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Share Name | Share Symbol | Market | Type |
---|---|---|---|
Leesport Financial (MM) | NASDAQ:FLPB | NASDAQ | Common Stock |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|---|---|
0.00 | 0.00% | 17.94 | 0 | 01:00:00 |
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x
Quarterly Report pursuant to Section 13 or 15(d)of the Securities
Exchange Act of 1934 for the
Quarterly Period Ended September 30, 2007,
or
o
Transition report pursuant to Section 13 or 15(d) Of the Exchange
Act
for the Transition Period from to .
No. 0-14555
(Commission File Number)
LEESPORT FINANCIAL CORP.
(Exact name of Registrant as specified in its charter)
PENNSYLVANIA |
|
23-2354007 |
(State or other jurisdiction of |
|
(I.R.S. Employer |
Incorporation or organization) |
|
Identification No.) |
|
|
|
1240 Broadcasting Road |
||
Wyomissing, Pennsylvania 19610 |
||
(Address of principal executive offices) |
||
|
|
|
(610) 478-9922 |
||
(Registrants telephone number, including area code) |
||
|
|
|
Securities registered under Section 12(b) of the Exchange Act: |
||
|
|
|
Common Stock, $5.00 Par Value |
|
The NASDAQ Stock Market LLC |
(Title of each class) |
|
(Name of each exchange on which registered) |
|
|
|
Securities registered under Section 12(g) of the Exchange Act: |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer x Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
State the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
|
|
Number of Shares Outstanding |
|
|
as of October 31, 2007 |
COMMON STOCK ($5.00 Par Value) |
|
5,660,497 |
(Title of Class) |
|
(Outstanding Shares) |
FORWARD LOOKING STATEMENTS
Leesport Financial Corp. (the Company) may from time to time make written or oral forward-looking statements, including statements contained in the Companys filings with the Securities and Exchange Commission (including this Quarterly Report on Form 10-Q and the exhibits hereto and thereto), in its reports to shareholders and in other communications by the Company, which are made in good faith by the Company pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include statements with respect to the Companys beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties, and are subject to change based on various factors (some of which are beyond the Companys control). The words may, could, should, would, believe, anticipate, estimate, expect, intend, plan and similar expressions are intended to identify forward-looking statements. The following factors, among others, could cause the Companys financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; inflation, interest rate, market and monetary fluctuations; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors products and services; the willingness of users to substitute competitors products and services for the Companys products and services; the success of the Company in gaining regulatory approval of its products and services, when required; the impact of changes in financial services laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes; acquisitions; changes in consumer spending and saving habits; and the success of the Company at managing the risks involved in the foregoing.
The Company cautions that the foregoing list of important factors is not exclusive. Readers are also cautioned not to place undue reliance on these forward-looking statements, which reflect managements analysis only as of the date of this report. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company.
2
Part I FINANCIAL INFORMATION
Item 1 Financial Statements
LEESPORT FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except per share data)
|
|
September 30, |
|
December 31, |
|
||
|
|
2007 |
|
2006 |
|
||
|
|
(Unaudited) |
|
|
|
||
ASSETS |
|
|
|
|
|
||
|
|
|
|
|
|
||
Cash and due from banks |
|
$ |
23,957 |
|
$ |
21,084 |
|
Interest-bearing deposits in banks |
|
330 |
|
751 |
|
||
|
|
|
|
|
|
||
Total cash and cash equivalents |
|
24,287 |
|
21,835 |
|
||
|
|
|
|
|
|
||
Mortgage loans held for sale |
|
2,818 |
|
5,582 |
|
||
Securities available for sale |
|
173,335 |
|
164,180 |
|
||
Securities held to maturity, fair value 2007 - $3,104; 2006 - $3,250 |
|
3,091 |
|
3,117 |
|
||
Loans, net of allowance for loan losses 2007 - $7,162; 2006 - $7,611 |
|
798,272 |
|
757,172 |
|
||
Premises and equipment, net |
|
6,863 |
|
6,941 |
|
||
Identifiable intangible assets |
|
4,042 |
|
4,514 |
|
||
Goodwill |
|
39,189 |
|
39,189 |
|
||
Bank owned life insurance |
|
17,677 |
|
17,190 |
|
||
Other assets |
|
22,213 |
|
21,912 |
|
||
|
|
|
|
|
|
||
Total assets |
|
$ |
1,091,787 |
|
$ |
1,041,632 |
|
|
|
|
|
|
|
||
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
||
Liabilities |
|
|
|
|
|
||
Deposits: |
|
|
|
|
|
||
Non-interest bearing |
|
$ |
104,742 |
|
$ |
108,549 |
|
Interest bearing |
|
643,149 |
|
594,290 |
|
||
|
|
|
|
|
|
||
Total deposits |
|
747,891 |
|
702,839 |
|
||
|
|
|
|
|
|
||
Securities sold under agreements to repurchase |
|
99,411 |
|
90,987 |
|
||
Federal funds purchased |
|
103,041 |
|
82,105 |
|
||
Long-term debt |
|
5,000 |
|
19,500 |
|
||
Junior subordinated debt, at fair value as of September 30, 2007 |
|
20,402 |
|
20,150 |
|
||
Other liabilities |
|
11,121 |
|
23,921 |
|
||
|
|
|
|
|
|
||
Total liabilities |
|
986,866 |
|
939,502 |
|
||
|
|
|
|
|
|
||
Shareholders equity |
|
|
|
|
|
||
Common stock, $5.00 par value; authorized 20,000,000 shares; issued: 5,745,350 shares at September 30, 2007 and 5,454,589 shares at December 31, 2006 |
|
28,727 |
|
27,273 |
|
||
Surplus |
|
63,854 |
|
58,733 |
|
||
Retained earnings |
|
16,139 |
|
20,302 |
|
||
Accumulated other comprehensive loss |
|
(1,879 |
) |
(2,526 |
) |
||
Treasury stock; 84,853 shares at September 30, 2007 and 68,234 shares at December 31, 2006, at cost |
|
(1,920 |
) |
(1,652 |
) |
||
|
|
|
|
|
|
||
Total shareholders equity |
|
104,921 |
|
102,130 |
|
||
|
|
|
|
|
|
||
Total liabilities and shareholders equity |
|
$ |
1,091,787 |
|
$ |
1,041,632 |
|
See Notes to Consolidated Financial Statements.
3
LEESPORT FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(Dollar amounts in thousands, except per share data)
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
September 30, 2007 |
|
September 30, 2006 |
|
September 30, 2007 |
|
September 30, 2006 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Interest income: |
|
|
|
|
|
|
|
|
|
||||
Interest and fees on loans |
|
$ |
14,944 |
|
$ |
13,621 |
|
$ |
44,267 |
|
$ |
38,522 |
|
Interest on securities: |
|
|
|
|
|
|
|
|
|
||||
Taxable |
|
2,140 |
|
1,813 |
|
5,844 |
|
5,474 |
|
||||
Tax-exempt |
|
123 |
|
217 |
|
393 |
|
634 |
|
||||
Dividend income |
|
144 |
|
165 |
|
526 |
|
476 |
|
||||
Other interest income |
|
6 |
|
5 |
|
24 |
|
12 |
|
||||
Total interest income |
|
17,357 |
|
15,821 |
|
51,054 |
|
45,118 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Interest expense: |
|
|
|
|
|
|
|
|
|
||||
Interest on deposits |
|
6,586 |
|
5,258 |
|
18,596 |
|
14,476 |
|
||||
Interest on short-term borrowings |
|
762 |
|
1,063 |
|
2,676 |
|
2,430 |
|
||||
Interest on securities sold under agreements to repurchase |
|
985 |
|
731 |
|
2,924 |
|
1,918 |
|
||||
Interest on long-term debt |
|
100 |
|
273 |
|
399 |
|
974 |
|
||||
Interest on junior subordinated debt |
|
470 |
|
470 |
|
1,419 |
|
1,336 |
|
||||
Total interest expense |
|
8,903 |
|
7,795 |
|
26,014 |
|
21,134 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net Interest Income |
|
8,454 |
|
8,026 |
|
25,040 |
|
23,984 |
|
||||
Provision for loan losses |
|
300 |
|
300 |
|
598 |
|
725 |
|
||||
Net Interest Income after provision for loan losses |
|
8,154 |
|
7,726 |
|
24,442 |
|
23,259 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Other income: |
|
|
|
|
|
|
|
|
|
||||
Customer service fees |
|
664 |
|
671 |
|
1,993 |
|
2,012 |
|
||||
Mortgage banking activities |
|
432 |
|
932 |
|
1,524 |
|
2,834 |
|
||||
Commissions and fees from insurance sales |
|
2,968 |
|
2,982 |
|
8,674 |
|
8,517 |
|
||||
Brokerage and investment advisory commissions and fees |
|
189 |
|
186 |
|
651 |
|
563 |
|
||||
Earnings on investment in life insurance |
|
197 |
|
131 |
|
587 |
|
387 |
|
||||
Gain on sale of loans |
|
62 |
|
24 |
|
153 |
|
32 |
|
||||
Other Income |
|
604 |
|
480 |
|
1,526 |
|
1,410 |
|
||||
Net realized gains (losses) on sales of securities |
|
85 |
|
65 |
|
(2,408 |
) |
274 |
|
||||
Total other income |
|
5,201 |
|
5,471 |
|
12,700 |
|
16,029 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Other expense: |
|
|
|
|
|
|
|
|
|
||||
Salaries and employee benefits |
|
5,177 |
|
5,265 |
|
16,206 |
|
16,667 |
|
||||
Occupancy expense |
|
1,087 |
|
1,101 |
|
3,234 |
|
3,394 |
|
||||
Furniture and equipment expense |
|
646 |
|
677 |
|
1,937 |
|
2,017 |
|
||||
Marketing and advertising expense |
|
398 |
|
286 |
|
1,171 |
|
1,007 |
|
||||
Amortization of identifiable intangible assets |
|
157 |
|
159 |
|
472 |
|
479 |
|
||||
Professional services |
|
446 |
|
333 |
|
1,199 |
|
901 |
|
||||
Outside processing |
|
789 |
|
700 |
|
2,395 |
|
2,180 |
|
||||
Insurance expense |
|
175 |
|
198 |
|
491 |
|
449 |
|
||||
Other expense |
|
1,159 |
|
1,036 |
|
3,333 |
|
3,173 |
|
||||
Total other expense |
|
10,034 |
|
9,755 |
|
30,438 |
|
30,267 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Income before income taxes |
|
3,321 |
|
3,442 |
|
6,704 |
|
9,021 |
|
||||
Income taxes |
|
786 |
|
854 |
|
1,266 |
|
2,144 |
|
||||
Net income |
|
$ |
2,535 |
|
$ |
2,588 |
|
$ |
5,438 |
|
$ |
6,877 |
|
See Notes to Consolidated Financial Statements.
4
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
September 30, 2007 |
|
September 30, 2006 |
|
September 30, 2007 |
|
September 30, 2006 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
EARNINGS PER SHARE DATA |
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Average shares outstanding |
|
5,668,516 |
|
5,665,104 |
* |
5,676,197 |
|
5,599,999 |
* |
||||
Basic earnings per share |
|
$ |
0.45 |
|
$ |
0.46 |
* |
$ |
0.96 |
|
$ |
1.23 |
* |
Average shares outstanding for diluted earnings per share |
|
5,688,714 |
|
5,711,759 |
* |
5,702,582 |
|
5,657,103 |
* |
||||
Diluted earnings per share |
|
$ |
0.45 |
|
$ |
0.46 |
* |
$ |
0.95 |
|
$ |
1.22 |
* |
Cash dividends declared per share |
|
$ |
0.20 |
|
$ |
0.18 |
* |
$ |
0.57 |
|
$ |
0.51 |
* |
* References to share amounts and per-share amounts were restated to reflect the 5% stock dividend distributed to shareholders on June 15, 2007.
See Notes to Consolidated Financial Statements.
5
LEESPORT FINANCIAL CORP.
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Nine Months Ended September 30, 2007 and 2006
(Dollar amounts in thousands, except per share data)
|
|
Common Stock |
|
|
|
|
|
Accumulated |
|
|
|
|
|
||||||||
|
|
Number of |
|
|
|
|
|
|
|
Other |
|
|
|
|
|
||||||
|
|
Shares |
|
|
|
|
|
Retained |
|
Comprehensive |
|
Treasury |
|
|
|
||||||
|
|
Issued |
|
Par Value |
|
Surplus |
|
Earnings |
|
Loss |
|
Stock |
|
Total |
|
||||||
Balance, December 31, 2006 |
|
5,454,589 |
|
$ |
27,273 |
|
$ |
58,733 |
|
$ |
20,302 |
|
$ |
(2,526 |
) |
$ |
(1,652 |
) |
$ |
102,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Adjustment to opening balance, net of tax, for the adoption of SFAS No. 159 (see Note 10) |
|
|
|
|
|
|
|
(409 |
) |
|
|
|
|
(409 |
) |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Adjusted opening balance, January 1, 2007 |
|
5,454,589 |
|
27,273 |
|
58,733 |
|
19,893 |
|
(2,526 |
) |
(1,652 |
) |
101,721 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net income |
|
|
|
|
|
|
|
5,438 |
|
|
|
|
|
5,438 |
|
||||||
Change in net unrealized gains (losses) on securities available for sale, net of reclassification adjustment and tax effect |
|
|
|
|
|
|
|
|
|
647 |
|
|
|
647 |
|
||||||
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
6,085 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Purchase of treasury stock (30,000 shares) |
|
|
|
|
|
|
|
|
|
|
|
(573 |
) |
(573 |
) |
||||||
Additional consideration in connection with acquisitions (13,381 shares) |
|
|
|
|
|
15 |
|
|
|
|
|
305 |
|
320 |
|
||||||
Common stock dividend (5%) |
|
270,413 |
|
1,352 |
|
4,591 |
|
(5,943 |
) |
|
|
|
|
|
|
||||||
Common stock issued in connection with directors compensation |
|
9,323 |
|
47 |
|
176 |
|
|
|
|
|
|
|
223 |
|
||||||
Common stock issued in connection with director and employee stock purchase plans |
|
11,025 |
|
55 |
|
137 |
|
|
|
|
|
|
|
192 |
|
||||||
Tax benefits from employee stock transactions |
|
|
|
|
|
12 |
|
|
|
|
|
|
|
12 |
|
||||||
Compensation expense related to stock options |
|
|
|
|
|
190 |
|
|
|
|
|
|
|
190 |
|
||||||
Cash dividends declared ($0.57 per share) |
|
|
|
|
|
|
|
(3,249 |
) |
|
|
|
|
(3,249 |
) |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Balance, September 30, 2007 |
|
5,745,350 |
|
$ |
28,727 |
|
$ |
63,854 |
|
$ |
16,139 |
|
$ |
(1,879 |
) |
$ |
(1,920 |
) |
$ |
104,921 |
|
|
|
Common Stock |
|
|
|
|
|
Accumulated |
|
|
|
|
|
||||||||
|
|
Number of |
|
|
|
|
|
|
|
Other |
|
|
|
|
|
||||||
|
|
Shares |
|
|
|
|
|
Retained |
|
Comprehensive |
|
Treasury |
|
|
|
||||||
|
|
Issued |
|
Par Value |
|
Surplus |
|
Earnings |
|
Loss |
|
Stock |
|
Total |
|
||||||
Balance, December 31, 2005 |
|
5,111,178 |
|
$ |
25,556 |
|
$ |
52,581 |
|
$ |
20,790 |
|
$ |
(3,143 |
) |
$ |
(1,028 |
) |
$ |
94,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net income |
|
|
|
|
|
|
|
6,877 |
|
|
|
|
|
6,877 |
|
||||||
Change in net unrealized gains (losses) on securities available for sale, net of reclassification adjustment and tax effect |
|
|
|
|
|
|
|
|
|
(148 |
) |
|
|
(148 |
) |
||||||
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
6,729 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Purchase of treasury stock (45,000 shares) |
|
|
|
|
|
|
|
|
|
|
|
(1,118 |
) |
(1,118 |
) |
||||||
Reissuance of treasury stock (26,457 shares) |
|
|
|
|
|
258 |
|
|
|
|
|
494 |
|
752 |
|
||||||
Common stock dividend (5%) |
|
253,241 |
|
1,266 |
|
4,453 |
|
(5,719 |
) |
|
|
|
|
|
|
||||||
Common stock issued in connection with directors compensation |
|
|
|
|
|
171 |
|
|
|
|
|
|
|
171 |
|
||||||
Common stock issued in connection with director and employee stock purchase plans |
|
56,438 |
|
282 |
|
441 |
|
|
|
|
|
|
|
723 |
|
||||||
Tax benefits from employee stock transactions |
|
|
|
|
|
200 |
|
|
|
|
|
|
|
200 |
|
||||||
Cash dividends declared ($0.51 per share) |
|
|
|
|
|
|
|
(2,899 |
) |
|
|
|
|
(2,899 |
) |
||||||
Balance, September 30, 2006 |
|
5,420,857 |
|
$ |
27,104 |
|
$ |
58,104 |
|
$ |
19,049 |
|
$ |
(3,291 |
) |
$ |
(1,652 |
) |
$ |
99,314 |
|
See Notes to Consolidated Financial Statements.
6
LEESPORT FINANCIAL CORP.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
|
|
Nine Months Ended |
|
||||
|
|
September 30, |
|
September 30, |
|
||
|
|
2007 |
|
2006 |
|
||
Cash Flows From Operating Activities |
|
|
|
|
|
||
Net income |
|
$ |
5,438 |
|
$ |
6,877 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
|
||
Provision for loan losses |
|
598 |
|
725 |
|
||
Provision for depreciation and amortization of premises and equipment |
|
1,161 |
|
1,258 |
|
||
Amortization of identifiable intangible assets |
|
472 |
|
479 |
|
||
Deferred income taxes |
|
(26 |
) |
864 |
|
||
Director stock compensation |
|
223 |
|
171 |
|
||
Net amortization of securities premiums and discounts |
|
103 |
|
210 |
|
||
Amortization of mortgage servicing rights |
|
51 |
|
36 |
|
||
Decrease (increase) in mortgage servicing rights |
|
16 |
|
(5 |
) |
||
Net realized gains on sales of foreclosed real estate |
|
(47 |
) |
(13 |
) |
||
Net realized losses (gains) on sales of securities |
|
2,408 |
|
(274 |
) |
||
Proceeds from sales of loans held for sale |
|
80,233 |
|
150,154 |
|
||
Net gains on sale of loans |
|
(1,421 |
) |
(2,405 |
) |
||
Loans originated for sale |
|
(76,048 |
) |
(140,991 |
) |
||
Increase in investment in life insurance |
|
(487 |
) |
(339 |
) |
||
Compensation expense related to stock options |
|
190 |
|
122 |
|
||
Net change in fair value of liabilities |
|
(67 |
) |
|
|
||
Increase in accrued interest receivable and other assets |
|
(1,872 |
) |
(2,153 |
) |
||
Decrease in accrued interest payable and other liabilities |
|
(12,360 |
) |
(1,746 |
) |
||
Net Cash (Used In) Provided by Operating Activities |
|
(1,435 |
) |
12,970 |
|
||
|
|
|
|
|
|
||
Cash Flow From Investing Activities |
|
|
|
|
|
||
Investment securities: |
|
|
|
|
|
||
Purchases - available for sale |
|
(111,816 |
) |
(13,895 |
) |
||
Principal repayments, maturities and calls - available for sale |
|
18,724 |
|
19,106 |
|
||
Principal repayments, maturities and calls - held to maturity |
|
|
|
2,008 |
|
||
Proceeds from sales |
|
82,325 |
|
1,445 |
|
||
Net increase in loans receivable |
|
(43,728 |
) |
(84,478 |
) |
||
Proceeds from sale of loans |
|
2,030 |
|
643 |
|
||
Net decrease in Federal Home Loan Bank Stock |
|
108 |
|
1,329 |
|
||
Net decrease (increase) in foreclosed real estate |
|
598 |
|
(171 |
) |
||
Purchases of premises and equipment |
|
(1,539 |
) |
(731 |
) |
||
Disposals of premises and equipment |
|
455 |
|
43 |
|
||
Net Cash Used in Investing Activities |
|
(52,843 |
) |
(74,701 |
) |
||
See Notes to Consolidated Financial Statements.
7
|
|
Nine Months Ended |
|
||||
|
|
September 30, |
|
September 30, |
|
||
|
|
2007 |
|
2006 |
|
||
Cash Flow From Financing Activities |
|
|
|
|
|
||
Net increase in deposits |
|
45,052 |
|
30,163 |
|
||
Net increase in federal funds purchased |
|
20,936 |
|
33,931 |
|
||
Net increase in securities sold under agreements to repurchase |
|
8,424 |
|
9,424 |
|
||
Repayments of long-term debt |
|
(14,500 |
) |
(19,500 |
) |
||
Purchase of treasury stock |
|
(573 |
) |
(1,118 |
) |
||
Proceeds from the exercise of stock options and stock purchase plans |
|
192 |
|
723 |
|
||
Tax benefits from employee stock transactions |
|
12 |
|
78 |
|
||
Reissuance of treasury stock |
|
320 |
|
752 |
|
||
Cash dividends paid |
|
(3,133 |
) |
(2,785 |
) |
||
Net Cash Provided by Financing Activities |
|
56,730 |
|
51,668 |
|
||
|
|
|
|
|
|
||
Increase (Decrease) in cash and cash equivalents |
|
2,452 |
|
(10,063 |
) |
||
Cash and Cash Equivalents: |
|
|
|
|
|
||
January 1 |
|
21,835 |
|
29,131 |
|
||
September 30 |
|
$ |
24,287 |
|
$ |
19,068 |
|
|
|
|
|
|
|
||
Cash Payments For: |
|
|
|
|
|
||
Interest |
|
$ |
26,339 |
|
$ |
20,894 |
|
Taxes |
|
$ |
950 |
|
$ |
1,610 |
|
See Notes to Consolidated Financial Statements.
8
LEESPORT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. All significant inter-company accounts and transactions have been eliminated. In the opinion of management, all adjustments (including normal recurring adjustments) considered necessary for a fair presentation of the results for the interim periods have been included.
The balance sheet at December 31, 2006 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
The results of operations for the three and nine month periods ended September 30, 2007 are not necessarily indicative of the results to be expected for the full year. For purpose of reporting cash flows, cash and cash equivalents include cash and due from banks, and interest bearing deposits in other banks. For further information, refer to the Consolidated Financial Statements and Footnotes included in the Companys Annual Report on Form 10-K for the year ended December 31, 2006.
2. Earnings Per Common Share
On May 15, 2007, the Company declared a 5% stock dividend on common stock outstanding payable June 15, 2007 to shareholders of record on June 1, 2007. The stock dividend resulted in the issuance of 270,413 additional common shares. All per share data have been adjusted for the effect of the stock dividend.
Basic earnings per share represent income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares (stock options) had been issued, as well as any adjustments to income that would result from the assumed issuance.
Earnings per common share for the respective periods indicated have been computed based upon the following:
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
September 30, |
|
September 30, |
|
September 30, |
|
September 30, |
|
||||
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
||||
|
|
(Dollar amounts in thousands) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
||||
Net income available to shareholders |
|
$ |
2,535 |
|
$ |
2,588 |
|
$ |
5,438 |
|
$ |
6,877 |
|
|
|
|
|
|
|
|
|
|
|
||||
Average shares outstanding |
|
5,668,516 |
|
5,665,104 |
* |
5,676,197 |
|
5,599,999 |
* |
||||
Effect of dilutive stock options |
|
20,198 |
|
46,655 |
* |
26,385 |
|
57,104 |
* |
||||
|
|
|
|
|
|
|
|
|
|
||||
Average number of shares used to calculate diluted earnings per share |
|
5,688,714 |
|
5,711,759 |
* |
5,702,582 |
|
5,657,103 |
* |
||||
* References to share amounts and per-share amounts were restated to reflect the 5% stock dividend distributed to shareholders on June 15, 2007.
9
3. Comprehensive Income
Accounting principles generally require that recognized revenue, expense, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. The components of other comprehensive income (loss) and related tax effects were as follows:
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
September 30, |
|
September 30, |
|
September 30, |
|
September 30, |
|
||||
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
||||
|
|
(Dollar amounts in thousands) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
||||
Unrealized holding gains (losses) on available for sale securities |
|
$ |
1,608 |
|
$ |
2,814 |
|
$ |
(1,428 |
) |
$ |
50 |
|
Reclassification adjustment for (gains) losses realized in income |
|
(85 |
) |
(65 |
) |
2,408 |
|
(274 |
) |
||||
Net unrealized gains (losses) |
|
1,523 |
|
2,749 |
|
980 |
|
(224 |
) |
||||
Income tax effect |
|
(518 |
) |
(935 |
) |
(333 |
) |
76 |
|
||||
Other comprehensive income (loss) |
|
$ |
1,005 |
|
$ |
1,814 |
|
$ |
647 |
|
$ |
(148 |
) |
4. Guarantees
Outstanding letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The Companys exposure to credit loss in the event of nonperformance by the other party to the financial instrument for standby letters of credit is represented by the contractual amount of those instruments. The Company had $19.2 million and $18.9 million of financial and performance standby letters of credit as of September 30, 2007 and December 31, 2006, respectively. The Bank uses the same credit policies in making conditional obligations as it does for on-balance sheet instruments.
The majority of these standby letters of credit expire within the next 24 months. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments. The Company requires collateral and personal guarantees supporting these letters of credit as deemed necessary. Management believes that the proceeds obtained through a liquidation of such collateral and the enforcement of personal guarantees would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The current amount of the liability as of September 30, 2007 and December 31, 2006 for guarantees under standby letters of credit is not material.
10
5. Segment Information
The Companys insurance operations, investment operations and mortgage banking operations are managed separately from the traditional banking and related financial services that the Company also offers. The mortgage banking operation offers residential lending products and generates revenue primarily through gains recognized on loan sales. The insurance operation utilizes insurance companies and acts as an agent or brokers to provide coverage for commercial, individual, surety bond, and group and personal benefit plans. The investment operation provides services for individual financial planning, retirement and estate planning, investments, corporate and small business pension and retirement planning.
|
|
Banking
|
|
Mortgage
|
|
Insurance
|
|
Investment
|
|
Total |
|
|||||
|
|
(Dollar amounts in thousands) |
|
|||||||||||||
Three months ended September 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|||||
Net interest income and other income from external sources |
|
$ |
9,803 |
|
$ |
665 |
|
$ |
2,969 |
|
$ |
218 |
|
$ |
13,655 |
|
Income (loss) before income taxes |
|
2,518 |
|
181 |
|
658 |
|
(36 |
) |
3,321 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Three months ended September 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|||||
Net interest income and other income from external sources |
|
$ |
9,201 |
|
$ |
1,089 |
|
$ |
2,996 |
|
$ |
211 |
|
$ |
13,497 |
|
Income (loss) before income taxes |
|
2,347 |
|
366 |
|
739 |
|
(10 |
) |
3,442 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Nine Months Ended September 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|||||
Net interest income and other income from external sources |
|
$ |
26,246 |
|
$ |
2,118 |
|
$ |
8,647 |
|
$ |
729 |
|
$ |
37,740 |
|
Income (loss) before income taxes |
|
4,574 |
|
506 |
|
1,677 |
|
(53 |
) |
6,704 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Nine Months Ended September 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|||||
Net interest income and other income from external sources |
|
$ |
27,284 |
|
$ |
3,515 |
|
$ |
8,609 |
|
$ |
605 |
|
$ |
40,013 |
|
Income (loss) before income taxes |
|
6,651 |
|
740 |
|
1,728 |
|
(98 |
) |
9,021 |
|
6. Stock Incentive Plans
The Company has an Employee Stock Incentive Plan (ESIP) that covers all officers and key employees of the Company and its subsidiaries and is administered by a committee of the Board of Directors. The total number of shares of common stock that may be issued pursuant to the ESIP is 486,781. The option price for options issued under the Plan must be at least equal to 100% of the fair market value of the common stock on the date of grant and shall not be less than the stocks par value. Options granted under the Plan have various vesting periods ranging from immediate up to 5 years, 20% exercisable not less than one year after the date of grant, but no later than ten years after the date of grant in accordance with the vesting. Vested options expire on the earlier of ten years after the date of grant, three months from the participants termination of employment or one year from the date of the participants death or disability. As of September 30, 2007, a total of 9,056 shares are available for issue under the ESIP. This ESIP plan will expire on November 10, 2008.
The Company has an Independent Directors Stock Option Plan (IDSOP). The total number of shares of common stock that may be issued pursuant to the IDSOP is 121,695. The Plan covers all directors of the Company who are not employees and former directors who continue to be employed by the Company. The option price for options issued under the Plan will be equal to the fair market value of the Companys common stock on the date of grant. Options are exercisable from the date of grant and expire on the earlier of ten years after the date of grant, three months from the date the participant ceases to be a director of the Company or the cessation of the participants employment, or twelve months from the date of the participants death or disability. As of September 30, 2007, a total of 1,020 shares are available for issue under the IDSOP. This IDSOP plan will expire on November 10, 2008.
11
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123 (R), Share-Based Payment. Statement No. 123 (R) addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprises equity instruments or that may be settled by the issuance of such equity instruments. Statement 123 (R) requires an entity to recognize the grant-date fair-value of stock options and other equity-based compensation issued to the employees in the income statement. The revised Statement generally requires that an entity account for those transactions using the fair-value-based method, and eliminates the intrinsic value method of accounting in APB Opinion No. 25. Accounting for Stock Issued to Employees, which was permitted under Statement No. 123, as originally issued.
The revised Statement requires entities to disclose information about the nature of the share-based payment transaction and the effects of those transactions on the financial statements. Statement No. 123 (R) is effective for fiscal periods beginning after June 15, 2005. All public companies must use either the modified prospective or the modified retrospective transition method. Effective January 1, 2006, the Company has adopted the modified prospective method. Using the modified prospective method, the Companys total stock-based compensation expense for the three months ended September 30, 2007 and 2006 was approximately $69,000 and $37,000, respectively. Using the modified prospective method, the Companys total stock-based compensation expense for the nine months ended September 30, 2007 and 2006 was approximately $190,000 and $122,000, respectively. Total stock-based compensation expense, net of related tax effects, was approximately $46,000 and $24,000 for the three months ended September 30, 2007 and 2006, respectively. Total stock-based compensation expense, net of related tax effects, was approximately $126,000 and $80,000 for the nine months ended September 30, 2007 and 2006, respectively. Any additional impact that the adoption of this statement will have on our results of operations will be determined by share-based payments granted in future periods. Cash flows from financing activities included in cash inflows from excess tax benefits related to stock compensation were approximately $12,000 and $78,000 for the nine months ended September 30, 2007 and 2006, respectively. Total unrecognized compensation cost related to non-vested stock options at September 30, 2007 was approximately $455,000 and will be recognized over a period of approximately three years.
Stock option transactions under the Plans for the nine months ended September 30, 2007, as adjusted for the 5% stock dividend, were as follows:
|
|
|
|
|
|
|
|
Weighted- |
|
||
|
|
|
|
Weighted- |
|
|
|
Average |
|
||
|
|
|
|
Average |
|
Aggregate |
|
Remaining |
|
||
|
|
|
|
Exercise |
|
Intrinsic |
|
Term |
|
||
|
|
Options |
|
Price |
|
Value |
|
(in years) |
|
||
Outstanding at the beginning of the year |
|
438,502 |
|
$ |
20.20 |
|
|
|
|
|
|
Granted |
|
4,978 |
|
23.45 |
|
|
|
|
|
||
Exercised |
|
(5,249 |
) |
13.42 |
|
|
|
|
|
||
Expired |
|
(2,267 |
) |
21.96 |
|
|
|
|
|
||
Forfeited |
|
(6,802 |
) |
21.80 |
|
|
|
|
|
||
Outstanding as of September 30, 2007 |
|
429,162 |
|
$ |
20.28 |
|
$ |
486,735 |
|
7.5 |
|
Exercisable as of September 30, 2007 |
|
276,008 |
|
$ |
19.08 |
|
$ |
464,193 |
|
6.7 |
|
The fair value of options granted for the nine month periods ended September 30, 2007 and 2006 were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
12
|
|
Nine Months Ended |
|
||||
|
|
2007 |
|
2006 |
|
||
|
|
|
|
|
|
||
Dividend yield |
|
3.06 |
% |
2.73 |
% |
||
Expected life |
|
7 years |
|
7 years |
|
||
Expected volatility |
|
16.91 |
% |
17.60 |
% |
||
Risk-free interest rate |
|
4.74 |
% |
4.89 |
% |
||
Weighted average fair value of options granted |
|
$ |
4.52 |
|
$ |
5.08 |
|
On April 17, 2007, shareholders approved the Leesport Financial Corp. 2007 Equity Incentive Plan (the Equity Incentive Plan). The total number of shares which may be granted under the Equity Incentive Plan is equal to 12.5% of the outstanding shares of the Companys common stock on the date of approval of the Plan by shareholders (676,572 shares), and is subject to automatic annual increases by an amount equal to 12.5% of any increase in the number of the Companys outstanding shares of common stock during the preceding year or such lesser number as determined by the Companys board of directors. The Equity Incentive Plan covers all employees and non-employee directors of the Company and its subsidiaries. Incentive stock options, nonqualified stock options and restricted stock grants are authorized for issuance under the Equity Incentive Plan. The exercise price for stock options granted under the Equity Incentive Plan must equal the fair market value of the Companys common stock on the date of grant. Vesting of awards under the Equity Incentive Plan is determined by the Human Resources Committee of the board of directors, but must be at least one year. The committee may also subject an award to one or more performance criteria. Stock options and restricted stock awards generally expire upon termination of employment. In certain instances after an optionee terminates employment or service, the Committee may extend the exercise period for a vested nonqualified stock option up to the remaining term of the option. A vested incentive stock option must be exercised within three months following termination of employment if such termination is for reasons other than cause.. Performance goals generally cannot be accelerated or waived except in the event of a change in control or upon death, disability or retirement. This Equity Incentive Plan will expire on April 17, 2017.
No new options or restricted stock awards were granted for the three month period ended September 30, 2007.
7. Debt and Borrowings
Total debt increased by $15.1 million, or 9.5% annualized, to $227.8 million at September 30, 2007 from $212.7 million at December 31, 2006. The increase in total debt and borrowings was primarily due to an increase in loans, net of allowance for loan losses, of $41.1 million to $798.3 million at September 30, 2007 from $757.2 million at December 31, 2006.
8. Investment in Limited Partnership
On December 29, 2003, the Bank entered into a limited partner subscription agreement with Midland Corporate Tax Credit XVI Limited Partnership, where the Bank will receive special tax credits and other tax benefits. The Bank subscribed to a 6.2% interest in the partnership, which is subject to an adjustment depending on the final size of the partnership at a purchase price of $5 million. This investment is included in other assets and is not guaranteed. It is accounted for in accordance with Statement of Position (SOP) 78-9, Accounting for Investments in Real Estate Ventures, using the equity method. This agreement was accompanied by a payment of $1.7 million. The associated non-interest bearing promissory note payable included in other liabilities was zero at September 30, 2007. Installments were paid as requested.
9. Recently Issued Accounting Standards
Effective January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes. The Interpretation provides clarification on accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB Statement of Financial Accounting Standard (SFAS) No. 109, Accounting for Income Taxes. The Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Interpretation also provides guidance on de-recognition,
13
classification, interest and penalties, accounting in interim periods, disclosure and transition. As a result of the Companys evaluation of the implementation of FIN 48, no significant income tax uncertainties were identified.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115. SFAS No. 159 permits certain financial assets and financial liabilities to be measured at fair value, using an instrument-by-instrument election. The initial effect of adopting SFAS No. 159 must be accounted for as a cumulative-effect adjustment to opening retained earnings for the year in which SFAS No. 159 is applied. Retrospective application of SFAS No. 159 to years preceding the effective date is not permitted. The Company elected to early adopt SFAS No. 159 as of January 1, 2007. This adoption resulted in a one-time cumulative after-tax charge of $409,000 ($619,000 pre-tax) to opening retained earnings as of January 1, 2007. See Note 10, Fair Value, for additional information.
In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about assets and liabilities measured at fair value. FASB Statement No. 157 does not change existing guidance as to whether or not an asset or liability is carried at fair value. The new standard provides a consistent definition of fair value which focuses on exit price and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. The standard also establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The standard eliminates large position discounts for financial instruments quoted in active markets, requires costs related to acquiring financial instruments carried at fair value to be included in earnings as incurred and requires that an issuers credit standing be considered when measuring liabilities at fair value. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007, with early adoption permitted. In conjunction with the early adoption of SFAS No. 159 indicated above, the Company adopted SFAS No. 157 beginning January 1, 2007. See Note 10, Fair Value, for the new disclosures required by SFAS No. 157 regarding the market-based pricing associated with assets and liabilities carried at fair value. No significant impact to amounts reported in the consolidated financial position or results of operations resulted from the adoption of SFAS No. 157.
In September 2006, the FASBs Emerging Issues Task Force (EITF) issued EITF Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements (EITF 06-4). EITF 06-4 requires the recognition of a liability related to the postretirement benefits covered by an endorsement split-dollar life insurance arrangement. The consensus highlights that the employer (who is also the policyholder) has a liability for the benefit it is providing to its employee. As such, if the policyholder has agreed to maintain the insurance policy in force for the employees benefit during his or her retirement, then the liability recognized during the employees active service period should be based on the future cost of the insurance to be incurred during the employees retirement. Alternatively, if the policyholder has agreed to provide the employee with a death benefit, then the liability for the future death benefit should be recognized by following the guidance in SFAS No. 106 or Accounting Principals Board (APB) No. 12, as appropriate. For transition, an entity can choose to apply the guidance using either of the following approaches: (a) a change in accounting principle through retrospective application to all periods presented or (b) a change in accounting principle through a cumulative-effect adjustment to the balance in retained earnings at the beginning of the year of adoption. Adoption is required in fiscal years beginning after December 15, 2007, with early adoption permitted. The Company does not believe that the implementation of this guidance will have a material impact on the Companys consolidated financial statements.
On September 7, 2006, the Task Force reached a conclusion on EITF Issue No. 06-5, Accounting for Purchases of Life Insurance Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance (EITF 06-5). The scope of EITF 06-5 consists of nine separate issues relating to accounting for life insurance policies purchased by entities protecting against the loss of key persons. The nine issues are clarifications of previously issued guidance on FASB Technical Bulletin No. 85-4. EITF 06-5 is effective for fiscal years beginning after December 15, 2006. The implementation of this standard did not have a material impact on the Companys consolidated financial position or results of operations.
In February 2007, the FASB issued FASB Staff Position (FSP) FAS 158-1, Conforming Amendments to the Illustrations in FASB Statements No. 87, No. 88, and No 106 and to the Related Staff Implementation Guides. This FSP makes conforming amendments to other FASB statements and staff implementation guides and provides technical corrections to SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans. The conforming amendments in this FSP shall be applied upon adoption of SFAS No. 158. The Company does not expect it to have a material impact on the Companys consolidated financial statements.
14
In March 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-10 Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements (EITF 06-10). EITF 06-10 provides guidance for determining a liability for the postretirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement. EITF 06-10 is effective for fiscal years beginning after December 15, 2007. The Company is currently assessing the impact of EITF 06-10 on its consolidated financial position and results of operations.
In March 2007, the FASB ratified EITF Issue No. 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards. EITF 06-11 requires companies to recognize the income tax benefit realized from dividends or dividend equivalents that are charged to retained earnings and paid to employees for non-vested equity-classified employee share-based payment awards as an increase to additional paid-in capital. EITF 06-11 is effective for fiscal years beginning after September 15, 2007. The Company does not expect EITF 06-11 will have a material impact on its consolidated financial position, results of operations or cash flows.
In April 2007, the FASB directed the FASB Staff to issue FSP No. FIN 39-1, Amendment of FASB Interpretation No. 39 (FSP FIN 39-1). FSP FIN 39-1 modifies FIN No. 39, Offsetting of Amounts Related to Certain Contracts, and permits companies to offset cash collateral receivables or payables with net derivative positions under certain circumstances. FSP FIN 39-1 is effective for fiscal years beginning after November 15, 2007, with early adoption permitted. The Company is currently assessing the impact of FIN 39-1on its consolidated financial position and results of operations.
In May 2007, the FASB directed the FASB Staff to issue FASB Staff Position No. FIN 46(R)-7, Application of FASB Interpretation No. 46(R) to Investment Companies (FSP FIN 46(R)-7). FSP FIN 46(R)-7 makes permanent the temporary deferral of the application of the provisions of FIN 46(R) to unregistered investment companies, and extends the scope exception from applying FIN 46(R) to include registered investment companies. FSP FIN 46(R)-7 is effective upon adoption of SOP 07-1. The Company is currently assessing the impact of FIN 46(R)-7 on its consolidated financial position and results of operations.
In May 2007, the FASB issued FASB Staff Position (FSP) FIN 48-1 Definition of Settlement in FASB Interpretation No. 48 (FSP FIN 48-1). FSP FIN 48-1 provides guidance on how to determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1 is effective retroactively to January 1, 2007. The implementation of this standard did not have a material impact on the Companys consolidated financial position or results of operations.
In June 2007, the AICPA issued Statement of Position (SOP) No. 07-1, Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies (SOP 07-1). SOP 07-1 addresses when the accounting principles of the AICPA Audit and Accounting Guide Investment Companies must be applied by an entity and whether those accounting principles must be retained by a parent company in consolidation or by an investor in the application of the equity method of accounting. The SOP is effective for fiscal years beginning on or after December 15, 2007, with earlier application encouraged. The Company is currently assessing the impact of SOP 07-1 on its consolidated financial position and results of operations.
In June 2007, the Emerging Issues Task Force (EITF) reached a final consensus on EITF Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities (EITF 07-3). EITF 07-3 is effective for fiscal years beginning after December 15, 2007. EITF 07-3 requires that non-refundable advance payments for future research and development activities should be capitalized until the goods have been delivered or related services have been performed. Adoption is on a prospective basis and could impact the timing of expense recognition for agreements entered into after December 31, 2007. The Company does not expect the adoption of EITF 07-3 to have a significant impact on the Companys consolidated financial position or results of operations.
10. Fair Value
Effective January 1, 2007, the Company elected early adoption of SFAS No. 159 and 157. SFAS No. 159, which was issued in February 2007, generally permits the measurement of selected eligible financial instruments at fair value at specified elections dates.
15
Fair Value Measurements (SFAS No. 157)
Liabilities, at fair value, consist of the following:
|
|
September 30, |
|
|
|
|
2007 |
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
Junior subordinated debt |
|
$ |
20,402 |
|
The Company records selected liabilities at fair value, with unrealized gains and losses reflected in the consolidated statement of income. The degree of judgment utilized in measuring the fair value of these liabilities generally correlates to the level of pricing observability. Pricing observability is impacted by a number of factors, including the type of liability, whether the liability has an established market and the characteristics specific to the transaction. Liabilities with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a lesser degree of judgment utilized in measuring fair value. Conversely, liabilities rarely traded or not quoted will generally have less, or no, pricing observability and a higher degree of judgment utilized in measuring fair value.
Effective January 1, 2007, the Company adopted SFAS No. 157, which, among other things, requires enhanced disclosures about assets and liabilities carried at fair value. SFAS No. 157 establishes a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. The three broad levels defined by SFAS No. 157 hierarchy are as follows:
Level I: |
|
Quoted prices are available in active markets for identical assets or liabilities as of the reported date. |
Level II: |
|
Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed. |
|
|
|
Level III: |
|
Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using managements best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. |
The following table presents the assets and liabilities reported on the consolidated statements of financial condition at their fair value as of September 30, 2007 by level within the fair value hierarchy. As required by SFAS No. 157, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
|
|
September 30, 2007 |
|
||||||||||
|
|
Level I |
|
Level II |
|
Level III |
|
Total |
|
||||
|
|
(In thousands) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
||||
Securities available for sale |
|
$ |
|
|
$ |
173,335 |
|
$ |
|
|
$ |
173,335 |
|
Interest Rate Swap |
|
|
|
67 |
|
|
|
67 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
||||
Junior subordinated debt |
|
$ |
|
|
$ |
20,402 |
|
$ |
|
|
$ |
20,402 |
|
Fair Value Measurements (SFAS No. 159)
The Company elected to early adopt SFAS No. 159 as of January 1, 2007. Early adoption was elected to accommodate balance sheet strategies to facilitate the Companys regulatory capital, liquidity management and interest rate risk management. The Company adopted the fair value option for its junior subordinated debt that had been carried at
16
approximately $20.2 million at December 31, 2006. Effective January 1, 2007, junior subordinated debt was accounted for at their then fair value. This resulted in a one-time cumulative after-tax charge of $409,000 ($619,000 pre-tax) to opening retained earnings as of January 1, 2007. As a result of the change in fair value of the junior subordinated debt, included in other non-interest income for the first nine months of 2007 is a pre-tax loss of approximately $67,000.
The following table presents information about the eligible financial liabilities for which the Company elected the fair value measurement option and for which a transition adjustment was recorded to retained earnings as of January 1, 2007:
|
|
January 1,
|
|
Cumulative-
|
|
January 1,
|
|
|||
|
|
(In thousands) |
|
|||||||
Liabilities: |
|
|
|
|
|
|
|
|||
Junior subordinated debt |
|
$ |
20,150 |
|
$ |
185 |
|
$ |
20,335 |
|
Total Liabilities |
|
$ |
20,150 |
|
$ |
185 |
|
$ |
20,335 |
|
|
|
|
|
|
|
|
|
|||
Pre-tax cumulative effect of adoption of SFAS No. 159 |
|
|
|
$ |
185 |
|
|
|
||
Unamortized deferred issuance costs |
|
|
|
$ |
434 |
|
|
|
||
Income tax benefit |
|
|
|
(210 |
) |
|
|
|||
Cumulative effect of adoption of SFAS No. 159 |
|
|
|
$ |
409 |
|
|
|
17
Item 2 - MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies
Note 1 to the Companys consolidated financial statements (included in Item 8 of the Form 10-K for the year ended December 31, 2006) lists significant accounting policies used in the development and presentation of its financial statements. This discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of the Company and its results of operations.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, other than temporary impairment losses on available for sale securities and the valuation of deferred tax assets. In estimating other-than temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
Results of Operations
OVERVIEW
Net income for the Company for the quarter ended September 30, 2007 was $2.54 million, a decrease of 2.0%, as compared to $2.59 million for the same period in 2006. For the first nine months of 2007, net income was $5.44 million, a decrease of 20.9%, as compared to $6.88 million for the same period in 2006. Basic and diluted earnings per share for the third quarter of 2007 were $.45 and $.45, respectively, compared to basic and diluted earnings per share of $.46 and $.46, respectively, for the same period of 2006. For the first nine months of 2007, basic and diluted earnings per share were $.96 and $.95, respectively, compared to basic and diluted earnings per share of $1.23 and $1.22, respectively, for the same period of 2006. Earnings per share amounts reflect a 5% stock dividend distributed to shareholders on June 15, 2007. The decrease in net income for the first nine months of 2007 was due primarily to the recognition of a $1.6 million (after-tax) loss from the sale of $64.1 million in available for sale securities in the first quarter of 2007.
The following are the key ratios for the Company:
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||
|
|
September 30, |
|
September 30, |
|
September 30, |
|
September 30, |
|
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
Return on average assets |
|
0.94 |
% |
1.02 |
% |
0.69 |
% |
0.94 |
% |
Return on average shareholders equity |
|
9.66 |
% |
10.59 |
% |
7.00 |
% |
9.54 |
% |
Dividend payout ratio |
|
44.44 |
% |
39.58 |
% |
60.00 |
% |
42.19 |
% |
Average shareholders equity to average assets |
|
9.69 |
% |
9.67 |
% |
9.82 |
% |
9.81 |
% |
Net Interest Income
Net interest income is a primary source of revenue for the Company. Net interest income results from the difference between the interest and fees earned on loans and investments and the interest paid on deposits to customers and other non-deposit sources of funds, such as repurchase agreements and short and long-term borrowed funds. Net interest margin is the difference between the gross (tax-effected) yield on earning assets and the cost of interest bearing funds as a percentage of earning assets. All discussion of net interest margin is on a fully taxable equivalent basis (FTE).
18
Net interest income before the provision for loan losses for the three months ended September 30, 2007 was $8.8 million, an increase of $0.5 million, or 5.5%, compared to the $8.3 million reported for the third quarter of 2006. Net interest income before the provision for loan losses for the nine months ended September 30, 2007 was $25.9 million, an increase of $1.1 million, or 4.6%, compared to the $24.8 million reported for the same period in 2006. The net interest margin decreased to 3.57% for the third quarter of 2007 from 3.64% for the third quarter of 2006. The net interest margin decreased to 3.63% for the first nine months of 2007 from 3.76% for the same period in 2006.
The following summarizes net interest margin information:
|
|
Three months ended September 30, |
|
||||||||||||||
|
|
2007 |
|
2006 |
|
||||||||||||
|
|
Average
|
|
Interest
|
|
%
|
|
Average
|
|
Interest
|
|
%
|
|
||||
|
|
(Dollar amounts in thousands, except percentages) |
|
||||||||||||||
Interest-Earning Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Loans: (1) (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Commercial |
|
$ |
625,661 |
|
$ |
12,004 |
|
7.51 |
|
$ |
537,588 |
|
$ |
10,331 |
|
7.52 |
|
Mortgage |
|
44,006 |
|
716 |
|
6.50 |
|
47,223 |
|
760 |
|
6.44 |
|
||||
Consumer |
|
126,123 |
|
2,414 |
|
7.59 |
|
137,286 |
|
2,643 |
|
7.64 |
|
||||
Other |
|
|
|
|
|
|
|
146 |
|
|
|
|
|
||||
Investments (2) |
|
175,267 |
|
2,513 |
|
5.73 |
|
180,546 |
|
2,351 |
|
5.21 |
|
||||
Other short-term investments |
|
482 |
|
6 |
|
4.59 |
|
245 |
|
5 |
|
7.94 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total interest-earning assets |
|
$ |
971,539 |
|
$ |
17,653 |
|
7.11 |
|
$ |
903,034 |
|
$ |
16,090 |
|
6.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest-Bearing Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Transaction accounts |
|
$ |
329,621 |
|
$ |
2,480 |
|
2.99 |
|
$ |
289,460 |
|
$ |
1,988 |
|
2.73 |
|
Certificates of deposit |
|
336,480 |
|
4,106 |
|
4.84 |
|
292,207 |
|
3,270 |
|
4.44 |
|
||||
Securities sold under agreement to repurchase |
|
94,964 |
|
985 |
|
4.07 |
|
70,851 |
|
731 |
|
4.03 |
|
||||
Short-term borrowings |
|
58,292 |
|
762 |
|
5.11 |
|
77,872 |
|
1,063 |
|
5.34 |
|
||||
Long-term borrowings |
|
11,109 |
|
100 |
|
3.51 |
|
31,620 |
|
273 |
|
3.38 |
|
||||
Junior subordinated debt |
|
20,360 |
|
470 |
|
9.17 |
|
20,150 |
|
470 |
|
9.25 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total interest-bearing liabilities |
|
850,826 |
|
8,903 |
|
4.15 |
|
782,160 |
|
7,795 |
|
3.95 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Noninterest-bearing deposits |
|
108,999 |
|
|
|
|
|
112,607 |
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total cost of funds |
|
$ |
959,825 |
|
8,903 |
|
3.68 |
|
$ |
894,767 |
|
7,795 |
|
3.46 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Net interest margin (fully taxable equivalent) |
|
|
|
$ |
8,750 |
|
3.57 |
|
|
|
$ |
8,295 |
|
3.64 |
|
(1) |
|
Loan fees have been included in the interest income totals presented. Nonaccrual loans have been included in average loan balances. |
|
|
|
(2) |
|
Interest income on loans and investments is presented on a taxable equivalent basis using an effective tax rate of 34%. |
19
|
|
Nine Months Ended September 30, |
|
||||||||||||||
|
|
2007 |
|
2006 |
|
||||||||||||
|
|
Average
|
|
Interest
|
|
%
|
|
Average
|
|
Interest
|
|
%
|
|
||||
|
|
(Dollar amounts in thousands, except percentages) |
|
||||||||||||||
Interest-Earning Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Loans: (1) (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Commercial |
|
$ |
609,761 |
|
$ |
35,258 |
|
7.63 |
|
$ |
512,346 |
|
$ |
28,796 |
|
7.41 |
|
Mortgage |
|
44,169 |
|
2,130 |
|
6.43 |
|
49,091 |
|
2,461 |
|
6.68 |
|
||||
Consumer |
|
128,919 |
|
7,399 |
|
7.68 |
|
135,243 |
|
7,572 |
|
7.49 |
|
||||
Other |
|
|
|
|
|
|
|
248 |
|
|
|
|
|
||||
Investments (2) |
|
170,005 |
|
7,094 |
|
5.56 |
|
183,142 |
|
7,046 |
|
5.13 |
|
||||
Federal funds sold |
|
|
|
|
|
|
|
11 |
|
|
|
4.53 |
|
||||
Other short-term investments |
|
711 |
|
24 |
|
4.51 |
|
273 |
|
12 |
|
5.60 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total interest-earning assets |
|
$ |
953,565 |
|
$ |
51,905 |
|
7.18 |
|
$ |
880,354 |
|
$ |
45,887 |
|
6.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest-Bearing Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Transaction accounts |
|
$ |
310,765 |
|
$ |
6,801 |
|
2.93 |
|
$ |
289,568 |
|
$ |
5,419 |
|
2.50 |
|
Certificates of deposit |
|
327,873 |
|
11,795 |
|
4.81 |
|
284,122 |
|
9,057 |
|
4.26 |
|
||||
Securities sold under agreement to repurchase |
|
93,827 |
|
2,924 |
|
4.11 |
|
66,734 |
|
1,918 |
|
3.79 |
|
||||
Short-term borrowings |
|
66,927 |
|
2,676 |
|
5.27 |
|
63,285 |
|
2,430 |
|
5.13 |
|
||||
Long-term borrowings |
|
15,189 |
|
399 |
|
3.46 |
|
37,678 |
|
974 |
|
3.41 |
|
||||
Junior subordinated debt |
|
20,282 |
|
1,419 |
|
9.35 |
|
20,150 |
|
1,336 |
|
8.87 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total interest-bearing liabilities |
|
834,863 |
|
26,014 |
|
4.17 |
|
761,537 |
|
21,134 |
|
3.71 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Noninterest-bearing deposits |
|
106,966 |
|
|
|
|
|
113,452 |
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total cost of funds |
|
$ |
941,829 |
|
26,014 |
|
3.69 |
|
$ |
874,989 |
|
21,134 |
|
3.23 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Net interest margin (fully taxable equivalent) |
|
|
|
$ |
25,891 |
|
3.63 |
|
|
|
$ |
24,753 |
|
3.76 |
|
Average interest-earning assets for the three months ended September 30, 2007 were $971.5 million, a $68.5 million, or 7.6%, increase over average interest-earning assets of $903.0 million for the same period in 2006. Average interest-earning assets for the nine months ended September 30, 2007 were $953.6 million, a $73.2 million, or 8.3%, increase over average interest-earning assets of $880.4 million for the same period in 2006. The yield on average interest-earning assets increased by 14 basis points to 7.11% for the third quarter of 2007, compared to 6.97% for the same period in 2006. The yield on average interest-earning assets increased by 31 basis points to 7.18% for the first nine months of 2007, compared to 6.87% for the same period in 2006.
Average interest-bearing liabilities for the three months ended September 30, 2007 were $850.8 million, a $68.6 million, or 8.8%, increase over average interest-bearing liabilities of $782.2 million for the same period in 2006. Average interest-bearing liabilities for the nine months ended September 30, 2007 were $834.9 million, a $73.4 million, or 9.6%, increase over average interest-bearing liabilities of $761.5 million for the same period in 2006. Average noninterest-bearing deposits decreased to $109.0 million for the three months ended September 30, 2007, from $112.6 million for the same time period of 2006. Average noninterest-bearing deposits decreased to $107.0 million for the nine months ended September 30, 2007, from $113.5 million for the same time period of 2006. The average interest rate paid on total non interest-bearing and interest-bearing liabilities increased by 22 basis points to 3.68% for the three months ended September 30, 2007, compared to 3.46% for the same period in 2006. The average interest rate paid on total non interest-bearing and interest-bearing liabilities increased by 46 basis points to 3.69% for the nine months ended September 30, 2007, compared to 3.23% for the same period in 2006.
The increase in interest income for the three and nine months ended September 30, 2007, as compared to the same period in 2006, was primarily the result of an increase in average earning assets and earning asset yields. Average earning assets increased due mainly to an increase in commercial loans. For the three months ended September 30, 2007, as compared to the same period in 2006, average commercial loans increased by $88.1 million, or 16.4%. For the nine months ended September 30, 2007, as compared to the same period in 2006, average commercial loans increased by $97.4 million, or 19.0%. The slight decrease in earning asset yields on commercial loans for the three months ended September
20
30, 2007, compared to the same period in 2006, was due mainly to a lower average prime rate for the comparative periods. The increase in earning asset yields on commercial loans for the nine months ended September 30, 2007, compared to the same period in 2006, was due mainly to a higher average prime rate for the comparative periods. For the three months ended September 30, 2007, as compared to the same period in 2006, earning asset yields on investment securities increased from 5.2% at September 30, 2006 to 5.7% at September 30, 2007. For the nine months ended September 30, 2007, as compared to the same period in 2006, earning asset yields on investment securities increased from 5.1% at September 30, 2006 to 5.6% at September 30, 2007. In March 2007, the Company restructured the investment portfolio by selling approximately $64.1 million of available for sale investment securities yielding 4.04% and reinvesting the proceeds into approximately $65.5 million of available for sale investment securities yielding 5.54%.
The increase in interest expense for the three and nine months ended September 30, 2007, as compared to the same period in 2006, was primarily the result of an increase in average interest-bearing liabilities and overall cost of funds. For the three months ended September 30, 2007, as compared to the same period in 2006, the average rate paid on interest-bearing liabilities increased from 4.0% at September 30, 2006 to 4.2% at September 30, 2007. For the nine months ended September 30, 2007, as compared to the same period in 2006, the average rate paid on interest-bearing liabilities increased from 3.7% at September 30, 2006 to 4.2% at September 30, 2007. For the three month period ended September 30, 2007, as compared to the same period in 2006, average interest bearing deposits increased $84.4 million or 14.5% from September 30, 2006 to September 30, 2007 due primarily to strong organic growth in certificate of deposits and escrow accounts. For the nine month period ended September 30, 2007, as compared to the same period in 2006, average interest bearing deposits increased $64.9 million or 11.3% from September 30, 2006 to September 30, 2007 due primarily to strong organic growth in certificate of deposits and escrow accounts. The increase in interest-bearing deposit rates for the comparative three and nine month periods was the result of managements disciplined approach to deposit pricing in response to the increase in short-term interest rates, as well as, the effect of longer-term certificates of deposit maturing during the period and repricing at higher interest rates. For the three months ended September 30, 2007, as compared to the same period in 2006, average interest-bearing wholesale funding decreased by $15.8 million or 7.9%. For the nine months ended September 30, 2007, as compared to the same period in 2006, average interest-bearing wholesale funding grew by $8.4 million or 4.5%.
Provision for Loan Losses
The provision for loan losses for the three months ended September 30, 2007 was $300,000 compared to $300,000 for the same period of 2006. The provision for loan losses for the nine months ended September 30, 2007 was $598,000 compared to $725,000 for the same period of 2006. The provision reflects the amount deemed appropriate by management to provide an adequate reserve to meet the present risk characteristics of the loan portfolio. The decrease in the provision for the nine months ended September 30, 2007 is due primarily to the result of managements evaluation and classification of the credit quality of the loan portfolio utilizing a qualitative and quantitative internal loan review process. Non-performing loans decreased $1,400,000 in the third quarter of 2007. Substandard loans decreased by $565,000 for the nine month period ended September 30, 2007. Management has determined that the current allowance for loan losses is adequate. The Company continues to maintain strong asset quality ratios in light of the continued growth in the Companys loan portfolio and managements assessment of the credit quality factors existing at this time. The ratio of the allowance for loan losses to loans outstanding at September 30, 2007 and December 31, 2006 was 0.89% and 1.00%, respectively. Please see further discussion under the caption Allowance for Loan Losses.
Other Income
Total non-interest income for the three months ended September 30, 2007 decreased 4.9% to $5.2 million compared to $5.5 million for the same period in 2006. Total non-interest income for the nine months ended September 30, 2007 decreased 20.8% to $12.7 million compared to $16.0 million for the same period in 2006.
Net securities gains of $85,000 were recorded for the three months ended September 30, 2007 compared to net security gains of $65,000 for the same period in 2006. Net securities losses were $2.4 million for the nine months ended September 30, 2007 compared to net security gains of $274,000 for the same period in 2006. Net securities gains for the three months ended September 30, 2007 and 2006 were primarily from the planned sales of investment securities and equity portfolio holdings. Net securities losses for the nine months ended September 30, 2007 were primarily due to the sale of $64.1 million in lower-yielding available for sale securities as part of a balance sheet restructuring completed in the first quarter of 2007. Net securities gains for the nine months ended September 30, 2006 were primarily from the planned sales of equity portfolio holdings.
21
For the three months ended September 30, 2007, customer service fees decreased to $664,000 from $671,000, or 1.0%, for the same period in 2006. For the nine months ended September 30, 2007, customer service fees decreased to $1,993,000 from $2,012,000, or 0.9%, for the same period in 2006. The decreases for the three and nine month periods were due primarily to a decrease in commercial account analysis fees and non-sufficient funds charges.
Revenue from mortgage banking activities for the three months ended September 30, 2007 decreased to $432,000 from $932,000, or 53.6%, compared to the same period in 2006. For the nine months ended September 30, 2007, revenue from mortgage banking activity decreased to $1.5 million from $2.8 million, or 46.2%, compared to the same period in 2006. The decrease is due primarily to a declining volume of loans sold into the secondary mortgage market. The Company operates its mortgage banking activities through Philadelphia Financial Mortgage, a division of Leesport Bank. Philadelphia Financial Mortgage does not underwrite any sub-prime loans.
One of the Companys primary sources of other income is commissions and other revenue generated primarily through sales of insurance products through Essick & Barr, LLC, a wholly owned subsidiary of the Company. Revenues from insurance operations were $3.0 million for the third quarter of 2007 compared to $3.0 million for the same period in 2006. Revenues from insurance operations were $8.7 million for the nine months ended September 30, 2007 compared to $8.5 million for the same period in 2006, a 1.8% increase. The increase in insurance commissions and other revenue for the three and nine month periods ended September 30, 2007 is mainly attributed to increased contingency income on sales of insurance products.
Revenue from brokerage and investment advisory commissions and fees for the three months ended September 30, 2007 increased to $189,000 from $186,000, or 1.6%, for the same period in 2006. For the nine months ended September 30, 2007, revenue from brokerage and investment advisory commissions and fees increased to $651,000 from $563,000, or 15.6%, for the same period in 2006. The increase is due primarily to an increase in investment advisory service activity offered through Madison Financial Advisors, LLC, a wholly owned subsidiary of the Company.
Earnings on investment in life insurance for the three months ended September 30, 2007 increased to $197,000 from $131,000, or 50.4%, for the same period in 2006. For the nine months ended September 30, 2007, earnings on investment in life insurance increased to $587,000 from $387,000, or 51.7%, for the same period in 2006. The increase is due primarily to the purchase of $5 million of additional bank owned life insurance (BOLI) in the third quarter of 2006.
Other income including gain on sale of loans for the three months ended September 30, 2007 increased to $666,000 from $504,000, or 32.1%, for the same period in 2006. For the nine months ended September 30, 2007, other income including gain on sale of loans increased to $1.7 million from $1.4 million, or 16.4%, for the same period in 2006. The increases for the three and nine months are due primarily to an increase in network interchange income and gains recognized on the sale of SBA loans.
Other Expense
Total non-interest expense for the three months ended September 30, 2007 increased 2.9% to $10.0 million compared to $9.8 million for the same period in 2006. Total non-interest expense for the nine months ended September 30, 2007 increased 0.6% to $30.4 million compared to $30.3 million for the same period in 2006.
Salaries and benefits were $5.2 million for the three months ended September 30, 2007, a decrease of 1.7% compared to $5.3 million for the same period in 2006. Salaries and benefits were $16.2 million for the nine months ended September 30, 2007, a decrease of 2.8% compared to $16.7 million for the same period in 2006. Included in salaries and benefits for the three months ended September 30, 2007 and September 30, 2006 were stock-based compensation costs of $69,000 and $37,000, respectively. Included in salaries and benefits for the nine months ended September 30, 2007 and September 30, 2006 were stock-based compensation costs of $190,000 and $122,000, respectively. The decrease in salaries and benefits for the comparative three and nine month periods is primarily attributed to a reduction in staff as a result of the Companys corporate-wide reorganization plan initiated in 2006, as well as a decrease in commissions paid on mortgage origination activity through Philadelphia Financial Mortgage. Total commissions paid for the three months ended September 30, 2007 and 2006 were $307,000 and $624,000, respectively. Total commissions paid for the nine months ended September 30, 2007 and 2006 were $1.2 million and $1.7 million, respectively. Full-time equivalent (FTE) employees decreased to 316 at September 30, 2007 from 320 at September 30, 2006.
22
Occupancy expense and furniture and equipment expense for the three months ended September 30, 2007 decreased to $1.7 million from $1.8 million, or 2.5%, for the same period in 2006. For the nine months ended September 30, 2007, occupancy expense and furniture and equipment expense decreased to $5.2 million from $5.4 million, or 4.4%, for the same period in 2006. The decrease for the comparative periods is due primarily to a reduction in building lease expense and furniture and equipment depreciation expense.
Marketing and advertising expense for the three months ended September 30, 2007 was $398,000 compared to $286,000 for the same period of 2006. Marketing and advertising expense for the nine months ended September 30, 2007 was $1.2 million compared to $1.0 million for the same period of 2006. The Company continues its marketing campaigns targeting the greater Reading and Philadelphia regions. These marketing efforts coincide with a new corporate-wide re-branding initiative designed to focus on our one-company portfolio of banking, insurance and wealth management products and services.
Professional services expense and outside processing expense for the three months ended September 30, 2007 increased to $1.2 million from $1.0 million, or 19.6%, for the same period in 2006. For the nine months ended September 30, 2007, professional services expense and outside processing expense increased to $3.6 million from $3.1 million, or 16.7%, for the same period in 2006. The increase for the comparative periods is due primarily to an increase in general Company business initiatives and computer, network and internet banking expenses.
Income Taxes
Income tax expense for the three months ended September 30, 2007 was $786,000, an 8.0% decrease as compared to income tax expense of $854,000 for the three months ended September 30, 2006. Income tax expense for the nine months ended September 30, 2007 was $1.3 million, a 41.0% decrease as compared to income tax expense of $2.1 million for the nine months ended September 30, 2006. The effective income tax rate for the three months ended September 30, 2007 and 2006 was 23.7% and 24.8%, respectively. The effective income tax rate for the nine months ended September 30, 2007 and 2006 was 18.9% and 23.8%, respectively. The decrease in the effective income tax rate for the comparative three and nine month periods are due primarily to tax exempt income increasing while income before income taxes decreased. Also affecting the income tax rate for the nine months ended September 30, 2007 was a $2.5 million pretax loss incurred on the sale of $64.1 million in available for sale securities in the first quarter of 2007. Included in the income tax provision is a federal tax benefit from our $5.0 million investment in an affordable housing, corporate tax credit limited partnership of $450,000 and $450,000 for the nine months ended September 30, 2007 and 2006, respectively.
Financial Condition
The total assets of the Company at September 30, 2007 were $1.09 billion, an increase of approximately $50.2 million, or 6.4% annualized, from $1.04 billion at December 31, 2006.
Mortgage Loans Held for Sale
Mortgage loans held for sale decreased $2.8 million, or 66.0% annualized, to $2.8 million at September 30, 2007 from $5.6 million at December 31, 2006. This decrease is primarily related to a decrease in the volume of loans originated for sale into the secondary residential real estate loan market through the Philadelphia Financial Mortgage.
Securities Available for Sale
Investment securities available for sale increased $9.1 million, or 7.4% annualized, to $173.3 million at September 30, 2007 from $164.2 million at December 31, 2006. Investment securities are used to supplement loan growth as necessary, to generate interest and dividend income, to manage interest rate risk, and to provide liquidity. The increase in investment securities available for sale will mitigate interest rate risk and enhance net interest income. As discussed above, in March 2007, the Company restructured the available for sale investment portfolio by selling approximately $64.1 million of available for sale investment securities yielding 4.04% and reinvesting the proceeds into approximately $65.5 million of available for sale investment securities yielding 5.54%. The Company believes this restructuring has had a positive impact on the Companys ability to manage its balance sheet from both a market and an interest rate risk perspective which will benefit interest income, net interest margin, net income and earnings per common share for the remainder of 2007 and beyond.
23
Loans
Total loans, net of allowance for loan losses, increased to $798.3 million, or 7.2% annualized, at September 30, 2007 from $757.2 million at December 31, 2006.
The components of loans were as follows:
|
|
September 30, |
|
December 31, |
|
||
|
|
2007 |
|
2006 |
|
||
|
|
(Dollar amounts in thousands) |
|
||||
Residential real estate |
|
$ |
230,625 |
|
$ |
210,175 |
|
Commercial |
|
151,773 |
|
136,666 |
|
||
Commercial, secured by real estate |
|
364,052 |
|
350,149 |
|
||
Consumer |
|
5,911 |
|
6,034 |
|
||
Home equity lines of credit |
|
54,038 |
|
62,847 |
|
||
|
|
|
|
|
|
||
Loans |
|
806,399 |
|
765,871 |
|
||
|
|
|
|
|
|
||
Net deferred loan fees |
|
(965 |
) |
(1,088 |
) |
||
Allowance for loan losses |
|
(7,162 |
) |
(7,611 |
) |
||
|
|
|
|
|
|
||
Loans, net of allowance for loan losses |
|
$ |
798,272 |
|
$ |
757,172 |
|
Loans secured by real estate (not including home equity lending products) increased $34.4 million, or 8.2% annualized, to $594.7 million at September 30, 2007 from $560.3 million at December 31, 2006. This increase is primarily due to an increase in originations of commercial loans secured by residential real estate.
Commercial loans increased to $515.8 million at September 30, 2007 from $486.8 million at December 31, 2006, an increase of $29.0 million, or 8.0% annualized. The increase is due primarily to an increase in fixed-rate commercial real estate loans. This increase is also net of approximately $2.0 million of SBA loans sold during the period. The sale of these loans is in line with the Companys asset/liability strategy to limit interest rate risk.
Allowance for Loan Losses
The allowance for loan losses at September 30, 2007 was $7.2 million compared to $7.6 million at December 31, 2006. Additions to the allowance are made from time to time based upon managements assessment of credit quality factors existing at that time. The Company performs a review of the credit quality of its loan portfolio on a monthly basis to determine the adequacy of the allowance for loan losses. The allowance at September 30, 2007 was 0.89% of outstanding loans compared to 1.00% of outstanding loans at December 31, 2006. The decrease in the allowance for loan losses at September 30, 2007 from December 31, 2006 is primarily due to an increase in the credit quality of the loan portfolio with non-performing loans decreasing $1.4 million for the three months ended September 30, 2007 and substandard loans decreasing by $565,000 for the nine months ended September 30, 2007. For the three months ended September 30, 2007, annualized net charge-offs to average loans was 0.32% compared to 0.04% for the three months ended September 30, 2006. For the nine months ended September 30, 2007, annualized net charge-offs to average loans was 0.18% compared to 0.16% for the nine months ended September 30, 2006.
The allowance for loan losses is an amount that management believes to be adequate to absorb potential losses in the loan portfolio. Additions to the allowance are charged through the provision for loan losses. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. Management regularly assesses the adequacy of the allowance by performing both quantitative and qualitative evaluations of the loan portfolio, including such factors as charge-off history, the level of delinquent loans, the current financial condition of specific borrowers, the value of any underlying collateral, risk characteristics in the loan portfolio, local and national economic conditions, and other relevant factors. Significant loans are individually analyzed, while other smaller balance loans are evaluated by loan category. This evaluation is inherently subjective as it requires material estimates that may be susceptible to change. Based upon the results of such reviews, management believes that the allowance for loan losses at September 30, 2007 was adequate to absorb credit losses inherent in the portfolio at that date.
The following table shows the activity in the Companys allowance for loan losses:
24
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
September 30, |
|
September 30, |
|
||||||||
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
||||
|
|
(Dollar amounts in thousands) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
||||
Balance of allowance for loan losses, beginning of period |
|
$ |
7,492 |
|
$ |
7,301 |
|
$ |
7,611 |
|
$ |
7,619 |
|
Loans charged-off: |
|
|
|
|
|
|
|
|
|
||||
Commercial, financial and agricultural |
|
(605 |
) |
(141 |
) |
(1,012 |
) |
(876 |
) |
||||
Real estate mortgage |
|
|
|
|
|
(34 |
) |
|
|
||||
Consumer |
|
(52 |
) |
(7 |
) |
(196 |
) |
(87 |
) |
||||
Total loans charged-off |
|
(657 |
) |
(148 |
) |
(1,242 |
) |
(963 |
) |
||||
Recoveries of loans previously charged-off: |
|
|
|
|
|
|
|
|
|
||||
Commercial, financial and agricultural |
|
7 |
|
52 |
|
110 |
|
57 |
|
||||
Real estate mortgage |
|
8 |
|
4 |
|
53 |
|
34 |
|
||||
Consumer |
|
12 |
|
20 |
|
32 |
|
57 |
|
||||
Total recoveries |
|
27 |
|
76 |
|
195 |
|
148 |
|
||||
Net loans charged-off |
|
(630 |
) |
(72 |
) |
(1,047 |
) |
(815 |
) |
||||
Provision for loan losses |
|
300 |
|
300 |
|
598 |
|
725 |
|
||||
Balance, end of period |
|
$ |
7,162 |
|
$ |
7,529 |
|
$ |
7,162 |
|
$ |
7,529 |
|
|
|
|
|
|
|
|
|
|
|
||||
Net charge-offs to average loans (annualized) |
|
0.32 |
% |
0.04 |
% |
0.18 |
% |
0.16 |
% |
||||
Allowance for loan losses to loans outstanding |
|
0.89 |
% |
1.02 |
% |
0.89 |
% |
1.02 |
% |
||||
Loans outstanding at end of period (net of unearned income) |
|
$ |
805,434 |
|
$ |
737,264 |
|
$ |
805,434 |
|
$ |
737,264 |
|
Average balance of loans outstanding during the period |
|
$ |
792,893 |
|
$ |
713,703 |
|
$ |
778,891 |
|
$ |
687,129 |
|
The following table summarizes the Companys non-performing assets:
|
|
September 30, |
|
December 31, |
|
||
|
|
2007 |
|
2006 |
|
||
|
|
(Dollar amounts in thousands) |
|
||||
Non-accrual loans: |
|
|
|
|
|
||
Real estate |
|
$ |
1,837 |
|
$ |
1,317 |
|
Consumer |
|
213 |
|
578 |
|
||
Commercial, financial and agricultural |
|
2,229 |
|
2,094 |
|
||
Total |
|
4,279 |
|
3,989 |
|
||
|
|
|
|
|
|
||
Loans past due 90 days or more and still accruing: |
|
|
|
|
|
||
Real estate |
|
|
|
47 |
|
||
Consumer |
|
10 |
|
|
|
||
Commercial, financial and agricultural |
|
851 |
|
46 |
|
||
Total |
|
861 |
|
93 |
|
||
|
|
|
|
|
|
||
Troubled debt restructurings |
|
276 |
|
319 |
|
||
|
|
|
|
|
|
||
Total non-performing loans |
|
5,416 |
|
4,401 |
|
||
|
|
|
|
|
|
||
Other real estate owned |
|
307 |
|
858 |
|
||
|
|
|
|
|
|
||
Total non-performing assets |
|
$ |
5,723 |
|
$ |
5,259 |
|
|
|
|
|
|
|
||
Non-performing loans to loans outstanding at end of period (net of unearned income) |
|
0.67 |
% |
0.58 |
% |
||
Non-performing assets to loans outstanding at end of period (net of unearned income) plus OREO |
|
0.71 |
% |
0.69 |
% |
25
Premises and Equipment
Components of premises and equipment were as follows:
|
|
September 30, |
|
December 31, |
|
||
|
|
2007 |
|
2006 |
|
||
|
|
(Dollar amounts in thousands) |
|
||||
|
|
|
|
|
|
||
Land and land improvements |
|
$ |
263 |
|
$ |
263 |
|
Buildings |
|
858 |
|
858 |
|
||
Leasehold improvements |
|
3,454 |
|
3,398 |
|
||
Furniture and equipment |
|
10,489 |
|
9,463 |
|
||
|
|
15,064 |
|
13,982 |
|
||
|
|
|
|
|
|
||
Less: accumulated depreciation |
|
8,201 |
|
7,041 |
|
||
|
|
|
|
|
|
||
Premises and equipment, net |
|
$ |
6,863 |
|
$ |
6,941 |
|
Included in furniture and equipment for the nine months ended September 30, 2007 was approximately $560,000 for the purchase, installation and implementation of a new corporate-wide IP Phone system. In keeping with the one-company approach and the unified branding initiative, this phone system consolidates the Companys internal communications infrastructure between the Bank, Insurance and Wealth Management divisions.
Deposits
Total deposits at September 30, 2007 were $747.9 million compared to $702.8 million at December 31, 2006, an increase of $45.1 million, or 6.4% annualized.
The components of deposits were as follows:
|
|
September 30, |
|
December 31, |
|
||
|
|
2007 |
|
2006 |
|
||
|
|
(Dollar amounts in thousands) |
|
||||
|
|
|
|
|
|
||
Demand, non-interest bearing |
|
$ |
104,742 |
|
$ |
108,549 |
|
Demand, interest bearing |
|
218,757 |
|
209,875 |
|
||
Savings |
|
98,776 |
|
80,982 |
|
||
Time, $100,000 and over |
|
106,275 |
|
97,419 |
|
||
Time, other |
|
219,341 |
|
206,014 |
|
||
|
|
|
|
|
|
||
Total deposits |
|
$ |
747,891 |
|
$ |
702,839 |
|
The increase in interest bearing deposits is due primarily to an increase in time deposits and escrow deposits with the majority of these deposits maturing in one year or less. Management continues to promote these types of deposits through a disciplined pricing strategy as a means of managing the Companys overall cost of funds, as well as, managements continuing emphasis on commercial and retail marketing programs and customer service.
Borrowings
Total debt increased by $15.1 million, or 9.5% annualized, to $227.8 million at September 30, 2007 from $212.7 million at December 31, 2006. The increase in total debt and borrowings was primarily due to overnight federal funds which increased to $103.0 million at September 30, 2007 from $82.1 million at December 31, 2006 offset by long term debt which decreased to $5.0 million at September 30, 2007 from $19.5 million at December 31, 2006. The net increase in borrowed funds was due primarily to an increase in loans, net of allowance for loan losses, of $41.1 million to $798.3 million at September 30, 2007 from $757.2 million at December 31, 2006. Securities sold under agreements to repurchase increased by $8.4 million, or 12.3% annualized, for the nine months ended September 30, 2007.
26
Off Balance Sheet Commitments
The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.
The Banks exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
A summary of the contractual amount of the Companys financial instrument commitments is as follows:
|
|
September 30, |
|
December 31, |
|
||
|
|
2007 |
|
2006 |
|
||
|
|
(Dollar amounts in thousands) |
|
||||
Loan origination committments |
|
$ |
69,890 |
|
$ |
82,123 |
|
Unused lines of credit |
|
250,901 |
|
197,576 |
|
||
Standby letters of credit |
|
19,219 |
|
18,862 |
|
||
Capital
Total shareholders equity increased $2.8 million, or 3.6% annualized, to $104.9 million at September 30, 2007 from $102.1 million at December 31, 2006. The increase in shareholders equity is the net result of: Net income for the period of $5.4 million less dividends declared of $3.2 million; proceeds of $617,000 from the issuance of shares of common stock under the Companys employee benefit and director compensation plans; a net decrease in the unrealized loss on securities available for sale, net of tax, of $647,000; the reissuance of treasury stock of $320,000 primarily in connection with earn-outs of contingent consideration to principals from the acquisition of The Boothby Group insurance agency and First Affiliated Investments; and the purchase of $573,000 in treasury stock . Also included in shareholders equity for the nine month period ended September 30, 2007 was $409,000 in a cumulative-effect adjustment to retained earnings, net of tax, due to the adoption of SFAS No. 159.
Federal bank regulatory agencies have established certain capital-related criteria that must be met by banks and bank holding companies. The measurements which incorporate the varying degrees of risk contained within the balance sheet and exposure to off-balance sheet commitments were established to provide a framework for comparing different institutions. Regulatory guidelines require that Tier I capital and total risk-based capital to risk-adjusted assets must be at least 4.0% and 8.0%, respectively.
Other than Tier 1 capital restrictions on the Companys junior subordinated debt discussed later, the Company is not aware of any pending recommendations by regulatory authorities that would have a material impact on the Companys capital, resources, or liquidity if they were implemented, nor is the Company under any agreements with any regulatory authorities.
The adequacy of the Companys capital is reviewed on an ongoing basis with regard to size, composition and quality of the Companys resources. An adequate capital base is important for continued growth and expansion in addition to providing an added protection against unexpected losses.
An important indicator in the banking industry is the leverage ratio, defined as the ratio of common shareholders equity less intangible assets (Tier I risk-based capital), to average quarterly assets less intangible assets. The leverage ratio at September 30, 2007 was 8.11% compared to 8.24% at December 31, 2006. This decrease is primarily the result of a proportionate increase in average assets compared to Tier I risk-based capital. For the nine months ended September 30, 2007, the capital ratios were above minimum regulatory guidelines.
As required by the federal banking regulatory authorities, guidelines have been adopted to measure capital adequacy. Under the guidelines, certain minimum ratios are required for core capital and total capital as a percentage of
27
risk-weighted assets and other off-balance sheet instruments. For the Company, Tier I risk-based capital consists of common shareholders equity less intangible assets plus the junior subordinated debt, and Tier II risk-based capital includes the allowable portion of the allowance for loan losses, currently limited to 1.25% of risk-weighted assets. By regulatory guidelines, the separate component of equity for unrealized appreciation or depreciation on available for sale securities is excluded from Tier I risk-based capital. In addition, federal banking regulating authorities have issued a final rule restricting the Companys junior subordinated debt to 25% of Tier I risk-based capital. Amounts of junior subordinated debt in excess of the 25% limit generally may be included in Tier II risk-based capital. The final rule provides a five-year transition period, ending March 31, 2009. At September 30, 2007, the entire amount of these securities was allowable to be included as Tier I risk-based capital for the Company. For both periods, the capital ratios were above minimum regulatory guidelines.
The following table sets forth the Companys risk-based capital amounts and ratios.
|
|
September 30, |
|
December 31, |
|
||
|
|
2007 |
|
2006 |
|
||
|
|
(Dollar amounts in thousands) |
|
||||
|
|
|
|
|
|
||
Tier I |
|
|
|
|
|
||
Common shareholders equity excluding unrealized gains (losses) on securities |
|
$ |
104,921 |
|
$ |
102,130 |
|
Disallowed intangible assets |
|
(42,927 |
) |
(43,338 |
) |
||
Junior subordinated debt |
|
20,252 |
|
20,000 |
|
||
Tier II |
|
|
|
|
|
||
Allowable portion of allowance for loan losses |
|
7,162 |
|
7,611 |
|
||
Unrealized losses on available for sale equity securities |
|
1,366 |
|
2,296 |
|
||
|
|
|
|
|
|
||
Total risk-based capital |
|
$ |
90,774 |
|
$ |
88,699 |
|
|
|
|
|
|
|
||
Risk adjusted assets (including off-balance sheet exposures) |
|
$ |
805,791 |
|
$ |
796,229 |
|
|
|
|
|
|
|
||
Leverage ratio |
|
8.11 |
% |
8.24 |
% |
||
Tier I risk-based capital ratio |
|
10.38 |
% |
10.18 |
% |
||
Total risk-based capital ratio |
|
11.27 |
% |
11.14 |
% |
The Company is not aware of any pending recommendations by regulatory authorities that would have a material impact on the Companys capital resources, or liquidity if they were implemented, nor is the Company under any agreements with any regulatory authorities.
Junior Subordinated Debt
On March 9, 2000 and September 26, 2002, the Company established First Leesport Capital Trust I and Leesport Capital Trust II, respectively, in which the Company owns all of the common equity. First Leesport Capital Trust I issued $5 million of mandatory redeemable capital securities carrying an interest rate of 10.875%, and Leesport Capital Trust II issued $10 million of mandatory redeemable capital securities carrying a floating interest rate of 3 month LIBOR plus 3.45%. These debentures are the sole assets of the Trusts. These securities must be redeemed in March 2030 and September 2032, respectively, but may be redeemed on or after March 2010 and November 2007, respectively, or earlier in the event that the interest expense becomes non-deductible for federal income tax purposes or if the treatment of these securities no longer qualifies as Tier I capital for the Company. In October 2002, the Company entered into an interest rate swap agreement that effectively converts the $5 million of fixed-rate capital securities to a floating interest rate of nine month LIBOR plus 5.25%.
On June 26, 2003, Madison established Madison Statutory Trust I in which the Company owns all of the common equity. Madison Statutory Trust I issued $5 million of mandatory redeemable capital securities carrying a floating interest rate of three month LIBOR plus 3.10%. These debentures are the sole assets of the Trusts. These securities must be redeemed in June 2033, but may be redeemed on or after September 26, 2008 or earlier in the event that the interest expense becomes non-deductible for federal income tax purposes or if the treatment of these securities no longer qualifies as Tier I capital for the Company.
28
Liquidity and Interest Rate Sensitivity
The banking industry has been required to adapt to an environment in which interest rates may be volatile and in which deposit deregulation has provided customers with the opportunity to invest in liquid, interest rate-sensitive deposits. The banking industry has adapted to this environment by using a process known as asset/liability management.
Adequate liquidity means the ability to obtain sufficient cash to meet all current and projected needs promptly and at a reasonable cost. These needs include deposit withdrawal, liability runoff, and increased loan demand. The principal sources of liquidity are deposit generation, overnight federal funds transactions with other financial institutions, investment securities portfolio maturities and cash flows, and maturing loans and loan payments. The Bank can also package and sell residential mortgage loans into the secondary market. Other sources of liquidity are term borrowings from the Federal Home Loan Bank, and the discount window of the Federal Reserve Bank. In view of all factors involved, the Banks management believes that liquidity is being maintained at an adequate level.
At September 30, 2007, the Company had a total of $227.9 million, or 20.9%, of total assets in borrowed funds. These borrowings included $99.4 million of repurchase agreements, $103.0 million of federal funds purchased, $5.0 million of term borrowings with the Federal Home Loan Bank, and $20.4 million in junior subordinated debt. The FHLB borrowings have final maturities ranging from January 2008 through February 2008 at interest rates ranging from 3.5% to 3.9%. At September 30, 2007, the Company had a maximum borrowing capacity with the Federal Home Loan Bank of approximately $176.9 million. The Company remains slightly liability sensitive and will continue its strategy to originate fixed and adjustable rate commercial and installment loans and use investment security cash flows, core deposits, escrow deposits and repurchase agreements to reduce the overnight borrowings to maintain a more neutral gap position.
Asset/liability management is intended to provide for adequate liquidity and interest rate sensitivity by matching interest rate-sensitive assets and liabilities and coordinating maturities on assets and liabilities. With the exception of the majority of residential mortgage loans, loans generally are written having terms that provide for a readjustment of the interest rate at specified times during the term of the loan. In addition, interest rates offered for all types of deposit instruments are reviewed weekly and are established on a basis consistent with funding needs and maintaining a desirable spread between cost and return.
During October 2002, the Company entered into an interest rate swap agreement with a notional amount of $5 million. This derivative financial instrument effectively converted fixed interest rate obligations of outstanding junior subordinated debt to variable interest rate obligations, decreasing the asset sensitivity of its balance sheet by more closely matching the Companys variable rate assets with variable rate liabilities. The Company considers the credit risk inherent in the contract to be negligible.
29
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in the Companys assessment of its sensitivity to market risk since its presentation in the Annual Report on Form 10-K for the year ended December 31, 2006 filed with the SEC.
Item 4 - Controls and Procedures
The Companys management, with the participation of the Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Companys disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of September 30, 2007. Based on that evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective as of such date.
There have been no material changes in the Companys internal control over financial reporting during the third quarter of 2007 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
30
PART II - OTHER INFORMATION
Period |
|
Total
|
|
Average Price
|
|
Total Number of
|
|
Maximum
Number (or
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Month #1 (July 1 July 31, 2007) |
|
5,000 |
|
$ |
19.60 |
|
5,000 |
|
145,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Month #2 (August 1 August 31, 2007) |
|
25,000 |
|
$ |
19.00 |
|
25,000 |
|
120,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Month #3 (September 1 September 30, 2007) |
|
|
|
$ |
|
|
|
|
120,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
30,000 |
|
$ |
19.10 |
|
30,000 |
|
120,000 |
|
Item 3 |
|
Defaults Upon Senior Securities None |
|
|
|
Item 4 |
|
Submission of Matters to Vote of Security Holders None |
|
|
|
Item 5 |
|
Other Information - None |
31
Item 6 |
|
Exhibits |
Exhibit No. |
|
Title |
|
|
|
3.1 |
|
Articles of Incorporation of the Company (Incorporated by reference to Exhibit 3.1 of the Companys Quarterly Report on Form 10-Q/A for the quarter ended June 30, 2003). |
|
|
|
3.2 |
|
Bylaws of the Company (Incorporated by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K filed on November 18, 2005). |
|
|
|
10.1 |
|
Second Amendment to Employment Agreement, effective July 2, 2007, by and among the Company, Essick & Barr, LLC and Charles J. Hopkins (Incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K filed on July 19, 2007). |
|
|
|
31.1 |
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
|
|
|
31.2 |
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
|
|
|
32.1 |
|
Rule 1350 Certification of Chief Executive Officer and Chief Financial Officer |
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
LEESPORT FINANCIAL CORP. |
|
|
|
|
|
(Registrant) |
|
|
|
|
|
|
|
Dated: October 31, 2007 |
|
|
By |
/s/Robert D. Davis |
|
|
|
|
|
|
|
|
|
|
|
Robert D. Davis |
|
|
|
|
|
President and Chief |
|
|
|
|
|
Executive Officer |
|
|
|
|
|
|
|
Dated: October 31, 2007 |
|
|
By |
/s/Edward C. Barrett |
|
|
|
|
|
|
|
|
|
|
|
Edward C. Barrett |
|
|
|
|
|
Executive Vice President and |
|
|
|
|
|
Chief Financial Officer |
32
1 Year Leesport Financial (MM) Chart |
1 Month Leesport Financial (MM) Chart |
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