adopted FIN 46R, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." Upon adoption, the trusts that previously issued the outstanding company-obligated mandatorily redeemable trust preferred securities were deconsolidated from the Company’s Consolidated Financial Statements. Instead, the junior subordinated debentures issued by the Company to these subsidiary trusts are shown as liabilities in the consolidated balance sheet and interest expense associated with the junior subordinated debentures is shown in the consolidated statements of income. The Consolidated Financial Statements have been restated to reflect the adoption of FIN 46R. Adoption of FIN 46R did not affect previously reported amounts for net income and shareholders’ equity.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." This statement establishes standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity. Many instruments affected by this standard were previously classified as equity. The Company adopted SFAS 150 on January 1, 2004 and its adoption had no effect on the consolidated financial statements.

In March 2004, the Emerging Issues Task Force ("EITF") reached consensus on Issue 03-01 (EITF 03-01), "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments." EITF 03-01 includes new guidance for evaluating and recording impairment losses on debt and equity investments, as well as new disclosure requirements for investments that are deemed to be temporarily impaired. This Issue specifically addresses whether an investor has the ability and intent to hold an investment until recovery. On September 30, 2004, the Financial Accounting Standards Board deferred the effective date of the Issue's guidance on how to evaluate and recognize an impairment loss that is other-than-temporary. This Issue's guidance is pending the issuance of a final FASB Staff Position ("FSP") relating to the draft FSP EITF Issue 03-01-a, Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-01, "The Meaning of Other-Than-Temporary Impairment and Its application to Certain Investments," which the Board may issue as early as November. This deferral did not change the disclosure guidance which remains effective for fiscal years ending after December 15, 2003. Matters being considered by the FASB which may impact the Company's financial reporting include the accounting as a component in determining net income for declines in market value of debt securities which are due solely to changes in market interest rates and the effect of sales of available-for-sale securities which have market values below cost at the time of sale and whether such sale indicates an absence of intent and ability of the investor to hold to a forecasted recovery of the investment's value to its original cost.

 
     
Table of Contents

SNB BANCSHARES, INC. AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
September 30, 2004
(Unaudited)
 

Earnings per Share
Earnings per share are presented under two formats: basic earnings per share and diluted earnings per share. Basic earnings per share is computed by dividing net earnings available to holders of common stock and Class B stock by the weighted average number of common and Class B shares outstanding for the reporting period. Diluted earnings per share is computed by dividing net earnings by the weighted average number of shares outstanding adjusted for the incremental shares issuable upon exercise of outstanding stock options. The incremental shares for the assumed exercise of the outstanding options were determined by application of the treasury stock method. Outstanding stock options issued by the Company represent the on ly dilutive effect reflected in diluted weighted average shares. Basic and diluted earnings per share were computed as follows (dollars in thousands, except per share data):

   
 
  
Three Months Ended 
  
 
    Nine Months Ended  
      September 30,      September 30,  
      2004

2003

 2004  2003  
                                                   
Net earnings
        
$
1,818
        
$
861
        
$
4,494
        
$
2,618
  
                                                   
Basic:
                                                  
Weighted average shares outstanding
          
9,137
         
6,994
         
7,713
         
6,994
 
Basic earnings per share
        
$
0.20
        
$
0.12
        
$
0.58
        
$
0.37
  
                                                   
Diluted:
                                                  
Weighted average shares outstanding
          
9,137
         
6,994
         
7,713
         
6,994
 
Potentially dilutive common shares from options
          
210
         
253
         
215
         
169
 
Weighted average shares and potentially dilutive common shares outstanding
    
9,347
         
7,247
         
7,928
         
7,163
 
                                                   
Diluted earnings per share
        
$
0.19
        
$
0.12
        
$
0.57
        
$
0.37
  
 

 
     

SNB BANCSHARES, INC. AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
September 30, 2004
(Unaudited)

(2) Securities

The amortized cost and fair value of investment securities at September 30, 2004 and December 31, 2003 were as follows (in thousands):
 

   
As of September 30, 2004
  
   

 

 
Gross

 
Gross

 

 

 

 

 
Amortized

 
Unrealized

 
Unrealized

 
Fair

 

 

 
Cost

 
Gains

 
Losses

 
Value
 
Available-for-Sale:
                          
U.S. Government securities
 
$
286,969
 
$
47
 
$
(2,762
)
$
284,254
 
Mortgage-backed securities
   
106,600
   
291
   
(1,384
)
  
105,507
 
Collateralized mortgage obligations
   
83,028
   
16
   
(1,137
)
  
81,907
 
Obligations of state and political subdivisions
    
2,158
   
41
   
(10
)
  
2,189
 
Other securities
   
18,462
   
83
   
(32
)
  
18,513
 
Total
 
$
497,217
 
$
478
 
$
(5,325
)
$
492,370
 
                           
Held-to-maturity:
                          
Collateralized mortgage obligations
 
$
5,424
 
$
-
 
$
(13
)
$
5,411
 
Obligations of state and political subdivisions
    
5,790
   
118
   
-
   
5,908
 
Total
 
$
11,214
 
$
118
 
$
(13
)
$
11,319
 
                   
   
As of December 31, 2003
  
   

 

 
Gross

 
Gross

 

 

 

 

 
Amortized

 
Unrealized

 
Unrealized

 
Fair

 

 

 
Cost

 
Gains

 
Losses

 
Value
 
Available-for-Sale:
                          
U.S. Government securities
 
$
245,977
 
$
374
 
$
(2,376
)
$
243,975
 
Mortgage-backed securities
   
71,419
   
639
   
(277
)
  
71,781
 
Collateralized mortgage obligations
   
83,308
   
151
   
(970
)
  
82,489
 
Obligations of state and political subdivisions
    
2,525
   
60
   
(269
)
  
2,316
 
Other securities
   
12,040
   
19
   
-
   
12,059
 
Total
 
$
415,269
 
$
1,243
 
$
(3,892
)
$
412,620
 
Included in Other securities above is the Company’s investment in Federal Reserve Bank and Federal Home Loan Bank stock of $12.7 million and $7.8 million at September 30, 2004 and December 30, 2003, respectively. The carrying value of Federal Reserve Bank and Federal Home Loan Bank stock approximates fair value based on the respective redemption provisions of the Federal Reserve Bank and the Federal Home Loan Bank.

 
     
Table of Contents

SNB BANCSHARES, INC. AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
September 30, 2004
(Unaudited)
 

Declines in the fair value of individual securities below their cost that are other than temporary would result in write-downs, as a realized loss, of the individual securities to their fair value. Management believes that based upon the credit quality of the securities, none of the unrealized loss on securities is considered other-than-temporary at September 30, 2004. An analysis of gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2004 is as follows (in thousands):

   
Less than 12 months
  
12 months or longer
  
Total
  
     
Gross
    
Gross
    
Gross
  
 
Fair
  
Unrealized
  
Fair
  
Unrealized
  
Fair
  
Unrealized
  
 
Value
  
Losses
  
Value
  
Losses
  
Value
  
Losses
  
                           
Available-for-Sale:
                          
U.S. Government securities
 
$
181,403
 
$
(1,571
)
$
62,809
 
$
(1,191
)
$
244,212
 
$
(2,762
)
Mortgage-backed securities
   
81,835
   
(1,218
)
  
10,646
   
(166
)
  
92,481
   
(1,384
)
Collateralized mortgage obligations
   
51,801
   
(557
)
  
19,794
   
(580
)
  
71,595
   
(1,137
)
Obligations of state and political subdivisions
    
1,384
   
(10
)
  
-
   
-
   
1,384
   
(10
)
Other securities
   
1,537
   
(7
)
  
1,560
   
(25
)
  
3,097
   
(32
)
Total
 
$
317,960
 
$
(3,363
)
$
94,809
 
$
(1,962
)
$
412,769
 
$
(5,325
)
                                       
Held-to-maturity:
                                      
Collateralized mortgage obligations
 
$
5,411
 
$
(13
)
$
-
 
$
-
 
$
5,411
 
$
(13
)
Obligations of state and political subdivisions
    
-
   
-
   
-
   
-
   
-
   
-
 
Total
 
$
5,411
 
$
(13
)
$
-
 
$
-
 
$
5,411
 
$
(13
)
 
Investment securities with amortized costs of $287.6 million and $114.5 million and fair values of $284.0 million and $113.4 million at September 30, 2004 and December 31, 2003, respectively, were pledged to collateralize public deposits and Federal Home Loan Bank advances and for other purposes required or permitted by law.

(3) Shareholders’ Equity

Common Stock - In the third quarter of 2004 the Company completed an initial public offering of its common stock (par value $0.01 per share), in which it sold 5,436,364 shares at $10.50 per share. Net proceeds, after deducting underwriting commissions of $4.0 million and offering expenses of $842 thousand, in the amount of $52.2 million were credited to shareholders’ equity.

Stock Options - In March 2002, the shareholders of the Company approved a Stock Option Plan which provides for the grant of stock options as incentives and rewards for employees and directors of the Company. The shareholders of the Company approved an amendment to the Stock Option Plan on June 7, 2004 to increase the maximum number of shares issuable under the Stock Option Plan from 500,000 to 1,300,000 shares. The exercise price of the outstanding options is the fair market value of the shares of common stock at the date of grant and the outstanding options vest ratably over a 5-year period. The Stock Option Plan expires November 21, 2012. At September 30, 2004 and December 31, 2003, options to purchase 1,284,000 and 340,500 sha res of the Company’s common stock, respectively, were outstanding.

 
     
Table of Contents
 
SNB BANCSHARES, INC. AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
September 30, 2004
(Unaudited)



A summary of changes in outstanding options is as follows:

   
Nine months ended September 30, 2004
  
Year Ended December 31, 2003
  
   
Number of Options
  
Weighted Average Exercise Price
  
Number of Options
  
Weighted Average Exercise Price
  
Outstanding at beginning of period
    
340,500
 
$
5.00
   
363,000
 
$
5.00
 
Granted- employees
    
910,500
   
10.82
   
-
   
-
 
Granted - directors
    
35,000
   
10.82
   
-
   
-
 
Exercised
    
-
   
-
   
-
   
-
 
Forfeited
    
(2,000
)
  
5.00
   
(22,500
)
  
5.00
 
Outstanding at end of period
    
1,284,000
   
9.29
   
340,500
   
5.00
 
Exercisable at end of period
    
67,700
   
5.00
   
68,100
   
5.00
 
                           
Weighted average fair value of options granted during period
        
$
4.57
         
-
 
                           
Remaining authorized shares under approved plan at end of period
    
16,000
         
159,500
       
 
The fair value of options at date of grant was estimated using the Black-Scholes options-pricing model with the following weighted-average assumptions:

2004
2003
2002
  
   
 
 
 
Expected life (years)
    
7
   
-
   
7
 
Risk free interest rate
    
4.23
%
  
-
   
4.19
%
Volatility
    
31.00
%
  
-
   
31.00
%
Dividend yield
    
0.00
%
  
-
   
0.00
%
 
(4) Regulatory Matters

The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Any institution that fails to meet its minimum capital requirements is subject to actions by regulators that could have a direct material effect on its financial statements. Under the capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines based on the assets, liabilities and certain off-balance-sheet items as calculated under the regulatory accounting practices. The Bank’s capital amounts and classification under the regulatory framework for prompt corrective action are also subject to qualitative judgments by the regulators about the components, risk weightings and other factors.

To meet the capital adequacy requirements, the Company must maintain minimum capital amounts and ratios as defined in the regulations. As of September 30, 2004, the most recent notification from the OCC categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There have been no conditions or events since that notification which management believes have changed the Bank’s category.

 
     
Table of Contents

SNB BANCSHARES, INC. AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
September 30, 2004
(Unaudited)


The following is a summary of the Company’s and the Bank’s capital ratios at September 30, 2004 and December 31, 2003 (dollars in thousands):


                   
To Be Categorized
  
         
As Well Capitalized
  
         
Under Prompt
  
     
For Capital
  
Corrective Action
  
 
Actual
  
Adequacy Purposes
  
Provisions
  
   
Amount
Ratio
Amount
Ratio
Amount
Ratio
  
CONSOLIDATED*:
                          
As of September 30, 2004 (Unaudited)
                                      
Total Capital (to Risk-Weighted Assets)
  
$
133,801
   
20.56
%
$
52,063
   
8.00
%
            
Tier I Capital (to Risk-Weighted Assets)
    
118,972
   
18.28
 
  
26,033
   
4.00
 
            
Tier I Capital (to Total Assets)
    
118,972
   
10.83
 
  
43,942
   
4.00
 
            
As of December 31, 2003
                                      
Total Capital (to Risk-Weighted Assets)
  
$
74,244
   
15.35
%
$
39,214
   
8.00
%
            
Tier I Capital (to Risk-Weighted Assets)
    
43,329
   
8.84
 
  
19,607
   
4.00
 
            
Tier I Capital (to Total Assets)
    
43,329
   
5.09
 
  
34,027
   
4.00
 
            
BANK:
                                      
As of September 30, 2004 (Unaudited)
                                      
Total Capital (to Risk-Weighted Assets)
  
$
116,370
   
17.92
%
$
51,951
   
8.00
%
$
64,939
   
10.00
%
Tier I Capital (to Risk-Weighted Assets)
    
108,897
   
16.77
 
  
25,974
   
4.00
 
  
38,961
   
6.00
 
Tier I Capital (to Total Assets)
    
108,897
   
9.92
 
  
43,910
   
4.00
 
  
54,888
   
5.00
 
As of December 31, 2003
                                      
Total Capital (to Risk-Weighted Assets)
  
$
75,227
   
15.39
%
$
39,095
   
8.00
%
$
48,868
   
10.00
%
Tier I Capital (to Risk-Weighted Assets)
    
69,577
   
14.24
 
  
19,547
   
4.00
 
  
29,321
   
6.00
 
Tier I Capital (to Total Assets)
    
69,577
   
8.19
 
  
33,966
   
4.00
 
  
47,457
   
5.00
 
                                       
* At September 30, 2004 and December 31, 2003, Tier I Capital ( for Purposes of determining the Tier I Capital to Total Assets ratio and the Tier I Capital to Risk-Weighted
  
Assets ratio) includes a portion of the Company's Trust Preferred Securities as allowed by regulatory capital guidelines.  Trust Preferred Securities amounts not included
 
in Tier I Capital are included in Tier II Capital for purposes of determining the Total Capital to Risk-Weighted Assets ratio.
  


 
     
Table of Contents


Special Cautionary Notice Regarding Forward-Looking Statements


Statements and financial discussion and analysis contained in this quarterly report on Form 10-Q that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and are including this statement for purposes of invoking these safe harbor provisions. These forward-looking statements include information about possible or assumed future results of the Company’s operations or performance. When the Company uses any of the words "believe," "expect", "anticipate", "estimate", "continue", "intend", "may", "will", "shou ld", or similar expressions, identifies these forward-looking statements. Many possible factors or events could affect the future financial results and performance of the Company and could cause those financial results or performance to differ materially from those expressed in the forward-looking statement. These possible events or factors include, without limitation:

·   the effects of future economic and business conditions on the Company and its customers;
 
·   changes in governmental legislation and regulations or their interpretations thereof, including changes in tax requirements and tax rates;
 
·   the risks of changes in interest rates which could reduce the Company’s net interest margins, asset valuations and expense expectations;
 
·   competition from other banks and financial institutions for customer deposits and loans;
 
·   the failure of assumptions underlying the establishment of reserves for loan losses;
 
·   changes in the levels of loan prepayments and the resulting effects on the value of the Company’s loan portfolio;
 
·   the failure of assumptions underlying the establishment of and provisions made to the allowance for loan losses;
 
·   the effect of changes in accounting policies and practices which may be adopted by regulatory agencies and/or the Financial Accounting Standards Board;
 
·   the Company’s ability to acquire, operate and maintain cost effective and efficient systems without incurring unexpectedly difficult or expensive technological changes;
 
·   acquisition and integration of acquired businesses;
 
·   the loss of senior management or operating personnel and the potential inability to hire qualified personnel at reasonable compensation levels;
 
·   acts of terrorism, hostilities or other international or domestic calamities; and
 
·   other risks and uncertainties listed from time to time in the Company’s reports filed with the Securities and Exchange Commission.

A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. The Company believes it has chosen these assumptions or bases in good faith and that they are reasonable. However, the Company cautions you that assumptions or bases almost always vary from actual results, and the differences between assumptions or bases and actual results can be material. The Company undertakes no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless the securities laws require the Company to do so.

 
     
Table of Contents

Overview

Net earnings for the three months ended September 31, 2004 were $1.8 million or $0.19 per diluted common and Class B share, an increase of $957 thousand or 111.1% compared with $861 thousand or $0.12 per diluted share for the same period in 2003. Net earnings for the nine months ended September 30, 2004 were $4.5 million or $0.57 per diluted share, an increase of $1.9 million or 71.7% compared with $2.6 million or $0.37 per diluted share for the same period in 2004. As of September 30, 2004 the Company had total assets of $1.1 billion, total loans of $553.2 million, total deposits of $815.2 million and total shareholders’ equity of $86.1 million.

Recent Developments

On October 12, 2004, the Company opened its fourth full service location in Katy, Texas at 5733 Second Street. This location, in the area known as Old Town Katy, serves as the Company’s entry-point into the Katy market. Additionally, the Company has purchased land in Katy, on Highway 99 at Cinco Ranch Boulevard, with the intention of opening a second branch location which will serve as the community headquarters for the Katy market. Construction is scheduled to begin in 2005 and the Company currently anticipate opening in the first quarter of 2006.

Critical Accounting Policies

The Company's accounting policies are integral to understanding the results reported. The Company's accounting policies are described in Note 1 to the consolidated financial statements included in the Company's prospectus dated August 17, 2004. The policies related to the allowance for loan losses require a significant amount of subjective and complex judgment and assumptions by the Company's management. Because of the nature of judgments and assumptions made by our management, actual results could differ from these judgments and assumptions, which could have a material impact on the Company's financial condition and results of operations.

Allowance for Loan Losses - The allowance for loan losses is a valuation allowance for probable losses incurred on loans. Loans are charged to the allowance when the loss actually occurs or when a determination is made that a probable loss has occurred. Recoveries are credited to the allowance at the time of recovery. Throughout the year, management estimates the probable level of losses to determine whether the allowance for loan losses is adequate to absorb losses in the existing portfolio. Based on these estimates, an amount is charged to the provision for loan losses and credited to the allowance for loan losses in order to adjust the allowance to a level determined to be adequate to absorb losses. Management’s judgment as to the level of probable losses on existing loans involves the consideration of current economic conditions and their estimated effects on specific borrowers; an evaluation of the existing relationships among loans, potential loan losses and the present level of the allowance; results of examinations of the loan portfolio by regulatory agencies; and management’s internal review of the loan portfolio. In determining the collectability of certain loans, management also considers the fair value of any underlying collateral. The amount ultimately realized may differ from the carrying value of these assets because of economic, operating or other conditions beyond our control.


Results of Operations for the Three Months Ended September 30, 2004 and 2003

General
Net earnings for the third quarter of 2004 were $1.8 million compared with $861 thousand for the same quarter in 2003, an increase of $957 thousand or 111.1%. The $957 thousand increase in net earnings was primarily due to the following: a $2.1 million increase in net interest income, partially offset by an $886 thousand increase in noninterest expense and a $492 thousand increase in the provision for Federal income taxes.

Diluted earnings per share for the third quarter of 2004 were $0.19 per share compared with $0.12 per share for the third quarter of 2003. Basic earnings per share for the third quarter of 2004 were $0.20 compared with $0.12 for the same period in 2003. Earnings per share did not increase to the same extent as net earnings due to the issuance of 5,436,364 shares of common stock in the Company’s initial public offering in August and September 2004. Returns on average assets and average equity for the three months ended September 30, 2004 were 0.66% and 14.20%, respectively.

 
     
Table of Contents

Net Interest Income
When comparing the third quarter of 2004 to the same quarter in 2003, net interest income increased $2.1 million, primarily due to an increase of $3.7 million in interest income, partially offset by a $1.6 million increase in interest expense. The net interest margin decreased 5 basis points to 2.85% for the quarter ended September 30, 2004 compared with 2.90% for the same period in 2003. Interest income from loans increased by $1.8 million, or 29.0%, to $8.0 million for the quarter ended September 30, 2004, compared with $6.2 million for the same period in 2003. This increase was primarily the result of the combined effect of an increase in loan volume, with loans averaging $533.6 million in this quarter compared with $394.7 million in the third quarter of 2003, an increase of $138.9 million, or 35.2% and a decrease i n the average yield on loans for the quarter to 5.89% compared with 6.17% for the same period of 2003.

Interest income from investment securities increased by $1.9 million, or 79.3%, to $4.2 million for the quarter ended September 30, 2004 compared with $2.4 million for the same period in 2003. This increase was due to increases in both yields and securities principal balances, with investment securities averaging $517.0 million in the third quarter of 2004 compared with $351.0 million in the third quarter of 2003, an increase of $166.0 million or 47.3%. The average yield on investment securities increased to 3.20% from 2.63% for the same period in 2003.

The average balance of interest-bearing liabilities increased $261.0 million or 39.4% from the quarter ended September 30, 2003 compared with the same period in 2004, while the average rate paid increased 0.15%, to 2.03% for the quarter ended September 30, 2004, from 1.88% for the same period in 2003. The increase in average liabilities was due primarily to deposit growth of $164.1 million or 31.5%, an increase in borrowings of $87.3 million or 78.1% and an increase of $9.6 million in junior subordinated debentures. The average balance of interest-earning assets increased $307.3 million from the quarter ended September 30, 2003 compared with the same period in 2004, while the average yield increased 0.05% to 4.55% from 4.50%.

 
     
Table of Contents

The following table sets forth for the periods indicated an analysis of net interest income by each major category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding, the interest earned or paid on such amounts, and the average rate earned or paid. The table also sets forth the average rate earned on total interest-earning assets, the average rate paid on total interest-bearing liabilities, and the net interest margin for the same periods. Nonaccruing loans have been included in the table as loans carrying a zero yield.
 

   
For the Three Months Ended September 30,
  

 

 

  2004

 

  2003
Average
Interest
Average
Average
Interest
Average
Outstanding
Earned/
Yield/
Outstanding
Earned/
Yield/
Balance
Paid
Rate (1)
Balance
Paid
Rate (1)
  
   
(Dollars in thousands)          
  
Assets:
                          
Interest-earning assets:
                                      
Loans
  
$
533,607
  
$
8,031
    
5.89
%
$
394,725
  
$
6,224
    
6.17
%
Securities
    
517,041
    
4,234
    
3.20
    
351,008
    
2,362
    
2.63
  
Federal funds sold
    
816
    
3
    
1.33
    
727
    
1
    
0.40
  
Interest-earning deposits in other financial institutions
    
2,985
    
11
    
1.45
    
739
    
2
    
1.14
  
Total interest-earning assets
    
1,054,449
    
12,279
    
4.55
%
  
747,199
    
8,589
    
4.50
%
Less allowance for loan losses
    
(7,258
)
              
(4,962
)
            
Total interest-earning assets, net of allowance
    
1,047,191
                
742,237
              
Non-earning assets:
                                      
Cash and due from banks
    
13,116
                
26,928
              
Premises and equipment
    
13,061
                
12,537
              
Accrued interest receivable and other assets
    
15,542
                
8,324
              
Total noninterest-earning assets
    
41,719
                
47,789
              
Total assets
  
$
1,088,910
              
$
790,026
              
                                       
Liabilities and Shareholders' Equity:
                                      
Interest-bearing liabilities:
                                      
NOW, savings, and money market accounts
  
$
334,347
  
$
1,215
    
1.45
%
$
231,421
  
$
606
    
1.04
%
Time deposits
    
351,116
    
2,179
    
2.47
   
289,938
    
1,788
    
2.45
 
Other borrowed funds
    
199,093
    
753
    
1.51
   
111,806
    
327
    
1.16
 
Junior subordinated debentures
    
38,250
    
566
    
5.79
   
28,612
    
415
    
5.67
 
Total interest-bearing liabilities
    
922,806
    
4,713
    
2.03
%
  
661,777
    
3,136
    
1.88
%
Noninterest-bearing liabilities:
                                      
Demand deposits
    
111,968
                
94,880
              
Accrued interest payable and other liabilities
    
3,536
                
3,552
              
Total noninterest-bearing liabilities
    
115,504
                
98,432
              
Total liabilities
    
1,038,310
                
760,209
              
Shareholders' equity
    
50,600
                
29,817
              
Total liabilities and shareholders' equity
  
$
1,088,910
              
$
790,026
              
Net interest income
        
$
7,566
              
$
5,453
        
Net interest spread
                
2.52
%
              
2.62
%
Net interest margin
                
2.85
%
              
2.90
%
                                       
(1) Annualized
                                      

 
     
 
The following table presents information regarding changes in interest income and interest expense for the periods indicated for each major category of interest-earning assets and interest-bearing liabilities, which distinguishes between the changes attributable to changes in volume (changes in volume multiplied by old rate) and changes in rates (changes in rates multiplied by new volume). For purposes of this table, changes attributable to both rate and volume which cannot be segregated have been allocated to rate (dollars in thousands).

   
For the Three Months Ended September 30, 2004
Compared with the Same Period in 2003
  
   
Increase (Decrease)
  
 
  
   
Due to Change in
     
   
Volume
 
Rate
 
Total
 
   
(Dollars in thousands)
Interest-earning assets:
                    
Loans
 
$
2,154
  
$
(347
)
$
1,807
  
Securities
   
781
    
1,091
    
1,872
  
Federal funds sold
   
-
   
2
    
2
  
Interest-bearing deposits in other financial institutions
    
6
    
3
    
9
  
Total increase in interest income
   
2,941
    
749
    
3,690
  
                     
Interest-bearing liabilities:
                    
NOW, savings and money market accounts
    
3
    
606
    
609
  
Time deposits
   
376
    
15
    
391
  
Other borrowed funds
   
254
    
172
    
426
  
Junior subordinated debentures
   
137
    
14
    
151
  
Total increase in interest expense
   
770
    
807
    
1,577
  
                     
Increase (decrease) in net interest income
 
$
2,171
  
$
(58
)
$
2,113
  
Provision for Loan Losses
During the quarter ended September 30, 2004, the Company recorded a provision for loan losses of $625 thousand compared with $660 thousand for the same period in 2003. The provision recorded in the third quarter of 2004 is less than the amount recorded in the third quarter of 2003 based upon the current level of unallocated reserves and the decrease in nonperforming loans. At September 30, 2004, the allowance for loan losses as a percentage of total loans was 1.35% compared with 1.33% at December 31, 2003. At September 30, 2004, The Company had nonperforming loans totaling $4.2 million, a decrease of $332 thousand, or 7.37% compared with $4.5 million at December 31, 2003. Nonperforming loans are those loans on non-accrual status as well as those loans greater than ninety days delinquent and still accruing interest. At September 30, 2004, nonperforming assets (which include nonperforming loans, real estate owned and repossessed assets) were $6.4 million and the ratio of nonperforming assets to total assets was 1.15%, compared to 1.07% at December 31, 2003. At September 30, 2004, the allowance for loan losses as a percentage of nonperforming loans was 178.82% compared to 125.25% at December 31, 2003.

Noninterest Income
Noninterest income for the third quarter of 2004 was $543 thousand, an increase of $187 thousand compared with the third quarter of 2004 to the same period in 2003. This increase was comprised primarily of a $198 thousand increase in the gain on sale of securities.   

Noninterest Expense and Provision for Federal Income Taxes
Noninterest expense for the third quarter of 2004 was $4.7 million compared with $3.8 million for the third quarter of 2003, an increase of $886 thousand, or 23.0%. This $886 thousand increase was comprised primarily of an increase of $597 thousand in salaries and employee benefits and an increase of $183 thousand in other noninterest expense. The provision for Federal income taxes increased $492 thousand due to the increased amount of taxable income, with the effective tax rate being approximately 34% for both the quarter ended September 30, 2004 and the same period in 2003.

 
     
Table of Contents

Results of Operations for the Nine Months Ended September 30, 2004 and 2003

General
Net earnings for the nine months ended September 30, 2004 were $4.5 million, an increase of $1.9 million or 71.7%, compared with $2.6 million for the same period in 2003. Diluted earnings per share for the nine months ended September 30, 2004 were $0.57, compared with $0.37 per share for the same period in 2003. Basic earnings per share for the nine months ended September 30, 2004 were $0.58, compared with $0.37 for the same period in 2003. The weighted average shares outstanding used in the basic earnings per share computations were 7,713,432 and 6,993,989 for the nine months ended September 30, 2004 and 2003, respectively.

The $1.9 million increase in net earnings for the nine months ended September 30, 2004 compared with the same period in 2003 was primarily due to the following: a $5.2 million increase in net interest income, offset by a $2.0 million increase in noninterest expense, a $964 thousand increase in the provision for Federal income taxes, a $180 thousand decrease in the net gain on sales of securities and a $174 thousand increase in the provision for loan losses.   

Net Interest Income
For the nine months ended September 30, 2004, net interest income increased $5.2 million to $20.7 million compared with $15.5 million for the same period in 2003. This 33.8% increase is due to a $9.5 million increase in interest income offset by a $4.3 million increase in interest expense. Net interest margin decreased 0.37% to 2.81% for the nine months ended September 30, 2004 from 3.18% for the same period in 2003.

Interest income from loans increased by $3.8 million, or 21.2%, to $21.6 million for the nine months ended September 30, 2004, compared with $17.8 million for the same period in 2003. This increase was the result of increases in loan volumes which more than offset decreases in interest rates. Loans averaged $485.5 million for the nine months ended September 30, 2004 versus $372.7 million in the same period in 2003, with an increase of $112.9 million, or 30.3%. The average yield on loans for the nine months ended September 30, 2004 was 5.85% compared with 6.31% for the same period in 2003.

Interest income from investment securities increased by $5.6 million, or 93.7% to $11.6 million for the nine months ended September 30, 2004, compared with $6.0 million for the same quarter in 2003. The majority of this increase was due to increases in volumes of securities, with investment securities averaging $478.1 million for the nine months ended September 30, 2004 compared with $273.4 million for the same period in 2003, an increase of $204.7 million or 74.8%. The average yield on investment securities increased to 3.19% for the nine months ended September 30, 2004 compared with 2.89% for the same period in 2003.

The average balance of interest-bearing liabilities increased $309.8 million or 55.3% from the nine months ended September 30, 2003 compared with the same period in 2004, while the average rate paid decreased 0.06%, to 1.95% for the nine months ended September 30, 2004, from 2.01% for the same period in 2003. The increase in average liabilities is due primarily to average deposit growth of $250.3 million or 54.3%, an increase in average borrowings of $45.2 million or 60.0% and an increase in average junior subordinated debentures of $16.5 million or 75.6%, compared with the nine months ended September 30, 2003. The average balance of interest-earning assets increased $332.5 million, or 51.2%, for the nine months ended September 30, 2004 compared with the same period in 2003, while the average yield decreased 0.38% to 4 .46% from 4.84%.

 
     
Table of Contents

The following table sets forth for the periods indicated an analysis of net interest income by each major category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding, the interest earned or paid on such amounts, and the average rate earned or paid. The table also sets forth the average rate earned on total interest-earning assets, the average rate paid on total interest-bearing liabilities, and the net interest margin for the same periods. Nonaccruing loans have been included in the table as loans carrying a zero yield.

   
For the Nine Months Ended September 30,
  
   

 2004

 2003

  
Average
Interest
Average
Average
Interest
Average
Outstanding
Earned/
Yield/
Outstanding
Earned/
Yield/
Balance
Paid
Rate (1)
Balance
Paid
Rate (1)
  
   
(Dollars in thousands)
  
Assets:
                                      
Interest-earning assets:
                                      
Loans
  
$
485,532
  
$
21,617
    
5.85
%
$
372,656
  
$
17,829
    
6.31
%
Securities
    
478,067
    
11,626
    
3.19
    
273,425
    
6,001
    
2.89
  
Federal funds sold
    
11,446
    
80
    
0.92
    
903
    
7
    
1.08
  
Interest-earning deposits in other financial institutions
    
7,168
    
55
    
1.00
    
2,757
    
24
    
1.15
  
Total interest-earning assets
    
982,213
    
33,378
    
4.46
%
  
649,741
    
23,861
    
4.84
%
Less allowance for loan losses
    
(6,572
)
              
(4,511
)
            
Total interest-earning assets, net of allowance
    
975,641
                
645,230
              
Non-earning assets:
                                      
Cash and due from banks
    
15,269
                
27,958
              
Premises and equipment
    
12,799
                
11,449
              
Accrued interest receivable and other assets
    
12,921
                
6,079
              
Total noninterest-earning assets
    
40,989
                
45,486
              
Total assets
  
$
1,016,630
              
$
690,716
              
                                       
Liabilities and Shareholders' Equity:
                                      
Interest-bearing liabilities:
                                      
NOW, savings, and money market accounts
  
$
337,891
  
$
3,190
    
1.26
%
$
229,782
  
$
2,037
    
1.19
%
Time deposits
    
373,668
    
6,708
    
2.40
   
231,430
    
4,594
    
2.65
 
Other borrowed funds
    
120,642
    
1,209
    
1.34
   
75,398
    
699
    
1.24
 
Notes payable to bank
    
-
   
-
   
-
   
2,208
    
53
    
3.23
 
Junior subordinated debentures
    
38,250
    
1,603
    
5.51
   
21,784
    
1,028
    
6.22
 
Total interest-bearing liabilities
    
870,451
    
12,710
    
1.95
%
  
560,602
    
8,411
    
2.01
%
Noninterest-bearing liabilities:
                                      
Demand deposits
    
105,136
                
96,484
              
Accrued interest payable and other liabilities
    
3,258
                
2,673
              
Total noninterest-bearing liabilities
    
108,394
                
99,157
              
Total liabilities
    
978,845
                
659,759
              
Shareholders' equity
    
37,785
                
30,957
              
Total liabilities and shareholders' equity
  
$
1,016,630
              
$
690,716
              
Net interest income
        
$
20,668
              
$
15,450
        
Net interest spread
                
2.51
%
              
2.83
%
Net interest margin
                
2.81
%
              
3.18
%
                                       
(1) Annualized
                                      
 
 
     
 
The following table presents information regarding changes in interest income and interest expense for the periods indicated for each major category of interest-earning assets and interest-bearing liabilities, which distinguishes between the changes attributable to changes in volume (changes in volume multiplied by old rate) and changes in rates (changes in rates multiplied by new volume). For purposes of this table, changes attributable to both rate and volume which cannot be segregated have been allocated to rate (dollars in thousands).

   
For the Nine Months Ended September 30, 2004 Compared with the Same Period in 2003
  
   
Increase (Decrease)
  
 
  
   
Due to Change in
     
   
Volume
 
Rate
 
Total
 
   
(Dollars in thousands)
  
Interest-earning assets:
                    
Loans
 
$
5,331
  
$
(1,543
)
$
3,788
  
Securities
   
4,465
    
1,160
    
5,625
  
Federal funds sold
   
85
    
(12
)
  
73
  
Interest-bearing deposits in other financial institutions
    
38
    
(7
)
  
31
  
Total increase (decrease) in interest income
   
9,919
    
(402
)
  
9,517
  
                     
Interest-bearing liabilities:
                    
NOW, savings and money market accounts
    
10
    
1,143
    
1,153
  
Time deposits
   
2,826
    
(712
)
  
2,114
  
Other borrowed funds
   
420
    
90
    
510
  
Notes payable to bank
   
(53
)
  
0
    
(53
)
Junior subordinated debentures
   
767
    
(192
)
  
575
  
Total increase in interest expense
   
3,970
    
329
    
4,299
  
                     
Increase (decrease) in net interest income
 
$
5,949
  
$
(731
)
$
5,218
  
 
Provision for Loan Losses
During the nine months September 30, 2004, the Company recorded a provision for loan losses of $2.3 million compared with $2.1 million for the same period in 2003. The provision recorded in 2004 is greater than the prior period due primarily to the increase in the size of the loan portfolio. At September 30, 2004, the allowance for loan losses as a percentage of total loans was 1.35% compared with 1.33% at December 31, 2003. While management believes that it has adequately provided for loan losses, it will continue to monitor the loan portfolio and make adjustments to the allowance for loan losses as it considers necessary to absorb known and inherent losses in the loan portfolio.

Noninterest Income
For the nine months ended September 30, 2004, noninterest income decreased slightly to $1.8 million compared with $2.0 million for the same period in 2003. The $201 thousand decrease was attributable to a $180 thousand decrease in the gain on sale of securities and a $51 thousand decrease in service charges on deposit accounts, partially offset by a $30 thousand increase in other noninterest income.

 
     
Table of Contents

Noninterest Expense and Provision for Federal Income Taxes
Noninterest expense for the nine months ended September 30, 2004 was $13.4 million compared with $11.4 million for the same period in 2003, an increase of $2.0 million of 17.6%. This $2.0 million increase was comprised primarily of an increase in salaries and employee benefits of $1.5 million and an increase of $298 thousand in other noninterest expense. The provision for Federal income taxes increased $964 thousand due to the increased amount of taxable income, with the effective tax rate being approximately 34% for both the nine months ended September 30, 2004 and the same period in 2003.


Financial Condition

General
Total assets increased by $210.7 million from December 31, 2003 to September 30, 2004. The increase was primarily due to increases of $128.7 million in loans receivable, $79.8 million in available for sale securities and $11.2 million in held to maturity securities, partially offset by a decrease of $12.1 million in cash and cash equivalents.

From December 31, 2003 to September 30, 2004, total liabilities increased by $155.4 million primarily due to deposit growth and borrowing to fund asset growth. When comparing the two periods, deposits increased $81.2 million and other borrowings increased $73.7 million. Shareholders' equity increased $55.3 million from December 31, 2003 to September 30, 2004 primarily as a result of the $52.2 million in net proceeds from the issuance of common stock in the Company’s initial public offering.

Loan Portfolio
Total loans were $553.2 million as of September 30, 2004, an increase of $128.7 million or 30.3% compared with loans of $424.5 million as of December 31, 2003. Loan growth occurred primarily in commercial mortgage loans, which increased $84.7 million or 48.2% and construction and land development loans, which increased $40.9 million or 62.3%.

The following table summarizes our loan portfolio by type as of the dates indicated (dollars in thousands):

   
September 30,  
December 31,  
2004  
2003  
Amount
Percent
Amount
Percent
  
                   
Business and industrial
  
$
64,152
    
11.6
%
$
55,218
    
13.0
%
Real estate:
                          
Construction and land development
    
106,536
    
19.3
   
65,628
    
15.5
 
Residential mortgages
    
110,828
    
20.0
   
117,593
    
27.7
 
Commercial mortgages
    
260,359
    
47.1
   
175,686
    
41.4
 
Consumer
    
12,715
    
2.3
   
11,092
    
2.6
 
Other
    
154
    
0.0
   
198
    
0.1
 
Gross loans
    
554,744
    
100.3
   
425,415
    
100.3
 
Less unearned discounts and fees
    
(1,559
)
  
(0.3
)
  
(936
)
  
(0.3
)
Total loans
  
$
553,185
    
100.0
%
$
424,479
    
100.0
%

Nonperforming Assets
Nonperforming assets were $6.4 million and $4.6 million as of September 30, 2004 and December 31, 2003, respectively. The increase was primarily due to an increase in other real estate as a result of one commercial and two residential properties acquired through foreclosure. The Company’s ratio of nonperforming assets to total loans and other real estate was 1.15% and 1.07% as of September 30, 2004 and December 31, 2003, respectively.

 
     

The following table presents information regarding nonperforming assets as of the dates indicated (dollars in thousands):

 
As of September 30,
As of December 31,
2004
2003
  
           
Nonaccrual loans
  
$
2,237
  
$
2,496
  
Accruing loans past due 90 days or more
    
-
    
-
  
Restructured loans
    
1,942
    
2,015
  
Other real estate
    
2,183
    
40
  
Total nonperforming assets
  
$
6,362
  
$
4,551
  
Nonperforming assets to total loans and other real estate
    
1.15
%
  
1.07
%
 
Allowance for Loan Losses
The Company’s allowance for loan losses is a reserve established through monthly charges to earnings in the form of a provision for loan losses. The allowance for loan losses represents management’s estimate of the amount necessary to provide for known and inherent losses in the loan portfolio in the normal course of business. Due to the uncertainty of risks in the loan portfolio, management’s judgment of the amount of the allowance necessary to absorb loan losses is approximate. The allowance for loan losses is also subject to regulatory examinations and determination by the regulatory agencies as to its adequacy.

As of September 30, 2004, the allowance for loan losses amounted to $7.5 million or 1.35% of total loans. As of December 31, 2003, the allowance for loan losses amounted to $5.7 million or 1.33% of total loans. The allowance for loan losses as a percentage of nonperforming loans increased to 178.82% as of September 30, 2004 from 125.25% as of December 31, 2003.

 
     

The following table summarizes the activity in our allowance for loan losses during the periods indicated (dollars in thousands):

As of and for
 the Nine Months
As of and for the Year
Ended September 30,
Ended December 31,
  
   
2004
2003
  
   
(Dollars in thousands)
  
               
Average loans outstanding
  
$
485,532
  
$
383,844
  
               
Total loans outstanding at end of period
  
$
553,185
  
$
424,479
  
               
Allowance for loan losses at beginning of period
   $ 
5,650
   $ 
4,006
  
Provision for loan losses
    
2,275
    
2,821
  
Charge-Offs:
              
Business and industrial
    
(242
)
  
(516
)
Real estate
    
(235
)
  
(673
)
Consumer
    
(84
)
  
(337
)
Total charge-offs
    
(561
)
  
(1,526
)
Recoveries:
              
Business and industrial
    
33
    
185
  
Real estate
    
60
    
51
  
Consumer
    
16
    
113
  
Total recoveries
    
109
    
349
  
Net charge-offs
    
(452
)
  
(1,177
)
Allowance for loan losses at end of period
  
$
7,473
  
$
5,650
  
               
Alloance for loan losses to end of period loans
    
1.35
%
  
1.33
%
               
Net charge-offs to average loans
    
0.09
%
  
0.31
%
               
Allowance for loans losses to end of period nonperforming loans
    
178.82
%
  
125.25
%
 
Securities
As of September 30, 2004, investment securities totaled $503.6 million, an increase of $91.0 million or 22.1% compared with $412.6 million as of December 31, 2003. The increase is primarily due to security purchases of $305.1 million during the nine months ended September 30, 2004, partially offset by $211.9 million in sales, calls, maturities and principal repayments during the same period and a $2.2 million increase in net unrealized loss on available-for-sale securities. The growth in the securities portfolio was primarily in the categories of U.S. Government securities ($40.3 million) and mortgage-backed securities ($33.8 million). As of September 30, 2004, securities represented 46.0% of total assets compared with 46.7% of total assets as of December 31, 2003.
 
Deposits
As of September 30, 2004, NOW accounts, money market accounts and savings deposits accounted for 43.7% of total deposits, while certificates of deposit made up 43.7% of total deposits. Total deposits were $815.2 million as of September 30, 2004, an increase of $81.2 million or 11.1% compared with $734.0 million as of December 31, 2003. As of September 30, 2004, we had $103.0 million in noninterest-bearing deposits compared with $101.7 million as of December 31, 2003. The average cost of deposits, including noninterest bearing deposits, was 1.62% compared with 1.61% for the year ended December 31, 2003.
 
     
 

Other Borrowings
Other borrowings totaled $151.5 million as of September 30, 2004, an increase of $73.7 million of 94.7% compared with $77.8 million as of December 31, 2003. The increase is due to borrowings to fund loan growth and securities purchases.


LIQUIDITY AND CAPITAL RESOURCES

The Company's primary sources of funds consist of deposits bearing market rates of interest, advances from the FHLB, principal payments on loans and securities and other types of borrowings. The Company uses its funding resources principally to meet its ongoing commitments to fund maturing deposits and deposit withdrawals, repay borrowings, purchase securities, fund existing and continuing loan commitments, maintain its liquidity and meet operating expenses. The cash and federal funds sold position, supplemented by amortizing investments along with payments and maturities within the loan portfolio, have historically created an adequate liquidity position.

In the third quarter of 2004, the Company completed an initial public offering of common stock (par value $0.01 per share), in which it sold 5,435,364 shares at $10.50 per share. Net proceeds, after deducting offering expenses of $842 thousand and the underwriting discount of $4.0 million, in the amount of $52.2 million were credited to shareholders’ equity. As of September 30, 2004, shareholders’ equity totaled $86.1 million, an increase of $55.3 million or 179.7% compared with $30.8 million as of December 31, 2003. The increase is comprised of the $52.2 million proceeds from the sale of common stock and $4.5 million in net income, partially offset by a $1.4 million decrease due to the change in the fair value of available-for-sale securities. Regulatory agencies for banks and bank holding companies utilize capital guidelines designed to measure Tier I and total capital and take into consideration the risk inherent in both on-balance-sheet and off-balance-sheet items.

There have been no material changes in the Company's interest rate risk position since December 31, 2003. The Company's principal market risk exposure is to interest rates. For more information regarding quantitative and qualitative disclosures about market risk, please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Interest Rate Sensitivity and Market Risk" in the Company's prospectus dated August 17, 2004 filed pursuant to Rule 424(b)(3).


Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported to the Company's management within the time perio ds specified in the Securities and Exchange Commission's rules and forms.

Changes in Internal Control over Financial Reporting
There were no changes in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

 
     


Not applicable.

Pursuant to a registration statement on Form S-1 (Registration No. 333-116366) filed with, and declared effective on August 17, 2004 by, the Securities and Exchange Commission, the Company sold 4,727,273 shares of its common stock at $10.50 per share, for an aggregate of $49.6 million, to the public in an underwritten firm commitment offering which closed on August 23, 2004. The underwriters exercised their 30-day option on September 13, 2004 to purchase an additional 709,091 shares to cover over-allotments. The managing underwriters for the public offering were Keefe, Bruyette & Woods, Inc., Hoefer & Arnett, Incorporated and Sanders Morris Harris Inc.

The Company received $52.2 million in net proceeds, after deduction of underwriting discounts of $4.0 million and $842,000 in offering expenses. Of the net proceeds, $35.0 million was contributed to the capital of the Bank and the balance will be used for general corporate purposes including the possible opening of additional branches and the possible acquisition of financial institutions.


Not applicable.

Not applicable.


Not applicable.


Exhibits.


 
     
Table of Contents


Signatures


Pursuant to the requirement 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.

     
Date:   November 15, 2004 By:   /s/  Harvey Zinn
  President and Chief Executive Officer
 
 
     
Date:   November 15, 2004 By:   /s/  R. Darrell Brewer
  Chief Financial Officer