UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the transition period from to
COMMISSION FILE NUMBER 0-28936
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GOLD BANC CORPORATION, INC.
(Exact name of registrant as specified in its charter)
KANSAS 48-1008593
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11301 NALL AVENUE, LEAWOOD, KANSAS 66211
(Address of principal executive offices) (Zip code)
(913) 451-8050
(Registrant's telephone number, including area code)
------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
CLASS OUTSTANDING AT AUGUST 5, 2003
----- ---------------------------------
Common Stock, $1.00 par value 38,930,882
GOLD BANC CORPORATION, INC.
INDEX TO 10-Q FOR THE QUARTERLY
PERIOD ENDED JUNE 30, 2003
Page
PART I FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 1: FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Balance Sheets at June 30, 2003, and December 31, 2002
(unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Earnings-Three Months ended June 30, 2003
and June 30, 2002 (restated)(unaudited). . . . . . . . . . . . . . . 3
Consolidated Statements of Earnings-Six Months ended June 30, 2003
and June 30, 2002 (restated)(unaudited). . . . . . . . . . . . . . . 4
Consolidated Statements of Stockholders' Equity and Comprehensive
Income For the Six Months Ended June 30, 2003, and June 30, 2002
(restated) (unaudited) . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows For the Six Months ended June
30, 2003 and June 30, 2002 (restated)(unaudited) . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . 7
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . 13
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . . . 26
ITEM 4: CONTROLS AND PROCEDURES. . . . . . . . . . . . . . . . . . . . . . . 27
PART II OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . 28
ITEM 1: LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . 28
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS. . . . . . . . . . . . . . 28
ITEM 3: DEFAULTS UPON SENIOR SECURITIES. . . . . . . . . . . . . . . . . . . 28
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. . . . . . . . . 28
ITEM 5: OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . 28
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . 29
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
i
PART I FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
GOLD BANC CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
JUNE 30, 2003 DECEMBER 31, 2002
--------------- -------------------
ASSETS
Cash and due from banks $ 94,000 $ 96,215
Federal funds sold and interest-bearing deposits 98,359 193
--------------- -------------------
Total cash and cash equivalents 192,359 96,408
--------------- -------------------
Investment securities:
Held-to-maturity 173,526 201,563
Available-for-sale 712,236 531,037
Trading 2,357 3,485
--------------- -------------------
Total investment securities 888,119 736,085
--------------- -------------------
Mortgage loans held for sale, net 21,585 25,134
Loans, net 2,864,338 2,705,217
Allowance for loan losses (33,381) (33,439)
Premises and equipment, net 67,066 69,587
Goodwill, net 35,643 35,643
Intangible assets, net 6,462 6,835
Cash surrender value of bank owned life insurance 78,448 56,501
Accrued interest and other assets 48,827 113,752
--------------- -------------------
Total assets $ 4,169,466 $ 3,811,723
=============== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 2,962,173 $ 2,716,569
Securities sold under agreements to repurchase 144,450 153,595
Federal funds purchased and other short-term borrowings 1,117 25,658
Subordinated debt and guaranteed preferred beneficial interests in
Company's debentures 113,365 113,137
Long-term borrowings 684,395 548,848
Accrued interest and other liabilities 23,445 26,142
--------------- -------------------
Total liabilities 3,928,945 3,583,949
--------------- -------------------
Stockholders' equity:
Preferred stock, no par value; 50,000,000 shares
authorized, no shares issued - -
Common stock, $1.00 par value; 50,000,000 shares
authorized
44,218,092 issued at June 30, 2003 and
44,188,384 issued at December 31, 2002 44,218 44,188
Additional paid-in capital 118,410 118,257
Retained earnings 119,018 107,392
Accumulated other comprehensive income, net 5,427 3,489
1
Unearned compensation (13,432) (12,432)
--------------- -------------------
273,641 260,894
Less treasury stock - 4,721,510 shares at June 30, 2003
and December 31, 2002 (33,120) (33,120)
--------------- -------------------
240,521 227,774
--------------- -------------------
Total liabilities and stockholders' equity $ 4,169,466 $ 3,811,723
=============== ===================
See accompanying notes to consolidated financial statements
2
GOLD BANC CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND 2002
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
JUNE 30, 2003 JUNE 30 2002
--------------- -------------
(Restated)
Interest Income:
Loans, including fees $ 43,239 $ 41,077
Investment securities 9,595 8,625
Other 533 432
--------------- -------------
53,367 50,134
--------------- -------------
Interest Expense:
Deposits 15,273 16,069
Borrowings and other 8,697 8,632
--------------- -------------
23,970 24,701
--------------- -------------
Net interest income 29,397 25,433
Provision for loan losses 3,025 4,920
--------------- -------------
Net interest income after provision for loan losses 26,372 20,513
--------------- -------------
Other income:
Service fees 4,354 4,550
Investment trading fees and commissions 1,414 1,172
Net gains on sale of mortgage loans 773 142
Net securities gains 976 2,825
Gain on sale of branch facilities 1,179 2,381
Information technology services 3,381 4,780
Bank-owned life insurance 1,038 794
Other 1,026 224
--------------- -------------
14,141 16,868
--------------- -------------
Other expense:
Salaries and employee benefits 14,408 13,329
Net occupancy expense 1,927 1,538
Depreciation expense 1,717 1,537
Core deposit intangible amortization 188 125
Losses resulting from misapplication of bank funds - 78
Information technology services 2,317 3,317
Other 9,681 7,580
--------------- -------------
30,238 27,504
--------------- -------------
Earnings before income tax 10,275 9,877
Income tax expense 2,990 2,837
Net earnings $ 7,285 $ 7,040
=============== =============
Net earnings per share-basic and diluted $ 0.19 $ 0.21
=============== =============
See accompanying notes to consolidated financial statements.
3
GOLD BANC CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
JUNE 30, 2003 JUNE 30 2002
--------------- -------------
(Restated)
Interest Income:
Loans, including fees $ 85,703 $ 79,943
Investment securities 19,531 16,962
Other 1,002 1,027
--------------- -------------
106,236 97,932
--------------- -------------
Interest Expense:
Deposits 30,758 31,466
Borrowings and other 16,544 17,072
--------------- -------------
47,302 48,538
--------------- -------------
Net interest income 58,934 49,394
Provision for loan losses 6,575 9,955
--------------- -------------
Net interest income after provision for loan losses 52,359 39,439
--------------- -------------
Other income:
Service fees 8,551 8,520
Investment trading fees and commissions 2,891 2,568
Net gains on sale of mortgage loans 1,517 838
Net securities gains 973 3,426
Gain on sale of branch facilities 1,179 2,381
Information technology services 5,632 9,595
Bank-owned life insurance 1,947 1,897
Other 2,138 1,473
--------------- -------------
24,828 30,698
--------------- -------------
Other expense:
Salaries and employee benefits 29,148 25,277
Net occupancy expense 3,800 3,016
Depreciation expense 3,462 3,046
Core deposit intangible amortization 375 250
Losses resulting from misapplication of bank funds - 103
Information technology services 3,883 6,488
Other 17,368 14,093
--------------- -------------
58,036 52,273
--------------- -------------
Earnings before income tax 19,151 17,864
Income tax expense 5,157 4,767
--------------- -------------
Net earnings $ 13,994 $ 13,097
=============== =============
Net earnings per share-basic and diluted $ 0.37 $ 0.39
=============== =============
4
GOLD BANC CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2003, AND JUNE 30, 2002 (RESTATED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
ACCUMULATED
ADDITIONAL OTHER
PREFERRED COMMON PAID-IN RETAINED COMPREHENSIVE UNEARNED TREASURY
STOCK STOCK CAPITAL EARNINGS INCOME (LOSS) COMPENSATION STOCK TOTAL
------ ------ ------- --------- ------------- ------------- -------- ---------
Balance at December 31, 2001 $ - 38,352 76,584 83,987 (8) (3,440) (30,935) $164,540
Net earnings for the six months ended
June 30, 2002 - - - 13,097 - - - 13,097
Change in unrealized gain on
available for-sale securities - - - - 4,555 - - 4,555
------ ------ ------- --------- ------------- ------------- -------- ---------
Total comprehensive income
for the six months ended June 30, 2002 - - - 13,097 4,555 - - 17,652
Exercise of 79,619 stock options - 80 150 - - - - 230
Purchase of 304,500 shares of
treasury stock - - - - - - (2,185) (2,185)
Increase in unearned compensation - - - - - (6,243) - (6,243)
Dividends paid ($0.04 per common share) - - - (1,348) - - - (1,348)
------ ------ ------- --------- ------------- ------------- -------- ---------
Balance at June 30, 2002 $ - 38,432 76,734 95,736 4,547 (9,683) (33,120) $172,646
====== ====== ======= ========= ============= ============= ======== =========
Balance at December 31, 2002 $ - 44,188 118,257 107,392 3,489 (12,432) (33,120) $227,774
Net earnings for the six months ended
June 30, 2003 - - - 13,994 - - - 13,994
Change in unrealized gain on
available for-sale securities - - - - 1,938 - - 1,938
------ ------ ------- --------- ------------- ------------- -------- ---------
Total comprehensive income
for the six months ended June 30, 2003 - - - 13,994 1,938 - - 15,932
Exercise of 29,708 stock options - 30 153 - - - - 183
Increase in unearned compensation - - - - - (1,000) - (1,000)
Dividends paid ($0.06 per common share) - - - (2,368) - - - (2,368)
------ ------ ------- --------- ------------- ------------- -------- ---------
Balance at June 30, 2003 $ - 44,218 118,410 119,018 5,427 (13,432) (33,120) $240,521
====== ====== ======= ========= ============= ============= ======== =========
See accompanying notes to consolidated financial statements.
5
GOLD BANC CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(IN THOUSANDS)
(UNAUDITED)
JUNE 30, 2003 JUNE 30, 2002
--------------- ---------------
(RESTATED)
Cash flows from operating activities:
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,994 $ 13,097
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities:
Provision for loan losses. . . . . . . . . . . . . . . . . . . . . . . 6,575 9,955
Gains on sales of securities . . . . . . . . . . . . . . . . . . . . . (973) (3,426)
Amortization of investment securities premiums, net of accretion . . . 1,801 (320)
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,462 3,046
Amortization of intangible assets. . . . . . . . . . . . . . . . . . . 375 250
Gain on sale of mortgage loans held for sale . . . . . . . . . . . . . (1,517) (838)
Increase in cash surrender value of bank owned life insurance. . . . . (1,947) (1,897)
Net decrease in trading securities . . . . . . . . . . . . . . . . . . 1,128 2,459
Proceeds from sale of loans held for sale. . . . . . . . . . . . . . . 130,498 51,297
Origination of loans held for sale, net of repayments. . . . . . . . . (125,432) (55,623)
Other changes:
Accrued interest receivable and other assets . . . . . . . . . . . . 64,925 11,754
Accrued interest payable and other liabilities . . . . . . . . . . . (1,933) 5,345
--------------- ---------------
Net cash provided by operating activities. . . . . . . . . . . . . . . $ 90,954 $ 35,099
--------------- ---------------
Cash flows from investing activities:
Net increase in loans. . . . . . . . . . . . . . . . . . . . . . . . . $ (165,754) $ (279,258)
Principal collections and proceeds from sales and maturities of
available-for-sale securities. . . . . . . . . . . . . . . . . . . . 103,314 336,379
Purchases of available-for-sale securities . . . . . . . . . . . . . . (283,878) (337,504)
Principal collections and proceeds from sales and maturities of held-
to-maturity securities . . . . . . . . . . . . . . . . . . . . . . . 10,529 -
Purchases of held-to-maturity securities . . . . . . . . . . . . . . . 17,219 (9,021)
Purchase of bank owned life insurance policy . . . . . . . . . . . . . (20,000) -
Net additions to premises and equipment. . . . . . . . . . . . . . . . (941) (15,441)
--------------- ---------------
Net cash used in investing activities. . . . . . . . . . . . . . . . . $ (339,511) $ (304,845)
--------------- ---------------
Cash flows from financing activities:
Increase in deposits . . . . . . . . . . . . . . . . . . . . . . . . . $ 245,604 $ 271,212
Net decrease in short-term borrowings. . . . . . . . . . . . . . . . . (33,686) (7,663)
Proceeds from FHLB & long-term borrowings. . . . . . . . . . . . . . . 134,775 25,797
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . 183 230
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . - (2,185)
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,368) (1,348)
--------------- ---------------
Net cash provided by financing activities. . . . . . . . . . . . . . 344,508 286,043
--------------- ---------------
Increase in cash and cash equivalents. . . . . . . . . . . . . . . . . 95,951 16,561
Cash and cash equivalents, beginning of period . . . . . . . . . . . . 96,408 73,773
--------------- ---------------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . $ 192,359 $ 90,334
=============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . $ 49,296 $ 48,586
Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . 7,682 1,717
See accompanying notes to consolidated financial statements
6
GOLD BANC CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with the instructions for Form 10-Q. The consolidated financial
statements should be read in conjunction with the audited financial statements
included in Amendment No. 1 to our 2002 Annual Report on Form 10-K/A filed with
the Securities and Exchange Commission on April 15, 2003 (the "2002 Annual
Report").
The consolidated financial statements include the accounts of Gold Banc
Corporation, Inc. and its subsidiary banks and companies. All significant
inter-company balances and transactions have been eliminated.
The consolidated financial statements as of June 30, 2003 and for the three
and six months ended June 30, 2003 and 2002 are unaudited but include all
adjustments (consisting only of normal recurring adjustments) which we consider
necessary for a fair presentation of our financial position and results of our
operations and cash flows for those periods. The consolidated statements of
earnings for the three and six months ended June 30, 2003 are not necessarily
indicative of the results to be expected for the entire year.
2. RESTATEMENT AND IMPACT ON EARNINGS
As disclosed in our 2002 Annual Report, we have restated our financial
statements for the years ended December 31, 2001 and 2000. The 2002 Annual
Report included all of the adjustments relating to the restatement for such
prior periods including those required by Staff Accounting Bulletin 99. We also
filed amended Form 10-Qs with respect to the first two quarters of 2002 to
reflect the restatement of the financial information presented therein. We
intend to file an amended Form 10-Q for the third quarter of 2002 in the near
future. Based on discussions with the staff of the SEC, we do not plan to file
amended Form 10-Ks or Form 10-Qs for 2001 or 2000. The accompanying
consolidated financial information for the three and six months ended June 30,
2002 are also restated for the effect of the adjustments described above.
The restatement principally related to certain transactions totaling
approximately $136,000, $1.1 million and $1.3 million in 2002, 2001 and 2000,
respectively, in which Michael W. Gullion, our former Chief Executive Officer,
diverted funds of Gold Bank-Kansas for personal use, as well as the use of his
company credit card for personal use and improper reimbursement of personal
expenses charged to his personal credit card. The transactions were discovered
by an internal investigation conducted by our Audit Committee, with assistance
from its independent legal counsel and forensic accountants. For a detailed
discussion of the internal investigation and the transactions discovered
therefrom, see "Item 13 - Certain Relationships and Related Transactions" in the
2002 Annual Report.
The effect of the restatement is as follows:
RESTATEMENTS TO NET EARNINGS
AS PREVIOUSLY REPORTED
--------------------------------------------------
% CHANGE
PRE-TAX TAX EFFECT AFTER TAX TO REPORTED
--------- ------------ ----------- ------------
(DOLLARS IN THOUSANDS)
Three Months Ended June 30, 2002 $ (255) $ (183) $ (72) 1.01%
Six Months Ended June 30, 2002 $ (488) $ (366) $ (122) 0.92%
7
The impact of these amounts is as follows:
BASIC EARNINGS PER SHARE DILUTED EARNINGS PER SHARE
-------------------------- --------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED
------------ ------------ ------------ ------------
Three Months Ended June 30, 2002 $ 0.21 $ 0.21 $ 0.21 $ 0.21
Six Months Ended June 30, 2002 . $ 0.39 $ 0.39 $ 0.39 $ 0.39
3. EARNINGS PER COMMON SHARE
Basic earnings per share is based upon the weighted average number of
common shares outstanding during the periods presented. Diluted earnings per
share includes the effects of all potentially dilutive common shares outstanding
during each period. Employee stock options are our only potential common share
equivalent.
The shares used in the calculation of basic and diluted income per share
for the three and six months ended June 30, 2003 and June 30, 2002 are shown
below (in thousands):
FOR THE THREE FOR THE SIX MONTHS
MONTHS ENDED ENDED
JUNE 30 JUNE 30
-------------------- ----------------------
2003 2002 2003 2002
---------- -------- ----------- ---------
(RESTATED) (RESTATED)
Weighted average common shares outstanding. . . . . . . . 39,496 33,199 39,486 33,080
Unallocated ESOP Shares . . . . . . . . . . . . . . . . . (1,546) (947) (1,505) (857)
---------- -------- ----------- ---------
Total basic average common shares outstanding . . . . . . 37,950 32,252 37,982 32,924
Stock options . . . . . . . . . . . . . . . . . . . . . . 178 225 191 156
---------- -------- ----------- ---------
Total diluted weighted average common shares outstanding. 38,128 32,477 38,173 33,379
========== ======== =========== =========
We account for employee options under the intrinsic-value method prescribed
by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" with pro forma disclosures of net earnings and earnings per share, as
if the fair value method of accounting defined in SFAS No. 123 "Accounting for
Stock Based Compensation" had been applied. SFAS No. 123 establishes a fair
value based method of accounting for stock based employee compensation plans.
Under the fair value 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 SFAS No. 123, our net income and net
income per share would have decreased as reflected in the following pro forma
amounts (in thousands, except per share amounts):
FOR THE THREE MONTHS ENDED
JUNE 30, 2003 JUNE 30, 2002
-------------- --------------
Net earnings as reported $ 7,285 $ 7,040
Deduct: Total stock based employee
compensation expense determined
under fair valued based method for all
awards, net of related tax effects 107 75
-------------- --------------
Pro forma net earnings $ 7,178 $ 5,982
============== ==============
Earnings per share:
Basic-as reported $ 0.19 $ 0.21
Basic-pro forma 0.19 0.21
Diluted-as reported 0.19 0.21
Diluted-pro forma 0.19 0.21
8
FOR THE SIX MONTHS ENDED
JUNE 30, 2003 JUNE 30, 2002
-------------- --------------
Net earnings as reported $ 13,994 $ 13,077
Deduct: Total stock based employee
compensation expense determined
under fair valued based method for all
awards, net of related tax effects 182 150
-------------- --------------
Pro forma net earnings $ 13,812 $ 12,947
============== ==============
Earnings per share:
Basic-as reported $ 0.37 $ 0.39
Basic-pro forma 0.36 0.39
Diluted-as reported 0.37 0.39
Diluted-pro forma 0.36 0.39
4. INTANGIBLE ASSETS AND GOODWILL
The following table presents information about our intangible assets which
are being amortized in accordance with Statement of Financial Accounting
Standards (SFAS) No. 142.
JUNE 30, 2003 JUNE 30, 2002
---------------------- ----------------------
(RESTATED)
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------- ------------ -------- -------------
(IN THOUSANDS)
Amortized intangible assets:
Core deposit premium. . . . . . . . . . . . . . . . . . $ 7,508 $ 1,046 $ 4,156 $ 293
Aggregate amortization expense for the six months ended. - $ 375 - $ 250
Estimated amortization expense (in thousands) for the years ending
December 31:
2003. . . . . . . . . . . . . . . . . . $751
2004. . . . . . . . . . . . . . . . . . $751
2005. . . . . . . . . . . . . . . . . . $751
2006. . . . . . . . . . . . . . . . . . $751
2007. . . . . . . . . . . . . . . . . . $751
Goodwill at June 30, 2003 was $35.6 million, which was the same amount at
December 31, 2002. There was no impairment to goodwill recorded for the three or
six months ended June 30, 2003.
During 2002 and the first six months of 2003, CompuNet Engineering did not
comply with certain Federal Reserve regulations regarding the sources of its
revenue. As a result, we may be required under the Bank Holding Company Act to
divest our interest in CompuNet Engineering. In the event that CompuNet
Engineering is sold for less than the carrying value of its associated assets
and goodwill, we will be required to record a goodwill impairment charge. The
goodwill associated with CompuNet Engineering was $4.6 million at June 30, 2003.
5. COMPREHENSIVE INCOME
Comprehensive income was $10.0 million and $11.8 million for the three
months ended June 30, 2003 and June 30, 2002, respectively. Comprehensive income
was $15.9 million and $17.7 million for the six months ended June 30, 2003 and
June 30, 2002, respectively. The difference between comprehensive income and
net earnings presented in the consolidated statements of earnings is attributed
solely to unrealized gains and losses on available-for-sale securities. During
the three months ended June 30, 2003 and June 30, 2002, we recorded
9
reclassification adjustments of $622,000 and $1.8 million, respectively,
associated with gains included in net earnings for such periods. During the six
months ended June 30, 2003 and June 30, 2002, we recorded reclassification
adjustments of $624,000 and $2.2 million, respectively, associated with gains
included in net earnings for such periods.
6. MERGERS, ACQUISITIONS, DISPOSITIONS AND CONSOLIDATIONS
SALE OF GUYMON BRANCH. On December 24, 2002, Gold Bank-Oklahoma entered
into an agreement for the sale of its Guymon, Oklahoma branch location to City
National Bank and Trust Company of Guymon, Oklahoma. The deposits and loans of
this branch were approximately $36 million and $8 million, respectively, as of
March 31, 2003. The sale of this branch closed on April 11, 2003, following
receipt of regulatory approvals. In connection with the sale of the Guymon
branch location, the Company recorded a gain of approximately $845 thousand. We
believe the sale of this branch will not have a significant impact on our
capital and liquidity or operations.
SALE OF WAKITA & HELENA BRANCHES. On March 4, 2003, Gold Bank-Oklahoma
entered into an agreement for the sale of its Helena and Wakita, Oklahoma branch
locations to Farmers Exchange Bank of Cherokee, Oklahoma. The aggregate
deposits and loans of these Gold Bank-Oklahoma branches were approximately $18
million and $3 million, respectively, at the closing date. The sale of these
branches closed on May 30, 2003 upon receipt of regulatory approvals. In
connection with the sale of these branches, the Company recorded a gain of
approximately $334 thousand. We believe the sale of these branches will not
have a significant impact on our capital and liquidity or operations.
7. DERIVATIVE INSTRUMENTS
In August 2002, we entered into three interest rate swap agreements with an
aggregate notional amount of $82.5 million. Each swap has a notional amount
equal to the outstanding principal amount of the related trust preferred
securities, together with the same payment dates, maturity date and call
provisions as the related trust preferred securities. Under each of the swaps,
we pay interest at a variable rate equal to a spread over 90-day LIBOR, adjusted
quarterly, and we receive a fixed rate equal to the interest that we are
obligated to pay on the related trust preferred securities. The interest rate
swaps are derivative financial instruments and have been designated as fair
value hedges of the trust preferred securities.
During the quarter ended June 30, 2003, we received net cash flows of $700
thousand under these agreements, which was recorded as a reduction of interest
expense on the trust preferred securities. During the six months ended June 30,
2003, we received net cash flows of $1.7 million under these agreements, which
was also recorded as a reduction of interest expense on the trust preferred
securities.
The $28.7 million notional amount swap agreement was called by the
counter-party and terminated on April 7, 2003. The $16.3 million notional
amount swap agreement was called by the counter-party and terminated on June 30,
2003. Under these swap agreements, no payments were due between the parties and
no gain or loss was recognized by us. There are no current plans to replace
these terminated swap agreements. The remaining swap agreement is also callable
by the counter-party prior to its respective maturity date.
8. LEGAL PROCEEDINGS
REGULATORY EXAMINATIONS AND SUPERVISORY ACTIONS
During the first quarter of 2003, the Kansas Office of the State Bank
Commissioner (the "OSBC") and the Federal Reserve Bank of Kansas City (the
"FRB-KC") conducted a joint safety and soundness examination of Gold
Bank-Kansas. The FRB-KC also began a financial holding company examination of
the Company. Concurrently with these examinations, we conducted an internal
investigation that uncovered misappropriations and other improper conduct by our
former CEO, Michael W. Gullion. For additional information relating to Mr.
Gullion's misconduct, see our 2002 Annual Report.
We have received the joint report of examination for Gold Bank-Kansas and
the financial holding company examination report. The "management" and
"composite" CAMELS ratings for Gold Bank-Kansas in the joint report of
examination were less than "satisfactory." Because of these CAMELS ratings, Gold
Bank-Kansas is no longer a "well-managed" financial institution. In addition to
the Gullion misconduct, the report of examination identified noncompliance or
deficiencies by Gold Bank-Kansas in regard to:
- Regulation H (information technology, bank secrecy act, currency
transaction reports, and suspicious activity reporting);
- Section 23A of the Federal Reserve Act (transactions with affiliates);
- Regulation O (loans to officers and directors); and
- Regulation Y and K.S.A. Sec. 17-11-21 (appraisals).
The financial holding company examination report identified noncompliance or
deficiencies by us in regard to:
- Section 23A of the Federal Reserve Act (transactions with affiliates);
- Regulation Y (information security);
- CompuNet's revenues from non-financial data processing activities; and
- Late filing of a regulatory report.
The joint examination report was based upon the condition and management of Gold
Bank-Kansas as of December 31, 2002. The holding company examination report was
based upon the condition and management of the Company as of March 31, 2003.
10
As a result of the examinations, we are subject to the following
restrictions:
- We must provide 30 days prior written notice to the FRB-KC before
adding or replacing any member of our board of directors, employing
any person as a senior executive officer or changing the
responsibilities of any senior executive officer so that the person
would assume a different senior executive officer position.
- We are prohibited from making or contracting to make severance
payments to any director, officer or employee in excess of the
severance benefits we provided to all eligible employees without the
prior written approval of the FRB-KC and the Federal Deposit Insurance
Corporation.
- We are prohibited from making indemnification payments to any
institution-affiliated party to pay or reimburse such person for any
civil money penalty, judgement or legal expenses resulting from any
administrative or civil action instituted by any federal banking
agency.
Also, as a result of the examinations, the OSBC and FRB-KC will take formal
supervisory action against Gold Bank-Kansas and us. The regulators have
recently delivered to us a draft of a written supervisory agreement (a "Written
Agreement") for Gold Bank-Kansas and us intended to address and remediate the
deficiencies identified in the joint report of examination. The proposed
Written Agreement does not prohibit or limit the payment of dividends by Gold
Bank-Kansas or us. It is not a cease and desist order. After the draft has
been reviewed by our directors and the directors of Gold Bank-Kansas, and the
final text has been negotiated with the regulators, we expect to voluntarily
sign the Written Agreement sometime in late August or early September 2003. We
plan to make the final Written Agreement publicly available by filing it with a
Current Report on Form 8-K. Because we have already begun or completed nearly
all the corrective actions set forth in the draft Written Agreement, we believe
that complying with the final supervisory agreement will not have a material
adverse effect upon the conduct of our business operations or our future
earnings or results of operations.
As a financial holding company under the Bank Holding Company Act (the "BHC
Act"), each of our depository institution subsidiaries must remain both
"well-capitalized" and "well-managed" for us to retain our status as a financial
holding company with authority to engage in expanded financial activities.
Because Gold Bank-Kansas has lost its "well-managed" rating, we are not in
compliance with the requirements for financial holding companies under the BHC
Act. We will not be in compliance with the requirements for financial holding
companies until the "management" and "composite" ratings of Gold Bank-Kansas
have been upgraded to "satisfactory" by the FRB and the OSCB.
The FRB-KC has delivered to us a draft of a written agreement (a "BHC
Agreement") under the BHC Act intended to address and remediate the deficiencies
identified in the financial holding company examination report. It also sets
forth corrective steps we must take to restore the well managed rating of Gold
Bank-Kansas and bring us into compliance with the requirements for a financial
holding company. The proposed BHC Agreement requires that we take all the
actions required by the Written Agreement to correct the deficiencies at Gold
Bank-Kansas. It further requries that until the FRB-KC determines that we meet
the requirements for a financial holding company, we may not, directly or
indirectly, engage in an additional activity, or acquire any company under
Section 4(k) of the BHC Act, without prior written approval of the Federal
Reserve. We expect to voluntarily sign the BHC Agreement contemporaneously with
the Written Agreement.
11
Based upon the drafts of the Written Agreement and the BHC Agreement and
the activities we are already taking to correct the deficiencies identified in
the examination reports, we believe that Gold Bank-Kansas will regain its
"well-managed" rating, and that we will remain a financial holding company. For
a discussion of the implications and alternatives if Gold Bank-Kansas does not
regain its "well-managed" rating, see our 2003 first quarter report on Form
10-Q.
9. SUBSEQUENT EVENTS
On May 20, 2003, Gold Bank-Kansas entered into a restitution agreement with
our former Chairman and Chief Executive Officer, Michael W. Gullion. On July
23, 2003, we purchased from an unaffiliated bank a $4 million loan to Mr.
Gullion evidenced by a promissory note collateralized by substantially all of
the shares of common stock of the Company owned by Mr. Gullion. On the same
day, we exercised our option under the restitution agreement to purchase 583,065
shares of our common stock from Mr. Gullion for approximately $6.3 million. The
purchase price of $10.805 per share was calculated in accordance with the
restitution agreement and was equal to the 10-day average closing price of our
common stock on the NASDAQ preceding the date on which the shares were
purchased. We retained the sales proceeds to satisfy Mr. Gullion's obligation
under the note payable that we purchased (aggregating approximately $4.0
million) and to satisfy Mr. Gullion's obligation under the restitution agreement
(aggregating approximately $2.3 million).
As a result of the transaction, we have acquired 583,065 shares of treasury
stock and will record income of approximately $2.3 million in the third quarter
of 2003. We plan to reissue some of these treasury shares in private sales. Two
members of our Board of Directors have purchased an aggregate of 80,000 of these
shares from us at a purchase price of $10.805 per share. On August 1, 2003,
Daniel P. Connealy purchased 10,000 of these shares. On August 5, 2003, William
Randon purchased 70,000 of these shares. In addition, Allen D. Peterson has
agreed to purchase 300,000 of these shares either directly or through an
affiliated entity for $10.805 per share. Resale of these shares will be
restricted for two years in accordance with SEC regulations.
We are currently attempting to negotiate a settlement with Mr. Gullion that
would result in the payment by Mr. Gullion of additional restitution amounts
that we believe he owes us. In addition to the $2.3 million which has been paid
by Mr. Gullion, we are seeking to recover from Mr. Gullion the following:
- $1.1 million for additional amounts that we believe Mr. Gullion
either misappropriated from us or for which he failed to
reimburse us;
- $1.5 million for the costs of investigation into Mr. Gullion's
misconduct;
- $0.5 million of interest on the above items;
- $0.2 million of outstanding loans;
- $3.0 million representing the forfeiture of all cash compensation
paid to Mr. Gullion since January 1, 1998; and
- the forfeiture of all stock options granted to Mr. Gullion since
January 1, 1998.
We are currently attempting to negotiate a settlement with Mr. Gullion that
would result in the repayment by Mr. Gullion of some or all these amounts. In
the event that we are unable to reach a satisfactory settlement with Mr.
Gullion, we intend to initiate legal proceedings against Mr. Gullion for the
payment of such amounts. No assurance can be given, however, that we will be
able to recover such amounts from Mr. Gullion. Mr. Gullion's assets may be
insufficient to pay all of such amounts and he may have statute of limitations
or other defenses to the payment of some of these amounts.
12
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following financial review presents management's discussion and
analysis of our consolidated financial condition and results of operations.
This review highlights the major factors affecting results of operations and any
significant changes in financial condition for the three and six month periods
ended June 30, 2003. This review should be read in conjunction with the
consolidated financial statements and related notes appearing elsewhere in this
report as well as Amendment No. 1 to our 2002 Annual Report on Form 10-K/A (the
"2002 Annual Report"). Results of operations for the three and six month periods
ended June 30, 2003 are not necessarily indicative of results to be attained for
any other period.
STRATEGIC DIRECTION AND GOALS
We have undertaken a review and assessment of our strategic direction and
goals. We continue to believe in the underlying soundness of our community
banking model, which has been strengthened by the recent improvements in process
and controls, while retaining a substantial amount of decision-making at the
local level. We are also committed to a renewed focus on our core businesses of
commercial banking and wealth management. As a result, we may seek to sell some
of our non-core businesses.
We intend to focus our efforts in our existing fast growing, metropolitan
markets: Kansas City (particularly Johnson County, Kansas) and four counties in
Florida (Manatee, Charlotte, Sarasota and Hillsborough). Our branches in slower
growth markets such as out-state Kansas (i.e., outside of metropolitan Kansas
City) and out-state Oklahoma (i.e., outside of Oklahoma City and Tulsa) have
lower growth opportunities, reduced margin opportunities, and higher cost of
funds. As a result, these branches do not fit as well with our current growth
and other strategic goals. We are currently evaluating the possible sale of
some or all of these out-state branches in order to refine our strategic focus.
We may use the proceeds from any sales of our out-state branches to fund loans
in our higher growth markets, call and redeem some of our trust preferred
securities or repurchase shares of our common stock. Also, the resulting
reduction in our assets and liabilities from any sales of our out-state branches
would increase our regulatory capital ratios.
At this time, Gold Bank-Florida benefits from being in a rapidly growing
market and a sale of the bank would result in a high tax burden. Therefore, a
sale of Gold Bank-Florida is unlikely in the foreseeable future.
We plan to decrease the asset sensitivity of our balance sheet by entering
into interest rate swap agreements for a portion of our long-term fixed rate
borrowings. By agreeing to pay a variable rate of interest that is currently
lower than the fixed rates we are paying on our borrowings, we expect to
increase our net interest margin and more closely match our variable rate assets
with variable rate liabilities. Our plans are to have interest rate swap
agreements in place by the end of August 2003 for up to $250 million of our
fixed rate borrowings from the Federal Home Loan Bank System. In addition, we
currently have in place an interest rate swap agreement with respect to $37.6
million of our trust preferred securities. We have no current plans to enter
into interest rate swap agreements for our other trust preferred securities
because we want to have the flexibility to call and redeem those securities.
Our strategic objectives of this more refined focus are to improve
profitability and the strength and flexibility of our balance sheet as well as
to reduce asset sensitivity. In order to achieve these objectives, we have
established the following strategic goals:
- equity capital ratio in the range of 8%,
- liquidity ratio of approximately 20%,
- loan to deposit ratio in the range of 90%,
- earnings per share growth in excess of 10%,
- return on equity in excess of 15%, and
- efficiency ratio of 60%.(1)
-------------------------------
(1) We calculate the efficiency ratio as a ratio, expressed as a percentage, the
numerator of which is non-interest expense (excluding any non-recurring
expenses), and the denominator of which is the sum of net interest income before
provision for loan losses, plus non-interest income (excluding any non-recurring
income).
13
We are also targeting total annual expense reductions of $2.5 million.
Approximately $600,000 of such savings have been realized during the first six
months of 2003.
Our focus on achieving the above goals makes it unlikely that we will
pursue any acquisitions in the next 12 to 18 months.
CERTAIN FINANCIAL DATA
The following table sets forth certain financial data for the three and six
month periods ended June 30, 2003 and June 30, 2002 (dollars in thousands,
except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ----------------------
2003 2002 2003 2002
----------- ----------- ---------- ----------
Net Earnings $ 7,285 $ 7,040 $ 13,994 $ 13,097
Earnings Per Share $ 0.19 $ 0.21 $ 0.37 $ 0.39
Return on Average Assets 0.72% 0.86% 0.71% 0.83%
Return on Equity 12.23% 16.66% 12.03% 15.75%
Dividend to Net Earnings 16.27% 9.56% 16.93% 10.29%
AT JUNE 30, AT JUNE 30,
2003 2002
---- ----
Stockholders' equity to total assets 5.77% 5.20%
RECENT EVENTS AND RESTATEMENT
As disclosed in our 2002 Annual Report, we have restated our financial
statements for the years ended December 31, 2001 and 2000. The 2002 Annual
Report included all of the adjustments relating to the restatement for such
prior periods including those required by Staff Accounting Bulletin 99. We also
filed amended Form 10-Qs with respect to the first two quarters of 2002 to
reflect the restatement of the financial information for such periods. We
intend to file an amended Form 10-Q for the third quarter of 2002 in the near
future. Based on discussions with the staff of the SEC, we do not plan to file
amended Form 10-Ks or Form 10-Qs for 2001 or 2000. The consolidated financial
statements included elsewhere in this report restate our financial statements
for the three and six months ended June 30, 2002.
The restatement principally related to certain transactions totaling
approximately $136,000, $1.1 million and $1.3 million in 2002, 2001 and 2000,
respectively, in which Michael W. Gullion, our former Chief Executive Officer,
diverted funds of Gold Bank-Kansas for personal use, as well as the use of his
company credit card for personal use and improper reimbursement of personal
expenses charged to his personal credit card. The transactions were discovered
by an internal investigation conducted by our Audit Committee, with assistance
from its independent legal counsel and forensic accountants. For a detailed
discussion of the internal investigation and the transactions discovered
therefrom, see "Item 13 - Certain Relationships and Related Transactions" in the
2002 Annual Report. For a discussion of the amounts we seek to recover from Mr.
Gullion, see "-Financial Condition-Recovery of Restitution Amounts from Gullion"
below.
The effect of the restatement (as described in Note 2 "Restatement and
Impact on Earnings" of the consolidated financial statements) is as follows:
14
RESTATEMENTS TO NET EARNINGS
AS PREVIOUSLY REPORTED
--------------------------------------------------
% CHANGE
PRE-TAX TAX EFFECT AFTER TAX TO REPORTED
--------- ------------ ----------- ------------
(DOLLARS IN THOUSANDS)
Three Months Ended June 30, 2002. $ (255) $ (183) $ (72) 1.01%
Six Months Ended June 30, 2002. . $ (488) $ (366) $ (122) 0.92%
The impact of these amounts is as follows:
BASIC EARNINGS PER SHARE DILUTED EARNINGS PER SHARE
-------------------------- --------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED
------------ ------------ ------------ ------------
Three Months Ended June 30, 2002 $ 0.21 $ 0.21 $ 0.21 $ 0.21
Six Months Ended June 30, 2002 . $ 0.39 $ 0.39 $ 0.39 $ 0.39
RESULTS OF OPERATIONS
Net Interest Income
Total interest income for the three months ended June 30, 2003 was $53.4
million compared to $50.1 million for the three months ended June 30, 2002 or an
increase of $3.2 million. This increase resulted from a $2.2 million increase in
loan interest and a $1.0 million increase in investment security interest. Total
interest income for the six months ended June 30, 2003 was $106.2 million
compared to $97.9 million for the six months ended June 30, 2002 or an increase
of $8.3 million. This increase resulted from a $5.8 million increase in loan
interest and a $2.5 million increase in investment security interest. Average
loans increased to $2.8 billion for the three months ended June 30, 2003
compared to $2.4 billion for the three months ended June 30, 2002, or a 19.5%
increase. Average loans increased to $2.8 billion for the six months ended June
30, 2003 compared to $2.3 billion for the six months ended June 30, 2002, or a
22.0% increase. This increase in loans resulted from the opening of our
Briarcliff, Eastland and Olathe branches in our Kansas City market, our Tampa
and Sarasota branches in our Florida market and our new Hefflin branch in our
Oklahoma City market. For the three months ended June 30, 2003, our average
rate on a tax equivalent basis for earning assets was 5.67%, a decrease from
6.73% for the three months ended June 30, 2002. For the six months ended June
30, 2003, our average rate on a tax equivalent basis for earning assets was
5.83%, a decrease from 6.76% for the six months ended June 30, 2002. The
decrease in the average rate on earning assets primarily relates to the decrease
in the prime rate that we charge to borrowers.
Average earning assets were $3.8 billion for the three months ended June
30, 2003 compared with $3.0 billion for the three months ended June 30, 2002.
Average earning assets were $3.7 billion for the six months ended June 30, 2003
compared with $2.9 billion for the six months ended June 30, 2002. The increase
in average earning assets is attributable to our increase in loans and our
increase in investments, which relates to our leverage strategy.
Total interest expense for the three months ended June 30, 2003 was $24.0
million; a $731,000, or 3.0%, decrease over the three months ended June 30,
2002. The decrease was the result of a $796,000 decrease in interest on deposits
partially offset by a $65,000 increase in interest expense on other borrowings.
Total interest expense for the six months ended June 30, 2003 was $47.3 million;
a $1.2 million, or 2.5%, decrease over the six months ended June 30, 2002. The
decrease was the result of a $708,000 decrease in interest on deposits and a
$528,000 decrease in interest expense on other borrowings. For the three months
ended June 30, 2003, our average cost of funds was 2.71%, a decrease from 3.46%
for the three months ended June 30, 2002. For the six months ended June 30,
2003, our average cost of funds was 2.78%, a decrease from 3.56% for the six
months ended June 30, 2002. The decrease in the average cost of funds primarily
relates to the reduced rates paid on deposits.
15
Net interest income was $29.4 million for the three months ended June 30,
2003, compared to $25.4 million for the same period in 2002; an increase of
15.6%. Net interest income was $58.9 million for the six months ended June 30,
2003, compared to $49.4 million for the same period in 2002; an increase of
19.3%. Our net interest margin decreased from 3.44% for the three months ended
June 30, 2002 to 3.14% for the three months ended June 30, 2003 on a tax
equivalent basis. Our net interest margin on interest earning assets decreased
from 3.44% for the six months ended June 30, 2002 to 3.25% for the six months
ended June 30, 2003 on a tax equivalent basis. The increase in net interest
income and the decrease in net interest margin was the result of the combination
of a significant increase in loans during the periods and a decrease in the
average rate on loans receivable. For the three months ended June 30, 2003
compared to the three months ended June 30, 2002, average interest bearing
liabilities increased $87.0 million compared to an increase of $351.3 million in
average interest earning assets. For the six months ended June 20, 2003
compared to the six months ended June 30, 2002, average interest bearing
liabilities increased $679 million compared to an increase of $756 million in
average interest earning assets. The difference between the increase in average
interest bearing liabilities and the increase in average interest earning assets
is due to an increase in non-interest bearing deposits during the relevant
periods.
Provision/Allowance for Loan Losses
The success of a bank depends to a significant extent upon the quality of
its assets, particularly loans. This is highlighted by the fact that net loans
were 68% of our total assets as of June 30, 2003. Credit losses are inherent in
the lending business. The risk of loss will vary with general economic
conditions, the type of loan being made, the creditworthiness of the borrower
over the term of the loan and the value of the collateral in the case of a
collateralized loan, among other things.
The allowance for loan losses totaled $33.4 million and $33.4 million at
June 30, 2003 and December 31, 2002, respectively, and represented 1.16% and
1.22% of total loans at each date. The provision for loan losses for the three
months ended June 30, 2003 was $3.0 million compared to $4.9 million for the
three months ended June 30, 2002. The decrease in the provision for loan losses
for the three months ended June 30, 2003 compared to the three months ended June
30, 2002 was the result of a slower rate of increase in our loan portfolio
during 2003 and an improvement in the credit quality of our loan portfolio. Net
charge-offs for the three months ended June 30, 2003 were $2.3 million compared
to $2.6 million for the three months ended June 30, 2002. The provision for loan
losses for the six months ended June 30, 2003 was $6.6 million compared to $10.0
million for the six months ended June 30, 2002. The decrease in the provision
for loan losses for the six months ended June 30, 2003 compared to the six
months ended June 30, 2002 was also the result of a slower rate of increase in
our loan portfolio during 2003 and an improvement in the credit quality of our
loan portfolio. Net charge-offs for the six months ended June 30, 2003 were $6.6
million compared to $5.6 million for the six months ended June 30, 2002.
Management has continued to review the loan portfolios of the banks, to increase
the provision and to charge-off those credits when collection is considered to
be doubtful.
The allowance for loan losses is comprised of specific allowances assigned
to certain classified loans and a general allowance. We continuously evaluate
our allowance for loan losses to maintain an adequate level to absorb loan
losses inherent in the loan portfolio. Factors contributing to the determination
of specific allowances include the credit worthiness of the borrower, changes in
the expected future receipt of principal and interest payments and/or changes in
the value of pledged collateral. An allowance is recorded when the carrying
amount of the loan exceeds the discounted cash flows using the loan's initial
effective interest rate or the fair value of the collateral for certain
collateral dependent loans. For purposes of determining the general allowance,
the portfolio is segregated by product types to recognize differing risk
profiles among categories, and then further segregated by credit grades. Each
credit grade is assigned a risk factor, or allowance allocation percentage.
These risk factors are multiplied by the outstanding principal balance and
risk-weighted by product type to calculate the required allowance.
The allowance allocation percentages assigned to each credit grade have
been developed based on an analysis of historical loss rates at our individual
banks, adjusted for certain qualitative factors and on our management's
experience. Qualitative adjustments for such things as general economic
conditions, changes in credit policies and lending standards, and changes in the
trend and severity of problem loans, can cause the estimation of future losses
to differ from past experience. The unallocated portion of the general allowance
serves to compensate for additional areas of uncertainty and considers industry
comparable reserve ratios.
16
The methodology used in the periodic review of allowance adequacy, which is
performed at least quarterly, is designed to be responsive to changes in actual
credit losses. The changes are reflected in the general allowance and in
specific allowances as the collectability of larger classified loans is
continuously recalculated with new information. As our portfolio matures,
historical loss ratios are being closely monitored.
We actively manage our past due and non-performing loans in each bank
subsidiary in an effort to minimize credit losses, and monitor asset quality to
maintain an adequate loan loss allowance. Although management believes our
allowance for loan losses is adequate for each bank and on an aggregate basis,
the allowance may not prove sufficient to cover future loan losses. Further,
although management uses the best information available to make determinations
with respect to the allowance for loan losses, future adjustments may be
necessary if economic conditions differ substantially from the assumptions used,
or adverse developments arise with respect to non-performing or performing
loans. Accordingly, the allowance for loan losses may not be adequate to cover
loan losses, and significant increases to the allowance may be required in the
future if economic conditions should worsen. Material additions to the allowance
for loan losses would result in a decrease of the our net earnings and capital.
We consider non-performing assets to include all non-accrual loans, other
loans past due 90 days or more as to principal and interest and still accruing,
other real estate owned and repossessed assets. Total non-performing loans were
$20.1 million and $15.9 million at June 30, 2003 and December 31, 2002,
respectively. The $4.2 million increase in non-performing loans can generally be
attributed to one Gold Bank-Kansas loan of $4.0 million that was placed in
non-performing status in March 2003. Total non-performing loans were 0.70% and
0.58% of gross loans at June 30, 2003 and December 31, 2002, respectively. Total
non-performing assets were $27.3 million and $22.2 million at June 30, 2003 and
December 31, 2002, respectively. The increase in non-performing assets of $5.1
million can be generally attributed to the above mentioned non-performing loan.
Total non-performing assets were 0.66% and 0.58% of total assets at June 30,
2003 and December 31, 2002, respectively.
Other Income
For the three months ended June 30, 2003, other income was $14.1 million
compared to $16.9 million for the three months ended June 30, 2002, a decrease
of $2.7 million, or 16.2%. The net decrease resulted from a decrease in sales
from information technology sales, which decreased from $4.8 million in the
second quarter of 2002 to $3.4 million in the second quarter of 2003. This
decrease was the result of decreased sales revenue principally in the hardware
sales area. In addition, the decrease in other income was also the result of a
decline in net securities gains of $1.8 million in comparing the second quarter
of 2003 to 2002. This decline was primarily the result of income recorded in
the second quarter of 2002 from the sale of our investment in Blue Rhino stock.
The decrease was also the result of gain on sale of branch facilities declining
from $2.4 million in the second quarter of 2002 to $1.2 million in the second
quarter of 2003. This decrease was also affected by an decrease in service fees
of $196,000 and a $242,000 increase in investment trading fees and commissions
compared with the first quarter of 2002. For the three months ended June 30,
2003, net gains on sale of mortgage loans increased $631,000 compared to the
three months ended June 30, 2002. In comparing the same periods, Bank-owned
life insurance income increased $244,000 and other income increased $802,000.
For the six months ended June 30, 2003, other income was $24.8 million
compared to $30.7 million for the six months ended June 30, 2002, a decrease of
$5.9 million, or 19.1%. The net decrease resulted from a decrease in sales from
information technology sales, which decreased from $9.6 million in the first six
months of 2002 to $5.6 million in the first six months of 2003. This decrease
was the result of decreased sales revenue principally in the hardware sales
area. The decrease was also the result of a decline in net securities gains of
$2.4 million in comparing the first six months of 2003 to 2002. This decline
was primarily the result of income recorded in the first six months of 2002 from
the sale of our investment in Blue Rhino stock. The decrease was also the
result of gain on sale of branch facilities declining from $2.4 million in the
second quarter of 2002 to $1.2 million in the second quarter of 2003. This
decrease was partially offset by an increase in service fees of $31,000 and a
$257,000 increase in investment trading fees and commissions compared with the
first six months of 2002. For the six months ended June 30, 2003, net gains on
sale of mortgage loans increased $679,000 compared to the six months ended June
30, 2002. In comparing the same periods, Bank-owned life insurance income
increased $50,000 and other income increased $715,000.
17
Other Expense
For the three months ended June 30, 2003, other expense was $30.2 million
compared to $27.5 million for the same period of 2002. Salaries and employee
benefits increased from $13.3 million in the second quarter of 2002 to $14.4
million in the second quarter of 2003, or an increase of $1.1 million. Adding
additional branch locations and expansion of our current operations caused this
increase. Net occupancy expense increased from $1.2 million for the quarter
ended June 30, 2002 to $1.9 million for the quarter ended June 30, 2003 as a
result of opening new branch facilities in Florida and Kansas. Depreciation
expense increased from $1.5 million to $1.7 million from the quarter period
ended June 30, 2002 to June 30, 2003, respectively. Core deposit intangible
amortization expense was $188,000 during the second quarter of 2003, compared to
$125,000 for the same period of 2002. A $1.0 million decrease in information
technology services expenses resulted from the decline in cost of sales
component for hardware and software sold by CompuNet. This directly relates to
the $1.4 million decrease in information technology sales described above in the
Other Income section. The remaining expenses classified as other expense
increased from $7.6 million to $9.7 million. The largest items accounting for
this increase in Other Expense of $2.1 million were a $900,000 increase in
legal, accounting and consulting expense and an increase of $380,000 in
advertising, marketing and public relations expense. The increase in legal and
consulting expense was primarily attributable to the investigation into Mr.
Gullion's misconduct discussed elsewhere in this report. The increase in
advertising and marketing was caused by an increased communications effort.
For the six months ended June 30, 2003, other expense was $58.0 million
compared to $52.3 million for the same period of 2002. Salaries and employee
benefits increased from $25.3 million in the first six months of 2002 to $29.1
million in the first six months of 2003, or an increase of $3.9 million. Adding
additional branch locations and expansion of our current operations caused this
increase. Net occupancy expense increased from $3.0 million for the first six
months ended June 30, 2002 to $3.8 million for the six months ended June 30,
2003 as a result of opening new offices. Depreciation expense increased from
$3.0 million to $3.5 million from the six month periods ended June 30, 2002 to
June 30, 2003, respectively. Core deposit intangible amortization expense was
$375,000 during the first six months of 2003, compared to $250,000 for the same
period of 2002. A $2.6 million decrease in information technology services
expenses resulted from the decline in cost of sales component for hardware and
software sold by CompuNet. This directly relates to the $4.0 million decrease in
information technology sales described above in the Other Income section. The
remaining expenses classified as other expense increased from $14.1 million to
$17.4 million. The largest items accounting for this increase in Other Expense
of $3.3 million were a $1.4 million increase in legal, accounting and consulting
expense and an increase of $188,000 in FDIC and state assessments. The increase
in legal and consulting expense was primarily attributable to the investigation
into Mr. Gullion's misconduct discussed elsewhere in this report.
Income Tax Expense
Income tax expense for the three months ended June 30, 2003 and 2002 was
$3.0 million and $2.8 million, respectively. The effective tax rate for each
time period was 29.1% and 28.7%, respectively. Income tax expense for the six
months ended June 30, 2003 and 2002 was $5.2 million and $4.8 million,
respectively. The effective tax rate for each time period was 26.9% and 26.7%,
respectively. Our effective tax rate is less than the statutory federal rate of
35% due primarily to municipal tax-exempt interest on municipal bonds and tax
deferred income generated from our investments in bank owned life insurance.
FINANCIAL CONDITION
From December 31, 2002 to June 30, 2003, total assets grew from $3.8
billion to $4.2 billion. Cash and cash equivalents increased from $96.4 million
to $192.4 million. Net loans increased from $2.7 billion to $2.9 billion.
Investment securities were $888.1 million at June 30, 2003, compared to $736.1
million at December 31, 2002; an increase of $152.0 million or 20.7%. Mortgage
loans held for sale decreased from $25.1 million to $21.6 million. Net premises
and equipment decreased from $69.6 million to $67.1 million. Cash surrender
value of bank owned life insurance increased from $56.5 million to $78.4
million. Total liabilities increased from $3.6 billion to $3.9 billion. Deposits
increased from $2.7 billion to $3.0 billion, from December 31, 2002 to June 30,
2003. Securities sold under agreements to repurchase decreased from $153.6
million to $144.5 million. Total long and short-term borrowings increased $111.2
million, or 16.2%, from December 31, 2002. Accrued interest and other
liabilities decreased from $26.1 million to $23.4 million.
18
During the first six months of 2003, cash and cash equivalents increased
$96.0 million or 99.5% over balances at December 31, 2002. This increase was
the direct result of a certificate of deposit campaign we completed at the end
of the second quarter of 2003, which raised approximately $100 million of new
deposits. A significant amount of these new funds were used to repay brokered
deposits that matured shortly after the end of the second quarter.
During the first six months of 2003, loans increased $155.6 million, or
5.7%, over balances at December 31, 2002. Mortgage loans held for sale
decreased $3.6 million over the balance at December 31, 2002. The decrease was
due to a decrease in fixed rate single-family mortgage loans originated during
the six month period ended June 30, 2003.
Investment securities at June 30, 2003, increased $152.0 million compared
to the balance at December 31, 2002. This increase resulted from an increase of
$16.3 million in US agency mortgage-backed securities and an increase of $130.5
million in US agency securities. The total investment securities portfolio
amounted to $888.1 million at June 30, 2003, and was comprised mainly of U.S.
government and agencies (30.1%), mortgage-backed (49.7%), and other asset-backed
(20.2%) investment securities.
Bank owned life insurance at June 30, 2003, increased $21.9 million
compared to the balance sheet amount at December 31, 2002. The increase in the
balance primarily resulted from the Company's additional investment of $20.0
million and earnings recorded on our investment in bank owned life insurance.
Total deposits increased $245.6 million at June 30, 2003, compared to December
31, 2002, mainly due to the effect of an increase of $240.9 million in time
deposits, a $82.5 million decrease in money market accounts and a $87.2 million
increase in other deposits.
Compared to 2002 year-end balances, borrowings at June 30, 2003, increased
$111.2 million. Our short-term borrowings of federal funds purchased and
securities sold under agreements to repurchase vary depending on daily liquidity
requirements. These borrowings decreased $24.5 million during the first six
months of 2003 to a balance of $1.1 million at June 30, 2003. Long term
borrowings, consisting mainly of FHLB advances, increased $135.5 million to
$684.4 million outstanding at June 30, 2003. The increase in long-term
borrowings is the direct result of loan growth in the current year, as well as
our leverage strategy related to our investment portfolio.
During the first six months of 2003, accrued interest and other liabilities
decreased $2.7 million, or 10.3%, due to a $3.3 million decrease in federal
taxes payable due to tax payments made during the first six months of 2003 and
some increase in the amount of accrued interest payable.
Contractual Obligations and Commercial Commitments
The following table presents our contractual cash obligations, defined as
operating lease obligations, principal and interest payments due on non-deposit
obligations and guarantees with maturities in excess of one year, as of June 30,
2003 for the periods indicated.
PAYMENTS DUE BY PERIOD
TOTAL INTEREST ONE YEAR ONE TO FOUR TO MORE THAN
CONTRACTUAL CASH OBLIGATIONS AND PRINCIPAL AND LESS THREE YEARS FIVE YEARS FIVE YEARS
------------------------------ --------------- --------- ------------ ----------- -----------
(DOLLARS IN THOUSANDS)
Operating leases . . . . . . . $ 36,952 $ 3,689 $ 7,127 $ 4,762 $ 21,374
FHLB advances(1) . . . . . . . 671,726 61,928 96,495 127,504 385,799
Subordinated debt(1) . . . . . 71,727 1,467 2,930 2,926 64,404
Trust preferred securities . . 277,919 7,548 14,642 14,642 240,180
--------------- --------- ------------ ----------- -----------
Total contractual obligations. $ 1,058,324 $ 74,632 $ 121,469 $ 150,288 $ 711,757
=============== ========= ============ =========== ===========
---------------
(1) For floating interest rate obligations, based upon interest rate in effect on June 30,
2003.
19
Liquidity and Capital Resources
Liquidity defines the ability of us and the Banks to generate funds to
support asset growth, satisfy other disbursement needs, meet deposit withdrawals
and other fund reductions, maintain reserve requirements and otherwise operate
on an ongoing basis. The immediate liquidity needs of the Banks are met
primarily by Federal Funds sold, short-term investments, deposits and the
generally predictable cash flow (primarily repayments) from each Bank's assets.
Intermediate term liquidity is provided by the Banks' investment portfolios.
Each of the Banks has established a credit facility with the FHLB, under which
it is eligible for short-term advances and long-term borrowings secured by real
estate loans or mortgage-related investments. As described under "-Credit
Facilities" below, Gold Bank-Kansas may be in default under its agreements for
advances with the FHLB of Topeka and Des Moines. Our liquidity needs and funding
are provided through non-affiliated bank borrowings, cash dividends and tax
payments from our subsidiary Banks. Total loans increased $155.6 million
compared to December 31, 2002, while total deposits increased $245.6 million
compared to the same period. The majority of our deposits consist of time
deposits which mature in less than one year. If we are unsuccessful in rolling
over these deposits, then we will have to replace these funds with alternative
sources of funding, mainly other short-term borrowings.
Cash and cash equivalents and investment securities totaled $1.1 billion,
or 25.9%, of total assets at June 30, 2003 compared to $832.5 million, or 21.8%,
at December 31, 2002. Cash provided by operating activities for the six months
ended June 30, 2003 was $90.9 million, consisting primarily of net earnings and
proceeds from the sale of loans. Cash used by investing activities was $339.5
million, consisting of an increase in loans of $166.0 million and the purchase
of fixed assets of $1.0 million, the reduction of held to maturity securities of
$10.5 million, and the net increase in available for sale securities of $170.5
million. Cash provided by financing activities was $344.5 million, consisting
primarily of an increase in deposits of $245.6 million and an increase in net
borrowings of $100.1 million.
We and our subsidiaries actively monitor our compliance with regulatory
capital requirements. The elements of capital adequacy standards include strict
definitions of core capital and total assets, which include off-balance sheet
items such as commitments to extend credit. Under the risk-based capital method
of capital measurement, the ratio computed is dependent on the amount and
composition of assets recorded on the balance sheet and the amount and
composition of off-balance sheet items, in addition to the level of capital.
Historically, the Banks have increased core capital through retention of
earnings or capital infusions. To be "well capitalized" a company's total
risk-based capital ratio, tier 1 risk-based capital ratio and tier 1 leverage
ratio would be at least 10.0%, 6.0% and 5.0%, respectively. Our total risk-based
capital ratio, tier 1 risk-based capital ratio and tier 1 leverage ratio at June
30, 2003 were 10.75%, 8.60% and 6.70%, respectively. These same ratios at
December 31, 2002 were 11.02%, 8.61% and 6.96%, respectively. Total loans
increased $155.6 million compared to December 31, 2002 while total deposits
increased $245.6 million compared to the same period. Even with this increase in
the balance sheet, our ratios exceed the necessary levels to be considered well
capitalized.
The principal source of funds at the holding company level is dividends
from the Banks. The payment of dividends is subject to restrictions imposed by
federal and state banking laws and regulations. At June 30, 2003, our subsidiary
banks could pay $54.2 million in dividends to us and still remain well
capitalized. Management believes funds generated from the dividends from our
subsidiaries and our existing lines of credit will be sufficient to meet our
current cash requirements. However, if we continue at our current rate of
internal growth, we will need to raise additional equity to remain "well
capitalized".
Credit Facilities
Our subsidiary banks have agreements with the Federal Home Loan Bank system
to provide them with advances. As of June 30, 2003, our subsidiary banks had
approximately $540.9 million of advances outstanding with the FHLB.
We have a revolving line of credit with LaSalle Bank National Association
("LaSalle Credit Line"). As of June 30, 2003, we had nothing outstanding under
this line of credit. On July 1, 2003, we entered into an amendment with LaSalle
Bank to reduce the maximum amount that we may borrow from $25 million to $10
million and extend the maturity date from July 1, 2003 to July 1, 2004. Interest
accrues on advances under the LaSalle Credit Line at our option at a rate equal
to either LIBOR plus 1.25% per annum or LaSalle Bank's prime rate (but in no
event will the interest rate under the LaSalle Credit Line be less than 3.5%
20
per' annum). We draw on the LaSalle Credit Line from time to time to fund
various corporate matters including making contributions to our bank
subsidiaries to help them maintain their "well-capitalized" status.
Under the Amended and Restated Loan Agreement dated as of February 8, 2002
("ESOP Loan Agreement") of our Employees' Stock Ownership Plan (the "ESOP") with
LaSalle Bank, the ESOP may borrow up to $15 million. Loans under the ESOP Loan
Agreement bear interest, at the ESOP's option, at either LaSalle Bank's Prime
Base Rate or LIBOR plus 1.75%. As of June 30, 2003, the ESOP had approximately
$13.4 million outstanding under the ESOP Loan Agreement, which it borrowed to
purchase our common stock. We guarantee the ESOP's obligations under the ESOP
Loan Agreement. We currently do not anticipate that the ESOP will need to borrow
any further amounts under the ESOP Loan Agreement.
As a result of the misappropriation of funds by Mr. Gullion and the actions
taken by the bank regulatory authorities in response thereto, we were in default
under the LaSalle Credit Line and our ESOP was in default under the ESOP Loan
Agreement. We have obtained waivers from LaSalle Bank with respect to these
defaults.
The Federal Home Loan Banks of Topeka and Des Moines could assert that the
events described above under "-Internal Investigation and Regulatory
Examination" permit them to declare Gold Bank-Kansas in default as a result of a
material adverse change or other similar covenant default. To date, neither of
these Federal Home Loan Banks have notified us that they consider the Gold
Bank-Kansas agreements for advances to be in default. As of June 30, 2003, Gold
Bank-Kansas had outstanding advances of approximately $16 million with the FHLB
of Des Moines and approximately $339 million with the FHLB of Topeka.
After we have finalized the formal written agreements with the FRB-KC and
the OSBC as described in Note 8 "Legal Proceedings" to our consolidated
financial statements included elsewhere in this report, we plan to approach the
FHLB of Topeka and FHLB of Des Moines to request any necessary waivers. We
anticipate that we will be successful in securing such waivers. However, if the
FHLB of Topeka and the FHLB of Des Moines do not waive these defaults or refuse
to permit Gold Bank-Kansas to borrow additional funds under its agreements for
advances, we anticipate that Gold Bank-Kansas will be able to find alternative
financing on reasonable terms and conditions. If Gold Bank-Kansas is unable to
replace these agreements for advances with alternative financing on reasonable
terms or conditions this could have a material adverse affect on its liquidity.
Recovery of Restitution Amounts from Gullion.
On May 20, 2003, Gold Bank-Kansas entered into a restitution agreement with
our former Chairman and Chief Executive Officer, Michael W. Gullion. On July
23, 2003, we purchased from an unaffiliated bank a $4 million loan to Mr.
Gullion evidenced by a promissory note collateralized by substantially all of
the shares of common stock of the Company owned by Mr. Gullion. On the same
day, we exercised our option under the restitution agreement to purchase 583,065
shares of our common stock from Mr. Gullion for approximately $6.3 million. The
purchase price of $10.805 per share was calculated in accordance with the
restitution agreement and was equal to the 10-day average closing price of our
common stock on the NASDAQ preceding the date on which the shares were
purchased. We retained the sales proceeds to satisfy Mr. Gullion's obligation
under the note payable that we purchased (aggregating approximately $4.0
million) and to satisfy Mr. Gullion's obligation under the restitution agreement
(aggregating approximately $2.3 million).
As a result of the transaction, we have acquired 583,065 shares of treasury
stock and will record income of approximately $2.3 million in the third quarter
of 2003. We plan to reissue some of these treasury shares in private sales. Two
members of our Board of Directors have purchased an aggregate of 80,000 of these
shares from us at a purchase price of $10.805 per share. On August 1, 2003,
Daniel P. Connealy purchased 10,000 of these shares. On August 5, 2003, William
Randon purchased 70,000 of these shares. In addition, Allen D. Peterson has
agreed to purchased 300,000 of these shares either directly or through an
affiliated entity for $10.805 per share. Resale of these shares will be
restricted for two years in accordance with SEC regulations.
We are currently attempting to negotiate a settlement with Mr. Gullion that
would result in the payment by Mr. Gullion of additional restitution amounts
that we believe he owes us. In addition to the $2.3 million which has been paid
by Mr. Gullion, we are seeking to recover from Mr. Gullion the following:
21
- $1.1 million for additional amounts that we believe Mr. Gullion
either misappropriated from us or for which he failed to
reimburse us;
- $1.5 million for the costs of investigation into Mr. Gullion's
misconduct;
- $0.5 million of interest on the above items;
- $0.2 million of outstanding loans;
- $3.0 million representing the forfeiture of all cash compensation
paid to Mr. Gullion since January 1, 1998; and
- the forfeiture of all stock options granted to Mr. Gullion since
January 1, 1998.
We are currently attempting to negotiate a settlement with Mr. Gullion that
would result in the repayment by Mr. Gullion of some or all these amounts. In
the event that we are unable to reach a satisfactory settlement with Mr.
Gullion, we intend to initiate legal proceedings against Mr. Gullion for the
payment of such amounts. No assurance can be given, however, that we will be
able to recover such amounts from Mr. Gullion. Mr. Gullion's assets may be
insufficient to pay all of such amounts and he may have statute of limitations
or other defenses to the payment of some of these amounts.
BOLI Policies
Our Bank subsidiaries have purchased bank-owned life insurance ("BOLI")
policies with death benefits payable to the Banks on the lives of certain
officers. These single premium, whole-life policies provide favorable tax
benefits, but are illiquid investments. Federal guidelines limit a bank's
aggregate investment in BOLI to 25% of the bank's capital and surplus, and its
aggregate investment in BOLI policies from a single insurance company to 15% of
the Bank's capital and surplus. All of the Banks' BOLI investments comply with
federal guidelines. In January 2003, Gold Bank-Kansas, Gold Bank-Oklahoma and
Gold Bank-Florida increased their BOLI investments by $14 million, $4 million
and $2 million, respectively. As of June 30, 2003, Gold Bank-Kansas had $43.8
million of BOLI (equal to 24.0% of its capital and surplus), Gold Bank-Oklahoma
had $21.1 million of BOLI (equal to 24.0% of its capital and surplus) and Gold
Bank-Florida had $13.4 million of BOLI (equal to 23.8% of its capital and
surplus). The aggregate BOLI investment of each Bank is now just below the
maximum regulatory limit. The Banks monitor the financial condition and credit
rating of each of the three life insurance companies that issued the BOLI
policies. We believe that these BOLI investments will not have any significant
impact on the capital or liquidity of our Bank subsidiaries.
CompuNet Activities
CompuNet Engineering, Inc., which was acquired in March 1999, provides
information technology, e-commerce services and networking solutions for banks
and other businesses. Under current Federal Reserve regulations, a bank holding
company and its subsidiaries may conduct data processing and transmission
services to process or furnish financial, banking or economic data ("Financial
Data Processing"). Data processing and transmission services that are not
financial, banking or economic in nature may also be provided, so long as such
services do not exceed 30% of the bank holding company's total consolidated
annual revenues from data processing and transmission. Financial Data
Processing services may include the furnishing of data processing and
transmission facilities, hardware, software, documentation, operating personnel
and support services. However, hardware may only be sold in connection with
software designed for the processing of financial, banking or economic data, and
general purpose hardware (such as a personal computer or a network router) may
not exceed 30% of the cost of any packaged offering of hardware, software and
services. When we acquired CompuNet, the aggregate data processing activities
of us and CompuNet complied with these limitations.
On December 21, 2000, the Federal Reserve published a proposed regulation
that would permit a financial holding company to generate up to 80% of its
consolidated data processing revenue from non-Financial Data Processing
activities. The proposed regulation limits the investment of a financial holding
22
company in such data processing activities to 5% of the financial holding
company's tier 1 capital. The comment period on the proposed regulation expired
on February 16, 2001. To date this regulation has not been adopted.
In 2001, CompuNet acquired the assets of Information Products, Inc., which
provides technology services, including LAN, WAN, product support,
telecommunication line monitoring, hardware, maintenance and systems design and
installation across all industry sectors. This acquisition significantly
increased the amount of CompuNet's non-Financial Data Processing activities.
During 2002 and the first six months of 2003, CompuNet's revenues from
non-Financial Data Processing activities have exceeded the Federal Reserve's
current limitations. As a result, we are required to take corrective action to
bring CompuNet's activities within federal regulatory requirements.
This could be accomplished by increasing CompuNet's revenues from Financial
Data Processing activities, decreasing CompuNet's revenues from non-Financial
Data Processing activities, converting ComputNet into a merchant banking
investment, or selling part or all of CompuNet's business to an unaffiliated
third party, or other curative action. Due to the uncertainty involved in our
continued ownership of CompuNet, we are currently exploring the possible sale of
CompuNet with potential buyers.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
Financial Accounting Standards Board Interpretation (FIN) No. 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 elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002. Implementation of the remaining provisions
of FIN 45 during the first half of 2003 did not have a significant impact on our
financial statements.
FIN No. 46 "Consolidation of Variable Interest Entities, an Interpretation
of Accounting Research Bulleting No. 51." FIN 46 established accounting
guidance for consolidation of variable interest entities (VIE) that function to
support the activities of the primary beneficiary. The primary beneficiary of a
VIE entity is the entity that absorbs a majority of the VIE's expected losses,
receives a majority of the VIE's expected residual returns, or both, as a result
of ownership, controlling interest, contractual relationship or other business
relationship with a VIE. Prior to the implementation of FIN 46, VIEs were
generally consolidated by an enterprise when the enterprise had a controlling
financial interest through ownership of a majority of voting interest in the
entity. The provisions of FIN 46 were effective immediately for all
arrangements entered into after January 31, 2003, and are otherwise effective at
the beginning of the first interim period beginning after June 15, 2003. The
Company has several statutory trusts that were formed, prior to January 31,
2003, for the purpose of issuing Trust Preferred Securities (see note 11 to the
annual consolidated financial statements). These statutory trusts will be
subjected to FIN 46 in the third quarter of 2003. We currently believe the
continued consolidation of these trusts is appropriate under FIN 46. However,
the applications of FIN 46 to this type of trust is an emerging issue and a
possible unintended consequence of FIN 46 is the deconsolidation of these
trusts. The deconsolidation of these statutory trusts would not have a material
effect on our consolidated balance sheet or our consolidated statement of
operations. In July 2003, the Board of Governors of the Federal Reserve System
issued a supervisory letter instructing bank holding companies to continue to
include the trust preferred securities in their Tier I capital for regulatory
capital purposes until notice is given to the contrary. The Federal Reserve
intends to review the regulatory implications of any accounting treatment
changes and, if necessary or warranted, provide further appropriate guidance.
There can be no assurance that the Federal Reserve will continue to allow
institutions to include trust preferred securities in Tier I capital for
regulatory capital purposes.
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." SFAS 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." The amendments
(i) reflect decisions of the Derivatives Implementation Group; (ii) reflect
decisions made by the Financial Accounting standards Board in conjunction with
23
other projects dealing with financial instruments; and (iii) address
implementation issues related to the application of the definition of a
derivative. SFAS 149 also modifies various other existing pronouncements to
conform with the changes to SFAS 133. SFAS 149 is effective for contracts
entered into or modified after June 30,2003, and for hedging relationships
designated after June 30, 2003, with all provisions applied prospectively.
Adoption of SFAS 149 on July 1, 2003 did not have a significant impact on our
financial statements.
SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity." SFAS 150 establishes standards
for how an issuer classifies, measures and discloses in its financial statements
certain financial instruments with characteristics of both liabilities and
equity. SFAS 150 requires that an issuer classify financial instruments that are
within its scope as a liability, in most circumstances. Such financial
instruments include (i) financial instruments that are issued in the form of
shares that are mandatorily redeemable; (ii) financial instruments that embody
an obligation to repurchase the issuer's equity shares, or are indexed to such
an obligation and that require the issuer to settle the obligation by
transferring assets; (iii) financial instruments that embody an obligation that
the issuers settle by issuing a variable number of its equity shares if, at
inception, the monetary value of the obligations is predominately based on a
fixed amount, variations in something other than the fair value of the issuer's
equity shares or variations inversely related to changes in the fair value of
the issuer's equity shares; and (iv) certain freestanding financial instruments.
SFAS 150 is effective for contracts entered into or modified after May 31, 2003,
and is otherwise effective at the beginning of the first interim period
beginning after June 15, 2003. Adoption of SFAS 150 on July 1, 2003 did not have
a significant impact on our financial statements.
CRITICAL ACCOUNTING POLICIES
Our accounting policies are fundamental to understanding management's
discussion and analysis of results of operations and financial condition. Many
of our accounting policies require significant judgment regarding valuation of
assets and liabilities. A summary of significant accounting policies is listed
in the first note to the consolidated financial statements in the 2002 Annual
Report. Critical accounting policies are both important to the portrayal of our
financial condition and results, and require management's most difficult,
subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain.
Allowance for Loan Losses
Our most critical accounting policy relates to the allowance for loan
losses and involves significant management valuation judgments. We perform
periodic and systematic detailed reviews of our lending portfolio to assess
overall collectability. The level of the allowance for loan losses reflects our
estimate of the collectability of the loan portfolio. Further discussion of the
methodologies used in establishing this reserve is contained in the
Provision/Allowance for Loan Losses section of this report.
We make various assumptions and judgments about the collectability of our
loan portfolio and provide an allowance for losses based on a number of factors.
If our assumptions are wrong, our allowance for loan losses may not be
sufficient to cover loan losses. We may have to increase the allowance in the
future. Material additions to our allowance for loan losses would have a
material adverse effect on our net earnings.
Impairment of Goodwill Analysis
As required by the provisions of SFAS 142, we completed our initial
valuation analysis to determine whether the carrying amounts of our reporting
units were impaired. Our initial impairment review indicated that there was no
impairment of goodwill as of December 31, 2002. However, as required by SFAS
142, we will be required to review the goodwill for impairment at least annually
or more frequently based upon facts and circumstances related to a particular
reporting unit.
The fair value of our non-bank financial subsidiaries (Gold Capital
Management and CompuNet Engineering) fluctuates significantly based upon, among
other factors, the net operating income of these subsidiaries. If these
subsidiaries experience a sustained deterioration in their cash flow from
operations then we may have to record a goodwill impairment charge in the
future.
24
During 2002 and the first six months of 2003, CompuNet Engineering did not
comply with certain Federal Reserve regulations regarding the sources of its
revenue. As a result, we are currently exploring the possible sale of our
interest in CompuNet Engineering. See "- Financial Condition-Liquidity and
Capital Resources - CompuNet Activities" above. In the event that CompuNet
Engineering were sold for less than the carrying value of its associated assets
and goodwill, we would be required to record a goodwill impairment charge. The
goodwill associated with CompuNet Engineering was $4.6 million at June 30, 2003.
Deferred Income Taxes
SFAS 109, Accounting for Income Taxes, establishes financial accounting and
reporting standards for the effect of income taxes. The objectives of accounting
for income taxes are to recognize the amount of taxes payable or refundable for
the current year and deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in an entity's financial
statements or tax returns. Judgement is required in assessing the future tax
consequences of events that have been recognized in our financial statements or
tax returns. Fluctuations in the actual outcome of these future tax consequences
could materially impact our financial position or our results of operations.
FORWARD LOOKING INFORMATION AND STATEMENTS
The information included or incorporated by reference in this report
contains certain forward-looking statements with respect to the financial
condition, results of operations, plans, objectives, future financial
performance and business of us and our subsidiaries, including, without
limitation:
- statements that are not historical in nature
- statements preceded by, followed by or that include the words
"believes," "expects," "may," "will," "should," "could,"
"anticipates," "estimates," "intends" or similar expressions
- statements regarding the timing of the closing of the branch
sales
Forward-looking statements are not guarantees of future performance or results.
You are cautioned not to put undue reliance on any forward-looking statement
which speaks only as of the date it was made. They involve risks, uncertainties
and assumptions. Actual results may differ materially from those contemplated by
the forward-looking statements due to, among others, the following factors:
- results of the joint regulatory examination of Gold Bank-Kansas
and the examination of us
- inability to obtain waivers of defaults under our credit
facilities or find alternative financing
- transition and strategies of new management
- changes in interest margins on loans
- changes in allowance for loan losses
- changes in the interest rate environment
- the effect of a change in the management rating of Gold
Bank-Kansas
- our ability to enter into interest rate swap agreements with
favorable rates and terms
- our ability to sell out-state branches at favorable prices
- competitive pressures among financial services companies may
increase significantly
- general economic conditions, either nationally or in our markets,
may be less favorable than expected
25
- legislative or regulatory changes may adversely affect the
business in which we and our subsidiaries are engaged
- technological changes may be more difficult or expensive than
anticipated
- changes may occur in the securities markets
These risks and other risks are described in Exhibit 99.1 to this Form 10-Q and
are incorporate herein by reference.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset/liability management refers to management's efforts to minimize
fluctuations in net interest income caused by interest rate changes. This is
accomplished by managing the repricing of interest rate sensitive
interest-earning assets and interest-bearing liabilities. An interest rate
sensitive balance sheet item is one that is able to reprice quickly, through
maturity or otherwise. Controlling the maturity or repricing of an institution's
liabilities and assets in order to minimize interest rate risk is commonly
referred to as gap management. Close matching of the repricing of assets and
liabilities will normally result in little change in net interest income when
interest rates change. A mismatched gap position will normally result in changes
in net interest income as interest rates change.
While we have not historically used interest rate swaps or other derivative
instruments to manage interest rate exposure, in August 2002 we entered into
three interest rate swap agreements with an aggregate notional amount of $82.5
million. The swaps effectively converted our fixed interest rate obligations
under our three outstanding series of trust preferred securities to variable
interest rate obligations, decreasing the asset sensitivity of our balance sheet
by more closely matching our variable rate assets with variable rate
liabilities. Each swap has a notional amount equal to the outstanding principal
amount of the related trust preferred securities, together with the same payment
dates, maturity date and call provisions as the related trust preferred
securities. Under each of the swaps, we pay a variable rate equal to a spread
over 90-day LIBOR, adjusted quarterly, and receive a fixed rate equal to the
interest we are obligated to pay on the related trust preferred securities.
The $28.7 million notional amount swap agreement was called by the
counter-party and terminated on April 7, 2003. The $16.3 million notional amount
swap agreement was called by the counter-party and terminated on June 30, 2003.
Under the swap agreements, no payments were due between the parties and no gain
or loss was recognized by us. There are no current plans to replace the
terminated swap agreements. The remaining swap agreement is also callable by the
counterparty prior to its respective maturity date.
We plan to decrease the asset sensitivity of our balance sheet by entering
into swap agreements for a portion of our long-term fixed rate borrowings. By
agreeing to pay a variable rate of interest that is currently lower than the
fixed rates we are paying on our borrowings, we expect to increase our net
interest margin and more closely match our variable rate assets with variable
rate liabilities. Our plans are to have swap agreements in place by the end of
August 2003 for up to $250 million of our fixed rate borrowings from the Federal
Home Loan Bank System.
Along with internal gap management reports, we and our subsidiary banks use
an asset/liability modeling service to analyze each bank's current gap position.
The system simulates the banks' asset and liability base and projects future net
interest income results under several interest rate assumptions. We strive to
maintain an aggregate gap position such that each 100 basis point change in
interest rates will not affect net interest income by more than 10%.
The following table indicates that, at June 30, 2003, in the event of a
sudden and sustained increase in prevailing market rates, our net interest
income would be expected to increase, while a decrease in rates would indicate a
decrease in net interest income.
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Changes in Interest Rates Net Interest Income Actual Change Percent Change Actual
------------------------- -------------------- --------------- ----------------------
200 basis point rise. . . $ 138,083,000 $ 9,184,000 7.12%
100 basis point rise. . . $ 135,228,000 $ 6,329,000 4.91%
Base Rate Scenario. . . . $ 128,899,000 - -
50 basis point decline. . $ 127,175,000 $ (1,724,000) (1.34%)
100 basis point decline . $ 124,577,000 $ (4,322,000) (3.35%)
ITEM 4: CONTROLS AND PROCEDURES
As of the end of the period covered by this report, an evaluation was
carried out under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. There are inherent limitations to the effectiveness of any system
of disclosure controls and procedures, including the possibility of human error
and the circumvention or overriding of the controls and procedures. Accordingly,
even effective disclosure controls and procedures can only provide reasonable
assurance of achieving their control objectives. Based upon and as of the date
of the evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that the design and operation of these disclosure controls and
procedures were effective in all material respects to provide reasonable
assurance that information required to be disclosed in the reports we file and
submit under the Exchange Act is recorded, processed, summarized and reported as
and when required.
There were no changes in our internal control over financial reporting that
occurred during the quarter ended June 30, 2003 that materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
We regularly evaluate our internal control over financial reporting and
discuss these matters with our independent accountants and our audit committee.
Based on these evaluations and discussions, we consider what revisions,
improvements or corrections are necessary in order to ensure that our internal
controls over financial reporting are and remain effective. As part of this
process, Deloitte & Touche has been engaged to conduct a controls risk
assessment of our internal controls. We anticipate that Deloitte & Touche will
make a number of recommendations as to how our internal controls can be further
strengthened and improved. Deloitte & Touche is scheduled to complete this
assessment by the end of 2003. Full implementation of any recommended changes
will continue into next year.
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PART II OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
For a discussion of legal proceedings, including regulatory proceedings and
formal actions taken by our banking regulators, see Note 8 "Legal Proceedings"
to the consolidated financial statements contained in Part I, Item I of this
report.
For a discussion of legal proceedings and recent developments pertaining to
restitution and future claims against Mike Guillion, our former CEO, see "Part I
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations - Financial Condition - Recovery of Restitution Amounts from
Gullion" above.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
The Federal Home Loan Bank of Topeka could assert that the events described
above under "-Internal Investigation and Regulatory Examination" permit them to
declare Gold Bank-Kansas in default under its agreement for advances with the
FHLB of Topeka as a result of a material adverse change or other similar
covenant default. To date, the Federal Home Loan Bank of Topeka has not
notified us that they consider the Gold Bank-Kansas agreement for advances to be
in default.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
At the Annual Meeting of Shareholders on May 19, 2003, three Class I
directors, Malcolm M. Aslin, Daniel P. Connealy and D. Patrick Curran, were
elected for terms expiring in 2006. Voting results were as follows:
Malcolm M Aslin
33,322,568 votes or 84% FOR
392,807 votes or 1% AGAINST
5,735,807 votes or 15% BROKER NON-VOTES AND ABSTENTIONS
Daniel P. Connealy
33,323,011 votes or 84% FOR
401,364 votes or 1% AGAINST
5,726,807 votes or 15% BROKER NON-VOTES AND ABSTENTIONS
D. Patrick Curran
33,323,652 votes or 84% FOR
391,723 votes or 1% AGAINST
5,735,807 votes or 15% BROKER NON-VOTES AND ABSTENTIONS
Class II Directors continuing in office are William Randon and William R.
Hagman, Jr. Class II Directors' terms expire in 2004.
Class III Directors continuing in office are Allen Peterson, J. Gary Russ,
Donald C. McNeill, and E. Miles Prentice, III. Class III Directors' terms expire
in 2005.
ITEM 5: OTHER INFORMATION
None
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ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Required to be Filed by Item 601 of Regulation S-K
Exhibit
Number Description
------- -------------------------------------------------------------------------------------
4.33 Eighth Amendment to Amended and Restated Loan Agreement, dated as of July 1,
2003, between Gold Banc Corporation, Inc. and LaSalle Bank National Association.
10.15* First Amendment to the Gold Banc Corporation, Inc. 1996 Equity Compensation
Plan, dated as of March 20, 2000.
10.16* Second Amendment to the Gold Banc Corporation, Inc. 1996 Equity Compensation
Plan, dated as of February 2, 2001.
31.1 Certification of Chief Executive Officer of Gold Banc Corporation, Inc., dated August
14, 2003, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2003.
31.2 Certification of Chief Financial Officer of Gold Banc Corporation, Inc., dated August
14, 2003, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2003.
32.1 Certification of Chief Executive Officer of Gold Banc Corporation, Inc. dated August
14, 2003, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, which is accompanying this Quarterly Report on
Form 10-Q for the quarter ended June 30, 2003 and is not treated as filed in reliance
upon Sec. 601(b)(32) of Regulations S-K.
32.2 Certification of Chief Financial Officer of Gold Banc Corporation, Inc. dated August
14, 2003, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, which is accompanying this Quarterly Report on
Form 10-Q for the quarter ended June 30, 2003 and is not treated as filed in reliance
upon Sec. 601(b)(32) of Regulations S-K.
99.1 Factors That May Affect Future Results of Operations, Financial Condition or
Business for Gold Banc Corporation, Inc.
* Management contracts or compensating plans or arrangements required to be
filed by Item 6(a).
(b) Reports on Form 8-K
We filed the following Current Reports on Form 8-K during the second
quarter of 2003:
- On April 4, 2003, we filed a Current Report on Form 8-K announcing a
conference call during which the Company provided an earnings forecast and
business outlook for the first quarter as well as the full fiscal year of
2003.
- On April 24, 2003, we field a Current Report on Form 8-K reporting the 2003
first quarter earnings and other select financial data.
- On May 23, 2003, we filed a Current Report on Form 8-K announcing the
execution of a restitution agreement between Gold Bank-Kansas and Michael
W. Gullion.
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- On June 6, 2003, we filed a Current Report on Form 8-K announcing that the
Company made a presentation by the Company at the Eighth Annual Community
Bankers Conference on June 4, 2003.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GOLD BANC CORPORATION, INC.
By: /s/ Rick J. Tremblay
------------------------------------------
Rick J. Tremblay
Executive Vice President and
Chief Financial Officer
(Authorized officer and principal financial
officer of the registrant)
Date: August 14, 2003
31