AMERICAN PATRIOT FINANCIAL GROUP, INC. AND SUBSIDIARY
Greeneville, Tennessee
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Summary of Significant Accounting Policies
Nature of Business:
American Patriot Financial Group, Inc. (the “Company”) is a bank holding company whose business is conducted by its wholly-owned subsidiary, American Patriot Bank (the “Bank”). American Patriot Bank is engaged in the business of originating loans primarily within its lending area, Greeneville and Greene County in Tennessee. The Bank obtains deposits both inside and outside of its primary lending area. The Company was organized in October 2003. The Company had minimal assets, liabilities or operations until January, 2004, when it acquired the Bank in a Plan of Share Exchange whereby the stockholders exchanged their shares of ownership in the Bank for shares of ownership in the Company on a one-for-one basis. As a part of the Plan of Share Exchange, the Bank became a wholly owned subsidiary of the Company.
The following is a description of the significant policies used in the preparation of the accompanying consolidated financial statements.
Basis of Presentation:
These consolidated financial statements include the accounts of the American Patriot Financial Group, Inc. and its wholly owned subsidiary, American Patriot Bank. Significant intercompany transactions and accounts are eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Operating results for the three and six months ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. Certain amounts from prior period financial statements have been reclassified to conform to current period’s presentation.
Use of Estimates:
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant management accounting estimate is the allowance for loan losses. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
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Note 2. Stock Options and Awards
On July 1, 2005, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123R”). This statement supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25), which the Company had followed until the adoption of SFAS No. 123R. The revised statement addresses the accounting for share-based payment transactions with employees and other third parties, eliminates the ability to account for share-based compensation transactions using APB 25 and requires that the compensation costs relating to such transactions be recognized in the consolidated statement of income. In anticipation of adopting SFAS No. 123R, on May 17, 2005 the Board of Directors approved that all non-vested employee stock options granted to become fully vested and exercisable as of that date in order to avoid recognition of compensation costs in the consolidated statement of income in future periods. Any stock options granted after May 17, 2005 are fully exercisable on the date granted. Accordingly, no compensation cost was recognized prior to the adoption of SFAS No. 123R on July 1, 2005. No additional options were granted during the period ended June 30, 2007, therefore, no compensation cost is recognized in the consolidated statement of income for the period ended June 30, 2007. The aggregate intrinsic value of options was $1,089,839 at June 30, 2007. The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying option and the quoted market price of the Company’s common stock of $9.00 per common share for the 223,629 options that were in-the-money at June 30, 2007.
Note 3. Earnings Per Share of Common Stock
Basic earnings per share (EPS) of common stock is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share of common stock is computed by dividing net income by the weighted average number of common shares and potential dilutive common shares outstanding during the period. Stock options are regarded as potential common shares. Potential common shares are computed using the treasury stock method. For the three months ended June 30, 2007, 19,000 options are excluded from the effect of dilutive securities because they are anti-dilutive; 85,344 options are similarly excluded from the effect of dilutive securities for the three months ended June 30, 2006.
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The following is a reconciliation of the numerators and denominators used in the basic and diluted earnings per share computations for the three months and six months ended June 30, 2007 and 2006:
| | Three Months Ended June 30, | |
| | 2007 | | 2006 | |
| | Income
(Numerator) | | Shares
(Denominator) | | Income
(Numerator) | | Shares
(Denominator) | |
| | | | | | | | | |
Basic EPS | | | | | | | | | |
Income available to common stockholders | | $ | 140,979 | | 2,310,771 | | $ | (46,964 | ) | 2,310,771 | |
| | | | | | | | | |
Effect of dilutive securities Stock options outstanding | | — | | 121,008 | | — | | 132,031 | |
| | | | | | | | | |
Diluted EPS | | | | | | | | | |
Income available to common shareholders plus assumed conversions | | $ | 140,979 | | 2,431,779 | | $ | (46,964 | ) | 2,442,802 | |
| | Six Months Ended June 30, | |
| | 2007 | | 2006 | |
| | Income
(Numerator) | | Shares
(Denominator) | | Income
(Numerator) | | Shares
(Denominator) | |
| | | | | | | | | |
Basic EPS | | | | | | | | | |
Income available to common stockholders | | $ | 242,070 | | 2,310,771 | | $ | 118,380 | | 2,310,771 | |
| | | | | | | | | |
Effect of dilutive securities Stock options outstanding | | — | | 120,319 | | — | | 139,685 | |
| | | | | | | | | |
Diluted EPS | | | | | | | | | |
Income available to common shareholders plus assumed conversions | | $ | 242,070 | | 2,431,090 | | $ | 118,380 | | 2,450,456 | |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Impact of Inflation
The consolidated financial statements and related financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States and practices within the banking industry that require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation.
Critical Accounting Estimates
The Company follows generally accepted accounting principles that are recognized in the United States, along with general practices within the banking industry. In connection with the application of those principles and practices, we have made judgments and estimates which, in the case of our allowance for loan and lease losses (ALLL), are material to the determination of our financial position and results of operation. Other estimates relate to the valuation of assets acquired in connection with foreclosures or in satisfaction of loans, and realization of deferred tax assets.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board ratified a consensus opinion reached by the Emerging Issues Task Force on Issue 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements, (“EITF 06-04”) which requires employers that enter into endorsement split-dollar life insurance arrangements that provide an employee with a postretirement benefit to recognize a liability for the future benefits promised based on the substantive agreement made with the employer. Whether the accrual is based on a death benefit or on the future cost of maintaining the insurance would depend on what the employer has effectively agreed to provide during the employee’s retirement. The purchase of an endorsement-type life insurance policy does not qualify as a settlement of the liability.
The consensus in EIFT 06-4 is effective for fiscal years beginning after December 15, 2007. The Company intends to adopt EIFT 06-4 effective January 1, 2008. The Company is currently evaluating the impact this guidance will have on the Company’s financial position and results of operation.
In September 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force in Issue 06-5, Accounting for Purchases of Life Insurance- Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No.85-47, Accounting for Purchases of Life Insurance (“EIFT 06-05”). EIFT 06-5 is effective for the fiscal years beginning after December 15, 2006. EIFT 06-5 pertains to companies with life insurance asset on a company’s balance sheet. The Company adopted this EIFT effective January 1, 2007 and it did not have a material impact on the Company’s financial position and results of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of this standard is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is effective as of the beginning of fiscal years beginning after November 15, 2007, with early adoption permitted under certain circumstances. The Company did not choose to early adopt this standard.
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In March 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 156, Accounting for Servicing of Financial Assets, an Amendment of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, (“SFAS 140”) which requires that all separately recognized servicing assets and liabilities be initially measured at fair value, if practicable, and requires entities to elect either fair value measurement with changes in fair value reflected in earnings or the amortization and impairment requirements of Statement 140 for subsequent measurement. SFAS 156 is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company adopted SFAS 156 on January 1, 2007. The adoption of SFAS 156 did not have any material impact on the Company’s consolidated financial condition or results of operations.
In July 2006, FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (“FIN 48”). FIN 48 is effective for fiscal years beginning after December 15, 2006. FIN 48 applies to all income tax positions subject to FASB Statement No. 109, Accounting for Income Tax (“SFAS 109”), including tax positions considered to be routine and those with a high degree of uncertainty. FIN 48 did not have a material impact on the Company’s consolidated financial statements.
In September, 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 will be applied prospectively and is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. SFAS 157 is not expected to have a material impact on the Company’s consolidated financial statements.
In December 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123R”), which revised SFAS No. 123, Accounting for Stock-Based Compensation. This statement supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees. The revised statement addresses the accounting for share-based payment transactions with employees and other third parties, eliminates the ability to account for share-based compensation transactions using APB 25 and requires that the compensation costs relating to such transactions be recognized in the consolidated statement of income. The revised statement was effective as of the first interim or annual period beginning after September 15, 2005. In anticipation of adopting SFAS No. 123R, the Company elected to immediately vest all remaining stock options during 2005 to avoid the recognition of compensation costs in the consolidated statement of income in future periods.
Forward-Looking Statements
Management’s discussion of the Company and management’s analysis of the Company’s operations and prospects, and other matters, may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other provisions of federal and state securities laws. Although the Company believes that the assumptions underlying such forward-looking statements contained in this Report are reasonable, any of the assumptions could be inaccurate and, accordingly, there can be no assurance that the forward-looking statements included herein will prove to be accurate. The use of such words as “expect,” “anticipate,” “forecast,” and comparable terms should be understood by the reader to indicate that the statement is “forward-looking” and thus subject to change in a manner that can be unpredictable. Factors that could cause actual results to differ from the results anticipated, but not guaranteed, in this Report, include (without limitation) economic and social conditions, competition for loans, mortgages, and other financial services and products, changes in interest rates, unforeseen changes in liquidity, results of operations, and financial conditions affecting the Company’s customers, and other risks that cannot be accurately quantified or completely identified. Many factors affecting the Company’s financial condition and profitability, including changes in economic conditions, the volatility of interest rates, political events and competition from other providers of financial services simply cannot be predicted. Because these factors are unpredictable and beyond the Company’s control, earnings may fluctuate from period to period. The purpose of this type of information is to provide readers with information relevant to understanding and assessing the financial condition and results of operations of the Company, and not to predict the future or to guarantee results. The Company is unable to predict the types of circumstances, conditions and factors that can cause anticipated results to change. The Company undertakes no obligation to publish revised forward-looking statements to reflect the occurrence of changed or unanticipated events, circumstances or results.
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General
On January 23, 2004, American Patriot Financial Group, Inc. (formerly known as BG Financial Group, Inc.) (“Company”), a bank holding company, acquired all of the outstanding shares of American Patriot Bank (formerly known as Bank of Greeneville) (“Bank”) in a one for one stock exchange. The Bank is a Tennessee-chartered, FDIC-insured, non-Member commercial bank offering a wide range of banking services, including checking, savings, and money market deposit accounts, certificates of deposit and loans for consumers, commercial and real estate purposes, and is the principal business of the Company. The main office of the Corporation is located at 3095 East Andrew Johnson Highway, Greeneville, Greene County, Tennessee, which is also the main office of the Bank. This location is a 2.66 acre lot, on which there is a fully operational modular bank unit. Other full service branch banking offices of the Bank are located at 506 Asheville Highway and 208 West Summer Street, Greeneville, Greene County, Tennessee. Recently the Bank purchased property in Maryville, Tennessee at 710 South Foothills Plaza Drive. This location is a 1.17 acre lot, on which there is a 3,272 square foot fully operational brick bank building with drive through facilities and was opened for business on July 9, 2007. These locations are centrally located and in high traffic/exposure areas. Automatic teller machines and overnight “deposit drops” are positioned to serve the Bank’s clients. Additional branches may be established as market opportunities surface.
Liquidity
At June 30, 2007, the Company had liquid assets of approximately $12.7 million in the form of cash and federal funds sold compared to approximately $15.5 million on December 31, 2006. Management believes that the liquid assets are adequate at June 30, 2007. Additional liquidity should be provided by the growth in deposit accounts and loan repayments. The Company also has the ability to purchase federal funds and is a member of the Federal Home Loan Bank of Cincinnati that will provide a credit line if necessary. Management is not aware of any trends, events or uncertainties that are reasonably likely to have a material impact on the Company’s short term or long term liquidity.
Results of Operations
The Company had net income of $140,979 or $.06 per share for the quarter ended June 30, 2007 compared to a net loss of $(46,964) or $(.02) per share for the quarter ended June 30, 2006. Net income for the six months ended June 30, 2007 was $242,070 as compared to a net income of $118,380 for the same period in 2006. Most of the net loss during the quarter ended June 30, 2006 is attributable to additional provision for loan losses made during the period for potential consumer loan losses, and additional specific reserves for commercial loans. During the quarter ended June 20, 2007, the Company recorded a benefit of $(63,401), while recording a provision of $150,368 for the same period in 2006.
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Net Interest Income/Margin
Net interest income represents the amount by which interest earned on various assets exceeds interest paid on deposits and other interest-bearing liabilities and is the most significant component of the Company’s earnings. Interest income for the quarter ended June 30, 2007 was $2,037,639 compared to $1,516,451 for the same period in 2006, and total interest expense was $957,774 in 2007 compared to $680,093 in 2006 for the same period. Interest income for the six months ended June 30, 2007 was $3,873,195, compared to $3,166,305 for the same period in 2006, and total interest expense was $1,803,123 in 2007 compared to $1,309,090 in 2006 for the same period. The Company pursues local deposits aggressively with attractive interest rates, which has resulted in compression of net interest margin. The Company benefited from a “catch up” interest payment of $121,082 received from a large loan previously in non accrual status during the six months ended June 30, 2007. Based on the Company’s mix of interest earning assets and interest bearing liabilities, management believes that net interest margin should remain stable or begin to decrease slightly for the remainder of the year. This assumption is based on a continued rising interest rate environment. If interest rates remain stable or begin to decline, net interest margin could decline due to competitive pricing of both loans and interest bearing deposits.
Provision for / Benefit from Loan Losses
The provision for (benefit from) loan losses represents a charge (or recovery) to operations necessary to establish an allowance for possible loan losses, which in management’s evaluation, is adequate to provide coverage for estimated losses on outstanding loans and to provide for uncertainties in the economy. The benefit from loan losses during the three month period ended June 30, 2007 was $(63,401), whereas there was a provision of $40,963 for the six month period ended June 30, 2007, as compared to the provision for loan losses of $150,368 and $99,871 for the same periods in 2006. For the three months ended June 30, 2007, the Bank was able to record a benefit from loan loss provision due to excellent collection efforts on both consumer and commercial loans. During the three and six months ended June 30, 2007, loan charge-offs were $54,267 and $79,961 respectively. The recoveries for the three and six month periods ended June 30, 2007 were $17,996 and $25,961, respectively. The allowance for loan losses was $604,918 at June 30, 2007 as compared to $617,956 at December 31, 2006, a decrease of 2.1%. The allowance was .73% of loans at June 30, 2007. Management believes the allowance for loan losses at June 30, 2007 to be adequate and will increase during the year to match normal loan growth.
Provision (Benefit) for/from Income Taxes
The Company’s provision for income tax expense for the three and six months ended June 30, 2007 was $92,797 and $153,744, respectively when compared to the benefit from $(44,803) and the provision for $61,682 for the same periods in 2006. Management believes the provision for income taxes for the period ended June 30, 2007 to be adequate.
Noninterest Income
The Company’s noninterest income consists of service charges on deposit accounts and other fees and commissions. Total noninterest income for three and six months ended June 30, 2007 was $177,151 and $346,511, respectively when compared to $137,918 and $263,807 for the same periods in 2006. The main reason for the increase for the six month period ended June 30, 2006, was an increase in service charges on deposit accounts. Management projects that other fees and commissions and service charges will increase in 2007.
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Noninterest Expense
Noninterest expenses totaled $1,086,641 and $1,979,806 for the three and six months ended June 30, 2007, as compared to $915,675 and $1,841,089 for the same periods in 2006. Salaries and benefits increased $98,520 for the three months ended June 30, 2007, while the six months ended June 30, 2006 increased $126,216, as compared to the same periods in 2006. The increase was mainly due the addition of key management personnel in anticipation of opening the branch bank in Maryville, Tennessee. The Maryville branch opened on July 9, 2007. Legal and professional fees increased $28,685 for the three months ended June 30, 2007, while decreasing $5,601 for the six months ended June 30, 2007, as compared to the same periods in 2006. Management continues to incur additional expenses to meet the demands of regulatory requirements and strategic plan development. Other operating expenses increased $17,039 for the three months ended June 30, 2007, while decreasing $26,362 for the six months ended June 30, 2007, when compared to the same periods in 2006. Most of the other operating expense increase can be attributed to increases in occupancy expenses and data processing expense.
Financial Condition
Total assets at June 30, 2007, were $104,096,011, an increase of $6,343,330 or 6.5% compared to 2006 year-end assets of $97,752,681. Deposits increased to $92,206,841 at June 30, 2007, an increase of $9,703,789 or 11.8% from $82,503,052 at December 31, 2006. The increase in deposits was mainly due to management’s more aggressive efforts to obtain local deposits. Premises and equipment increased to $5,500,591 at June 30, 2007 an increase of $1,701,072 or 44.8% from $3,799,519 at December 31, 2006. The purchase of a new branch located at 710 South Foothills Plaza Drive, Maryville, Tennessee, accounted for $1,483,258 of the increase in Premises and equipment. The Company places an emphasis on an integrated approach to its balance sheet management. Significant balance sheet components of loans and sources of funds are managed in an integrated manner with the management of interest rate risk, liquidity, and capital. These components are discussed below
Loans
Net loans outstanding totaled $82,628,681 at June 30, 2007 compared to $77,059,828 at December 31, 2006. Commercial and real estate loan growth accounted for almost all of the approximately $5.6 million increase for the first two quarters of 2007. Management feels the overall quality of loans remains solid. In the event that a loan is 90 days or more past due the accrual of income is generally discontinued when the full collection of principal or interest is in doubt unless the obligations are both well secured and in the process of collection. At June 30, 2007, total loans 90 days or more past due and still accruing interest were $0, while total loans in non-accrual status were $898,373. At December 31, 2006, total loans 90 days or more past due and still accruing interest were $0, while total loans in non-accrual status were $1,531,621.
Restricted Equity Investments
Federal Home Loan Bank (FHLB) stock at June 30, 2007 had an amortized cost and market value of $258,800 as compared to an amortized cost and a market value of $258,800 at December 31, 2006. As a member of the FHLB, the Company is required to maintain stock in an amount equal to .15% of total assets. Federal Home Loan Bank stock is carried at cost. Federal Home Loan Bank stock is maintained by the Company at par value of one hundred dollars per share.
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Deposits
Total deposits, which are the principal source of funds for the Company, were $92,206,841 at June 30, 2007, compared to $82,503,052 at December 31, 2006, representing an increase of 11.8%. The Company has targeted local consumers, professional and commercial businesses as its central clientele, therefore, deposit instruments in the form of demand deposits, savings accounts, money market demand accounts, NOW accounts, certificates of deposit and individual retirement accounts are offered to customers. The Company established a line of credit with the Federal Home Loan Bank secured by a blanket-pledge of 1-4 family residential mortgage loans. At June 30, 2007 the Company had outstanding advances of $2,046,708 at the Federal Home Loan Bank.
Securitized Borrowings
Securitized borrowings were $0 at June 30, 2007, compared to $3,099,091 at December 31, 2006. Certain loans amounting to $3,099,091 at December 31, 2006 were participated with other banks, but contained prohibited language according to SFAS No. 140. Prior to Statement No. 140, it was not uncommon for participation agreements to contain covenants that restricted the extent of control that a purchasing institution could exercise over loans purchased from another institution. Under previous guidance, such constraints did not prohibit sale accounting from being used by the seller. However, under Statement No. 140, such constraints do prohibit sale accounting from being used and thus, the sold portion is accounted for as a secured borrowing on the seller’s financial statements. This situation arose when a software update (GulfPak) was installed by the Bank. The update contained the prohibited language according to Statement No. 140. The Bank was unaware of this change until discovered in April 2007. This language was corrected and agreed to by all banks participating in the various loans.
Capital
Equity capital at June 30, 2007 was $9,078,598, an increase of $242,070 from $8,836,528 at December 31, 2006, due to a net profit of $242,070 for the first six months of 2007.
At June 30, 2007, both the Company’s and Bank’s capital ratios were in excess of the regulatory minimums. Those ratios are as follows:
| | Required
Minimum
Ratio | | To be
Well
Capitalized | | Bank | | Company | |
Tier 1 Leverage ratio | | 4.00 | % | 5.00 | % | 8.85 | % | 8.85 | % |
Tier 1 risk-based capital ratio | | 4.00 | % | 6.00 | % | 10.41 | % | 10.41 | % |
Total risk-based capital ratio | | 8.00 | % | 10.00 | % | 11.11 | % | 11.11 | % |
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Liability and Asset Management
The Company’s Asset/Liability Committee (“ALCO”) actively measures and manages interest rate risk using a process developed by the Company. The ALCO is also responsible for implementing the Company’s asset/liability management policies, overseeing the formulation and implementation of strategies to improve balance sheet positioning and earnings, and reviewing the Company’s interest rate sensitivity position.
The primary tool that management uses to measure short-term interest rate risk is a net interest income simulation model prepared by an independent correspondent institution. These simulations estimate the impact that various changes in the overall level of interest rates over one- and two-year time horizons would have on net interest income. The results help the Company develop strategies for managing exposures to interest rate risk.
Like any forecasting technique, interest rate simulation modeling is based on a large number of assumptions. In this case, the assumptions relate primarily to loan and deposit growth, asset and liability prepayments, interest rates and balance sheet management strategies. Management believes that both individually and in the aggregate the assumptions are reasonable. Nevertheless, the simulation modeling process produces only a sophisticated estimate, not a precise calculation of exposure.
At June 30, 2007, approximately 67% of the Company’s gross loans had adjustable rates. Based on the asset/liability modeling, management believes that these loans reprice at a faster pace than liabilities held by the Company. Because the majority of the Company’s liabilities are 12 months and under and the gap in repricing is asset sensitive, management believes that a rising rate environment would have a positive impact on the Company’s net interest margin. Floors in the majority of the Company’s adjustable rate assets also mitigate interest rate sensitivity in a decreasing rate environment.
Off-Balance Sheet Arrangements
The Company, at June 30, 2007, had outstanding unused lines of credit and standby letters of credit that totaled approximately $13,299,631. These commitments have fixed maturity dates and many will mature without being drawn upon, meaning that the total commitment does not necessarily represent the future cash requirements. The Company has the ability to liquidate Federal funds sold or, on a short-term basis, to purchase Federal funds from other banks and to borrow from the Federal Home Loan Bank. At June 30, 2007, the Company had established with correspondent banks the ability to purchase Federal funds if needed.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The information set forth on pages 11 through 17 of Item 2, “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS is incorporated herein by reference.
Item 4. Controls and Procedures
a) Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by it in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer. The Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this report. Based on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure control and procedures were effective.
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b) Changes in Internal Controls and Procedures
There were no changes in our internal controls over financial reporting during the quarter ended June 30, 2007, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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