e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2006
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
For the transition period from to
Commission file number 000-23550
Fentura Financial, Inc.
(Exact name of registrant as specified in its charter)
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Michigan
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38-2806518 |
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(State or other jurisdiction of
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(IRS Employee Identification No.) |
incorporation or organization) |
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175 N Leroy, P.O. Box 725, Fenton, Michigan 48430
(Address of Principal Executive Offices)
(810) 629-2263
(Registrants telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the 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. þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date: November 1, 2006
Class Common Stock Shares Outstanding 2,151,253
Fentura Financial Inc.
Index to Form 10-Q
2
PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Fentura Financial, Inc.
Consolidated Balance Sheets
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|
|
|
|
|
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|
September 30, |
|
Dec 31, |
|
|
2006 |
|
2005 |
(000s omitted except share data) |
|
(unaudited) |
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
17,473 |
|
|
$ |
21,327 |
|
Federal funds sold |
|
|
8,950 |
|
|
|
9,750 |
|
|
|
|
Total cash & cash equivalents |
|
|
26,423 |
|
|
|
31,077 |
|
Securities-available for sale |
|
|
92,557 |
|
|
|
99,542 |
|
Securities-held to maturity, (fair value of $12,161
at September 30, 2006 and $14,672 at December 31, 2005) |
|
|
12,202 |
|
|
|
14,851 |
|
|
|
|
Total securities |
|
|
104,759 |
|
|
|
114,393 |
|
Loans held for sale |
|
|
2,079 |
|
|
|
1,042 |
|
Loans: |
|
|
|
|
|
|
|
|
Commercial |
|
|
264,306 |
|
|
|
254,498 |
|
Real estate loans construction |
|
|
86,413 |
|
|
|
76,386 |
|
Real estate loans mortgage |
|
|
37,963 |
|
|
|
37,627 |
|
Consumer loans |
|
|
65,090 |
|
|
|
70,845 |
|
|
|
|
Total loans |
|
|
453,772 |
|
|
|
439,356 |
|
Less: Allowance for loan losses |
|
|
(6,625 |
) |
|
|
(6,301 |
) |
|
|
|
Net loans |
|
|
447,147 |
|
|
|
433,055 |
|
Bank Owned Life Insurance |
|
|
6,736 |
|
|
|
6,579 |
|
Bank premises and equipment |
|
|
16,564 |
|
|
|
14,617 |
|
Federal Home Loan Bank stock |
|
|
2,172 |
|
|
|
2,300 |
|
Accrued interest receivable |
|
|
3,079 |
|
|
|
2,676 |
|
Goodwill |
|
|
7,955 |
|
|
|
7,955 |
|
Acquisition intangibles |
|
|
835 |
|
|
|
1,075 |
|
Other assets |
|
|
5,215 |
|
|
|
4,320 |
|
|
|
|
Total assets |
|
$ |
622,964 |
|
|
$ |
619,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
Non-interest bearing deposits |
|
$ |
75,564 |
|
|
$ |
76,792 |
|
Interest bearing deposits |
|
|
456,021 |
|
|
|
451,262 |
|
|
|
|
Total deposits |
|
|
531,585 |
|
|
|
528,054 |
|
Short term borrowings |
|
|
1,251 |
|
|
|
1,537 |
|
Federal Home Loan Bank Advances |
|
|
11,091 |
|
|
|
14,228 |
|
Repurchase Agreements |
|
|
10,000 |
|
|
|
10,000 |
|
Subordinated debentures |
|
|
14,000 |
|
|
|
14,000 |
|
Accrued taxes, interest and other liabilities |
|
|
5,094 |
|
|
|
4,375 |
|
|
|
|
Total liabilities |
|
|
573,021 |
|
|
|
572,194 |
|
|
|
|
SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Common stock no par value
2,147,408 shares issued (2,124,427 at Dec. 31, 2005) |
|
|
41,978 |
|
|
|
34,491 |
|
Retained earnings |
|
|
9,149 |
|
|
|
13,729 |
|
Accumulated other comprehensive income (loss) |
|
|
(1,184 |
) |
|
|
(1,325 |
) |
|
|
|
Total shareholders equity |
|
|
49,943 |
|
|
|
46,895 |
|
|
|
|
Total Liabilities and Shareholders Equity |
|
$ |
622,964 |
|
|
$ |
619,089 |
|
|
|
|
See notes to consolidated financial statements.
3
Fentura Financial, Inc.
Consolidated Statements of Income (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Three Months Ended |
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|
Nine Months Ended |
|
|
|
September 30 |
|
|
September 30 |
|
(000s omitted except per share data) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
INTEREST INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans |
|
$ |
8,929 |
|
|
$ |
7,749 |
|
|
$ |
26,211 |
|
|
$ |
21,516 |
|
Interest and dividends on securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Taxable |
|
|
860 |
|
|
|
801 |
|
|
|
2,595 |
|
|
|
2,464 |
|
Tax-exempt |
|
|
205 |
|
|
|
227 |
|
|
|
608 |
|
|
|
704 |
|
Interest on federal funds sold |
|
|
218 |
|
|
|
36 |
|
|
|
391 |
|
|
|
54 |
|
|
|
|
Total interest income |
|
|
10,212 |
|
|
|
8,813 |
|
|
|
29,805 |
|
|
|
24,738 |
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
INTEREST EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
3,943 |
|
|
|
2,538 |
|
|
|
10,778 |
|
|
|
6,449 |
|
Borrowings |
|
|
567 |
|
|
|
498 |
|
|
|
1,614 |
|
|
|
1,435 |
|
|
|
|
Total interest expense |
|
|
4,510 |
|
|
|
3,036 |
|
|
|
12,392 |
|
|
|
7,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME |
|
|
5,702 |
|
|
|
5,777 |
|
|
|
17,413 |
|
|
|
16,854 |
|
Provision for loan losses |
|
|
240 |
|
|
|
404 |
|
|
|
880 |
|
|
|
1,002 |
|
|
|
|
Net interest income after
Provision for loan losses |
|
|
5,462 |
|
|
|
5,373 |
|
|
|
16,533 |
|
|
|
15,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
|
989 |
|
|
|
907 |
|
|
|
2,750 |
|
|
|
2,571 |
|
Gain on sale of mortgage loans |
|
|
124 |
|
|
|
282 |
|
|
|
444 |
|
|
|
630 |
|
Trust and investment services income |
|
|
372 |
|
|
|
254 |
|
|
|
1,172 |
|
|
|
842 |
|
Gain (Loss) on sale of securities |
|
|
(2 |
) |
|
|
2 |
|
|
|
(2 |
) |
|
|
(108 |
) |
Other income and fees |
|
|
457 |
|
|
|
439 |
|
|
|
1,261 |
|
|
|
1,303 |
|
|
|
|
Total non-interest income |
|
|
1,940 |
|
|
|
1,884 |
|
|
|
5,625 |
|
|
|
5,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
3,197 |
|
|
|
3,094 |
|
|
|
9,844 |
|
|
|
9,062 |
|
Occupancy |
|
|
457 |
|
|
|
441 |
|
|
|
1,399 |
|
|
|
1,325 |
|
Furniture and equipment |
|
|
541 |
|
|
|
495 |
|
|
|
1,600 |
|
|
|
1,576 |
|
Loan and collection |
|
|
72 |
|
|
|
87 |
|
|
|
227 |
|
|
|
255 |
|
Advertising and promotional |
|
|
140 |
|
|
|
153 |
|
|
|
494 |
|
|
|
509 |
|
Other operating expenses |
|
|
1,096 |
|
|
|
1,002 |
|
|
|
3,221 |
|
|
|
2,937 |
|
|
|
|
Total non-interest expense |
|
|
5,503 |
|
|
|
5,272 |
|
|
|
16,785 |
|
|
|
15,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE TAXES |
|
|
1,899 |
|
|
|
1,985 |
|
|
|
5,373 |
|
|
|
5,426 |
|
Federal income taxes |
|
|
563 |
|
|
|
686 |
|
|
|
1,572 |
|
|
|
1,681 |
|
|
|
|
NET INCOME |
|
$ |
1,336 |
|
|
$ |
1,299 |
|
|
$ |
3,801 |
|
|
$ |
3,745 |
|
|
|
|
Per share: (adjusted for 10% stock dividend paid on August 4, 2006) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income basic |
|
$ |
0.62 |
|
|
$ |
0.62 |
|
|
$ |
1.78 |
|
|
$ |
1.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income diluted |
|
$ |
0.62 |
|
|
$ |
0.62 |
|
|
$ |
1.77 |
|
|
$ |
1.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Dividends declared |
|
$ |
0.25 |
|
|
$ |
0.22 |
|
|
$ |
0.71 |
|
|
$ |
0.65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
4
Fentura Financial, Inc.
Consolidated Statements of Changes in Shareholders Equity (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
(000s omitted) |
|
2006 |
|
|
2005 |
|
|
COMMON STOCK |
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
$ |
34,491 |
|
|
$ |
33,110 |
|
Issuance of shares under |
|
|
|
|
|
|
|
|
Stock dividend (194,978 shares) |
|
|
6,850 |
|
|
|
0 |
|
Director stock purchase plan &
Dividend reinvestment program (17,087 and
14,222 shares) |
|
|
582 |
|
|
|
483 |
|
Stock Offering (0 shares and 23,019 shares) |
|
|
0 |
|
|
|
766 |
|
Stock repurchase (977 shares 2006) |
|
|
(32 |
) |
|
|
0 |
|
Stock options exercised (5,023 shares 2006) |
|
|
87 |
|
|
|
0 |
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
41,978 |
|
|
|
34,359 |
|
|
|
|
|
|
|
|
|
|
RETAINED EARNINGS |
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
13,729 |
|
|
|
10,514 |
|
Net income |
|
|
3,801 |
|
|
|
3,745 |
|
Stock dividend (194,978 shares) |
|
|
(6,850 |
) |
|
|
0 |
|
Cash dividends declared |
|
|
(1,531 |
) |
|
|
(1,377 |
) |
|
|
|
|
|
|
|
Balance, end of period |
|
|
9,149 |
|
|
|
12,882 |
|
|
|
|
|
|
|
|
|
|
ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS) |
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
(1,325 |
) |
|
|
(655 |
) |
Change in unrealized gain (loss)
on securities, net of tax |
|
|
141 |
|
|
|
(445 |
) |
|
|
|
|
|
|
|
Balance, end of period |
|
|
(1,184 |
) |
|
|
(1,100 |
) |
|
|
|
|
|
|
|
TOTAL SHAREHOLDERS EQUITY |
|
$ |
49,943 |
|
|
$ |
46,141 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
5
Fentura Financial, Inc.
Consolidated Statements of Cash Flows (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
September 30, |
(000s omitted) |
|
2006 |
|
2005 |
|
OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,801 |
|
|
$ |
3,745 |
|
Adjustments to reconcile net income to cash
Provided by Operating Activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,600 |
|
|
|
1,058 |
|
Provision for loan losses |
|
|
880 |
|
|
|
1,002 |
|
Loans originated for sale |
|
|
(28,578 |
) |
|
|
(38,528 |
) |
Proceeds from the sale of loans |
|
|
27,985 |
|
|
|
38,303 |
|
Loss on sale of securities |
|
|
2 |
|
|
|
108 |
|
Gain on sales of loans |
|
|
(444 |
) |
|
|
(630 |
) |
Net (increase) decrease in bank owned life insurance |
|
|
(157 |
) |
|
|
444 |
|
Net (increase) decrease in interest receivable & other assets |
|
|
(1,356 |
) |
|
|
121 |
|
Net increase (decrease) in interest payable & other liabilities |
|
|
647 |
|
|
|
(665 |
) |
|
|
|
Total Adjustments |
|
|
579 |
|
|
|
1,213 |
|
|
|
|
Net Cash Provided By (Used In) Operating Activities |
|
|
4,380 |
|
|
|
4,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities: |
|
|
|
|
|
|
|
|
Proceeds from maturities of securities HTM |
|
|
4,762 |
|
|
|
8,200 |
|
Proceeds from maturities of securities AFS |
|
|
12,191 |
|
|
|
0 |
|
Proceeds from calls of securities HTM |
|
|
925 |
|
|
|
102 |
|
Proceeds from calls of securities AFS |
|
|
985 |
|
|
|
17,351 |
|
Proceeds from sales of securities AFS |
|
|
1,101 |
|
|
|
14,684 |
|
Purchases of securities HTM |
|
|
(3,051 |
) |
|
|
(3,201 |
) |
Purchases of securities AFS |
|
|
(7,354 |
) |
|
|
(16,953 |
) |
Purchase of FHLB stock |
|
|
(132 |
) |
|
|
0 |
|
FHLB stock buy back |
|
|
260 |
|
|
|
0 |
|
Net increase in loans |
|
|
(14,972 |
) |
|
|
(41,195 |
) |
Acquisition of premises and equipment, net |
|
|
(3,080 |
) |
|
|
(1,491 |
) |
|
|
|
Net Cash Provided By (Used in) Investing Activities |
|
|
(8,365 |
) |
|
|
(22,503 |
) |
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities: |
|
|
|
|
|
|
|
|
Net increase (decrease) in deposits |
|
|
3,531 |
|
|
|
25,871 |
|
Net increase (decrease) in borrowings |
|
|
(286 |
) |
|
|
(3,250 |
) |
Net increase (decrease) in repurchase agreements |
|
|
0 |
|
|
|
2,000 |
|
Purchase of advances from FHLB |
|
|
4,000 |
|
|
|
29,900 |
|
Repayments of advances from FHLB |
|
|
(7,020 |
) |
|
|
(32,918 |
) |
Net proceeds from stock issuance and purchase |
|
|
637 |
|
|
|
1,249 |
|
Cash dividends |
|
|
(1,531 |
) |
|
|
(1,377 |
) |
|
|
|
Net Cash Provided By (Used In) Financing Activities |
|
|
(669 |
) |
|
|
21,475 |
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS |
|
$ |
(4,654 |
) |
|
$ |
3,930 |
|
CASH AND CASH EQUIVALENTS BEGINNING |
|
$ |
31,077 |
|
|
$ |
27,255 |
|
|
|
|
CASH AND CASH EQUIVALENTS ENDING |
|
$ |
26,423 |
|
|
$ |
31,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH PAID FOR: |
|
|
|
|
|
|
|
|
INTEREST |
|
$ |
12,074 |
|
|
$ |
7,740 |
|
INCOME TAXES |
|
$ |
1,316 |
|
|
$ |
2,303 |
|
NONCASH DISCLOSURES: |
|
|
|
|
|
|
|
|
Transfers from loans to other real estate |
|
$ |
927 |
|
|
$ |
532 |
|
See notes to consolidated financial statements
6
Fentura Financial, Inc.
Consolidated Statements of Comprehensive Income (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
(000s Omitted) |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
Net Income |
|
$ |
1,336 |
|
|
$ |
1,299 |
|
|
$ |
3,801 |
|
|
$ |
3,745 |
|
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) arising
during period |
|
|
942 |
|
|
|
(258 |
) |
|
|
143 |
|
|
|
(553 |
) |
Less: reclassification adjustment for
gains/(losses) included in net income |
|
|
(2 |
) |
|
|
2 |
|
|
|
(2 |
) |
|
|
(108 |
) |
|
|
|
Other comprehensive income (loss) |
|
|
940 |
|
|
|
(260 |
) |
|
|
141 |
|
|
|
(445 |
) |
|
|
|
Comprehensive income |
|
$ |
2,276 |
|
|
$ |
1,039 |
|
|
$ |
3,942 |
|
|
$ |
3,300 |
|
|
|
|
Fentura Financial, Inc.
Notes to Consolidated Financial Statements (Unaudited)
Note 1. Basis of Presentation
The consolidated financial statements at December 31, 2005 and September 30, 2006 include Fentura
Financial, Inc. (the Corporation) and its wholly owned subsidiaries, The State Bank in Fenton,
Michigan; Davison State Bank in Davison, Michigan; and West Michigan Community Bank in Hudsonville,
Michigan (the Banks), as well as Fentura Mortgage Company, West Michigan Mortgage Company, LLC,
and the other subsidiaries of the Banks. Intercompany transactions and balances are eliminated in
consolidation.
The accompanying unaudited consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America for interim financial
information and the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they
do not include all of the information and notes required by accounting principles generally
accepted in the United States of America for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the nine months ended September 30,
2006 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2006. For further information, refer to the consolidated financial statements and
footnotes thereto included in the Corporations annual report on Form 10-K for the year ended
December 31, 2005.
Reclassifications: Some items in the prior year financial statements were reclassified to
conform to the current presentation.
Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for
probable incurred credit losses, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance required using past loan
loss experience, the nature and volume of the portfolio, information about specific borrower
situations and estimated collateral values, economic conditions, and other factors. Allocations of
the allowance may be made for specific loans, but the entire allowance is available for any loan
that, in managements judgment, should be charged-off. Loan losses are charged against the
allowance when management believes the uncollectibility of a loan balance is confirmed.
A loan is impaired when full payment under the loan terms is not expected. Impairment is evaluated
in total for smaller-balance loans of similar nature such as residential mortgage, consumer, and
credit card
7
loans, and on an individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value of estimated future
cash flows using the loans existing rate or at the fair value of collateral if repayment is
expected solely from the collateral.
Stock Option Plans
The Nonemployee Director Stock Option Plan grants options to nonemployee directors to purchase the
Corporations common stock on April 1 each year. The purchase price of the shares is the fair
market value at the date of the grant, and there is a three-year vesting period before options may
be exercised. Options to acquire no more than 8,131 shares of stock may be granted under the Plan
in any calendar year and options to acquire not more than 73,967 shares in the aggregate may be
outstanding at any one time.
The Employee Stock Option Plan grants options to eligible employees to purchase the Corporations
common stock at or above, the fair market value of the stock at the date of the grant. Awards
granted under this plan are limited to an aggregate of 89,936 shares. The administrator of the plan
is a committee of directors. The administrator has the power to determine the number of options to
be granted, the exercise price of the options and other terms of the options, subject to
consistency with the terms of the plan.
The following table summarizes stock option activity (adjusted for the 10% stock dividend paid
on August 4, 2006):
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Weighted |
|
|
|
Options |
|
|
Average Price |
|
Options outstanding at December 31, 2004 |
|
|
46,433 |
|
|
$ |
28.00 |
|
Options granted 2005 |
|
|
809 |
|
|
|
31.82 |
|
Options forfeited 2005 |
|
|
(710 |
) |
|
|
29.97 |
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2005 |
|
|
46,532 |
|
|
$ |
28.04 |
|
Options exercised 2006 |
|
|
(5,525 |
) |
|
|
15.74 |
|
|
|
|
|
|
|
|
Options outstanding at September 30, 2006 |
|
|
41,007 |
|
|
$ |
29.69 |
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of all options outstanding at September 30, 2006 was $142,000.
The aggregate intrinsic value of all options that were exercisable at September 30, 2006 was
$80,000.
Proceeds, related tax benefits realized from options exercised and intrinsic value of options
exercised were as follows:
|
|
|
|
|
|
|
Nine months ended |
(000s omitted) |
|
September 30, 2006 |
Proceeds of options exercised |
|
$ |
87 |
|
Related tax benefit recognized |
|
|
0 |
|
Intrinsic value of options exercised |
|
|
85 |
|
8
Options outstanding at September 30, 2006 were as follows (adjusted for the 10% stock dividend
paid on August 4, 2006) :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
Exercisable |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Remaining |
|
|
|
|
|
Average |
|
|
|
|
|
|
Contractual |
|
|
|
|
|
Exercise |
|
|
Shares |
|
Life |
|
Shares |
|
Price |
$1.00 -$20.00 |
|
|
668 |
|
|
|
1.6 |
|
|
|
668 |
|
|
$ |
19.28 |
|
$20.01-$30.00 |
|
|
22,072 |
|
|
|
6.1 |
|
|
|
10,880 |
|
|
$ |
24.48 |
|
$30.01-$40.00 |
|
|
18,267 |
|
|
|
7.0 |
|
|
|
18,267 |
|
|
$ |
34.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at period end |
|
|
41,007 |
|
|
|
6.5 |
|
|
|
29,815 |
|
|
$ |
30.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No stock options were granted during the nine months ended September 30, 2006.
The Corporation will use the Black Sholes model to estimate the fair value of options granted in
the future, using the following assumptions. The expected average risk-free rate is based on the
U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the life of
the option. The expected average life represents the weighted average period of time that options
granted are expected to be outstanding giving consideration to vesting schedules, historical
exercise and forfeiture patterns. Expected volatility is based on historical volatilities of the
Corporations common stock. The expected dividend yield is based on historical information.
Employment compensation expense was reported using the intrinsic value method. Beginning with the
first quarter of 2006 stock-based compensation cost is reflected in net income, as required by
Statement of Financial Accounting Standards No. 123R Share based Payments. Prior to the first
quarter of 2006, stock-based compensation cost was reflected as a footnote adjustment to net
income, as allowed by FASB Statement No. 123, Accounting for Stock-Based Compensation. All options
granted have an exercise price equal to or greater than the market price of the underlying common
stock at date of grant.
Compensation costs for all share-based plans were as follows:
Stock Options: (000s omitted)
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
Three Months |
|
Nine Months |
|
|
Ended |
|
Ended |
Compensation cost recognized in income |
|
$ |
7 |
|
|
$ |
15 |
|
Related tax benefit recognized |
|
|
0 |
|
|
|
0 |
|
The compensation cost yet to be recognized for stock-based awards that have been awarded but not
vested is as follows:
(000s omitted)
|
|
|
|
|
|
|
Stock |
|
|
|
Options |
|
Remainder of 2006 |
|
$ |
4 |
|
2007 |
|
|
16 |
|
2008 |
|
|
8 |
|
|
|
|
|
Total |
|
$ |
28 |
|
|
|
|
|
Weighted average life in years is 1.60.
9
The following table illustrates the effect on net income and earnings per share, adjusted for the
10% stock dividend paid on August 4, 2006, if 2005 expense had been recorded using the fair value
recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation
(unaudited):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 |
|
|
Three months |
|
Nine months |
(Dollars in thousands except per share data) |
|
ended |
|
ended |
Net Income as Reported |
|
$ |
1,299 |
|
|
$ |
3,745 |
|
Less: Value Determined Under Fair Value
Based Method (net of taxes) |
|
|
2 |
|
|
|
6 |
|
Amount Expensed in the Period (net of taxes) |
|
|
0 |
|
|
|
0 |
|
|
|
|
Pro Forma Net Income |
|
$ |
1,297 |
|
|
$ |
3,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings per Share as Reported |
|
$ |
0.62 |
|
|
$ |
1.79 |
|
Pro Forma Basic Earnings per Share |
|
$ |
0.62 |
|
|
$ |
1.79 |
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Share as Reported |
|
$ |
0.62 |
|
|
$ |
1.79 |
|
Pro Forma Diluted Earnings per Share |
|
$ |
0.62 |
|
|
$ |
1.79 |
|
Recently-Issued Standard Not Yet Adopted:
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes -
an Interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting for
uncertainty in income taxes recognized in a companys financial statements in accordance with SFAS,
Accounting for Income Taxes. FIN 48 prescribes a recognition and measurement threshold for a tax
position taken or expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods, disclosure,
and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The
Corporation has not completed its evaluation of the impact of the adoption of FIN 48.
In September 2006, the Securities and Exchange Commission released Staff Accounting Bulletin (SAB)
108. This SAB provides detailed guidance to registrants in the determination of what is material
to their financial statements. This SAB is required to be applied to financial statements issued
after November 15, 2006. Upon adoption of applying the new guidance is to be reflected as an
adjustment to opening retained earnings as of the beginning of the current year. The Corporation
has not completed its evaluation of the impact of SAB 108.
10
Note 2. Earnings Per Common Share
A reconciliation of the numerators and denominators used in the computation of basic earnings per
common share and diluted earnings per common share is presented below. Earnings per common share,
adjusted for the 10% stock dividend paid on August 4, 2006, are presented below for the three and
nine months ended September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Basic Earnings Per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
1,336,000 |
|
|
$ |
1,299,000 |
|
|
$ |
3,801,000 |
|
|
$ |
3,745,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
Outstanding |
|
|
2,144,854 |
|
|
|
2,092,278 |
|
|
|
2,138,322 |
|
|
|
2,087,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
0.62 |
|
|
$ |
0.62 |
|
|
$ |
1.78 |
|
|
$ |
1.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
1,336,000 |
|
|
$ |
1,299,000 |
|
|
$ |
3,801,000 |
|
|
$ |
3,745,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
Outstanding for basic earnings per
Common share |
|
|
2,144,854 |
|
|
|
2,092,278 |
|
|
|
2,138,322 |
|
|
|
2,087,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: Dilutive effects of assumed
exercises of stock options |
|
|
4,909 |
|
|
|
6,170 |
|
|
|
4,611 |
|
|
|
6,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
and dilutive potential common
shares outstanding |
|
|
2,149,763 |
|
|
|
2,098,448 |
|
|
|
2,142,933 |
|
|
|
2,093,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
|
$ |
0.62 |
|
|
$ |
0.62 |
|
|
$ |
1.77 |
|
|
$ |
1.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options for 14,324 shares and 15,059 shares of common stock for the three and nine month
period ended September 30, 2006 and stock options for 14,935 shares of common stock for the three
and nine month period ended September 30, 2005 were not considered in computing diluted earnings
per common share because they were not dilutive.
Note 3. Commitments and Contingencies
There are various contingent liabilities that are not reflected in the financial statements
including claims and legal actions arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate disposition of these matters is not
expected to have a material effect on the Corporations consolidated financial condition or results
of operations.
11
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Certain of the Corporations accounting policies are important to the portrayal of the
Corporations financial condition, since they require management to make difficult, complex or
subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates
associated with these policies are susceptible to material changes as a result of changes in facts
and circumstances. Facts and circumstances, which could affect these judgments, include, but
without limitation, changes in interest rates, in the performance of the economy or in the
financial condition of borrowers. Management believes that its critical accounting policies include
determining the allowance for loan losses and determining the fair value of securities and other
financial instruments.
As indicated in the income statement, earnings for the three months and nine months ended September
30, 2006 were $1,336,000 and $3,801,000 respectively compared to $1,299,000 and $3,745,000 for the
same period in 2005. Higher net interest income and increases in noninterest income, which were
partially offset by increases in noninterest expense, contributed to the slight increase in net
income. Net interest income was higher due to favorable increases in the prime rate and
significantly higher loan balances during the first nine months of 2006 compared with the same
period in 2005. The Corporation continues to focus on core banking activities and new opportunities
in current and surrounding markets. Third quarter net interest income decreased 2.4% compared to
the second quarter of 2006, due to higher deposit costs. The provision for loan losses was
unchanged comparing the third quarter of 2006 to the second quarter of 2006. The provision for
loan losses is down $160,000 comparing the third quarter of 2006 with the same quarter in 2005.
Also, the provision for loan losses is down $122,000 when comparing year-to-date information.
Management feels the provision is adequate and the allowance for loan losses has increased $331,000
when comparing September 2006 to September 2005. Also, decreases in noninterest expense combined
with the increase in noninterest income contributed a 6.2% increase in net income from the second
to third quarter, 2006.
The banking industry uses standard performance indicators to help evaluate a banking institutions
performance. Return on average assets is one of these indicators. For the nine months ended
September 30, 2006, the Corporations return on average assets (annualized) was 0.81% compared to
0.85% for the same period in 2005. Net income per share, adjusted for the 10% stock dividend paid
on August 4, 2006, basic was $1.78 and diluted was $1.77 in the first nine months of 2006
compared to $1.79 net income per share basic and diluted for the same period in 2005.
Net Interest Income
Net interest income and average balances and yields on major categories of interest-earning assets
and interest-bearing liabilities for the nine months ended September 30, 2006 and 2005 are
summarized in Table 2. The effects of changes in average interest rates and average balances are
detailed in Table 1 below.
12
Table 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NINE MONTHS ENDED |
|
|
|
SEPTEMBER 30, |
|
|
|
2006 COMPARED TO 2005 |
|
|
|
INCREASE (DECREASE) |
|
|
|
DUE TO |
|
|
|
|
|
|
|
YIELD/ |
|
|
|
|
(000S OMITTED) |
|
VOL |
|
|
RATE |
|
|
TOTAL |
|
|
Taxable Securities |
|
$ |
(143 |
) |
|
$ |
274 |
|
|
$ |
131 |
|
Tax-Exempt Securities |
|
|
(113 |
) |
|
|
(33 |
) |
|
|
(146 |
) |
Federal Funds Sold |
|
|
179 |
|
|
|
158 |
|
|
|
337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans |
|
|
1,791 |
|
|
|
2,934 |
|
|
|
4,725 |
|
Loans Held for Sale |
|
|
(46 |
) |
|
|
7 |
|
|
|
(39 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Earning Assets |
|
|
1,668 |
|
|
|
3,340 |
|
|
|
5,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Demand Deposits |
|
|
(76 |
) |
|
|
744 |
|
|
|
668 |
|
Savings Deposits |
|
|
(215 |
) |
|
|
132 |
|
|
|
(83 |
) |
Time CDs $100,000 and Over |
|
|
1,427 |
|
|
|
1,197 |
|
|
|
2,624 |
|
Other Time Deposits |
|
|
520 |
|
|
|
600 |
|
|
|
1,120 |
|
Other Borrowings |
|
|
(318 |
) |
|
|
497 |
|
|
|
179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Bearing Liabilities |
|
|
1,338 |
|
|
|
3,170 |
|
|
|
4,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income |
|
$ |
330 |
|
|
$ |
170 |
|
|
$ |
500 |
|
|
|
|
|
|
|
|
|
|
|
As indicated in Table 1, during the nine months ended September 30, 2006, net interest income
increased compared to the same period in 2005, principally because of the increase in loan interest
income. Loan income increased due to increases in the prime rate and higher balances during the
first nine months of 2006 compared to the same period in 2005. Interest expenses increased compared
to the first nine months of 2005 due to the increase in deposit pricing and deposit balances for
the Corporation.
Net interest income (displayed with consideration of full tax equivalency), average balance sheet
amounts, and the corresponding yields for the nine months ended September 30, 2006 and 2005 are
shown in Table 2. Net interest income for the nine months ended September 30, 2006 was $17,797,000,
an increase of $500,000, or 2.9%, over the same period in 2005. Net interest margin decreased due
to higher deposit and borrowing costs during the first nine months of 2006. Managements actions to
reprice deposits were made to adjust pricing to be competitive in the markets and the very limited
ability to reprice loans tied to Prime Rate during the first nine months of 2006 has contributed
substantially to the decline during the first nine months of 2006 compared to the first nine months
of 2005.
Management reviews economic forecasts and strategy on a monthly basis. Accordingly, the Corporation
will continue to strategically manage the balance sheet structure in an effort to create stability
in net interest income. The Corporation expects to continue to seek out new loan opportunities
while continuing to maintain sound credit quality.
As indicated in Table 2, for the nine months ended September 30, 2006, the Corporations net
interest margin (with consideration of full tax equivalency) was 4.15% compared with 4.28% for the
same period in 2005. This decrease is attributable to the impact of higher deposit and borrowing
costs that out paced loan repricing.
13
Average earning assets increased 6.2% or approximately $33,545,000 comparing the first nine months
of 2006 to the same time period in 2005. Loans, the highest yielding component of earning assets,
represented 78.6% of earning assets in 2006 compared to 77.0% in 2005. Average interest bearing
liabilities increased 6.7% or $31,125,000 comparing the first nine months of 2006 to the same time
period in 2005. Non-interest bearing deposits amounted to 13.6% of average earning assets in the
first nine months of 2006 compared with 15.2% in the same time period of 2005.
As indicated in Table 3, for the three months ended September 30, 2006, the Corporations net
interest margin (with consideration of full tax equivalency) was 4.01% compared with 4.26% for the
same period in 2005. This decrease is attributable to the impact of higher deposit repricing and
borrowing costs that out paced loan repricing of variable rate instruments.
Average earning assets increased 4.7% or approximately $25,836,000 comparing the third quarter of
2006 to the same time period in 2005. Loans, the highest yielding component of earning assets,
represented 78.2% of earning assets in 2006 compared to 77.8% in 2005. Average interest bearing
liabilities increased 5.5% or $25,935,000 comparing the third quarter of 2006 to the same time
period in 2005. Non-interest bearing deposits amounted to 13.5% of average earning assets in the
third quarter of 2006 compared with 14.9% in the same time period of 2005.
Management continually monitors the Corporations balance sheet in an effort to insulate net
interest income from significant swings caused by interest rate volatility. If market rates change
in 2006, corresponding changes in funding costs will be considered to avoid potential negative
impacts on net interest income. The Corporations policies in this regard are further discussed in
the section titled Interest Rate Sensitivity Management.
14
Table 2 Average Balance and Rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NINE MONTHS ENDED SEPTEMBER 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
AVERAGE |
|
|
INCOME/ |
|
|
YIELD/ |
|
|
AVERAGE |
|
|
INCOME/ |
|
|
YIELD/ |
|
(000s omitted)(Annualized) |
|
BALANCE |
|
|
EXPENSE |
|
|
RATE |
|
|
BALANCE |
|
|
EXPENSE |
|
|
RATE |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and Government Agencies |
|
$ |
84,706 |
|
|
$ |
2,499 |
|
|
|
3.94 |
% |
|
$ |
93,282 |
|
|
$ |
2,412 |
|
|
|
3.46 |
% |
State and Political (1) |
|
|
22,122 |
|
|
|
921 |
|
|
|
5.57 |
% |
|
|
24,735 |
|
|
|
1,067 |
|
|
|
5.77 |
% |
Other |
|
|
4,347 |
|
|
|
96 |
|
|
|
2.95 |
% |
|
|
1,241 |
|
|
|
52 |
|
|
|
5.60 |
% |
|
|
|
|
|
Total Securities |
|
|
111,175 |
|
|
|
3,516 |
|
|
|
4.23 |
% |
|
|
119,258 |
|
|
|
3,531 |
|
|
|
3.96 |
% |
Fed Funds Sold |
|
|
10,342 |
|
|
|
391 |
|
|
|
5.05 |
% |
|
|
2,400 |
|
|
|
54 |
|
|
|
3.01 |
% |
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
342,383 |
|
|
|
19,949 |
|
|
|
7.79 |
% |
|
|
303,201 |
|
|
|
15,545 |
|
|
|
6.85 |
% |
Tax Free (1) |
|
|
4,349 |
|
|
|
209 |
|
|
|
6.43 |
% |
|
|
4,933 |
|
|
|
235 |
|
|
|
6.37 |
% |
Real Estate-Mortgage |
|
|
36,061 |
|
|
|
1,984 |
|
|
|
7.36 |
% |
|
|
35,505 |
|
|
|
1,952 |
|
|
|
7.35 |
% |
Consumer |
|
|
67,681 |
|
|
|
4,072 |
|
|
|
8.04 |
% |
|
|
72,173 |
|
|
|
3,757 |
|
|
|
6.96 |
% |
|
|
|
|
|
Total loans |
|
|
450,474 |
|
|
|
26,214 |
|
|
|
7.78 |
% |
|
|
415,812 |
|
|
|
21,489 |
|
|
|
6.91 |
% |
Allowance for Loan Losses |
|
|
(6,590 |
) |
|
|
|
|
|
|
|
|
|
|
(5,881 |
) |
|
|
|
|
|
|
|
|
Net Loans |
|
|
443,884 |
|
|
|
26,214 |
|
|
|
7.90 |
% |
|
|
409,931 |
|
|
|
21,489 |
|
|
|
7.01 |
% |
|
|
|
|
|
Loans Held for Sale |
|
|
1,289 |
|
|
|
68 |
|
|
|
7.05 |
% |
|
|
2,265 |
|
|
|
107 |
|
|
|
6.32 |
% |
|
|
|
|
|
TOTAL EARNING ASSETS |
|
$ |
573,280 |
|
|
$ |
30,189 |
|
|
|
7.04 |
% |
|
$ |
539,735 |
|
|
$ |
25,181 |
|
|
|
6.24 |
% |
|
|
|
|
|
Cash Due from Banks |
|
|
18,346 |
|
|
|
|
|
|
|
|
|
|
|
19,936 |
|
|
|
|
|
|
|
|
|
All Other Assets |
|
|
39,200 |
|
|
|
|
|
|
|
|
|
|
|
37,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
624,236 |
|
|
|
|
|
|
|
|
|
|
$ |
591,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES & SHAREHOLDERS EQUITY: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing DDA |
|
$ |
104,891 |
|
|
$ |
1,795 |
|
|
|
2.29 |
% |
|
$ |
112,505 |
|
|
$ |
1,127 |
|
|
|
1.34 |
% |
Savings Deposits |
|
|
101,830 |
|
|
|
952 |
|
|
|
1.25 |
% |
|
|
128,533 |
|
|
|
1,035 |
|
|
|
1.08 |
% |
Time CDs $100,000 and Over |
|
|
129,798 |
|
|
|
4,550 |
|
|
|
4.69 |
% |
|
|
74,548 |
|
|
|
1,926 |
|
|
|
3.45 |
% |
Other Time CDs |
|
|
118,801 |
|
|
|
3,481 |
|
|
|
3.92 |
% |
|
|
97,360 |
|
|
|
2,361 |
|
|
|
3.24 |
% |
|
|
|
|
|
Total Deposits |
|
|
455,320 |
|
|
|
10,778 |
|
|
|
3.16 |
% |
|
|
412,946 |
|
|
|
6,449 |
|
|
|
2.09 |
% |
Other Borrowings |
|
|
39,461 |
|
|
|
1,614 |
|
|
|
5.47 |
% |
|
|
50,710 |
|
|
|
1,435 |
|
|
|
3.78 |
% |
|
|
|
|
|
INTEREST BEARING LIABILITIES |
|
$ |
494,781 |
|
|
$ |
12,392 |
|
|
|
3.35 |
% |
|
$ |
463,656 |
|
|
$ |
7,884 |
|
|
|
2.27 |
% |
|
|
|
|
|
Non-Interest bearing DDA |
|
|
77,723 |
|
|
|
|
|
|
|
|
|
|
|
81,849 |
|
|
|
|
|
|
|
|
|
All Other Liabilities |
|
|
3,394 |
|
|
|
|
|
|
|
|
|
|
|
1,541 |
|
|
|
|
|
|
|
|
|
Shareholders Equity |
|
|
48,338 |
|
|
|
|
|
|
|
|
|
|
|
44,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES & SHAREHOLDERS EQUITY |
|
$ |
624,236 |
|
|
|
|
|
|
|
|
|
|
$ |
591,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Rate Spread |
|
|
|
|
|
|
|
|
|
|
3.69 |
% |
|
|
|
|
|
|
|
|
|
|
3.96 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income /Margin |
|
|
|
|
|
$ |
17,797 |
|
|
|
4.15 |
% |
|
|
|
|
|
$ |
17,297 |
|
|
|
4.28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Presented on a fully taxable equivalent basis using a federal income tax rate of 34%. |
15
Table 3 Average Balance and Rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED SEPTEMBER 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
AVERAGE |
|
|
INCOME/ |
|
|
YIELD/ |
|
|
AVERAGE |
|
|
INCOME/ |
|
|
YIELD/ |
|
(000s omitted)(Annualized) |
|
BALANCE |
|
|
EXPENSE |
|
|
RATE |
|
|
BALANCE |
|
|
EXPENSE |
|
|
RATE |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and Government Agencies |
|
$ |
82,604 |
|
|
$ |
830 |
|
|
|
3.99 |
% |
|
$ |
90,401 |
|
|
$ |
783 |
|
|
|
3.44 |
% |
State and Political (1) |
|
|
21,900 |
|
|
|
311 |
|
|
|
5.63 |
% |
|
|
22,601 |
|
|
|
342 |
|
|
|
6.01 |
% |
Other |
|
|
4,164 |
|
|
|
30 |
|
|
|
2.86 |
% |
|
|
1,495 |
|
|
|
18 |
|
|
|
4.78 |
% |
|
|
|
|
|
Total Securities |
|
|
108,668 |
|
|
|
1,171 |
|
|
|
4.27 |
% |
|
|
114,497 |
|
|
|
1,143 |
|
|
|
3.96 |
% |
Fed Funds Sold |
|
|
16,248 |
|
|
|
218 |
|
|
|
5.32 |
% |
|
|
4,222 |
|
|
|
36 |
|
|
|
3.38 |
% |
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
344,613 |
|
|
|
6,846 |
|
|
|
7.88 |
% |
|
|
312,060 |
|
|
|
5,565 |
|
|
|
7.08 |
% |
Tax Free (1) |
|
|
4,116 |
|
|
|
67 |
|
|
|
6.43 |
% |
|
|
4,893 |
|
|
|
77 |
|
|
|
6.27 |
% |
Real Estate-Mortgage |
|
|
36,258 |
|
|
|
651 |
|
|
|
7.21 |
% |
|
|
39,540 |
|
|
|
753 |
|
|
|
7.56 |
% |
Consumer |
|
|
66,314 |
|
|
|
1,366 |
|
|
|
8.17 |
% |
|
|
72,864 |
|
|
|
1,325 |
|
|
|
7.21 |
% |
|
|
|
|
|
Total loans |
|
|
451,301 |
|
|
|
8,930 |
|
|
|
7.85 |
% |
|
|
429,357 |
|
|
|
7,720 |
|
|
|
7.13 |
% |
Allowance for Loan Losses |
|
|
(6,692 |
) |
|
|
|
|
|
|
|
|
|
|
(6,097 |
) |
|
|
|
|
|
|
|
|
Net Loans |
|
|
444,609 |
|
|
|
8,930 |
|
|
|
7.97 |
% |
|
|
423,260 |
|
|
|
7,720 |
|
|
|
7.24 |
% |
|
|
|
|
|
Loans Held for Sale |
|
|
1,237 |
|
|
|
22 |
|
|
|
7.06 |
% |
|
|
3,542 |
|
|
|
57 |
|
|
|
6.38 |
% |
|
|
|
|
|
TOTAL EARNING ASSETS |
|
$ |
577,454 |
|
|
$ |
10,340 |
|
|
|
7.10 |
% |
|
$ |
551,618 |
|
|
$ |
8,956 |
|
|
|
6.44 |
% |
|
|
|
|
|
Cash Due from Banks |
|
|
20,353 |
|
|
|
|
|
|
|
|
|
|
|
20,663 |
|
|
|
|
|
|
|
|
|
All Other Assets |
|
|
39,598 |
|
|
|
|
|
|
|
|
|
|
|
37,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
630,713 |
|
|
|
|
|
|
|
|
|
|
$ |
603,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES & SHAREHOLDERS EQUITY: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing DDA |
|
$ |
103,558 |
|
|
$ |
616 |
|
|
|
2.36 |
% |
|
$ |
113,795 |
|
|
$ |
488 |
|
|
|
1.70 |
% |
Savings Deposits |
|
|
99,573 |
|
|
|
329 |
|
|
|
1.31 |
% |
|
|
121,377 |
|
|
|
354 |
|
|
|
1.16 |
% |
Time CDs $100,000 and Over |
|
|
137,134 |
|
|
|
1,682 |
|
|
|
4.87 |
% |
|
|
92,020 |
|
|
|
844 |
|
|
|
3.64 |
% |
Other Time CDs |
|
|
123,358 |
|
|
|
1,316 |
|
|
|
4.23 |
% |
|
|
101,931 |
|
|
|
852 |
|
|
|
3.32 |
% |
|
|
|
|
|
Total Deposits |
|
|
463,623 |
|
|
|
3,943 |
|
|
|
3.37 |
% |
|
|
429,123 |
|
|
|
2,538 |
|
|
|
2.35 |
% |
Other Borrowings |
|
|
36,500 |
|
|
|
567 |
|
|
|
6.16 |
% |
|
|
45,065 |
|
|
|
498 |
|
|
|
4.38 |
% |
|
|
|
|
|
INTEREST BEARING LIABILITIES |
|
$ |
500,123 |
|
|
$ |
4,510 |
|
|
|
3.58 |
% |
|
$ |
474,188 |
|
|
$ |
3,036 |
|
|
|
2.54 |
% |
|
|
|
|
|
Non-Interest bearing DDA |
|
|
78,089 |
|
|
|
|
|
|
|
|
|
|
|
82,376 |
|
|
|
|
|
|
|
|
|
All Other Liabilities |
|
|
3,657 |
|
|
|
|
|
|
|
|
|
|
|
1,825 |
|
|
|
|
|
|
|
|
|
Shareholders Equity |
|
|
48,844 |
|
|
|
|
|
|
|
|
|
|
|
45,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES & SHAREHOLDERS EQUITY |
|
$ |
630,713 |
|
|
|
|
|
|
|
|
|
|
$ |
603,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Rate Spread |
|
|
|
|
|
|
|
|
|
|
3.53 |
% |
|
|
|
|
|
|
|
|
|
|
3.90 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income /Margin |
|
|
|
|
|
$ |
5,831 |
|
|
|
4.01 |
% |
|
|
|
|
|
$ |
5,920 |
|
|
|
4.26 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Presented on a fully taxable equivalent basis using a federal income tax rate of 34%. |
16
Allowance and Provision For Loan Losses
The Corporation maintains formal policies and procedures to control and monitor credit risk.
Management believes the allowance for loan losses is adequate to provide for probable incurred
losses in the loan portfolio. The Corporations loan portfolio has no significant concentrations in
any one industry or any exposure in foreign loans. The Corporation has not extended credit to
finance highly leveraged transactions nor does it intend to do so in the future. Employment levels
and other economic conditions in the Corporations local markets may have a significant impact on
the level of loan losses. Management continues to identify and devote attention to credits that are
not performing as agreed. Of course, deterioration of economic conditions could have an impact on
the Corporations credit quality, which could impact the need for greater provision for loan losses
and the level of the allowance for loan losses as a percentage of gross loans. Non-performing loans
are discussed further in the section titled Non-Performing Assets.
The allowance for loan losses (ALL) reflects managements judgment as to the level considered
appropriate to absorb probable losses in the loan portfolio. The Corporations subsidiary banks
methodology in determining the adequacy of the ALL relies on several key elements, which include
specific allowances for identified problem loans and a formula-based risk-allocated allowance for
the remainder of the portfolio. This includes a review of individual loans, historical loss
experience, current economic conditions, portfolio trends, and other pertinent factors. The amount
of the provision for loan losses is based on our review of the historical credit loss experience
and such factors that, in our judgment, deserve consideration under existing economic conditions in
estimating probable credit losses. While we consider the allowance for loan losses to be adequate
based on information currently available, future adjustments to the allowance may be necessary due
to changes in economic conditions, delinquencies, or loss rates. Although portions of the allowance
have been allocated to various portfolio segments, the ALL is general in nature and is available
for the portfolio in its entirety. At September 30, 2006, the ALL was $6,625,000, or 1.46% of total
loans compared to $6,301,000, or 1.43%, at December 31, 2005, increasing the ALL $324,000 during
the first nine months of 2006. Non performing loan levels, discussed later, decreased during the
period and net charge-offs have increased from $209,000 during the first nine months of 2005 to
$556,000 during the first nine months of 2006. This increase in net charge-offs and the increase
in loan balances has justified the 5% increase in the allowance for loan losses. Management
believes that the allowance is appropriate given identified risk in the loan portfolio based on
asset quality.
Table 4 below summarizes loan losses and recoveries for the first nine months of 2006 and 2005.
During the first nine months of 2006, the Corporation experienced net charge-offs of $556,000 or
..12% of gross loans compared with net charge-offs of $209,000 or .04% of gross loans in the first
nine months of 2005. The provision for loan losses was $880,000 in the first nine months of 2006
and $1,002,000 for the same time period in 2005 resulting principally from the growth in the loan
portfolio during 2006 and charge-offs incurred. While charge-offs have increased, non performing
loans have decreased since year-end and loan growth has slowed since year-end 2005 resulting in a
reduction of $122,000 in provision for loan losses more acceptable for the current year.
17
Table 4 Analysis Of The Allowance For Loan Losses
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
(000s omitted) |
|
2006 |
|
|
2005 |
|
Balance at Beginning of Period |
|
$ |
6,301 |
|
|
$ |
5,501 |
|
|
|
|
Charge-Offs: |
|
|
|
|
|
|
|
|
Commercial, Financial and Agriculture |
|
|
(411 |
) |
|
|
(113 |
) |
Real Estate-Mortgage |
|
|
0 |
|
|
|
0 |
|
Installment Loans to Individuals |
|
|
(235 |
) |
|
|
(236 |
) |
|
|
|
Total Charge-Offs |
|
|
(646 |
) |
|
|
(349 |
) |
Recoveries: |
|
|
|
|
|
|
|
|
Commercial, Financial and Agriculture |
|
|
20 |
|
|
|
63 |
|
Real Estate-Mortgage |
|
|
0 |
|
|
|
0 |
|
Installment Loans to Individuals |
|
|
70 |
|
|
|
77 |
|
|
|
|
Total Recoveries |
|
|
90 |
|
|
|
140 |
|
|
|
|
Net Charge-Offs |
|
|
(556 |
) |
|
|
(209 |
) |
Provision |
|
|
880 |
|
|
|
1,002 |
|
|
|
|
Balance at End of Period |
|
$ |
6,625 |
|
|
$ |
6,294 |
|
|
|
|
Ratio of Net Charge-Offs to Gross Loans |
|
|
0.12 |
% |
|
|
0.04 |
% |
|
|
|
Non-Interest Income
Non-interest income increased during the nine months ended September 30, 2006 as compared to the
same period in 2005, primarily due to the increase in service charges on deposits and an increase
in trust and investment income. Overall non-interest income was $5,625,000 for the nine months
ended September 30, 2006 compared to $5,238,000 for the same period in 2005. This represents an
increase of 7.4%.
Non-interest income increased 3.0% from the third quarter of 2006 compared to the third quarter of
2005. The income statement provides a detailed breakdown of the components of non-interest income
and the explanations for the components are in the following paragraphs.
The most significant category of non-interest income is service charges on deposit accounts. These
fees were $2,750,000 in the first nine months of 2006 compared to $2,571,000 for the same period of
2005. This represents an increase of 7.0%. The increases are attributable to increases in overdraft
privilege service charges and regular deposit account service charges in the Banks. The increase
of 9.0% was due to lower balances in deposit accounts and more customers using the overdraft
privilege product during the third quarter of 2006.
Gains on the sale of mortgage loans originated by the Banks and sold in the secondary market
decreased 29.5% to $444,000 in the nine months ended September 30, 2006 compared to $630,000 in the
same period in 2005. In the third quarter of 2006, gain on the sale of mortgages decreased 56.0%
over the same period in 2005, due to higher mortgage rates and slower real estate markets.
Trust and investment services income increased $330,000 (39.2%) in the first nine months of 2006
compared to the same period in the prior year. In the third quarter of 2006, trust and investment
services income increased 46.6% over the same period in 2005. The increase in fees is attributable
to the increase in the average market value of assets under management, the increase in investment
services at The State Bank, and an increase in West Michigan Community Bank trust and investment
services fees.
The Banks sold securities in the first nine months of 2006, resulting in a loss of $2,000. Loss on
sale of securities was $108,000 in the first nine months of 2005, due to the Banks selling
securities in the first quarter of 2005. The Banks took the loss to reposition their securities
portfolios into higher yielding securities.
18
Other operating income decreased $42,000 (3.2%) to $1,261,000 in the first nine months of 2006
compared to $1,303,000 in the same time period in 2005. Other operating income decreased due to the
write-off of fixed assets connected with the closing of the Bank affiliate branch of $46,000 offset
by an increase in debit card fees and an increase in the official check commissions in the first
nine months of 2006. In the third quarter of 2006, other operating income increased 4.1% over the
same period in 2005, due to an increase in debit card fees and official check commissions.
Non-Interest Expense
Total non-interest expense increased 7.2% to $16,785,000 in the nine months ended September 30,
2006, compared with $15,664,000 in the same period of 2005. This increase was largely attributable
to an increase in salaries and benefits expense and other operating expenses for new bank branch
offices.
Total non-interest expense increased 4.4% to $5,503,000 in the third quarter ended September 30,
2006, compared with $5,272,000 in the same period of 2005. This increase was largely attributable
to an increase in salaries and benefits expense and other operating expenses for new bank branch
offices.
Salary and benefit costs, the Corporations largest non-interest expense category, were $9,844,000
in the first nine months of 2006, compared with $9,062,000, or an increase of 8.6%, for the same
time period in 2005. Increased costs were primarily a result of a modest salary increase for
employees and an increase in employee benefit costs and modest staffing increases.
Salary and benefit costs, the Corporations largest non-interest expense category, were $3,197,000
in the third quarter of 2006, compared with $3,094,000, or an increase of 3.3%, for the same time
period in 2005. Increased costs were primarily a result of a modest salary increase for employees
and an increase in employee benefit costs and modest staffing increases.
Occupancy expenses, at $1,399,000, increased in the nine months ended September 30, 2006 compared
to the same period in 2005 by $74,000 or 5.6%. The increases were attributable to the opening of
Bank affiliates branch, offset by a decrease in facility repairs and maintenance contracts
expense.
Occupancy expenses, at $457,000, increased in the third quarter of September 30, 2006 compared to
the same period in 2005 by $16,000 or 3.6%. The increases were attributable to the additional
operating and building depreciation expenses for the Bank affiliates new branch.
During the nine months ended September 30, 2006, furniture and equipment expenses were $1,600,000
compared to $1,576,000 for the same period in 2005, an increase of 1.5%. The increases in expenses
were attributable to an increase in equipment maintenance contracts and equipment depreciation.
During the three months ended September 30, 2006, furniture and equipment expenses were $541,000
compared to $495,000 for the same period in 2005, an increase of 9.3%. The increases in expenses
were attributable to an increase in equipment depreciation in connection to the completion and
opening of the new bank branches.
Loan and collection expenses, at $227,000, were down $28,000 during the nine months ended September
30, 2006 compared to the same time period in 2005. In the third quarter of 2006, loan and
collection expense decreased 17.2% compared to the second quarter of 2005. The decrease was
primarily attributable to a decrease in other loan expense relating to other real estate and
decreases in other loan costs.
19
Advertising expenses of $494,000 in the nine months ended September 30, 2006, decreased 2.9%
compared with $509,000 for the same period in 2005. The decrease was primarily due to minor
decreases in media, shareholder and promotional expenses and free checking campaign in all of the
subsidiary banks.
Advertising expenses of $140,000, in the third quarter of 2006, decreased 8.5% compared with
$153,000 for the same period in 2005. The decrease was primarily due to moderate cost control
measures in media, shareholder and promotional expenses and free checking campaign in all of the
subsidiary banks.
Other operating expenses were $3,221,000 in the nine months ended September 30, 2006 compared to
$2,937,000 in the same time period in 2005, an increase of $284,000 or 9.7%. Other operating
expenses for the three months ended September 30, 2006 increased 9.4% compared to the same time
period in 2005. The increases were attributable to an increase in the amount of correspondent bank
service charges due to our Banks maintaining lower balances with such correspondent banks, an
increase in other outside services and consulting expenses and an external fraud loss of
approximately $50,000.
The federal income taxes for the three months ended September 30, 2005 includes additional income
taxes due to terminations of Bank Owned Life Insurance (BOLI) policies of past employees and the
Modified Endowment Contracts (MEC) penalties accompanying the terminations. Otherwise, our
effective tax rate is stable.
Financial Condition
Proper management of the volume and composition of the Corporations earning assets and funding
sources is essential for ensuring strong and consistent earnings performance, maintaining adequate
liquidity and limiting exposure to risks caused by changing market conditions. The Corporations
securities portfolio is structured to provide a source of liquidity through maturities and to
generate an income stream with relatively low levels of principal risk. The Corporation does not
engage in securities trading. Loans comprise the largest component of earning assets and are the
Corporations highest yielding assets. Customer deposits are the primary source of funding for
earning assets while short-term debt and other sources of funds could be further utilized if market
conditions and liquidity needs change.
The Corporations total assets were $623 million at September 30, 2006 compared to total assets of
$619 million at December 31, 2005. Loans comprised 72.8% of total assets at September 30, 2006
compared to 71.0% at December 31, 2005. Loans grew $14.4 million during the first nine months of
2006. The ratio of non-interest bearing deposits to total deposits was 14.2% at September 30, 2006
and 14.5% at December 31, 2005. Interest bearing deposit liabilities totaled $456 million at
September 30, 2006 compared to $451 million at December 31, 2005. Total deposits increased $3.5
million with non-interest bearing demand deposits decreasing $1,228,000 and interest bearing
deposits increasing $4.8 million. Short-term borrowings decreased $286,000 due to the increase in
loan volume, comparing the two periods. FHLB advance balances decreased $3.1 million with the
repayments of matured advances comparing the two periods. Repurchase agreement balances remained
steady comparing the two periods. Repurchase agreements are instruments with deposit type
characteristics, which are secured by government securities. The repurchase agreements were
leveraged against securities to increase net interest income.
Bank premises and equipment increased $1,947,000 to $16.6 million at September 30, 2006 compared to
$14.6 million at December 31, 2005. The increase was due to the completion of construction and the
opening of the branch at one of the Bank subsidiaries.
Non-Performing Assets
Non-performing assets are assets that have more than a normal risk of loss and include loans on
which interest accruals have ceased, loans that have been renegotiated, and real estate acquired
through foreclosure. Past due loans are loans which are delinquent 90 days or more, but have not
been placed on
20
non-accrual status. Table 5 reflects the levels of these assets at September 30, 2006 and December
31, 2005.
Non-performing assets decreased at September 30, 2006 compared to December 31, 2005. This decrease
was primarily due to decreases in Renegotiated Loans and Other Real Estate, which decreased due to
the sale of a residential property (acquired in foreclosure). REO-in-Redemption increased in the
third quarter of 2006. The Other Real Estate property was sold by subsidiary bank on a land
contract. REO-in-Redemption balance is comprised of three commercial properties and one
residential property for a total of $927,000. Marketability of this property is dependent on the
real estate market. Renegotiated loans decreased significantly due to the resolution of the
restructure of two SBA guaranteed loans from 2005.
The level and composition of non-performing assets are affected by economic conditions in the
Corporations local markets. Non-performing assets, charge-offs, and provisions for loan losses
tend to decline in a strong economy and increase in a weak economy, potentially impacting the
Corporations operating results. In addition to non-performing loans, management carefully monitors
other credits that are current in terms of principal and interest payments but, in managements
opinion, may deteriorate in quality if economic conditions change.
Table 5 Non-Performing Assets and Past Due Loans
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
|
2006 |
|
2005 |
Non-Performing Loans: |
|
|
|
|
|
|
|
|
Loans Past Due 90 Days or More & Still
Accruing |
|
$ |
71 |
|
|
$ |
80 |
|
Non-Accrual Loans |
|
|
1,483 |
|
|
|
1,476 |
|
Renegotiated Loans |
|
|
438 |
|
|
|
1,401 |
|
|
|
|
Total Non-Performing Loans |
|
|
1,992 |
|
|
|
2,957 |
|
|
|
|
Other Non-Performing Assets: |
|
|
|
|
|
|
|
|
Other Real Estate |
|
|
0 |
|
|
|
500 |
|
REO in Redemption |
|
|
927 |
|
|
|
0 |
|
Other Non-Performing Assets |
|
|
37 |
|
|
|
6 |
|
|
|
|
Total Other Non-Performing Assets |
|
|
964 |
|
|
|
506 |
|
|
|
|
Total Non-Performing Assets |
|
$ |
2,956 |
|
|
$ |
3,463 |
|
|
|
|
Non-Performing Loans as a % of
Total Loans |
|
|
0.44 |
% |
|
|
0.67 |
% |
Allowance for Loan Losses as a % of
Non-Performing Loans |
|
|
333.58 |
% |
|
|
213.09 |
% |
Accruing Loans Past Due 90 Days or
More to Total Loans |
|
|
0.02 |
% |
|
|
0.02 |
% |
Non-performing Assets as a % of
Total Assets |
|
|
0.48 |
% |
|
|
0.56 |
% |
Liquidity and Interest Rate Risk Management
Asset/Liability management is designed to assure liquidity and reduce interest rate risks. The goal
in managing interest rate risk is to maintain a strong and relatively stable net interest margin.
It is the responsibility of the Asset/Liability Management Committee (ALCO) to set policy
guidelines and to establish short-term and long-term strategies with respect to interest rate
exposure and liquidity. The ALCO, which is comprised of key members of management, meets regularly
to review financial performance and soundness, including interest rate risk and liquidity exposure
in relation to present and prospective markets, business conditions, and product lines.
Accordingly, the committee adopts funding
21
and balance sheet management strategies that are intended to maintain earnings, liquidity, and
growth rates consistent with policy and prudent business standards.
Liquidity maintenance together with a solid capital base and strong earnings performance are key
objectives of the Corporation. The Corporations liquidity is derived from a strong deposit base
comprised of individual and business deposits. Deposit accounts of customers in the mature market
represent a substantial portion of deposits of individuals. The Banks deposit base plus other
funding sources (federal funds purchased, short-term borrowings, FHLB advances, repurchase
agreements, other liabilities and shareholders equity) provided primarily all funding needs in the
first nine months of 2006. While these sources of funds are expected to continue to be available to
provide funds in the future, the mix and availability of funds will depend upon future economic
conditions. The Corporation does not foresee any difficulty in meeting its funding requirements.
Primary liquidity is provided through short-term investments or borrowings (including federal funds
sold and purchased) while the securities portfolio provides secondary liquidity. The securities
portfolio has decreased $9.6 million since December 31, 2005 due to the calls and maturities of
securities, paydowns of Mortgage Backed Securities (MBS) and the increase in loan demand. The
Corporation has decided to invest the excess funds, from the call of these securities, in the
securities and loan portfolios to increase yield and income versus keeping the excess funds in
federal funds sold at a lower yield. The Corporation regularly monitors liquidity to ensure
adequate cash flows to cover unanticipated reductions in the availability of funding sources.
Interest rate risk is managed by controlling and limiting the level of earnings volatility arising
from rate movements. The Corporation regularly performs reviews and analysis of those factors
impacting interest rate risk. Factors include maturity and re-pricing frequency of balance sheet
components, impact of rate changes on interest margin and prepayment speeds, market value impacts
of rate changes, and other issues. Both actual and projected performance are reviewed, analyzed,
and compared to policy and objectives to assure present and future financial viability.
The Corporation had cash flows from financing activities resulting primarily from the increase of
borrowings and increase of demand and savings deposits. In the first nine months of 2006, these
borrowings decreased $286,000 while these deposits increased $3,531,000. Cash used by investing
activities was $8,365,000 in first nine months of 2006 compared to cash used of $22,503,000 in
first nine months of 2005. The change in investing activities was due to the increase in the
origination of loans in the first nine months of 2006 compared to the first nine months of 2005.
Capital Management
Total shareholders equity increased 6.5% to $49,943,000 at September 30, 2006 compared with
$46,895,000 at December 31, 2005. The Corporations equity to asset ratio was 8.0% at September 30,
2006 and 7.6% at December 31, 2005. The increase in the amount of capital resulted primarily from
net income, partially offset by dividends declared.
As indicated on the balance sheet at December 31, 2005, the Corporation had an accumulated other
comprehensive loss of $1,325,000 compared to accumulated other comprehensive loss at September 30,
2006 of $1,184,000. The decrease in the loss position is attributable to the fluctuation of the
market price of securities held in the available for sale portfolio.
Regulatory Capital Requirements
Bank holding companies and their bank subsidiaries are required by banking industry regulators to
maintain certain levels of capital. These are expressed in the form of certain ratios. These ratios
are based on the degree of credit risk in the Corporations assets. All assets and off-balance
sheet items such as
22
outstanding loan commitments are assigned risk factors to create an overall risk-weighted asset
total. Capital is separated into two levels, Tier I capital (essentially total common shareholders
equity plus qualifying cumulative preferred securities (limited to 33% of common equity), less
goodwill) and Tier II capital (essentially the allowance for loan losses limited to 1.25% of gross
risk-weighted assets). Capital levels are then measured as a percentage of total risk weighted
assets. The regulatory minimum for Tier I capital to risk weighted assets is 4% and the minimum for
Total capital (Tier I plus Tier II) to risk weighted assets is 8%. The Tier I leverage ratio
measures Tier I capital to average assets and must be a minimum of 3%. As reflected in Table 6, at
September 30, 2006 and at December 31, 2005, the Corporation was well in excess of the minimum
capital and leverage requirements necessary to be considered a well capitalized banking company.
The FDIC has adopted a risk-based insurance premium system based in part on a banks capital
adequacy. Under this system, a depository institution is classified as well capitalized, adequately
capitalized, or undercapitalized according to its regulatory capital levels. Subsequently, a
financial institutions premium levels are based on these classifications and its regulatory
supervisory rating (the higher the classification the lower the premium). It is the Corporations
goal to maintain capital levels sufficient to retain a designation of well capitalized.
Table 6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Ratios |
|
|
Regulatory Minimum |
|
Fentura Financial, Inc. |
|
|
For Well Capitalized |
|
September 30, |
|
December 31, |
|
September 30, |
|
|
|
|
|
|
2006 |
|
2005 |
|
2005 |
Total Capital to risk
Weighted assets |
|
|
10 |
% |
|
|
12.17 |
% |
|
|
11.40 |
% |
|
|
11.84 |
% |
Tier 1 Capital to risk
Weighted assets |
|
|
6 |
% |
|
|
10.94 |
% |
|
|
10.20 |
% |
|
|
10.61 |
% |
Tier 1 Capital to average
Assets |
|
|
5 |
% |
|
|
8.28 |
% |
|
|
8.70 |
% |
|
|
8.87 |
% |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information concerning quantitative and qualitative disclosures about market risk contained on
page 53 in the Corporations Annual Report on Form 10-K for the year ended December 31, 2005, is
incorporated herein by reference.
Fentura Financial, Inc. faces market risk to the extent that both earnings and the fair value of
its financial instruments are affected by changes in interest rates. The Corporation manages this
risk with static GAP analysis and has begun simulation modeling. For the first nine months of 2006,
the results of these measurement techniques were within the Corporations policy guidelines. The
Corporation does not believe that there has been a material change in the nature of the
Corporations primary market risk exposures, including the categories of market risk to which the
Corporation is exposed and the particular markets that present the primary risk of loss to the
Corporation, or in how those exposures have been managed in 2006 compared to 2005.
The Corporations market risk exposure is mainly comprised of its vulnerability to interest rate
risk. Prevailing interest rates and interest rate relationships in the future will be primarily
determined by market factors, which are outside of the Corporations control. All information
provided in this section consists of forward-looking statements. Reference is made to the section
captioned Forward Looking Statements in this quarterly report for a discussion of the limitations
on the Corporations responsibility for such statements.
23
Interest Rate Sensitivity Management
Interest rate sensitivity management seeks to maximize net interest income as a result of changing
interest rates, within prudent ranges of risk. The Corporation attempts to accomplish this
objective by structuring the balance sheet so that re-pricing opportunities exist for both assets
and liabilities in roughly equivalent amounts at approximately the same time intervals. Imbalances
in these re-pricing opportunities at any point in time constitute a banks interest rate
sensitivity. The Corporation currently does not utilize derivatives in managing interest rate risk.
An indicator of the interest rate sensitivity structure of a financial institutions balance sheet
is the difference between rate sensitive assets and rate sensitive liabilities, and is referred to
as GAP.
Table 7 sets forth the distribution of re-pricing of the Corporations earning assets and interest
bearing liabilities as of September 30, 2006, the interest rate sensitivity GAP, as defined above,
the cumulative interest rate sensitivity GAP, the interest rate sensitivity GAP ratio (i.e.
interest rate sensitive assets divided by interest rate sensitive liabilities) and the cumulative
sensitivity GAP ratio. The table also sets forth the time periods in which earning assets and
liabilities will mature or may re-price in accordance with their contractual terms.
Table 7 GAP Analysis September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within |
|
Three |
|
One to |
|
After |
|
|
|
|
Three |
|
Months to |
|
Five |
|
Five |
|
|
(000s omitted) |
|
Months |
|
One Year |
|
Years |
|
Years |
|
Total |
Earning Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Funds Sold |
|
$ |
8,950 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
8,950 |
|
Securities |
|
|
14,352 |
|
|
|
20,264 |
|
|
|
42,751 |
|
|
|
27,392 |
|
|
|
104,759 |
|
Loans |
|
|
83,348 |
|
|
|
93,981 |
|
|
|
222,497 |
|
|
|
53,946 |
|
|
|
453,772 |
|
Loans Held for Sale |
|
|
2,079 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
2,079 |
|
FHLB Stock |
|
|
2,172 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
2,172 |
|
|
|
|
Total Earning Assets |
|
$ |
110,901 |
|
|
$ |
114,245 |
|
|
$ |
265,248 |
|
|
$ |
81,338 |
|
|
$ |
571,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Demand Deposits |
|
$ |
104,421 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
104,421 |
|
Savings Deposits |
|
$ |
111,073 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
111,073 |
|
Time Deposits Less than $100,000 |
|
|
26,254 |
|
|
|
52,482 |
|
|
|
30,641 |
|
|
|
392 |
|
|
|
109,769 |
|
Time Deposits Greater than $100,000 |
|
|
24,952 |
|
|
|
56,372 |
|
|
|
49,434 |
|
|
|
0 |
|
|
|
130,758 |
|
Short term borrowings |
|
|
1,251 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
1,251 |
|
Other Borrowings |
|
|
0 |
|
|
|
1,015 |
|
|
|
9,099 |
|
|
|
977 |
|
|
|
11,091 |
|
Repurchase agreements |
|
|
0 |
|
|
|
0 |
|
|
|
10,000 |
|
|
|
0 |
|
|
|
10,000 |
|
Subordinated debentures |
|
|
0 |
|
|
|
0 |
|
|
|
14,000 |
|
|
|
0 |
|
|
|
14,000 |
|
|
|
|
Total Interest Bearing Liabilities |
|
$ |
267,951 |
|
|
$ |
109,869 |
|
|
$ |
113,174 |
|
|
$ |
1,369 |
|
|
$ |
492,363 |
|
|
|
|
Interest Rate Sensitivity GAP |
|
|
($157,050 |
) |
|
$ |
4,376 |
|
|
$ |
152,074 |
|
|
$ |
79,969 |
|
|
$ |
79,369 |
|
Cumulative Interest Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sensitivity GAP |
|
|
($157,050 |
) |
|
|
($152,674 |
) |
|
|
($600 |
) |
|
$ |
79,369 |
|
|
|
|
|
Interest Rate Sensitivity GAP |
|
|
(0.41 |
) |
|
|
1.04 |
|
|
|
2.34 |
|
|
|
59.41 |
|
|
|
|
|
Cumulative Interest Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sensitivity GAP Ratio |
|
|
(0.41 |
) |
|
|
(0.60 |
) |
|
|
(1.00 |
) |
|
|
1.16 |
|
|
|
|
|
As indicated in Table 7, the short-term (one year and less) cumulative interest rate
sensitivity gap is negative. Accordingly, if market interest rates continue to increase, this
negative gap position could have a short-term negative impact on interest margin. Conversely, if
market rates decline this should theoretically have a short-term positive impact. However, gap
analysis is limited and may not provide an accurate indication of the impact of general interest
rate movements on the net interest margin since the re-pricing of various categories of assets and
liabilities is subject to the Corporations needs, competitive
24
pressures, and the needs of the Corporations customers. In addition, various assets and
liabilities indicated as re-pricing within the same period may in fact re-price at different times
within such period and at different rate volumes. These limitations are evident when considering
the Corporations Gap position at September 30, 2006 and the change in net interest margin for the
nine months ended September 30, 2006 compared to the same time period in 2005. At September 30,
2006, the Corporation was negatively gapped through one year and since that time interest rates
have stayed steady. Further, net interest margin decreased when the first nine months of 2006 is
compared to the same period in 2005. This occurred because certain deposit categories, specifically
interest bearing demand, savings deposits and new certificates of deposits, repriced at the same
time but not at the same level as the asset portfolios resulting in a decrease in net interest
margin. In addition to GAP analysis, the Corporation, as part of managing interest rate risk, also
performs simulation modeling, which measures the impact of upward and downward movements of
interest rates on interest margin and the market value of equity. Assuming continued success at
achieving repricing of loans to higher rates at a faster pace than repricing of deposits,
simulation modeling indicates that an upward movement of interest rates could have a positive
impact on net interest income. Because management believes that it should be able to continue
these repricing relationships, it anticipates improved performance in net interest margin as a
result of a rising interest rate environment.
Forward Looking Statements
This report includes forward-looking statements as that term is used in the securities laws. All
statements regarding our expected financial position, business and strategies are forward-looking
statements. In addition, the words anticipates, believes, estimates, seeks, expects,
plans, intends, and similar expressions, as they relate to us or our management, are intended
to identify forward-looking statements. The presentation and discussion of the provision and
allowance for loan losses and statements concerning future profitability or future growth or
increases, are examples of inherently forward looking statements in that they involve judgments and
statements of belief as to the outcome of future events. Our ability to predict results or the
actual effect of future plans or strategies is inherently uncertain. Factors which could have a
material adverse affect on our operations and our future prospects include, but are not limited to,
changes in: interest rates, general economic conditions, legislative/regulatory changes, monetary
and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal
Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan
products, deposit flows, competition, demand for financial services in our market area and
accounting principles, policies and guidelines. These risks and uncertainties should be considered
in evaluating forward-looking statements and undue reliance should not be placed on such
statements. Further information concerning us and our business, including additional factors that
could materially affect our financial results, is included in our other filings with the Securities
and Exchange Commission.
ITEM 4: CONTROLS AND PROCEDURES
(a) |
|
Evaluation of Disclosure Controls and Procedures. The Corporations Chief Executive
Officer and Chief Financial Officer, after evaluating the effectiveness of the Corporations
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
as of the end of the period covered by this Form 10-Q Quarterly Report, have concluded that
the Corporations disclosure controls and procedures were adequate and effective to ensure
that material information relating to the Corporation would be made known to them by others
within the Corporation, particularly during the period in which this Form 10-Q was being
prepared. |
|
(b) |
|
Changes in Internal Controls. During the period covered by this report, there have
been no changes in the Corporations internal control over financial reporting that have
materially affected or are reasonably likely to materially affect the Corporations internal
control over financial reporting. |
25
PART II OTHER INFORMATION
Item 1. Legal Proceedings. None
|
|
|
Item 1A. |
|
Risk Factors There have been no material changes in the risk factors applicable to the Company from those disclosed
in its Annual Report on Form 10-K for the year ended December 31, 2005. |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. None
Item 3. Defaults Upon Senior Securities. None
Item 4. Submission of Matters to a Vote of Securities Holders. None
Item 5. Other Information. None
Item 6. Exhibits.
|
31.1 |
|
Certificate of the President and Chief Executive Officer of
Fentura Financial, Inc. pursuant to 15 U.S.C. Section 7241, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
31.2 |
|
Certificate of the Chief Financial Officer of Fentura
Financial, Inc. pursuant to 15 U.S.C. Section 7241, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
32.1 |
|
Certificate of the Chief Executive Officer of Fentura
Financial, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
32.2 |
|
Certificate of the Chief Financial Officer of Fentura
Financial, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
26
Signatures
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.
|
|
|
|
|
|
|
Fentura Financial Inc. |
|
|
|
|
|
|
|
Dated: November 10, 2006
|
|
/s/ Donald L. Grill |
|
|
|
|
Donald L. Grill
President & CEO
|
|
|
|
|
|
|
|
Dated: November 10, 2006
|
|
/s/ Douglas J. Kelley |
|
|
|
|
|
|
|
|
|
Douglas J. Kelley |
|
|
|
|
Chief Financial Officer |
|
|
27
EXHIBIT INDEX
|
|
|
Exhibit |
|
Description |
31.1
|
|
Certificate of the President and Chief Executive Officer of Fentura Financial, Inc. pursuant
to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
|
|
|
31.2
|
|
Certificate of the Chief Financial Officer of Fentura Financial, Inc. pursuant to 15 U.S.C.
Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certificate of the Chief Executive Officer of Fentura Financial, Inc. pursuant to 18 U.S.C.
Section 1350 , as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Certificate of the Chief Financial Officer of Fentura Financial, Inc. pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
28