Total stockholders equity increased by $3,947,000, from $95,561,000 at December 31, 2006 to $99,508,000
at September 30, 2007. The increase is largely attributable to net income of $8,444,000, as partially
offset by $3,254,000 in cash dividends declared and $2,527,000 expended for share repurchases. Also
contributing to the increase, but to a much lesser extent, are proceeds from the exercise of stock
options, stock-based compensation and unrealized gains on available-for-sale securities.
Stock Repurchase Program and Market Liquidity.
Since 1988, the Corporation has had a stock repurchase program under which it has purchased,
from time to time, shares of its own common stock in market or private transactions. The Corporations
market transactions are generally intended to comply with the manner, timing, price and volume conditions
set forth in SEC Rule 10b-18 and therefore, with respect to such transactions, provide the Corporation
with safe harbor from liability for market manipulation under section 9(a)(2) and Rule 10b-5 of the
Securities Exchange Act of 1934.
The Corporation periodically reevaluates whether it wants to continue purchasing shares of its own
common stock in open market transactions under Rule 10b-18 or otherwise. Because the trading volume
in the Corporations common stock is limited, the Corporation believes that a reduction or discontinuance
of its share repurchase program could adversely impact market liquidity for its common stock, the
price of its common stock, or both. The publicly reported trading volume in the Corporations
common stock for the year ended September 30, 2007 was 628,547 shares, 4.6% of which resulted from
open market purchases by the Corporation under its share repurchase program.
Russell Microcap Index.
Frank Russell Company maintains a family of U.S. equity indices. The indices are reconstituted in June
of each year based on market capitalization and do not reflect subjective opinions. All Indices are
subsets of the Russell 3000E Index, which represents most of the investable U. S. equity market.
The Corporations common stock is included in the Russell Microcap Index. The average market capitalization
of companies in the Russell Microcap Index is $300.9 million, the median market capitalization is
$260.1 million, the capitalization of the largest company in the index is $711.4 million, and the
capitalization of the smallest company in the index is $78.6 million. The Corporations market
capitalization as of September 30, 2007 was approximately $158 million.
The Corporation believes that inclusion in the Russell Microcap Index positively impacts the price,
trading volume and liquidity of its common stock. Conversely, if the Corporations market capitalization
falls below the minimum necessary to be included in the Russell Microcap Index at any future annual
reconstitution date, the Corporation believes that this could adversely affect the price, volume
and liquidity of its common stock.
Cash Flows and Liquidity
Cash Flows
. The Corporations primary sources of cash are deposit growth, maturities and amortization
of loans and investment securities, operations, and borrowing. The Corporation uses cash from these
and other sources to first fund loan growth. Any remaining cash is used primarily to purchase a combination
of short, intermediate, and longer-term investment securities, pay cash dividends, and repurchase
common stock under the Corporations share repurchase program. During the first nine months
of 2007, the Corporations cash and cash equivalent position increased by $17,902,000. The increase
occurred primarily because cash provided by deposit growth, securities runoff, borrowed funds and
operations exceeded the cash needed to grow loans.
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