ITEM 1. BUSINESS
Forward-Looking Statements
This Annual Report on Form 10-K of The Peoples BancTrust Company, Inc. (“BancTrust”) contains forward-looking statements. Additional written or oral forward-looking statements may be made by BancTrust from time to time in filings with the Securities and Exchange Commission (“SEC”) or otherwise. The words “believe,” “expect,” “seek,” and “intend” and similar expressions identify forward-looking statements, which speak only as of the date the statement is made. Such forward-looking statements are within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such statements may include, but are not limited to, projections of income or loss, expenditures, acquisitions, plans for future operations, financing needs or plans relating to services of BancTrust, as well as assumptions relating to the foregoing. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements.
BancTrust does not undertake, and specifically disclaims, any obligation to publicly release the results of revisions which may be made to forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.
Available Information
BancTrust maintains an internet website, located at http://www.peoplesbt.com. Corporate information, to include access to Securities and Exchange Commission filings, is contained on the website.
The Peoples BancTrust Company, Inc. and The Peoples Bank and Trust Company
BancTrust is a bank holding company incorporated under the laws of the State of Alabama in 1984. BancTrust is registered under the Bank Holding Company Act of 1956, as amended (the “Holding Company Act”). BancTrust is the holding company for The Peoples Bank and Trust Company (“Peoples Bank”), which was chartered by the State of Alabama in 1902 and acquired by BancTrust in 1985.
BancTrust and Peoples Bank are headquartered in Selma, Alabama. Peoples Bank conducts a commercial and full-service retail banking business in Dallas, Autauga, Butler, Bibb, Shelby, Tallapoosa, Elmore, Lee and Tuscaloosa counties and surrounding areas of Alabama. In addition, Peoples Bank offers trust and financial management services, to include a full service brokerage operation through PrimeVest Financial Services, Inc. Some of the services offered by Peoples Bank include business and personal checking accounts, savings accounts, money market accounts, certificates of deposit, overdraft protection, personal loans, business loans, real estate mortgage loans, internet banking, ATM banking, travelers’ checks, retail repurchase agreements, letters of credit, safe deposit box rental, credit card opportunities and both foreign and domestic funds transfer via wire transfer or Automated Clearing House (“ACH”).
Peoples Bank is a member of the Federal Deposit Insurance Corporation (“FDIC”), and its deposit accounts are insured by the FDIC to the maximum allowed by law. Peoples Bank is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “FRB”) and the State Banking Department of the State of Alabama (the “Banking Department”). There are also various requirements and restrictions under the laws of the United States of America and the State of Alabama, which affect the operations of Peoples Bank. These laws include usury requirements, restrictions relating to securities and other requirements. See “Regulation, Supervision and Governmental Policy.”
BancTrust’s executive offices and the main office of Peoples Bank are located at 310 Broad Street, Selma, Alabama 36701. Peoples Bank operates three branches in Selma, three branches in Tallassee, two branches in Prattville, two branches in Greenville, and one branch in each of Plantersville, Georgiana, McKenzie, Centreville, Millbrook, Montevallo, Helena, Eclectic, North Bibb, Opelika, Auburn and Tuscaloosa, Alabama. BancTrust’s telephone number is (334) 875-1000.
Lending Activities
Loan Composition. The following table sets forth a five-year comparison of major categories of BancTrust’s loans.
The above loans include agricultural loans totaling approximately $4 million, $8.3 million, $9.1 million, $13.6 million and $22.4 million at December 31, 2003, 2002, 2001, 2000 and 1999, respectively. Such agricultural loans do not include other business or personal loans the proceeds of which were used for non-agricultural purposes. The primary source of repayment of these loans is a farm commodity (e.g., timber). See Note 5 to Consolidated Financial Statements incorporated in Item 15.-”Exhibits, Financial Statement Schedules and Reports on Form 8-K”.
Loan Maturities. The following table reflects at December 31, 2003 the dollar amount of loans maturing or subject to rate adjustment based on their contractual terms. Loans with fixed rates are reflected based upon the contractual repayment schedule, while loans with variable interest rates are reflected based upon the contractual repayment schedule up to the contractual rate adjustment date. Demand loans, loans having no stated schedule of repayments and loans having no stated maturity are reported as due within three months.
Commercial and Industrial Loans. These loans are generally originated in BancTrust’s primary market area. BancTrust’s commercial and industrial loans are made for a variety of business purposes, including working capital, inventory, equipment and capital expansion. At December 31, 2003, commercial and industrial loans outstanding totaled $127.7 million, or 27.62% of BancTrust’s total loan portfolio. The terms for commercial and industrial loans are generally less than one year. Commercial and industrial loan applications must be supported by current financial information on the borrower and, where appropriate, by adequate collateral. Approval of the loans is subject to the borrower qualifying for the loan under BancTrust’s underwriting standards. These types of loans are generally considered to be a higher credit risk than other loans originated by BancTrust.
Real Estate Mortgage and Construction Loans. BancTrust also originates one-to-four family, owner-occupied residential mortgage loans secured by property located in BancTrust’s primary market area. BancTrust’s residential mortgage loans totaled approximately $91.9 million at December 31, 2003. Commercial, construction and development and other real estate mortagage loans comprised the balance of the real estate mortgage loan portfolio at December 31, 2003. BancTrust had $281.1 million, or 60.80% of its total loan portfolio, in real estate mortgage and construction loans at December 31, 2003.
Personal Loans. At December 31, 2003, BancTrust’s personal loan portfolio totaled $53.6 million, or 11.58% of BancTrust’s total loan portfolio. BancTrust’s personal loan portfolio is comprised of automobile loans (including automobile loans originated by dealers), home improvement loans, unsecured personal notes, mobile home loans, boat loans and loans secured by savings deposits. Although personal loans tend to have a higher risk of default than other loans, management believes its monitoring and review processes provide sufficient safeguards. These loans tend to be significantly affected by local economies. Furthermore, BancTrust has experienced increased competition from non-banking institutions in the consumer credit market, as well as redutions in the credit quality of personal loan applicants. Management has elected to reduce its focus on personal loan originations, and continues to closely monitor the quality and performance of the personal loan portfolio.
Lending Limits. BancTrust’s limit for unsecured loans to individual customers is 10% of the capital accounts of BancTrust. The limit for unsecured and secured loans combined to individual customers is 20% of the capital accounts of BancTrust, subject to certain terms and conditions. For customers desiring loans in excess of BancTrust’s lending limits, BancTrust may loan on a participation basis with its correspondent banks taking the amount of the loan in excess of BancTrust’s lending limits. In other cases, BancTrust may refer such borrowers to other institutions.
Nonaccrual, Past Due, Restructured and Potential Problem Loans. BancTrust classifies its problem loans into four categories: non-accrual loans, past-due loans, restructured loans, and potential problem loans.
When management determines that a loan no longer meets the criteria for performing loans and that collection of interest appears doubtful, the loan is placed on nonaccrual status. All loans 90 days past due are placed on nonaccrual status, unless they are adequately secured and there is reasonable assurance of full collection of principal and interest. Management closely monitors all loans which are contractually 90 days past due, restructured or on nonaccrual status. These loans are summarized as follows:
As a result of its efforts in the area of credit administration (see Item 7.- “Management’s Discussion and Analysis of Financial Condition and Results of Operations”), management has modified (“restructured”) the terms of many of its loans that require special attention due to potential weakness of the borrower. The majority of these loans have been restructured with regard to the length of time the borrower has to repay the loan, or the amount and nature of the collateral securing these loans. Of the loans that were restructured in 2003, the largest ten totaled $10.1 million, and ranged in size from $3.2 million to $299,000, accounting for the majority of the increase set forth in the above table for such loans. By restructuring loans, it is management’s intent to reduce the risk of loss to BancTrust by amending repayment terms in order to allow a borrower to recover from an adverse condition or event affecting his ability to repay, or by procuring additional collateral which would be available to BancTrust in the event of default.
Management of BancTrust has identified certain loans totaling approximately $57.4 million at December 31, 2003 (including loans identified in the above table) which it has determined require special attention due to potential weaknesses. The largest five loans aggregated approximately $16.9 million and ranged in size from $2.1 million to $5.3 million. It is management’s opinion that the allowance for loan losses (see below) is adequate to absorb probable losses related to such loans. Aggressive efforts continue to reduce principal, secure additional collateral and improve the overall payment status of these loans. The vast majority of these loans are collateralized, with approximately $1.8 million being unsecured. $35.9 million are secured by real estate, with the balance being secured by other collateral.
The following table contains certain ratios related to BancTrust’s non-performing assets and allowance for loan losses.
(1) Non-perfoming assets consist of loans accounted for on a non-accrual basis and other real estate owned.
Management has deployed significant resources toward enhancing processes used in identifying loans it has determined require special attention due to potential weakness. For example, the criteria by which loans are determined to possess potential weaknesses have been broadened, so as to allow for an increasing number of loans to be more closely monitored, and more frequently reviewed. Management anticipates that it will deploy additional resources toward the process of identifying and monitoring loans that require special attention due to potential weakness. See Item 7.- “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
Loan Loss Experience. See Notes 1 and 5 to Consolidated Financial Statements incorporated in Item 15.-”Exhibits, Financial Statement Schedules and Reports on Form 8-K”.
The allowance for possible loan losses at BancTrust is maintained at a level which, in management’s opinion, is adequate to absorb all probable losses on loans then present in the loan portfolio. The amount of the allowance is affected by: (1) loan charge-offs, which decrease the allowance; (2) recoveries on loans previously charged-off, which increase the allowance; and (3) the provision for possible loan losses charged against income, which increases the allowance. In determining the provision for possible loan losses, management monitors fluctuations in the allowance resulting from actual charge-offs and recoveries. Also, management periodically reviews the size and composition of the loan portfolio in light of economic conditions in an effort to evaluate portfolio risks. Ultimately, the amount of the provision charged against income is an amount sufficient to maintain the allowance at a level consistent with management’s assessment of the aforementioned portfolio risks.
The following table is a summary of activity in the allowance for loan losses:
(1) Includes real estate-construction loans.
The following table presents an allocation of BancTrust’s allowance for loan losses at the dates indicated:
(1) Includes real estate-construction loans.
Investment Activities
Securities by Category. Securities are classified as either held-to-maturity, trading or available-for-sale securities. See Notes 1 and 4 to Consolidated Financial Statements incorporated in Item 15.-”Exhibits, Financial Statement Schedules and Reports on Form 8-K”. There were no securities classified as held-to-maturity or trading at December 31, 2003, 2002 or 2001. The following table sets forth the amount of securities available-for-sale by major categories held by BancTrust at December 31, 2003, 2002 and 2001.
Corporate and other securities as of December 31, 2003, were comprised of the following:
All corporate notes are rated A3 to AAA. All mortgage backed securities obligations are either guaranteed by the Federal National Mortgage Association, the Government National Mortgage Association or the Federal Home Loan Mortgage Corporation or have AAA ratings. Common stock holdings include investments in the Federal Reserve Bank, The Federal Home Loan Bank of Atlanta (“FHLB”), The Bankers’ Bank and another local bank, which is closely monitored by management.
Management considers all of the above securities to have a relatively low level of default or credit risk.
For information regarding the amortized cost and approximate market value of securities at December 31, 2003, 2002 and 2001, see Note 4 to Consolidated Financial Statements incorporated in Item 15.-”Exhibits, Financial Statement Schedules and Reports on Form 8-K”.
Maturity Distributions of Securities. The following table sets forth the distributions of maturities of securities at carrying value as of December 31, 2003.
(1) Yields on tax-exempt obligations have been computed on a tax-equivalent basis using an incremental rate of 34%.
Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. For information regarding the amortized cost and approximate market value of securities at December 31, 2003, by contractual maturity, see Note 4 to Consolidated Financial Statements incorporated in Item 15.-”Exhibits, Financial Statement Schedules and Reports on Form 8-K”.
Deposits
Deposits are the primary source of funds for BancTrust. BancTrust’s deposits consist of checking accounts, regular savings deposits, NOW accounts, Money Market Accounts, Certificates of Deposit and Jumbo Certificates of Deposit. Deposits are attracted from individuals, partnerships and corporations primarily in BancTrust’s market area. In addition, BancTrust obtains deposits from state and local entities and, to a lesser extent, the U.S. Government and other depository institutions. As of December 31, 2003, BancTrust’s total deposits were $643.8 million. BancTrust was in receipt of $29.8 million in brokered time deposits at December 31, 2003.
The following table indicates the amount of BancTrust’s certificates of deposit and other time deposits, including brokered time deposits, of $100,000 or more by time remaining until maturity as of December 31, 2003.
The following table sets forth the average balances and average interest rates based on daily balances for deposits for the periods indicated.
BancTrust utilizes borrowings as a source of funds, albeit to a much lesser extent than deposits. The primary source of borrowed funds is the FHLB, of which BancTrust is a member. At December 31, 2003, BancTrust had borrowed funds outstanding with FHLB of approximately $54 million. BancTrust also, from time to time, borrows funds on a short-term or overnight basis, to meet current or immediate funding needs. These short-term borrowings are referred to as “Federal funds purchased”. At December 31, 2003, BancTrust had no such borrowings. BancTrust also participates in retail repurchase agreements, which are short-term in nature (overnight), and are referred to as “securities sold under agreements to repurchase”. At December 31, 2003, BancTrust had $1.8 million in securities sold under agreements to repurchase. For information regarding borrowed funds at December 31, 2003, see Note 10 to Consolidated Financial Statements incorporated in Item 15.-”Exhibits, Financial Statement Schedules and Reports on Form 8-K”.
Competition
In order to compete effectively, BancTrust relies substantially on local commercial activity; personal contacts by its directors, officers, other employees and shareholders; personalized services; and its reputation in the communities it serves.
BancTrust is presently competing in its market area with several other Alabama bank holding companies. It also competes with independent banks, credit unions, and various other nonbank financial companies.
The banking business in Alabama is generally, and in BancTrust’s primary service areas specifically, highly competitive with respect to both loans and deposits. BancTrust competes with many larger banks and other financial institutions, which have offices over a wide geographic area. These larger institutions have certain inherent advantages, such as the ability to finance wide ranging advertising campaigns and promotions and to allocate their investment assets to regions offering the highest yields and demand. They also offer services such as international banking, which are not offered directly by BancTrust (but could be offered indirectly through correspondent institutions). By virtue of their larger total capitalization (legal lending limits to an individual consumer or corporation are limited to a percentage of BancTrust’s total capital accounts), such banks have substantially higher lending limits than does BancTrust. Other entities, both governmental and in private industry, raise capital through the issuance and sale of debt and equity securities and thereby indirectly compete with BancTrust in the acquisition of deposit funds.
Under federal law, Alabama banks and their holding companies may be acquired by out-of-state banks or their holding companies, and Alabama banks and their holding companies may acquire out-of-state banks without regard to whether the transaction is prohibited by the laws of any state. Under federal and Alabama law, the FRB may not approve the acquisition of a bank in Alabama if such bank has not been in existence for at least five years or, if following the acquisition, the acquiring bank holding company and its depository institution affiliates would control 30% or more of the deposits in depository institutions in Alabama. In addition, the federal banking agencies are authorized to approve interstate merger transactions without regard to whether such transactions are prohibited by the law of any state, unless the home state of one of the banks opts out by adopting a law that applies equally to all out-of-state banks and expressly prohibits merger transactions involving out-of-state banks. Alabama has enacted legislation that expressly authorizes Alabama banks to participate in interstate mergers in accordance with federal law.
Employees
As of December 31, 2003, BancTrust employed 310 persons, including executive officers, loan officers, bookkeepers, tellers and others. None of BancTrust’s employees are presently represented by a union or covered under a collective bargaining agreement. Management considers that BancTrust’s employee relations are excellent.
Return on Equity and Assets
The following table shows the percentage return on equity and assets of BancTrust for the years ended December 31, 2003, 2002 and 2001.
Regulation, Supervision and Governmental Policy
The following is a brief summary of certain statutes, rules and regulations affecting BancTrust and Peoples Bank. A number of other statutes and regulations have an impact on their operations. The following summary of applicable statutes and regulations does not purport to be complete and is qualified in its entirety by reference to such statutes and regulations.
Sarbanes-Oxley Act of 2002. On July 30, 2002, the President of the United States signed the Sarbanes-Oxley Act of 2002 (the “SOX Act”) into law. The SOX Act provides for sweeping changes with respect to corporate governance, accounting policies and disclosure requirements for public companies, and also for their directors and officers. Section 302 of the SOX Act (“Corporate Responsibility for Financial Reports”) required the SEC to adopt new rules to implement the requirements of the SOX Act. These requirements include new financial reporting requirements and rules concerning corporate governance. New SEC rules require a reporting company’s chief executive and chief financial officers to certify certain financial and other information included in the company’s quarterly and annual reports. The rules also require these officers to certify that they are responsible for establishing, maintaining and regularly evaluating the effectiveness of the company’s disclosure controls and procedures; that they have made certain disclosures to the auditors and to the audit committee of the board of directors about the company’s controls and procedures; and that they have included information in their quarterly and annual filings about their evaluation and whether there have been significant changes to the controls and procedures or other factors which would significantly impact these controls subsequent to their evaluation. Certifications by the Company’s Chief Executive Officer and Chief Financial Officer of the financial statements and other information have been filed with the SEC as exhibits to this Annual Report on Form 10-K. See Item 9A.- “Controls and Procedures” hereof for BancTrust’s evaluation of disclosure controls and procedures. The certifications required by Section 906 of the SOX Act also accompany this Form 10-K.
USA Patriot Act. The President of the United States signed the USA Patriot Act into law in 2001. The USA Patriot Act authorizes new regulatory powers to combat international terrorism. The provisions that affect financial institutions most directly provide the federal government with enhanced authority to identify, deter, and punish international money laundering and other crimes. Among other things, the USA Patriot Act prohibits financial institutions from doing business with foreign “shell” banks and requires increased due diligence for private banking transactions and correspondent accounts for foreign banks. In addition, financial institutions have to follow new minimum verification of identity standards for all new accounts and are permitted to share information with law enforcement authorities under circumstances that were not previously permitted.
Financial Modernization Legislation. The Gramm-Leach-Bliley Act of 1999 (the “GLB Act”) includes a number of provisions intended to modernize and to increase competition in the American financial services industry, including authority for bank holding companies to engage in a wider range of nonbanking activities, such as securities underwriting and general insurance activities. Under the GLB Act, a bank holding company that elects to become a financial holding company may engage in any activity that the FRB, in consultation with the Secretary of the Treasury, determines by regulation or order is (i) financial in nature, (ii) incidental to any such financial activity, or (iii) complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. The GLB Act specifies certain activities that are deemed to be financial in nature, including lending, exchanging, transferring, investing for others, or safeguarding money or securities; underwriting and selling insurance; providing financial, investment, or economic advisory services; underwriting, dealing in or making a market in, securities; and any activity currently permitted for bank holding companies by the FRB. A bank holding company may elect to be treated as a financial holding company only if all depository institution subsidiaries of the holding company are and continue to be well-capitalized and well-managed and have at least a satisfactory rating under the Community Reinvestment Act.
National banks and state banks (assuming they have the requisite investment authority under state law) are also authorized by the GLB Act to engage, through “financial subsidiaries,” in any activity that is permissible for a financial holding company (as described above) and any activity that the Secretary of the Treasury, in consultation with the FRB, determines is financial in nature or incidental to any such financial activity, except (i) insurance underwriting, (ii) real estate development or real estate investment activities (unless otherwise permitted by law), (iii) insurance company portfolio securities and (iv) merchant banking. The authority of a bank to invest in a financial subsidiary is subject to a number of conditions, including, among other things, requirements that the bank must be well-managed and well-capitalized (after deducting from capital the bank’s outstanding investments in financial subsidiaries).
The GLB Act also adopts a number of consumer protections, including provisions intended to protect privacy of bank customers’ financial information and provisions requiring disclosure of ATM fees imposed by banks on customers of other banks.
At this time, BancTrust has not determined whether it will become a financial holding company. Peoples Bank believes that the GLB Act’s financial subsidiary provisions and consumer protections have had no material impact on its operations.
Bank Holding Company Regulation. BancTrust is registered as a bank holding company under the Holding Company Act and, as such, is subject to supervision and regulation by the FRB. BancTrust is required to furnish to the FRB an annual report of its operations at the end of each fiscal year and to furnish such additional information as the FRB may require pursuant to the Holding Company Act. BancTrust is also subject to regular examination by the FRB.
Under the Holding Company Act, a bank holding company must obtain the prior approval of the FRB before (i) acquiring direct or indirect ownership or control of any voting shares of any bank or bank holding company if, after such acquisition, the bank holding company would directly or indirectly own or control more than 5% of such shares; (2) acquiring all or substantially all of the assets of another bank or bank holding company; or (3) merging or consolidating with another bank holding company. The Holding Company Act generally permits the FRB to approve interstate bank acquisitions by bank holding companies without regard to any prohibitions of state law. See “Competition.”
Under the Holding Company Act, approval of the FRB must be obtained prior to acquiring control of BancTrust or Peoples Bank. For purposes of the Holding Company Act, “control” is defined as ownership of more than 25% of any class of voting securities of BancTrust or Peoples Bank, the ability to control the election of a majority of the directors, or the exercise of a controlling influence over management or policies of the BancTrust or Peoples Bank.
As a bank holding company, BancTrust is prohibited under the Holding Company Act, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of a company that is not a bank or a
bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities that, by statute or by FRB regulation or order, have been identified as activities closely related to the business of banking or managing or controlling banks. The activities of BancTrust and of its non-bank subsidiaries are subject to these legal and regulatory limitations under the Holding Company Act and the FRB’s regulations thereunder. Notwithstanding the FRB’s prior approval of specific nonbanking activities, the FRB has the power to order a holding company or its subsidiaries to terminate any activity, or to terminate its ownership or control of any subsidiary, when it has reasonable cause to believe that the continuation of such activity or such ownership or control constitutes a serious risk to the financial safety, soundness or stability of any bank subsidiary of that holding company.
The FRB has adopted guidelines regarding the capital adequacy of bank holding companies, which require bank holding companies to maintain specified minimum ratios of capital to total assets and capital to risk-weighted assets. See “-Capital Requirements.”
The FRB has the power to prohibit dividends by bank holding companies if , depending on the financial condition of the bank in question, the payment of dividends could be deemed as an unsafe or unsound practice. In addition, the FRB has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the FRB’s view that a bank holding company should pay cash dividends only to the extent that BancTrust’s net income for the past year is sufficient to cover both the cash dividends and a rate of earning retention that is consistent with BancTrust’s capital needs, asset quality, and overall financial condition.
Bank Regulation. As an Alabama banking institution, Peoples Bank is subject to regulation, supervision and regular examination by the Banking Department. Peoples Bank is a member of the Federal Reserve System and thus is subject to supervision and regular examination by the FRB under the applicable provisions of the Federal Reserve Act and the FRB’s regulations. The deposits of Peoples Bank are insured by the FDIC to the maximum extent provided by law (a maximum of $100,000 for each insured depositor). Alabama and federal banking laws and regulations control, among other things, Peoples Bank’s required reserves, securities, loans, mergers and consolidations, issuance of securities, payment of dividends, and establishment of branches and other aspects of Peoples Bank’s operations.
There are statutory and regulatory restrictions on the ability of Peoples Bank to pay dividends to BancTrust. Under Alabama law, a bank may not pay a dividend in excess of 90% of its net earnings until the bank’s surplus is equal to at least 20% of its total capital. The approval of the Banking Department is required if the total of all the dividends declared by Peoples Bank in any calendar year will exceed its net earnings for that year combined with its retained net earnings for the preceding two calendar years, less any required transfers to surplus. In addition, no dividends may be paid from surplus without the written approval of the Banking Department.
Peoples Bank is subject to various regulatory capital requirements administered by the federal banking agencies, including the FRB’s capital adequacy guidelines for state-chartered banks that are members of the Federal Reserve System (“state member banks”). Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on BancTrust’s financial statements. See “-Capital Requirements.”
As a federally insured bank, Peoples Bank is required to pay deposit insurance assessments to the FDIC based on a percentage of its insured deposits. Under the FDIC’s risk-based deposit insurance assessment system, the assessment rate for an insured bank depends on the assessment risk classification assigned to the bank. The FDIC has set the 2003 annual insurance assessment rates applicable to Bank Insurance Fund (“BIF”) member banks like Peoples Bank from 0% for well-capitalized banks in the highest supervisory subgroup to 0.27% of insured deposits for undercapitalized banks in the lowest supervisory subgroup. Peoples Bank was a “well-capitalized” bank as of December 31, 2003. In addition to deposit insurance assessments, FDIC-insured institutions are currently required to pay assessments to the FDIC at an annual rate of approximately 0.02% of insured deposits to fund interest payments on certain bonds issued by the Financing Corporation, an agency of the federal government established to recapitalize the predecessor to the Savings Institution Insurance Fund.
Supervision, regulation and examination of BancTrust and Peoples Bank by the bank regulatory agencies are intended primarily for the protection of depositors rather than for holders of BancTrust stock or of BancTrust as the holder of the stock of Peoples Bank.
Capital Requirements. The FRB has established guidelines with respect to the maintenance of appropriate levels of capital by registered bank holding companies and state member banks. The regulations of the FRB impose two sets of capital adequacy requirements: minimum leverage rules, which require bank holding companies and banks to maintain a specified
minimum ratio of capital to total assets, and risk-based capital rules, which require the maintenance of specified minimum ratios of capital to “risk-weighted” assets.
The regulations of the FRB require bank holding companies and state member banks to maintain a minimum leverage ratio of “Tier 1 capital” (as defined in the risk-based capital guidelines discussed in the following paragraphs) to total assets of 3.0%. Although setting a minimum 3.0% leverage ratio, the regulations state that only the strongest bank holding companies and banks, with composite examination ratings of 1 under the rating system used by the federal bank regulators, would be permitted to operate at or near such a minimum level of capital. All other bank holding companies and banks are expected to maintain a leverage ratio of at least 1% to 2% above the minimum ratio, depending on the assessment of an individual organization’s capital adequacy by its primary regulator. Any bank or bank holding company experiencing or anticipating significant growth would be expected to maintain capital well above the minimum levels. In addition, the FRB has indicated that whenever appropriate, and in particular when a bank holding company is undertaking expansion, seeking to engage in new activities or otherwise facing unusual or abnormal risks, it will consider, on a case-by-case basis, the level of an organization’s ratio of tangible Tier 1 capital (after deducting all intangibles) to total assets in making an overall assessment of capital.
The risk-based capital rules of the FRB require bank holding companies and state member banks to maintain minimum regulatory capital levels based upon a weighing of their assets and off-balance sheet obligations according to risk. The risk-based capital rules have two basic components: a core capital (Tier 1) requirement and a supplementary capital (Tier 2) requirement. Core capital consists primarily of common stockholders’ equity, certain perpetual preferred stock (which must be noncumulative with respect to banks), and minority interests in the equity accounts of consolidated subsidiaries; less intangible assets (primarily goodwill), with limited exceptions for mortgage servicing rights and purchased credit card relationships. Supplementary capital elements include, subject to certain limitations, the allowance for losses on loans and leases; perpetual preferred stock that does not qualify for Tier 1 and long-term preferred stock with an original maturity of at least 20 years from issuance; hybrid capital instruments, including perpetual debt and mandatory convertible securities; and subordinated debt and intermediate-term preferred stock. The risk-based capital regulations assign balance sheet assets and credit equivalent amounts of off-balance sheet obligations to one of four broad risk categories based principally on the degree of credit risk associated with the obligor. The assets and off-balance sheet items in the four risk categories are weighted at 0%, 20%, 50% and 100%. These computations result in the total risk-weighted assets.
The risk-based capital regulations require all banks and bank holding companies to maintain a minimum ratio of total capital to total risk-weighted assets of 8%, with at least 4% as core capital. For the purpose of calculating these ratios: (i) supplementary capital will be limited to no more than 100% of core capital; and (ii) the aggregate amount of certain types of supplementary capital will be limited. In addition, the risk-based capital regulations limit the allowance for loan losses includible as capital to 1.25% of total risk-weighted assets.
In addition, the FRB’s capital guidelines require the agency to take into consideration concentrations of credit risk and risks from non-traditional activities, as well as a bank’s ability to manage those risks, when determining a bank’s capital adequacy. Such evaluation will be made as a part of the bank’s regular safety and soundness examination. The FRB’s guidelines also specify that its assessment of a bank’s capital adequacy will include an assessment of the bank’s interest rate risk (that is, the bank’s exposure to declines in the economic value of its capital due to changes in interest rates) and authorizing the agency to require a bank to hold additional capital for its interest rate risk exposure.
The FRB has adopted regulations that classify insured depository institutions by capital levels and provide that the FRB will take various prompt corrective actions to resolve the problems of any state member bank that fails to satisfy the capital standards. Under the regulations, a “well-capitalized” bank is one that is not subject to any regulatory order or directive to meet any specific capital level and that has or exceeds the following capital levels: a total risk-based capital ratio of 10%, a Tier 1 risk-based capital ratio of 6%, and a leverage ratio of 5%. An “adequately capitalized” bank is one that does not qualify as “well capitalized” but meets or exceeds the following capital requirements: a total risk-based capital of 8%, a Tier 1 risk-based capital ratio of 4%, and a leverage ratio of either (i) 4% or (ii) 3% if the bank has the highest composite examination rating. A bank not meeting these criteria is treated as “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized” depending on the extent to which the bank’s capital levels are below these standards. A bank that falls within any of the three “undercapitalized” categories is subjected to certain severe regulatory sanctions. As of December 31, 2003, Peoples Bank was categorized as “well-capitalized.”
According to FRB policy, a bank holding company is to act as a source of financial strength to its subsidiary bank and commit resources to the subsidiary’s support. This support may be required when the holding company is not able to provide it.
See Item 7.-“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 13 to Consolidated Financial Statements incorporated in Item 15.-“Exhibits, Financial Statement Schedules and Reports on Form 8-K”.
Effects of Governmental Policy. The earnings and business of BancTrust and Peoples Bank have been and will be affected by the policies of various regulatory authorities of the United States, particularly the FRB. Important functions of the FRB, in addition to those enumerated above, include the regulation of the supply of money in light of general economic conditions within the United States. The instruments of monetary policy employed by the FRB for these purposes influence in various ways the overall level of securities, loans, other extensions of credit and deposits, and the interest rates paid on liabilities and received on interest-earning assets.
Banking is a business that depends on interest rate differentials. In general, the difference between the interest paid by Peoples Bank on its deposits and its other borrowings and the interest received by Peoples Bank on loans extended to customers and securities held in its securities portfolios comprises the major portion of Peoples Bank’s earnings. The earnings and gross income of Peoples Bank thus have been and will be subject to the influence of economic conditions generally, both domestic and foreign, and also to monetary and fiscal policies of the United States and its agencies, particularly the FRB. The nature and timing of any future changes in such policies and their impact on Peoples Bank are not predictable.
ITEM 2.
ITEM 2. PROPERTIES
BancTrust’s principal executive offices and Peoples Bank’s main office are located at 310 Broad Street, Selma, Alabama in a building owned by Peoples Bank. At March 25, 2004, Peoples Bank maintained 22 branches in Dallas, Autauga, Butler, Bibb, Elmore, Shelby, Tallapoosa, Lee and Tuscaloosa counties, of which 4 are leased.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In the opinion of BancTrust, based on review and consultation with legal counsel, the outcome of any litigation presently pending is not anticipated to have a material adverse effect on BancTrust’s consolidated financial statements or results of operations.
See Note 13 to Consolidated Financial Statements incorporated in Item 15.-”Exhibits, Financial Statement Schedules and Reports on Form 8-K”.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
Elam P. Holley, Jr., 53, has served as President and Chief Executive Officer of Peoples Bank and BancTrust since January of 2003. Prior to that, Mr. Holley served as President and Chief Operating Officer of Peoples Bank and BancTrust from 1994 through 2002. Mr. Holley has been an officer of Peoples Bank since 1975 and a Director of Peoples Bank and BancTrust since 1988.
Andrew C. Bearden, Jr., 57, has served as Executive Vice President - Operations/Finance Division of Peoples Bank and Executive Vice President and Chief Financial Officer of BancTrust since 1996. Prior to assuming his position as manager of Operations/Finance Division, Mr. Bearden served as manager of Retail/Operations Division of Peoples Bank since 1994. Mr. Bearden was in private practice as a certified public accountant prior to his employment with Peoples Bank in 1985.
Gerald F. Holley, 60, has served as Executive Vice President and Senior lender of Peoples Bank since February of 2003 and Executive Vice President and Assistant Secretary of BancTrust since July of 2000. Prior to assuming his current position, Mr. Holley was Executive Vice President and Head of the Lending Division of Peoples Bank. Prior to joining BancTrust in July of 2000, Mr. Holley served as Senior Vice President of Operations for Colonial BancGroup in Montgomery, Alabama from 1998 to 2000, and President of the Chattahoochee Valley Area Banks of Colonial BancGroup from 1993 to 1998. Mr. Holley began his banking career in Anniston, Alabama in 1962.
Terry S. Pritchett, 53, has served as Executive Vice President and Risk Management Officer of both Peoples Bank and BancTrust since October of 2002. Prior to that, Mrs. Pritchett served as Senior Vice President and Auditor for Peoples Bank and BancTrust from December 1997, to October 2002. Mrs. Pritchett joined Peoples Bank in April of 1984 as Auditor.
M. Scott Patterson, 61, has served as Executive Vice President of Peoples Bank and BancTrust since 1996. Mr. Patterson also serves as Financial Services Division Manager, Secretary and Chief Investment Officer of Peoples Bank and Secretary of BancTrust. Mr. Patterson has been in all these positions, with the exception of Chief Investment Officer, with Peoples Bank since 1985 and with BancTrust since 1997. Mr. Patterson was named Chief Investment Officer in February of 2003. Prior to coming to Peoples Bank in 1983, Mr. Patterson served for 20 years in the United States Air Force, retiring as a Lieutenant Colonel.
Lynn D. Swindal, 50, has served as Executive Vice President-Retail Division Manager of Peoples Bank and Executive Vice President and Assistant Secretary of BancTrust since December of 1998. Prior to that, Mrs. Swindal served as Senior Vice President-Loan Administration of Peoples Bank. Mrs. Swindal has been employed with Peoples Bank since 1978. Prior to coming to Peoples Bank, Mrs. Swindal was employed at National Bank & Trust Co. in St. Petersburg, Florida.
Jefferson G. Ratcliffe, Jr., 42, has served as Senior Vice President and Senior Credit Officer of Peoples Bank since February of 2003. Prior to that, Mr. Ratcliff e served as Regional President of the Prattville/Millbrook Division of Peoples Bank from December 1997 to February of 2003. Mr. Ratcliffe joined Peoples Bank in 1985.
All officers serve at the discretion of the boards of directors of BancTrust or Peoples Bank. There are no known arrangements or understandings between any officer and any other person pursuant to which he or she was or is to be selected as an officer.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The common stock of BancTrust is listed on the Nasdaq Small Cap Market under the symbol, “PBTC.” Market makers for the common stock include Morgan Keegan & Company, Inc. and Sterne Agee & Leach, Inc.
The following table is the reported sale information for the common stock for each quarterly period within the last two fiscal years, along with the dividends declared. Quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not reflect actual transactions.
See Note 16 to Consolidated Financial Statements incorporated in Item 15.-”Exhibits, Financial Statement Schedules and Reports on Form 8-K” regarding regulatory approval for the payment of dividends to BancTrust by Peoples Bank.
Although BancTrust has no established policy regarding dividends, BancTrust has paid regular dividends in recent years. There can be no assurance, however, as to whether, or in what amounts, BancTrust might declare dividends in the future, or whether such dividends, once declared, will continue. Future dividends are subject to the discretion of the Board of Directors and depend on a number of factors, including future earnings, financial condition, and capital requirements, along with economic and market conditions.
The primary source of BancTrust’s revenues (including funds to pay dividends) is dividends from Peoples Bank. Alabama law imposes certain restrictions on the ability of BancTrust and Peoples Bank to pay dividends. See Item 1.-“Business-Regulation, Supervision and Governmental Policy” and Note 16 to Consolidated Financial Statements incorporated in Item 15.-“Exhibits, Financial Statement Schedules and Reports on Form 8-K”.
BancTrust’s board of directors has adopted resolutions whereby BancTrust will not enter into the following capital transactions without prior approval from its primary regulator: incurrence or refinancing of debt, declaration or payment of dividends or the purchase of treasury stock. Resolutions have also been adopted whereby BancTrust is committed to specific goals regarding loan quality.
As of March 23, 2004, BancTrust had 1,004 stockholders of record, and 5,568,853 shares of common stock outstanding. This total does not reflect the number of persons who hold stock in nominee or “street name” through various brokerage firms and other financial institutions.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain historical financial information for BancTrust. This information is based on the consolidated financial statements of BancTrust including applicable notes incorporated by reference elsewhere herein.
FIVE YEAR COMPARISON OF SELECTED FINANCIAL DATA
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following is a discussion and analysis of the consolidated financial condition and results of operations of BancTrust, as of the dates and for the years indicated. It is intended to be read in conjunction with the consolidated financial statements and notes thereto, along with various other financial data disclosures, both current and historical, contained in this Annual Report on form 10-K.
OVERVIEW
This overview is intended to discuss briefly and on a broad basis, some of the primary factors affecting the business of BancTrust. It is not intended to be a detailed discussion of any one or multiple topics. Additionally, BancTrust does not intend to convey that topics discussed in this overview are any more significant, or possess any greater degree of risk, than topics discussed elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
At December 31, 2003 BancTrust had total assets of $778,302,000, compared to $740,261,000 at December 31, 2002. Asset growth primarily occurred in cash and cash equivalents, as well as in investment securities, while loans declined. Total deposits increased to $643,757,000 at December 31, 2003 from $596,972,000 at December 31, 2002. Typically, BancTrust would endeavor to deploy incoming deposit funds in its loan portfolio, which generally earns a higher rate of interest than do cash equivalent investments or investment securities. Slowed regional and local economies contributed to a significantly diminished level of loan demand, contributing greatly to the aforementioned reduction in total loans. Diminished loan demand coupled with historically low market rates of interest continues to place downward pressure on BancTrust’s net interest income and net interest margins.
BancTrust earned $26,827,000 in net interest income in calendar year 2003, compared to $29,544,000 in calendar year 2002. In 2003, BancTrust’s net interest margin was 3.79%, compared to 4.46% in 2002. Net interest margin is net interest income expressed as a percentage of average earning assets, or stated another way, is the net yield earned on interest earning assets after deducting interest expense. As stated above, diminished loan demand precluded BancTrust from deploying available funds in its higher yielding loan portfolio to the extent it otherwise may have in a more robust loan demand environment. As a result, net interest income and net interest margins were negatively affected.
BancTrust realized a 20% reduction in provision for loan losses in 2003 to $5,706,000 from $7,204,000 in 2002. BancTrust significantly refined its credit administration function, to include the addition of an executive level credit administration officer operating independently of the Senior Lender. As a result, credit review and approval processes and criteria were significantly enhanced. It is management’s belief these refinements and enhancements were contributing factors to the aforementioned reduction in provision for loan losses.
CRITICAL ACCOUNTING POLICIES
BancTrust’s significant accounting policies are presented in Note 1 to Consolidated Financial Statements. These policies, along with the disclosures presented in the other footnotes, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Those accounting policies involving significant estimates and assumptions by management, which have, or could have, a material impact on the carrying value of certain assets and impact comprehensive income, are considered critical accounting policies. BancTrust recognizes the following as critical accounting policies: Allowance for Loan Losses and Goodwill Impairment Analysis.
Allowance for Loan Losses. Management’s ongoing evaluation of the adequacy and allocation of the allowance considers both impaired and unimpaired loans and takes into consideration the Bank’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay, estimated value of any underlying collateral, the reviews of regulators, and an analysis of current economic conditions. While management believes that it has exercised prudent judgment and applied reasonable assumptions which have resulted in an allowance presented in accordance with generally accepted accounting principles, there can be no assurance that in the future, adverse economic conditions, increased nonperforming loans, regulatory concerns, or other factors will not require further increases in, or re-allocation of the allowance. A more detailed discussion of BancTrust’s allowance for loan losses is included in the respective section of Management’s Discussion and Analysis and Note 1 to Consolidated Financial Statements.
The table below illustrates BancTrust’s sensitivity to changes in certain factors used in the determination of the allowance for loan losses
(1) Criticized loans include all loans rated special mention or worse (includes all nonperforming assets and severely past due loans).
(2) These computations do not contemplate any action BancTrust could undertake in response to changes in each of these risk factors.
(3) All scenerios presented above assume no change in the level of loans specifically identified as impaired under SFAS 114.
Goodwill Impairment Analysis. Goodwill represents the excess of the cost of the acquisition over the fair value of the net assets acquired. BancTrust tests goodwill for impairment on an annual basis, or more often if events or circumstances indicate that there may be impairment. BancTrust has elected to perform its annual testing as of June 30 each year. The goodwill impairment test is a two-step process, which requires management to make judgments in determining the assumptions used in the calculations. The first step involves estimating the fair value of each reporting unit and comparing it to the reporting unit’s carrying value, which includes the allocated goodwill. If the estimated fair value is less than the carrying value, then a second step is performed to measure the actual amount of goodwill impairment. The second step first involves determining the implied fair value of goodwill. This requires BancTrust to allocate the estimated fair value to all the assets and liabilities of the reporting unit. Any unallocated fair value represents the implied fair value of goodwill which is compared to its corresponding carrying value. If the carrying value exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess.
Fair values of reporting units were estimated using discounted cash flow models derived from internal earnings forecasts. The key assumptions used to estimate the fair value of each reporting unit included earnings forecasts for 10 years, terminal values based on future growth rates and discount rates based on BancTrust’s average cost of capital adjusted for the risks associated with the operations of each reporting unit.
The goodwill impairment analysis for 2003 indicated that no impairment write-offs were required. The table below illustrates BancTrust’s sensitivity to changes in the rates used in discounting the estimated future cash flows. The sensitivity analysis was based on information available as of the annual test date of June 30, 2003. Further discussion regarding BancTrust’s accounting for goodwill is included at Note 1 to Consolidated Financial Statements.
(1) These computations do not take into account changes in the forecasted cash flows and future annual growth rates. Further, the computations do not contemplate any action BancTrust could undertake in response to changes in the risks associated with the operations of each reporting unit.
(2) Under these computations, the Company would anticipate no material impairment.
BALANCE SHEET SUMMARY
Loans
BancTrust’s largest earning asset category is its loan portfolio. Because loans generally generate the highest yields, most other assets and liabilities are managed to accommodate fluctuations in the loan portfolio.
At December 31, 2003, BancTrust’s loans, net of the unearned discount, totaled $461,405,000, compared to $499,258,000 at December 31, 2002.
The following table illustrates the loan portfolio of BancTrust at December 31, 2003 and 2002 by major loan category, along with the change in each category between the two periods.
(1) includes real estate contruction loans
Each segment of the loan portfolio was lower at December 31, 2003 when compared to December 31, 2002. BancTrust has experienced diminished loan demand in many of its markets, and attributes the majority of loan decreases to this fact. Additionally, BancTrust has deployed significant resources in its credit administration function. This intense focus on credit administration has been a conscious effort on the part of BancTrust in order that a strong credit review and approval infrastructure will be in place when local and regional economies begin to recover and loan demand increases.
Real estate mortgage loans decreased to $281,079,000 at December 31, 2003 from $288,742,000 at December 31, 2002. Declines in residential real estate loans, as well as construction and development loans contributed to the majority of the overall decrease in real estate mortgage loans. While BancTrust offers real estate mortgage loans to its customer base, it does not retain the majority of these loans within its loan portfolio. Rather, BancTrust sells the majority of real estate mortgage loans it originates to upstream institutions, while retaining a fee for the origination. Consequently, the total amount of residential real estate loans BancTrust maintains in its loan portfolio continues to decline as customers repay these loans. The primary factor to which BancTrust attributes the decline in construction and development real estate loans is the diminished loan demand previously discussed. BancTrust anticipates that demand for construction and development real estate loans will increase as local and regional economies begin to recover.
Commercial and industrial loans totaled $127,703,000 at December 31, 2003 compared to $147,233,000 at December 31, 2002. Efforts by BancTrust to secure some existing and new commercial loans with real estate, contributed to the decline in commercial and industrial loans, because loans secured with real estate, are classified as a real estate mortgage loans. Additionally, diminished demand for these types of loans was a significant factor as well. Commercial loans not secured by real estate are typically collateralized by assets such as inventories and equipment. BancTrust endeavors to establish and maintain quality commercial lending relationships. This is achieved via thorough analysis of the financial viability and soundness of commercial loan applicants, as well as ongoing monitoring and communication with existing commercial loan customers.
The personal loan portfolio declined from $62,522,000 at December 31, 2002 to $51,765,000 at December 31, 2003. Personal loans primarily include loans to individuals for household, family and other personal expenditures. This decline extends a trend that BancTrust has been experiencing in recent periods. The two main factors for this declining trend remain the same as for prior periods, and are as follows: First, alternative sources of credit continue to be more available to consumers than in prior years. Major sources of alternative credit include credit cards, finance companies and manufacturer
direct financing on consumer goods such as automobiles, recreational vehicles and major appliances. Second, denials of personal loan applications remain high, primarily due the existing debt levels of personal loan applicants. For these reasons and others, BancTrust has chosen to reduce its emphasis on originating personal loans.
Allowance for Loan Losses
Management’s estimate of uncollectible amounts within BancTrust’s loan portfolio is represented by the allowance for loan losses. The allowance for loan losses is established through charges against earnings in the form of a provision for loan losses. A loan is charged against the allowance for loan losses when management determines that it is probable that BancTrust will not recover the entire loan balance, either through repayment by the customer or from collateral proceeds. Should a loan that has been charged off be recovered, either partially or entirely, it is credited back to the allowance. Periodic reviews of the loan portfolio that include analysis of such factors as current and expected economic conditions, historical loss experience and levels of non-accruing loans and delinquencies, determine the appropriate level at which to maintain the allowance for loan losses. Because the allowance is based on assumptions and subjective judgments, it is not necessarily reflective of the charge-offs that may ultimately occur.
Management monitors and evaluates all loans, in an effort to identify those which currently posses, or otherwise indicate characteristics of weakness, potential weakness or non-conformity with their original terms. A loan is evaluated in light of its performance against its original stated terms, the fair market value of the collateral securing the loan, known or anticipated economic events and or trends, and the on-going credit worthiness of the borrower and any guarantors. If when a loan is evaluated, there is determined to be a deficiency (or deficiencies) in any of the aforementioned areas, the loan is added to a list of loans which are subject to heightened scrutiny, and for which additional loss reserves are maintained, depending on the magnitude of the deficiencies. The loan continues to be monitored closely, which may include modifications through negotiations with the borrower. Such modifications may include, but are not limited to, the assignment of additional collateral, the modification of repayment terms and the procurement of a guarantor(s). Only after the loan has been paid back in full, or performs in a favorable manner for a sustained period of time with all identified deficiencies having been duly discharged and documented, will the loan no longer receive the exceptionally close and frequent monitoring previously described.
Using input from BancTrust’s credit risk identification process, BancTrust’s credit administration area analyzes and validates the loan loss reserve methodology at least quarterly. The analysis includes specific allowances for individual loans and general allowances for certain pools of loans. The credit administration area along with senior management reviews and ensures the methodology is appropriate and that all risk elements have been assessed in order to determine the appropriate level of allowance for the inherent losses in the loan portfolio at each quarter end. In addition, the allowance methodology is discussed with and reviewed quarterly by the Audit Committee.
The first area of the allowance for loan losses analysis involves the calculation of specific allowances for individual impaired loans as required by SFAS 114 and 118. In addition, BancTrust requires that a broad group of loans be analyzed for impairment each quarter (this includes all loans of $500,000 and over that have internal risk ratings below a predetermined classification level). The credit administration area validates all impairment testing and validates the reserve allocations for all impaired loans each quarter. Reserves associated with these activities are based on a thorough analysis of the most probable sources of repayment which is normally the liquidation of collateral, but also includes discounted future cash flows or the market value of the loan itself.
The second reserve area is the general allowance for loan pools assessed by applying loan loss allowance factors to groups of loans within the portfolio that have similar characteristics. This part of the methodology is governed by SFAS 5. The general allowance factors are based upon recent and historical charge-off experience and are typically applied to the portfolio by loan type. Historical loss analyses provide the basis for factors used for homogenous pools of smaller loans, such as residential real estate and other consumer loan categories which are not evaluated based on individual risk ratings but almost entirely based on historical losses. The statistics used in this analysis of this second reserve element are adjusted quarterly based on loss trends and risk rating migrations.
At December 31, 2003, BancTrust’s allowance for loan losses had a balance of $11,995,000, as compared to $10,257,000 at December 31, 2002. The ratio of the allowance to total loans, net of the unearned discount, was 2.60% and 2.05% at December 31, 2003 and 2002, respectively. At December 31, 2003, management had identified $57,449,000 of loans requiring special attention because of potential weakness. Reserves for these loans accounted for $6,863,000 of the $11,995,000 allowance for loan losses at December 31, 2003. At December 31, 2002, management had identified $45,184,000 of loans requiring special attention because of potential weakness, accounting for $5,542,000 of the $10,257,000
of allowance for loan losses. Non-accruing loans totaled $2,204,000 and $6,128,000 at December 31, 2003 and 2002 respectively. Non-accruing loans at December 31, 2003 and 2002 represented 0.48% and 1.23% respectively, of total loans net of the unearned discount. The coverage of the allowance to non-accruing loans was 544% and 167% at December 31, 2003 and 2002, respectively. As a percentage of average loans, net of the unearned discount, net loan charge offs in 2003 were 0.82% compared with 0.95% in 2002.
Management has designed and implemented a loan monitoring and review process that significantly refines the criteria by which loans are determined to require special attention. By doing this, management has brought into focus those areas of its lending function that would benefit most from increased efforts in areas such as lender training, credit underwriting and loan relationship management. Management has been, and remains firmly committed to devoting the necessary time, energy and other resources to the issue of credit quality. Also, management believes strongly that its efforts in the area of credit quality have begun to produce positive results, including a 20% reduction in BancTrust’s provision for loan losses (see “Provision for Loan Losses”).
Management believes that its efforts in the credit administration area are at least somewhat responsible for improvements in several of the ratios previously highlighted. For instance, non-accruing loans as a percentage of total loans decreased to 0.48% at December 31, 2003 from 1.23% at December 31, 2002. Also, the ratio of net loan charge offs to average loans decreased to 0.82% in 2003 compared to 0.95% in 2002. Management remains committed to taking additional actions in the credit administration area, which may include, but are not limited to, the centralization of several of its credit functions. Examples of these functions include; loan documentation review, collections, repossessions and the disposition of collateral pledged on defaulted loans.
It is management’s belief that, at its current level, the allowance for loan losses is sufficient to absorb all probable losses that currently exist in BancTrust’s loan portfolio. See Notes 1 and 5 to Consolidated Financial Statements incorporated in Item 15.-“Exhibits, Financial Statement Schedules and Reports on Form 8-K” for further information regarding the allowance for loan losses.
Securities
The securities portfolio of BancTrust increased to $225,135,000 at December 31, 2003 from $163,207,000 at December 31, 2002. This change represented an increase of $61,928,000, or 37.94%. BancTrust has received significant volumes of customer deposits (see “Deposits”), while experiencing significantly diminished loan demand in many of its markets (see “Loans”). BancTrust maintains that these two factors contributed significantly to the increase in investment securities. In a more robust loan demand environment, BancTrust would attempt to deploy the majority of incoming deposit funds in the loan portfolio. Given the recent loan demand environment however, BancTrust deployed the majority of these funds in the investment securities portfolio.
BancTrust participates in the Security for Alabama Funds Enhancement (“SAFE”) program. Under this program, banks that hold deposits of the state of Alabama, or deposits of SAFE member municipalities within the state of Alabama (“public deposits”), must pledge qualifying securities (typically United States Treasury or Agency debt instruments) as collateral for those amounts that exceed the FDIC insurable limit. At December 31, 2003, BancTrust had pledged to the State Treasurer for the State of Alabama $109,860,000, or approximately 48.8% of its investment securities portfolio under the SAFE program.
The entire securities portfolio is classified as “available-for-sale”, causing it to be marked-to-market with the unrealized gains and losses reflected directly in stockholders’ equity. The portfolio had a net unrealized gain of $643,000 (net of tax) December 31, 2003, compared to a net unrealized gain of $1,936,000 (net of tax) at December 31, 2002. See Notes 1 and 4 to Consolidated Financial Statements incorporated in Item 15.-”Exhibits, Financial Statement Schedules and Reports on Form 8-K” for further information regarding securities.
Cash and Cash Equivalents
Cash and cash equivalents totaled $59,481,000 at December 31, 2003 and $37,583,000 at December 31, 2002. The same factors that contributed to the increase in the investment securities (diminished loan demand plus deposit growth) contributed significantly to the increase in cash and cash equivalents. Cash and cash equivalents are comprised of cash and due from banks and federal funds sold and securities purchased under agreements to resell. Cash and due from banks totaled $57,433,000 at December 31, 2003 compared to $28,526,000 at December 31, 2002. This increase was primarily attributable to balances BancTrust held at the Federal Home Loan Bank of Atlanta (the “FHLB”) at December 31, 2003, which totaled $26,871,000 compared to $4,421,000 at December 31, 2002. Balances held at the FHLB earn a rate of interest that is comparable to rates earned on federal funds sold.
Federal funds sold and securities purchased under agreements to resell, totaled $2,048,000 at December 31, 2003 and $9,057,000 at December 31, 2002. This decrease is considered routine, given the daily fluctuations in short-term investments, and the purposes for which they are held. These investments are extremely liquid, and typically have investment terms of only one day.
Cash and cash equivalents are monitored on a daily basis. Management seeks to strike a balance between alternative investments opportunities such as loans and investment securities, and its operating liquidity needs (see “Liquidity”).
Other Real Estate
Other real estate (“ORE”) represents real estate BancTrust has acquired via foreclosure on loans secured by real estate, or otherwise taken possession of in lieu of foreclosure on loans secured by real estate. When BancTrust takes possession of real estate in such a manner, it is recorded at its fair market value. Periodically, BancTrust may reduce the value of ORE through write downs in its value resulting from fluctuations in market values. Additionally, BancTrust may periodically record write downs that are related to regulations addressing the maximum period of time a single ORE property can be recorded at a value greater than $1.
Other real estate, net of accumulated write downs, totaled $2,395,000 at December 31, 2003 and $7,120,117 at December 31, 2002. This was primarily attributable to the sale of a commercial real estate property BancTrust took possession of in lieu of foreclosure in August of 2002. BancTrust had recorded this property at its fair market value of $5,500,000 until December of 2003, when the property was sold. BancTrust realized a gain on the sale of this property in the amount of $1,194,000 (see “Noninterest Income”).
Deposits
BancTrust’s primary source of funding for its lending and investment activities is its deposit base. At December 31, 2003, BancTrust had total deposits in the amount of $643,757,000. At December 31, 2002 total deposits were $596,972,000. BancTrust believes this increase in total deposits is attributable to several factors. BancTrust believes that as market rates of interest remain at historically low levels, individual and commercial deposit customers are leaving funds on deposit with BancTrust rather than deploying said funds in low yield investment instruments. Also, BancTrust believes that as local and regional economies have remained relatively soft, commercial customer funds remain on deposit with BancTrust as opposed to being deployed in capital improvement and investment. Finally, BancTrust also suspects that while performance in the equities markets has been generally positive, BancTrust customers have not withdrawn significantly large volumes of funds for investment in these markets, as was previously anticipated.
While all segments of the deposit base increased, interest-bearing demand deposits experienced the highest degree of increase. These deposits increased by $28,993,000 or 15.97%, to $210,548,000 at December 31, 2003, compared to $181,555,000 at December 31, 2002. Interest-bearing demand deposits primarily include negotiable order withdrawal (“NOW”) accounts and insured money market accounts (“IMMA”). It is management’s opinion that interest bearing demand deposits experienced the greatest increase, because many customers opted to place funds in these highly liquid accounts, rather than commit to stated future maturities in the current interest rate environment.
Other deposit types which experienced far less significant fluctuations than did interest-bearing demand deposits, include noninterest bearing demand deposits, which totaled $74,254,000 and $67,205,000 at December 31, 2003 and 2002, respectively, savings deposits, which totaled $38,646,000 and $38,006,000 at December 31, 2003 and 2002, respectively, and time deposits, which totaled $320,309,000 and $310,206,000 at December 31, 2003 and 2002, respectively. At December 31, 2003, BancTrust held $29,764,000 in deposits placed by brokers (“brokered deposits”). BancTrust utilizes brokered deposits in order to meet funding needs not met by more traditional types of deposits. Brokered deposits are more likely to be withdrawn from BancTrust than other, more traditional types of deposits. Brokered deposits are fully insured by the FDIC. See Item 1.- “Business - Bank Regulation”.
Liquidity
Liquidity describes BancTrust’s ability to meet its needs for cash. Those needs primarily include lending, withdrawal demands of customers and the payment of operating expenses.
Liquidity management is crucial in ensuring that BancTrust is able to conduct its day-to-day business. Without proper liquidity management, BancTrust would be restricted in its activities as a financial institution, including its ability to meet the needs of the communities it serves.
Typically, increasing the liquidity of BancTrust would serve to reduce its profits as a result of reduced earnings from assets with shorter maturities. Estimating liquidity needs is made more complex by the fact that certain balance sheet
components are, by nature, more controllable by management than others. For example, the maturity frequency of the securities portfolio is generally manageable at the time investment decisions are made. However, deposits flowing into and out of BancTrust are much less predictable and controllable by management. Monitoring liquidity needs and the changing relationships between certain balance sheet components is the responsibility of BancTrust’s Asset Liability Committee (“ALCO”) (see - “Interest Rate Risk”).
The asset items that are BancTrust’s primary sources of liquidity are cash and cash equivalents (see “Cash and Cash Equivalents”). These assets represent the most immediately available source of funds from which BancTrust is able to provide loans to and honor the deposit withdrawals of customers, and pay its operating expenses.
The asset base generates liquidity through interest and fee income, loan repayments and the maturity or sales of other earning assets including securities. At December 31, 2003, approximately 3.4% of the total securities portfolio was to mature, or otherwise reprice, within one year. At December 31, 2003, the entire securities portfolio, having a value of $225,135,000, was classified as available-for-sale. These securities are generally high grade, exchange traded securities (see “Securities”).
The liability base generates liquidity through deposit growth, the rollover of maturing deposits and accessibility to external sources of funds, (“Borrowed funds”). Borrowed funds totaled $56,690,000 at December 31, 2003, compared to $67,478,000 at December 31, 2002. BancTrust has several available sources from which to borrow funds.
The predominant source of borrowed funds utilized by BancTrust is the FHLB. Given the increases in deposits (see “Deposits”) and diminished loan demand (see “Loans”), BancTrust did not initiate additional borrowings from the FHLB in 2003, thereby reducing total borrowed funds via regularly scheduled repayments of borrowed funds to FHLB. At December 31, 2003, BancTrust had borrowed from the FHLB $54,017,000, along with $18,482,000 of letters of credit issued on behalf of BancTrust from the FHLB. BancTrust periodically obtains “backup” letters of credit from the FHLB. Occasionally, such letters are necessary to facilitate the public offering of debt instruments for which BancTrust has provided its own letter of credit to the issuer. When determining available borrowing capacity at the FHLB, BancTrust must factor both borrowed funds balances outstanding and the total amount of letters of credit outstanding, against its available lines of credit. At December 31, 2003, BancTrust had total credit facilities (borrowed funds outstanding plus letter of credit) at the FHLB of $72,499,000 against a total line of credit of $77,099,000.
At December 31, 2003, BancTrust had federal funds lines of credit with correspondent financial institutions of approximately $44 million. See Note 10 to Consolidated Financial Statements incorporated in Item 15.-”Exhibits, Financial Statement Schedules and Reports on Form 8-K” for further information regarding borrowed funds.
The following table provides additional details regarding borrowed funds:
Stockholders’ Equity and Regulatory Capital Requirements
Stockholders’ equity indicates BancTrust’s net worth. Stockholders’ equity was $72,779,000 at December 31, 2003, compared to $71,181,000 at December 31, 2002.
The FRB has adopted risk-based capital regulations. These regulations require all bank holding companies and banks to achieve, and maintain, specified ratios of capital to risk-weighted assets. The risk-based capital rules assign weight factors to different classes of assets and off-balance sheet obligations at 0%, 20%, 50% or 100%, depending upon the risk classification of the asset or obligation. All bank holding companies and banks are required to maintain a minimum total capital to total risk-weighted assets ratio of 8.00%, at least half of which must be in the form of core, or Tier 1 capital (consisting of stockholders’ equity, less goodwill and certain components of accumulated other comprehensive income, net of tax). BancTrust’s and Peoples Bank’s capital ratios at December 31, 2003 were well above the minimum regulatory requirements. See Note 16 to Consolidated Financial Statements incorporated in Item 15.-”Exhibits, Financial Statement Schedules and Reports on Form 8-K” for further information regarding stockholders’ equity and regulatory capital requirements.
The following table indicates BancTrust’s dividends per share, earnings per share and the percent of earnings per share represented by dividends in 2003, 2002 and 2001.
Contractual Obligations
BancTrust has contractual obligations to make future payments on debt and certain lease agreements. Obligations such as debt are reflected on the balance sheet, whereas operating lease obligations for office space and equipment are not reflected on the balance sheet. See Note 13 to Consolidated Financial Statements incorporated in Item 15.-“Exhibits, Financial Statement Schedules and Reports on Form 8-K” for further information on operating lease obligations. Total contractual obligations at December 31, 2003 are set forth in the following table.
(1) includes principal payments only
Credit Extension Commitments
Many of BancTrust’s lending relationships contain both funded and unfunded elements. The unfunded elements of these relationships are not reflected on the balance sheet. The following table indicates the total unfunded credit extension, or off-balance sheet, commitment amounts by expiration date. See Note 17 to Consolidated Financial Statements incorporated in Item 15.-“Exhibits, Financial Statement Schedules and Reports on Form 8-K” for further information on credit commitments.
(1) Lending commitments are primarily comprised of the unused portion of commercial lines of credit and equity lines of credit
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the agreement. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of BancTrust’s commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. BancTrust had approximately $53,562,000 and $50,519,000 in commitments to extend credit at December 31, 2003 and 2002, respectively. BancTrust evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by BancTrust upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies, but may include certificates of deposit, marketable securities, real estate, and other collateral.
Standby letters of credit are conditional commitments issued by BancTrust to guarantee the performance of a customer to an outside third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The collateral varies but may include certificates of deposit, marketable securities, real estate, and other collateral for those commitments for which collateral is deemed necessary. BancTrust had approximately $22,187,000 and $18,527,000 in irrevocable standby letters of credit at December 31, 2003 and 2002, respectively.
INCOME SUMMARY
Net Income
Net income for the year ended December 31, 2003 increased to $5,338,000 from $5,137,000 for the same period in 2002. This increase was primarily attributable to a reduction in the provision for loan losses, as well as an increase in noninterest income. For the year ended December 31, 2003, provision for loan losses totaled $5,706,000 compared to $7,204,000 for the same period in 2002. Noninterest income totaled $11,772,000 and $9,888,000 for the years ended December 31, 2003 and 2002 respectively (see “Noninterest income”).
Net Interest Income
Net interest income is the amount of total interest earned on loans and securities that remains after interest expense for interest-bearing deposits and borrowed funds has been subtracted. This is the single largest income source for BancTrust. Movements in interest rates, coupled with other factors such as changes in the relationship of interest earning assets to interest bearing liabilities, have direct effects on BancTrust’s net interest income.
The following table, “Analysis of Changes in Interest Income and Expense,” illustrates the changes, and causes of those changes, in each line item that makes up net interest income. The next table, “Average Balance Sheets and Analysis of Net Interest Income,” is a presentation of the average balance sheet, along with the income or expense realized or incurred with each of its components. Only earning assets and interest bearing liabilities have interest income and expense associated with them.
ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE
for the years ended December 31, 2003, 2002 and 2001
(In Thousands)
(1) Increases (decreases) are attributed to volume changes and rate changes on the following basis: Changes in Volume = change in volume times old rate. Changes in Rates = change in rate times old volume. The Mix Change = change in volume times change in rate.
(2) Columns may not add because of rounding
THE PEOPLES BANCTRUST CO., INC.
AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(Dollars in thousands)
(1) Average balances include non-accruing loans of approximately $2,204,000, $6,128,000 and $5,721,000 in 2003, 2002 and 2001, respectively.
The table above sets forth certain information relating to BancTrust’s average interest-earning assets and interest-bearing liabilities and reflects the average yield on assets and average cost on liabilities for the years indicated. Such yields and costs are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the years indicated.
2003 versus 2002
Total interest income for 2003 decreased to $38,799,000 from $43,966,000 for 2002. A reduction in the average yield earned on interest earning assets was the primary reason for this reduction. In 2003, interest earning assets (loan, securities and federal funds sold and securities purchased under agreements to resell) earned an average yield of 5.49%, compared to 6.63% for 2002. Market rates of interest continued to decline in 2003, and remained at historically low levels. Consequently, the rates of interest BancTrust was able to earn on its interest earning assets declined as well.
Interest and fee income earned on the loan portfolio totaled $32,117,000 in 2003, compared to $35,980,000 in 2002. This reduction was caused by reductions in both the average yield earned, and the average volume between the two periods. In 2003, the loan portfolio earned an average yield of 6.65% on average volume of $483,063,000. In 2002, the loan portfolio earned an average yield of 7.42% on average volume of $485,203,000. Market rates of interest continued to decline in 2003, and remained at historically low levels. Consequently, the rates of interest BancTrust was able to earn on its loan portfolio declined as well. During 2003, BancTrust experienced generally lower levels of loan demand in many of its markets, which is believed to have contributed to reductions in average loan volume (see “Loans”).
Interest and dividend income earned on the securities portfolio decreased to $6,438,000 in 2003 from $7,861,000 in 2002. The average yield earned on the securities portfolio decreased to 3.23% in 2003 compared to 4.67% in 2002. This decrease in average yield more than offset an increase in the average volume of investment securities. The average volume of investment securities increased in 2003 to $198,705,000 compared to $168,290,000 in 2002. Market rates of interest continued to decline in 2003, and remained at historically low levels. Consequently, the rates of interest BancTrust was able to earn on its securities portfolio declined as well. For discussion on changes in securities balances, see - “Securities”.
Federal funds sold and securities purchased under agreements to resell generated $244,000 of interest income in 2003, compared to $125,000 in 2002. The average yield earned on federal funds sold and securities purchased under agreement to resell in 2003 was 0.96% on average volume of $25,505,000, compared to 1.36% in 2002 on average volume of $9,188,000. The increase in average volume of federal funds sold and securities purchased under agreements to resell was the primary factor in the increase in income between the two periods, given the decrease in the average yield earned.
Interest expense totaled $11,972,000 in 2003, compared to $14,421,000 in 2002. The average rate of interest paid on interest bearing liabilities decreased in 2003 to 1.94%, from 2.53% in 2002, accounting for substantially all of the decrease in total interest expense between the two periods. The average volume of interest bearing liabilities increased in 2003, to $618,278,000 from $569,800,000 in 2002.
Interest expense on deposits decreased to $9,539,000 in 2003, from $11,176,000 in 2002. The primary cause for this decrease was a reduction in the average rate of interest paid on deposits in 2003 compared to 2002. BancTrust paid an average rate of interest of 1.71% for interest bearing deposits in 2003, on average volume of $558,929,000. In 2002, BancTrust paid 2.20% for interest bearing deposits, on average volume of $506,960,000. Market rates of interest continued to decline in 2003, and remained at historically low levels. Consequently, the rates of interest BancTrust paid on interest bearing deposits declined as well. For discussion on changes in interest bearing deposit balances, see - “Deposits”.
Interest expense on borrowed funds (primarily FHLB borrowings and federal funds purchased and securities sold under agreements to repurchase) totaled $2,433,000 and $3,246,000 in 2003 and 2002 respectively. Reductions in both the average rate of interest paid and average volume contributed to this decline. The average rate of interest paid on borrowed funds in 2003 was 4.10% on average volume of $59,349,000. The average rate of interest paid on borrowed funds in 2002, was 5.16% on average volume of $62,840,000. Market rates of interest continued to decline in 2003, and remained at historically low levels. Consequently, the rates of interest BancTrust paid on borrowed funds declined as well. For discussion on changes in borrowed funds balances, see - “Liquidity”.
Net interest income for 2003 totaled $26,827,000 compared to $29,545,000 for 2002. Expressed as a percentage of average earning assets, also referred to as “net interest margin”, net interest income totaled 3.79% for 2003 and 4.46% for 2002. Reductions in the rates of interest BancTrust paid on interest bearing liabilities in 2003, as well as an increase in the average balance of interest earning assets, contributed to the increases in net interest income and net interest margin in 2003 when compared to 2002.
2002 versus 2001
Total interest income for 2002 decreased to $43,966,000 from $51,205,000 for 2001. A reduction in the average yield earned on interest earning assets was the primary reason for this reduction. In 2002, interest earning assets (loan, securities and federal funds sold and securities purchased under agreements to resell) earned an average yield of 6.63%, compared to 8.12% for 2001. Market rates of interest continued to decline in 2002, and remained at historically low levels. Consequently, the rates of interest BancTrust was able to earn on its interest earning assets declined as well.
Interest and fee income earned on the loan portfolio totaled $35,980,000 in 2002, compared to $42,657,000 in 2001. This reduction was primarily caused by a decrease in the average yield earned on the loan portfolio, given that the average balance of the portfolio increased between the two periods. In 2002, the loan portfolio earned an average yield of 7.42% on average volume of $485,203,000. In 2001, the loan portfolio earned an average yield of 9.06% on average volume of $470,914,000. Market rates of interest continued to decline in 2002, and remained at historically low levels. Consequently, the rates of interest BancTrust was able to earn on its loan portfolio declined as well. For discussion on changes in loan balances, see - “Loans”.
Interest and dividend income earned on the securities portfolio increased to $7,861,000 in 2002 from $7,790,000 in 2001. An increase in the average volume of securities was the primary cause of the increase in interest and dividend income earned on the securities portfolio between the two periods. The average yield earned on the securities portfolio decreased to 4.67% in 2002 on average volume of $168,290,000, compared to an average yield in 2001 of 6.06% on average volume of $128,578,000. Market rates of interest continued to decline in 2002, and remained at historically low levels. Consequently, the rates of interest BancTrust was able to earn on its securities portfolio declined as well. For discussion on changes in securities balances, see - “Securities”.
Federal funds sold and securities purchased under agreements to resell generated $125,000 of interest income in 2002, compared to $758,000 in 2001. The average yield earned on federal funds sold and securities purchased under agreement to resell in 2002 was 1.36% on average volume of $9,188,000, compared to 2.44% in 2001 on average volume of $31,008,000.
Interest expense totaled $14,422,000 in 2002, compared to $23,805,000 in 2001. The average rate of interest paid on interest bearing liabilities decreased in 2002 to 2.53%, from 4.38% in 2001, accounting for substantially all of the decrease in total interest expense between the two periods. The average volume of interest bearing liabilities increased in 2002, to $569,800,000 from $542,878,000 in 2001.
Interest expense on deposits decreased to $11,176,000 in 2002, from $20,189,000 in 2001. The primary cause for this decrease was a reduction in the average rate of interest paid on deposits in 2002 compared to 2001. BancTrust paid an average rate of interest of 2.20% for interest bearing deposits in 2002, on average volume of $506,960,000. In 2001, BancTrust paid 4.19% for interest bearing deposits, on average volume of $481,917,000. Market rates of interest continued to decline in 2002, and remained at historically low levels. Consequently, the rates of interest BancTrust paid on interest bearing deposits declined as well. For discussion on changes in interest bearing deposit balances, see - “Deposits”.
Interest expense on borrowed funds (FHLB borrowings and federal funds purchased and securities sold under agreements to repurchase) totaled $3,246,000 and $3,616,000 in 2002 and 2001 respectively. A reduction in the average rate of interest paid on borrowed funds was the primary cause for this decrease between the two periods, given that the average balance of borrowed funds increased. The average rate of interest paid on borrowed funds in 2002 was 5.16% on average volume of $62,840,000. The average rate of interest paid on borrowed funds in 2001, was 5.93% on average volume of $60,961,000. Market rates of interest continued to decline in 2002, and remained at historically low levels. Consequently, the rates of interest BancTrust paid on borrowed funds declined as well. For discussion on changes in borrowed funds balances, see - “Liquidity”.
Net interest income for 2002 totaled $29,545,000 compared to $27,400,000 for 2001. Expressed as a percentage of average earning assets, also referred to as “net interest margin”, net interest income totaled 4.46% for 2002 and 4.35% for 2001. Reductions in the rates of interest BancTrust paid on interest bearing liabilities in 2002, as well as an increase in the average balance of interest earning assets, contributed to the increases in net interest income and net interest margin in 2002 when compared to 2001.
Provision for Loan Losses
2003 versus 2002
When management determines that increases in the allowance for loan losses are necessary, such increases are realized through charges against income in the form of provision for loan losses (see-“Allowance for Loan Losses”). During 2003, BancTrust realized $5,706,000 in provision for loan losses compared to $7,204,000 in 2002. BancTrust did not have to increase its allowance for loan losses in 2003 to the extent that it did in 2002. Consequently, provision for loan losses was lower in 2003. Performance and quality analyses of the loan portfolio determine the level at which the allowance for loan losses must be maintained, thereby significantly affecting the amount of provision for loan losses in any given period (see -”Allowance for Loan Losses”).
2002 versus 2001
When management determines that increases in the allowance for loan losses are necessary, such increases are realized through charges against income in the form of provision for loan losses. During 2002, management deemed it necessary to significantly increase BancTrust’s allowance for loan losses (see - “Allowance for Loan Losses”). Consequently, the provision for loan losses recorded in 2002 was higher than that recorded in 2001. BancTrust recorded $7,204,000 in provision for loan losses in 2002, compared to $ $3,463,000 in 2001. The majority of this increase was the result of identifying a higher volume of loans at December 31, 2002, for which additional reserves were required, than had been identified at December 31, 2001 (see - “Allowance for Loan Losses”).
Noninterest Income
BancTrust realizes income from sources other than interest earned on loans and securities. Fee and other noninterest income is seen by management as being a major source of earnings for BancTrust. BancTrust’s primary sources of noninterest income are deposit service charges, fee-based trust services, brokerage income, credit life commissions, and fee income from BancTrust’s insurance and finance subsidiaries. Through the development of new services and the continued evaluation of existing fee structures, management intends to enhance the contribution of fee and other noninterest income to future earnings.
2003 versus 2002
The largest component of noninterest income is deposit service charges. In 2003, deposit service charges totaled $5,219,000 compared to $5,398,000 in 2002. The dollar volume of deposits increased in 2003, while the total number of deposit accounts held by BancTrust for its customers remained relatively unchanged. Management believes that higher deposit account balances contributed to the reduction in service charges on deposits, as individual account balances are a determining factor in many of these service charge cycles.
Other noninterest income increased to $3,396,000 in 2003, compared to $2,969,000 in 2002. The majority of this increase is accounted for in rental income realized from other real estate owned. During 2003, BancTrust operated a commercial property it took possession of in lieu of foreclosure in August of 2002. Upon taking possession of the property, BancTrust immediately classified it as other real estate owned. BancTrust realized $712,000 of rental income from this property in 2003, and $201,000 in 2002.
Gains on sales of other real estate owned increase significantly in 2003, to $1,259,000 from $109,000 in 2002. The majority of this increase is accounted for in the sale of the aforementioned commercial property acquired by BancTrust in lieu of foreclosure in 2002. Upon the sale of this property in December of 2003, BancTrust realized a gain of $1,194,000, thereby accounting for substantially all of the increase in gains of sales of other real estate owned.
Net securities gains increased in 2003, to $1,069,000 from $762,000 in 2002. While market rates of interest continued to decline in 2003, the market value of fixed income debt securities increased. As a result, BancTrust was able to realize more gains on sales of these securities in 2003, as it sought to implement investment strategies designed to mitigate the negative impact declining interest rates and low loan demand were having on interest margins.
Trust department income increased to $830,000 in 2003 from $650,000 in 2002. BancTrust began a proactive process of soliciting new trust clients in 2002 in several of its markets. 2003 was the first billable year of service for many of the trust clients BancTrust attracted in 2002. Management believes that this is the primary contributing factor to the increase in trust department income between 2002 and 2003. BancTrust continues to solicit new trust business and anticipates that to the extent new trust clients are registered, fee income from trust services will continue to trend positively.
2002 versus 2001
The largest component of noninterest income is deposit service charges. In 2002, deposit service charges totaled $5,398,000 compared to $5,315,000 in 2001. While the dollar volume of deposits increased in 2002, the total number of deposit accounts held by BancTrust for its customers remained relatively unchanged. Consequently, service charges realized on deposits changed little in 2002 when compared to 2001.
BancTrust realized an increase of $199,000 in fees generated from its trust operation in 2002, when compared to 2001. Trust related fees accounted for $650,000 of noninterest income in 2002, and $451,000 in 2001. This increase is primarily attributable to BancTrust having expanded its trust operation into one of its newer and more dynamic markets. Consequently, BancTrust’s base of trust clients has increased, thereby providing and increase in trust fee income.
BancTrust realized $201,000 of noninterest income from the operating revenues of a commercial real estate property it assumed control of in August of 2002. The property, which is included in other real estate, was acquired as a result of having been pledged as collateral on a defaulted commercial real estate loan. Also, earnings on life insurance policies owned by BancTrust totaled $459,000 in 2002, compared to $119,000 in 2001. 2002 was the first full twelve-month period in which BancTrust owned these policies, thereby generating noninterest income not earned in 2001.
Gains on securities totaled $762,000 in 2002, compared to $836,000 in 2001. Interest rates did not decline as drastically, nor did they decline as quickly in 2002 as in 2001. This was the primary reason that gains realized on the sale in securities in 2002 were lower than in 2001.
Noninterest Expense
Primary examples of noninterest expense include, but are not limited to: employee salaries and benefits, premises and equipment, outside services, data processing and security. Management is firmly committed to controlling noninterest expenses, and is constantly seeking and evaluating techniques and courses of action that could serve to reduce them, while maintaining its ability to provide quality service to its customer base as well as operational integrity.
2003 versus 2002
In 2003, noninterest expense totaled $25,592,000 compared to $24,856,000 in 2002. Increases in expenses associated with pensions and other employee benefits, as well as occupancy and premises were the primary factors in the overall increase in noninterest expense. Salaries and wages, as well as other noninterest expenses decrease in 2003 compared to 2002.
Pensions and other employee benefits expense increase in 2003 to $2,018,000 from $1,525,000 in 2002. BancTrust realized $859,000 of expense associated with its defined benefits pension plan in 2003, compared to $621,000 in 2002. Also, BancTrust realized $128,000 of expenses associated with a non qualified executive supplemental retirement plan in 2003, compared to $36,000 realized in 2002. These increases were the primary contributing factors to the overall increase in pensions and other employee benefits expense. See Note 12 to Consolidated Financial Statements incorporated in Item 15.-”Exhibits, Financial Statement Schedules and Reports on Form 8-K” for further information on employee benefit plans.
Occupancy and premises expense increased in 2003 to $5,091,000 from $4,435,000 in 2002. Increases in depreciation expense, facilities upkeep and maintenance contributed to the overall increase, as did expenses associated with communications and data network upgrades. Management anticipates that these upgrades will result in future cost savings and avoidance sufficient to justify the expenses incurred in their implementation.
Salaries and wages expense declined $233,000 in 2003 to $11,462,000 from $11,695,000 in 2002. The primary cause for this decline is that BancTrust employed fewer people in 2003 than it did in 2002. At December 31, 2003 BancTrust employed 310 people compared to 333 people at December 31, 2002.
Other noninterest expense declined $181,000 in 2003 to $7,021,000, from $7,202,000 in 2002. The primary cause for this decline was that BancTrust realized $142,000 of expense in 2003 associated with the retirement of a former senior executive, compare to $384,000 of expense realized in 2002 for the retirement of the same executive.
2002 versus 2001
Noninterest expense totaled $24,856,000 in 2002, compared to 23,933,000 in 2001. This represents a $923,000 increase over 2001, or 3.9%. Salaries and employee benefits increased $397,000 in 2002 to $11,695,000 from $11,298,000 in 2001. Routine salary increases, combined with a 29% increase in expenses associated with BancTrust’s defined benefits pension plan, accounted for the majority of the aforementioned increase in salaries and employee benefits. Premises and
equipment expense increased in 2002 to $4,435,000, from $4,264,000 in 2001. Expenses associated with service maintenance arrangements BancTrust has with equipment vendors increased in 2002 and were the primary cause of the increase in premises and equipment expense. Other noninterest expense totaled $7,202,000 in 2002, compared to $6,528,000 in 2001. Expenses associated with the retirement of BancTrust’s former Chief Executive Officer in the amount of $382,000, accounted for the majority of this increase between the two periods. Also, BancTrust did not realize any amortization expense associated with goodwill. In 2001, BancTrust realized goodwill amortization expense of $338,000. See Note 7 to Consolidated Financial Statements incorporated in item 15. - “Exhibits, Financial Statement Schedules and Reports on Form 8-K” for further information regarding goodwill amortization.
Amortization of goodwill and core deposits is included in other noninterest expense. Amortization of goodwill and core deposits decreased from $728,000 for 2000 to $645,000 for 2001. BancTrust has ceased to amortize goodwill, beginning January 1, 2002. See Note 7 to Consolidated Financial Statements incorporated in Item 15.-“Exhibits, Financial Statement Schedules and Reports on Form 8-K” for further discussion about the termination of goodwill amortization.
Income Taxes
BancTrust participates in several low-income housing projects, which provide tax credits, and invests in certain nontaxable obligations of states and political subdivisions, thus reducing its effective tax rate. Also, BancTrust owns life insurance policies on certain employees, the earnings of which are not taxable, thus further reducing its effective tax rate. See Note 11 to Consolidated Financial Statements incorporated in Item 15.-”Exhibits, Financial Statement Schedules and Reports on Form 8-K”.
2003 versus 2002
Net income before the provision for income tax totaled $7,302,000 and $7,372,000 respectively for the years ended December 31, 2003 and 2002. For each of the years 2003 and 2002, the provision for income tax totaled $1,965,000 and $2,235,000, respectively. The effective income tax rates for BancTrust in 2003 and 2002 were 26.9% and 30.3%, respectively.
2002 versus 2001
Net income before the provision for income tax totaled $7,372,000 and $8,745,000 respectively for the years ended December 31, 2002 and 2001. For each of the years 2002 and 2001, the provision for income tax totaled $2,235,000 and $2,534,000 respectively. The effective income tax rates for BancTrust in 2002 and 2001, were 30.3% and 29.0%, respectively.
Interest Rate Risk
The profitability of most financial institutions, including BancTrust, is greatly dependent on net interest income. Given this, management believes changes in interest rates impact BancTrust’s profitability to a greater extent than the effects of general inflation levels. Interest rates do not always move with the same magnitude, or in the same direction as inflation. When interest-earning assets are repricing to market rate levels at a different pace than interest-bearing liabilities, net interest income is affected either positively or negatively, depending on the direction market rates are moving. When interest rates are volatile, liquidity and maturity of BancTrust’s assets and liabilities is crucial in maintaining desired performance levels. Interest rates are highly sensitive to many factors, including Federal Reserve monetary policies and domestic and international political conditions such as inflation, recession, unemployment, money supply, government borrowing and other factors beyond management’s control may also affect interest rates. Management is unable to predict the future of interest rate movements; therefore, management attempts to strike a relative balance between rate sensitive assets and liabilities. This strategy is designed to protect BancTrust’s profitability against radical shifts in interest rate levels. Management believes the current relationship between rate sensitive assets and rate sensitive liabilities is well matched, indicating a minimal exposure to interest-rate risk. The table below presents a quantitative expression of interest-rate risk.
In June of 2002, BancTrust entered into an agreement known as an “interest rate swap”. Interest rate swaps are typically used to mitigate exposure to interest rate risk. Pursuant to the agreement, BancTrust will receive payment from its counterparty for the same amount of interest it is being charged on a $12,000,000 loan from the Federal Home Loan Bank of Atlanta (“FHLB”), which bears an interest rate of 6.85%. In turn, BancTrust will pay its counterparty an amount equal to the one month London Inter-Bank Offering Rate (“LIBOR”) plus 2.61% on a specified day each calendar quarter. The interest rate swap qualifies for treatment under the short-cut method of accounting; therefore, fluctuations in the fair value of the interest rate swap will be fully offset by fluctuations in the fair value of the underlying debt and have no effect on the results of operations of BancTrust.
THE PEOPLES BANCTRUST COMPANY, INC.
INTEREST RATE SENSITIVITY POSITION
December 31, 2003
On December 31, 2003, BancTrust had a positive cumulative one-year gap position of $32,556,000, indicating that while $393,270,000 in assets could reprice during 2004, $360,714,000 in liabilities could reprice in the same time frame. The above table reflects a positive cumulative gap position in all maturity classifications. A positive cumulative gap position implies that interest earning assets (loans and securities) will reprice at a faster pace than interest-bearing liabilities (deposits and debt). In a rising rate environment, this position will generally have a positive effect on earnings, while in a falling rate environment this position will generally have a negative effect on earnings. Other factors, however, including the speed at which assets and liabilities reprice in response to changes in market rates and the interplay of competitive factors, can also influence the overall impact on net income of changes in interest rates. The actual interest rate sensitivity of BancTrust’s assets and liabilities could vary significantly from the information set forth in the above table due to market conditions and other factors.
The process of measuring, compiling and analyzing the maturity and repricing dynamics of interest sensitive assets and interest sensitive liabilities is referred to as, “asset liability management” (“ALM”). BancTrust has established an ALCO (see - “Liquidity”), consisting of the Chief Executive Officer, Chief Financial Officer, Risk Management Officer, Senior Lender, Chief Investment Officer, Retail Division Manager, Senior Credit Officer and the Principal Accounting Officer. The ALCO is responsible for ensuring that the relationship of interest sensitive assets and liabilities, as defined by their respective maturity and repricing characteristics, does not become so mismatched as to expose BancTrust to unacceptable levels of risk in the areas of equity capital valuation, earnings or liquidity. ALCO achieves its objectives via regular meetings where various data relating to specific liquidity and interest rate issues are presented and discussed. At least quarterly, ALCO utilizes an interest rate risk computer model which compiles the detailed repricing and maturity characteristics of BancTrust’s interest sensitive instruments (both assets and liabilities), and produces various reports and supporting detail, which indicate BancTrust’s overall interest rate risk status.
The following table illustrates the results of simulation analysis used by BancTrust to determine the extent to which market risk would have affected the net interest margin if prevailing interest rates differed from actual rates during 2003 and 2002. Because of the inherent use of estimates and assumptions in the simulation model used to derive this information, the actual results for 2003 and 2002 and the future impact of market risk on BancTrust’s net interest margin may differ from those found in the table.
New Accounting Standards
See Note 1 to Consolidated Financial Statements incorporated in Item 15.-“Exhibits, Financial Statement Schedules and Reports on Form 8-K” for discussion on new accounting standards.
Impact of Inflation and Changing Prices
The financial statements and accompanying data herein have been prepared according to accounting principles generally accepted in the United States of America. Those principles dictate that financial position and operating results be measured in terms of historical dollars, with no consideration made for changes in the relative purchasing power of money over time due to inflation.
The nature of a financial institution’s assets and liabilities differs greatly from that of most commercial concerns. They are monetary in nature, whereas those of most commercial and industrial entities are concentrated in fixed assets or inventories. Inflation does, however, affect the growth of total assets, creating the need for more equity capital in order to maintain appropriate ratios of capital to assets. Inflation also affects noninterest expenses, which tend to rise during periods of inflation.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7.-“Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and related notes thereto, along with related financial schedules as listed in Item 15.-“Exhibits, Financial Statement Schedules and Reports on Form 8-K” have been included in this report, and should be referred to in their entirety. The table below sets forth certain quarterly supplementary financial information.
SELECTED QUARTERLY FINANCIAL DATA 2003 - 2002
(Dollars in thousands, except for per share amounts)
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
BancTrust maintains disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”) that are designed to ensure that information required to be disclosed by it in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified under the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decision making regarding required disclosure. The Company, under the supervision and participation of its management, including the Company’s Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by the report pursuant to the Exchange Act. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that all material information required to be disclosed in this annual report has been accumulated and communicated to them in a manner appropriate to allow timely decisions regarding required disclosure. During the quarter ended December 31, 2003, there have been no changes in the Company’s internal control over financial reporting that have materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors of BancTrust is omitted from this Report as BancTrust intends to file a definitive proxy statement not later than 120 days after December 31, 2003, and the information to be included therein is incorporated herein by reference.
Information regarding the executive officers of BancTrust is included under separate caption in Part I of this Form 10-K.
Item 405 of Regulation S-K disclosure is omitted from this Report as BancTrust will file a definitive proxy statement dated not later than 120 days after December 31, 2003, and the Item 405 disclosure to be included therein is incorporated herein by reference.
BancTrust has adopted a code of ethics that applies to all directors and employees, including without exception, the principal executive officer, principal financial officer, principal accounting officer and/or controller, or persons performing similar functions. The code of ethics is attached as Exhibit 14 to this Form 10-K. It is also posted on BancTrust’s internet website, located at http://www.peoplesbt.com.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is omitted from this Report as BancTrust will file a definitive proxy statement dated not later than 120 days after December 31, 2003 and the information to be included therein is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information required by this Item is omitted from this Report as BancTrust will file a definitive proxy statement dated not later than 120 after December 31, 2003, and the information to be included therein is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item is omitted from this Report as BancTrust will file a definitive proxy statement dated not later than 120 days after December 31, 2003, and the information to be included therein is incorporated herein by reference.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by this item is omitted from the Report as BancTrust will file a definitive proxy statement dated not later than 120 days after December 31, 2003, and the information to be included therein is incorporated herein by reference.
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of BancTrust included herein (beginning on page), are as follows.
(a)(2) All schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are inapplicable and therefore have been omitted.
(a)(3) The following exhibits either are filed as part of this Report or are incorporated herein by reference:
Exhibit No. 3. Articles of Incorporation and Bylaws
(i) Articles of Incorporation - incorporated herein by reference to Exhibit 3(i) to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1997.
(ii) Bylaws - incorporated herein by reference to Exhibit 3(ii) to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999.
Exhibit No. 10.1. Stock Option Plans
(i) 1992 Stock Option Plan - Incorporated herein by reference to Exhibit 10 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1992.
(ii) 1999 Stock Option Plan - Incorporated herein by reference to Exhibit 99.1 to the Registrant’s Registration Statement on Form S-8 (File No. 333-77109).
Exhibit No. 10.2. Executive Supplemental Retirement Plans
(i) Agreement dated July 17, 2001, by and between The Peoples Bank and Trust Company and Richard P. Morthland - Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001.
(ii) Agreement dated July 17, 2001, by and between The Peoples Bank and Trust Company and Elam P. Holley, Jr. Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001.
Exhibit No. 10.3. Agreement with Richard P. Morthland - Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, dated December 17, 2002.
Exhibit No. 14. Code of Ethics
Exhibit No. 21. Subsidiaries of the Registrant
A list of subsidiaries of the Registrant is included as an exhibit to this Report.
Exhibit No. 23. Consent of PricewaterhouseCoopers LLP
Exhibit No. 31.1. Certification of Principal Executive Officer pursuant to Exchange Act Rule 12a - 14(a) or 15d - 14(a).
Exhibit No. 31.2. Certification of Principal Financial Officer pursuant to Exchange Act Rule 12a - 14(a) or 15d - 14(a).
Exhibit No. 32.1. Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.
Exhibit No. 32.1. Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.
(b) Reports on Form 8-K
Current report on Form 8-K dated February 17, 2004, reporting under Item 12, results of operations and financial condition of the Registrant as of and for the years ended December 31, 2003 and 2002.
(c) Exhibits to this Form 10-K are attached or incorporated by reference as stated above.
(d) None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated and on the dates indicated.
The Peoples BancTrust Company, Inc. and Subsidiary
Consolidated Financial Statements
As of December 31, 2003 and 2002 and
For Each of the Three Years Ended December 31, 2003
Report of Independent Auditors
To the Board of Directors
The Peoples BancTrust Company, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows present fairly, in all material respects, the financial position of The Peoples BancTrust Company, Inc. and its subsidiary (the Company) at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
February 27, 2004
The Peoples BancTrust Company, Inc. and Subsidiary
Consolidated Balance Sheets
December 31, 2003 and 2002
The accompanying notes are an integral part of these financial statements.
The Peoples BancTrust Company, Inc. and Subsidiary
Consolidated Statements of Income
Years Ended December 31, 2003, 2002, and 2001
The accompanying notes are an integral part of these financial statements.
The Peoples BancTrust Company, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2003, 2002, and 2001
The accompanying notes are an integral part of these financial statements.
The Peoples BancTrust Company, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholder’s Equity
Years Ended December 31, 2003, 2002, and 2001
The accompanying notes are an integral part of these financial statements.
The Peoples BancTrust Company, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Years Ended December 31, 2003, 2002, and 2001
The accompanying notes are an integral part of these financial statements.
The Peoples BancTrust Company, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
1. Significant Accounting Policies
Basis of Consolidation
The consolidated financial statements included herein are those of The Peoples BancTrust Company, Inc. (the Company) and its wholly owned subsidiary, The Peoples Bank and Trust Company (the Bank). The Company operates primarily in the retail banking industry.
Nature of Operations
The Company operates as a single-segment retail banking enterprise with twenty-five offices in rural and suburban communities in south-central Alabama. The Company’s primary source of revenue is providing loans to customers, who are predominately small and middle-market businesses and middle-income individuals.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Securities
Securities are classified as either held-to-maturity, trading, or available-for-sale securities.
Securities held-to-maturity are securities for which management has the ability and intent to hold on a long-term basis or until maturity. These securities are carried at amortized cost, adjusted for amortization of premiums and accretion of discounts to the earlier of the maturity or call date.
Securities available-for-sale represent those securities intended to be held for an indefinite period of time, including securities that management intends to use as part of its asset/liability strategy, or that may be sold in response to changes in interest rates, changes in prepayment risk, the need to increase regulatory capital or other similar factors. Securities available-for-sale are recorded at market value with unrealized gains and losses, net of any tax effect, added or deducted directly from stockholders’ equity.
Securities carried in trading accounts are carried at market value with unrealized gains and losses reflected in income.
At December 31, 2003 and 2002, the Company classified all securities as available-for-sale as part of an asset and liability strategy to maximize the flexibility of its investment portfolio.
Realized and unrealized gains and losses are based on the specific identification method.
Loans
Loans are stated at face value, net of unearned discount and the allowance for loan losses. Unearned discounts on installment loans are recognized as income over the terms of the loans by the interest method. Interest on other loans is credited to operations based on the principal amount outstanding.
The Peoples BancTrust Company, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
Nonrefundable fees and costs associated with originating or acquiring loans are recognized by the interest method as a yield adjustment over the life of the corresponding loan.
Allowance for Loan Losses
A loan is considered impaired, based on current information and events, if it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Uncollateralized loans are measured for impairment based on the present value of expected future cash flows discounted at the historical effective interest rate, while all collateral-dependent loans are measured for impairment based on the fair value of the collateral.
At December 31, 2003 and 2002, the recorded investment in loans for which impairment has been recognized totaled approximately $15,312,000 and $7,821,000, respectively. These loans had a corresponding valuation allowance of approximately $1,486,000 at December 31, 2003 and $1,897,000 at December 31, 2002. The impaired loans were measured for impairment using the fair value of the collateral, as substantially all of these loans were collateral dependent. The average recorded investment in impaired loans during 2003 and 2002 was approximately $10,479,000 and $9,833,000, respectively. The Company recognized approximately $554,000 and $305,000 of interest on impaired loans during 2003 and 2002, respectively.
The Company uses several factors in determining if a loan is impaired. Internal asset classification procedures include a thorough review of significant loans and lending relationships and include the accumulation of related data. This data includes loan payment status, borrowers’ financial data, and borrowers’ operating factors such as cash flows and operating income or loss.
Management’s periodic evaluation of the adequacy of the allowance also considers unimpaired loans and takes into consideration the Bank’s loan loss experience for pools of homogeneous loans, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay, and current economic conditions. While management believes that it has established the allowance in accordance with generally accepted accounting principles and has taken into account the views of its regulators and the current economic environment, there can be no assurance that in the future the Bank’s regulators or its economic environment will not require further increases in the allowance.
The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. Increases and decreases in the allowance due to changes in the measurement of the impaired loans are included in the provision for loan losses. Loans continue to be classified as impaired unless they are brought fully current and the collection of scheduled interest and principal is considered probable. When a loan or portion of a loan is determined to be uncollectible, the portion deemed uncollectible is charged against the allowance and subsequent recoveries, if any, are credited to the allowance.
Income Recognition on Impaired and Nonaccrual Loans
Loans, including impaired loans, are generally classified as nonaccrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans are well-collateralized and in the process of collection. If a loan or a portion of a loan is classified as doubtful or is partially charged off, the loan is generally classified as nonaccrual. At the discretion
The Peoples BancTrust Company, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
of management, loans that are on a current payment status or past due less than 90 days may also be classified as nonaccrual if repayment in full of principal and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance (generally a minimum of six months) by the borrower, in accordance with the contractual terms of interest and principal.
While a loan is classified as nonaccrual and the future collectibility of the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to principal outstanding, except in the case of loans with scheduled amortizations where the payment is generally applied to the oldest payment due. When the future collection of the recorded loan balance is expected, interest income may be recognized on a cash basis. In the case where a nonaccrual loan has been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered.
Bank Premises and Equipment
Office equipment, vehicles, and buildings are stated at cost less accumulated depreciation computed on the straight-line, declining-balance and other accelerated methods over the estimated useful lives of the assets. Gains or losses on disposition are recorded in other operating income on the date of disposition, based upon the difference between the net proceeds and the adjusted carrying value of the assets sold or retired. Maintenance and repairs are charged to expense as incurred, while renewals and betterments are capitalized. Estimated useful lives range from seven to forty years for buildings and improvements, and three to five years for furniture and equipment.
Other Real Estate
Other real estate is stated at the lower of the appraised value, less estimated costs to sell the property, or outstanding loan balance at the time of foreclosure. Any subsequent write-downs are charged against operating expenses. Operating expenses of such properties, net of related income are included in other expenses.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Other intangible assets represent purchased assets that also lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset, or liability. On January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) 142, Goodwill and Other Intangible Assets. Under the provisions of SFAS No. 142, goodwill and other intangible assets with indefinite useful lives will no longer be amortized, but instead are tested for impairment as of the date of adoption and at least annually. Intangible assets that have finite lives continue to be amortized over their estimated useful lives and also continue to be subject to impairment testing. All of the Company’s other intangible assets have finite lives and are amortized on an accelerated basis over a period of no more than ten years. Prior to the adoption of SFAS 142, the Company’s goodwill was amortized over a period of 25 years using the straight-line method. Note 7 includes a summary of the Company’s goodwill and other intangible assets as well as further detail about the impact of the adoption of SFAS 142.
The Peoples BancTrust Company, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
Income Taxes
Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
Stock-Based Compensation
SFAS No. 123, Accounting for Stock-Based Compensation, defines a fair value based method of accounting for an employee stock option or similar equity instrument. However, SFAS No. 123 allows an entity to continue to measure compensation costs for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees. Entities electing to remain with the accounting in Opinion No. 25 must make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting defined in SFAS No. 123 had been applied. Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at the grant date or other measurement date over the amount an employee must pay to acquire the stock. The Company has elected to continue to measure compensation cost for its stock option plans under the provisions in APB Opinion 25 and has calculated the fair value of outstanding options for purposes of pro forma disclosure utilizing the Black-Scholes option-pricing model.
The majority of the Company’s options granted in 2003, 2002 and 2001 vest ratably over a period of two years; therefore, for purposes of pro forma disclosures, the compensation expense related to these options has been allocated over the vesting period.
The Company’s actual and pro forma information follows:
The Peoples BancTrust Company, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model. The following weighted-average assumptions were used for options granted in 2003, 2002, and 2001, respectively: dividend yield of 2.75 percent, 3.39 percent, and 3.32 percent; expected volatility of 41.32 percent, 43.6 percent, and 36.6 percent; risk-free interest rate of 3.55 percent, 2.36 percent, and 3.57 percent; and expected life of 6.45 years, 4.11 years, and 3.79 years. The weighted average fair value of options granted during 2003, 2002, and 2001 was $6.78, $4.97, and $3.89, respectively.
Advertising Costs
Advertising costs are expensed as incurred.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, federal funds sold, securities purchased under agreements to resell, and interest-bearing deposits in banks.
Accounting for Derivatives and Hedging Activities
As part of the Company’s overall interest rate risk management, the Company occasionally uses derivative instruments. Under the guidelines of SFAS 133, Accounting for Derivative Instruments and Hedging Activities, as amended, all derivative instruments are required to be carried at fair value on the balance sheet. SFAS 133 provides special hedge accounting provisions, which permit the change in the fair value of the hedged item related to the risk being hedged to be recognized in earnings in the same period and in the same income statement line as the change in fair value of the derivative.
Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges under SFAS 133. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking each hedge transaction.
Derivative instruments that are used as part of the Company’s interest-rate risk-management strategy consist primarily of interest-rate swaps. Interest-rate swaps generally involve the exchange of fixed-rate and variable-rate interest payments between two parties, based on a notional principal amount, interest rate index and maturity date. The Company is exposed to credit and market risk by using derivative instruments. If the counterparty fails to perform, credit risk is equal to the extent of the fair-value gain in a derivative. The Company minimizes the credit (or repayment) risk in derivative instruments by entering into transactions with high quality counterparties. Market risk is the adverse effect that a change in interest rates, or implied volatility rates has on the value of a financial instrument. The Company manages the market risk by using derivatives for hedging purposes, and then monitoring the effectiveness of the hedges.
Reclassifications
Certain reclassifications have been made to the 2002 financial statements to conform to the 2003 presentation.
The Peoples BancTrust Company, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
Recently Issued Accounting Standards
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34. FIN 45 clarifies the requirements of SFAS No. 5, Accounting for Contingencies, relating to the guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. The disclosure provisions of the Interpretation are effective for financial statements that end after December 15, 2002. However, the provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002, irrespective of a guarantor’s year-end. (See Note 17, Financial Instruments with Off-Balance-Sheet Risk, and Note 18, Fair Value of Financial Instruments, in the Notes to Consolidated Financial Statements, for additional discussion of the Company’s financial guarantees as of December 31, 2003.) The initial adoption of this standard did not have an impact on the financial condition or results of operations. The provisions of this standard did not have a material impact on operations of the Company.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, which amends SFAS No. 123, Accounting for Stock-Based Compensation. SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. The transition guidance and annual disclosure provisions of SFAS 148 are effective for fiscal years ending after December 15, 2002. Disclosures required by this standard are in Note 1, Summary of Significant Accounting Policies-Stock Based Compensation, in the Notes to Consolidated Financial Statements. The transition rules of this standard are not applicable since the Company continues to account for stock-based compensation under the guidance of APB Opinion 25. See Note 19, Stock Option Plan, in the Notes to Consolidated Financial Statements, for further discussion of the Company’s stock based plans.
In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities. FIN 46 defines a variable interest entity (“VIE”) as a corporation, partnership, trust, or any other legal structure used for business purposes that has: (a) an insufficient amount of equity to permit the entity to finance its activities, without additional subordinated financial support from other parties; or (b) a group of equity holders that lack the direct or indirect ability to make decisions about an entity’s activities through voting rights or similar rights; or (c) a group of equity holders who are not obligated to absorb the expected losses of the entity or the right to receive the expected residual returns of the entity. FIN 46 requires a VIE to be consolidated by an investor company if the investor company, regardless of voting interests, is subject to a majority (greater than 50 percent) of the risk of the expected losses from the VIE’s activities or entitled to receive a majority (greater than 50 percent) of the VIE’s expected losses from the VIE’s activities or entitled to receive a majority (greater than 50 percent) of the VIE’s expected residual returns or both. Prior to FIN 46, a partially-owned entity was only consolidated into the investor company’s consolidated financial statements if it was controlled by the investor company through voting interests.
In December 2003, the FASB issued a revision of FIN 46. The Revised Interpretation codifies both the proposed modifications and other decisions previously issued through certain FASB Staff Positions (FSPs) and supercedes the original Interpretation to include: (1) deferring the effective
The Peoples BancTrust Company, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
date of the Interpretation’s provisions for certain variable interests, (2) providing additional scope exceptions for certain other variable interests, (3) clarifying the impact of troubled debt restructurings on the requirement to reconsider (a) whether an entity is a VIE or (b) which party is the primary beneficiary of a VIE, and (4) revising Appendix B of the Interpretation to provide additional guidance on what constitutes a variable interest. The revised Interpretation is effective for financial statements of periods ending after March 15, 2004. Entities which previously adopted the provisions of the original Interpretation have the option of continuing to apply those provisions until the effective date of the Revised Interpretation or applying the provisions of the Revised Interpretation at an earlier date. The provisions of the Revised Interpretation will not change the accounting treatment applicable to the Company under the provisions of the original Interpretation.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. The Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The Statement is effective for contracts entered into or modified after June 30, 2003, with certain exceptions, and for hedging relationships designated after June 30, 2003. In addition, the provisions of the statement, with certain exceptions, were required to be applied prospectively. The initial implementation of the Statement did not have a material affect on the Company’s consolidated financial position or consolidated results of operations and management does not anticipate any such impact in the future.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement provides new rules on the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. Such financial instruments include mandatorily redeemable shares, instruments that require the issuer to buy back some of its shares in exchange for cash or other assets, or obligations that can be settled with shares, the monetary value of which is fixed. Most of the guidance in SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 30, 2003. The initial implementation of the Statement did not have a material affect on the Company’s consolidated financial position or consolidated results of operations and management does not anticipate any such impact in the future.
In December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers’ Disclosures about Pension and Postretirement Benefits. This statement requires additional disclosures about the assets, obligations, and cash flows of defined benefit pension and postretirement plans, as well as the expense recorded for such plans. As of December 31, 2003, the Company had disclosed the required elements related to its defined benefit pension plans in Note 12 to these consolidated financial statements.
In December 2003, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position (“SOP”) 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer. This SOP addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. It includes such loans acquired in purchase business combinations and applies to all nongovernmental entities, including not-for-profit organizations. This SOP does not apply to loans originated by the
The Peoples BancTrust Company, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
entity. This SOP limits the yield that may be accreted (accretable yield) to the excess of the investor’s estimate of undiscounted expected principal, interest, and other cash flows (cash flows expected at acquisition to be collected) over the investor’s initial investment in the loan. This SOP requires that the excess of contractual cash flows over cash flows expected to be collected (nonaccretable difference) not be recognized as an adjustment of yield, loss accrual, or valuation allowance. This SOP prohibits “carrying over” or creation of valuation allowances in the initial accounting of all loans acquired in a transfer that are within the scope of this SOP. The prohibition of the valuation allowance carryover applies to the purchase of an individual loan, a pool of loans, a group of loans, and loans acquired in a purchase business combination. This SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. The changes required by this SOP are not expected to have a material impact on results of operations, financial position, or liquidity of the Company.
2. Restricted Cash Balances
Aggregate reserves in the form of deposits with the Federal Reserve Bank of approximately $12,433,000 and $10,797,000 were maintained to satisfy federal regulatory requirements at December 31, 2003 and 2002, respectively.
3. Capital and Preferred Stock
The Company declared a 10 percent stock dividend in 2001. The dividends were payable on June 15, 2001 to stockholders of record on June 7, 2001. Basic and diluted earnings per share have been restated for all periods presented to reflect the stock dividends. Stock options have also been restated to reflect the stock dividends.
The Company is authorized to issue 1,000,000 shares of preferred stock, par value $0.10 per share, which have been designated as Non-cumulative Non-voting Directors’ Preferred Stock, Series A. No preferred stock is outstanding at either December 31, 2003 or 2002.
The Peoples BancTrust Company, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
4. Securities
The amortized cost and approximate market values of available-for-sale securities at December 31, 2003 and 2002 are as follows:
The amortized cost and approximate market value of available-for-sale securities at December 31, 2003, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
The Peoples BancTrust Company, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
Included within corporate and other securities are $772,249 and $1,753,970 in marketable equity securities at December 31, 2003 and 2002, respectively. Also included within corporate and other securities are $2,717,300 and $3,426,500 of Federal Home Loan Bank stock at December 31, 2003 and 2002, respectively, and $635,400 of Federal Reserve Bank stock at both December 31, 2003 and 2002.
The following table reflects BancTrust’s investments’ gross unrealized losses and market value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2003.
The securities above consist of government agency debentures and mortgage-backed securities. Because of the creditworthiness of the issuers and because the future direction of interest rates is unknown, the impairments are deemed to be temporary.
Gross gains of $1,207,961, $785,614, and $843,763, and gross losses of $139,263, $23,482, and $8,195 were realized on the sales of debt securities for 2003, 2002, and 2001, respectively.
Securities with a par value of approximately $146,205,000 and $127,341,000 were pledged as collateral for public funds deposits and repurchase agreements at December 31, 2003 and 2002, respectively.
The Peoples BancTrust Company, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
5. Loans
The major categories of loans at December 31, 2003 and 2002 are as follows:
The Bank’s lending is concentrated throughout Dallas, Autauga, Butler, Bibb, Elmore, Shelby, Tallapoosa, Lee, and Tuscaloosa counties in Alabama; the repayment of these loans is, in part, dependent on the economic conditions in this region of the state. Management does not believe the loan portfolio contains concentrations of credit risk either geographically, or by borrower, which would expose the Bank to unacceptable amounts of risk. The above loans included agricultural loans totaling approximately $3,808,000 and $8,253,000 for 2003 and 2002, respectively. Management continually evaluates the potential risk in this segment of the portfolio in determining the adequacy of the allowance for possible loan losses.
The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank, upon extension of credit is based on management’s credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, residential real estate and income-producing commercial properties. No additional credit risk exposure relating to outstanding loan balances exists beyond the amounts shown in the consolidated balance sheets as of December 31, 2003.
Loans on which the accrual of interest has been discontinued or reduced amounted to approximately $14,128,000, $7,308,000, and $5,802,000 for 2003, 2002, and 2001, respectively. If these loans had been current throughout their terms, interest income would have increased approximately $554,000, $572,000, and $349,000 in 2003, 2002, and 2001, respectively.
The Peoples BancTrust Company, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
Changes in the allowance for loan losses were as follows:
6. Bank Premises and Equipment
Bank premises and equipment and accumulated depreciation at December 31, 2003 and 2002 are summarized as follows:
The Peoples BancTrust Company, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
7. Goodwill and Other Intangible Assets
Upon adoption of SFAS 142 on January 1, 2002, the Company ceased amortizing its goodwill, which decreased noninterest expense and increased net income in 2002 as compared to 2001 and prior periods. The following table shows the pro forma effect of applying SFAS 142 to the 2002 and 2001 periods:
The Company has amortizable finite-lived intangible assets capitalized on its balance sheet in the form of core deposits and other intangibles. Intangible assets (including goodwill) at December 31, 2003 and 2002 are as follows:
The Peoples BancTrust Company, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
Amortization expense on finite-lived intangible assets totaled approximately $281,000, $232,000, and $318,000 for 2003, 2002, and 2001, respectively. Aggregate amortization expense of currently recorded core deposits and other intangibles is expected to be approximately $209,000 for the year ended December 31, 2004 and $207,000 for each of the years ended December 31, 2005 through December 31, 2007.
8. Derivatives
During 2002, the Company entered into an interest rate swap in an effort to mitigate exposure to fluctuations in the fair market value of a fixed rate borrowing. Pursuant to the agreement, the Company will receive payment from its counterparty for interest it is being charged on a $12,000,000 loan from the Federal Home Loan Bank of Atlanta (FHLB), which bears an interest rate of 6.85 percent. In turn, on a specified day each calendar quarter, the Company will pay its counterparty an amount equal to the one month London Inter-Bank Offering Rate (LIBOR) plus 2.61 percent.
As allowed by SFAS 133, the interest rate swap qualifies for treatment under the short-cut method of accounting; therefore, fluctuations in the fair value of the interest rate swap will be fully offset by fluctuations in the fair value of the underlying debt and have no effect on the results of operations of the Company.
9. Deposits
Certificates of deposit of less than $100,000 totaled $152,114,563 at December 31, 2003, while certificates of deposit of $100,000 or more totaled $134,609,476. At December 31, 2003, the scheduled maturities of certificates of deposit were as follows:
The Peoples BancTrust Company, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
10. Borrowed Funds
Borrowed funds are summarized as follows:
The Company is a member of the Federal Home Loan Bank (FHLB). At December 31, 2003 and 2002, the Company had borrowings of $54,016,961 and $65,470,983, respectively, outstanding with $4,928,224 of additional borrowing capacity with the FHLB at December 31, 2003 based upon current collateral. FHLB has a blanket lien on the Company’s 1-4 family mortgage loans in the amount of the outstanding debt. These borrowings bear interest rates of 1.16 percent to 7.45 percent and mature from 2004 to 2018.
At December 31, 2003, borrowed funds, including the current portion, are scheduled to mature as follows:
At December 31, 2003, the Company has unused lines of credit with unaffiliated financial institutions totaling approximately $49 million.
The Peoples BancTrust Company, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
11. Income Taxes
The Company and the Bank file a consolidated income tax return. The consolidated provision (benefit) for income taxes is as follows:
Temporary differences and carryforwards which give rise to a significant portion of deferred tax assets and liabilities at December 31 are as follows:
The Company did not establish a valuation allowance related to the net deferred tax asset due to taxes paid within the carry-back period being sufficient to offset future deductions resulting from the reversal of these temporary differences.
The Peoples BancTrust Company, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
The provision for income taxes is different from the amount computed by applying the federal income tax statutory rate to income before provision for income taxes. The reasons for this difference, as a percentage of pre-tax income, are as follows:
12. Benefit Plans
The Company has a noncontributory defined benefit pension plan (the Pension Plan) covering substantially all of its employees. The Company’s policy is to contribute annually an amount that can be deducted for federal income tax purposes using the projected unit credit method of actuarial computation. Actuarial computations for financial reporting purposes are also based on the projected unit credit method.
The Peoples BancTrust Company, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
The reconciliation of the beginning and ending balances of the projected benefit obligation and plan assets, as well as disclosure of the Pension Plan’s funded status for the year ended December 31, 2003 and 2002 is as follows:
The accumulated benefit obligation for the plan was $8,611,897 and $7,290,955 at December 31, 2003 and 2002, respectively. The Company assesses its funded position quarterly.
The Peoples BancTrust Company, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
The components of net pension expense for the years ended December 31, 2003, 2002, and 2001 are as follows:
The historical returns of asset categories as weighted by actual allocation produce an average return of 8.48 percent for the 15-year period ending December 31, 2003.
The Company’s estimates of future market returns by asset category are lower than actual long-term historical returns in order to generate a conservative forecast. Overall, the Company projected that the funds could achieve an 8.0 percent net return over time from the above asset allocation strategy.
The pension plan’s weighted-average asset allocations at December 31, 2003, and 2002, by asset category are as follows:
The Peoples BancTrust Company, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
At both December 31, 2003 and 2002, there were no shares of the Company’s common stock included in plan assets.
The pension plan seeks to grow the plan assets in relation to the benefit obligations to participants and beneficiaries, while prudently managing the risk of a decrease in the plan assets relative to those liabilities. The Plan Committee and the Investment Managers maintain the fund in compliance with all applicable laws governing the operation of pension plans, including ERISA and its fiduciary standards.
The assets of the Plan are invested in a broadly diversified portfolio that includes the following asset classes in the respective allocation levels:
During 2001, the Company adopted a non-qualified Executive Supplemental Retirement Plan (the Executive Plan) and entered into agreements with certain executive officers under which the Company will make payments to the executives upon their retirement, or to the executives’ beneficiaries upon their death. The Executive Plan supplements the benefits payable to the executives under the Pension Plan, and is based upon the accumulated after-tax income from specified life insurance contracts. Cash values of the underlying life insurance contracts, of which the Company is the sole beneficiary, were approximately $1,571,000 and $1,493,000 at December 31, 2003 and 2002, respectively. Accrued benefits under the Executive Plan were approximately $183,000 and $55,000 at December 31, 2003 and 2002, respectively.
Effective January 1, 1998, the Company established a qualified employee benefit plan under Section 401(k) of the Internal Revenue Code covering substantially all employees. Employees can contribute up to 15 percent of their salary to the plan on a pre-tax basis and the Company matches participants’ contributions up to the first 1.5 percent of each participant’s salary. The Company’s matching contribution charged to operations related to this plan was approximately $96,000 and $85,000 for the years ended December 31, 2003 and 2002, respectively.
During 1987, the Company established an Employee Stock Ownership Plan (ESOP), a tax-qualified, defined contribution plan which covers substantially all employees. Contributions are determined by the Board of Directors of the Company. Contributions made to the ESOP by the Company totaled $-0- for both the years ended 2003 and 2002. As of December 31, 2003 and 2002, the ESOP holds 80,792 and 88,046 shares of common stock in the Company, respectively.
13. Commitments and Contingencies
The Bank leases certain buildings, equipment and land under noncancelable operating leases which require various minimum annual rentals.
The Peoples BancTrust Company, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
The total minimum rental commitment at December 31, 2003 under the leases is as follows:
The total rental expense was approximately $245,000, $256,000, and $288,000 in 2003, 2002, and 2001, respectively.
The Company is from time to time a defendant in legal actions from normal business activities. Management does not anticipate that the ultimate liability arising from litigation outstanding at December 31, 2003 will have a materially adverse effect on the Company’s financial statements.
14. Related Party Transactions
Certain directors and officers of the Company and its subsidiary bank, including their immediate families and companies in which they are principal owners, were loan customers of the Bank in the ordinary course of business. Such loans had outstanding balances of $6,879,312 and $7,112,301 at December 31, 2003 and 2002, respectively. A summary of the loan activity with these related parties during 2003 is shown below:
During 2003, 2002, and 2001, the Company paid legal fees of approximately $105,000, $121,000, and $162,000, respectively, to a law firm in which a partner of the firm serves on the board of directors of the Company.
During 2002, the Company entered into a contractual agreement for consulting services with a former executive officer and director. Amounts contractually due in 2004 through 2006 are $125,000, $125,000, and $100,000, respectively.
The Peoples BancTrust Company, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
15. Earnings Per Share
The following table reflects the reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation:
The Peoples BancTrust Company, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
16. Regulatory Matters
The approval of regulatory authorities is required if the total of all the dividends declared by the Bank in any calendar year exceeds the Bank’s net income as defined for that year combined with its retained net income for the preceding two calendar years. When necessary, the Bank obtained regulatory approval as applicable for the payment of dividends in 2003, 2002, and 2001.
The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2003, that the Company meets all capital adequacy requirements to which it is subject.
As of December 31, 2003, the most recent notification from the Federal Deposit Insurance Corporation categorized the Company as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company must maintain minimum total risk-based, Tier I risk-based, and Tier I capital ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution’s category.
The Peoples BancTrust Company, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
The Company’s and the Bank’s actual capital amounts and ratios are also presented in the table.
17. Financial Instruments With Off-Balance-Sheet Risk
The Bank is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. The contract amount of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments.
The Peoples BancTrust Company, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
The Bank’s exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank had approximately $53,562,000 and $50,519,000 in commitments to extend credit at December 31, 2003 and 2002, respectively. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Bank upon extension of credit is based on management’s credit evaluation of the customer. Collateral held varies, but may include certificates of deposit, marketable securities, real estate, and other collateral.
Irrevocable standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The collateral varies but may include certificates of deposit, marketable securities, real estate, and other collateral for those commitments for which collateral is deemed necessary. The Bank had approximately $22,187,000 and $18,527,000 in irrevocable standby letters of credit at December 31, 2003 and 2002, respectively.
18. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and Cash Equivalents
For those short-term instruments, the carrying amount is a reasonable estimate of fair value.
Securities Available for Sale
For debt securities and marketable equity securities, fair values are based on quoted market prices or dealer quotes.
Loans
The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
Deposits
The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.
The Peoples BancTrust Company, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
Securities Sold Under Agreements to Repurchase
The carrying amount is a reasonable estimate of fair value.
FHLB Borrowings
The fair value of this debt is estimated based on rates currently available to the Company for borrowings with similar terms and remaining maturities.
Derivatives
Interest rate swaps are recorded on the balance sheet at fair value, based on dealer quoted prices.
Commitments to Extend Credit and Irrevocable Standby Letters of Credit
The value of these unrecognized financial instruments is estimated based on the deferred fee income associated with the commitments. Such fee income is not material to the Company’s financial statements at December 31, 2003 and 2002 and, therefore, the fair value of these commitments is not presented.
The estimated fair values of the Company’s financial instruments at December 31, 2003 and 2002 are as follows:
The Peoples BancTrust Company, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
19. Stock Option Plan
As of December 31, 2003, the Company had one stock option plan (the Plan) under which 550,000 shares of common stock have been reserved for issue to certain employees and officers through incentive stock options and board members through nonqualified stock options. Options granted under the Plan may have vesting provisions based upon continued service from the date of grant. Options issued under the Plan will have an exercise price not less than fair market value of the stock at the date of grant. Upon a change in control, as defined in the Plan, options become fully exercisable.
A summary of the status of the Company’s plan as of December 31, 2003, 2002, and 2001, and changes during the years ending on those dates is presented below:
The Peoples BancTrust Company, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
The following table summarizes information about the Plan’s stock options at December 31, 2003:
20. Board Resolution
Commencing in December 2002, in response to regulatory examinations of the holding company, the Company’s board of directors adopted resolutions addressing: (1) plans for the evaluation and management of credit quality processes; (2) the prohibition of certain capital transactions without the prior approval of the Federal Reserve Bank; and (3) the adoption of restrictions on the amount of classified loans as a percentage of the Company’s future regulatory capital calculations.
The Peoples BancTrust Company, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
21. The Peoples BancTrust Company, Inc. (Parent Company Only)
Presented below and on the following pages are the financial statements of The Peoples BancTrust Company, Inc. (parent company only).
BALANCE SHEETS
December 31, 2003 and 2002
* Eliminated in consolidation
The Peoples BancTrust Company, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
STATEMENTS OF INCOME AND RETAINED EARNINGS
For the Years Ended December 31, 2003, 2002, and 2001
* Eliminated in consolidation
The Peoples BancTrust Company, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2003, 2002, and 2001
* Eliminated in consolidation