In connection with the transitional goodwill impairment evaluation, Statement 142 will require the Company to perform an assessment of whether there is an indication that goodwill [and equity-method goodwill] is impaired as of the date of adoption. To accomplish this the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit’s carrying amount. To the extent a reporting unit’s carrying amount exceeds its fair value, an indication exists that the reporting unit’s goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit’s goodwill, determined by allocating the reporting unit’s fair value to all of it assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with Statement 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company’s statement of earnings.
Finally, any unamortized negative goodwill [and negative equity-method goodwill] existing at the date Statement 142 is adopted must be written off as the cumulative effect of a change in accounting principle.
As of the date of adoption, the Company expects to have unamortized goodwill in the amount of $1,405,000, unamortized identifiable intangible assets in the amount of $2,080,000, and no unamortized negative goodwill, all of which will be subject to the transition provisions of Statements 141 and 142. Amortization expense related to goodwill was $56,000 and $112,000 for the six months ended June 30, 2001 and the year ended December 31, 2000. Because of the extensive effort needed to comply with adopting Statements 141 and 142, it is not practicable to reasonably estimate the impact of adopting these Statements on the Company’s financial statements at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle.
Item 2. Management's Discussion And Analysis Of Financial Condition
And Results Of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that are subject to risks and uncertainties and include information about possible or assumed future results of operations. Many possible events or factors could affect the future financial results and performance of the company. This could cause results or performance to differ materially from those expressed in our forward-looking statements. Words such as “experts”, “anticipates”, “believes”, “estimates”, variations of such words and other similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, such forward-looking statements.
Readers of the Company’s Form 10-Q should not rely solely on forward looking statements and should consider all uncertainties and risks discussed throughout this report, as well as those discussed in the Company’s 2000 annual Report on Form 10-K. These statements are representative only on the date hereof, and the Company undertakes no obligation to update any forward-looking statements made. Some possible events or factors that could occur that may cause differences from expected results include the following: the company’s loan growth is dependent on economic conditions, as well as various discretionary factors, such as decisions to sell, or purchase certain loans or loan portfolios; participations of loans and the management of borrower, industry, product and geographic concentrations and the mix of the loan portfolio. The rate of charge-offs and provision expense can be affected by local, regional and international economic and market conditions, concentrations of borrowers, industries, products and geographical conditions, the mix of the loan portfolio and management’s judgements regarding the collectibility of loans. Liquidity requirements may change as a result of fluctuations in assets and liabilities and off-balance sheet exposures, which will impact the capital and debt financing needs of the company and the mix of funding sources. Decisions to purchase, hold, or sell securities are also dependent of liquidity requirements and market volatility, as well as on and off-balance sheet positions. Factors that may impact interest rate risk include local, regional and international economic conditions, levels, mix, maturities, yields or rates of assets and liabilities and the wholesale and retail funding sources of the Company.
The Company is also exposed to the potential of losses arising from adverse changes in market rate and prices which can adversely impact the value of financial products, including securities, loans, and deposits. In addition, the banking industry in general is subject to various monetary and fiscal policies and regulations, which include those determined by the Federal Reserve Board, the Federal Deposit Insurance Corporation and state regulators, whose policies and regulations could affect the Company’s results.
Other factors that may cause actual results to differ from the forward-looking statements include the following: competition with other local and regional banks, savings and loan associations, credit unions and other non-bank financial institutions, such as investment banking firms, investment advisory firms, brokerage firms, mutual funds and insurance companies, as well as other entities which offer financial services; interest rate, market and monetary fluctuations: inflation; market volatility; general economic conditions; introduction and acceptance of new banking-related products, services and enhancement; fee pricing strategies, mergers and acquisitions and their integration into the Company and management’s ability to manage these and other risks.
The following discussion and analysis is designed to provide a better understanding of the significant changes and trends related to the Company and its subsidiaries' financial condition, operating results, asset and liability management, liquidity and capital resources and should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes thereto.
Results Of Operations
Overview. For the three and six months ended June 30, 2001 the Company reported record net income of $1,981,000 and $3,893,000. This compares to $1,800,000 and $3,314,000 for the same period in 2000 and represents an increase of $181,000 and $579,000. Basic and diluted earnings per share were $.41 and $.40 for the three months ending June 30, 2001. This compares to basic and diluted earnings per share of $.38 and $.37 for the three months ending June 30, 2000 and represents an increase of $0.03 per basic and diluted share. The annualized return on average assets was 1.08% and 1.18% for the three months ended June 30, 2001 and 2000. The Company's annualized return on average equity was 13.80% and 15.73% for the three months ended June 30, 2001 and 2000.
The following tables provides a summary of the major categories of income and expense for the second quarter of 2001 compared with the second quarter of 2000 and for the first six months of 2001 compared with the first six months of 2000:
| | Three Months | | | | |
| | Ending June 30, | | Percentage Change | |
| | 2001 | | 2000 | | Increase (decrease) | |
| | (in thousands, except earnings per share) | | | | |
| | | | | | | | |
| Interest income | $ | 14,146 | | $ | 12,361 | | 14.4 | % | |
| Interest expense | 5,668 | | 5,041 | | 12.4 | | |
| Net interest income | 8,478 | | 7,320 | | 15.8 | | |
| Provisions for loan losses | 789 | | 768 | | 2.7 | | |
| Net interest income after provision for loan losses | 7,689 | | 6,552 | | 17.4 | | |
| Other income | 1,574 | | 1,644 | | (4.3 | ) | |
| Other expenses | 6,476 | | 5,655 | | 14.5 | | |
| Net income before income taxes | 2,787 | | 2,541 | | 9.7 | | |
| Income taxes | 806 | | 741 | | 8.8 | | |
| Net income | 1,981 | | 1,800 | | 10.1 | | |
| Diluted earnings per common share | 0.40 | | 0.37 | | 8.1 | | |
| | | | | | | | | | |
| | Six Months | | | |
| | Ending June 30, | | Percentage Change | |
| | 2001 | | 2000 | | Increase (decrease) | |
| | (in thousands, except earnings per share) | | | |
| | | | | | | |
| Interest income | $ | 28,432 | | $ | 23,594 | | 20.5 | % |
| Interest expense | 11,539 | | 9,345 | | 23.5 | |
| Net interest income | 16,893 | | 14,249 | | 18.6 | |
| Provisions for loan losses | 1,539 | | 1,531 | | 0.5 | |
| Net interest income after provision for loan losses | 15,354 | | 12,718 | | 20.7 | |
| Other income | 2,927 | | 2,791 | | 4.9 | |
| Other expenses | 12,815 | | 10,798 | | 18.7 | |
| Net income before income taxes | 5,466 | | 4,711 | | 16.0 | |
| Income taxes | 1,573 | | 1,397 | | 12.6 | |
| Net income | 3,893 | | 3,314 | | 17.5 | |
| Diluted earnings per common share | 0.78 | | 0.68 | | 14.7 | |
| | | | | | | | |
Net Interest Income. The Company's primary source of income is net interest income and is determined by the difference between interest income and fees derived from earning assets and interest paid on interest bearing liabilities. Net interest income for the three and six months ended June 30, 2001 totaled $8,478,000 and $16,893,000 and represented an increase of $1,158,000 and $2,644,000 when compared to the $7,320,000 and $14,249,000 achieved during the three and six months ended June 30, 2000.
Total interest and fees on earning assets were $14,146,000 and $28,432,000 for the three and six months ended June 30, 2001, an increase of $1,785,000 and $4,838,000 from the $12,361,000 and $23,594,000 for the same period in 2000. The level of interest income is affected by changes in volume of and rates earned on interest–earning assets. Interest–earning assets consist primarily of loans, investment securities and federal funds sold. The increase in interest income for the three and six months ended June 30, 2001 was primarily the result of an increase in the volume of interest–earning assets. Average interest–earning assets for the three and six months ended June 30, 2001 were $668,802,000 and $650,423,000 compared with $544,401,000 and $525,122,000 for the three and six months ended June 30, 2000, an increase of $124,401,000 and $125,301,000 or 22.9% and 23.9%.
Interest expense is a function of the volume of and the rates paid on interest–bearing liabilities. Interest–bearing liabilities consist primarily of certain deposits and borrowed funds. Total interest expense was $5,668,000 and $11,539,000 for the three and six months ended June 30, 2001, compared with $5,041,000 and $9,345,000 for the three and six months ended June 30, 2000, an increase of $627,000 and $2,194,000 or 12.4% and 23.5%. This increase was primarily the result of an increase in the volumes of interest–bearing liabilities. Average interest–bearing liabilities were $563,895,000 and $546,964,000 for the three and six months ended June 30, 2001 compared with $469,183,000 and $452,757,000 for the same three and six months in 2000, an increase of $94,712,000 and $87,336,000 or 20.2 and 19.3%. Average interest rates paid on interest-bearing liabilities were 4.02% and 4.27% for the three and six months ending June 30, 2001 compared with 4.30 and 4.13% for the same three and months of 2000, a decrease of 28 basis points or 6.5% and an increase of 14 basis points or 3.4% for these periods.
The increase in interest-earning assets and interest-bearing liabilities is primarily the result of increased market penetration within our target markets. Internal growth has been achieved primarily through expanding loan and deposit balances through our existing branch network.
The Company's net interest margin, the ratio of net interest income to average interest–earning assets, was 5.13% and 5.22% for the three and six months ended June 30, 2001 compared with 5.45% and 5.46% for the same periods in 2000, a decrease of 32 and 24 basis points for the three and six months ending June 30, 2001 compared to the same three and six months ending June 30, 2000. Net interest margin provides a measurement of the Company's ability to employ funds profitably during the period being measured. The Company's decrease in net interest margin for the three and six months ending June 30, 2001 was primarily attributable to the decrease in market rates experienced during 2001. Loans as a percentage of average interest-earning assets were 64% for the three months ended June 30, 2001 compared to 65% for the three months ended June 30, 2000.
Average Balances And Rates Earned And Paid. The following table presents condensed average balance sheet information for the Company, together with interest rates earned and paid on the various sources and uses of its funds for each of the three month periods indicated. Nonaccruing loans are included in the calculation of the average balances of loans, but the nonaccrued interest on such loans is excluded.
AVERAGE BALANCE SHEET & ANALYSIS OF NET INTEREST EARNINGS
| | | | | | | | | | | | | |
| | Three months ended | | Three months ended | |
| | June 30, 2001 | | June 30, 2000 | |
| | | Average
Balance | | Interest | | Taxable
Equivalent
Yield/rate | | Average
Balance | | Interest | | Taxable
Equivalent
Yield/rate | |
| | | | | | (Dollars In thousands) | | | | | |
| Assets | | | | | | | | | | |
| Federal funds sold | $ | 20,759 | | $ | 227 | | 4.37 | % | $ | 13,821 | | $ | 224 | | 6.48 | % |
| Time deposits at other financial institutions | 427 | | 5 | | 4.68 | | 483 | | 6 | | 4.97 | |
| Taxable investment securities | 193,888 | | 3,090 | | 6.37 | | 143,981 | | 2,547 | | 7.08 | |
| Nontaxable investment securities (1) | 28,991 | | 423 | | 5.84 | | 29,709 | | 442 | | 5.95 | |
| Loans, gross: (2) | 424,737 | | 10,497 | | 9.89 | | 356,407 | | 9,242 | | 10.37 | |
| |
| |
| |
| |
| |
| |
| |
| Total interest-earning assets: | 668,802 | | 14,242 | | 8.52 | | 544,401 | | 12,461 | | 9.16 | |
| Allowance for loan losses | (8,608 | ) | | | | | (6,801 | ) | | | | |
| Cash and due from banks | 26,453 | | | | | | 22,976 | | | | | |
| Premises and equipment, net | 13,323 | | | | | | 13,083 | | | | | |
| Interest receivable and other assets | 33,108 | | | | | | 28,273 | | | | | |
| |
| | | | | |
| | | | | |
| Total assets | $ | 733,078 | | | | | | $ | 601,932 | | | | | |
| |
| | | | | |
| | | | | |
| | | | | | | | | | | | | |
| Liabilities And Shareholders' Equity | | | | | | | | | | | | |
| Negotiable order of withdrawal | $ | 81,995 | | $ | 61 | | 0.30 | % | $ | 73,917 | | $ | 124 | | 0.67 | % |
| Savings deposits | 193,457 | | 1,614 | | 3.34 | | 177,380 | | 1,773 | | 4.00 | |
| Time deposits | 255,454 | | 3,530 | | 5.53 | | 191,402 | | 2,708 | | 5.66 | |
| Other borrowings | 32,989 | | 463 | | 5.61 | | 26,484 | | 436 | | 6.59 | |
| |
| |
| |
| |
| |
| |
| |
| Total interest–bearing liabilities | 563,895 | | 5,668 | | 4.02 | | 469,183 | | 5,041 | | 4.30 | |
| | | | | | | | | | | | | |
| Noninterest–bearing deposits | 100,391 | | | | | | 82,517 | | | | | |
| Accrued interest, taxes and other liabilities | 5,387 | | | | | | 4,457 | | | | | |
| |
| | | | | |
| | | | | |
| | Total liabilities | 669,673 | | | | | | 556,157 | | | | | |
| | | | | | | | | | | | | |
| Trust Preferred Capital Securities | 6,000 | | | | | | - | | | | | |
| | | | | | | | | | | | | |
| Total shareholders' equity | 57,405 | | | | | | 45,775 | | | | | |
| |
| | | | | |
| | | | | |
| Total liabilities and shareholders' equity | $ | 733,078 | | | | | | $ | 601,932 | | | | | |
| |
| | | | | |
| | | | | |
| Net interest income and margin (3) | | | $ | 8,574 | | 5.13 | % | | | $ | 7,420 | | 5.45 | % |
| | | |
| |
| | | |
| |
| |
(1) Interest on tax advantaged securities such as municipal securities is computed on a taxable–equivalent basis
(2) Amounts of interest earned includes loan fees of $266,000 and $190,000 for June 30, 2001 and 2000 respectively.
(3) Net interest margin is computed by dividing net interest income by total average interest–earning assets.
The following table presents condensed average balance sheet information for the Company, together with interest rates earned and paid on the various sources and uses of its funds for each of the six month periods indicated. Nonaccruing loans are included in the calculation of the average balances of loans, but the nonaccrued interest on such loans is excluded.
| | Six months ended | | Six months ended | |
| | June 30, 2001 | | June 30, 2001 | |
| | Average
Balance | | Interest | | Yield/rate | | Average
Balance | | Interest | | Yield/rate | |
| | | | | | (In thousands) | | | | | |
| Assets | | | | | | | | | | | | |
| Federal funds sold | $ | 22,761 | | $ | 571 | | 5.02 | % | $ | 9,544 | | $ | 298 | | 6.24 | % |
| Time deposits at other financial institutions | 269 | | 7 | | 5.20 | | 702 | | 18 | | 5.13 | |
| Taxable investment securities | 180,711 | | 5,922 | | 6.55 | | 139,115 | | 4,874 | | 7.01 | |
| Nontaxable investment securities (1) | 28,997 | | 751 | | 5.18 | | 29,758 | | 782 | | 5.26 | |
| Loans, gross: (2) | 417,685 | | 21,277 | | 10.19 | | 346,003 | | 17,721 | | 10.24 | |
| |
| |
| |
| |
| |
| |
| |
| Total interest-earning assets: | 650,423 | | 28,528 | | 8.77 | | 525,122 | | 23,693 | | 9.02 | |
| Allowance for loan losses | (8,506 | ) | | | | | (6,762 | ) | | | | |
| Cash and due from banks | 26,716 | | | | | | 22,827 | | | | | |
| Premises and equipment, net | 13,190 | | | | | | 13,126 | | | | | |
| Interest receivable and other assets | 29,769 | | | | | | 27,575 | | | | | |
| |
| | | | | |
| | | | | |
| Total assets | $ | 711,592 | | | | | | $ | 581,888 | | | | | |
| |
| | | | | |
| | | | | |
| Liabilities And Shareholders' Equity | | | | | | | | | | | | |
| Negotiable order of withdrawal | $ | 81,224 | | $ | 152 | | 0.37 | % | $ | 72,884 | | $ | 245 | | 0.67 | % |
| Savings deposits | 190,159 | | 3,421 | | 3.60 | | 174,187 | | 3,287 | | 3.77 | |
| Time deposits | 246,254 | | 7,113 | | 5.78 | | 181,603 | | 5,021 | | 5.53 | |
| Other borrowings | 29,327 | | 853 | | 5.82 | | 24,083 | | 792 | | 6.58 | |
| |
| |
| |
| |
| |
| |
| |
| Total interest–bearing liabilities | 546,964 | | 11,539 | | 4.22 | | 452,757 | | 9,345 | | 4.13 | |
| | | | | | | | | | | | | |
| Noninterest–bearing deposits | 98,548 | | | | | | 79,711 | | | | | |
| Accrued interest, taxes and other liabilities | 5,652 | | | | | | 4,484 | | | | | |
| |
| | | | | |
| | | | | |
| | Total liabilities | 651,164 | | | | | | 536,952 | | | | | |
| | | | | | | | | | | | | |
| Trust Preferred Capital Securities | 4,276 | | - | | | | | | | | | |
| | | | | | | | | | | | | |
| Total shareholders' equity | 56,152 | | | | | | 44,936 | | | | | |
| Total liabilities and shareholders' equity | $ | 711,592 | | | | | | $ | 581,888 | | | | | |
| |
| | | | | |
| | | | | |
| Net interest income and margin (3) | | | $ | 16,989 | | 5.22 | % | | | $ | 14,348 | | 5.46 | % |
| | | |
| |
| | | |
| |
| |
| | | | | | | | | | | | | | | | | |
(1) Interest on tax advantaged securities such as municipal securities is computed on a tax-equivalent basis.
(2) Amounts of interest earned includes loan fees of $533,000 and $326,000 for June 30, 2001 and 2000 respectively.
(3) Net interest margin is computed by dividing net interest income by total average interest-earning assets.
Net Interest Income Changes Due To Volume And Rate. The following table sets forth, for the periods indicated, a summary of the changes in average asset and liability balances and interest earned and interest paid resulting from changes in average asset and liability balances (volume) and changes in average interest rates and the total net change in interest income and expenses. The changes in interest due to both rate and volume have been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amount of the change in each.
| | Three Months Ended | |
| | June 30, 2001 compared to June 30, 2000 | |
| | Volume | | Rate | | Total | |
| |
| |
| |
| |
| | (Dollar in thousands) | |
| Increase (decrease) in interest income: | | | �� | | | |
| Federal funds sold | $ | 178 | | $ | (175 | ) | $ | 3 | |
| Time deposits at other financial institutions | (1 | ) | - | | (1 | ) |
| Taxable investment securities | 1,196 | | (654 | ) | 542 | |
| Tax-exempt investment securities | (5 | ) | (13 | ) | (18 | ) |
| Loans | 1,705 | | (450 | ) | 1,255 | |
| |
| |
| |
| |
| Total | 3,073 | | (1,292 | ) | 1,781 | |
| |
| |
| |
| |
| Increase (decrease) interest expense: | | | | | | |
| Interest bearing demand | 12 | | (75 | ) | (63 | ) |
| Savings deposits | 151 | | (310 | ) | (159 | ) |
| Time deposits | 886 | | (64 | ) | 822 | |
| Other borrowings | 97 | | (70 | ) | 27 | |
| |
| |
| |
| |
| Total | 1,146 | | (519 | ) | 627 | |
| |
| |
| |
| |
| Increase in net interest income | $ | 1,927 | | $ | (773 | ) | $ | 1,154 | |
| |
| |
| |
| |
| | | | | | | |
| | | | | | | |
| | Six Months Ended | |
| | June 30, 2001 compared to June 30, 2000 | |
| | Volume | | Rate | | Total | |
| |
| |
| |
| |
| | (Dollar in thousands) |
| | | | | | | |
| Increase (decrease) in interest income: | | | | | | |
| Federal funds sold | $ | 444 | | $ | (171 | ) | $ | 273 | |
| Time deposits at other financial institutions | (12 | ) | 1 | | (11 | ) |
| Taxable investment securities | 1,899 | | (852 | ) | 1,047 | |
| Tax-exempt investment securities | (20 | ) | (11 | ) | (31 | ) |
| Loans | 3,839 | | (282 | ) | 3,557 | |
| |
| |
| |
| |
| Total | 6,150 | | (1,315 | ) | 4,835 | |
| |
| |
| |
| |
| Increase (decrease) interest expense: | | | | | | |
| Interest bearing demand | 70 | | (163 | ) | (93 | ) |
| Savings deposits | 495 | | (361 | ) | 134 | |
| Time deposits | 1,859 | | 233 | | 2,092 | |
| Other borrowings | 279 | | (218 | ) | 61 | |
| |
| |
| |
| |
| Total | 2,703 | | (509 | ) | 2,194 | |
| |
| |
| |
| |
| Increase in net interest income | $ | 3,447 | | $ | (806 | ) | $ | 2,641 | |
| |
| |
| |
| |
Provision For Loan Losses. The provision for loan losses for the three and six months ended June 30, 2001 was $789,000 and $1,539,000 which compares with $768,000 and $1,531,000 for the three and six months ended June 30, 2000. See "Allowance for Loan Losses" contained herein. As of June 30, 2001 the allowance for loan losses was $8,802,000 or 1.96% of total loans. At June 30, 2001, nonperforming assets totaled $3,035,000 or .39% of total assets, nonperforming loans totaled $2,453,000 or .55% of total loans and the allowance for loan losses totaled 359% of nonperforming loans. At December 31, 2000, nonperforming assets totaled $2,588,000 or .38% of total assets, nonperforming loans totaled $2,340,000 or .57% of total loans and the allowance for loan losses totaled 351% of nonperforming loans. No assurance can be given that nonperforming loans will not increase or that the allowance for loan losses will be adequate to cover losses inherent in the loan portfolio.
Other Income. Total other income for the three and six months ended June 30, 2001 was $1,574,000 and $2,927,000 which compares with $1,644,000 and $2,791,000 for the same periods in 2000. Service charges on deposit accounts increased by $133,000 and 222,000 or 15.3% and 13.2% to $1,004,000 and $1,906,000 for the three and six months ended June 30, 2001 compared with $871,000 and $1,684,000 for the same three and six month period in 2000. Income from the sale of real estate held for sale or development decreased by $381,000 over 2000 levels, as there were no real estate sales during the second quarter of 2001. The $381,000 gain on sale of real estate recorded during the second quarter of 2000 resulted from the sale of the last remaining land parcel held by MAID, a real estate subsidiary of County Bank. The book value of this property had been previously written off. Other income, which includes commissions earned on the retail sale of securities and annuities and dividends received on life insurance policies, increased by $178,000 and $295,000 or 45% and 41% for the three and six month period ended June 30, 2001 to 570,000 and $1,021,000. This compares to $392,000 and $726,000 in other income for the three and six months ended June 30, 2000.
Other Expense. Noninterest expenses for the three and six months ended June 30, 2001 were $6,476,000 and $12,815,000 which compares with $5,655,000 and $10,798,000 for the three and six months ended June 30, 2000. The primary components of noninterest expenses were salaries and related benefits, equipment expenses, premises and occupancy expenses, professional fees, marketing expenses, goodwill and intangible amortization expense, supplies expense, and other operating expenses.
For the three and six months ended June 30, 2001, salaries and related benefits increased by $613,000 and $1,420,000 over the same period in 2000 to $3,328,000 and $6,641,000. Equipment expenses increased by $26,000 and $60,000 or 4% and 5% during the three and six months ended June 30, 2001 to $680,000 and $1,304,000 from the $654,000 and $1,244,000 experienced during the three and six months ending June 30, 2000. When comparing the results of the three and six months ending June 30, 2001 with the results of the three and six months ending June 30, 2000, premises and occupancy expenses increased $97,000 and $156,000 or 23% and 19%, professional fees decreased by $235,000 and $279,000 or 70% and 56%, marketing expenses increased by $6,000 and decreased by $23,000 or 3% and 5%, supplies expense increased by $66,000 and $140,000 or 35% and 45%, and other expenses increased by $105,000 and $325,000 or 12% and 18%. The salary expense increases were primarily the result of increased staffing levels and normal salary progression. Increased equipment expenses were primarily the result of increased spending on technology and processing equipment. Increased spending on premises and occupancy is primarily related to increased spending on branch office maintenance and repair. Decreased professional fees were primarily the result of decreased use of outside consulting firms. Decreased marketing expenses were primarily the result of decreased media spending on network and cable television advertising. Increased supplies expense was primarily the result of increased use of supplies in supporting increased loan and deposit volumes. The increase in other expense was primarily the result of increased transaction volumes that have accompanied balance sheet growth.
Provision For Income Taxes. The Company recorded an increase of $65,000 and $176,000 in the income tax provision to $806,000 and $1,573,000 for the three and six months ended June 30, 2001compared to the $741,000 and $1,397,000 recorded for the same periods in 2000. For the three and six months ended June 30, 2001, the Company experienced an effective tax rate of 29% compared to 29% and 30% recorded for the same periods in 2000. The increase in income taxes during the six months ending June 30, 2001 as compared to the same period in 2000 is primarily related to an overall increase in pretax earnings. The decrease in effective tax rates during the six months ending June 30, 2001 as compared to the same period in 2000 is primarily related to an increased utilization of federal low income housing tax credits that were obtained from investments in limited partnerships in low-income affordable housing projects and increased investments in Agency Preferred Stock. The Company had investments in these partnerships of $6,026,000 and $5,238,000 as of June 30, 2001 and 2000 which generated estimated tax credits of $150,000 and $300,000 for the three and six months ended June 30, 2001 compared with $105,000 and $245,000 for the same periods in 2000.
Interest Rate Risk Management
Managing interest rate risk is an integral part of managing a banking institution's primary source of income, net interest income. The Company manages the balance between rate–sensitive assets and rate–sensitive liabilities being repriced in any given period with the objective of stabilizing net interest income during periods of fluctuating interest rates. The Company considers its rate–sensitive assets to be those which either contain a provision to adjust the interest rate periodically or mature within one year. These assets include certain loans, investment securities and federal funds sold. Rate–sensitive liabilities are those which allow for periodic interest rate changes within one year and include maturing time certificates, certain savings deposits and interest–bearing demand deposits. The difference between the aggregate amount of assets and liabilities that reprice at various time frames is called the "gap." Generally, if repricing assets exceed repricing liabilities in a time period the Company would be considered to be asset–sensitive. If repricing liabilities exceed repricing assets in a time period the Company would be considered to be liability–sensitive. Generally, the Company seeks to maintain a balanced position whereby there is no significant asset or liability sensitivity within a one–year period to ensure net interest margin stability in times of volatile interest rates. This is accomplished through maintaining a significant level of loans, investment securities and deposits available for repricing within one year.
The following tables set forth the interest rate sensitivity of the Company’s interest–earning assets and interest–bearing liabilities as of June 30, 2001, using the interest rate sensitivity gap ratio. For purposes of the following table, an asset or liability is considered rate–sensitive within a specified period when it can be repriced or matures within its contractual terms.
| | | | | | | | | | | | | | |
| | At June 30, 2001 | |
| |
|
| |
| | | | After 3 | | After 1 | | | | | | | |
| | | | But | | Year But | | | | | | | |
| | Within | | Within | | Within | | After | | Noninterest- | | | |
| | 3 Months | | 12 Months | | 5 Years | | 5 Years | | Bearing | | Total | |
| |
| |
| |
| |
| |
| |
| |
| | | | | | (Dollars In Thousands) | | | | | | |
| Assets | | | | | | | | | | | | | |
| Time deposits at other banks | $ | 500 | | $ | - | | $ | - | | $ | - | | $ | - | | $ | 500 | | |
| Federal funds sold | 6,785 | | - | | - | | - | | - | | 6,785 | | |
| Investment securities | 6,324 | | 4,426 | | 50,652 | | 163,282 | | 17,944 | | 242,628 | | |
| Loans | 239,331 | | 52,918 | | 105,402 | | 50,961 | | - | | 448,612 | | |
| |
| |
| |
| |
| |
| |
| | |
| Total earning assets | 252,940 | | 57,344 | | 156,054 | | 214,243 | | 17,944 | | 698,525 | | |
| Noninterest–earning assets and allowances for loan losses | - | | - | | - | | - | | 72,500 | | 72,500 | | |
| | |
| |
| |
| |
| |
| |
| | |
| Total assets | $ | 252,940 | | $ | 57,344 | | $ | 156,054 | | $ | 214,243 | | $ | 90,444 | | $ | 771,025 | | |
| | | | | | | | | | | | | | |
| Liabilities And | | | | | | | | | | | | | |
| Shareholders' Equity | | | | | | | | | | | | | |
| Demand deposits | $ | - | | $ | - | | $ | - | | $ | - | | $ | 106,174 | | $ | 106,174 | | |
| Savings, money market and NOW deposits | 283,199 | | - | | - | | - | | - | | 283,199 | | |
| Time deposits | 43,940 | | 188,036 | | 34,787 | | - | | - | | 266,763 | | |
| Other interest–bearing liabilities | 7,649 | | 8,000 | | 13,000 | | 13,128 | | - | | 41,777 | | |
| Other liabilities, capital securities and shareholders' equity | - | | - | | - | | 6,000 | | 67,112 | | 73,112 | | |
| |
| |
| |
| |
| |
| |
| | |
| Total liabilities, capital securities and shareholders' equity | 334,788 | | 196,036 | | 47,787 | | 19,128 | | 173,286 | | | 771,025 | | |
| | $ | | |
| Incremental gap | (81,848 | ) | (138,692 | ) | 108,267 | | 195,115 | | (82,842 | ) | | | |
| Cumulative gap | $ | (81,848 | ) | $ | (220,540 | ) | $ | (112,273 | ) | $ | 82,842 | | $ | - | | | | |
| Cumulative gap as a % of earning assets | (11.72 | )% | (31.57 | )% | (16.07 | )% | 11.86 | % | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The Company was liability–sensitive with a negative cumulative one–year gap of $220,540,000 or (31.57)% of interest–earning assets at June 30, 2001. In general, based upon the Company's mix of deposits, loans and investments, increases in interest rates would be expected to result in a decrease in the Company's net interest margin.
The interest rate gaps reported in the tables arise when assets are funded with liabilities having different repricing intervals. Since these gaps are actively managed and change daily as adjustments are made in interest rate views and market outlook, positions at the end of any period may not be reflective of the Company's interest rate sensitivity in subsequent periods. Active management dictates that longer–term economic views are balanced against prospects for short–term interest rate changes in all repricing intervals. For purposes of the analysis above, repricing of fixed–rate instruments is based upon the contractual maturity of the applicable instruments. Actual payment patterns may differ from contractual payment patterns. The change in net interest income may not always follow the general expectations of an asset–sensitive or liability–sensitive balance sheet during periods of changing interest rates, because interest rates earned or paid may change by differing increments and at different time intervals for each type of interest–sensitive asset and liability. As a result of these factors, at any given time, the Company may be more sensitive or less sensitive to changes in interest rates than indicated in the above tables. Greater liability sensitivity would have a more adverse effect on net interest margin if market interest rates were to increase, and a more favorable effect if rates were to decrease.
In order to manage interest rate sensitivity, the Company utilizes a detailed model to expected change in net interest income. The model's estimate of interest rate sensitivity takes into account the differing time intervals and differing rate change increments of each type of interest–sensitive asset and liability. It then measures the projected impact of changes in market interest rates on the Company's net interest income. Based upon the June 30, 2001 mix of interest–sensitive assets and liabilities, given an immediate and sustained decrease in the market interest rates of 2%, this model estimates the Company's cumulative change in net interest income over the next year would decrease by approximately $1,133,000 or 3% of annualized net interest income. Based upon the June 30, 2001 mix of interest-sensitive assets and liabilities, given an immediate and sustained increase in the market interest rates of 2%, this model estimates the Company's cumulative change in net interest income over the next year would decrease by approximately $130,000 or less than 1% of annualized net interest income. No assurance can be given that actual net interest income would not decrease by more than $1,133,000 or 3% in response to a 2% decrease in market interest rates or that net interest income would not decrease by more than $130,000 or less than 1% in response to a 2% increase in market interest rates or that actual net interest income would not decrease substantially if market interest rates increased or decreased by more than 2%.
Financial Condition
Total assets at June 30, 2001 were $771,025,000, an increase of $88,004,000 or 13% compared with total assets of $683,021,000 at December 31, 2000. Net loans were $439,810,000 at June 30, 2001, an increase of $35,353,000 or 9% compared with net loans of $404,457,000 at December 31, 2000. Deposits were $656,136,000 at June 30, 2001, an increase of $54,638,000 or 9% compared with deposits of $601,498,000 at December 31, 2000. The increase in total assets of the Company from December 31, 2000 to June 30, 2001 was primarily the result of increased deposit gathering efforts in gathering retail deposits and the introduction of a brokered certificate of deposit program. During the second quarter of 2001, maturities that occurred within the investment portfolio and new deposit monies received were primarily used to fund loan growth. All short term borrowings were secured by a portion of the Company's investment portfolio.
Total shareholders' equity was $59,139,000 at June 30, 2001, an increase of $5,688,000 or 11% from $53,451,000 at December 31, 2000. The growth in shareholders’ equity between December 31, 2000 and June 30, 2001 was primarily achieved through the retention of accumulated earnings.
Investment Portfolio. The following table sets forth the carrying amount (fair value) of available for sale investment securities as of June 30, 2001 and December 31, 2000.
| | June 30 | | December 31 |
| | (In thousands) | 2001 | | 2000 |
| | |
| |
|
| | Available for sale securities: | | | |
| |
| | | |
| | U.S. government agencies | $ | 38,005 | | $ | 35,939 |
| | State and political subdivisions | 24,536 | | 24,170 |
| | Mortgage–backed securities | 64,141 | | 54,409 |
| | Collateralized mortgage obligations | 38,911 | | 29,015 |
| | Corporate debt securities | 18,817 | | 9,833 |
| | Equity securities | 17,944 | | 2,464 |
| | |
| |
|
| | Carrying amount and fair value | $ | 202,354 | | $ | 155,830 |
| | |
| |
|
The following table sets forth the carrying amount (amortized cost) and fair value of held to maturity securities at June 30, 2001 and December 31, 2000:
| | | | |
| | June 30 | | December 31 |
| | (Dollars in thousands) | 2001 | | 2000 |
| |
| |
|
| | Held To Maturity Securities: | | | |
| |
| | | |
| | Carrying amount (amortized cost): | | | |
| | U.S. Government agency | $ | 4,603 | | $ | 4,595 |
| | State and political subdivisions | 4,317 | | 4,375 |
| | Mortgage-backed securities | 29,435 | | 22,736 |
| | Collateralized mortgage obligations | 1,919 | | 3,516 |
| | |
| |
|
| | | $ | 40,274 | | $ | 35,222 |
| | |
| |
|
| | Fair Value: | | | |
| | U.S. Government agency | $ | 4,746 | | $ | 4,595 |
| | State and political subdivisions | 4,395 | | 4,453 |
| | Mortgage-backed securities | 29,744 | | 22,804 |
| | Collateralized mortgage obligations | 1,958 | | 3,560 |
| | |
| |
|
| | | $ | 40,843 | | $ | 35,412 |
| | |
| |
|
The following table sets forth the maturities of the Company's debt security investments at June 30, 2001 and the weighted average yields of such securities calculated on a book value basis using the weighted average yields within each scheduled maturity grouping. Maturities of mortgage-backed securities and collateralized mortgage obligations are stipulated in their respective contracts. However, actual maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties. Yields on municipal securities have been recalculated on a tax–equivalent basis.
| | At June 30, 2001 |
| |
|
| | Within One Year | | One To 5 Years | | Five To Ten Years | | Over Ten Years | | Total |
| | Amount | | Yield | | Amount | | Yield | | Amount | | Yield | | Amount | | Yield | | Amount |
| (Dollars in thousands) | | | | | | | | | | | | | | | | | |
| Available for Sale Securities: | | | | | | | | | | | | | | | | | |
| U.S. Government agency | $ | - | | - | % | $ | 26,136 | | 6.66 | % | $ | 11,869 | | 7.14 | % | $ | - | | - | | $ | 38,005 |
| State and political | - | | - | | - | | - | | 9,674 | | 6.74 | | 14,862 | | 7.02 | | 24,536 |
| Mortgage–backed securities | 3 | | 8.99 | | 21 | | 9.26 | | 5,446 | | 5.97 | | 58,671 | | 6.78 | | 64,141 |
| Collateralized mortgage obligations | - | | - | | - | | - | | - | | - | | 38,911 | | 5.84 | | 38,911 |
| Corporate debt securities | 682 | | 6.17 | | 12,865 | | 5.78 | | - | | - | | 5,270 | | 5.39 | | 18,817 |
| |
|
| Carrying amount and fair value | 685 | | 6.18 | | 39,022 | | 6.37 | | 26,989 | | 6.76 | | 117,714 | | 6.44 | | 184,410 |
| |
|
| Held to maturity securities: | | | | | | | | | | | | | | | | | |
| U.S. Government agency | - | | - | | 4,603 | | 6.70 | | - | | - | | - | | - | | 4,603 |
| State and political | - | | - | | - | | - | | - | | - | | 4,317 | | 8.10 | | 4,317 |
| Mortgage-backed securities | - | | - | | - | | - | | - | | - | | 29,435 | | 7.09 | | 29,435 |
| Collateralized mortgage obligations | - | | - | | - | | - | | - | | - | | 1,919 | | 7.72 | | 1,919 |
| |
|
| Carrying amount (amortized cost) | - | | - | | 4,603 | | 6.70 | | - | | - | | 35,671 | | 7.25 | | 40,274 |
| |
|
| Total debt securities | $ | 685 | | 6.18 | % | $ | 43,625 | | 6.40 | % | $ | 26,989 | | 6.76 | % | $ | 153,385 | | 6.63 | % | $ | 224,684 |
| |
| |
| |
| |
| |
| |
| |
| |
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
In the preceding table, mortgage-backed securities and collateralized mortgage obligations are shown repricing at the time of maturity rather than in accordance with their principal amortization schedules. The Company does not own securities of a single issuer whose aggregate book value is in excess of 10% of its total equity.
Loan Portfolio. The following table shows the composition of the Company's loan portfolio at the dates indicated.
| | | | | | | | | |
| | June 30 | | December 31 | | |
| | (In thousands) | 2001 | | 2000 | | |
| | |
| |
| |
| | Loan Categories: | Dollar Amount | | Percentof loans | | Dollar Amount | | Percentof loans |
| | |
| |
| |
| |
| |
| | Commercial | $ | 90,509 | | 20 | % | $ | 71,920 | | 17 | % | |
| | Agricultural | 88,441 | | 20 | | 84,032 | | 20 | | |
| | Real estate construction | 38,013 | | 8 | | 30,133 | | 7 | | |
| | Real estate mortgage | 153,530 | | 34 | | 141,575 | | 35 | | |
| | Consumer | 78,119 | | 18 | | 85,004 | | 21 | | |
| | |
| |
| |
| |
| | |
| | Total | 448,612 | | 100 | % | 412,664 | | 100 | % | |
| | |
| |
| |
| |
| | |
| | Less allowance for loan losses | (8,802 | ) | | | (8,207 | ) | | | |
| | |
| | | |
| | | | |
| | Net loans | $ | 439,810 | | | | $ | 404,457 | | | | |
| |
| | | |
| | | | |
| | | | | | | | | | | | | |
The following table shows the maturity distribution of the portfolio of commercial, agricultural, real estate construction, real estate mortgage, and consumer loans at June 30, 2001:
| | At June 30, 2001 |
| |
|
| | | | After 1 but | | | | |
| | Within 1 year | | within 5 years | | After 5 years | | Total |
| |
|
| | (In thousands) |
| | | | | | | | |
| Commercial and agricultural | | | | | | | |
| | Loans with floating interest rates | $ | 67,067 | | $ | 38,014 | | $ | 22,161 | | $ | 127,242 |
| | Loans with fixed interest rates | 7,599 | | 26,698 | | 17,411 | | 51,708 |
| |
| |
| |
| |
|
| | Subtotal | 74,666 | | 64,712 | | 39,572 | | 178,950 |
| Real estate construction | | | | | | | |
| | Loans with floating interest rates | 22,083 | | 6,455 | | 6,307 | | 34,845 |
| | Loans with fixed interest rates | 1,767 | | 209 | | 1,192 | | 3,168 |
| |
| |
| |
| |
|
| | Subtotal | 23,850 | | 6,664 | | 7,499 | | 38,013 |
| Real estate mortgage | | | | | | | |
| | Loans with floating interest rates | 9,377 | | 21,275 | | 77,325 | | 107,977 |
| | Loans with fixed interest rates | 1,891 | | 5,868 | | 37,794 | | 45,553 |
| |
| |
| |
| |
|
| | Subtotal | 11,268 | | 27,143 | | 115,119 | | 153,530 |
| Consumer Installment | | | | | | | |
| | Loans with floating interest rates | 12,482 | | 6,951 | | - | | 19,433 |
| | Loans with fixed interest rates | 3,994 | | 51,533 | | 3,159 | | 58,686 |
| |
| |
| |
| |
|
| | Subtotal | 16,476 | | 58,484 | | 3,159 | | 78,119 |
| |
| |
| |
| |
|
| | Total | $ | 126,260 | | $ | 157,003 | | $ | 165,349 | | $ | 448,612 |
| |
| |
| |
| |
|
| | | | | | | | | | | | | |
Off-Balance Sheet Commitments. The following table shows the distribution of the Company's undisbursed loan commitments at the dates indicated.
| | June 30, | | December 31, |
| | 2001 | | 2000 |
| |
| |
|
| | (In thousands) |
| | | | |
| | Letters of credit | $ | 2,328 | | $ | 1,320 |
| | Commitments to extend credit | 168,449 | | 144,480 |
| | |
| |
|
| | Total | $ | 170,777 | | $ | 145,800 |
| |
| |
|
Other Interest-Earning Assets. The following table relates to other interest-earning assets not disclosed previously for the dates indicated. This item consists of a salary continuation plan for the Company's executive management and deferred retirement benefits for participating board members. The plan is informally linked with universal life insurance policies for the salary continuation plan. Income from these policies is reflected in noninterest income.
| | At June 30, | | At December 31, |
| | 2001 | | 2000 |
| |
| |
|
| | (In thousands) |
| | | | |
| Cash surrender value of life insurance | $ | 12,797 | | $ | 6,075 |
| |
| |
|
| | | | | |
Nonperforming Assets. Nonperforming assets include nonaccrual loans, loans 90 days or more past due, restructured loans and other real estate owned.
Nonperforming loans are those which the borrower fails to perform in accordance with the original terms of the obligation and include loans on nonaccrual status, loans past due 90 days or more and still accruing and restructured loans. The Company generally places loans on nonaccrual status and accrued but unpaid interest is reversed against the current year's income when interest or principal payments become 90 days or more past due unless the outstanding principal and interest is adequately secured and, in the opinion of management, is deemed in the process of collection. Interest income on nonaccrual loans is recorded on a cash basis. Payments may be treated as interest income or return of principal depending upon management's opinion of the ultimate risk of loss on the individual loan. Cash payments are treated as interest income where management believes the remaining principal balance is fully collectible. Additional loans not 90 days past due may also be placed on nonaccrual status if management reasonably believes the borrower will not be able to comply with the contractual loan repayment terms and collection of principal or interest is in question.
A "restructured loan" is a loan on which interest accrues at a below market rate or upon which certain principal has been forgiven so as to aid the borrower in the final repayment of the loan, with any interest previously accrued, but not yet collected, being reversed against current income. Interest is reported on a cash basis until the borrower's ability to service the restructured loan in accordance with its terms is established. The Company had no restructured loans as of the dates indicated in the table below.
The following table summarizes nonperforming assets of the Company at June 30, 2001 and December 31, 2000:
| | June 30 | | December 31 | |
| | 2001 | | 2000 | |
| |
| |
| |
| | (In thousands) |
| | | | | |
| | Nonaccrual loans | $ | 2,015 | | $ | 2,243 | |
| | Accruing loans past due 90 days or more | 437 | | 97 | |
| | |
| |
| |
| | Total nonperforming loans | 2,452 | | 2,340 | |
| | Other real estate owned | 583 | | 248 | |
| | |
| |
| |
| | Total nonperforming assets | $ | 3,035 | | $ | 2,588 | |
| | |
| |
| |
| | | | | | |
| | Nonperforming loans to total loans | .55 | % | .57 | % |
| | Nonperforming assets to total assets | .39 | % | .38 | % |
Contractual accrued interest income on loans on nonaccrual status as of June 30, 2001 and 2000 that would have been recognized if the loans had been current in accordance with their loan agreement was approximately $82,000 and $60,000 for the six month periods ended June 30, 2001 and 2000.
At June 30, 2001, nonperforming assets represented .39% of total assets, an increase of .01% of total assets compared to the .38% at December 31, 2000. Nonperforming loans represented .68% of total loans at June 30, 2001, an increase of .11% of total loans compared to the .57% at December 31, 2000. Nonperforming loans that were secured by first deeds of trust on real property were $0 at June 30, 2001 and December 31, 2000. Other forms of collateral such as inventory and equipment secured the remaining nonperforming loans as of each date. No assurance can be given that the collateral securing nonperforming loans will be sufficient to prevent losses on such loans.
The increase in nonperforming loans and nonperforming assets at June 30, 2001 compared with the levels as of December 31, 2000, was due primarily to a increase in non performing agricultural and commercial loans and an increase in foreclosure properties being held for sale.
At June 30, 2001, the Company had $583,000 in three propertues acquired through foreclosure. The properties are carried at the lower of its estimated market value, as evidenced by an independent appraisal, or the recorded investment in the related loan, less estimated selling expenses. At foreclosure, if the fair value of the real estate is less than the Company's recorded investment in the related loan, a charge is made to the allowance for loan losses. No assurance can be given that the Company will sell such property during 2001 or at any time or the amount for which such property might be sold.
Management defines impaired loans, regardless of past due status on loans, as those on which principal and interest are not expected to be collected under the original contractual loan repayment terms. An impaired loan is charged off at the time management believes the collection process has been exhausted. At June 30, 2001 and December 31, 2000, impaired loans were measured based on the present value of future cash flows discounted at the loan's effective rate, the loan's observable market price or the fair value of collateral if the loan is collateral–dependent. Impaired loans at June 30, 2001 were $2,452,000, on account of which the Company had made provisions to the allowance for loan losses of $589,000.
Except for loans that are disclosed above, there were no assets as of June 30, 2001, where known information about possible credit problems of the borrower causes management to have serious doubts as to the ability of the borrower to comply with the present loan repayment terms and which may become nonperforming assets. Given the magnitude of the Company’s loan portfolio, however, it is always possible that current credit problems may exist that may not have been discovered by management.
Allowance for Loan Losses
The following table summarizes the loan loss experience of the Company for the six months ended June 30, 2001 and 2000, and the year ended December 31, 2000:
| | June 30, | | December 31, | |
| | 2001 | | 2000 | | 2000 | |
| |
| |
| |
| |
| | In thousands | |
| Allowance for Loan Losses: | | | | | | |
| Balance at beginning of period | $ | 8,207 | | $ | 6,542 | | $ | 6,542 | |
| |
| |
| |
| |
| Provision for loan losses | 1,539 | | 1,531 | | 3,286 | |
| Charge-offs: | | | | | | |
| | Commercial and agricultural | 188 | | 416 | | 423 | |
| | Real estate construction | - | | - | | - | |
| | Consumer | 1,088 | | 935 | | 1,971 | |
| |
| |
| |
| |
| | Total charge–offs | 1,276 | | 1,351 | | 2,394 | |
| |
| |
| |
| |
| Recoveries | | | | | | |
| | Commercial and agricultural | 125 | | 41 | | 410 | |
| | Real estate-mortgage | - | | - | | - | |
| | Consumer | 207 | | 162 | | 363 | |
| |
| |
| |
| |
| | Total recoveries | 332 | | 203 | | 773 | |
| |
| |
| |
| |
| Net charge–offs | 944 | | 1,148 | | 1,621 | |
| |
| |
| |
| |
| Balance at end of period | $ | 8,802 | | $ | 6,925 | | $ | 8,207 | |
| |
| |
| |
| |
| | | | | | | |
| Loans outstanding at period-end | $ | 448,612 | | $ | 368,501 | | $ | 412,664 | |
| |
| |
| |
| |
| Average loans outstanding | $ | 417,685 | | $ | 346,003 | | $ | 369,367 | |
| |
| |
| |
| |
| | | | | | | |
| Annualized net charge-offs to average loans | 0.45 | % | 0.66 | % | 0.44 | % |
| | | | | | | |
| Allowance for loan losses | | | | | | |
| | To total loans | 1.96 | % | 1.88 | % | 1.99 | % |
| | To nonperforming assets | 289.99 | % | 373.88 | % | 317.12 | % |
| | | | | | | |
| | | | | | | | | | | |
The Company maintains an allowance for loan losses at a level considered by management to be adequate to cover the inherent risks of loss associated with its loan portfolio under prevailing economic conditions. In determining the adequacy of the allowance for loan losses, management takes into consideration growth trends in the portfolio, examination of financial institution supervisory authorities, prior loan loss experience for the Company, concentrations of credit risk, delinquency trends, general economic conditions, the interest rate environment and internal and external credit reviews. In addition, the risks management considers vary depending on the nature of the loan. The normal risks considered by management with respect to agricultural loans include the fluctuating value of the collateral, changes in weather conditions and the availability of adequate water resources in the Company's local market area. The normal risks considered by management with respect to real estate construction loans include fluctuation in real estate values, the demand for improved commercial and industrial properties and housing, the availability of permanent financing in the Company's market area and borrowers' ability to obtain permanent financing. The normal risks considered by management with respect to real estate mortgage loans include fluctuations in the value of real estate. Additionally, the Company relies on data obtained through independent appraisals for significant properties to determine loss exposure on nonperforming loans.
The balance in the allowance is affected by the amounts provided from operations, amounts charged off and recoveries of loans previously charged-off. The Company recorded provisions for loan losses for the three and six months ended June 30, 2001 of $789,000 and $1,539,000 compared with $768,000 and $1,531,000 for the same periods during 2000. The increase in loan loss provisions in 2001 compared to 2000 was primarily due to loan portfolio growth that has occurred over the last several quarters.
The Company's charge-offs, net of recoveries, were $944,000 for the six months ended June 30, 2001 compared with net charge-offs of $1,148,000 for the same six months in 2000. The decrease in net charge-offs during the first six months of 2001 compared with the same period in 2000 was primarily due to decreased charge-offs in the commercial and agricultural segments of the loan portfolio.
As of June 30, 2001, the allowance for loan losses were $8,802,000 or 1.96% of total loans outstanding, compared with $8,207,000 or 1.99% of total loans outstanding as of December 31, 2000. During the second quarter of 2001, the allowance for loan loss increased $595,000 or 7% compared to December 31, 2000 levels.
The Company uses a method developed by management determining the appropriate level of its allowance for loan losses. This method applies relevant risk factors to the entire loan portfolio, including nonperforming loans. The methodology is based, in part, on the Company's loan grading and classification system. The Company grades its loans through internal reviews and periodically subjects loans to external reviews which then are assessed by the Company's audit committee. Credit reviews are performed on a monthly basis and the quality grading process occurs on a quarterly basis. Risk factors applied to the performing loan portfolio are based on the Company's past loss history considering the current portfolio's characteristics, current economic conditions and other relevant factors. General reserves are applied to various categories of loans at percentages ranging up to 1.8% based on the Company's assessment of credit risks for each category. Risk factors are applied to the carrying value of each classified loan: (i) loans internally graded "Watch" or "Special Mention" carry a risk factor from 1.0% to 2.0%; (ii) "Substandard" loans carry a risk factor from 15% to 40% depending on collateral securing the loan, if any; (iii) "Doubtful" loans carry a 50% risk factor; and (iv) "Loss" loans are charged off 100%. In addition, a portion of the allowance is specially allocated to identified problem credits. The analysis also includes reference to factors such as the delinquency status of the loan portfolio, inherent risk by type of loans, industry statistical data, recommendations made by the Company's regulatory authorities and outside loan reviewers, and current economic environment. Important components of the overall credit rating process are the asset quality rating process and the internal loan review process.
The allowance is based on estimates and ultimate future losses may vary from current estimates. It is always possible that future economic or other factors may adversely affect the Company's borrowers, and thereby cause loan losses to exceed the current allowance. In addition, there can be no assurance that future economic or other factors will not adversely affect the Company's borrowers, or that the Company's asset quality may not deteriorate through rapid growth, failure to enforce underwriting standards, failure to maintain appropriate underwriting standards, failure to maintain an adequate number of qualified loan personnel, failure to identify and monitor potential problem loans or for other reasons, and thereby cause loan losses to exceed the current allowance.
The allocation of the allowance to loan and business risk components is an estimate by management of the relative overall risk characteristics of the Company. No assurance can be given that losses in one or more risk categories will not exceed the portion of the allowance allocated to that category or even exceed the entire allowance.
External Factors Affecting Asset Quality. As a result of the Company's loan portfolio mix, the future quality of its assets could be affected by adverse economic trends in its region or in the agricultural community. These trends are beyond the control of the Company.
California is an earthquake-prone region. Accordingly, a major earthquake could result in material loss to the Company. At times the Company's service area has experienced other natural disasters such as floods and droughts. The Company's properties and substantially all of the real and personal property securing loans in the Company's portfolio are located in California. The Company faces the risk that many of its borrowers face uninsured property damage, interruption of their businesses or loss of their jobs from earthquakes, floods or droughts. As a result these borrowers may be unable to repay their loans in accordance with their terms and the collateral for such loans may decline significantly in value. The Company's service area is a largely agricultural region and therefore is highly dependent on a reliable supply of water for irrigation purposes. The area obtains nearly all of its water from the run-off of melting snow in the mountains of the Sierra Nevada to the east. Although such sources have usually been available in the past, water supply can be adversely affected by light snowfall over one or more winters or by any diversion of water from its present natural courses. Any such event could impair the ability of many of the Company's borrowers to meet their obligations to the Company.
California is a region that also experiences flooding. The Company is not aware of any material adverse effects to the collateral position of the Company as a result of flooding, but no assurance can be given that future flooding will not have an adverse impact on the Company and its borrowers and depositors.
Liquidity. In order to maintain adequate liquidity, the Company must have sufficient resources available at all times to meet its cash flow requirements. The need for liquidity in a banking institution arises principally to provide for deposit withdrawals, the credit needs of its customers and to take advantage of investment opportunities as they arise. The Company may achieve desired liquidity from both assets and liabilities. The Company considers cash and deposits held in other banks, federal funds sold, other short term investments, maturing loans and investments, payments of principal and interest on loans and investments and potential loan sales as sources of asset liquidity. Deposit growth and access to credit lines established with correspondent banks and market sources of funds are considered by the Company as sources of liability liquidity. The Holding Company’s primary source of liquidity is from dividends received from the Bank. Dividends from the Bank are subject to certain regulatory limitations.
The Company reviews its liquidity position on a regular basis based upon its current position and expected trends of loans and deposits. These assets include cash and deposits in other banks, available–for–sale securities and federal funds sold. The Company's liquid assets totaled $244,240,000 and $203,698,000 on June 30, 2001 and December 31, 2000, respectively, and constituted 32%, and 30%, respectively, of total assets on those dates. Liquidity is also affected by the collateral requirements of its public deposits and certain borrowings. Total pledged securities were $124,454,000 at June 30, 2001 compared with $124,396,000 at December 31, 2000.
Although the Company's primary sources of liquidity include liquid assets and a stable deposit base, the Company maintains lines of credit with the Federal Reserve Bank of San Francisco, Federal Home Loan Bank of San Francisco and Pacific Coast Bankers' Bank aggregating $59,045,000 of which $31,000,000 was outstanding as of June 30, 2001 and $14,600,000 was outstanding as of December 31, 2000. Funds used to reduce outstanding short term borrowings during the second quarter of 1999 were obtained from maturities and curtailments that occurred within the investment portfolio and deposit gathering efforts. Management believes that the Company maintains adequate amounts of liquid assets to meet its liquidity needs. The Company's liquidity might be insufficient if deposit withdrawals were to exceed anticipated levels. Deposit withdrawals can increase if a company experiences financial difficulties or receives adverse publicity for other reasons, or if its pricing, products or services are not competitive with those offered by other institutions.
Capital Resources Capital serves as a source of funds and helps protect depositors against potential losses. The primary source of capital for the company has been internaly generated capital through retained earnings. The Company’s shareholder equity increased by $5,688,000 or 11% from December 31, 2000 to June 30, 2001.
The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate mandatory and possibly additional discretionary actions by the regulators that, if undertaken, could have a material adverse effect on the Company’s financial statements. Management believes, as of June 30, 2001, that the Company and the Bank met all capital requirements to which they are subject. The Company’s leverage capital ratio at June 30, 2001 was 8.24% as compared with 7.56% as of December 31, 2000. The Company’s total risk based capital ratio at June 30, 2001 was 11.53% as compared to 10.92% as of December 31, 2000.
The Company’s and Bank’s actual capital amounts and ratios met all regulatory requirements as of June 30, 2001 and were summarized as follows:
| | | | | | | | | | To Be Well Capitalized | |
| | | | | | | | | | Under Prompt | |
| | | | | | For Capital | | Corrective | |
| In thousands | Actual | | Adequacy Purposes | | Action Provisions: | |
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| The Company: | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | |
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| As of June 30, 2001 | | | | | | | | | | | | |
| Total capital (to risk weighted assets) | $ | 67,379 | | 11.53 | % | $ | 46,748 | | 8.0 | % | $ | 58,435 | | 10.0 | % |
| Tier 1 capital (to risk weighted assets) | 60,056 | | 10.28 | | 23,374 | | 4.0 | | 35,061 | | 6.0 | |
| Leverage ratio* | 60,056 | | 8.24 | | 29,168 | | 4.0 | | 36,460 | | 5.0 | |
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| The Bank: | | | | | | | | | | | | |
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| As of June 30, 2001 | | | | | | | | | | | | |
| Total capital (to risk weighted assets) | $ | 60,498 | | 10.45 | % | $ | 46,304 | | 8.0 | % | $ | 57,880 | | 10.0 | % |
| Tier 1 capital (to risk weighted assets) | 53,244 | | 9.20 | | 23,152 | | 4.0 | | 34,728 | | 6.0 | |
| Leverage ratio* | 53,244 | | 7.36 | | 28,931 | | 4.0 | | 36,164 | | 5.0 | |
* The leverage ratio consists of Tier 1 capital divided by quarterly average assets. The minimum leverage ratio is 3 percent for banking organizations that do not anticipate significant growth and that have well-diversified risk, excellent asset quality and in general, are considered top-rated banks.
The Company has no formal dividend policy, and dividends are issued solely at the discretion of the Company’s Board of Directors, subject to compliance with regulatory requirements. In order to pay any cash dividends, the Company must receive payments of dividends or management fees from the Bank. There are certain regulatory limitations on the payment of cash dividends by banks.
Deposits. Deposits are the Company's primary source of funds. At June 30, 2001, the Company had a deposit mix of 31% in savings deposits, 41% in time deposits, 12% in interest–bearing checking accounts and 16% in noninterest-bearing demand accounts. Noninterest-bearing demand deposits enhance the Company's net interest income by lowering its costs of funds.
The Company obtains deposits primarily from the communities it serves. No material portion of its deposits has been obtained from or is dependent on any one person or industry. The Company's business is not seasonal in nature. The Company accepts deposits in excess of $100,000 from customers. These deposits are priced to remain competitive. At June 30, 2001, the Company had brokered deposits of $1,278,000.
Maturities of time certificates of deposits of $100,000 or more outstanding at June 30, 2001 and December 31, 2000 are summarized as follows:
| | June 30, 2001 | | December 31, 2000 | |
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| | Three months or less | $ | 20,829 | | $ | 45,233 | |
| | Over three to six months | 53,464 | | 20,643 | |
| | Over six to twelve months | 24,110 | | 16,526 | |
| | Over twelve months | 12,790 | | 10,252 | |
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| | Total | $ | 111,193 | | $ | 93,654 | |
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Borrowed Funds
The increase in other borrowings during the second quarter of 2001 was primarily due to the use of a leveraged investment strategy that used additional FHLB borrowings to fund purchases of investment securities within the Bank’s investment portfolio.
Impact of Inflation
The primary impact of inflation on the Company is its effect on interest rates. The Company’s primary source of income is net interest income which is affected by changes in interest rates. The Company attempts to limit inflation’s impact on its net interest margin through management of rate sensitive assets and liabilities and the analysis of interest rate sensitivity. The effect of inflation on premises and equipment, as well as on interest expenses, has not been significant for the periods covered in this report.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
In the normal course of business, the Company is exposed to market risk which includes both price and liquidity risk. Price risk is created from fluctuations in interest rates and the mismatch in repricing characteristics of assets, liabilities, and off balance sheet instruments at a specified point in time. Mismatches in interest rate repricing among assets and liabilities arise primarily through the interaction of the various types of loans versus the types of deposits that are maintained as well as from management's discretionary investment and funds gathering activities. Liquidity risk arises from the possibility that the Company may not be able to satisfy current and future financial commitments or that the Company may not be able to liquidate financial instruments at market prices. Risk management policies and procedures have been established and are utilized to manage the Company's exposure to market risk.
On June 30, 2001, the interest rate position of the Company was relatively neutral as the impact of a gradual parallel 100 basis-point rise or fall in interest rates over the next 12 months was estimated to be approximately 1-2% of net interest income when compared to stable rates. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Risk Management."
PART II - Other Information
Item 1. Legal Proceedings
The Company is a party to routine litigation in the ordinary course of its business. In the opinion of management, pending and threatened litigation is not likely to have a material adverse effect on the financial condition or results of operations of the Company.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Securities Holders.
| (a.) | Annual Meeting was held April 17, 2001. The number of shares represented in person or by proxy and constituting a quorum was 3,395,380 which equals approximately 74% of the shares outstanding. |
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| (b.) | Election of directors | Votes For |
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| | John D. Fawcett | 3,109,730 |
| | Thomas T. Hawker | 3,128,037 |
| | Curtis A. Riggs | 3,142,411 |
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| (c.) | Proposal to increase the number of shares available for grant under the Company’s Stock Option Plan. The proposal was approved with 2,780,341 voting in favor and 588,846 were opposed. |
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Item 5. Other Information.
In the opinion of management, there is no additional information relating to these periods being reported which warrants inclusion in the report.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
| Exhibits | | Description of Exhibits | | |
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| 3.1 | | Articles of Incorporation, incorporated by reference from (filed as Exhibit 3.1 of the Company’s June 30, 1996 Form 10Q filed with the SEC on or about November 14, 1996). | | * |
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| 3.2 | | Bylaws (filed as Exhibit 3.2 of the Company’s June 30, 1996 Form 10Q filed with the SEC on or about November 14, 1996.) | | * |
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| 10 | | Employment agreement between Thomas T. Hawker and Capital Corp. (Filed as Exhibit 10 of the Company’s 1996 form 10K filed with the SEC on or about June 30, 1997) | | * |
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| 10.1 | | Administration Construction Agreement (filed as Exhibit 10.4 of the Company’s 1995 Form 10K filed with the SEC on or about June 30, 1996). | | * |
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| 10.2 | | Stock Option Plan (filed as Exhibit 10.6 of the Company’s 1995 Form 10K filed with the SEC on or about March 31, 1996). | | * |
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| 10.3 | | 401 (k) Plan (filed as Exhibit 10.7 of the Company’s 1995 Form 10K filed with the SEC on or about March 31, 1996). | | * |
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| 10.4 | | Employee Stock Ownership Plan (filed as Exhibit 10.8 of the Company’s 1995 Form 10K filed with the SEC on or about March 31, 1996). | | * |
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| 10.5 | | Purchase Agreement for three branches from Bank of America is incorporated herein by reference from Exhibit 2.1 Registration Statement on Form S-2 filed July 14, 1997, File No. 333-31193. | | * |
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| 10.6 | | Change-in-Control Agreement between R. Dale McKinney and Capital Corp of the West (filed as Exhibit 10.6 of the Company’s 1999 Form 10K with the SEC on or about March 17, 2000). | | * |
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| 10.7 | | Deferred Compensation Agreement between members of the board of directors and Capital Corp of the West (filed as Exhibit 10.7 of the Company’s 1999 Form 10K with the SEC on or about March 17, 2000). | | * |
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| 10.8 | | Executive Salary Continuation Agreement between certain members of executive management and Capital Corp of the West (filed as Exhibit 10.8 of the Company’s 1999 Form 10K with the SEC on or about March 17, 2000). | | * |
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(b) Reports on Form 8-K
None
* Denotes documents which have been incorporated by reference.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.
| | CAPITAL CORP OF THE WEST | |
| | (Registrant) | |
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| | By /s/ Thomas T. Hawker |
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| | Thomas T. Hawker | |
| | President and |
| | Chief Executive Officer |
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| | By /s/ R. Dale McKinney |
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| | R. Dale McKinney | |
| | Chief Financial Officer |
