Eastern Virginia Bankshares 10-Q 2008
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the quarterly period ended June 30, 2008
For the transition period from to
Commission File Number: 000-23565
EASTERN VIRGINIA BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
(Registrants 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 preceding 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 the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of accelerated filer, non- accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares of the registrants Common Stock outstanding as of August 4, 2008 was 5,880,092.
For the Period Ended June 30, 2008
Eastern Virginia Bankshares, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
See Notes to Consolidated Financial Statements
Eastern Virginia Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income (Unaudited)
(Dollars in thousands except per share amounts)
See Notes to Consolidated Financial Statements
Eastern Virginia Bankshares, Inc. and Subsidiaries
Consolidated Statement of Cash Flows (Unaudited)
(Dollars in thousands)
See Notes to Consolidated Financial Statements
EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Eastern Virginia Bankshares, Inc., based in Tappahannock, VA, is the parent company of EVB. EVB operates 25 retail branches in the Virginia counties of Caroline, Essex, Gloucester, Hanover, Henrico, King William, Lancaster, Middlesex, Northumberland, Southampton, Surry, Sussex and the City of Colonial Heights. Subsidiaries of EVB include EVB Investments, EVB Mortgage, EVB Insurance and EVB Title. The Companys stock trades on the NASDAQ Global Market under the symbol EVBS.
We were organized and chartered under the laws of the Commonwealth of Virginia on September 5, 1997 and commenced operations effective December 29, 1997 when Southside Bank and Bank of Northumberland, Inc. became our wholly owned subsidiaries. The transaction was accounted for using the pooling-of-interests method of accounting. We opened our third subsidiary in May 2000 when Hanover Bank began operations in Hanover County, Virginia. On April 24, 2006, we completed the conversion to a one-bank holding company by merging the three banking subsidiaries. The new bank began operating under the name EVB on April 24, 2006. All significant inter-company transactions and accounts have been eliminated in consolidation.
In the first quarter of 2008, we completed the previously announced purchase of 2 branches in the Richmond market from Millennium Bank. These branches are in new markets for our company and added $92 million in deposits and $49 million in loans to our balance sheet. This transaction was accretive to earnings starting in the
second quarter of 2008. (See Note 12) Earlier in the first quarter of 2008, we relocated our Village branch in Mechanicsville to a better location, the Windmill, which is right off Route 360 as you come into town. The visibility of the location has already brought new customers in the door. In addition, the building of an owned branch in the Quinton area of New Kent County, Virginia continues on schedule. We are constantly looking for accretive ways to expand our franchise.
The results of operations for the three and six month periods ended June 30, 2008 are not necessarily indicative of the results to be expected for the full year.
There are no securities classified as Held to Maturity or Trading.
At June, 2008, investments in an unrealized loss position that were temporarily impaired were as follows:
Bonds with unrealized loss positions of less than 12 months duration at June 30, 2008 included 6 federal agencies, 10 corporate bonds, 42 mortgage-backed securities, 8 collateralized mortgage obligations (CMO), 2 federal agency preferred stocks and 45 municipal bonds. Securities with losses of 12 months or greater duration included 6 mortgage-backed securities, 10 corporate bonds, 1 collateralized mortgage obligation and 3 federal agency preferred stocks. The unrealized loss positions at June 30, 2008 were primarily related to the widened market spreads for mortgage backed and corporate securities. Holdings of GMAC and Ford Motor Credit Corp. contained unrealized loss positions because these securities have been downgraded by Moodys and Standard & Poors rating agencies to levels below investment grade. As of June 30, 2008, we held $3.0 million in GMAC bonds and $250 thousand in Ford Motor Credit Corp. bonds. These holdings are monitored regularly by our Chief Financial Officer and reported to the EVB Board on a monthly basis. Based on this analysis, we recorded a $300 thousand impairment charge on the GMAC holdings in March 2008. Given the attractive yield, our ability and intent to hold until maturity or principal recovery and the belief that the risk of default is remote, we have not recommended sale of the holdings and believe the remaining unrealized loss is temporary.
The 10 corporate issues with losses of less than 12 months include 5 pooled trust preferred securities packaged by FTN Financial and Keefe Bruyette and Woods secured by debt of banks and insurance companies, primarily banks, and 1 similar issue packaged by Suntrust Robinson Humphrey and Bear Stearns consisting solely of bank borrowings. We believe that these pooled trust preferred securities are high quality investments that have seen their market value decline as the spread between corporate and government bonds have widened to near record levels. None of these issues has been downgraded by rating agencies. As we have the positive intent and ability to hold these securities until maturity or a recovery in value, no decline was deemed to be other than temporary.
The five federal agency preferred stocks with unrealized losses consist of $4.74 million par value of five different FHLMC and FNMA issues. These securities have a total cost basis of $4.71 million and an unrealized loss of $1.17 million at June 30, 2008. This loss reflects the current turmoil in the markets and not necessarily the long term results of these investments. With a blended tax equivalent yield of 7.76% and the fact that EVB has both the intent and the ability to hold these securities until they have recovered to cost brings management to the conclusion that an impairment charge on these holdings at this time could not be substantiated. Valuation of these securities will continue to be monitored for permanent changes that might warrant a write down of the value.
At December 31, 2007 investments in an unrealized loss position that were temporarily impaired were as follows:
We had $5.5 million in non-performing assets at June 30, 2008 that included $961 thousand in loans past due 90 days or more but still accruing, $3.4 million in nonaccrual loans including $1.2 million of restructured loans and $1.2 million classified as OREO.
Following is a summary pertaining to impaired loans:
No additional funds are committed to be advanced in connection with impaired loans. Nonaccrual loans excluded from impaired loan disclosure under Statement of Financial Accounting Standards (SFAS) No. 114 amounted to $1.5 million and $1.4 million at June 30, 2008 and December 31, 2007, respectively. Of the $1.5 million not included in the impairment table at June 30, 2008, $1.2 million were homogeneous loans and $312 thousand were non-homogeneous impaired loans with no specific allowance.
The table presented below shows the maturities and potential call dates of FHLB advances. All but $12.9 million of the FHLB borrowings are convertible advances that have a call provision.
At June 30, 2008 and 2007, respectively, options to acquire 234,387 shares and 145,112 shares of common stock were not included in computing diluted earnings per common share because their effects were anti-dilutive.
On April 19, 2007, our shareholders approved the Eastern Virginia Bankshares, Inc. 2007 Equity Compensation Plan (the 2007 Plan) to enhance our ability to recruit and retain officers, directors and employees with ability and initiative and to encourage such persons to have a greater financial interest in the company. The 2007 Plan authorizes the Company to issue up to 400,000 additional shares of common stock. No awards have been issued under the 2007 Plan.
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R, Share-Based Payment. SFAS 123R requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, such as stock options, based on the fair value of those awards at the date of grant. We had already adopted SFAS No. 123 in 2002 and began recognizing compensation expense for stock option grants in that year, as all such grants had an exercise price not less than the fair market value on the date of the grant.
SFAS 123R also requires that new awards to employees eligible for retirement prior to the awards becoming fully vested be recognized as compensation cost over the period through the date that the employee first becomes eligible to retire and is no
longer required to provide service to earn the award. Our stock options granted to eligible participants prior to the adoption of SFAS 123R that had an accelerated vesting feature associated with employee retirement are being recognized, as required, as compensation cost over the vesting period except in the instance where a participant reaches normal retirement age of 65 prior to the normal vesting date.
For the three and six month periods ended June 30, 2008 and 2007, stock option compensation expense of $66 thousand and $133 thousand for 2008 and $63 thousand and $126 thousand for 2007, respectively was included in salary and benefit expense.
Stock option compensation expense is the estimated fair value of options granted, amortized on a straight-line basis over the requisite service period for each stock grant award. Through June 30, there have been no awards issued in 2008. The weighted average estimated fair value of stock options granted in the years 2007, 2006 and 2005 was $5.95, $5.40 and $5.31, respectively. Fair value is estimated using the Black-Scholes option-pricing model with the assumptions indicated in the table below:
The dividend rate is calculated as the average quarterly dividend yield on our stock for the past seven years by dividing the quarterly dividend by the average daily closing price of the stock for the period. Volatility is a measure of the standard deviation of the daily closing stock price plus dividend yield for the same period. The risk-free interest rate is the seven-year Treasury strip rate on the date of the grant. The expected life of options granted in 2007 was calculated using the simplified method whereby the vesting period and the contractual period are averaged.
Stock option plan activity for the six months ended June 30, 2008 is summarized below:
As of June 30, 2008, there was $443 thousand of unrecognized compensation expense related to stock options that will be recognized over the remaining requisite service period of approximately 1.35 years. There were no options granted in the three- or six-month periods ended June 30, 2008 or 2007. There were no shares exercised in the three or six month periods ended June 30, 2008. There were 1,095 shares exercised in the three month period and 2,320 shares exercised in the six month period ended June 30, 2007 at an average price of $16.10 providing cash proceeds of $18 thousand and $37 thousand, respectively with an intrinsic value at time of exercise of $7 thousand and $15 thousand, respectively.
We awarded 15,000 shares of restricted stock to employees on December 20, 2007. One half of these shares are subject to time vesting at 20% per year over a fiveyear vesting. At June 30, 2008 there was $99 thousand of total unrecognized compensation related to the time-vested awards. The other half of the restricted share award is performance based and will vest on June 30, 2010 if, and only if, 2009 financial achievements of the Company meet very aggressive targets. Given the aggressive targets for the performance based award, compensation expense will be recognized only if the award vests. Compensation is accounted for using the fair market value of our common stock on the date the restricted shares were awarded, which was $17.25 per share. For the three and six months ended June 30, 2008, restricted stock compensation expense of $7 thousand and $14 thousand, respectively, was included in salary and benefit expense.
We made our required 2007 fiscal year contribution to the pension plan in December 2007 in the amount of $1.63 million. While we project that we will recognize $642 thousand of pension expense in 2008, no contribution will be required because of the pension curtailment gain discussed above.
Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:
Where quoted prices are available in an active market, securities are classified within level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market
prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within level 3 of the valuation hierarchy. Currently, all of the Companys securities are considered to be Level 2 securities.
Loans held for sale
Loans held for sale which is required to be measured in a lower of cost or fair value. Under SFAS No. 157, market value is to represent fair value. Management obtains quotes or bids on all or part of these loans directly from the purchasing financial institutions. Premiums received or to be received on the quotes or bids are indicative of the fact that cost is lower than fair value. At June 30, 2008, our Company had no loans held for sale.
SFAS No. 157 applies to loans measured for impairment using the practical expedients permitted by SFAS No. 114, Accounting by Creditors for Impairment of a Loan, including impaired loans measured at an observable market price (if available), or at the fair value of the loans collateral (if the loan is collateral dependent). Fair value of the loans collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral. Note 4 details information regarding our impaired loans as of June 30, 2008.
Other Real Estate Owned
Certain assets such as other real estate owned (OREO) are measured at fair value less cost to sell. We believe that the fair value component in our valuation of OREO follows the provisions of SFAS No. 157.
In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141(R), Business Combinations (SFAS 141(R)). The Standard will significantly change the financial accounting and reporting of business combination transactions. SFAS 141(R) establishes the criteria for how an acquiring entity in a business combination recognizes the assets acquired and liabilities assumed in the transaction; establishes the acquisition date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. Acquisition related costs including finders fees, advisory, legal, accounting valuation and other professional and consulting fees are required to be expensed as incurred. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008 and early implementation is not permitted. We do not expect the implementation to have a material impact on our consolidated financial statements.
In December 2007, the FASB issued Statement of Financial Accounting Standards No.160, Noncontrolling Interests in Consolidated Financial Statements (SFAS 160). SFAS 160 requires us to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. We do not expect the implementation of SFAS 160 to have a material impact on our consolidated financial statements.
In March 2008, the FASB issued Statement of Financial Accounting Standards No. No.161 Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No.133 (SFAS 161). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entitys financial position, financial performance and cash flows. SFAS 161 is effective for fiscal years and interim
periods beginning after November 15, 2008, with early application permitted. We do not expect the implementation of SFAS 161 to have a material impact on our consolidated financial statements.
The acquisition included the assumption of certain deposit accounts and purchase of selected loans and fixed assets as follows:
Of the acquired intangible assets, $20 thousand was assigned to core deposit intangibles to be amortized over a period of 28.5 months. The unamortized balance of accumulated core deposit intangibles, including previous branch acquisitions, was $647 thousand and $910 thousand at June 30, 2008 and 2007, respectively. The estimated aggregate amortization expense for core deposit intangibles for the next 27 months is $24 thousand per month.
In addition, $1.6 million was assigned as a discount on the certificates of deposit assumed, while $438 thousand was assigned as a premium on the loans purchased. Weighted average lives for the certificates of deposit and loans receivable were 1.05 years and 7.0 years, respectively. The unamortized balance of the CD discount was $1.2 million and $0.0 at June 30, 2008 and 2007, respectively. The unamortized balance of the loan premium was $423 thousand and $0.0 at June 30, 2008 and 2007, respectively. The estimated aggregate CD discount on a monthly basis through March 2009 is $130 thousand per month. The estimated aggregate loan premium amortization on a monthly basis for the 84 months beginning April 2008 is $5 thousand.
In the first quarter of 2008 we also booked to Goodwill $488 thousand of general loan loss reserve on the acquired loans and $84 thousand of acquisition costs including legal fees, conversion fees, legal advertising and legal mailings.
We present managements discussion and analysis of financial information to aid the reader in understanding and evaluating our financial condition and results of operations. This discussion provides information about our major components of the results of operations, financial condition, liquidity and capital resources. This discussion should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements presented elsewhere in this report and in the 2007 Form 10-K. Operating results include those of all our operating entities combined for all periods presented.
We provide a broad range of personal and commercial banking services including commercial, consumer and real estate loans. We complement our lending operations with an array of retail and commercial deposit products and fee-based services. Our services are delivered locally by well-trained and experienced bankers, whom we empower to make decisions at the local level so that they can provide timely lending decisions and respond promptly to customer inquiries. We believe that, by offering our customers personalized service and a breadth of products, we can compete effectively as we expand within our existing markets and into new markets.
CRITICAL ACCOUNTING POLICIES
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. For example, we use historical loss factors as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ substantially from the historical factors that we use. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change.
Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (i) SFAS No. 5, Accounting for Contingencies, which requires that losses be accrued when their occurrence is probable and estimable, and (ii) SFAS No. 114, Accounting by Creditors for Impairment of a Loan, as amended by FASB Statement No. 118, Accounting by Creditors for Impairment of a Loan Income Recognition and Disclosure which require that losses be accrued based on the differences between the value of the collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.
We evaluate non-performing loans individually for impairment as required by SFAS No. 114. The evaluations are based upon discounted expected cash flows or collateral valuations. If the evaluation shows that a loan is individually impaired, then a specific reserve is established for the amount of the impairment. In addition to specific reserves for loans that are individually impaired, we also allocate reserves for non-impaired loans based on inherent risks in the loan portfolio by category of loans in accordance with SFAS No. 5.
For loans without individual measures of impairment, we make estimates of losses for groups of loans as required by SFAS No. 5. Loans are grouped by similar characteristics, including the type of loan, the assigned loan grade and general collateral type. A loss rate reflecting the expected loss inherent in a group of loans is derived based upon historical loss rates for each loan type, the predominant collateral type for the group and the terms of the loan. The resulting estimates of losses for groups of loans are adjusted for relevant environmental factors and other conditions of the portfolio of loans including: borrower or industry concentrations; levels
and trends in delinquencies, charge-offs and recoveries; changes in risk selection; level of experience, ability and depth of lending staff; and national and economic conditions.
The amounts of estimated losses for loans individually evaluated for impairment and groups of loans are added together for a total estimate of loan losses. The estimate of losses is compared to our allowance for loan losses as of the evaluation date and, if the estimate of losses is greater than the allowance, an additional provision to the allowance would be evaluated to determine whether an addition to the allowance is needed. If the estimate of losses is less than the allowance, the degree to which the allowance exceeds the estimate is evaluated to determine whether a reduction to the allowance would be necessary. While management uses the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the valuations. Such adjustments would be made in the relevant period and may be material to the Consolidated Financial Statements.
Goodwill and Intangible Assets
SFAS No. 141, Business Combinations, requires the purchase method of accounting be used for all business combinations initiated after June 30, 2001. For purchase acquisitions, we are required to record assets acquired, including identifiable intangible assets, and liabilities at their fair value, which in many instances involves estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analysis or other valuation techniques. Effective January 1, 2001, we adopted SFAS No. 142 Goodwill and Other Intangible Assets (SFAS 142) which prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. The provisions of SFAS No. 142 discontinue the amortization of goodwill and intangible assets with indefinite lives, but require at least an annual impairment review and more frequently if certain impairment indicators are in evidence. Additionally, we adopted SFAS No. 147 Acquisitions of Certain Financial Institutions, on January 1, 2002, and determined that core deposit intangibles will continue to be amortized over their estimated useful lives.
Goodwill totaled $16.0 million and $5.7 million as of June 30, 2008 and December 31, 2007, respectively. Based on the testing of goodwill for impairment, no impairment charges have been recorded. As described in Note 12, this increase was due to our acquisition in the first quarter of 2008. Core deposit intangible assets are being amortized over the period of expected benefit, which ranges from 2.39 to 7.0 years. Core deposit intangibles, net of amortization, amounted to $647 thousand and $770 thousand, respectively and are included in other assets.
The first six months of 2008 have been a challenge for the banking industry as a result of rapid interest rate reductions, an evolving recessionary economic environment and a more conservative evaluation of asset valuations, especially loans in community banks. Our performance during the first half of 2008 reflects the impact of the economic environment and some conservative steps taken by management to prepare for the potential future impact of current economic activity.
Net income of $1.2 million for the quarter ended June 30, 2008 decreased $1.1 million, or 45.8%, when compared to $2.3 million for the same period in 2007. The largest single contributor to this decline in earnings was a $1.2 million increase in provision for loan losses which management continued to increase in the second quarter due to economic concerns and an increase in impaired loans. For the quarter, net interest income declined $28 thousand compared to the 2007 second quarter, while noninterest income increased $457 thousand or 30.9% and noninterest expense rose 10.7%, or $685 thousand. Interest income increased $657 thousand, or 4.6% with loan income up $391 thousand reflecting continued loan growth through the second quarter, interest from investments up $422 thousand, or 26.0%, as the average portfolio grew $32.9 million, while Federal funds sold income was down $156 thousand, or -83.9%, as management utilized most of its excess funds in new loans and investments. Interest expense rose $685 thousand, or 11.2%, as deposit interest increased $397 thousand, or 8.3%, and Federal Home Loan Bank borrowing cost rose $337 thousand. The FOMCs aggressive lowering of the target federal funds rate during the first third of the year, led to increased loan income mostly from higher volume, as the yield on earning assets continued to decline. The rise in interest expense reflects managements strategy of increased borrowing and increased certificate growth in 2007 to fund loan growth. While the rates for borrowings and deposits in 2007 were within managements guidance, based on the market interest rates at the time, they do not re-price as quickly as the loan rates, resulting in temporary shrinking of the interest margin until deposits are replaced with lower cost funds. The noninterest income increase of $457 thousand was fueled by increases of $109 thousand in deposit fees, $99 thousand in card fees and $252 thousand in gains, other than security gains. These gains were the result of a $128 thousand gain on the sale of a former branch building and a
$126 thousand gain in an LLC investment from the purchase of our investment subsidiarys processer, Bankers Investment, by Infinex. Without the gains, noninterest income increased by $203 thousand, or 13.8%. The noninterest expense increase of $685 thousand, or 10.7%, reflected the operating costs of the Millennium branches purchased in the first quarter of 2008, the relocation in Mechanicsville to the new Windmill location, increased regulatory expense and infrastructure improvements.
While the Company grew in the first quarter of 2008, in the second quarter, management took aggressive steps to respond to the potential future impacts of the tough economic environment that has existed in 2008. The yield curve has returned to a more normal slope as a result of the Federal Reserves rate cuts but is erratic, moving up or down sharply with each new economic shock. These rate changes caused a large portion of our loan portfolio to re-price instantly, while our deposits with longer maturity terms will not re-price until later in the year. In the first quarter, management saw three areas for action in 2008: (1) bring the deposit cost down by re-pricing new deposits at current market rates; (2) evaluate loans for problems resulting from the weak economy and build up our loan loss reserve accordingly; and (3) continue to grow our earning assets in order to benefit from the long term effects of a lower rate environment. Throughout the second quarter, management acted on these issues. Current rates on all new or renewing deposits have been lowered to reflect the current market, and we will benefit from a large block of certificates maturing in the 3rd and 4th quarters which will re-price at lower rates. We have addressed the shaky economy by increasing our reserve for loan loss in a manner consistent with our increase in impaired loans, monitoring our past due loans and tightening our credit standards. In addition, earning assets have grown. We believe our core earnings are strong and continue growing. Much of the noninterest expense increases we have seen in the first quarter were nonrecurring and in the second were related to core costs of operating the additional branches in our retail group. Our new branch in New Kent is nearly finished and may open in late third quarter which will create a short term earnings drag. This should be minimized since we have a branch in the county and we have had a loan production officer working the region for two years. While we will operate in the shadow of the past years economic fiascos, our steps to prepare for the future are in place and should be effective.
Total assets at June 30, 2008 were $1.03 billion, up $100.8 million, or 10.9%, from $926.7 million at year end 2007 and up $145.6 million, or 16.5% from June 30, 2007, when total assets were $881.9 million. This increase is the result of strong growth and the acquisition of the Millennium branches which added $91.9 million to our footings. New deposits in these two branches have more than replaced any run off from the original deposits. Loan growth for the second quarter 2008 was $23.4 million. For the quarter, total assets averaged $1.01 billion, 8.2% above the first quarter 2008 average of $931.4 million. At June 30, 2008, total loans, net of unearned income, at period end amounted to $790.1 million an increase of $81.2 million, or 11.5%, from $708.8 million at December 31, 2007. Average loans for the second quarter 2008 increased $98.5 million to $773.6 million compared to $675.1 million for the same period in 2007. At June 30, 2008, net loans as a percent of total assets were 75.9%, as compared to 75.6% at December 31, 2007 including the growth in the loan portfolio from $48.9 million of loans acquired in the Millennium branch acquisitions. Loan demand has been good in the first half of 2008, but there are signs that the pipeline of new loans is slowing. Our action with the loan loss reserve provision reflects our guarded optimism for a strong year. While our core earnings are in place and net interest margin should move up, any unforeseen event could drain funds from the bottom line.
At June 30, 2008, the investment portfolio totaled $168.4 million, an increase of $24.1 million from $144.3 million at June 30, 2007 and up $7.6 million, or 4.7%, from $160.9 million at December 31, 2007. During the second quarter of 2008, rates started to stabilize as the Federal Reserve slowed its rate cutting pace and hinted that it would be more cautious about future rate cuts. In this environment bond rates have moved up and down within a range and with a more normal slope. However, the size of the unrealized loss has grown, especially in the corporate categories. We took an impairment charge in the first quarter but feel that the increased loss in the market value of our portfolio is a temporary state which should reverse itself when credit markets return to a more normal status. Most of the funds that are invested in the investment portfolio are part of managements effort to balance interest rate risk and to provide liquidity. At June 30, 2008, we were in a federal funds purchased position of $16.5 million, while there were $17.1 million in federal funds purchased at December 31, 2007 and a net of $6.8 million federal funds purchased at June 30, 2007. The stock offering in December 2006 and the acquisition in March 2008 have funded our growth through the second quarter but our ability to raise deposits will determine how much more we can grow for the remainder of the year.
Total deposits of $769.6 million at June 30, 2008 represented an increase of $97.7 million, or 14.5%, from $671.9 million at year-end 2007 and an increase of $109.7 million, or 16.6%, from $659.8 million at June 30, 2007. The branch acquisitions in March 2008
added approximately $91.9 million to our deposit base. Year-over-year, all deposit categories were up except savings. Noninterest-bearing demand deposits of $101.4 million at June 30, 2008 increased $5.5 million when compared to $95.8 million at December 31, 2007 and up $1.9 million from $99.4 million at the end of the same quarter in 2007. Interest-bearing deposits at June 30, 2008 increased $92.1 million, or 16.0%, to $668.2 million compared to $576.1 million at December 31, 2007 and up $107.8 million, or 19.2%, compared to $560.4 million at June 30, 2007. These last two statistics highlight the importance of the acquisition because with out the inflow, noninterest-bearing deposits would have been down and interest-bearing deposits would have increased minimally compared to the prior periods. While some of the time deposits from the Millennium branches were priced higher than our existing base, the influx of noninterest bearing deposits and our effort to lower our cost of funds should minimize any impact on the margin as we go through the year. All deposit prices are evaluated frequently, especially at the point when rates are decreased, to adjust them to the new rate environment. As an example, our 12 month certificate of deposit was priced at 4.05% in early January 2008 and was 2.85% at the end of June 2008, a decline of 120 basis points. Our primary growth deposit product, Reward Checking, had its rate decreased from 5.01% to a still above market 4.01% at the end of the first quarter and has been set up in a tiered format, so funds over $100,000 earn a lower rate. All these steps were taken to lower our cost of funds and we are starting to see them have an impact. With some large blocks of certificates of deposit maturing in the last half of the year, our margin should come back into a more acceptable level.
FHLB borrowings at June 30, 2008 totaled $135.4 million, a $35.6 million, or 35.7%, increase over $99.8 million at June 30, 2007 and up $8.3 million from $127.1 million at December 31, 2007. Loan demand continued to outpace deposit growth during the second quarter of 2008. After borrowing in the first quarter, management was able to utilize the funds from our branch purchase and fed funds borrowing to fund second quarter growth. For the remainder of the current year, we expect to attract lower cost deposits and anticipate maturing certificates of deposit to re-price at lower rates. We do not anticipate additional borrowing this year, but that is dictated by the markets and the economic environment.
SFAS No. 115, discussed in the 2007 Form 10-K, requires the Company to show the effect of market changes in the value of securities available for sale. The effect of the change in market value of securities, net of income taxes, is reflected in a line titled Accumulated other comprehensive (loss), net in the Shareholders Equity section of the Consolidated Balance Sheets. The securities portion was a negative $8.1 million at June 30, 2008, an increase of $5.2 million from a negative $2.9 million at December 31, 2007 and an increase of $5.6 million from a negative $2.6 million at June 30, 2007. Also included in this line item is a $606 thousand negative amount related to the pension plan (SFAS No. 158). The unrealized loss on securities is presented as a value at one specific point in time but fluctuates significantly over time depending on interest rate changes.
RESULTS OF OPERATIONS
Net income decreased 45.8% to $1.3 million for the three months ended June 30, 2008, compared to $2.3 million for the same period in 2007. Diluted earnings per share decreased 44.7% to $0.21 for the second quarter of 2008, compared to $0.38 for the same quarter in 2007. Net interest income decreased $28 thousand for the quarter ended June 30, 2008, when compared to the same period in 2007. This decrease in net interest income for second quarter 2008 was the result of deposit balances and interest expense growing faster than loan interest income. For the quarter, interest and fees on loans increased $391 thousand, or 3.1%, while deposit interest grew $397 thousand, or 8.3%. Investment income increased $266 thousand net of a $156 thousand decline in fed funds sold. Interest on FHLB advances rose $337 thousand. The biggest single impact on second quarter earnings was a $1.2 million increase in provision for loan loss, as we continued to increase our reserve due to an increase in impaired loans coupled with the slowed economys potential impact on our loan portfolio. Noninterest income excluding securities gains was up $455 thousand with gains of $109 thousand in deposit service charges, $99 thousand increase in card fees and a $252 thousand increase from sale of a fixed asset and a gain from an LLC.
Noninterest expense rose $685 thousand, or 10.7%, for the three months ended June 30, 2008, compared to the comparable period in 2007, as all categories, except marketing and advertising, increased. Much of this increase is the result of absorbing a full quarter of the operating expenses of our purchased branches and the net impact of changing the pension plan. Salaries and benefits increased $371 thousand, or 10.6%, as increases in salaries were partially offset by declines in insurance and other benefits. The other benefit decrease represents the net impact of lower pension cost which was partially offset by an increase in the 401K contribution. Net occupancy expense rose $127 thousand to $1.2 million compared to $1.0 million for the quarter ended June 30, 2007. Other expenses
increased $187 thousand as telephone expense increased $125 thousand due to infrastructure changes, marketing and advertising decreased $146 thousand as a result of a strategic change in our approach to attracting customers, and other operating expenses rose $208 thousand. Other operating expense was primarily impacted by a $77 thousand increase in FDIC insurance expense.
Net income for the six months ended June 30, 2008 was $3.9 million, a decrease of $497 thousand from $4.4 million for the six month period ending June 30, 2007. Net interest income rose $63 thousand as interest income increased $1.5 million while interest expense increased $1.4 million. This is further evidence of the sharp impact the rapid rate changes have had on the earnings stream. For the six months ended June 30, 2008, provision for loan loss increased $1.4 million and consumed most of the increase in noninterest income of $1.8 million. Noninterest income was bolstered by two one time items, a $1.3 million pension plan gain from the changes to our plan and an impairment charge of $300 thousand to Corporate bond investments. Core noninterest income without any gains increased $437 thousand or 15.5% as deposit service charges rose $244 thousand and card fees rose $210 thousand. Noninterest expense increased $1.0 million to $13.7 million for the six months ended June 30, 2008 compared to $12.7 million for the same period in 2007. All categories except marketing and advertising grew from their 2007 levels primarily due to our retail expansion, new personnel, infrastructure improvements on the telephone system and higher FDIC expense.
Return on average assets (ROA) for the second quarter 2008 declined to 0.50%, compared to 1.07% in the same quarter of 2007, and return on average equity (ROE) declined to 5.57% compared to 10.27% for the quarters ended June 30, 2008 and 2007, respectively. For the six months ended June 30, 2008 ROA was 0.81% compared to 1.03% for the same six months in 2007. ROE for the six month period was 8.64% compared to 9.97% for the same periods ending June 30, 2008 and 2007, respectively.
Net Interest Income
Our primary source of income is net interest income which on a fully tax equivalent basis totaled $8.4 million for the second quarter of 2008, a $28 thousand decrease from the second quarter of 2007. Average earning assets for the quarter ended June 30, 2008 were $943.0 million an increase of $122.6 million compared to $820.4 for the same period in 2007. Average loans increased $98.5 million, or 14.6%. Average securities increased $32.9 million, or 25.1%. Average federal funds sold decreased $8.8 million, or 60.5%, reflecting the utilization of excess funds in the other earning asset categories. The fully tax equivalent net interest margin for the three-month period ended June 30, 2008 was 3.59% compared to 4.11% for the same quarter ended in 2007. For the quarter ended June 30 2008, the yield on earning assets declined 61 basis points to 6.49%, compared to 7.10% for the second quarter of 2007, and the cost of interest bearing liabilities was down 27 basis points to 3.37% from 3.64% in the same period in 2007, narrowing the spread between the yield on earning assets and the cost of funds. This decline in earning assets yield reflects the impact of multiple rate cuts by the Federal Reserve beginning in the second half of 2007 and the intense competition in loan pricing. Our increase in funding costs is more specifically related to a year-over-year increase in interest checking of 37 basis points which is less than the 60 basis point gap in the first quarter of 2008. With this narrowing of the interest gap, we may be seeing our first benefits of our re-pricing earlier in the year. Interest checking also displayed the largest growth of any category at $45.0 million, or 44.8%. The cost of all the interest bearing liabilities, except interest checking which includes reward checking, declined across the board but not as much as the earning assets decline. For the three months ended June 30, 2008, the average balances for all interest bearing liabilities, except savings, increased. A large part of this is the result of the new deposits from the purchased branches.
The continued decline in the cost of funds is encouraging, pointing to the impact that our rate re-pricing has had on the cost of funds. With the re-pricing of large blocks of certificates of deposit in the third and fourth quarters of 2008, we expect our interest margin to grow as we move into 2009. Depositors are still undecided on where to place their money. They want yield and security. They are worried about the economy, their jobs and the future. Our goal is to convince them that our products meet their needs and if they do not, then develop products that will. We anticipate that a positively sloping yield curve will enhance the margin. Monitoring the markets, listening to our customers and utilizing our market models should help us adjust quickly to all challenges.
Tables that disclose fully tax equivalent net interest income calculations for the three-month and six month periods ended June 30, 2008 and 2007 follow:
Average Balances, Income and Expense, Yields and Rates (1)
The tax equivalent adjustment for the quarter is $186 thousand, compared to $147 thousand in the prior year.
Average Balances, Income and Expense, Yields and Rates (1)
The tax equivalent adjustment for the quarter is $367 thousand, compared to $292 thousand in the prior year.
This category includes all income not related to interest on investments and interest and fees on loans. Noninterest income excluding net realized gains on securities sales was $1.9 million for the second quarter of 2008 compared to $1.5 million for the same quarter in 2007. Service charges on deposit accounts for the quarter ended June 30, 2008 were $1.0 million, compared to $907 thousand for the comparable period in 2007. Debit and credit card fees increased $99 thousand or 51.3% for the second quarter 2008 to $292 thousand compared to $193 thousand in the second quarter of 2007. Service charge increases were from volume increases and the impact of a slow economy. Debit and credit card increases were the result of more usage of debit cards which raised the fees related to these transactions and more fee and interchange income from credit card transactions. Part of this increased volume in card activity is a direct result of our Reward Checking product which requires a minimum number of debit card transactions. Other operating income was flat compared to the same period in 2007. Gains, excluding securities gains, added $254 thousand to second quarter 2008 earnings.
For the six months ended June 30, 2008 noninterest income excluding securities gains was $4.5 million compared to $2.8 million for the same period in 2007. This increase follows a trend mentioned in the three months comments but also benefited from a gain from changes to the pension plan of $1.3 million and a loss from a securities impairment charge of $300 thousand. For the six months ended June 30, 2008, deposit fees were up $244 thousand, card fees were up $210 thousand and other operating income was down $17 thousand.
This category includes all expenses other than interest paid on deposits and borrowings. When comparing 2008 and 2007 second quarter results, total noninterest expense for the three months ended June 30, 2008 increased $685 thousand with increases in all the identified categories, except marketing and advertisement. Salaries and benefits increased $371 thousand, or 10.6%, as a result of added salaries from the purchased branches, additional staff and the full impact of raises given in mid first quarter. The salary increases were mitigated some by declines in the other benefit categories. Occupancy expense increased $127 thousand from increased depreciation for new locations, higher rent and higher custodial costs which are associated with the relocation to the new Windmill office and the addition of the two purchased branches. Telephone expense is up as a result of infrastructure changes which have some upfront cost and required the running of two systems in parallel. Marketing and advertising expense decreased compared to the same period last year. Other operating expenses increased $208 thousand with FDIC expense up $77 thousand, postage expense up $41 thousand as a result of higher mail volume from new branches and miscellaneous loan expenses up $35 thousand from new loans and higher collection expense.
For the six month period ended June 30, 2008, noninterest expense is up $1.0 million, or 7.9%, at $13.7 million compared to $12.7 million for June 30, 2007. Again, all expense categories except marketing and advertisement increased as a result of branch expansion, telephone system improvements, postage expense related to higher account volume and special mailings and the FDIC rate increase.
Income tax expense for the quarter ended June 30, 2008 was $560 thousand compared to $905 thousand for the same period in 2007 reflecting the effect of the increased reserve for loan loss. For the first half of 2008 income taxes were $1.7 million compared to $1.8 million for the same period in 2007. This decrease was the result of lower income caused by the increase in loan loss reserve. The effective tax rate for the quarter was 30.9% and 30.3% for the six month period ending June 30, 2008.
The Companys allowance for loan losses is an estimate of the amount needed to provide for possible losses in the loan portfolio. In determining adequacy of the allowance, management considers the Companys historical loss experience, the size and composition of the loan portfolio, specific impaired loans, the overall level of nonperforming loans, the value and adequacy of collateral and guarantors, experience and depth of lending staff, effects of credit concentrations and economic conditions. The allowance is increased by a provision for loan losses, which is charged to expense and reduced by charge offs, net of recoveries. Because the risk of loan loss includes general economic trends as well as conditions affecting individual borrowers, the allowance for loan losses can only be an estimate. (See the Allowance for Loan Losses discussion under Critical Accounting Policies earlier in this section.)
Total nonperforming assets, which consist of nonaccrual loans, restructured loans, loans past due 90 days and still accruing interest and foreclosed properties, were $5.5 million at June 30, 2008, $2.9 million at December 31, 2007 and $2.2 million at June 30, 2007. Nonperforming assets are composed largely (93.1%) of loans secured by real estate in the Companys market area or Other Real Estate Owned (OREO). Nonaccrual loans at June 30, 2008 were $3.4 million which had $13 thousand in interest reversed from income and $70 thousand in interest that would have accrued. In the second quarter of 2008, OREO increased $76 thousand and for the year increased $99 thousand representing improvements on the OREO properties necessary to ready the properties for sale. The slow economy has affected the real estate markets and home values in our markets have declined.
Total loan charge-offs, less recoveries, amounted to $332 thousand for the second quarter of 2008 compared to $58 thousand for the same quarter in 2007, while the annualized ratio of net charge-offs to total average loans, net of unearned income, was 0.11% at June 30, 2008 compared to 0.05% for the same period in 2007. For the six months ended June 30, 2008, net charge-offs were $415 thousand compared to $149 thousand at the six month point in 2007. This increase in the ratio of 0.06%, or $266 thousand, reflects the impact of the slowing economy on our customers ability to pay. If there are more job layoffs, this number could rise. Credit quality management continues to be our top priority. The lenders and our collection area are maintaining close contact with our troubled customers but charge-offs are inevitable in this environment. With the high level of real estate secured debt and the large increase in loan loss reserves taken in the second quarter, management is confident that we can successfully manage through the economic downturn. We will continue to monitor our reserve needs and make adjustments when needed.
The allowance for loan losses of $9.7 million at June 30, 2008 increased $2.5 million when compared to $7.2 million at June 30, 2007 and was up $1.8 million, compared to $7.9 million at December 31, 2007. The increase in allowance over the last year has been largely a matter of management increasing the reserve in anticipation of economic problems in the second half of 2008 and as a result of an increase in impaired loans. Management has directed higher than historical additions to the allowance to better prepare the Company for the impact of a potential recessionary economic environment. The ratio of allowance for loan losses to total loans was 1.23% at June 30, 2008, 1.11% at 2007 year-end and 1.06% at June 30, 2007. The allowance for loan losses at June 30, 2008 included $2.0 million of specific impaired loan reserves.
At June 30, 2008, the Company reported $6.1 million in impaired loans, an increase of $1.7 million from $4.4 million at December 31, 2007 and an increase of $2.0 million from $4.0 million at June 30, 2007. The average balance of impaired loans for the three months ended June 30, 2008 was $5.5 million.
At June 30, 2008 we also had $28.1 million in loans classified as potential problem loans that were excluded from impaired and non accrual status. These loans are currently performing and no loss is anticipated at this time based on Managements on-going analysis. Management considers all loans that are adversely risk rated as potential problem loans. These loans are risk rated based on the borrowers perceived ability to comply with current repayment terms. These loans are subject to constant management and Board attention, and their status is reviewed on a regular basis. Factors that cause a loan to be adversely risk rated include:
The following table summarizes the Companys nonperforming assets at the dates indicated.
Liquidity represents our ability to meet present and future deposit withdrawals, to fund loans, to maintain reserve requirements and to operate the organization. To meet our liquidity needs, we maintain cash reserves and have an adequate flow of funds from maturing loans, securities and short-term investments. In addition, our subsidiary bank maintains borrowing arrangements with major regional banks and with the Federal Home Loan Bank (FHLB). We consider our sources of liquidity to be sufficient to meet our estimated liquidity needs.
During the first quarter of 2008, we executed net new FHLB borrowings of $9 million to take advantage of attractive rates in prefunding the expected inflow of funds from our purchase of the Millennium branches. For the second quarter of 2008, we were able to use the funds from the purchased branches and an ebb and flow of purchased and sold funds to fund our growth. These were the only changes to our contractual obligations that would impact liquidity since the 2007 Form 10-K disclosure. At June 30, 2008, we had immediate available credit with the FHLB of $372 thousand and with nonaffiliated banks of $10.6 million. See Note 5 to the Consolidated Financial Statements in the 2007 Form 10-K for further FHLB information.
There have been no material changes in off-balance sheet arrangements since the 2007 Form 10-K disclosure.
Management believes that we maintain overall liquidity sufficient to satisfy our depositors requirements and meet our customers credit needs.
For Tier 1 capital, our risk-based capital position at June 30, 2008 was $88.5 million, or 11.09% of risk-weighted assets, and $96.9 million, or 12.13%, for total risk based capital. Our Tier 1 leverage ratio at June 30, 2008 was 9.69%. Our year-end 2007 ratios were 13.82%, 14.75% and 10.80%, respectively. Enhancing our capital ratios to support future growth was the primary reason for the December 2006 stock offering. At June 30, 2007, these ratios were 14.60%, 15.67% and 11.37%, respectively.
Tier 1 capital consists primarily of common shareholders equity, while total risk based capital adds our trust preferred borrowing and a portion of the allowance for loan losses to Tier 1. Risk weighted assets are determined by assigning various levels of risk to different categories of assets and off-balance sheet activities. Under current risk based capital standards, all banks and bank holding companies are required to have a Tier 1 capital of at least 4% and a total capital ratio of at least 8%.
In financial institutions, unlike most other industries, virtually all of the assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on a banks performance than the effects of general levels of inflation. While interest rates are significantly impacted by inflation, neither the timing nor the magnitude of the changes are directly related to price level movements. The impact of inflation on interest rates, loan demand, and deposits is reflected in the Consolidated Financial Statements.
Certain information contained in this discussion may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We caution you to be aware of the speculative nature of forward-looking statements. These statements are not guarantees of performance or results. Statements that are not historical in nature, including statements that include the words may, anticipate, estimate, could, should, would, will, plan, predict, project, potential, expect, believe, intend, continue, assume and similar expressions, are intended to identify forward-looking statements. Although these statements reflect our good faith belief 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 our expectations and predictions is subject to a number of known and unknown risks and uncertainties, including the risks and uncertainties discussed in this Form 10-Q, including the following:
All of the forward-looking statements made in this filing are qualified by these factors, and there can be no assurance that the actual results anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us or our business or operations. You should also refer to risks detailed under the Risk Factors section included in the 2007 Form 10-K and otherwise included in our periodic and current reports filed with the Securities and Exchange Commission for specific factors that could cause our actual results to be significantly different from those expressed or implied by our forward-looking statements.
There have been no material changes in market risk since 2007 year end as disclosed in the 2007 Form 10-K.
We maintain disclosure controls and procedures that are designed to provide assurance that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commission. An evaluation of the effectiveness of the design and
operations of our disclosure controls and procedures as of the end of the period covered by this report was carried out under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based on such evaluation, such officers concluded that our disclosure controls and procedures were effective as of the end of such period. In addition, while we have reorganized and centralized many functions over the last year, we have maintained the control points that had been previously established.
There was no change in our internal control over financial reporting that occurred during the quarter ended June 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We believe that the merger of our subsidiary banks continues to have a positive impact on internal controls by decreasing the number of banks, accounts and internal processes and procedures.
PART II - OTHER INFORMATION
There are no material pending legal proceedings to which the registrant or any of its subsidiaries is a party. The only litigation in which we and our subsidiaries are involved pertains to collection suits involving delinquent loan accounts in the normal course of business.
There have been no material changes in our risk factors from those disclosed in the 2007 Form 10-K.
In January 2001, the Board of Directors gave the authority to management to repurchase up to 5% of the outstanding shares of the companys stock per calendar year based on the number of shares outstanding on December 31 of the preceding year. This authority has been reaffirmed each year and was most recently reaffirmed in June of 2007. There is no stated expiration date for the Plan. The table below highlights the number of shares eligible and purchased in the second quarter of 2008.
Issuer Purchases of Equity Securities
The Company held its annual meeting of shareholders on April 17, 2008. At this meeting, the shareholders approved the following proposal by the margins indicated:
1. To elect 10 directors to serve for terms of one year each, expiring at the 2009 annual meeting of shareholders:
Exhibit 31.1 Rule 13a-14(a) Certification of Chief Executive Officer
Exhibit 31.2 Rule 13a-14(a) Certification of Chief Financial Officer
Exhibit 32.1 Section 906 Certification of Chief Executive Officer
Exhibit 32.2 Section 906 Certification of Chief Financial Officer
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.
Date: August 4, 2008
Exhibit 31.1 Rule 13a-14(a) Certification of Chief Executive Officer
Exhibit 31.2 Rule 13a-14(a) Certification of Chief Financial Officer
Exhibit 32.1 Section 906 Certification of Chief Executive Officer
Exhibit 32.2 Section 906 Certification of Chief Financial Officer