Item
2.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
Peoples
Bancorp, Inc. is a Maryland corporation and a financial holding company
registered under the Bank Holding Company Act of 1956, as amended, located
in
Chestertown, Kent County, Maryland. Peoples Bancorp, Inc. was incorporated
on
December 10, 1996 to serve as the holding company of The Peoples Bank (the
“Bank”), a Maryland commercial bank, which it acquired on March 24, 1997.
The
Bank
was incorporated on April 13, 1910 and operates five branches located in Kent
County, Maryland and one branch located in Queen Annes County, Maryland which
the bank opened this quarter. The Bank offers a variety of services to satisfy
the needs of consumers and small- to medium-sized businesses and professional
enterprises. Most of the Bank’s deposit and loan customers are located in and
derived from Kent County, northern Queen Anne's County, and southern Cecil
County, Maryland. This primary service area is located between the Chesapeake
Bay and the western border of Delaware.
The
Insurance Agency has roots dating back to the 1920s, when The Fleetwood-Kirby
Agency was formed. In 1977, that agency was merged with several other
well-respected insurances agencies to form Fleetwood, Athey, Macbeth &
McCown, Inc. The Insurance Agency operates from one location in Kent County
and
provides a full range of insurance products to businesses and consumers. Product
lines include property, casualty, life, marine, long-term care and health
insurance.
Unless
the context clearly requires otherwise, the terms “Company”, “we”, “us” and
“our” in this report refer collectively to Peoples Bancorp, Inc. and the
Subsidiaries.
Application
of Critical Accounting Policies
The
unaudited consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and in accordance with the instructions to
Form 10-Q. Application of these principles requires management to make
estimates, assumptions, and judgments that affect the amounts reported in the
unaudited consolidated financial statements and accompanying notes. These
estimates, assumptions, and judgments are based on information available as
of
the date of the consolidated financial statements; accordingly, as this
information changes, the unaudited consolidated financial statements could
reflect different estimates, assumptions, and judgments. Certain policies
inherently have a greater reliance on the use of estimates, assumptions, and
judgments and as such have a greater possibility of producing results that
could
be materially different than originally reported. Estimates, assumptions, and
judgments are necessary when assets and liabilities are required to be recorded
at fair value, when a decline in the value of an asset not carried on the
consolidated financial statements at fair value warrants an impairment
write-down or valuation reserve to be established, or when an asset or liability
needs to be recorded contingent upon a future event. Carrying assets and
liabilities at fair value inherently results in more financial statement
volatility. The fair values and information used to record valuation adjustments
for certain assets and liabilities are based either on quoted market prices
or
are provided by other third-party sources, when available.
The
policies, along with the disclosures presented in the other financial statement
notes and in this financial review, provide information on how significant
assets and liabilities are valued in the financial statements and how those
values are determined. Based on the valuation techniques used and the
sensitivity of financial statement amounts to the methods, assumptions, and
estimates underlying those amounts, management has identified the determination
of the allowance for loan losses as the accounting area that requires the most
subjective or complex judgments, and as such should be most subject to revision
as new information becomes available.
The
allowance for loan losses represents management’s estimate of probable loan
losses inherent in the loan portfolio. Determining the amount of the allowance
for loan losses is considered a critical accounting estimate because it requires
significant judgment and the use of estimates related to the amount and timing
of expected future cash flows on impaired loans, estimated losses on pools
of
homogeneous loans based on historical loss experience, and consideration of
current economic trends and conditions, all of which may be susceptible to
significant change. In addition, various regulatory agencies, as an integral
part of their examination processes, periodically review our allowance for
loan
losses. Such agencies may require us to make additional provisions for estimated
loan losses based upon judgments different from those of management. The loan
portfolio also represents the largest asset type on the balance sheet. Further
information about the methodology used to determine the allowance for loan
losses is discussed below under the heading “Loan Quality”.
The
following discussion is designed to provide a better understanding of our
financial condition and results of operation and should be read in conjunction
with the September 30, 2007 Consolidated Financial Statements and Notes thereto
included elsewhere in this report, and in conjunction with the audited
Consolidated Financial Statements and Notes thereto and Management’s Discussion
and Analysis or Plan of Operation set forth in the Annual Report of Peoples
Bancorp, Inc. on Form 10-K for the year ended December 31, 2006.
Forward-Looking
Information
This
Quarterly Report on Form 10-Q may contain forward-looking statements within
the
meaning of The Private Securities Litigation Reform Act of 1995. Readers of
this
quarterly report should be aware of the speculative nature of “forward-looking
statements”. Statements that are not historical in nature, including the words
“anticipate”, “estimate”, “should”, “expect”, “believe”, “intend”, and similar
expressions, are based on current expectations, estimates and projections about
(among other things) the industry and the markets in which we operate; they
are
not guarantees of future performance. Whether actual results will conform to
expectations and predictions is subject to known and unknown risks and
uncertainties, including risks and uncertainties discussed in this report,
general economic, market or business conditions; changes in interest rates,
deposit flow, the cost of funds, and demand for loan products and financial
services; changes in our competitive position or competitive actions by other
companies; changes in the quality or composition of loan and investment
portfolios; the ability to mange growth; changes in laws or regulations or
policies of federal and state regulators and agencies; and other circumstances
beyond our control. These and other risks are discussed in detail in the section
of the periodic reports that Peoples Bancorp, Inc. files with the Securities
and
Exchange Commission (see Item 1A of Part II of this report). All of the
forward-looking statements made in this report are qualified by these cautionary
statements, and there can be no assurance that the actual results anticipated
will be realized, or if substantially realized, will have the expected
consequences on our business or operations. Except as required by applicable
laws, we do not intend to publish updates or revisions of any forward-looking
statements we make to reflect new information, future events or otherwise.
RECENT
DEVELOPMENTS
As
reported on a Current Report on Form 8-K filed on November 1, 2007, the Bank
received notice on October 31, 2007 that a large corporate borrower (the
“Borrower”) has filed a voluntary petition under Chapter 7 of the United States
Bankruptcy Code. The amounts owed to the Bank by the Borrower under all loans
is
approximately $2.5 million. These loans are secured by liens on certain of
the
Borrower’s assets, on certain parcels of real property and by personal
guarantees. In addition, the Borrower’s principal is the managing member of a
limited liability company (the “LLC”) that is indebted to the Bank in the
approximate amount of $564,000, which indebtedness is secured by liens on
certain parcels of real property and by certain personal guarantees. The LLC’s
primary business activity is leasing its real property to the Borrower, and
management believes that the Borrower’s financial difficulties could potentially
have an adverse impact on the LLC’s ability to make timely payments under its
loans.
Although
management believes that these loans were adequately collateralized at the
time
they were made, it is impossible to predict at this time what impact, if any,
the bankruptcy proceeding will have on the Bank’s ability to obtain repayment
under the loans or realize on the collateral securing those loans. Management
intends to aggressively pursue repayment of these loans and recovery and
liquidation of the collateral securing the loans if necessary. Nevertheless,
it
is possible that the Borrower’s bankruptcy filing, the deterioration of the
Borrower’s financial condition and/or decline in the value of any of the
collateral securing the loans could have a material, adverse impact on the
Bank’s financial condition and/or results of operations.
RESULTS
OF OPERATIONS
General
For
the
three- and nine-month periods ended September 30, 2007, the Company reported
net
income of $1,081,452, or $1.38 per share, and $3,285,238, or $4.17 per share,
respectively, compared to $1,105,756, or $1.40 per share, and $3,146,077, or
$3.99 per share, respectively, for the same periods in 2006. The increase of
4.42% for the nine months ended September 30, 2007 over the same period last
year resulted primarily from increases in net interest income and noninterest
revenue and a decrease in the provision for loan losses offset by increases
in
noninterest expense and income tax expense. The 2.20% decrease for the
three-month period was primarily due to increased noninterest expense associated
with the opening of our Church Hill branch and a higher effective income tax
rate for the period. The Insurance Agency, which was acquired during the first
quarter of 2007, produced a net gain of $29,648 for the three-month period
ended
September 30, 2007 and net income of $108,275 for the nine-month period ended
September 30, 2007.
Net
Interest Income
The
primary source of income for the Company is net interest income, which is the
difference between revenue on interest-earning assets, such as investment
securities and loans, and interest incurred on interest-bearing sources of
funds, such as deposits and borrowings.
Net
interest income for the three-month period ended September 30, 2007 was
$2,714,545, which represents an increase of $59,063 or 2.22% over net interest
income for the same period in 2006. Net interest income for the nine-month
period ended September 30, 2007 was $8,092,992, which represents an increase
of
$193,662 or 2.45% over the net interest income for the first nine months of
2006
Interest
revenue for the three and nine months ended September 30, 2007 totaled
$4,433,755 and $13,014,322, respectively, compared to $4,093,019 and
$11,966,815, respectively, for the same periods last year, representing
increases of $340,736 or 8.32% and $1,047,507 or 8.75%, respectively. The
increases are attributable primarily to an increase in loan income of $970,487
for the first nine months of 2007 over the same time period in 2006 due to
continued loan demand in our primary market area.
Interest
expense for the three- and nine-month periods ended September 30, 2007 totaled
$1,719,210 and $4,921,330, respectively, compared to $1,437,537 and $4,067,485,
respectively, for the same periods last year, representing increases of $281,673
or 19.59% and $853,845 or 20.99%, respectively. These increases resulted
primarily because we increased our borrowings from the Federal Home Loan Bank
(“FHLB”) during the first nine months of 2007 to fund loan demand, from
$43,700,000 at December 31, 2006 to $52,700,000 at September 30, 2007, resulting
in an increase in borrowed funds interest expense for the first nine months
of
2007 of $366,093 when compared to the same period last year. Advances from
the
FHLB were $51,700,000 at March 31, 2007 and $54,700,000 at June 30, 2007. In
addition, the Company assumed approximately $450,000 of debt in connection
with
the acquisition of the Insurance Agency, and deposits have increased slightly
during the first nine months of 2007.
The
key
performance measure for net interest income is the “net margin on
interest-earning assets,” or net interest income divided by average
interest-earning assets. Our net interest margin for the nine-month period
ended
September 30, 2007 was 4.63%, compared to 4.66%for the same period in 2006.
The
net margin may decline if competition increases, loan demand decreases, or
the
cost of funds rises faster than the return on loans and securities. Although
these expectations are based on management’s judgment, actual results may be
impacted by a number of unpredictable factors and cannot be
assured.
A
table
of the Company’s average balances, interest and yields follows.
Average
Balances, Interest, and Yield
|
|
|
For
the Nine Months Ended
September
30, 2007
|
|
For
the Nine Months Ended
September
30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yield
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
funds sold
|
|
$
|
2,334,825
|
|
$
|
94,161
|
|
|
5.39
|
%
|
$
|
2,051,584
|
|
$
|
74,130
|
|
|
4.83
|
%
|
|
Interest-bearing
deposits
|
|
|
194,138
|
|
|
8,394
|
|
|
5.78
|
%
|
|
68,674
|
|
|
2,441
|
|
|
4.75
|
%
|
|
Investment
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.
S. government agency
|
|
|
18,719,580
|
|
|
683,498
|
|
|
4.88
|
%
|
|
19,750,117
|
|
|
658,090
|
|
|
4.45
|
%
|
|
Other
|
|
|
27,095
|
|
|
405
|
|
|
2.00
|
%
|
|
0
|
|
|
0
|
|
|
-
|
%
|
|
FHLB
of Atlanta Stock
|
|
|
2,822,188
|
|
|
126,238
|
|
|
5.98
|
%
|
|
2,493,944
|
|
|
98,290
|
|
|
5.27
|
%
|
|
Total
investment securities
|
|
|
21,568,863
|
|
|
810,141
|
|
|
5.02
|
%
|
|
22,244,061
|
|
|
756,380
|
|
|
4.55
|
%
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
and time
|
|
|
42,573,695
|
|
|
2,944,397
|
|
|
9.25
|
%
|
|
41,024,921
|
|
|
2,756,614
|
|
|
8.98
|
%
|
|
Mortgage
|
|
|
166,681,555
|
|
|
8,935,825
|
|
|
7.17
|
%
|
|
160,334,009
|
|
|
8,144,515
|
|
|
6.79
|
%
|
|
Installment
|
|
|
4,798,496
|
|
|
309,356
|
|
|
8.62
|
%
|
|
5,049,721
|
|
|
306,060
|
|
|
8.10
|
%
|
|
Total
loans
|
|
|
214,053,746
|
|
|
12,189,578
|
|
|
7.61
|
%
|
|
206,408,651
|
|
|
11,207,189
|
|
|
7.26
|
%
|
|
Allowance
for loan losses
|
|
|
1,816,309
|
|
|
|
|
|
|
|
|
1,797,988
|
|
|
|
|
|
|
|
|
Total
loans, net of allowance
|
|
|
212,237,437
|
|
|
12,189,578
|
|
|
7.68
|
%
|
|
204,610,663
|
|
|
11,207,189
|
|
|
7.32
|
%
|
|
Total
interest-earning assets
|
|
|
236,335,263
|
|
|
13,102,274
|
|
|
7.41
|
%
|
|
228,974,982
|
|
|
12,040,140
|
|
|
7.03
|
%
|
|
Non-interest-bearing
cash
|
|
|
4,606,782
|
|
|
|
|
|
|
|
|
4,683,523
|
|
|
|
|
|
|
|
|
Premises
and equipment
|
|
|
5,188,392
|
|
|
|
|
|
|
|
|
3,809,369
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
3,670,991
|
|
|
|
|
|
|
|
|
2,489,475
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
249,801,428
|
|
|
|
|
|
|
|
$
|
239,957,349
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
and NOW deposits
|
|
$
|
36,813,087
|
|
|
160,488
|
|
|
0.58
|
%
|
$
|
40,511,077
|
|
|
172,576
|
|
|
0.57
|
%
|
|
Money
market and supernow
|
|
|
16,744,070
|
|
|
203,503
|
|
|
1.62
|
%
|
|
17,156,207
|
|
|
157,769
|
|
|
1.23
|
%
|
|
Other
time deposits
|
|
|
74,525,969
|
|
|
2,421,291
|
|
|
4.34
|
%
|
|
71,007,758
|
|
|
1,967,186
|
|
|
3.70
|
%
|
|
Total
interest-bearing deposits
|
|
|
128,083,126
|
|
|
2,785,282
|
|
|
2.91
|
%
|
|
128,675,042
|
|
|
2,297,531
|
|
|
2.39
|
%
|
|
Borrowed
funds
|
|
|
62,247,941
|
|
|
2,136,048
|
|
|
4.59
|
%
|
|
54,108,203
|
|
|
1,769,955
|
|
|
4.37
|
%
|
|
Total
interest-bearing liabilities
|
|
|
190,331,067
|
|
|
4,921,330
|
|
|
3.46
|
%
|
|
182,783,245
|
|
|
4,067,485
|
|
|
2.98
|
%
|
|
Noninterest-bearing
deposits
|
|
|
30,833,556
|
|
|
|
|
|
|
|
|
31,551,068
|
|
|
|
|
|
|
|
|
|
|
|
221,164,623
|
|
|
|
|
|
|
|
|
214,334,313
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
2,405,103
|
|
|
|
|
|
|
|
|
963,117
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
26,231,702
|
|
|
|
|
|
|
|
|
24,659,919
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders equity
|
|
$
|
249,801,428
|
|
|
|
|
|
|
|
$
|
239,957,349
|
|
|
|
|
|
|
|
|
Net
interest spread
|
|
|
|
|
|
|
|
|
3.95
|
%
|
|
|
|
|
|
|
|
4.05
|
%
|
|
Net
interest income
|
|
|
|
|
$
|
8,180,944
|
|
|
|
|
|
|
|
$
|
7,972,654
|
|
|
|
|
|
Net
margin on interest-earning assets
|
|
|
|
|
|
|
|
|
4.63
|
%
|
|
|
|
|
|
|
|
4.66
|
%
|
|
Interest
on tax-exempt loans and investments are reported on fully taxable
equivalent basis (a non GAAP financial
measure).
|
Noninterest
Revenue
Noninterest
revenue for the three- and nine-month periods ended September 30, 2007 totaled
$577,094 and $1,768,992, respectively, which represent increases of 106.40%
and
101.21% over $279.606 and $879,164, respectively, for the same periods in 2006.
The
increases resulted primarily from $798,745 of commission income earned by the
Insurance Agency during the first nine months of 2007. We expect
the
Insurance Agency to generate lower revenue and net income during the remaining
three months of 2007
.
In
addition, we experienced an increase in deposit service charges of $90,664
or
14.02% during the first nine months of 2007 when compared to the same period
of
2006 primarily due to increased overdraft activity. Management does not view
the
increased overdraft activity as an indication of economic problems within our
customer base, as we have generally been successful at collecting these
overdrawn balances and the fees associated with them.
Noninterest
Expense
The
Company recorded noninterest expense of $1,563,355 and $4,571,134 for the three-
and nine-month periods ended September 30, 2007, respectively, compared to
$1,220,143 and $3,551,624, respectively, for the same periods in 2006,
representing increases of $343,212 or 28.13% and $1,019,510 or 28.71%,
respectively. The increases are mainly attributable to increased salaries and
employee benefits of $783,808 for the first nine months of 2007, which is
primarily due to the acquisition of the Insurance Agency. Other operating costs
for the first nine months of 2007 also increased when compared to the same
period last year, primarily due to Insurance Agency operations.
Income
Tax Expense
The
Company’s effective tax rate for the three- and nine-month periods ended
September 30, 2007 was 37.1% and 37.4%, respectively, compared to 35.5% and
36.9% for the same periods in 2006. The Company’s income tax expense was
$636,832 and $1,965,612 for the three- and nine-months ended September 30,
2007,
respectively, compared to $609,189 and $1,840,793, respectively, for the same
periods in 2006. Comparing the three- and nine-month periods ended September
30,
2007 with the same periods last year, the increases of 4.54% and 6.78% in the
2007 periods, respectively, were comparable to the percentage increases in
income before income taxes.
FINANCIAL
CONDITION
Overview
Total
assets of the Company at September 30, 2007 were $255,153,458, compared to
$242,304,782 at December 31, 2006, representing an increase of $12,848,676
or
5.30%.
Total
liabilities at September 30, 2006 were $227,464,776, compared to $216,697,626
at
December 31, 2006, representing an increase of $10,767,150 or 4.97%.
Stockholders’
equity was $27,688,682 at September 30, 2007, compared to $25,607,156 at
December 31, 2006, which represents an increase of $2,081,526. The increase
was
due to comprehensive income for the period totaling $3,313,931 offset by
dividends paid to stockholders of $976,905 and the repurchase of 3,500 shares
of
stock during the second quarter of 2007 for an aggregate purchase price of
$255,500.
Return on average equity for the nine months ended September 30, 2007 was
16.74%, compared to 17.06% for the same period in 2006. Return on average assets
was 1.76% for the nine months ended September 30, 2007, compared to 1.75% for
the same period in 2006.
Composition
of Loan Portfolio
At
September 30, 2007, loans, net of unearned income, were $215,812,135, an
increase of $9,734,978 since December 31, 2006. Because loans are expected
to
produce higher yields than investment securities and other interest-earning
assets, the absolute volume of loans and the volume as a percentage of total
earning assets is an important determinant of net interest margin. Average
loans, net of the allowance for loan losses, were $212,237,437 and $204,610,663
during the first nine months of 2007 and 2006, respectively, which constituted
89.80% and 89.36% of average interest-earning assets for the respective periods.
For the nine months ended September 30, 2007, our average loan to deposit ratio
was 133.55%, compared to 127.70% for the nine months ended September 30, 2006.
The securities sold under repurchase agreements function like deposits, with
the
securities providing collateral in place of the FDIC insurance. Our ratio of
average loans to deposits plus borrowed funds was 95.96% for the nine months
ended September 30, 2007, compared to 95.46% for the nine months ended September
30, 2006. The Company extends credit primarily to customers located in and
near
the Maryland counties of Kent County, Queen Anne’s County, and Cecil County.
There are no industry concentrations in our loan portfolio. A substantial
portion of our loans are, however, secured by real estate, and the real estate
market in the region will influence the performance of the Company’s portfolio
and the value of the collateral securing the portfolio.
Loan
Quality
The
allowance for loan losses represents a reserve for potential losses in the
loan
portfolio. The adequacy of the allowance for loan losses is evaluated
periodically based on a review of all significant loans, with a particular
emphasis on non-accruing, past due, and other loans that management believes
require attention. The determination of the reserve level rests upon
management's judgment about factors affecting loan quality and assumptions
about
the economy. Management believes that the allowance as of September 30, 2007
is
adequate to cover possible losses in the loan portfolio; however, management's
judgment is based upon a number of assumptions about future events, which are
believed to be reasonable, but which may not prove valid. Thus, there can be
no
assurance that charge-offs in future periods will not exceed the allowance
for
loan losses or that additional increases in the loan loss allowance will not
be
required.
For
significant problem loans, management's review consists of evaluation of the
financial strengths of the borrowers and guarantors, the related collateral,
and
the effects of economic conditions. The overall evaluation of the adequacy
of
the total allowance for loan losses is based on an analysis of historical loan
loss ratios, loan charge-offs, delinquency trends, and previous collection
experience, along with an assessment of the effects of external economic
conditions. The allowance may be increased to accommodate reserves for specific
loans identified as substandard during management's loan review. Generally,
however, neither net recoveries nor a decrease in loans will require a negative
provision to reduce the allowance. Therefore, net recoveries and/or decreases
in
loans may cause the allowance as a percentage of gross loans to exceed our
target. Historically, our regulators have discouraged negative
provisions.
The
provision for loan losses is a charge to earnings in the current period to
replenish the allowance and maintain it at a level management has determined
to
be adequate. As of September 30, 2007 and December 31, 2006, the allowance
for
loan losses compared to gross loans was 0.83% and 0.90%, respectively.
The
following table sets forth activity in the Company’s allowance for loan losses
for the periods indicated:
Allowance
for Loan Losses
|
|
|
Nine months ended
September 30,
2007
|
|
Nine months ended
September 30,
2006
|
|
Year ended
December 31,
2006
|
|
|
Balance
at beginning of year
|
|
$
|
1,860,283
|
|
$
|
1,649,420
|
|
$
|
1,649,420
|
|
|
Loan
losses:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
81,189
|
|
|
4,946
|
|
|
4,947
|
|
|
Mortgages
|
|
|
0
|
|
|
0
|
|
|
15,000
|
|
|
Consumer
|
|
|
18,314
|
|
|
8,986
|
|
|
16,214
|
|
|
Total
loan losses
|
|
|
99,503
|
|
|
13,932
|
|
|
36,161
|
|
|
Recoveries
on loans previously charged off
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
0
|
|
|
25
|
|
|
25
|
|
|
Mortgages
|
|
|
2,271
|
|
|
0
|
|
|
0
|
|
|
Consumer
|
|
|
912
|
|
|
6,867
|
|
|
6,999
|
|
|
Total
loan recoveries
|
|
|
3,183
|
|
|
6,892
|
|
|
7,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loan losses (recoveries)
|
|
|
96,320
|
|
|
(7,040
|
)
|
|
29,137
|
|
|
Provision
for loan losses charged to expense
|
|
|
40,000
|
|
|
240,000
|
|
|
240,000
|
|
|
Balance
at end of year
|
|
$
|
1,803,963
|
|
$
|
1,882,380
|
|
$
|
1,860,283
|
|
|
Allowance
for loan losses to loans outstanding at end of period
|
|
|
0.83
|
%
|
|
0.91
|
%
|
|
0.90
|
%
|
As
a
result of management's ongoing review of the loan portfolio, loans are
classified as nonaccrual when it is not reasonable to expect collection of
interest under the original terms. These loans are classified as nonaccrual
even
though the presence of collateral or the borrower's financial strength may
be
sufficient to provide for ultimate repayment. Interest on nonaccrual loans
is
recognized only when received. A loan is generally placed in nonaccrual status
when it becomes 90 days or more past due. When a loan is placed in nonaccrual
status, all interest that had been accrued on the loan but remains unpaid is
reversed and deducted from earnings as a reduction of reported interest income.
No additional interest is accrued on the loan balance until the collection
of
both principal and interest becomes reasonably certain.
At
September 30, 2007 and December 31, 2006, we had loans past due 90 days or
more
including nonaccrual loans of $230,407 and $422,338, respectively. These loans
are detailed below:
|
Risk
Elements of Loan Portfolio
|
|
|
|
September 30,
2007
|
|
December 31,
2006
|
|
|
|
|
|
|
|
|
|
Nonaccrual
Loans
|
|
$
|
5,529
|
|
$
|
23,201
|
|
|
Accruing
Loans Past Due 90 Days or More
|
|
|
224,878
|
|
|
399,137
|
|
Loans
are
classified as impaired when the collection of contractual obligations, including
principal and interest, is doubtful. Management has identified no significant
impaired loans as of September 30, 2007 or
December
31
,
2006.
Deposits
and Other Interest-Bearing Liabilities
Average
interest-bearing deposits decreased $591,916 or 0.46% to $128,083,126 for the
nine months ended September 30, 2007, from $128,675,042 for the same period
in
2006. Average noninterest-bearing deposits decreased $717,512 or 2.27% to
$30,833,556 for the nine months ended September 30, 2007, from $31,551,068
for
the same period in 2006. Average total deposits have decreased 0.82% or
$1,309,429 to $158,916,682 for the nine months ended September 30, 2006 from
$160,226,110 for the same period in 2006. Borrowings at September 30, 2007,
from
the Federal Home Loan Bank of Atlanta, increased to $52,700,000 from $43,700,000
at December 31, 2006, an increase of 20.59%.
Deposits,
particularly core deposits, have been the Company’s primary source of funding
and have enabled the Company to meet both our short-term and long-term liquidity
needs. Management anticipates that such deposits will continue to be the
Company’s primary source of funding for the foreseeable future. It should be
noted, however, investor confidence in alternatives to deposit accounts, which
may pay yields that are higher than those paid on deposits, typically increases
when the economy and stock markets perform well. Increased investor confidence
in nondeposit investment products in future periods would likely have an adverse
impact on our deposit growth. In addition, changes in governmental monetary
policy, especially interest rates, may impact our ability to attract and retain
deposits.
Short-term
Borrowings
The
following table sets forth the our position with respect to short-term
borrowings for September 30, 2007 and December 31, 2006.
|
|
|
September
30, 2007
|
|
December
31, 2006
|
|
|
|
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
Home Loan Bank (daily re-price)
|
|
$
|
0
|
|
|
-
|
%
|
$
|
0
|
|
|
-
|
%
|
|
Retail
Repurchase Agreements
|
|
|
7,987,113
|
|
|
3.80
|
%
|
|
9,513,593
|
|
|
2.85
|
%
|
|
Federal
Funds Borrowed
|
|
|
1,200,000
|
|
|
4.69
|
%
|
|
6,060,000
|
|
|
1.60
|
%
|
|
|
|
$
|
9,187,113
|
|
|
|
|
$
|
15,573,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We
may
borrow up to approximately 30% of total assets from the Federal Home Loan Bank
(FHLB) through any combination of notes or line of credit advances. Both the
notes payable and the line of credit are secured by a floating lien on all
of
our real estate mortgage loans. The Company was required to purchase shares
of
capital stock in the FHLB as a condition to obtaining the line of
credit.
We
provide collateral of 105% of the repurchase agreement balances by pledging
U.S.
Government Agency securities.
The
Bank
has lines of credit of $19,400,000 in unsecured overnight federal funds and
$5,000,000 in secured overnight federal funds with correspondent banks at
September 30, 2007.
Liquidity
and Capital Resources
Liquidity
describes the our ability to meet financial obligations that arise out of the
ordinary course of business. Liquidity is needed primarily to fund loans, meet
depositor withdrawal requirements, and fund current and planned expenditures.
The Company derives liquidity through increased customer deposits, maturities
in
the investment portfolio, loan repayments and income from earning assets. To
the
extent that deposits are not adequate to fund customer loan demand, liquidity
needs can be met in the short-term funds markets through lines of credit
totaling $24,400,000 from correspondent banks, namely, Bank of America,
Community Bank and M & T Bank. The Bank is also a member of the Federal Home
Loan Bank of Atlanta, which provides another source of liquidity through a
secured line of credit in the amount of $71,450,000 of which $52,700,000 has
been advanced as of September 30, 2007.
Bank
regulatory agencies have adopted various capital standards, including risk-based
capital standards, that apply to financial institutions like the Company. The
primary objectives of the risk-based capital framework are to provide a more
consistent system for comparing capital positions of financial institutions
and
to take into account the different risks among financial institutions’ assets
and off-balance sheet items.
Risk-based
capital standards have been supplemented with requirements for a minimum Tier
1
capital to assets ratio (leverage ratio). In addition, regulatory agencies
consider the published capital levels as minimum levels and may require a
financial institution to maintain capital at higher levels. A comparison of
the
Company’s capital ratios as of September 30, 2007 to the minimum ratios required
by federal banking regulators is presented below.
|
|
|
Actual
|
|
Minimum
Requirements
|
|
To
be well
capitalized
|
|
|
Tier
1 risk-based capital
|
|
|
12.69
|
%
|
|
4.00
|
%
|
|
6.00
|
%
|
|
|
|
|
13.54
|
%
|
|
8.00
|
%
|
|
10.00
|
%
|
|
Leverage
ratio
|
|
|
10.72
|
%
|
|
4.00
|
%
|
|
5.00
|
%
|