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Leesport Financial 10-Q 2005

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.1

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

ý  Quarterly Report pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934 for the

Quarterly Period Ended March 31, 2005,

 

or

 

o  Transition report pursuant to Section 13 or 15(d) Of the Exchange Act

for the Transition Period from           to          .

 

No. 0-14555

(Commission File Number)

 

LEESPORT FINANCIAL CORP.

(Exact name of Registrant as specified in its charter)

 

PENNSYLVANIA

 

23-2354007

(State or other jurisdiction of

 

(I.R.S. Employer

Incorporation or organization)

 

Identification No.)

 

 

 

1240 Broadcasting Road, Wyomissing, Pennsylvania

 

19610

(Address of principal executive offices)

 

(Zip Code)

 

(610) 208-0966

(Registrants telephone number, including area code)

 

 

(Former name, former address and former fiscal year,

if changed since last report)

 

Check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes ý No o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Yes o No ý

 

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

 

Number of Shares Outstanding

 

 

as of May 12, 2005

COMMON STOCK ($5.00 Par Value)

 

5,024,539

(Title of Class)

 

(Outstanding Shares)

 

 



 

FORWARD LOOKING STATEMENTS

 

Leesport Financial Corp. (the “Company”) may from time to time make written or oral “forward-looking statements,” including statements contained in the Company’s filings with the Securities and Exchange Commission (including this Quarterly Report on Form 10-Q and the exhibits hereto and thereto), in its reports to shareholders and in other communications by the Company, which are made in good faith by the Company pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include statements with respect to the Company’s beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties, and are subject to change based on various factors (some of which are beyond the Company’s control).  The words “may,” “could,” “should,” would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” and similar expressions are intended to identify forward-looking statements.  The following factors, among others, could cause the Company’s financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; inflation, interest rate, market and monetary fluctuations; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors’ products and services; the willingness of users to substitute competitors’ products and services for the Company’s products and services; the success of the Company in gaining regulatory approval of its products and services, when required; the impact of changes in financial services laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes; acquisitions; changes in consumer spending and saving habits; and the success of the Company at managing the risks involved in the foregoing.

 

The Company cautions that the foregoing list of important factors is not exclusive.  Readers are also cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date of this report.  The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company.

 

2



 

Part I — FINANCIAL INFORMATION

 

Item 1 — Financial Statements

 

LEESPORT FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands, except per share data)

 

 

 

March 31,

 

December 31,

 

 

 

2005

 

2004

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

25,875

 

$

22,643

 

Interest-bearing deposits in banks

 

1,442

 

1,412

 

 

 

 

 

 

 

Total cash and cash equivalents

 

27,317

 

24,055

 

 

 

 

 

 

 

Mortgage loans held for sale

 

17,747

 

9,799

 

Securities available for sale

 

181,408

 

165,778

 

Securities held to maturity, fair value - 2005 - $6,328; 2004 - $6,298

 

6,345

 

6,403

 

Loans, net of allowance for loan losses 2005 - $7,338; 2004 - $7,248

 

584,101

 

589,080

 

Premises and equipment, net

 

8,410

 

8,600

 

Identifiable intangible assets

 

5,630

 

5,790

 

Goodwill

 

38,840

 

38,227

 

Bank owned life insurance

 

11,477

 

11,355

 

Other assets

 

19,438

 

18,295

 

 

 

 

 

 

 

Total assets

 

$

900,713

 

$

877,382

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits:

 

 

 

 

 

Non-interest bearing

 

$

112,260

 

$

107,442

 

Interest bearing

 

508,790

 

504,849

 

 

 

 

 

 

 

Total deposits

 

621,050

 

612,291

 

 

 

 

 

 

 

Securities sold under agreements to repurchase

 

51,595

 

52,800

 

Federal funds purchased

 

52,787

 

36,092

 

Long-term debt

 

55,000

 

54,500

 

Junior subordinated debt

 

20,150

 

20,150

 

Other liabilities

 

9,326

 

10,614

 

 

 

 

 

 

 

Total liabilities

 

809,908

 

786,447

 

 

 

 

 

 

 

Shareholders' equity

 

 

 

 

 

Common stock, $5.00 par value; authorized 20,000,000 shares; issued:
5,039,937 shares at March 31, 2005 and 5,031,021 shares at December 31, 2004

 

25,198

 

25,154

 

Surplus

 

51,441

 

51,210

 

Retained earnings

 

16,520

 

15,592

 

Accumulated other comprehensive loss

 

(1,674

)

(119

)

Treasury stock; 34,691 shares at March 31, 2005 and 46,645 shares at December 31, 2004, at cost

 

(680

)

(902

)

 

 

 

 

 

 

Total shareholders’ equity

 

90,805

 

90,935

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

900,713

 

$

877,382

 

 

See Notes to Consolidated Financial Statements.

 

3



 

LEESPORT FINANCIAL CORP. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

(Dollar amounts in thousands, except per share data)

 

 

 

Three Months Ended

 

 

 

March 31, 2005

 

March 31, 2004

 

 

 

 

 

 

 

Interest income:

 

 

 

 

 

Interest and fees on loans

 

$

9,673

 

$

5,352

 

Interest on securities:

 

 

 

 

 

Taxable

 

1,569

 

1,639

 

Tax-exempt

 

165

 

229

 

Dividend income

 

144

 

102

 

Other interest income

 

11

 

3

 

 

 

 

 

 

 

Total interest income

 

11,562

 

7,325

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

Interest on deposits

 

3,020

 

2,049

 

Interest on short-term borrowings

 

324

 

165

 

Interest on securities sold under agreement to repurchase

 

273

 

179

 

Interest on long-term debt

 

434

 

301

 

Interest on junior subordinated debt

 

333

 

193

 

 

 

 

 

 

 

Total interest expense

 

4,384

 

2,887

 

 

 

 

 

 

 

Net Interest Income

 

7,178

 

4,438

 

Provision for loan losses

 

430

 

360

 

 

 

 

 

 

 

Net Interest Income after provision for loan losses

 

6,748

 

4,078

 

 

 

 

 

 

 

Other income:

 

 

 

 

 

Customer Service Fees

 

604

 

426

 

Mortgage banking activities

 

1,187

 

229

 

Commissions and fees from insurance sales

 

3,078

 

2,701

 

Brokerage and investment advisory commissions and fees

 

209

 

129

 

Gain (loss) on sale of loans

 

246

 

(34

)

Other Income

 

520

 

450

 

Net realized gains on sales of securities

 

38

 

154

 

 

 

 

 

 

 

Total other income

 

5,882

 

4,055

 

 

 

 

 

 

 

Other expense:

 

 

 

 

 

Salaries and employee benefits

 

6,102

 

3,854

 

Occupancy expense

 

1,114

 

537

 

Furniture and equipment expense

 

600

 

446

 

Marketing and advertising expense

 

343

 

305

 

Amortization of identifiable intangible assets

 

160

 

84

 

Professional services

 

309

 

255

 

Outside processing

 

677

 

521

 

Insurance expense

 

202

 

100

 

Other expense

 

877

 

513

 

 

 

 

 

 

 

Total other expense

 

10,384

 

6,615

 

 

 

 

 

 

 

Income before income taxes

 

2,246

 

1,518

 

Income taxes

 

467

 

290

 

 

 

 

 

 

 

Net income

 

$

1,779

 

$

1,228

 

 

See Notes to Consolidated Financial Statements.

 

4



 

 

 

Three Months Ended

 

 

 

March 31, 2005

 

March 31, 2004

 

 

 

 

 

 

 

EARNINGS PER SHARE DATA

 

 

 

 

 

 

 

 

 

 

 

Average shares outstanding

 

4,997,887

 

3,570,881

 

Basic earnings per share

 

$

0.36

 

$

0.34

 

Average shares outstanding for diluted earnings per share

 

5,068,915

 

3,640,488

 

Diluted earnings per share

 

$

0.35

 

$

0.34

 

Cash dividends declared per share

 

$

0.17

 

$

0.162

 

 

See Notes to Consolidated Financial Statements.

 

5



 

LEESPORT FINANCIAL CORP.

UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Three Months Ended March 31, 2005 and 2004

(Dollar amounts in thousands, except per share data)

 

 

 

 

Common Stock

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Number of

 

 

 

 

 

 

 

Comprehensive

 

 

 

 

 

 

 

Shares

 

 

 

 

 

Retained

 

Other Income

 

Treasury

 

 

 

 

 

Issued

 

Par Value

 

Surplus

 

Earnings

 

(Loss)

 

Stock

 

Total

 

Balance, December 31, 2004

 

5,031,021

 

$

25,154

 

$

51,210

 

$

15,592

 

$

(119

)

$

(902

)

$

90,935

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

 

 

1,779

 

 

 

1,779

 

Change in net unrealized gains (losses) on securities available for sale, net of reclassification adjustment and tax effect

 

 

 

 

 

(1,555

)

 

(1,555

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

224

 

Reissuance of treasury stock

 

 

 

78

 

 

 

222

 

300

 

Fractional shares in connection with stock dividend paid

 

 

 

 

 

(10

)

(1

)

 

 

(11

)

Common stock issued in connection with directors' compensation

 

6,202

 

31

 

125

 

 

 

 

156

 

Common stock issued in connection with director and employee stock purchase plans

 

2,714

 

13

 

38

 

 

 

 

51

 

Cash dividends declared ($0.17 per share)

 

 

 

 

(850

)

 

 

(850

)

Balance, March 31, 2005

 

5,039,937

 

$

25,198

 

$

51,441

 

$

16,520

 

$

(1,674

)

$

(680

)

$

90,805

 

 

 

 

 

Common Stock

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Number of

 

 

 

 

 

 

 

Comprehensive

 

 

 

 

 

 

 

Shares

 

 

 

 

 

Retained

 

Other Income

 

Treasury

 

 

 

 

 

Issued

 

Par Value

 

Surplus

 

Earnings

 

(Loss)

 

Stock

 

Total

 

Balance, December 31, 2003

 

3,439,310

 

$

17,197

 

$

18,426

 

$

18,535

 

$

273

 

$

(1,054

)

$

53,377

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

 

 

1,228

 

 

 

1,228

 

Change in net unrealized gains (losses) on securities available for sale, net of reclassification adjustment and tax effect

 

 

 

 

 

1,730

 

 

1,730

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

2,958

 

Reissuance of treasury stock

 

 

 

66

 

 

 

299

 

365

 

Common stock issued in connection with directors' compensation

 

6,683

 

33

 

124

 

 

 

 

157

 

Common stock issued in connection with director and employee stock purchase plans

 

11,577

 

58

 

203

 

 

 

 

261

 

Cash dividends declared ($0.162 per share)

 

 

 

 

(581

)

 

 

(581

)

Balance, March 31, 2004

 

3,457,570

 

$

17,288

 

$

18,819

 

$

19,182

 

$

2,003

 

$

(755

)

$

56,537

 

 

See Notes to Consolidated Financial Statements.

 

6



 

LEESPORT FINANCIAL CORP.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands)

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2005

 

2004

 

Cash Flows From Operating Activities

 

 

 

 

 

Net Income

 

$

1,779

 

$

1,228

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Provision for loan losses

 

430

 

360

 

Provision for depreciation and amortization of premises and equipment

 

412

 

305

 

Amortization of identifiable intangible assets

 

160

 

84

 

Deferred income taxes

 

1,079

 

(148

)

Director stock compensation

 

156

 

157

 

Net amortization securities premiums and discounts

 

95

 

134

 

Amortization of mortgage servicing rights

 

5

 

32

 

Increase in mortgage servicing rights

 

(150

)

(28

)

Net realized (gain) loss on sale of foreclosed real estate

 

(13

)

 

Net realized gains on sales of securities

 

(38

)

(154

)

Proceeds from sales of loans held for sale

 

55,561

 

9,561

 

Net gains on sale of loans

 

(1,261

)

(138

)

Loans originated for sale

 

(62,247

)

(9,972

)

Earnings on investment in life insurance

 

(122

)

(191

)

Decrease (Increase) in accrued interest receivable and other assets

 

(337

)

(434

)

Increase (decrease) in accrued interest payable and other liabilities

 

(1,850

)

4,879

 

 

 

 

 

 

 

Net Cash Provided by (Used in) Operating Activities

 

(6,341

)

5,675

 

 

 

 

 

 

 

Cash Flow From Investing Activities

 

 

 

 

 

Available for sale securities:

 

 

 

 

 

Purchases

 

(26,011

)

(5,514

)

Principal repayments, maturities and calls

 

6,167

 

6,838

 

Proceeds from sales

 

1,815

 

18,181

 

Net decrease (increase) in federal funds sold

 

 

1,100

 

Net increase in loans receivable

 

(9,151

)

(4,042

)

Proceeds from sale of loans

 

13,699

 

2,837

 

Net (increase) decrease in Federal Home Loan Bank Stock

 

63

 

1,197

 

Proceeds from sale of foreclosed real estate

 

 

16

 

Purchases of premises and equipment

 

(222

)

(326

)

Purchase of limited partnership investment

 

(1,050

)

(975

)

Net Cash Used In Investing Activities

 

(14,690

)

19,312

 

 

See Notes to Consolidated Financial Statements.

 

7



 

 

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2005

 

2004

 

Cash Flow From Financing Activities

 

 

 

 

 

Net increase in deposits

 

8,759

 

12,796

 

Net increase (decrease) in federal funds purchased

 

16,695

 

(31,215

)

Net increase (decrease) in securities sold under agreements to repurchase

 

(1,205

)

1,576

 

Proceeds from long-term debt

 

3,000

 

 

Repayments of long-term debt

 

(2,500

)

 

Proceeds from the exercise of stock options and stock purchase plans

 

51

 

261

 

Reissuance of treasury stock

 

300

 

 

Cash dividends paid

 

(807

)

(558

)

Net cash disbursed with sale of financial centers

 

 

 

Net Cash (Used In) Provided By Financing Activities

 

24,293

 

(17,140

)

 

 

 

 

 

 

Increase in cash and cash equivalents

 

3,262

 

7,847

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

January 1

 

24,055

 

15,238

 

December 31

 

$

27,317

 

$

23,085

 

 

 

 

 

 

 

Cash payments for:

 

 

 

 

 

Interest

 

$

4,527

 

$

3,296

 

Taxes

 

$

 

$

405

 

 

See Notes to Consolidated Financial Statements.

 

8



 

LEESPORT FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

1.                              Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  All significant intercompany accounts and transactions have been eliminated.  In the opinion of management, all adjustments (including normal recurring adjustments) considered necessary for a fair presentation of the results for the interim periods have been included.  For comparative purposes, prior years’ consolidated financial statements have been reclassified to conform to report classifications of the current year.  The reclassifications had no effect on net income.

 

The balance sheet at December 31, 2004 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

 

The results of operations for the three month period ended March 31, 2005 are not necessarily indicative of the results to be expected for the full year.  For purpose of reporting cash flows, cash and cash equivalents include cash and due from banks, and interest bearing deposits in other banks.  For further information, refer to the Consolidated Financial Statements and Footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

 

2.                               Earnings Per Common Share

 

Basic earnings per share represent income available to common shareholders divided by the weighted-average number of common shares outstanding during the period.  Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares (stock options) had been issued, as well as any adjustments to income that would result from the assumed issuance.

 

Earnings per common share for the respective periods indicated have been computed based upon the following:

 

 

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2005

 

2004

 

 

 

(Dollar amounts in thousands)

 

 

 

 

 

Net income available to shareholders

 

$

1,779

 

$

1,228

 

 

 

 

 

 

 

Average shares outstanding

 

4,997,887

 

3,570,881

 

Effect of dilutive stock options

 

71,028

 

69,607

 

 

 

 

 

 

 

Average number of shares used to calculate diluted earnings per share

 

5,068,915

 

3,640,488

 

 

9



 

3.                               Comprehensive Income

 

Accounting principles generally require that recognized revenue, expense, gains and losses be included in net income.  Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.  The components of other comprehensive income (loss) and related tax effects were as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2005

 

2004

 

 

 

(Dollar amounts in thousands)

 

 

 

 

 

Unrealized holding gains (losses) on available for sale securities

 

$

(2,528

)

$

2,760

 

Reclassification adjustment for unrealized gains remaining to be amortized from transfer of available for sale securities to held to maturity  

 

139

 

 

Reclassification adjustment for (gains) losses realized in income

 

(38

)

(154

)

Net unrealized gains (losses)

 

(2,427

)

2,606

 

Income tax effect

 

872

 

(876

)

 

 

 

 

 

 

Other comprehensive income (loss)

 

$

(1,555

)

$

1,730

 

 

 

4.                               Guarantees

 

Outstanding letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.  The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for standby letters of credit is represented by the contractual amount of those instruments.  The Company had $10,967,000 of financial and performance standby letters of credit as of March 31, 2005.  The Bank uses the same credit policies in making conditional obligations as it does for on-balance sheet instruments.

The majority of these standby letters of credit expire within the next 24 months.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments.  The Company requires collateral and personal guarantees supporting these letters of credit as deemed necessary.  Management believes that the proceeds obtained through a liquidation of such collateral and the enforcement of personal guarantees would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees.  The current amount of the liability as of March 31, 2005 for guarantees under standby letters of credit is not material.

 

10



 

5.                                 Segment Information

 

The Company’s insurance operations and investment operations are managed separately from the traditional banking and related financial services that the Company also offers.  The insurance operation provides coverage for commercial, individual, surety bond, and group and personal benefit plans.  The investment operation provides services for individual financial planning, retirement and estate planning, investments, corporate and small business pension and retirement planning.  Effective January 1, 2005, the Company’s wealth management subsidiary, Leesport Wealth Management, LLC, changed its name to Madison Financial Advisors, LLC.

 

 

 

Banking

 

 

 

 

 

 

 

 

 

and

 

 

 

 

 

 

 

 

 

Financial

 

Insurance

 

Investment

 

 

 

 

 

Services

 

Services

 

Services

 

Total

 

 

 

(Dollar amounts in thousands)

 

Three months ended March 31, 2005

 

 

 

 

 

 

 

 

 

Net interest income and other income from external sources  

 

$

9,773

 

$

3,078

 

$

209

 

$

13,060

 

Income (loss) before income taxes

 

1,626

 

641

 

(21

)

2,246

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2004

 

 

 

 

 

 

 

 

 

Net interest income and other income from external sources  

 

$

5,663

 

$

2,701

 

$

129

 

$

8,493

 

Income before income taxes

 

 1,005

 

510

 

3

 

1,518

 

 

6.                                 Stock Option Plans

 

The Company has an Employee Stock Incentive Plan (ESIP) that covers all officers and key employees of the Company and its subsidiaries and is administered by a committee of the Board of Directors.  The total number of shares of common stock that may be issued pursuant to the ESIP is 441,525.  The option price for options issued under the Plan must be at least equal to 100% of the fair market value of the common stock on the date of grant and shall not be less than the stock’s par value.  Options granted under the Plan have various vesting periods ranging from immediate up to 5 years, 20% exercisable not less than one year after the date of grant, but no later than ten years after the date of grant in accordance with the vesting.  Vested options expire on the earlier of ten years after the date of grant, three months from the participant’s termination of employment or one year from the date of the participant’s death or disability.

 

The Company has an Independent Directors Stock Option Plan (IDSOP).  The total number of shares of common stock that may be issued pursuant to the ESIP is 110,381.  The Plan covers all directors of the Company who are not employees and former directors who continue to be employed by the Company.  The option price for options issued under the Plan will be equal to the fair market value of the Company’s common stock on the date of grant. Options are exercisable from the date of grant and expire on the earlier of ten years after the date of grant, three months from the date the participant ceases to be a director of the Company or the cessation of the participant’s employment, or twelve months from the date of the participant’s death or disability.

 

11



 

The Company accounts for the above stock option plans under the recognition and measurement principles of APB opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations.  No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.  The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation” to stock-based compensation:

 

 

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2005

 

2004

 

 

 

(Dollar amounts in thousands

 

 

 

except share data)

 

Net income, as reported

 

$

1,779

 

$

1,228

 

Deduct total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

 

(42

)

(48

)

 

 

 

 

 

 

Pro forma net income

 

$

1,737

 

$

1,180

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

As reported

 

$

0.36

 

$

0.34

 

Pro forma

 

$

0.35

 

$

0.33

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

As reported

 

$

0.35

 

$

0.34

 

Pro forma

 

$

0.34

 

$

0.33

 

 

 

7.                                 Debt and Borrowings

 

Total debt increased by $16.0 million, or 39.1% annualized, to $179.5 million at March 31, 2005 from $163.5 million at December 31, 2004.  The increase in total debt and borrowings was primarily due to the Company purchasing overnight federal funds which increased to $52.8 million at March 31, 2005 from $36.1 million at December 31, 2004.  The purchase of these funds was primarily the result of increases in available for sale investment securities which increased to $181.4 million at March 31, 2005 from $165.8 million at December 31, 2004.

 

8.                                 Acquisitions

 

On October 1, 2004, the Company acquired 100% of the outstanding voting shares of Madison Bancshares group, Ltd., the holding company for Madison Bank (“Madison”), a Pennsylvania state-chartered commercial bank and its wholly owned subsidiary, Philadelphia Financial Mortgage Company (“PFM” or “Philadelphia Financial”).  Madison and PFM are both now divisions of Leesport Bank.  Included in the sale were approximately $198.1 million in total loans, $30.1 million in goodwill and identifiable intangible assets and $180.1 million in total deposits.

 

On September 30, 2003, the Company paid cash of $1.0 million for Madison Insurance Consultants, LLC (“MIC” formerly CrosStates Insurance Consultants, Inc.), a full service insurance agency that specializes in personal and casualty insurance headquartered in Langhorne, Pennsylvania, and recorded a liability of $1.4 million, payable to the shareholder of MIC in cash and stock at the then current market value.  This liability is included in other liabilities.  After the first and second years following the acquisition, $1.0 million and $0.4 million, respectively, will be paid to the former shareholder of MIC.  On October 1, 2004, the Company paid the shareholder of MIC $500,000 in cash and $500,000 in fair market value of the Company’s stock.  Also, there are contingent payments totaling up to $1.2 million, payable to the former shareholder in cash and stock at the then current market value based on MIC achieving certain annual revenue levels through September 30, 2005.  On March 17, 2005, the Company amended the asset purchase agreement increasing the payment to the shareholder in the second year following the acquisition of MIC to $1.0 million.  The $0.6 million increase was recorded as goodwill and a liability payable to the shareholder in stock at the then current market value.

 

12



 

9.                                 Investment in Limited Partnership

 

On December 29, 2003, the Bank entered into a limited partner subscription agreement with Midland Corporate Tax Credit XVI Limited Partnership, where the Bank will receive special tax credits and other tax benefits. The Bank subscribed to a 6.2% interest in the partnership, which is subject to an adjustment depending on the final size of the partnership at a purchase price of $5 million. This investment is included in other assets and is not guaranteed.  It is accounted for in accordance with Statement of Position (SOP) 78-9, “Accounting for Investments in Real Estate Ventures,” using the equity method. This agreement was accompanied by a payment of $1.7 million.  The associated non-interest bearing promissory note payable included in other liabilities was zero at March 31, 2005 and $1.1 million at December 31, 2004.  Installments were paid as requested.  The Company funded the final installment of $1.1 million in January 2005.

 

10.                           Recent Accounting Pronouncements

 

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123(R), “Share-Based Payment.”  Statement No. 123(R) replaces Statement No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.”  Statement No. 123(R) requires compensation costs related to share-based payment transactions to be recognized in the financial statements over the period that an employee provides service in exchange for the award.  Public companies are required to adopt the new standard using a modified prospective method and may elect to restate prior periods using the modified retrospective method.  Under the modified prospective method, companies are required to record compensation cost for new and modified awards over the related vesting period of such awards prospectively and record compensation cost prospectively for the unvested portion, at the date of adoption, of previously issued and outstanding awards over the remaining vesting period of such awards.  No change to prior periods presented is permitted under the modified prospective method.  Under the modified retrospective method, companies record compensation costs for prior periods retroactively through restatement of such periods using the exact pro forma amounts disclosed in the companies’ footnotes.  Also, in the period of adoption and after, companies record compensation cost based on the modified prospective method.

 

On April 14, 2005, the Securities and Exchange Commission (“SEC”) adopted a new rule that amends the compliance dates for Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”). Under the new rule, the Company is required to adopt SFAS No. 123R in the first annual period beginning after June 15, 2005.  The Company has not yet determined the method of adoption or the effect of adopting SFAS No. 123R, and it has not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS No. 123.

 

In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB No. 107”), “Share-Based Payment”, providing guidance on option valuation methods, the accounting for income tax effects of share-based payment arrangements upon adoption of SFAS No. 123(R), and the disclosures in MD&A subsequent to the adoption. The Company will provide SAB No. 107 required disclosures upon adoption of SFAS No. 123(R) on January 1, 2006.

 

In December 2003, the Accounting Standards Executive Committee issued Statement of Position 03-3 (SOP 03-3), “Accounting for Certain Loans or Debt Securities Acquired in a Transfer.”  SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities acquired in a transfer, including business combinations, if those differences are attributable, at least in part, to credit quality.  SOP 03-3 is effective for loans and debt securities acquired in fiscal years beginning after December 15, 2004.  The Company adopted the provisions of SOP 03-3 on January 1, 2005.

 

13



 

Item 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Critical Accounting Policies

 

Note 1 to the Company’s consolidated financial statements (included in Item 8 of the Form 10-K for the year ended December 31, 2004) lists significant accounting policies used in the development and presentation of its financial statements.  This discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of the Company and its results of operations.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, other than temporary impairment losses on available for sale securities and the valuation of deferred tax assets.  In estimating other-than temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

 

Results of Operations

 

OVERVIEW

 

Net income for the Company for the quarter ended March 31, 2005 was $1.78 million, an increase of 44.9%, as compared to $1.23 million for the same period in 2004.  Basic and diluted earnings per share were $.36 and $.35, respectively, for the first quarter of 2005 compared to basic and diluted earnings per share of $.34 and $.34, respectively, for the same period of 2004.  Earnings per share amounts reflect a 5% stock dividend distributed to shareholders on January 14, 2005.

 

The following are the key ratios for the Company as of March 31:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2005

 

2004

 

 

 

 

 

 

 

Return on average assets

 

0.81

%

0.80

%

Return on average shareholders' equity

 

7.89

%

9.05

%

Dividend payout ratio

 

47.22

%

47.31

%

Average shareholders'equity to average assets

 

10.33

%

8.86

%

 

 

Net Interest Income

 

Net interest income is a primary source of revenue for the Company.  Net interest income results from the difference between the interest and fees earned on loans and investments and the interest paid on deposits to customers and other non-deposit sources of funds, such as repurchase agreements and short and long-term borrowed funds.  Net interest margin is the difference between the gross (tax-effected) yield on earning assets and the cost of interest bearing funds as a percentage of earning assets.  All discussion of net interest margin is on a fully taxable equivalent basis.

 

Net interest income for the three months ended March 31, 2005 was $7.4 million, an increase of $2.8 million, or 60.3%, compared to the $4.6 million reported for the first quarter of 2004.  The net interest margin increased to 3.80% for the first quarter of 2005 from 3.33% for the first quarter of 2004.

 

14



 

The following summarizes net interest margin information:

 

 

 

Three Months Ended March 31,

 

 

 

2005

 

2004

 

 

 

 

 

Interest

 

 

 

 

 

Interest

 

 

 

 

 

Average

 

Income/

 

%

 

Average

 

Income/

 

%

 

 

 

Balance

 

Expense

 

Rate

 

Balance

 

Expense

 

Rate

 

 

 

(Dollar amounts in thousands, except percentages)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans: (1) (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

429,175

 

$

6,879

 

6.41

 

$

236,707

 

$

3,613

 

6.14

 

Mortgage

 

57,387

 

943

 

6.57

 

37,620

 

585

 

6.22

 

Consumer

 

124,169

 

1,927

 

6.29

 

84,964

 

1,176

 

5.57

 

Other

 

96

 

 

 

233

 

 

 

Investments (2)

 

174,666

 

1,993

 

4.56

 

195,687

 

2,108

 

4.31

 

Federal funds sold

 

 

 

 

33

 

 

 

Other short-term investments

 

1,458

 

11

 

3.06

 

73

 

3

 

16.53

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-earning assets

 

$

786,951

 

$

11,753

 

5.97

 

$

555,317

 

$

7,485

 

5.42

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Transaction accounts

 

$

270,855

 

$

906

 

1.36

 

$

177,903

 

$

515

 

1.16

 

Certificates of deposit

 

235,743

 

2,114

 

3.64

 

168,066

 

1,535

 

3.67

 

Securities sold under agreement to repurchase

 

48,366

 

273

 

2.26

 

39,230

 

179

 

1.81

 

Short-term borrowings

 

46,156

 

324

 

2.85

 

52,274

 

165

 

1.27

 

Long-term borrowings

 

54,872

 

434

 

3.16

 

34,500

 

301

 

3.45

 

Junior subordinated debt

 

20,150

 

333

 

6.70

 

15,000

 

193

 

5.17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

676,142

 

4,384

 

2.63

 

486,973

 

2,888

 

2.39

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

109,177

 

 

 

 

64,601

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cost of funds

 

$

785,319

 

4,384

 

2.26

 

$

551,574

 

2,888

 

2.11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin (fully taxable equivalent)

 

 

 

$

7,369

 

3.80

 

 

 

$

4,597

 

3.33

 


(1)          Loan fees have been included in the interest income totals presented.  Nonaccrual loans have been included in average loan balances.

 

(2)          Interest income on loans and investments is presented on a taxable equivalent basis using an effective tax rate of 34%.

 

Average interest-earning assets for the quarter ended March 31, 2005 were $787.0 million, a $231.7 million, or 41.7%, increase over average interest-earning assets of $555.3 million for the first quarter of 2004.  The yield on average interest-earning assets increased by 55 basis points, to 5.97% for the first quarter of 2005, compared to 5.42% for the same period in 2004.

 

Average interest-bearing liabilities for the quarter ended March 31, 2005 were $676.1 million, a $189.1 million, or 38.8%, increase over average interest-bearing liabilities of $487.0 million for the first quarter of 2004.  In addition, the average noninterest-bearing deposits increased to $109.2 million for the three months ended March 31, 2005, from $64.6 million for the same time period of 2004.  The interest rate on the total cost of funds increased by 15 basis points, to 2.26% for the three months ended March 31, 2005, compared to 2.11% for the same period in 2004.

 

The increase in net interest income during the first quarter of 2005, as compared to the same period in 2004, was primarily the result of an increase in average earning assets, due mainly to commercial and installment loans acquired from Madison, the targeted short-term interest rate, as established by the Federal Reserve Bank (“FRB”), increasing, which resulted in an increase in the prime rate from 4.00% at March 31, 2004, to 5.75% at March 31, 2005, an increase in the commercial loan portfolio yield, an increase in the installment loan portfolio yield and an increase in the investment

 

15



 

portfolio yield.  Average loans increased by $251.3 million or 69.9% from March 31, 2004 to March 31, 2005.  Average investment securities decreased by $21.0 million or 10.7% from March 31, 2004 to March 31, 2005.

 

Another major contributing factor to net interest income was an increase in the cost of interest-bearing deposits and a decrease in the cost of long-term borrowings.  The increase in interest-bearing deposit rates from March 31, 2004 to March 31, 2005 was the result of management’s pricing strategy.  The average rate paid on interest-bearing deposits for the three months ended March 31, 2005 was 2.63%, an increase of 24 basis points or 10.0% as compared to the same period in 2004.  Average interest bearing deposits increased $160.6 million or 46.4% from March 31, 2004 to March 31, 2005 due primarily to deposits acquired from Madison.  The average rate paid on long-term borrowings decreased 29 basis points to 3.16% at March 31, 2005 from 3.45% at March 31, 2004.  Average long-term borrowings increased $20.4 million or 59.0% from March 31, 2004 to March 31, 2005.

 

Provision for Loan Losses

 

The provision for loan losses for the quarter ended March 31, 2005 was $430,000 compared to $360,000 for the same period of 2004.  The provision reflects the amount deemed appropriate by management to provide an adequate reserve to meet the present risk characteristics of the loan portfolio.  The Company continues to maintain strong asset quality ratios in light of the continued growth in the Company’s loan portfolio and management’s assessment of the credit quality factors existing at this time.  The ratio of the allowance for loan losses to loans outstanding at March 31, 2005 and March 31, 2004 was 1.24% and 1.28%, respectively.  Please see further discussion under the caption “Allowance for Loan Losses.”

 

Other Income

 

Total other income for the three months ended March 31, 2005 totaled $5.9 million, an increase of $1.8 million, or 45.1%, over other income of $4.1 million for the same period in 2004.

 

Customer service fees increased 41.8% for the first quarter of 2005 as compared to the same period in 2004, from $426,000 to $604,000.  These increases are primarily due to the acquisition of Madison and an expanded customer base.

 

Income from mortgage banking activities increased by $958,000, or 418.3%, from $229,000 for the first quarter of 2004 to $1.2 million for the first quarter of 2005.  The increase was due primarily to the acquisition of Philadelphia Financial Mortgage, the mortgage banking division of Madison.

 

One of the Company’s sources of other income is commissions and other revenue generated primarily through sales of insurance products through the Company’s insurance subsidiary, Essick & Barr, LLC.  Revenues from insurance operations totaled $3.1 million for the first quarter of 2005 compared to $2.7 million for the same period in 2004, an increase of 14.0%.  The increase is primarily the result of increased sales of commercial property and casualty, contingent income, surety bond and employee benefits insurance products.

 

Brokerage and investment advisory commissions and fees increased to $209,000, or 62.0%, for the first quarter of 2005, from $129,000 for the same period 2004.  The increase is primarily due to increased volume in brokerage and investment advisory activity.

 

Included in other income are $38,000 and $154,000 of gains on the sale of equity securities for the first three months ended March 31, 2005 and 2004, respectively.  Net gains on the sale of loans increased to $246,000, or 823.5%, for the first quarter of 2005, from a net loss on the sale of loans of $34,000 for the same period 2004.  The increase is due primarily to planned sales of SBA, PHEAA and fixed and adjustable rate mortgage loans.

 

Other income increased to $520,000 or 15.6% for the first quarter of 2005 as compared to the same period in 2004, from $450,000.  The increase is due primarily to the Madison acquisition.  Also included in other income are losses of $78,000 and $82,000, respectively, for the three months periods ended March 31, 2005 and 2004, on the Company’s investment in an affordable housing, corporate tax credit limited partnership, which is discussed under “Income Taxes”.

 

16



 

Other Expense

 

Total other expense for the quarter ended March 31, 2005 was $10.4 million compared to $6.6 million for the quarter ended March 31, 2004, a 57.0% increase.

 

Salary and benefits expense for the first quarter of 2005 increased by 58.3% to $6.1 million from $3.9 million for the same period of 2004.  This increase was primarily the result of the acquisition of Madison, severance costs of $445,000 incurred in the first quarter of 2005 associated with the departure of the Company’s Chairman, President and Chief Executive Officer, merit increases and increases in employee health insurance costs consistent with national trends.  Also included in salaries and benefits expense are total commissions paid of $771,000 for the quarter ended March 31, 2005 compared to $261,000 for the same period in 2004.  Full-time equivalent (FTE) employees increased to 330 at March 31, 2005 from 238 at March 31, 2004.  The increase in total commissions paid and FTE’s was due primarily to the acquisition of Madison and continued growth of the Company.

 

Occupancy expense for the first quarter of 2005 was $1.1 million, a $577,000, or 107.4%, increase over the $537,000 for the same period of 2004.  The increase is primarily attributable to the acquisition of Madison.

 

Equipment expense increased 34.5% to $600,000 for the first quarter of 2005 from $446,000 for the same period in 2004.  The increase is primarily attributable to the acquisition of Madison.

 

The amortization of identifiable intangible assets for the first quarter of 2005 was $160,000 compared to $84,000 for the same period of 2004.  These increases are primarily attributable to the acquisition of Madison.

 

Outside processing expense, insurance expense and other operating expense increased $622,000 or 54.9% to $1.7 million for the first quarter of 2005 from $1.1 million for the same period in 2004.  These increases are primarily attributable to the acquisition of Madison.

 

Income Taxes

 

The effective income tax rate for the Company for the first quarter of 2005 was 20.79% compared to 19.10% for the same period of 2004.  The effective income tax rate increased primarily as a result of the Madison acquisition.  Included in the income tax provision is a federal tax benefit from our $5.0 million investment in an affordable housing, corporate tax credit limited partnership of $150,000 and $147,000, respectively, for the three months ended March 31, 2005 and 2004.

 

Financial Condition

 

The total assets of the Company at March 31, 2005 were $900.7 million, an increase of approximately $23.3 million, or 10.6% annualized, since December 31, 2004.

 

Mortgage Loans Held for Sale

 

Mortgage loans held for sale increased $7.9 million, or 324.4% annualized, to $17.7 million at March 31, 2005 from $9.8 million at December 31, 2004.  This increase is related to additional mortgage banking activity generated through Philadelphia Financial Mortgage.

 

Securities Available for Sale

 

Investment securities available for sale increased 37.7% to $181.4 million at March 31, 2005 from $165.8 million at December 31, 2004. Investment securities are used to supplement loan growth as necessary, to generate interest and dividend income, to manage interest rate risk, and to provide liquidity.  The increase during the first three months of 2005 was a result of our strategy to replace principal maturities and pay-downs and to purchase higher yielding securities.

 

Loans

 

Total loans decreased to $591.4 million, or 3.3% annualized, at March 31, 2005 from $596.3 million at December 31, 2004.  Included in the first quarter of 2005 were sales of approximately $13.7 million in SBA loans, PHEAA loans and fixed and adjustable rate mortgage loans.

 

17



 

The components of loans were as follows:

 

 

 

March 31,

 

December 31,

 

 

 

2005

 

2004

 

 

 

(Dollar amounts in thousands)

 

Residential real estate

 

$

186,584

 

$

202,985

 

Commercial

 

143,121

 

140,420

 

Commercial, secured by real estate

 

181,393

 

169,376

 

Consumer, net of unearned income

 

8,179

 

12,116

 

Home equity lines of credit

 

72,162

 

71,431

 

 

 

 

 

 

 

Loans

 

591,439

 

596,328

 

 

 

 

 

 

 

Allowance for loan losses

 

(7,338

)

(7,248

)

 

 

 

 

 

 

Loans, net of allowance for loan losses

 

$

584,101

 

$

589,080

 

 

 

Loans secured by residential real estate (not including home equity lending products) decreased $16.4 million, or 32.3% annualized, between December 31, 2004 and March 31, 2005, from $203.0 million to $186.6 million.  This decrease is primarily due to the sale of $3.4 million in 15 and 30 year fixed rate mortgage loans and $5.5 million in 5/1 adjustable rate mortgage loans.  The sale of these loans is in line with the Company’s asset/liability strategy to limit interest rate risk.

 

Commercial loans increased to $324.5 million at March 31, 2005 from $309.8 million at December 31, 2004, an increase of $14.7 million, or 19.0% annualized.  The increase is due primarily to an increase in variable-rate term loans and lines of credit and tax exempt loans.  This increase is also net of approximately $3.5 million of commercial loans and $1.8 million of SBA loans sold during the period.  The sale of these loans is in line with the Company’s asset/liability strategy to limit interest rate risk.

 

In addition, home equity lines of credit increased to $72.2 million at March 31, 2005 from $71.4 million at December 31, 2004, an increase of $731,000, or 4.1% annualized.  This increase is primarily the result of marketing efforts relating to our home equity products.  This increase is also net of approximately $2.0 million of PHEAA loans sold during the period.  The sale of these loans gave the Company the opportunity to realize a gain on sale and to reinvest the funds into higher yielding assets.

 

 

Allowance for Loan Losses

 

The allowance for loan losses at March 31, 2005 was $7.3 million compared to $7.2 million at December 31, 2004.  Additions to the allowance are made from time to time based upon management’s assessment of credit quality factors existing at that time.  The Company performs a review of the credit quality of its loan portfolio on a monthly basis to determine the adequacy of the allowance for loan losses.  The allowance at March 31, 2005 was 1.24% of outstanding loans compared to 1.22% of outstanding loans at December 31, 2004.

 

The allowance for loan losses is an amount that management believes to be adequate to absorb potential losses in the loan portfolio.  Additions to the allowance are charged through the provision for loan losses.  Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance.  Management regularly assesses the adequacy of the allowance by performing an ongoing evaluation of the loan portfolio, including such factors as charge-off history, the level of delinquent loans, the current financial condition of specific borrowers, the value of any underlying collateral, risk characteristics in the loan portfolio, local and national economic conditions, and other relevant factors.  Significant loans are individually analyzed, while other smaller balance loans are evaluated by loan category. This evaluation is inherently subjective as it requires material estimates that may be susceptible to change.  Based upon the results of such reviews, management believes that the allowance for loan losses at March 31, 2005 was adequate to absorb credit losses inherent in the portfolio at that date.

 

18



 

The following table shows the activity in the Company’s allowance for loan losses:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2005

 

2004

 

 

 

(Dollar amounts in thousands)

 

 

 

 

 

 

 

Balance of allowance for loan losses, beginning of period

 

$

7,248

 

$

4,356

 

Loans charged-off:

 

 

 

 

 

Commercial, financial and agricultural

 

(86

)

(14

)

Real estate – mortgage

 

(223

)

(98

)

Consumer

 

(46

)

(26

)

Total loans charged-off

 

(355

)

(138

)

Recoveries of loans previously charged-off

 

 

 

 

 

Commercial, financial and agricultural

 

3

 

1

 

Real estate – mortgage

 

3

 

2

 

Consumer

 

9

 

4

 

Total recoveries

 

15

 

7

 

Net loans charged-off

 

(340

)

(131

)

Provision for loan losses

 

430

 

360

 

Balance, end of period

 

$

7,338

 

$

4,585

 

 

 

 

 

 

 

Net charge-offs to average loans (annualized)

 

0.23

%

0.15

%

Allowance for loan losses to loans outstanding

 

1.24

%

1.28

%

Loans outstanding at end of period (net of unearned income)

 

$

591,439

 

$

358,556

 

Average balance of loans outstanding during the period

 

$

598,114

 

$

358,283

 

 

The following table summarizes the Company’s non-performing assets:

 

 

 

March 31,

 

December 31,

 

 

 

2005

 

2004

 

 

 

(Dollar amounts in thousands)

 

 

 

 

 

 

 

Non-accrual loans:

 

 

 

 

 

Real estate – mortgage

 

$

856

 

$

1,189

 

Consumer

 

113

 

127

 

Commercial, financial and agricultural

 

3,351

 

1,602

 

Total

 

4,320

 

2,918

 

 

 

 

 

 

 

Loans past due 90 days or more and still accruing:

 

 

 

 

 

Real estate – mortgage

 

186

 

22

 

Consumer

 

140

 

 

Commercial, financial and agricultural

 

1,327

 

2,943

 

Total

 

1,653

 

2,965

 

 

 

 

 

 

 

Troubled debt restructurings

 

931

 

103

 

 

 

 

 

 

 

Total non-performing loans

 

6,904

 

5,986

 

 

 

 

 

 

 

Other real estate owned

 

61

 

19

 

 

 

 

 

 

 

Total non-performing assets

 

6,965

 

6,005

 

 

 

 

 

 

 

Non-performing loans to total loans

 

1.17

%

1.00

%

Non-performing assets to total loans plus OREO

 

1.18

%

1.01

%

 

                The increase in troubled debt restructurings to $931,000 at March 31, 2005 from $103,000 at December 31, 2004 was due primarily to the restructuring of one loan in March 2005.

 

19



 

Premises and Equipment

 

Components of premises and equipment were as follows:

 

 

 

March 31,

 

December 31,

 

 

 

2005

 

2004

 

 

 

(Dollar amounts in thousands)

 

 

 

 

 

 

 

Land and land improvements

 

$

407

 

$

407

 

Buildings

 

811

 

811

 

Leasehold improvements

 

3,363

 

3,271

 

Furniture and equipment

 

7,209

 

7,126

 

 

 

11,790

 

11,615

 

 

 

 

 

 

 

Less: accumulated depreciation

 

3,380

 

3,015

 

 

 

 

 

 

 

Premises and equipment, net

 

$

8,410

 

$

8,600

 

 

Additions in 2005 include approximately $51,000 for renovations to the operations center and approximately $49,000 in new computer equipment purchases.

 

Deposits

 

Total deposits at March 31, 2005 were $621.1 million compared to $612.3 million at December 31, 2004, an increase of $8.8 million, or 5.7% annualized.

 

The components of deposits were as follows:

 

 

 

March 31,

 

December 31,

 

 

 

2005

 

2004

 

 

 

(Dollar amounts in thousands)

 

 

 

 

 

 

 

Demand, non-interest bearing

 

$

112,260

 

$

107,442

 

Demand, interest bearing

 

200,522

 

201,202

 

Savings

 

70,461

 

74,058

 

Time, $100,000 and over

 

79,223

 

71,784

 

Time, other

 

158,584

 

157,805

 

 

 

 

 

 

 

Total deposits

 

$

621,050

 

$

612,291

 

 

The increase is due primarily to continuing emphasis on commercial and retail marketing programs and customer service.

 

Borrowings

 

Total debt and borrowings increased by $16.0 million, or 39.1% annualized, to $179.5 million at March 31, 2005 from $163.5 million at December 31, 2004.  Federal funds purchased increased by $16.7 million, or 185.0% annualized, to $52.8 million at March 31, 2005 from $36.1 million at December 31, 2004.  Long-term debt, composed of borrowings with the Federal Home Loan Bank, increased by $500,000, or 3.7% annualized, to $55.0 million at March 31, 2005 from $54.5 million at December 31, 2004.  The increase in federal funds purchased was part of our strategy to replace principal maturities and pay-downs on the available for sale investment portfolio and to purchase higher yielding securities.  Junior subordinated debt remained unchanged from December 31, 2004 to March 31, 2005.

 

20



 

Off Balance Sheet Commitments

 

The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit and letters of credit.  Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.

 

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments.  The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

 

A summary of the contractual amount of the Company’s financial instrument commitments is as follows:

 

 

 

March 31,

 

December 31,

 

 

 

2005

 

2004

 

 

 

(Dollar amounts in thousands)

 

Commitments to grant loans

 

$

47,225

 

$

52,181

 

Unfunded commitments under lines of credit

 

208,628

 

156,599

 

Financial and performance standby letters of credit

 

10,967

 

10,081

 

 

Capital

 

Total shareholders’ equity decreased $130,000, to $90.8 million at March 31, 2005 from $90.9 million at December 31, 2004.  The decrease is the net result of net income for the period of $1.8 million less dividends declared of $850,000, proceeds of $207,000 from the issuance of shares of common stock under the Company’s employee and director stock purchase plans and directors compensation plan, net increase in the unrealized loss on securities available for sale, net of tax, of $1.6 million and the reissuance of treasury stock of $300,000 in connection with earn-outs of contingent consideration to principals from the acquisition of The Boothby Group insurance agency and First Affiliated Investments.

 

Federal bank regulatory agencies have established certain capital-related criteria that must be met by banks and bank holding companies. The measurements which incorporate the varying degrees of risk contained within the balance sheet and exposure to off-balance sheet commitments were established to provide a framework for comparing different institutions.  Regulatory guidelines require that Tier I capital and total risk-based capital to risk-adjusted assets must be at least 4.0% and 8.0%, respectively.

 

Other than Tier 1 capital restrictions on the Company’s junior subordinated debt discussed later, the Company is not aware of any pending recommendations by regulatory authorities that would have a material impact on the Company’s capital, resources, or liquidity if they were implemented, nor is the Company under any agreements with any regulatory authorities.

 

The adequacy of the Company’s capital is reviewed on an ongoing basis with regard to size, composition and quality of the Company’s resources. An adequate capital base is important for continued growth and expansion in addition to providing an added protection against unexpected losses.

 

An important indicator in the banking industry is the leverage ratio, defined as the ratio of common shareholders’ equity less intangible assets (Tier I capital), to average quarterly assets less intangible assets.  The leverage ratio at March 31, 2005 was 8.05% compared to 7.98% at December 31, 2004.  This increase is primarily the result of a smaller increase in average quarterly assets compared to a larger increase in tier 1 risk-based capital.  For the first quarter ended March 31, 2005, the ratios were above minimum regulatory guidelines.

 

As required by the federal banking regulatory authorities, guidelines have been adopted to measure capital adequacy.  Under the guidelines, certain minimum ratios are required for core capital and total capital as a percentage of risk-weighted assets and other off-balance sheet instruments.  For the Company, Tier I capital consists of common shareholders’ equity less intangible assets plus the junior subordinated debt, and Tier II capital includes the allowable

 

21



 

portion of the allowance for loan losses, currently limited to 1.25% of risk-weighted assets.  By regulatory guidelines, the separate component of equity for unrealized appreciation or depreciation on available for sale securities is excluded from Tier I capital.  In addition, federal banking regulating authorities have issued a final rule restricting the Company’s junior subordinated debt to 25% of Tier I capital.  Amounts of junior subordinated debt in excess of the 25% limit generally may be included in Tier II capital.  The final rule provides a five-year transition period, ending March 31, 2009.  At March 31, 2005, the entire amount of these securities was allowable to be included as Tier I capital for the Company.  For both periods, the capital ratios were above minimum regulatory guidelines.

 

The following table sets forth the Company’s capital amounts and ratios.

 

 

 

 

March 31,

 

December 31,

 

 

 

2005

 

2004

 

 

 

(Dollar amounts in thousands)

 

 

 

 

 

 

 

Tier I

 

 

 

 

 

Common shareholders’ equity excluding unrealized gains (losses) on securities

 

$

92,479

 

$

91,017

 

Disallowed intangible assets

 

(45,014

)

(44,061

)

Junior subordinated debt/mandatory redeemable capital debentures

 

 20,150

 

20,150

 

Tier II

 

 

 

 

 

Allowable portion of allowance for loan losses

 

 7,338

 

7,248

 

Unrealized gains on available for sale equity securities

 

 

25

 

 

 

 

 

 

 

Total risk-based capital

 

$

74,953