Item 2. Managements Discussion
and Analysis of Financial Condition and Results of Operation
EARNINGS
SUMMARY
Comparison
of the Three and Nine Months Ended September 30, 2007 and 2006
Summary
Results
Net
income for the three months ended September 30, 2007 was $2,322,000 compared to
$2,464,000 for the same period of 2006. Basic and diluted earnings per share
for the three months ended September 30, 2007 were $0.60 as compared to $0.63
for the three months ended September 30, 2006. Return on average assets and
return on average equity were 1.57% and 13.21% for the three months ended
September 30, 2007 as compared to 1.71% and 13.41% for the corresponding period
of 2006. Net income from core operations (operating earnings) for the three
months ended September 30, 2007 and 2006, which excludes net after-tax
securities gains of $370,000 for the 2006 period, increased $228,000 to
$2,322,000 for the three months ended September 30, 2007 as compared to
$2,094,000 for the same period of 2006. Operating earnings per share for the
three months ended September 30, 2007 increased 13.2% or $0.07 to $0.60 basic
and dilutive as compared to the three months ended September 30, 2006. Operating
earnings per share for the three months ended September 30, 2007 represent a
$0.05 basic and dilutive increase from the previous three month period as core
earnings continued to build upon the $0.02 increase from the first to second
quarters of 2007.
The nine months ended
September 30, 2007 generated net income of $6,938,000 compared to $7,353,000
for the same period of 2006. Earnings per share, basic and diluted, for the
nine months ended September 30, 2007 were $1.78 as compared to $1.87 for the
comparable period of 2006. Return on average assets and return on average
equity were 1.57% and 12.63% for the nine months ended September 30, 2007 as
compared to 1.71% and 13.20% for the corresponding period of 2006
. Operating earnings for the nine months
ended September 30, 2007 and 2006, which excludes net after-tax securities
gains of $409,000 and $914,000, respectively, increased $90,000 to $6,529,000
for the 2007 period compared to $6,439,000 for the 2006 period. Operating
earnings per share, basic and dilutive, increased 3.1% to $1.68 for the nine
months ended September 30, 2007 as compared to $1.63 for the comparable period
of 2006.
(Management uses the
non-GAAP measure of net income from core operations in its analysis of the
Companys performance. This measure, as used by the Company, adjusts net income
by significant gains or losses that are unusual in nature. Because certain of
these items and their impact on the Companys performance are difficult to
predict, management believes the presentation of financial measures excluding
the impact of such items provides useful supplemental information in evaluating
the operating results of the Companys core businesses. For purposes of this
Quarterly Report on Form 10-Q, net income from core operations means net income
adjusted to exclude after-tax net securities gains. These disclosures should
not be viewed as a substitute for net income determined in accordance with
GAAP, nor are they necessarily comparable to non-GAAP performance measures that
may be presented by other companies.)
13
Interest
Income
Interest
income for the three months ended September 30, 2007 increased $430,000 to
$8,977,000 as compared to $8,547,000 for the same period of 2006. The increase
in interest income was primarily the result of growth in average loans of
$5,736,000 coupled with an 18 basis point (bp) increase in loan portfolio
yields for the three months ended September 30, 2007 over the same period of
2006. Over the same time frame, the average balance of investment securities
and interest bearing deposits increased $5,693,000 with the portfolio yield
increasing 28 bp resulting in a $164,000 increase in interest income. On a
taxable equivalent basis, the interest income from the investment portfolio and
interest bearing deposits increased $218,000 due to the investment portfolio
being strategically shifted toward tax-exempt instruments. The decrease in
dividends received is the result of a decrease in equity investments.
During
the nine months ended September 30, 2007, interest income was $26,449,000, an
increase of $1,533,000 over the same period in 2006. The reasons for the 6.2%
growth in interest income for the nine month period are identical to those for
the three month period ending September 30, 2007 discussed above. The growth in
average loans of $11,727,000 coupled with a 26 bp increase in the loan
portfolio yield resulted in an increase of $1,310,000 in loan interest and fee
income. Average investment securities and interest bearing deposits remained
stable, however, interest income increased $223,000 due to a 24 bp increase in
yield. The increase in yield was due to an increase in yield on taxable
securities as portfolio cash flow was reinvested into higher yielding bonds
over the past year. The asset allocation between loans and the investment
portfolio composition resulted in taxable equivalent interest income increasing
$1,673,000 for the nine months ended September 30, 2007 as compared to the same
period of 2006.
Interest
income composition for the three and nine months ended September 30, 2007 and
2006 was as follows:
14
|
|
For The Three Months Ended
|
|
|
|
September 30, 2007
|
|
September 30, 2006
|
|
Change
|
|
(In Thousands)
|
|
Amount
|
|
% Total
|
|
Amount
|
|
% Total
|
|
Amount
|
|
%
|
|
Loans including
fees
|
|
$
|
6,621
|
|
73.8
|
%
|
$
|
6,355
|
|
74.4
|
%
|
$
|
266
|
|
4.2
|
%
|
Investment
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
964
|
|
10.7
|
|
874
|
|
10.2
|
|
90
|
|
10.3
|
|
Tax-exempt
|
|
1,108
|
|
12.3
|
|
1,004
|
|
11.7
|
|
104
|
|
10.4
|
|
Dividend and
other interest income
|
|
284
|
|
3.2
|
|
314
|
|
3.7
|
|
(30
|
)
|
(9.6
|
)
|
Total interest
income
|
|
$
|
8,977
|
|
100.0
|
%
|
$
|
8,547
|
|
100.0
|
%
|
$
|
430
|
|
5.0
|
%
|
|
|
For The Nine Months Ended
|
|
|
|
September 30, 2007
|
|
September 30, 2006
|
|
Change
|
|
(In Thousands)
|
|
Amount
|
|
% Total
|
|
Amount
|
|
% Total
|
|
Amount
|
|
%
|
|
Loans including
fees
|
|
$
|
19,560
|
|
74.0
|
%
|
$
|
18,250
|
|
73.3
|
%
|
$
|
1,310
|
|
7.2
|
%
|
Investment
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
2,711
|
|
10.2
|
|
2,691
|
|
10.8
|
|
20
|
|
0.7
|
|
Tax-exempt
|
|
3,271
|
|
12.4
|
|
2,993
|
|
12.0
|
|
278
|
|
9.3
|
|
Dividend and
other interest income
|
|
907
|
|
3.4
|
|
982
|
|
3.9
|
|
(75
|
)
|
(7.6
|
)
|
Total interest
income
|
|
$
|
26,449
|
|
100.0
|
%
|
$
|
24,916
|
|
100.0
|
%
|
$
|
1,533
|
|
6.2
|
%
|
Interest
Expense
Interest
expense for the three months ended September 30, 2007 increased $405,000 to
$4,112,000 as compared to $3,707,000 for the same period of 2006. The increased
expense associated with deposits is primarily the result of rate increases for
time deposits, which are comprised of various certificates of deposit (CD)
accounts, from the three months ended September 30, 2006 to the corresponding
period of 2007. Factors that led to the rate increases include, but are not
limited to, competitive market pricing pressure and campaigns conducted to
attract 8 to 12 month maturity CDs that provide greater funding flexibility.
The increase in CD interest rates has exceeded the increase for other deposit
accounts. This has led to a shift of a portion of the money market and savings
deposit portfolios into higher yielding CDs. Borrowing interest expense on FHLB
advances and customer repurchase accounts increased $17,000 as rates paid
increased 4 bp, while the average balance of borrowed funds remained constant.
Interest
expense for the nine months ended September 30, 2007 increased $1,733,000 to
$12,050,000 from $10,317,000 for the comparable period of 2006. Interest on
deposits accounted for $1,963,000 of the increase due to the reasons noted in
the above three month analysis. Borrowing costs declined primarily due to the
previously noted CD campaigns that allowed for average FHLB advances to be
reduced for the nine months ended September 30, 2007 as compared to the same
period of 2006.
Interest
expense composition for the three and nine months ended September 30, 2007 and
2006 was as follows:
15
|
|
For The Three Months Ended
|
|
|
|
September 30, 2007
|
|
September 30, 2006
|
|
Change
|
|
(In Thousands)
|
|
Amount
|
|
% Total
|
|
Amount
|
|
% Total
|
|
Amount
|
|
%
|
|
Deposits
|
|
$
|
2,835
|
|
68.9
|
%
|
$
|
2,447
|
|
66.0
|
%
|
$
|
388
|
|
15.9
|
%
|
Short-term
borrowings
|
|
368
|
|
9.0
|
|
306
|
|
8.3
|
|
62
|
|
20.3
|
|
Long-term
borrowings, FHLB
|
|
909
|
|
22.1
|
|
954
|
|
25.7
|
|
(45
|
)
|
(4.7
|
)
|
Total interest
expense
|
|
$
|
4,112
|
|
100.0
|
%
|
$
|
3,707
|
|
100.0
|
%
|
$
|
405
|
|
10.9
|
%
|
|
|
For The Nine Months Ended
|
|
|
|
September 30, 2007
|
|
September 30, 2006
|
|
Change
|
|
(In Thousands)
|
|
Amount
|
|
% Total
|
|
Amount
|
|
% Total
|
|
Amount
|
|
%
|
|
Deposits
|
|
$
|
8,215
|
|
68.2
|
%
|
$
|
6,252
|
|
60.6
|
%
|
$
|
1,963
|
|
31.4
|
%
|
Short-term
borrowings
|
|
1,100
|
|
9.1
|
|
1,221
|
|
11.8
|
|
(121
|
)
|
(9.9
|
)
|
Long-term
borrowings, FHLB
|
|
2,735
|
|
22.7
|
|
2,844
|
|
27.6
|
|
(109
|
)
|
(3.8
|
)
|
Total interest
expense
|
|
$
|
12,050
|
|
100.0
|
%
|
$
|
10,317
|
|
100.0
|
%
|
$
|
1,733
|
|
16.8
|
%
|
Net Interest Margin
The
net interest margin (NIM) for the three months ended September 30, 2007 was
3.98% as compared to 4.00% for the corresponding period of 2006 and increased
slightly from 3.95% for the three months ended June 30, 2007. The decrease in
the NIM for the three months ended September 30, 2007 compared to the same
period in 2006 was due to the cost of interest bearing liabilities continuing
to increase at a rate greater than the increase in the yield on earning assets
as has been the trend over the past twelve months. The negative impact of the
disparity between the asset yield increases and the liability rate increases,
however, declined for the three months ended September 30, 2007 as compared to
the same period of 2006. Average loan growth of $5,736,000 and a shift in the
investment portfolio toward tax-exempt bonds paved the way for the increase in
yield on earning assets of 21 bp for the three month period ended September
2007 as compared to 2006. The average investment securities portfolio increased
by $6,088,000, as the tax-exempt segment increased to $95,383,000 at September
30, 2007 as compared to $91,234,000 at September 30, 2006. The growth in
tax-exempt bonds was part of the Companys tax strategy and was strategically
undertaken to provide the cash flow and yield desired from the portfolio as a
whole. The increase in the cost of interest bearing liabilities to 3.67% from
3.42% was driven primarily by the cost of time deposits increasing 48 bp for
the three months ended September 30, 2007 as compared to the previous year,
while the average balance of time deposits increased $17,503,000. The increase
in cost of time deposits was impacted by the Federal Open Market Committee rate
increases during 2006 of 100 bp, utilization of brokered deposits, and our
strategic decision to gather time deposits as part of marketing campaigns
associated with a branch opening and branch anniversaries in 2006 and 2007
The
NIM for the nine months ended September 30, 2007 was 3.96% as compared to 4.06%
for the corresponding period of 2006. The decrease in the NIM was the result of
the previously mentioned growth and change in mix of the earnings assets offset
by increased rates paid on interest bearing liabilities and growth in the
average CD portfolio of $29,282,000.
16
Following
is a schedule of average balances and associated yields for the three and nine
month periods ended September 30, 2007 and 2006:
|
|
AVERAGE BALANCES AND INTEREST RATES
|
|
|
|
Three Months Ended
|
|
Three Months Ended
|
|
|
|
September 30, 2007
|
|
September 30, 2006
|
|
(In Thousands)
|
|
Average Balance
|
|
Interest
|
|
Average Rate
|
|
Average Balance
|
|
Interest
|
|
Average Rate
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt loans
|
|
$
|
7,652
|
|
$
|
118
|
|
6.12
|
%
|
$
|
8,275
|
|
$
|
127
|
|
6.09
|
%
|
All other loans
|
|
354,032
|
|
6,543
|
|
7.33
|
%
|
347,673
|
|
6,271
|
|
7.16
|
%
|
Total loans
|
|
361,684
|
|
6,661
|
|
7.31
|
%
|
355,948
|
|
6,398
|
|
7.13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
investment securities
|
|
91,788
|
|
1,247
|
|
5.43
|
%
|
89,849
|
|
1,181
|
|
5.26
|
%
|
Tax-exempt
investment securities
|
|
95,383
|
|
1,679
|
|
7.04
|
%
|
91,234
|
|
1,521
|
|
6.67
|
%
|
Total securities
|
|
187,171
|
|
2,926
|
|
6.25
|
%
|
181,083
|
|
2,702
|
|
5.97
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing
deposits
|
|
40
|
|
1
|
|
9.92
|
%
|
435
|
|
7
|
|
6.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-earning assets
|
|
548,895
|
|
9,588
|
|
6.95
|
%
|
537,466
|
|
9,107
|
|
6.74
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
43,706
|
|
|
|
|
|
42,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
592,601
|
|
|
|
|
|
$
|
579,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
|
$
|
60,262
|
|
114
|
|
0.75
|
%
|
$
|
63,081
|
|
142
|
|
0.89
|
%
|
Super Now
deposits
|
|
46,531
|
|
153
|
|
1.30
|
%
|
47,071
|
|
170
|
|
1.43
|
%
|
Money market
deposits
|
|
23,183
|
|
131
|
|
2.24
|
%
|
23,300
|
|
131
|
|
2.23
|
%
|
Time deposits
|
|
203,690
|
|
2,437
|
|
4.75
|
%
|
186,187
|
|
2,004
|
|
4.27
|
%
|
Total deposits
|
|
333,666
|
|
2,835
|
|
3.37
|
%
|
319,639
|
|
2,447
|
|
3.04
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
32,910
|
|
368
|
|
4.44
|
%
|
27,255
|
|
306
|
|
4.45
|
%
|
Long-term
borrowings, FHLB
|
|
77,791
|
|
909
|
|
4.64
|
%
|
82,878
|
|
954
|
|
4.57
|
%
|
Total borrowings
|
|
110,701
|
|
1,277
|
|
4.58
|
%
|
110,133
|
|
1,260
|
|
4.54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-bearing liabilities
|
|
444,367
|
|
4,112
|
|
3.67
|
%
|
429,772
|
|
3,707
|
|
3.42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
70,689
|
|
|
|
|
|
69,660
|
|
|
|
|
|
Other
liabilities
|
|
7,249
|
|
|
|
|
|
6,596
|
|
|
|
|
|
Shareholders
equity
|
|
70,296
|
|
|
|
|
|
73,480
|
|
|
|
|
|
Total
liabilities and shareholders equity
|
|
$
|
592,601
|
|
|
|
|
|
$
|
579,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate
spread
|
|
|
|
|
|
3.28
|
%
|
|
|
|
|
3.32
|
%
|
Net interest
income/margin
|
|
|
|
$
|
5,476
|
|
3.98
|
%
|
|
|
$
|
5,400
|
|
4.00
|
%
|
1.
Information on this
table has been calculated using average daily balance sheets to obtain average
balances.
2.
Nonaccrual loans
have been included with loans for the purpose of analyzing net interest
earnings.
3.
Income and rates on
a fully taxable equivalent basis include an adjustment for the difference
between annual income from tax-exempt obligations and the taxable equivalent of
such income at the standard 34% tax rate.
17
|
|
AVERAGE BALANCES AND INTEREST RATES
|
|
|
|
Nine Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30, 2007
|
|
September 30, 2006
|
|
(In Thousands)
|
|
Average Balance
|
|
Interest
|
|
Average Rate
|
|
Average Balance
|
|
Interest
|
|
Average Rate
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt loans
|
|
$
|
7,913
|
|
$
|
365
|
|
6.17
|
%
|
$
|
8,155
|
|
$
|
377
|
|
6.18
|
%
|
All other loans
|
|
353,219
|
|
19,320
|
|
7.31
|
%
|
341,250
|
|
18,001
|
|
7.05
|
%
|
Total loans
|
|
361,132
|
|
19,685
|
|
7.29
|
%
|
349,405
|
|
18,378
|
|
7.03
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
securities
|
|
85,930
|
|
3,600
|
|
5.59
|
%
|
93,848
|
|
3,664
|
|
5.21
|
%
|
Tax-exempt
securities
|
|
99,497
|
|
4,956
|
|
6.64
|
%
|
90,972
|
|
4,535
|
|
6.65
|
%
|
Total securities
|
|
185,427
|
|
8,556
|
|
6.15
|
%
|
184,820
|
|
8,199
|
|
5.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing
deposits
|
|
431
|
|
18
|
|
5.58
|
%
|
161
|
|
9
|
|
7.47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-earning assets
|
|
546,990
|
|
28,259
|
|
6.90
|
%
|
534,386
|
|
26,586
|
|
6.65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
42,390
|
|
|
|
|
|
39,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
589,380
|
|
|
|
|
|
$
|
574,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
|
$
|
59,726
|
|
329
|
|
0.74
|
%
|
$
|
63,150
|
|
398
|
|
0.84
|
%
|
Super Now
deposits
|
|
46,309
|
|
455
|
|
1.31
|
%
|
47,835
|
|
488
|
|
1.36
|
%
|
Money market
deposits
|
|
24,362
|
|
414
|
|
2.27
|
%
|
24,190
|
|
367
|
|
2.03
|
%
|
Time deposits
|
|
198,401
|
|
7,017
|
|
4.73
|
%
|
169,119
|
|
4,999
|
|
3.95
|
%
|
Total Deposits
|
|
328,798
|
|
8,215
|
|
3.34
|
%
|
304,294
|
|
6,252
|
|
2.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
32,443
|
|
1,100
|
|
4.53
|
%
|
37,761
|
|
1,221
|
|
4.32
|
%
|
Other borrowings
|
|
78,818
|
|
2,735
|
|
4.64
|
%
|
83,359
|
|
2,844
|
|
4.56
|
%
|
Total borrowings
|
|
111,261
|
|
3,835
|
|
4.61
|
%
|
121,120
|
|
4,065
|
|
4.49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-bearing liabilities
|
|
440,059
|
|
12,050
|
|
3.66
|
%
|
425,414
|
|
10,317
|
|
3.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
69,203
|
|
|
|
|
|
69,219
|
|
|
|
|
|
Other
liabilities
|
|
6,866
|
|
|
|
|
|
5,245
|
|
|
|
|
|
Shareholders
equity
|
|
73,252
|
|
|
|
|
|
74,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
589,380
|
|
|
|
|
|
$
|
574,133
|
|
|
|
|
|
Interest rate
spread
|
|
|
|
|
|
3.24
|
%
|
|
|
|
|
3.41
|
%
|
Net interest
income/margin
|
|
|
|
$
|
16,209
|
|
3.96
|
%
|
|
|
$
|
16,269
|
|
4.06
|
%
|
1.
Information on this
table has been calculated using average daily balance sheets to obtain average
balances.
2.
Nonaccrual loans
have been included with loans for the purpose of analyzing net interest
earnings.
3.
Income and rates on
a fully taxable equivalent basis include an adjustment for the difference
between annual income from tax-exempt obligations and the taxable equivalent of
such income at the standard 34% tax rate.
18
The following table presents the
adjustment to convert net interest income to net interest income on a fully
taxable equivalent basis for the three and nine month periods ended September
30, 2007 and 2006.
|
|
For the Three Months Ended
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
(In Thousands)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Total interest
income
|
|
$
|
8,977
|
|
$
|
8,547
|
|
$
|
26,449
|
|
$
|
24,916
|
|
Total interest
expense
|
|
4,112
|
|
3,707
|
|
12,050
|
|
10,317
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
income
|
|
4,865
|
|
4,840
|
|
14,399
|
|
14,599
|
|
Tax equivalent
adjustment
|
|
611
|
|
560
|
|
1,810
|
|
1,670
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
income (fully taxable equivalent)
|
|
$
|
5,476
|
|
$
|
5,400
|
|
$
|
16,209
|
|
$
|
16,269
|
|
The following table sets forth the
respective impact that both volume and rate changes have had on net interest
income on a fully taxable equivalent basis for the three and nine month periods
ended September 30, 2007 and 2006:
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2007 vs 2006
|
|
2007 vs 2006
|
|
|
|
Increase (Decrease)
|
|
Increase (Decrease)
|
|
|
|
Due to
|
|
Due to
|
|
(In Thousands)
|
|
Volume
|
|
Rate
|
|
Net
|
|
Volume
|
|
Rate
|
|
Net
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans,
tax-exempt
|
|
$
|
(10
|
)
|
$
|
1
|
|
$
|
(9
|
)
|
$
|
(11
|
)
|
$
|
(1
|
)
|
$
|
(12
|
)
|
Loans
|
|
118
|
|
154
|
|
272
|
|
642
|
|
677
|
|
1,319
|
|
Taxable
investment securities
|
|
25
|
|
41
|
|
66
|
|
(419
|
)
|
355
|
|
(64
|
)
|
Tax-exempt
investment securities
|
|
71
|
|
87
|
|
158
|
|
425
|
|
(4
|
)
|
421
|
|
Interest bearing
deposits
|
|
(6
|
)
|
|
|
(6
|
)
|
15
|
|
(6
|
)
|
9
|
|
Total
interest-earning assets
|
|
198
|
|
283
|
|
481
|
|
652
|
|
1,021
|
|
1,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
|
(6
|
)
|
(22
|
)
|
(28
|
)
|
(21
|
)
|
(48
|
)
|
(69
|
)
|
Super Now
deposits
|
|
(2
|
)
|
(15
|
)
|
(17
|
)
|
(16
|
)
|
(17
|
)
|
(33
|
)
|
Money market
deposits
|
|
(2
|
)
|
2
|
|
|
|
3
|
|
44
|
|
47
|
|
Time deposits
|
|
197
|
|
236
|
|
433
|
|
939
|
|
1,079
|
|
2,018
|
|
Short-term
borrowings
|
|
63
|
|
(1
|
)
|
62
|
|
(184
|
)
|
63
|
|
(121
|
)
|
Long-term
borrowings, FHLB
|
|
(59
|
)
|
14
|
|
(45
|
)
|
(159
|
)
|
50
|
|
(109
|
)
|
Total
interest-bearing liabilities
|
|
191
|
|
214
|
|
405
|
|
562
|
|
1,171
|
|
1,733
|
|
Change in net
interest income
|
|
$
|
7
|
|
$
|
69
|
|
$
|
76
|
|
$
|
90
|
|
$
|
(150
|
)
|
$
|
(60
|
)
|
Provision
for Loan Losses
The
provision for loan losses is based upon managements quarterly review of the
loan portfolio. The purpose of the review is to assess loan quality, identify
impaired loans, analyze delinquencies, ascertain loan growth, evaluate
potential charge-offs and recoveries, and assess general economic conditions in
the markets served. An external independent loan review is also
19
performed
annually for the Bank. Management remains committed to an aggressive program of
problem loan identification and resolution.
The allowance for loan
losses is determined by applying loss factors to outstanding loans by type,
excluding loans for which a specific allowance has been determined. Loss
factors are based on managements consideration of the nature of the portfolio
segments, changes in mix and volume of the loan portfolio, and historical loan
loss experience. In addition, management considers industry standards and
trends with respect to non-performing loans and its knowledge and experience
with specific lending segments.
Although management
believes it uses the best information available to make such determinations and
that the allowance for loan losses is adequate at September 30, 2007, future
adjustments could be necessary if circumstances or economic conditions differ
substantially from the assumptions used in making the initial determinations. A
downturn in the local economy, employment, and delays in receiving financial
information from borrowers could result in increased levels of nonperforming
assets, charge-offs, loan loss provisions, and reductions in income. Additionally,
as an integral part of the examination process, bank regulatory agencies
periodically review the Banks loan loss allowance. The banking agencies could
require the recognition of additions to the loan loss allowance based on their
judgment of information available to them at the time of their examination.
While determining the
appropriate allowance level, management has attributed the allowance for loan
losses to various portfolio segments; however, the allowance is available for
the entire portfolio as needed.
The allowance for loan
losses decreased from $4,185,000 at December 31, 2006 to $4,092,000 at
September 30, 2007. At September 30, 2007, the allowance for loan losses was
1.14% of total loans compared to 1.16% of total loans at December 31, 2006. Managements
conclusion is that the allowance for loan losses is adequate
to provide for possible losses inherent in
the loan portfolio as of the balance sheet date.
The provision for loan
losses totaled $10,000 and $60,000 for the three and nine months ended
September 30, 2007, respectively, as compared to $89,000 and $485,000 for the
same periods in 2006. The decrease in the provision was the result of several
continuing positive factors, including but not limited to, a ratio of
annualized net charge offs to average loans of 0.06% for the nine months ended
September 30, 2007, a ratio of nonperforming loans to total loans of 0.28% at
September 30, 2007, and a ratio of the allowance for loan losses to
nonperforming loans of 403.95% at September 30, 2007. In addition, gross loans
have declined $2,669,000 since December 31, 2006 due to a softening of the loan
market and the payoff of several commercial loans.
Based upon this analysis,
as well as the others noted above, management has concluded that the allowance
for loan losses remains at a level adequate to provide for probable losses
inherent in its loan portfolio.
20
Non-interest
Income
Total
non-interest income for the three months ended September 30, 2007 compared to
the same period in 2006 decreased $381,000 to $2,006,000 primarily as a result
of the amount of net securities gains realized during the three month period
ended September 30, 2006. Excluding net securities gains, non-interest income
would have increased $180,000 as compared to the 2006 period. Deposit service
charges declined $50,000 as overdraft protection fees declined and customers
migrated to new checking accounts having reduced or no service charges. Other
income increased due primarily to revenue generated from increased debit card
transactions, merchant card commissions, and commissions generated by The M
Group for securities transactions.
Insurance
commissions for the three months ended September 30, 2007 increased $123,000 as
compared to the same period in 2006 due to a shift in product mix. Management
of The M Group continues to pursue new and build upon current relationships. The
sales call program continues to expand to other financial institutions, which
results in additional revenue for The M Group. However, the addition of another
sales outlet for The M-Group can take up to a year or more to be completed.
Total
non-interest income for the nine months ended September 30, 2007 compared to
the same period in 2006 decreased $774,000. Excluding net securities gains,
non-interest income would have remained stable as compared to the 2006 period. The
decrease in non-interest income for the nine month period is the result of the
same items noted in the three month discussion.
Non-interest
income composition for the three and nine months ended September 30, 2007 and
2006 were as follows:
21
|
|
For The Three Months Ended
|
|
|
|
September 30, 2007
|
|
September 30, 2006
|
|
Change
|
|
(In Thousands)
|
|
Amount
|
|
% Total
|
|
Amount
|
|
% Total
|
|
Amount
|
|
%
|
|
Deposit service
charges
|
|
$
|
546
|
|
27.2
|
%
|
$
|
596
|
|
25.0
|
%
|
$
|
(50
|
)
|
(8.4
|
)%
|
Securities
gains, net
|
|
|
|
|
|
561
|
|
23.5
|
|
(561
|
)
|
(100.0
|
)
|
Bank owned life
insurance
|
|
109
|
|
5.4
|
|
94
|
|
3.9
|
|
15
|
|
16.0
|
|
Gain on sale of
loans
|
|
282
|
|
14.1
|
|
264
|
|
11.1
|
|
18
|
|
6.8
|
|
Insurance
commissions
|
|
625
|
|
31.2
|
|
502
|
|
21.0
|
|
123
|
|
24.5
|
|
Other
|
|
444
|
|
22.1
|
|
370
|
|
15.5
|
|
74
|
|
19.9
|
|
Total non-interest
income
|
|
$
|
2,006
|
|
100.0
|
%
|
$
|
2,387
|
|
100.0
|
%
|
$
|
(381
|
)
|
(16.0
|
)%
|
|
|
For The Nine Months Ended
|
|
|
|
September 30, 2007
|
|
September 30, 2006
|
|
Change
|
|
(In Thousands)
|
|
Amount
|
|
% Total
|
|
Amount
|
|
% Total
|
|
Amount
|
|
%
|
|
Deposit service
charges
|
|
$
|
1,654
|
|
26.8
|
%
|
$
|
1,773
|
|
25.5
|
%
|
$
|
(119
|
)
|
(6.7
|
)%
|
Securities
gains, net
|
|
619
|
|
10.0
|
|
1,385
|
|
20.0
|
|
(766
|
)
|
(55.3
|
)
|
Bank owned life
insurance
|
|
310
|
|
5.0
|
|
272
|
|
3.9
|
|
38
|
|
14.0
|
|
Gain on sale of
loans
|
|
654
|
|
10.6
|
|
624
|
|
9.0
|
|
30
|
|
4.8
|
|
Insurance
commissions
|
|
1,613
|
|
26.2
|
|
1,732
|
|
25.0
|
|
(119
|
)
|
(6.9
|
)
|
Other
|
|
1,316
|
|
21.4
|
|
1,154
|
|
16.6
|
|
162
|
|
14.0
|
|
Total
non-interest income
|
|
$
|
6,166
|
|
100.0
|
%
|
$
|
6,940
|
|
100.0
|
%
|
$
|
(774
|
)
|
(11.2
|
)%
|
Non-interest
Expense
Total
non-interest expense increased $316,000 for the three months ended September
30, 2007 compared to the same period of 2006. The increase in salaries and
employee benefits was attributable to several items including standard cost of
living wage adjustments for employees, new additions to our staff, and increased
benefit costs. Occupancy expense increased due to the new branch in
Montoursville, which opened in the third quarter of 2006, and increased cost of
maintenance and property taxes. Other expenses increased primarily due to
normal anticipated inflationary adjustments to ongoing business operating costs
and the amortization related to a low income housing partnership that began
operation during the fourth quarter of 2006.
Total
non-interest expenses increased $755,000 for the nine months ended September 30,
2007 as compared to the same period of 2006. As noted above in the three month
discussion, the new Montoursville branch in addition to normal increases in
general business expenses and the amortization of a low income housing
partnership, impacted the level of non-interest expenses.
Non-interest
expense composition for the three and nine months ended September 30, 2007 and
2006 were as follows:
22
|
|
For The Three Months Ended
|
|
|
|
September 30, 2007
|
|
September 30, 2006
|
|
Change
|
|
(In Thousands)
|
|
Amount
|
|
% Total
|
|
Amount
|
|
% Total
|
|
Amount
|
|
%
|
|
Salaries and
employee benefits
|
|
$
|
2,330
|
|
52.6
|
%
|
$
|
2,174
|
|
52.8
|
%
|
$
|
156
|
|
7.2
|
%
|
Occupancy, net
|
|
319
|
|
7.2
|
|
308
|
|
7.5
|
|
11
|
|
3.6
|
|
Furniture and
equipment
|
|
267
|
|
6.0
|
|
309
|
|
7.5
|
|
(42
|
)
|
(13.6
|
)
|
Pennsylvania
shares tax
|
|
160
|
|
3.6
|
|
151
|
|
3.7
|
|
9
|
|
6.0
|
|
Other
|
|
1,354
|
|
30.6
|
|
1,172
|
|
28.5
|
|
182
|
|
15.5
|
|
Total
non-interest expense
|
|
$
|
4,430
|
|
100.0
|
%
|
$
|
4,114
|
|
100.0
|
%
|
$
|
316
|
|
7.7
|
%
|
|
|
For The Nine Months Ended
|
|
|
|
September 30, 2007
|
|
September 30, 2006
|
|
Change
|
|
(In Thousands)
|
|
Amount
|
|
% Total
|
|
Amount
|
|
% Total
|
|
Amount
|
|
%
|
|
Salaries and
employee benefits
|
|
$
|
6,912
|
|
53.6
|
%
|
$
|
6,620
|
|
54.5
|
%
|
$
|
292
|
|
4.4
|
%
|
Occupancy, net
|
|
987
|
|
7.7
|
|
826
|
|
6.8
|
|
161
|
|
19.5
|
|
Furniture and equipment
|
|
850
|
|
6.6
|
|
894
|
|
7.4
|
|
(44
|
)
|
(4.9
|
)
|
Pennsylvania
shares tax
|
|
482
|
|
3.7
|
|
447
|
|
3.7
|
|
35
|
|
7.8
|
|
Other
|
|
3,667
|
|
28.4
|
|
3,356
|
|
27.6
|
|
311
|
|
9.3
|
|
Total
non-interest expense
|
|
$
|
12,898
|
|
100.0
|
%
|
$
|
12,143
|
|
100.0
|
%
|
$
|
755
|
|
6.2
|
%
|
Provision
for Income Taxes
Income
taxes decreased $451,000 and $889,000 for the three and nine month periods
ended September 30, 2007 compared to the same periods of 2006. The effective
tax rates for the three and nine months ended September 30, 2007 were 4.48% and
8.79%, respectively, as compared to 18.52% and 17.48% for the same periods of
2006. The decline in the effective tax rate is consistent with managements
repositioning of the investment portfolio from taxable investment securities to
tax-exempt investment securities, additional tax credits related to investments
in low income housing projects, and greater than anticipated tax losses on the
housing projects. The current effective tax rate has resulted in a deferred tax
asset due to the low income housing tax credits. Management has reviewed the
deferred tax asset and has determined that the asset will be utilized within
the appropriate carry forward period and therefore does not require a valuation
allowance.
ASSET/LIABILITY
MANAGEMENT
Cash
and Cash Equivalents
Cash and cash equivalents
decreased $2,130,000 from $15,373,000 at December 31, 2006 to $13,243,000 at
September 30, 2007 primarily as a result of the following activities during the
nine months ended September 30, 2007:
Loans
Held for Sale
Activity regarding loans
held for sale resulted in loan originations exceeding sale proceeds, less
$654,000 in realized gains, by $2,787,000 for the nine months ended September
30, 2007.
23
Loans
Gross loans decreased
$2,669,000 since December 31, 2006 due to the early payoff of several large
commercial loans coupled with increased competition for commercial loans and a
softening of the market.
The allocation of the loan portfolio, by category,
as of September 30, 2007 and December 31, 2006 is presented below:
|
|
September 30,
|
|
December 31,
|
|
Change
|
|
(In Thousands)
|
|
2007
|
|
2006
|
|
Amount
|
|
%
|
|
Commercial,
financial, and agricultural
|
|
$
|
35,868
|
|
$
|
36,995
|
|
$
|
(1,127
|
)
|
(3.0
|
)%
|
Real estate
mortgage:
|
|
|
|
|
|
|
|
|
|
Residential
|
|
162,163
|
|
158,219
|
|
3,944
|
|
2.5
|
|
Commercial
|
|
129,726
|
|
135,404
|
|
(5,678
|
)
|
(4.2
|
)
|
Construction
|
|
17,492
|
|
16,749
|
|
743
|
|
4.4
|
|
Installment
loans to individuals
|
|
13,400
|
|
14,035
|
|
(635
|
)
|
(4.5
|
)
|
Less: Net
deferred loan fees
|
|
934
|
|
1,018
|
|
(84
|
)
|
(8.3
|
)
|
Gross loans
|
|
$
|
357,715
|
|
$
|
360,384
|
|
$
|
(2,669
|
)
|
(0.7
|
)%
|
The recorded investment in loans for which impairment has been
recognized in accordance with Statement of Financial Accounting Standards No.
114,
Accounting by Creditors for Impairment of a Loan
,
amounted to $1,195,000 at September 30, 2007, as compared to $574,000 at
December 31, 2006. The valuation allowance related to impaired loans amounted
to $98,000 at September 30, 2007 and $42,000 at December 31, 2006. The increase
in impaired loans is primarily from a single commercial relationship that
accounted for $523,000 of the increase, while the increase in valuation
allowance is the result of a second commercial relationship that had a specific
collateral weakness.
A loan is considered impaired, based on current information and events,
if it is probable that the Bank will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms
of the loan agreement. The measurement of impaired loans is generally based on
the present value of expected future cash flows discounted at the historical
effective interest rate, except that all collateral-dependent loans are
measured for impairment based on the fair value of the collateral.
Investments
The
estimated fair value of the investment securities portfolio in total has
increased $19,550,000 since December 31, 2006, while the amortized cost
increased $25,613,000. The majority of the changes in value incurred within the
state and municipal segment of the portfolio. The amortized cost position in
state and political securities increased $6,115,000 as the Bank continued its
strategy to build call protection, maintain taxable equivalent yields, reduce
the effective federal
24
income
tax rate, and invest in communities across the Commonwealth of Pennsylvania and
the country. The amortized cost position of other debt securities increased
$13,806,000 as the Bank began a leverage transaction to enhance earning asset
yields in a softening loan market. The increased level of unrealized losses,
which offset the increase in amortized cost, was the result of changes in the
yield curve, not credit quality, as the credit quality of the portfolio remains
sound.
The
amortized cost of investment securities and their estimated fair values are as
follows:
25
|
|
September 30, 2007
|
|
|
|
|
|
Gross
|
|
Gross
|
|
Estimated
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
(In Thousands)
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
Available for
sale (AFS)
|
|
|
|
|
|
|
|
|
|
U.S. Government
and agency
securities
|
|
$
|
60,732
|
|
$
|
69
|
|
$
|
(714
|
)
|
$
|
60,087
|
|
State and
political securities
|
|
110,773
|
|
561
|
|
(2,287
|
)
|
109,047
|
|
Other debt
securities
|
|
15,799
|
|
36
|
|
(173
|
)
|
15,662
|
|
Total debt
securities
|
|
187,304
|
|
666
|
|
(3,174
|
)
|
184,796
|
|
Equity
securities
|
|
20,274
|
|
1,000
|
|
(1,312
|
)
|
19,962
|
|
Total investment
securities AFS
|
|
$
|
207,578
|
|
$
|
1,666
|
|
$
|
(4,486
|
)
|
$
|
204,758
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity
(HTM)
|
|
|
|
|
|
|
|
|
|
U.S. Government
and agency
securities
|
|
$
|
14
|
|
$
|
1
|
|
$
|
|
|
$
|
15
|
|
Other debt
securities
|
|
262
|
|
1
|
|
|
|
263
|
|
Total investment
securities HTM
|
|
$
|
276
|
|
$
|
2
|
|
$
|
|
|
$
|
278
|
|
|
|
December 31, 2006
|
|
|
|
|
|
Gross
|
|
Gross
|
|
Estimated
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
(In Thousands)
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
Available for
sale (AFS)
|
|
|
|
|
|
|
|
|
|
U.S. Government
and agency
securities
|
|
$
|
54,949
|
|
$
|
24
|
|
$
|
(821
|
)
|
$
|
54,152
|
|
State and
political securities
|
|
104,658
|
|
1,646
|
|
(358
|
)
|
105,946
|
|
Other debt
securities
|
|
1,998
|
|
37
|
|
(11
|
)
|
2,024
|
|
Total debt
securities
|
|
161,605
|
|
1,707
|
|
(1,190
|
)
|
162,122
|
|
Equity
securities
|
|
20,353
|
|
2,883
|
|
(158
|
)
|
23,078
|
|
Total investment
securities AFS
|
|
$
|
181,958
|
|
$
|
4,590
|
|
$
|
(1,348
|
)
|
$
|
185,200
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity
(HTM)
|
|
|
|
|
|
|
|
|
|
U.S. Government
and agency
securities
|
|
$
|
26
|
|
$
|
2
|
|
$
|
|
|
$
|
28
|
|
Other debt
securities
|
|
257
|
|
1
|
|
|
|
258
|
|
Total investment
securities HTM
|
|
$
|
283
|
|
$
|
3
|
|
$
|
|
|
$
|
286
|
|
26
Financing Activities
Deposits
Total
deposits increased 2.4% or $9,663,000 from December 31, 2006 to September 30,
2007. The mix of deposits has shifted from December 31, 2006 to September 30,
2007 as brokered deposits have decreased substantially and customer time
deposits have increased. The shift is the result of the Bank strategically
attracting short-term customer time deposits and utilizing the funds gathered
to replace maturing brokered time deposits and higher cost short-term FHLB
advances. The amount of brokered deposits is continuously monitored and is used
to supplement deposits, not as a primary source of deposits.
Deposit balances and their changes
for the periods being discussed follow:
|
|
September 30, 2007
|
|
December 31, 2006
|
|
Change
|
|
(In Thousands)
|
|
Amount
|
|
% Total
|
|
Amount
|
|
% Total
|
|
Amount
|
|
%
|
|
Demand deposits
|
|
$
|
72,990
|
|
18.0
|
%
|
$
|
73,160
|
|
18.5
|
%
|
$
|
(170
|
)
|
(0.2
|
)%
|
NOW accounts
|
|
47,129
|
|
11.6
|
|
46,156
|
|
11.7
|
|
973
|
|
2.1
|
|
Money market
deposits
|
|
22,295
|
|
5.5
|
|
23,137
|
|
5.9
|
|
(842
|
)
|
(3.6
|
)
|
Savings deposits
|
|
59,883
|
|
14.8
|
|
59,289
|
|
15.0
|
|
594
|
|
1.0
|
|
Time deposits
|
|
189,313
|
|
46.8
|
|
168,420
|
|
42.6
|
|
20,893
|
|
12.4
|
|
Time deposits -
brokered
|
|
13,244
|
|
3.3
|
|
25,029
|
|
6.3
|
|
(11,785
|
)
|
(47.1
|
)
|
Total deposits
|
|
$
|
404,854
|
|
100.0
|
%
|
$
|
395,191
|
|
100.0
|
%
|
$
|
9,663
|
|
2.4
|
%
|
Borrowed Funds
Total borrowed funds
increased 11.6% to $131,171,000 at September 30, 2007 as compared to
$117,575,000 at December 31, 2006. The increase in borrowed funds is primarily
the result of an investment portfolio leverage strategy that was initiated
during September 2007. The leverage program at September 30, 2007 accounted for
$20,000,000 in borrowings split evenly between short-term and long-term FHLB
borrowings. Off setting the increase related to the leverage strategy were the
previously discussed time deposit gathering campaigns that were utilized to
provide funds to reduce the level of higher cost short-term borrowings and to
assist in replacing long-term borrowing maturities. Long-term borrowings
increased due to the maturity of four borrowings totaling $16,500,000 that
carried an average rate of 3.99% offset by two new $10,000,000 FHLB borrowings
that mature in 2017 and carry a rate of 4.28% and 4.15%, respectively.
27
|
|
September 30, 2007
|
|
December 31, 2006
|
|
Change
|
|
(In Thousands)
|
|
Amount
|
|
% Total
|
|
Amount
|
|
% Total
|
|
Amount
|
|
%
|
|
Short-term
borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB repurchase
agreements
|
|
$
|
12,870
|
|
9.8
|
%
|
$
|
18,706
|
|
15.9
|
%
|
$
|
(5,836
|
)
|
(31.2
|
)%
|
Short-term borrowings,
FHLB
|
|
15,000
|
|
11.4
|
|
|
|
|
|
15,000
|
|
|
|
Securities sold
under agreement to repurchase
|
|
16,923
|
|
12.9
|
|
15,991
|
|
13.6
|
|
932
|
|
5.8
|
|
Total short-term
borrowings
|
|
44,793
|
|
34.1
|
%
|
34,697
|
|
29.5
|
%
|
10,096
|
|
29.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings,
FHLB
|
|
86,378
|
|
65.9
|
|
82,878
|
|
70.5
|
|
3,500
|
|
4.2
|
|
Total borrowed
funds
|
|
$
|
131,171
|
|
100.0
|
%
|
$
|
117,575
|
|
100.0
|
%
|
$
|
13,596
|
|
11.6
|
%
|
Capital
The adequacy of the
Companys capital is reviewed on an ongoing basis with reference to the size,
composition, and quality of the Companys resources and regulatory guidelines. Management
seeks to maintain a level of capital sufficient to support existing assets and
anticipated asset growth, maintain favorable access to capital markets, and
preserve high quality credit ratings.
Bank holding companies
are required to comply with the Federal Reserve Boards risk-based capital
guidelines. The risk-based capital rules are designed to make regulatory
capital requirements more sensitive to differences in risk profiles among banks
and bank holding companies and to minimize disincentives for holding liquid
assets. Specifically, each is required to maintain certain minimum dollar
amounts and ratios of Total risk-based, Tier I risk-based, and Tier I leverage
capital requirements. In addition to the capital requirements, the Federal
Deposit Insurance Corporation Improvements Act (FDICIA) established five
capital categories ranging from well capitalized to critically
undercapitalized. To be classified as well capitalized, Total risk-based,
Tier I risked-based, and Tier I leverage capital ratios must be at least 10%,
6%,
and 5%, respectively.
28
Capital
ratios as of September 30, 2007 and December 31, 2006 were as follows:
|
|
2007
|
|
2006
|
|
(In Thousands)
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Total Capital
|
|
|
|
|
|
|
|
|
|
(to
Risk-weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
$
|
72,574
|
|
18.6
|
%
|
$
|
73,098
|
|
20.5
|
%
|
For Capital
Adequacy Purposes
|
|
31,149
|
|
8.0
|
|
28,515
|
|
8.0
|
|
To Be Well
Capitalized
|
|
38,937
|
|
10.0
|
|
35,643
|
|
10.0
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital
|
|
|
|
|
|
|
|
|
|
(to
Risk-weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
$
|
68,482
|
|
17.6
|
%
|
$
|
67,869
|
|
19.0
|
%
|
For Capital
Adequacy Purposes
|
|
15,575
|
|
4.0
|
|
14,257
|
|
4.0
|
|
To Be Well
Capitalized
|
|
23,362
|
|
6.0
|
|
21,386
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital
|
|
|
|
|
|
|
|
|
|
(to Average
Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
$
|
68,482
|
|
11.6
|
%
|
$
|
67,869
|
|
12.0
|
%
|
For Capital
Adequacy Purposes
|
|
23,714
|
|
4.0
|
|
22,591
|
|
4.0
|
|
To Be Well
Capitalized
|
|
29,643
|
|
5.0
|
|
28,239
|
|
5.0
|
|
Liquidity
and Interest Rate Sensitivity
The asset/liability
committee addresses the liquidity needs of the Company to ensure that
sufficient funds are available to meet credit demands and deposit withdrawals
as well as to the placement of available funds in the investment portfolio. In
assessing liquidity requirements, equal consideration is given to the current
position as well as the future outlook.
The following liquidity
measures are monitored for compliance within the limits cited:
1. Net Loans to Total
Assets, 85% maximum
2. Net Loans to Total
Deposits, 100% maximum
3. Cumulative 90 day
Maturity GAP %, +/- 20% maximum
4. Cumulative 1 Year
Maturity GAP %, +/- 20% maximum
Fundamental
objectives of the Companys asset/liability management process are to maintain
adequate liquidity while minimizing interest rate risk. The maintenance of
adequate liquidity
29
provides
the Company with the ability to meet its financial obligations to depositors,
loan customers, and shareholders. Additionally, it provides funds for normal
operating expenditures and business opportunities as they arise. The objective
of interest rate sensitivity management is to increase net interest income by
managing interest sensitive assets and liabilities in such a way that they can
be repriced in response to changes in market interest rates.
The
Bank, like other financial institutions, must have sufficient funds available
to meet its liquidity needs for deposit withdrawals, loan commitments and
originations, and expenses. In order to control cash flow, the Bank estimates
future flows of cash from deposits, loan payments, and investment security
payments. The primary sources of funds are deposits, principal and interest
payments on loans and investment securities, FHLB borrowings, and brokered
deposits. Management believes the Bank has adequate resources to meet its
normal funding requirements.
Management
monitors the Companys liquidity on both a long and short-term basis, thereby
providing management necessary information to react to current balance sheet
trends. Cash flow needs are assessed and sources of funds are determined. Funding
strategies consider both customer needs and economical cost. Both short and
long-term funding needs are addressed by maturities and sales of available for
sale investment securities, loan repayments and maturities, and liquidating
money market investments such as federal funds sold. The use of these
resources, in conjunction with access to credit provides core ingredients to
satisfy depositor, borrower, and creditor needs.
Management
monitors and determines the desirable level of liquidity. Consideration is
given to loan demand, investment opportunities, deposit pricing and growth
potential, as well as the current cost of borrowing funds. The Company has a
current borrowing capacity at the FHLB of
$218,872,000.
In addition to this credit arrangement, the
Company has additional lines of credit with correspondent banks of $29,535,000.
Management believes it has sufficient liquidity to satisfy estimated short-term
and long-term funding needs. FHLB borrowings totaled $114,248,000 as of
September 30, 2007.
Interest
rate sensitivity, which is closely related to liquidity management, is a
function of the repricing characteristics of the Companys portfolio of assets
and liabilities. Asset/liability management strives to match maturities and
rates between loan and investment security assets with the deposit liabilities
and borrowings that fund them. Successful asset/liability management results in
a balance sheet structure which can cope effectively with market rate
fluctuations. The matching process is affected by segmenting both assets and
liabilities into future time periods (usually 12 months, or less) based upon
when repricing can be effected. Repriceable assets are subtracted from
repriceable liabilities, for a specific time period to determine the gap, or
difference. Once known, the gap is managed based on predictions about future
market interest rates. Intentional mismatching, or gapping, can enhance net
interest income if market rates move as predicted. However, if market rates
behave in a manner contrary to predictions, net interest income will suffer. Gaps,
therefore, contain an element of risk and must be prudently managed. In
addition to gap management, the Company has an asset/liability management
policy which incorporates a market value at risk calculation which is used to
determine the effects of interest rate movements on shareholders equity and a
simulation analysis to monitor the effects of interest rate changes on the
Companys balance sheet.
30
There
have been no substantial changes in the Companys gap analyses or simulation
analyses compared to the information provided in the Companys Form 10-K for
the year ended December 31, 2006.
Generally,
management believes the Company is well positioned to respond in a timely
manner when the market interest rate outlook changes.
Inflation
The asset and liability
structure of a financial institution is primarily monetary in nature. Therefore,
interest rates rather than inflation have a more significant impact on the
Companys performance. Interest rates are not always affected in the same
direction or magnitude as prices of other goods and services, but are
reflective of fiscal policy initiatives or economic factors which are not
measured by a price index.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market
risk for the Company is comprised primarily of interest rate risk exposure and
liquidity risk. Interest rate risk and liquidity risk management is performed
at the Bank level as well as the Company level. The Companys interest rate
sensitivity is monitored by management through selected interest rate risk
measures produced by an independent third party. There have been no substantial
changes in the Companys gap analyses or simulation analyses compared to the
information provided in the Annual Report on Form 10-K for the period ended
December 31, 2006. Additional information and details are provided in the Liquidity
and Interest Rate Sensitivity section of Item 2. Managements Discussion and
Analysis of Financial Condition and Results of Operations.
Generally,
management believes the Company is well positioned to respond in a timely
manner when the market interest rate outlook changes.
Item 4. Controls and Procedures
An analysis was performed under the supervision and with the
participation of the Companys management, including the Chief Executive
Officer and the Principal Financial Officer, of the effectiveness of the design
and operation of the Companys disclosure controls and procedures. Based on
that evaluation, the Companys Chief Executive Officer and Principal Financial
Officer concluded that the Companys disclosure controls and procedures were
effective as of September 30, 2007. There were no changes in the Companys
internal control over financial reporting that occurred during the quarter
ended September 30, 2007, that have materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial
reporting.
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