CENTENNIAL BANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Unaudited Condensed Consolidated Financial Statements
(1)
Organization, Operations and Basis of Presentation
Centennial Bank Holdings, Inc. is a financial holding
company and a bank holding company registered under the Bank Holding Company
Act of 1956, as amended. Our principal business is to serve as a holding
company for our subsidiaries. As of September 30, 2007, those subsidiaries were
Guaranty Bank and Trust Company and Centennial Bank of the West, referred to as
Guaranty Bank, and CBW, respectively. At September 30, 2006, those subsidiaries
were Guaranty Bank, CBW and Collegiate Peaks Bank, which was sold on November
1, 2006. On July 24, 2007, the Company
announced that it would merge CBW into Guaranty Bank. Federal and state regulatory approval was
received in the third quarter and management intends to merge the two banks by
the end of the fourth quarter 2007. Reference to Banks means Guaranty Bank
and CBW, and we or Company means Centennial Bank Holdings, Inc. on a
consolidated basis with the Banks and Collegiate Peaks, if applicable.
References to Centennial or to the holding
company refer to the parent company on a stand-alone basis.
The Banks are full-service community banks offering an
array of banking products and services to the communities they serve, including
accepting time and demand deposits and originating commercial loans (including
energy loans), real estate loans (including construction loans and mortgage
loans), Small Business Administration guaranteed loans and consumer loans. CBW also provides trust services, including
personal trust administration, estate settlement, investment management
accounts and self-directed IRAs.
(a)
Basis of
Presentation
The accounting and reporting
policies of the Company conform to U.S. generally accepted accounting
principles. All significant intercompany balances and transactions have been
eliminated. Our financial statements reflect all adjustments that are, in the
opinion of management, necessary for a fair presentation of the financial
position and results of operations for the periods presented. Certain
information and note disclosures normally included in consolidated financial
statements prepared in accordance with U.S. generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. The interim operating results are
not necessarily indicative of operating results for the full year.
(b)
Use of
Estimates
The preparation of the
consolidated financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the dates of
the consolidated balance sheets and income and expense for the periods
presented. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant changes
include the assessment for impairment of certain investment securities, the
allowance for loan losses, valuation of other real estate owned, deferred tax
assets and liabilities, goodwill and other intangible assets, and stock
compensation expense. Assumptions and
factors are evaluated on an annual basis or whenever events or changes in
circumstance indicate that the previous assumptions and factors have
changed. The result of the analysis
could result in adjustments to the estimates.
(c)
Allowance
for Loan Losses
The allowance for loan
losses is reported as a reduction of outstanding loan balances.
An allowance for loan losses
is maintained at a level deemed appropriate by management to adequately provide
for known and probable risks in the loan portfolio. The allowance for loan losses is evaluated on
a regular basis by management and based upon managements periodic review of
the collectibility of the loans in light of historical experience, the nature
and volume of the loan portfolio, adverse situations that may affect borrowers
ability to repay, estimated value of any underlying collateral and prevailing
economic conditions. This evaluation is
inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available.
In addition to the allowance
for loan losses the Company records a reserve for unfunded commitments. Similar to the allowance for loan losses, the
reserve for unfunded commitments is evaluated on a regular basis by management. This reserve is recorded in other
liabilities.
9
CENTENNIAL BANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
(d)
Goodwill
and Other Intangible Assets
Goodwill represents the
excess of cost over the fair value of the net assets of businesses
acquired. Goodwill and intangible assets
acquired in a purchase business combination and determined to have an
indefinite useful life are tested for impairment and not amortized. Intangible
assets with definite useful lives are amortized over their estimated useful
lives to their estimated residual values.
Goodwill is our only
intangible asset with an indefinite life.
The annual impairment analysis of goodwill includes identification of
reporting units, the determination of the carrying value of each reporting
unit, including the existing goodwill and intangible assets, and estimating the
fair value of each reporting unit. We
have identified one significant reporting unit banking operations. The
Company tests for impairment of goodwill annually as of October 31, or if an
event occurs or circumstances change that would more likely than not reduce the
fair value of the reporting unit. We
determine the fair value of our reporting unit and compare it to its carrying
amount. If the carrying amount of a
reporting unit exceeds its fair value, we are required to perform a second step
to the impairment test to measure the extent of the impairment.
Core deposit intangible
assets, referred to as CDI, and other definite-lived intangible assets are
recognized apart from goodwill at the time of acquisition based on valuations
prepared by independent third parties or other estimates of fair value. In
preparing such valuations, the third parties consider variables such as deposit
servicing costs, attrition rates, and market discount rates. CDI assets are
amortized to expense over their useful lives, which we have estimated to range
from 7 years to 15 years.
(e)
Impairment
of Long-Lived Assets
Long-lived assets, such as
premises and equipment, and definite-lived intangible assets subject to
amortization, are reviewed for impairment whenever events or changes in
circumstance indicate that the carrying value of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying value of the asset to the estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying value of an asset
exceeds its estimated undiscounted future cash flows, an impairment charge is
recognized by the amount by which the carrying value of the asset exceeds the
fair value of the asset, less costs to sell. Assets to be disposed of are
separately presented in the balance sheet and reported at the lower of the
carrying value or fair value less costs to sell, and are no longer depreciated.
The assets and liabilities of a disposal group classified as held for sale are
presented separately in the appropriate asset and liability sections of the
consolidated balance sheet. The gain or loss and income from a disposal group
are recorded as discontinued operations on the consolidated statement of
income.
(f) Stock Incentive Plan
The Companys Amended and
Restated 2005 Stock Incentive Plan (Plan) provides for up to 2,500,000 grants
of stock options, stock awards, stock units awards, performance stock awards,
stock appreciation rights, and other equity-based awards to key employees,
nonemployee directors, consultants and prospective employees. Through September
30, 2007, the Company has only granted stock awards. The Company accounts for
the equity-based compensation using the provisions of Statement of Financial
Accounting Standards (SFAS) No. 123R,
Share-Based
Payment
. The Company recognizes expense for services received in a
share-based payment transaction as services are received. That cost is
recognized on a straight-line basis over the period during which an employee or
director provides service in exchange for the award. The Company has issued
stock awards that vest based on service periods from one to four years,
performance conditions, and awards with both service periods and performance
conditions. The performance-based share awards expire December 31, 2012. The
compensation cost of employee and director services received in exchange for
stock awards is based on the grant-date fair value of the award (as determined
by quoted market prices). The stock compensation expense recognized reflects
estimated forfeitures, adjusted as necessary based on actual forfeitures.
(g) Deferred
Compensation Plans
The Company has Deferred
Compensation Plans (the Plans) that allow directors and certain key employees
to voluntarily defer compensation. Compensation expense is recorded for the
deferred compensation and a related liability is recognized. Participants may
elect designated investment options for the notional investment of their
deferred compensation. The recorded obligations are adjusted for deemed
10
CENTENNIAL BANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
(5)
Borrowings
Borrowings
include Treasury Tax and Loan notes, Federal Home Loan Bank (FHLB)
borrowings, and a revolving credit agreement with U.S. Bank National
Association. The Company had $51,062,000 and $67,632,000 outstanding under
these obligations at September 30, 2007 and December 31, 2006, respectively,
with a total commitment, including balances outstanding, of $410,098,000 at
September 30, 2007.
At September 30, 2007, borrowings consisted
of a line of credit and term notes at the Federal Home Loan Bank of $29,400,000
and
$7,485,000
respectively, $13,085,000 under the U.S. Bank revolving credit agreement and a $1,092,000 Treasury Tax and Loan note balance.
The total commitment, including balances
outstanding, for borrowings at the Federal Home Loan Bank for the term notes
and line of credit at September 30, 2007 was $320.6 million. The interest rate
on the line of credit varies with the federal funds rate, and was 5.42% at
September 30, 2007. The term notes have fixed interest rates that range from
3.25%
to 6.22%. A blanket pledge and
security agreement with the Federal Home Loan Bank, which encompasses certain
loans and securities, serves as collateral for these borrowings.
The $70 million revolving credit agreement
with U.S. Bank National Association contains financial covenants, including
maintaining a minimum return on average assets, a maximum nonperforming assets
to total loans ratio and regulatory capital ratios that qualify the Company as
well-capitalized. As of September 30,
2007, the Company was not in compliance with the return on average assets
covenant because of the additional provision for loan losses recorded in the
third quarter 2007, which was mostly attributable to the Companys decision to
sell a portfolio of its nonperforming and classified loans in a bulk sale,
rather than continuing to work out each credit individually. As a result of the most recent amendment to
the credit agreement (see Part II, Item 5), however, the Company is now in
compliance with all outstanding financial covenants as of September 30, 2007. As of September 30, 2007, the Company had
$13.1
million drawn on this line. The Company is in compliance with all
outstanding debt covenants, as amended. The interest rate varies based on a
spread over the federal funds rate, with a rate of 6.4% at September 30, 2007. The credit agreement is secured by Guaranty Bank
stock.
(6)
Subordinated Debentures and Trust Preferred Securities
The
Company had $41,239,000 in aggregate principal balances of subordinated
debentures outstanding with a weighted average cost of 9.0% and 9.1% at
September 30, 2007 and December 31, 2006, respectively. The subordinated debentures
were issued in four separate series. Each issuance has a maturity of thirty
years from its date of issue. The subordinated debentures were issued to trusts
established by the Company, which in turn issued $40 million of trust preferred
securities. Generally and with certain limitations, the Company is permitted to
call the debentures subsequent to the first five or ten years, as applicable,
after issue if certain conditions are met, or at any time upon the occurrence
and continuation of certain changes in either the tax treatment or the capital
treatment of the trusts, the debentures or the preferred securities. As of September 30, 2007, the Company was in
compliance with all covenants of these subordinated debentures.
These
securities are currently included in Tier I capital for purposes of determining
the Companys Tier I and total risk-based capital ratios. The Board of
Governors of the Federal Reserve System, which is the holding companys banking
regulator, has promulgated a modification of the capital regulations affecting
trust preferred securities. Under this modification, beginning March 31,
2009, the Company will be required to use a more restrictive formula to
determine the amount of trust preferred securities that can be included in
regulatory Tier I capital. At that time, the Company will be allowed to include
in Tier I capital an amount of trust preferred securities equal to no more than
25% of the sum of all core capital elements, which is generally defined as
stockholders equity less certain intangibles, including goodwill, core deposit
intangibles and customer relationship intangibles, net of any related deferred
income tax liability. The regulations currently in effect limit the amount of
trust preferred securities that can be included in Tier I capital to 25% of the
sum of core capital elements without a deduction for permitted intangibles.
15
CENTENNIAL BANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated
Financial Statements (Continued)
(8) Stock-Based
Compensation
Under
the Companys Amended and Restated 2005 Stock Incentive Plan (the Incentive
Plan), the Company may grant stock-based compensation awards to nonemployee
directors, key employees, consultants and prospective employees under the terms
described in the Incentive Plan. The allowable stock-based compensation awards
include the grant of Options, Restricted Stock Awards, Restricted Stock Unit
Awards, Performance Stock Awards, Stock Appreciation Rights and other
Equity-Based Awards. The Incentive Plan provides that eligible participants may
be granted shares of Company common stock that are subject to forfeiture until
the grantee vests in the stock award based on the established conditions, which
include service conditions and established performance measures.
Prior
to vesting of the stock awards with a service vesting condition, each grantee
shall have the rights of a stockholder with respect to voting of the granted
stock. The recipient is not entitled to dividend rights with respect to the
shares of granted stock until vesting occurs. Prior to vesting of the stock
awards with performance vesting conditions, each grantee shall have the rights
of a stockholder with respect to voting of the granted stock. The recipient is
not entitled to dividend rights with respect to the shares of granted stock
until initial vesting occurs, at which time the dividend rights will exist on
vested and unvested shares of granted stock, subject to termination of such
rights under the terms of the Incentive Plan.
Other
than the stock awards with service and performance-based vesting conditions, no
grants have been made under the Incentive Plan. The Incentive Plan authorizes
grants of stock-based compensation awards of up to 2,500,000 shares of Company
common stock, subject to adjustments provided by the Incentive Plan. As of
September 30, 2007 and December 31, 2006, there were 1,651,344 and 1,725,825
shares of unvested stock granted (net of forfeitures and vestings), with
762,144 and 741,377 shares available for grant under the Incentive Plan,
respectively.
A
summary of the status of our outstanding stock awards and the change during the
period is presented in the table below:
|
|
Shares
|
|
Weighted
Average Fair
Value on
Award Date
|
|
Outstanding at December 31, 2006
|
|
1,725,825
|
|
$
|
10.67
|
|
Awarded
|
|
131,000
|
|
8.60
|
|
Forfeited
|
|
(151,767
|
)
|
10.92
|
|
Vested
|
|
(53,714
|
)
|
10.64
|
|
Outstanding at September 30, 2007
|
|
1,651,344
|
|
$
|
10.48
|
|
The
Company recognized $2,123,000 and $2,382,000 in stock-based compensation
expense for services rendered for the nine months ended September 30, 2007 and
2006, respectively. The total income tax benefit recognized in the consolidated
income statement for share-based compensation arrangements was $751,000 and
$905,000 for the nine months ended September 30, 2007 and 2006, respectively.
At September 30, 2007, compensation cost of $7,416,000 related to nonvested
awards not yet recognized is expected to be recognized over a weighted-average
period of 2.5 years. During the first
nine months of 2007, the value of the vested awards was approximately
$419,500. Of the 1,651,344 shares
outstanding at September 30, 2007, approximately 810,000 shares are expected to
vest.
(9)
Capital Ratios
At
September 30, 2007 and December 31, 2006, the Company had leverage ratios of
8.56% and 8.93%, Tier 1 risk-weighted capital ratios of 9.16% and 9.92%,
and total risk-weighted capital ratios of 10.35% and 11.17%, respectively. The
Company actively monitors its regulatory capital ratios to ensure that the
Company and its bank subsidiaries are well capitalized under the applicable
regulatory framework.
17
ITEM 2
.
Managements Discussion and Analysis of Financial
Condition and Results of Operations
This MD&A should be
read together with our unaudited Condensed Consolidated Financial Statements
and unaudited Statistical Information included elsewhere in this Report and
Items 1, 1A, 6, 7, 7A and 8 of our 2006 Annual Report on Form 10-K. Also, please see the disclosure in the
Forward-Looking Statements and Factors that Could Affect Future Results
section in this report for certain other factors that could cause actual
results or future events to differ materially from those anticipated in the
forward-looking statements included in this report or from historical
performance.
Overview
We are a financial
holding company and a bank holding company providing banking and other
financial services throughout our targeted Colorado markets to consumers and to
small and medium-sized businesses, including the owners and employees of those
businesses, through our bank subsidiaries.
At September 30, 2007, those subsidiaries included Guaranty Bank and
Trust Company and Centennial Bank of the West.
Unless the context requires otherwise, the terms Company, us, we,
and our refers to Centennial Bank Holdings, Inc. on a consolidated
basis. Collegiate Peaks Bank was a subsidiary
prior to its sale on November 1, 2006.
Collegiate Peaks Bank was classified as held for sale from December 31,
2004 through November 1, 2006, with the results of operations reported as
discontinued operations in the Companys financial statements. We refer to
Guaranty Bank and Trust Company as Guaranty Bank, Centennial Bank of the West
as CBW, and Collegiate Peaks Bank as Collegiate Peaks. We refer to Guaranty Bank and CBW as the
Banks. On July 24, 2007, the Company announced that it would merge CBW into
Guaranty Bank. Federal and state
regulatory approval was received in the third quarter 2007. Management expects
to complete the merger by the end of the year.
We offer an array of
banking products and services to the communities we serve, including accepting
time and demand deposits, originating commercial loans including energy loans,
real estate loans, including construction and mortgage loans, Small Business
Administration guaranteed loans and consumer loans. We derive our income
primarily from interest received on real estate-related loans, commercial loans
and leases and consumer loans and, to a lesser extent, from fees on the
referral of loans, interest on investment securities and fees received in
connection with servicing loan and deposit accounts. Our major operating
expenses are the interest we pay on deposits and borrowings and general
operating expenses. We rely primarily on locally generated deposits to provide
us with funds for making loans.
We are subject to
competition from other financial institutions and our operating results, like
those of other financial institutions operating exclusively or primarily in
Colorado, are significantly influenced by economic conditions in Colorado,
including the strength of the real estate market. In addition, both the fiscal
and regulatory policies of the federal government and regulatory authorities
that govern financial institutions and market interest rates also impact our
financial condition, results of operations and cash flows.
19
Earnings
Summary
Table 1
summarizes certain key financial results for the periods indicated:
Table 1
|
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
Change -
|
|
|
|
|
|
Change -
|
|
|
|
|
|
|
|
Favorable
|
|
|
|
|
|
Favorable
|
|
|
|
2007
|
|
2006
|
|
(Unfavorable)
|
|
2007
|
|
2006
|
|
(Unfavorable)
|
|
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
41,084
|
|
$
|
44,224
|
|
$
|
(3,140
|
)
|
$
|
125,147
|
|
$
|
129,900
|
|
$
|
(4,753
|
)
|
Interest
expense
|
|
15,848
|
|
15,229
|
|
(619
|
)
|
47,081
|
|
41,610
|
|
(5,471
|
)
|
Net
interest income
|
|
25,236
|
|
28,995
|
|
(3,759
|
)
|
78,066
|
|
88,290
|
|
(10,224
|
)
|
Provision
for loan losses
|
|
8,026
|
|
1,566
|
|
(6,460
|
)
|
21,641
|
|
1,566
|
|
(20,075
|
)
|
Net
interest income after provision for
loan losses
|
|
17,210
|
|
27,429
|
|
(10,219
|
)
|
56,425
|
|
86,724
|
|
(30,299
|
)
|
Noninterest
income
|
|
2,620
|
|
3,474
|
|
(854
|
)
|
7,764
|
|
10,191
|
|
(2,427
|
)
|
Noninterest
expense
|
|
18,205
|
|
22,942
|
|
4,737
|
|
66,509
|
|
69,686
|
|
3,177
|
|
Income
(loss) before income taxes
|
|
1,625
|
|
7,961
|
|
(6,336
|
)
|
(2,320
|
)
|
27,229
|
|
(29,549
|
)
|
Income
tax expense (benefit)
|
|
122
|
|
2,521
|
|
2,399
|
|
(2,438
|
)
|
9,123
|
|
11,561
|
|
Income
from continuing operations
|
|
1,503
|
|
5,440
|
|
(3,937
|
)
|
118
|
|
18,106
|
|
(17,988
|
)
|
Income
from discontinued operations (net of tax)
|
|
|
|
380
|
|
(380
|
)
|
|
|
869
|
|
(869
|
)
|
Net
income
|
|
$
|
1,503
|
|
$
|
5,820
|
|
$
|
(4,317
|
)
|
$
|
118
|
|
$
|
18,975
|
|
$
|
(18,857
|
)
|
Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.03
|
|
$
|
0.10
|
|
$
|
(0.07
|
)
|
$
|
0.00
|
|
$
|
0.33
|
|
$
|
(0.33
|
)
|
Diluted
earnings per share
|
|
$
|
0.03
|
|
$
|
0.10
|
|
$
|
(0.07
|
)
|
$
|
0.00
|
|
$
|
0.33
|
|
$
|
(0.33
|
)
|
Average
shares outstanding
|
|
52,699,409
|
|
57,093,056
|
|
(4,393,647
|
)
|
53,631,569
|
|
58,060,683
|
|
(4,429,114
|
)
|
Diluted
average shares outstanding
|
|
52,742,028
|
|
57,499,412
|
|
(4,757,384
|
)
|
53,771,405
|
|
58,394,354
|
|
(4,622,949
|
)
|
The $1.5 million third
quarter 2007 net income is $4.3 million lower than third quarter 2006 due
mostly to a $6.5 million increase to the provision for loan losses and a $3.8
million decrease to net interest income.
These decreases to net income were partially offset by $4.7 million in
lower noninterest expense.
The Company recorded an
$8.0 million provision for loan losses in the third quarter 2007 as compared to
a $1.6 million provision for loan losses in the third quarter 2006. The increase was primarily driven by the
decision to sell a large portion of its nonperforming and classified credits in
a bulk sale, rather than continuing to work each credit individually. This was a part of an ongoing adoption of a
more aggressive credit management philosophy, including an accelerated loan
disposition strategy for problem credits, announced in the second quarter 2007.
The decrease to net
interest income is mostly due to lower rates on loans combined with higher
rates on deposits as discussed in further detail under Net Interest Income
below.
The decrease to
noninterest expense is mostly due to lower salaries and employee benefit
expenses primarily attributable to a continued focus on determining each
business units appropriate level of staffing and managing to that level. Total full-time equivalent employees
decreased by 73 to 482 at September 30, 2007 as compared to 555 at September
30, 2006.
The Company recorded net
income of $0.1 million for the nine months ended September 30, 2007 as compared
to $19.0 million for the same period in 2006.
This decrease of $18.9 million is mostly attributable to the after-tax
impact of the $20.0 million increase to the provision for loan losses taken
year-to-date in 2007 as compared to 2006, and a $6.5 million charge for the
settlement of the Barnes action in the second quarter 2007.
Net
Interest Income and Net Interest Margin
Net interest income,
which is our primary source of income, represents the difference between interest
earned on assets and interest paid on liabilities. The interest rate spread is the difference
between the yield on our interest bearing assets and liabilities. Net interest margin is net interest income
expressed as a percentage of average interest-earning assets.
20
The
following table summarizes the Companys net interest income and related spread
and margin for the current quarter and prior four quarters:
Table 2
|
|
Quarter
Ended
|
|
|
|
September
30, 2007
|
|
June 30,
2007
|
|
March
31,
2007
|
|
December
31, 2006
|
|
September
30, 2006
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
Net
interest income
|
|
$
|
25,236
|
|
$
|
25,987
|
|
$
|
26,843
|
|
$
|
27,906
|
|
$
|
28,995
|
|
Interest
rate spread
|
|
3.84
|
%
|
3.98
|
%
|
4.16
|
%
|
4.14
|
%
|
4.45
|
%
|
Net
interest margin
|
|
4.82
|
%
|
5.00
|
%
|
5.16
|
%
|
5.12
|
%
|
5.34
|
%
|
Net
interest margin, fully tax equivalent
|
|
4.97
|
%
|
5.15
|
%
|
5.55
|
%
|
5.27
|
%
|
5.51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third
quarter 2007 net interest income of $25.2 million decreased by $3.8 million
from the third quarter 2006. This
decrease is a result of a $3.1 million unfavorable rate variance and a $0.7
million unfavorable volume variance (see Table 5). The reclassification of loans held for sale
as of September 30, 2007 had a minimal impact on yield.
The
unfavorable rate variance from the prior year third quarter is attributable to
lower yields on loans and a higher cost of funds causing an overall decline in
net interest margin of 52 basis points to 4.82% at September 30, 2007 as
compared to September 30, 2006. During
the same period, the interest rate spread decreased by 61 basis points. The reason for the lower impact on net
interest margin as compared to interest rate spread is primarily attributable
to a continued relatively high level of noninterest demand deposits. The average level of noninterest bearing
demand deposits to total average deposits was 23.9% in the third quarter 2007
as compared to 26.0% in the third quarter 2006.
The increase in cost of funds is due mostly to a 19 basis point increase
in rates on money market deposits and a 72 basis point increase in the cost of
time deposits. This increase in
interest expense from the third quarter 2006 is due mostly to higher costs
associated with time deposits with higher rates as a result of competition, as
well as the renewals of certificates of deposits at prevailing interest rates.
The
unfavorable volume variance from the prior year third quarter is mostly due to
a decrease in earning assets. Average
earning assets in the third quarter 2007 declined by $77.2 million, or 3.6%,
from the same period last year. This
decrease was mostly in the loan category, which had a $75.2 million decline in
average balances for the three months ended September 30, 2007 as compared to
the same period in 2006. The decline
was mostly due to a decrease in construction and land development loans. Part of the Companys strategy is to reduce
its exposure in residential construction and land development loans. Total real estate construction loans were
$290.6 million at September 30, 2007 as compared to $463.5 million at September
30, 2006, a decrease of $172.9 million, or 37.3%. All other loan categories increased by $12.1
million from September 30, 2006 to September 30, 2007.
The
following table summarizes the Companys net interest income and related spread
and margin for the year-to-date periods presented:
Table 3
|
|
Nine
Months Ended
|
|
|
|
September
30,
2007
|
|
September
30,
2006
|
|
|
|
(Dollars
in thousands)
|
|
Net
interest income
|
|
$
|
78,066
|
|
$
|
88,290
|
|
Interest
rate spread
|
|
4.00
|
%
|
4.59
|
%
|
Net
interest margin
|
|
4.99
|
%
|
5.43
|
%
|
Net
interest margin, fully tax equivalent
|
|
5.10
|
%
|
5.56
|
%
|
|
|
|
|
|
|
|
|
For
the nine-month period ended September 30, 2007, net interest income decreased
by $10.2 million, or 11.6%, as compared to the same period in 2006. This decrease is due to a $7.1 million
unfavorable rate variance and a $3.1 million unfavorable volume variance (see
Table 5).
The
unfavorable rate variance for year-to-date 2007 is mostly due to higher cost of
funds. In particular, time deposits and
money market accounts had significant increases over the prior year due to
continued rate competition and repricing at prevailing higher rates. These increases were partially offset by a
favorable earning asset yield variance due to a 2 basis point increase in the
yield on earning assets.
21
The
unfavorable volume variance is mostly a result of lower average earning
assets. As stated above, part of the
Companys strategy is to decrease its concentration in residential construction
and land development loans. This
strategy was the reason for most of the $84.1 million decrease in average
earning assets for the first nine months of 2007 as compared to the same period
in 2006. At September 30, 2007, total real estate construction
loans comprised 16% of the gross loan portfolio as compared to 23% at September
30, 2006.
The following table
presents, for the periods indicated, average assets, liabilities and
stockholders equity, as well as the net interest income from average
interest-earning assets and the resultant annualized yields expressed in
percentages. Nonaccrual loans are
included in the calculation of average loans while accrued interest thereon is
excluded from the computation of yields earned.
Table 4
|
|
Quarter
Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
Average
Balance
|
|
Interest
Income or Expense
|
|
Average
Yield or
Cost
|
|
Average
Balance
|
|
Interest
Income or Expense
|
|
Average
Yield or
Cost
|
|
|
|
(Dollars
in thousands)
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
loans, net of unearned fees
(1)(2)
|
|
$
|
1,871,939
|
|
$
|
38,369
|
|
8.13
|
%
|
$
|
1,947,126
|
|
$
|
41,427
|
|
8.44
|
%
|
Investment
securities
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
50,779
|
|
617
|
|
4.82
|
%
|
61,554
|
|
713
|
|
4.59
|
%
|
Tax-exempt
|
|
106,566
|
|
1,343
|
|
5.00
|
%
|
112,292
|
|
1,542
|
|
5.45
|
%
|
Bank
Stocks
(3)
|
|
32,181
|
|
490
|
|
6.05
|
%
|
30,731
|
|
485
|
|
6.27
|
%
|
Other
earning assets
|
|
16,326
|
|
265
|
|
6.43
|
%
|
3,244
|
|
57
|
|
6.88
|
%
|
Total
interest-earning assets
|
|
2,077,791
|
|
41,084
|
|
7.84
|
%
|
2,154,947
|
|
44,224
|
|
8.14
|
%
|
Non-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
44,189
|
|
|
|
|
|
73,837
|
|
|
|
|
|
Other
assets
|
|
504,933
|
|
|
|
|
|
621,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,626,913
|
|
|
|
|
|
$
|
2,850,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand
|
|
$
|
151,656
|
|
$
|
122
|
|
0.32
|
%
|
$
|
159,634
|
|
$
|
194
|
|
0.48
|
%
|
Money
Market
|
|
653,997
|
|
6,272
|
|
3.81
|
%
|
647,741
|
|
5,909
|
|
3.62
|
%
|
Savings
|
|
75,374
|
|
146
|
|
0.77
|
%
|
91,928
|
|
173
|
|
0.75
|
%
|
Time
certificates of deposit
|
|
579,339
|
|
7,393
|
|
5.06
|
%
|
548,846
|
|
6,007
|
|
4.34
|
%
|
Total
interest-bearing deposits
|
|
1,460,366
|
|
13,933
|
|
3.79
|
%
|
1,448,149
|
|
12,283
|
|
3.36
|
%
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase
agreements
|
|
35,475
|
|
425
|
|
4.75
|
%
|
31,083
|
|
349
|
|
4.45
|
%
|
Federal
funds purchased
|
|
258
|
|
3
|
|
5.39
|
%
|
122
|
|
2
|
|
4.94
|
%
|
Borrowings
|
|
35,326
|
|
543
|
|
6.09
|
%
|
115,591
|
|
1,623
|
|
5.57
|
%
|
Subordinated
debentures
|
|
41,239
|
|
944
|
|
9.08
|
%
|
41,239
|
|
972
|
|
9.35
|
%
|
Total
interest-bearing liabilities
|
|
1,572,664
|
|
15,848
|
|
4.00
|
%
|
1,636,184
|
|
15,229
|
|
3.69
|
%
|
Noninterest
bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
458,143
|
|
|
|
|
|
508,993
|
|
|
|
|
|
Other
liabilities
|
|
26,848
|
|
|
|
|
|
110,275
|
|
|
|
|
|
Total
liabilities
|
|
2,057,655
|
|
|
|
|
|
2,255,452
|
|
|
|
|
|
Stockholders
Equity
|
|
569,258
|
|
|
|
|
|
595,329
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
2,626,913
|
|
|
|
|
|
$
|
2,850,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
$
|
25,236
|
|
|
|
|
|
$
|
28,995
|
|
|
|
Net
interest margin
|
|
|
|
|
|
4.82
|
%
|
|
|
|
|
5.34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Yields on loans and securities have not
been adjusted to a tax-equivalent basis. Net interest margin on a fully
tax-equivalent basis would have been 4.97% and 5.51% (based on adjustments of
$811,000 and $922,000) for the three months ended September 30, 2007 and
September 30, 2006, respectively, using a combined federal and state tax rate
of 38.01%.
22
(2)
Net loan fees of $1.2 million and $1.5
million for the three months ended September 30, 2007 and 2006 are included in
the yield computation.
(3)
Includes Bankers Bank of the West stock,
Federal Agricultural Mortgage Corporation (Farmer Mac) stock, Federal Reserve
Bank stock and Federal Home Loan Bank stock.
Table 4 (Continued)
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
Average
Balance
|
|
Interest
Income or Expense
|
|
Average
Yield or Cost
|
|
Average
Balance
|
|
Interest
Income or Expense
|
|
Average
Yield or Cost
|
|
|
|
(Dollars
in thousands)
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
loans, net of unearned fees
(1)(2)
|
|
$
|
1,888,013
|
|
$
|
117,194
|
|
8.30
|
%
|
$
|
1,984,197
|
|
$
|
122,592
|
|
8.26
|
%
|
Investment
securities
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
51,075
|
|
1,846
|
|
4.83
|
%
|
69,112
|
|
2,207
|
|
4.27
|
%
|
Tax-exempt
|
|
109,347
|
|
4,091
|
|
5.00
|
%
|
87,066
|
|
3,420
|
|
5.25
|
%
|
Bank
Stocks
(3)
|
|
32,011
|
|
1,424
|
|
5.95
|
%
|
29,874
|
|
1,345
|
|
6.02
|
%
|
Other
earning assets
|
|
10,769
|
|
592
|
|
7.35
|
%
|
5,054
|
|
336
|
|
8.88
|
%
|
Total
interest-earning assets
|
|
2,091,215
|
|
125,147
|
|
8.00
|
%
|
2,175,303
|
|
129,900
|
|
7.98
|
%
|
Non-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
50,907
|
|
|
|
|
|
76,109
|
|
|
|
|
|
Other
assets
|
|
514,207
|
|
|
|
|
|
622,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,656,329
|
|
|
|
|
|
$
|
2,873,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand
|
|
$
|
156,837
|
|
$
|
637
|
|
0.54
|
%
|
$
|
169,415
|
|
$
|
538
|
|
0.42
|
%
|
Money
Market
|
|
636,547
|
|
18,034
|
|
3.79
|
%
|
624,450
|
|
15,527
|
|
3.32
|
%
|
Savings
|
|
79,299
|
|
462
|
|
0.78
|
%
|
95,581
|
|
534
|
|
0.75
|
%
|
Time
certificates of deposit
|
|
578,170
|
|
21,884
|
|
5.06
|
%
|
576,471
|
|
17,364
|
|
4.03
|
%
|
Total
interest-bearing deposits
|
|
1,450,853
|
|
41,017
|
|
3.78
|
%
|
1,465,917
|
|
33,963
|
|
3.10
|
%
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase
agreements
|
|
32,312
|
|
1,157
|
|
4.79
|
%
|
26,982
|
|
872
|
|
4.32
|
%
|
Federal
funds purchased
|
|
716
|
|
20
|
|
3.74
|
%
|
563
|
|
20
|
|
4.75
|
%
|
Borrowings
|
|
46,941
|
|
2,073
|
|
5.90
|
%
|
105,850
|
|
4,035
|
|
5.10
|
%
|
Subordinated
debentures
|
|
41,239
|
|
2,814
|
|
9.12
|
%
|
41,245
|
|
2,720
|
|
8.82
|
%
|
Total
interest-bearing liabilities
|
|
1,572,061
|
|
47,081
|
|
4.00
|
%
|
1,640,557
|
|
41,610
|
|
3.39
|
%
|
Noninterest
bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
473,214
|
|
|
|
|
|
522,537
|
|
|
|
|
|
Other
liabilities
|
|
31,332
|
|
|
|
|
|
110,580
|
|
|
|
|
|
Total
liabilities
|
|
2,076,607
|
|
|
|
|
|
2,273,674
|
|
|
|
|
|
Stockholders
Equity
|
|
579,722
|
|
|
|
|
|
599,857
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
2,656,329
|
|
|
|
|
|
$
|
2,873,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
$
|
78,066
|
|
|
|
|
|
$
|
88,290
|
|
|
|
Net
interest margin
|
|
|
|
|
|
4.99
|
%
|
|
|
|
|
5.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Yields on loans and securities have
not been adjusted to a tax-equivalent basis. Net interest margin on a fully
tax-equivalent basis would have been 5.10% and 5.56% (based on adjustments of
$1,648,000 and $2,180,000) for the nine months ended September 30, 2007 and
September 30, 2006, respectively, using a federal and state tax rate of
38.01%.
|
(2)
Net loan fees of $4.3 million and $5.3
million for the nine months ended September 30, 2007 and 2006 are included in
the yield computation.
|
(3)
Includes Bankers Bank of the West
stock, Federal Agricultural Mortgage Corporation (Farmer Mac) stock, Federal
Reserve Bank stock and Federal Home Loan Bank stock.
|
23
The following table
presents the dollar amount of changes in interest income and interest expense
for the major categories of our interest-earning assets and interest-bearing
liabilities. Information is provided for each category of interest-earning
assets and interest-bearing liabilities with respect to (i) changes
attributable to changes in volume (i.e., changes in average balances multiplied
by the prior-period average rate) and (ii) changes attributable to rate (i.e.,
changes in average rate multiplied by prior-period average balances). For
purposes of this table, changes attributable to both rate and volume, which
cannot be segregated, have been allocated proportionately to the change due to
volume and the change due to rate.
Table 5
|
|
Three
Months Ended September 30, 2007 Compared to Three Months Ended September 30,
2006
|
|
Nine
Months Ended September 30, 2007 Compared to Nine Months Ended
September 30, 2006
|
|
|
|
Net
Change
|
|
Rate
|
|
Volume
|
|
Net
Change
|
|
Rate
|
|
Volume
|
|
|
|
(In
thousands)
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
held for investment
|
|
$
|
(3,058
|
)
|
$
|
(1,488
|
)
|
$
|
(1,570
|
)
|
$
|
(5,398
|
)
|
$
|
575
|
|
$
|
(5,973
|
)
|
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
(96
|
)
|
37
|
|
(132
|
)
|
(361
|
)
|
370
|
|
(730
|
)
|
Tax-exempt
|
|
(199
|
)
|
(123
|
)
|
(76
|
)
|
671
|
|
(153
|
)
|
824
|
|
Equity
securities
|
|
5
|
|
(15
|
)
|
20
|
|
79
|
|
(16
|
)
|
95
|
|
Other
earning assets
|
|
208
|
|
(4
|
)
|
212
|
|
256
|
|
(46
|
)
|
302
|
|
Total
interest income
|
|
(3,140
|
)
|
(1,593
|
)
|
(1,546
|
)
|
(4,753
|
)
|
730
|
|
(5,482
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand
|
|
(72
|
)
|
(63
|
)
|
(9
|
)
|
99
|
|
135
|
|
(36
|
)
|
Money
market
|
|
363
|
|
305
|
|
58
|
|
2,507
|
|
2,201
|
|
306
|
|
Savings
|
|
(27
|
)
|
5
|
|
(32
|
)
|
(72
|
)
|
24
|
|
(96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
certificates of deposit
|
|
1,386
|
|
1,038
|
|
348
|
|
4,520
|
|
4,469
|
|
51
|
|
Repurchase
agreements
|
|
76
|
|
24
|
|
52
|
|
285
|
|
101
|
|
184
|
|
Federal
funds purchased
|
|
1
|
|
(1
|
)
|
1
|
|
0
|
|
2
|
|
(2
|
)
|
Borrowings
|
|
(1,080
|
)
|
171
|
|
(1,250
|
)
|
(1,962
|
)
|
783
|
|
(2,744
|
)
|
Subordinated
debentures
|
|
(28
|
)
|
(28
|
)
|
0
|
|
94
|
|
94
|
|
0
|
|
Total
interest expense
|
|
619
|
|
1,451
|
|
(832
|
)
|
5,471
|
|
7,809
|
|
(2,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
(3,759
|
)
|
$
|
(3,044
|
)
|
$
|
(714
|
)
|
$
|
(10,224
|
)
|
$
|
(7,079
|
)
|
$
|
(3,145
|
)
|
Provision
for Loan Losses
The provision for loan
losses represents a charge against earnings. The provision is the amount
required to maintain the allowance for loan losses at a level that, in our
judgment, is adequate to absorb probable incurred losses inherent in the loan
portfolio as of the balance sheet date.
In periods when an existing allowance is determined to exceed the amount
required, the allowance is reduced, which decreases the charge to earnings
through the provision for loan losses. When an existing allowance is deemed to
be less than the amount required, an additional provision is recorded,
resulting in an additional charge to earnings through the provision for loan
losses.
In the third quarter 2007, the Company recorded an
$8.0 million provision for loan losses as compared to $1.6 million in the same
period in 2006. As announced in the
second quarter 2007, the Company modified its credit management philosophy
including more aggressive collection efforts and an accelerated disposition
strategy regarding problem credits. The
increase in the provision for loan losses in the third quarter 2007 as compared
to the same period in 2006 is mostly attributable to the Company determining to
sell a portfolio of its nonperforming and classified loans in a bulk sale, rather
than continuing to work out each credit individually. The Company was not actively marketing these
loans as a bulk sale, but did solicit a bid from a single third party on a
portfolio of nonperforming and classified loans. A final offer was received in October 2007,
which the Company accepted. Because the
offer was received and accepted in October 2007, the loans were classified as
held for sale as of September 30, 2007 and written down to their estimated market
value through the allowance for loan loss.
Please see the
nonperforming assets and allowance for loan losses analysis in the Financial
Condition section of this document for additional information on our asset
quality.
24
For the nine months ended
September 30, 2007, the Company recorded a provision for loan losses of $21.6
million as compared to $1.6 million in the same period in 2006. This significant increase is mostly
attributable to the $8.0 million of provision for loan losses taken in the
third quarter as discussed above, as well as a $12.8 million provision for loan
losses taken in the second quarter 2007.
The $12.8 million provision for loan losses taken in the second quarter
2007 is primarily a result of the modification of the Companys credit
management philosophy during the second quarter 2007. As a result, the Company enhanced its risk
rating methodology, problem loan identification process and instituted more
aggressive collection efforts and an accelerated disposition strategy regarding
problem credits.
Noninterest
Income
The
following table presents the major categories of noninterest income for the
current quarter and prior four quarters:
Table 6
|
|
Quarter
Ended
|
|
|
|
September
30, 2007
|
|
June 30,
2007
|
|
March
31,
2007
|
|
December
31, 2006
|
|
September
30, 2006
|
|
|
|
(In
thousands )
|
|
Noninterest
income:
|
|
|
|
|
|
|
|
|
|
|
|
Customer
service and other fees
|
|
$
|
2,390
|
|
$
|
2,409
|
|
$
|
2,443
|
|
$
|
2,137
|
|
$
|
3,015
|
|
Gain
(loss) on sale of securities
|
|
|
|
|
|
|
|
(5
|
)
|
6
|
|
Gain
(loss) on sale of loans
|
|
|
|
|
|
3
|
|
(55
|
)
|
229
|
|
Other
|
|
230
|
|
168
|
|
121
|
|
449
|
|
224
|
|
Total
noninterest income
|
|
$
|
2,620
|
|
$
|
2,577
|
|
$
|
2,567
|
|
$
|
2,526
|
|
$
|
3,474
|
|
Noninterest
income remained relatively flat for the fourth consecutive quarter. The decrease in noninterest income between
the third quarter 2007 and third quarter 2006 was partially caused by the
discontinuation of our residential mortgage group at the end of the third
quarter 2006.
The
following table presents the major categories of noninterest income for the
year-to-date periods presented:
Table 7
|
|
Nine
Months Ended
|
|
|
|
September
30, 2007
|
|
September
30, 2006
|
|
|
|
|
|
|
|
Noninterest
income:
|
|
|
|
|
|
Customer
service and other fees
|
|
$
|
7,242
|
|
$
|
8,640
|
|
Gain
on sale of securities
|
|
|
|
1
|
|
Gain
on sale of loans
|
|
|
|
774
|
|
Other
|
|
522
|
|
776
|
|
Total
noninterest income
|
|
$
|
7,764
|
|
$
|
10,191
|
|
Noninterest
income for the first nine months of 2007 decreased by $2.4 million from the
same period in 2006. The decrease in
noninterest income between the year-to-date period in 2007 and the same period
in 2006 was partially caused by a reduction in loan placement and other fees in
2007 as compared to 2006, as well as the discontinuation of our residential
mortgage group at the end of the third quarter 2006.
Noninterest
Expense
The
following table presents, for the quarters indicated, the major categories of
noninterest expense:
25
Table 8
|
|
Quarter
Ended
|
|
|
|
September
30, 2007
|
|
June 30,
2007
|
|
March
31,
2007
|
|
December
31, 2006
|
|
September
30, 2006
|
|
|
|
(In
thousands)
|
|
Noninterest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
$
|
9,039
|
|
$
|
10,724
|
|
$
|
10,974
|
|
$
|
10,662
|
|
$
|
12,006
|
|
Occupancy
expense
|
|
1,855
|
|
2,056
|
|
2,121
|
|
2,040
|
|
1,891
|
|
Furniture
and equipment
|
|
1,188
|
|
1,231
|
|
1,240
|
|
1,176
|
|
1,286
|
|
Amortization
of intangible assets
|
|
2,143
|
|
2,195
|
|
2,195
|
|
2,960
|
|
2,858
|
|
Other
general and administrative
|
|
3,980
|
|
11,416
|
|
4,152
|
|
4,467
|
|
4,901
|
|
Total
noninterest expense
|
|
$
|
18,205
|
|
$
|
27,622
|
|
$
|
20,682
|
|
$
|
21,305
|
|
$
|
22,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The $4.7 million decrease in noninterest expense for the third quarter 2007 as compared to the same
period in 2006 is due to a decline in salary and employee benefit expense,
amortization of intangible assets and other general and administrative
expense. These categories decreased for
the reasons discussed below.
Salary
and employee benefits expense decreased by $3.0 million, or 24.7%, in the third
quarter 2007 as compared to the same period in 2006. This decrease is primarily attributable to a
13.2% reduction in full-time equivalent employees at September 30, 2007, as
compared to September 30, 2006.
Additional causes for the decrease in expense is a $0.4 million reduction
in the third quarter 2007 expense for equity-based compensation, as well as a
decline in the accrual for year-end executive bonuses. The decrease in equity-based compensation is
a result of a change in the estimate related to the performance criteria for
performance-based restricted stock awards.
Amortization
of intangible assets expense is $2.1 million in the third quarter 2007, as
compared to $2.9 million in the third quarter 2006, a decrease of $0.7 million,
or 25%. This decrease is mostly
attributable to the use of accelerated amortization periods on core deposit
intangibles and an expiration of non-compete agreements.
Other
general and administrative expense decreased by $0.9 million in the third
quarter 2007 as compared to the same period in 2006. This 18.8% decrease is primarily a result of
a $0.5 million reduction in professional fees, mostly due to lower internal and
external audit costs, and a $0.3 million reduction in advertising and business
development costs.
The
following table presents, for the year-to-date periods indicated, the major
categories of noninterest expense:
Table 9
|
|
Nine
Months Ended
|
|
|
|
September
30,
2007
|
|
September
30,
2006
|
|
|
|
|
|
|
|
Noninterest
expense:
|
|
|
|
|
|
Salaries
and employee benefits
|
|
$
|
30,737
|
|
$
|
35,523
|
|
Occupancy
expense
|
|
6,032
|
|
5,937
|
|
Furniture
and equipment
|
|
3,659
|
|
3,682
|
|
Amortization
of intangible assets
|
|
6,533
|
|
8,855
|
|
Other
general and administrative
|
|
19,548
|
|
15,689
|
|
Total
noninterest expense
|
|
$
|
66,509
|
|
$
|
69,686
|
|
|
|
|
|
|
|
26
Overall
noninterest expense decreased by $3.2 million, or 4.6%, for the nine months
ended September 30, 2007 as compared to the same period in 2006. This decrease is mostly attributable to
reductions in salaries and employee benefits, as well as amortization of
intangible assets. These declines were
partially offset by a $3.9 million increase in other general and administrative
expense.
Other
general and administrative expense increased year-to-date 2007 as compared to
the same period in 2006 due mostly to a $6.5 million second quarter 2007
settlement charge for the Barnes action, as well as a $1.0 million second
quarter 2007 charge related to the merger of our subsidiary banks. The company expects the total cost of the
merger to be approximately $1.5 million. Partially offsetting these 2007
charges were a $1.6 million charge in the second quarter 2006 related to a
management transition, a $1.2 million reduction in professional fees and a $0.5
million reduction in advertising and business development costs. The $1.2 million decrease in professional
fees in 2007 is attributable to a $0.5 million reduction in internal and
external audit fees mostly due to a change in auditors and lower compliance
costs for Sarbanes-Oxley, as well as a $0.5 million reduction in legal fees and
a $0.2 million reduction in miscellaneous professional fees.
Income
Tax Expense (Benefit)
The
effective tax rate on income from continuing operations was 7.5% and 31.7% for
the three-month periods ending September 30, 2007 and 2006, respectively. The primary difference between the expected
tax rate and the effective tax rates was tax-exempt income. The effective tax rate is significantly lower
in 2007 as compared to 2006 primarily due to the level of tax-exempt income as
compared to net income before tax.
The
Company recorded a $2.4 million tax benefit for the year-to-date period ending
September 30, 2007 due partially to the $2.3 million net loss before
taxes. An additional tax benefit was
recorded primarily due to tax-exempt income for the nine-months ended September
30, 2007. For the year-to-date period
ended September 30, 2006, the Company had an effective tax rate on income from
continuing operations of 33.5%. The
primary difference between the expected tax rate of 35% and the effective tax
rate for 2006 was tax-exempt income.
BALANCE
SHEET ANALYSIS
The
following sets forth certain key consolidated balance sheet data:
Table 10
|
|
September
30, 2007
|
|
June 30,
2007
|
|
March 31
2007
|
|
December
31, 2006
|
|
September
30, 2006
|
|
|
|
(In thousands)
|
|
Net
loans (including loans held for sale)
|
|
$
|
1,826,668
|
|
$
|
1,857,846
|
|
$
|
1,859,121
|
|
$
|
1,919,588
|
|
$
|
1,955,529
|
|
Total
assets
|
|
2,617,153
|
|
2,640,732
|
|
2,693,384
|
|
2,720,600
|
|
2,886,647
|
|
Deposits
|
|
1,915,932
|
|
1,938,412
|
|
1,971,869
|
|
1,960,105
|
|
1,968,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
The
following table sets forth the amount of our loans outstanding at the dates
indicated:
Table 11
|
|
September
30, 2007
|
|
June 30,
2007
|
|
March
31,
2007
|
|
December
31, 2006
|
|
September
30, 2006
|
|
|
|
(In
thousands)
|
|
Real
estate - Mortgage
|
|
$
|
724,528
|
|
$
|
742,802
|
|
$
|
708,416
|
|
$
|
686,056
|
|
$
|
663,170
|
|
Real
estate - Construction
|
|
290,591
|
|
321,982
|
|
353,323
|
|
427,465
|
|
463,468
|
|
Equity
lines of credit
|
|
49,747
|
|
53,676
|
|
54,904
|
|
56,468
|
|
60,817
|
|
Commercial
|
|
643,702
|
|
652,911
|
|
651,796
|
|
647,915
|
|
654,829
|
|
Agricultural
|
|
43,142
|
|
47,891
|
|
46,958
|
|
51,338
|
|
54,805
|
|
Consumer
|
|
40,868
|
|
45,214
|
|
43,891
|
|
50,222
|
|
53,714
|
|
Leases
receivable and other
|
|
30,340
|
|
32,829
|
|
31,213
|
|
32,144
|
|
32,931
|
|
Total
gross loans
|
|
1,822,918
|
|
1,897,305
|
|
1,890,501
|
|
1,951,608
|
|
1,983,734
|
|
Less:
allowance for loan losses
|
|
(23,979
|
)
|
(35,594
|
)
|
(27,492
|
)
|
(27,899
|
)
|
(25,977
|
)
|
Unearned
discount
|
|
(3,730
|
)
|
(3,865
|
)
|
(3,888
|
)
|
(4,121
|
)
|
(4,328
|
)
|
Loans,
net of unearned discount
|
|
$
|
1,795,209
|
|
$
|
1,857,846
|
|
$
|
1,859,121
|
|
$
|
1,919,588
|
|
$
|
1,953,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
held for sale
|
|
$
|
31,459
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
2,100
|
|
27
Loans, net of unearned
discount, at September 30, 2007, were $128.3 million lower than at December 31,
2006. This decrease is due in part to
our continued strategy to reduce our concentration in residential construction
and land development loans. The
September 30, 2007 real estate construction loan balances, which include both
residential and commercial construction loans and land development loans,
decreased by $136.9 million from December 31, 2006.
An additional cause for
the decrease in loan balances from December 31, 2006, was the reclassification
of certain nonperforming and classified loans from the portfolio, net of a
$16.4 million charge off taken through the allowance for loan losses, to loans
held for sale effective September 30, 2007.
This sale was closed on October 31, 2007.
Nonperforming
Assets
Credit risk related to
nonperforming assets arises as a result of lending activities. To manage this
risk, we employ frequent monitoring procedures and take prompt corrective
action when necessary. We employ a risk rating system that identifies the
potential risk associated with loans in our loan portfolio. This monitoring and
rating system is designed to help management determine current and potential
problems so that corrective actions can be taken promptly.
Generally, loans are
placed on nonaccrual status when they become 90 days or more past due or at
such earlier time as management determines timely recognition of interest to be
in doubt. Accrual of interest is discontinued on a loan when we believe, after
considering economic and business conditions and analysis of the borrowers
financial condition, that the collection of interest is doubtful.
The following table
summarizes the loans for which the accrual of interest has been discontinued,
loans with payments more than 90 days past due and still accruing interest,
loans that have been restructured, and other real estate owned. For reporting
purposes, other real estate owned (OREO) consists of all real estate, other
than bank premises, actually owned or controlled by us, including real estate
acquired through foreclosure.
Table 12
|
|
Quarter
Ended
|
|
|
|
September
30,
2007
|
|
June 30,
2007
|
|
March 31
2007
|
|
December
31,
2006
|
|
September
30,
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans
|
|
$
|
16,831
|
|
$
|
35,515
|
|
$
|
31,940
|
|
$
|
32,852
|
|
$
|
26,812
|
|
Accruing loans past due 90 days or more
|
|
9
|
|
122
|
|
323
|
|
3
|
|
396
|
|
Other real estate owned
|
|
3,401
|
|
1,385
|
|
861
|
|
1,207
|
|
5,090
|
|
Total nonperforming assets
|
|
$
|
20,241
|
|
$
|
37,022
|
|
$
|
33,124
|
|
$
|
34,062
|
|
$
|
32,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans
|
|
$
|
16,840
|
|
$
|
35,637
|
|
$
|
32,263
|
|
$
|
32,855
|
|
$
|
27,208
|
|
Other impaired loans
|
|
510
|
|
20,208
|
|
8,079
|
|
5,978
|
|
17,076
|
|
Total impaired loans
|
|
$
|
17,350
|
|
$
|
55,845
|
|
$
|
40,342
|
|
$
|
38,833
|
|
$
|
44,284
|
|
Allocated allowance for loan losses
|
|
(4,028
|
)
|
(14,113
|
)
|
(7,673
|
)
|
(8,028
|
)
|
(6,468
|
)
|
Net investment in impaired loans
|
|
$
|
13,322
|
|
$
|
41,732
|
|
$
|
32,669
|
|
$
|
30,805
|
|
$
|
37,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charged-off loans
|
|
$
|
20,079
|
|
$
|
5,473
|
|
$
|
1,692
|
|
$
|
1,088
|
|
$
|
1,736
|
|
Recoveries
|
|
(438
|
)
|
(809
|
)
|
(436
|
)
|
(366
|
)
|
(177
|
)
|
Net charge-off loans
|
|
$
|
19,641
|
|
$
|
4,664
|
|
$
|
1,256
|
|
$
|
722
|
|
$
|
1,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to loans, net of unearned discount
|
|
1.32
|
%
|
1.88
|
%
|
1.46
|
%
|
1.43
|
%
|
1.31
|
%
|
Allowance for loan losses to nonaccrual loans
|
|
142.47
|
%
|
100.22
|
%
|
86.07
|
%
|
84.92
|
%
|
96.89
|
%
|
Allowance for loan losses to nonperforming assets
|
|
118.47
|
%
|
96.14
|
%
|
83.00
|
%
|
81.91
|
%
|
80.43
|
%
|
Allowance for
loan losses to nonperforming loans
|
|
142.39
|
%
|
99.88
|
%
|
85.21
|
%
|
84.92
|
%
|
95.48
|
%
|
Nonperforming
assets to loans, net of unearned discount, and other real estate owned
|
|
1.11
|
%
|
1.96
|
%
|
1.76
|
%
|
1.75
|
%
|
1.63
|
%
|
Annualized net
charge-offs to average loans
|
|
4.16
|
%
|
0.99
|
%
|
0.27
|
%
|
0.15
|
%
|
0.32
|
%
|
Nonaccrual loans
to loans, net of unearned discount
|
|
0.93
|
%
|
1.88
|
%
|
1.69
|
%
|
1.69
|
%
|
1.35
|
%
|
28
Third quarter 2007
nonperforming assets decreased by $12.1 million from the third quarter 2006,
and by $16.8 million from the second quarter 2007. One of the reasons for the decrease in
nonperforming assets is the reclassification of certain nonperforming loans
from the portfolio to loans held for sale at the end of the third quarter 2007,
resulting from the Company entering into a definitive agreement in October 2007
for the sale of these loans. Only those
loans included in the loan sale were reclassified to loans held for sale. The sale of these loans closed on October
31, 2007. Included with this sale, the
Company also sold certain internally classified loans. As many of these loans were previously deemed
to be impaired, other impaired loans also decreased significantly from the
prior quarter and from the third quarter 2006.
Other impaired loans were $0.5 million at September 30, 2007 as compared
to $20.2 million at June 30, 2007 and $17.1 million at September 30, 2006.
As of September 30, 2007, the three largest
nonperforming loan relationships amounted to $9.0 million, or 53.4%, of the
total nonperforming loans.
Although our ratio of
allowance for loan losses to loans of 1.32% at September 30, 2007 remained
relatively flat as compared to 1.31% at September 30, 2006, there was a
significant decline as compared to the second quarter 2007. The allowance for loan loss to loans
decreased from 1.88% at June 30, 2007 to 1.32% at September 30, 2007 primarily
due to lower nonperforming and impaired loans.
The allowance for loan loss to nonperforming loans increased to 142.4%
at September 30, 2007, as compared to 95.5% at September 30, 2006 and 99.9% at
June 30, 2007.
Allowance
for Loan Losses
The allowance for loan
losses is maintained at a level that, in our judgment, is adequate to absorb
probable incurred losses in the loan portfolio. The amount of the allowance is
based on managements evaluation of the collectibility of the loan portfolio,
historical loss experience, and other significant factors affecting loan
portfolio collectibility, including the level and trends in delinquent,
nonaccrual and adversely classified loans, trends in volume and terms of loans,
levels and trends in credit concentrations, effects of changes in underwriting standards,
policies, procedures and practices, national and local economic trends and
conditions, changes in capabilities and experience of lending management and
staff, and other external factors including industry conditions, competition
and regulatory requirements.
Our methodology for
evaluating the adequacy of the allowance for loan losses has two basic
elements: first, the identification of impaired loans and the measurement of an
estimated loss for each individual loan identified; second, estimating an
allowance for probable incurred losses on other loans. The specific allowance
for impaired loans and the remaining allowance are combined to determine the
required allowance for loan losses. The amount calculated is compared to the
actual allowance for loan losses and adjustments are recorded through the
provision for loan losses.
The following table
provides a summary of the activity within the allowance for loan losses account
for the periods presented
:
29
Table 13
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
(In
thousands )
|
|
Balance,
beginning of period
|
|
$
|
27,899
|
|
$
|
27,475
|
|
Loan
charge-offs:
|
|
|
|
|
|
Real
estate mortgage
|
|
11,574
|
|
1,594
|
|
Real
estate construction
|
|
12,338
|
|
1,981
|
|
Commercial
|
|
2,182
|
|
871
|
|
Agricultural
|
|
21
|
|
24
|
|
Consumer
|
|
347
|
|
348
|
|
Lease
receivable and other
|
|
782
|
|
21
|
|
Total
loan charge-offs
|
|
27,244
|
|
4,839
|
|
Recoveries:
|
|
|
|
|
|
Real
estate mortgage
|
|
816
|
|
211
|
|
Real
estate construction
|
|
71
|
|
48
|
|
Commercial
|
|
272
|
|
919
|
|
Agricultural
|
|
394
|
|
29
|
|
Consumer
|
|
109
|
|
178
|
|
Lease
receivable and other
|
|
21
|
|
|
|
Total
loan recoveries
|
|
1,683
|
|
1,385
|
|
Net
loan charge-offs
|
|
25,561
|
|
3,454
|
|
Provision
for loan losses
|
|
21,641
|
|
1,956
|
|
Balance,
end of period
|
|
$
|
23,979
|
|
$
|
25,977
|
|
Securities
We manage our investment
portfolio principally to provide liquidity, balance our overall interest rate
risk and to provide collateral for public deposits and customer repurchase
agreements.
The carrying value of our
portfolio of investment securities at September 30, 2007 and December 31, 2006
was as follows:
Table 14
|
|
September
30,
|
|
December
31,
|
|
Increase
|
|
%
|
|
|
|
2007
|
|
2006
|
|
Decrease
|
|
Change
|
|
|
|
(In
thousands)
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
U.S.
Government agencies and government-sponsored entities
|
|
$
|
5,413
|
|
$
|
2,408
|
|
$
|
3,005
|
|
124.8
|
%
|
Obligations
of states and political subdivisions
|
|
104,788
|
|
115,571
|
|
(10,783
|
)
|
(9.3
|
)%
|
Mortgage
backed securities
|
|
31,508
|
|
38,440
|
|
(6,932
|
)
|
(18.0
|
)%
|
Corporate
bonds
|
|
560
|
|
|
|
560
|
|
100.0
|
%
|
Marketable
equity securities
|
|
997
|
|
841
|
|
156
|
|
18.5
|
%
|
Total
securities available-for-sale
|
|
$
|
143,266
|
|
$
|
157,260
|
|
$
|
(13,994
|
)
|
(8.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
Securities
held-to-maturity:
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
|
|
$
|
11,555
|
|
$
|
11,217
|
|
$
|
338
|
|
3.0
|
%
|
The carrying value of our
investment securities at September 30, 2007 was $154.8 million, compared to the
December 31, 2006 carrying value of $168.5 million. The decrease in the level
of our investments from December 31, 2006, is primarily due to a decision not
to maintain excess collateral for certain deposits and customer repurchase
agreements.
Deposits
At
the end of the third quarter 2007, deposits were $1.9 billion as compared to
$2.0 billion at December 31, 2006, reflecting a decrease of $44.2 million, or
2.3%. Even with the decline, noninterest
bearing deposits still comprised over 24% of total deposits at September 30,
2007, as compared to 26% at December 31, 2006 which helped to keep our overall
cost of funds lower. The $17.1 million
decline in time deposits from December 31, 2006 to September 30, 2007 is
primarily a result of not renewing internet certificate of deposits.
30
Table 15
|
|
At
September 30, 2007
|
|
At
December 31, 2006
|
|
|
|
Balance
|
|
% of
Total
|
|
Balance
|
|
% of
Total
|
|
|
|
(Dollars
in thousands)
|
|
Noninterest
bearing deposits
|
|
$
|
464,446
|
|
24.24
|
%
|
$
|
517,612
|
|
26.41
|
%
|
Interest
bearing demand
|
|
156,548
|
|
8.17
|
%
|
169,289
|
|
8.64
|
%
|
Money
market
|
|
661,379
|
|
34.52
|
%
|
608,290
|
|
31.03
|
%
|
Savings
|
|
73,054
|
|
3.81
|
%
|
87,265
|
|
4.45
|
%
|
Time
|
|
560,505
|
|
29.26
|
%
|
577,649
|
|
29.47
|
%
|
Total
deposits
|
|
$
|
1,915,932
|
|
100.00
|
%
|
$
|
1,960,105
|
|
100.00
|
%
|
Borrowings
and Subordinated Debentures
At
September 30, 2007, our outstanding borrowings were $51.1 million. These
borrowings consisted of $29.4 million and $7.5 million of line of credit and
term notes, respectively, at the Federal Home Loan Bank (FHLB); $13.1 million
on a U.S. Bank revolving credit agreement; and a $1.1 million Treasury Tax and
Loan balance.
Our
total available credit from the FHLB, including outstanding balances, was $
320.6 million at September 30, 2007. The interest rate on the FHLB line of
credit varies with the federal funds rate, and was 5.42% at September 30, 2007.
The term notes have fixed interest rates that range from 3.25% to 6.22%. We
have a blanket pledge and security agreement with the FHLB, which encompasses
certain loans and securities as collateral for these borrowings.
We have a $70 million
revolving credit agreement with U.S. Bank National Association that contains
financial covenants, including maintaining a minimum return on average assets,
a maximum nonperforming assets to total loans ratio, and regulatory capital
ratios that qualify the Company as well capitalized. As of September 30, 2007,
we had an outstanding balance of $13.1 million and were in compliance with all
debt covenants, as amended (see Part II, Item 5). The line of credit has a variable rate based
on the federal funds rate, and was 6.4% at September 30, 2007. The line of
credit is secured by the stock of Guaranty Bank. U.S. Bank performs various
commercial banking services for the Company for which they receive usual and
customary fees.
At September 30, 2007, we
had a $41,239,000 aggregate principal balance of subordinated debentures
outstanding with a weighted average cost of 9.0%. The subordinated debentures were issued in
four separate series. Each issuance has a maturity of thirty years from its
date of issue. The subordinated debentures were issued to trusts established by
us, which in turn issued $40 million of trust preferred securities. Generally
and with certain limitations, the Company is permitted to call the debentures
subsequent to the first five or ten years, as applicable, after issue if certain
conditions are met, or at any time upon the occurrence and continuation of
certain changes in either the tax treatment or the capital treatment of the
trusts, the debentures or the preferred securities.
These securities are
currently included in Tier I capital for purposes of determining the Companys
Tier I and total risk-based capital ratios. The Board of Governors of the
Federal Reserve System, which is the holding companys banking regulator, has
promulgated a modification of the capital regulations affecting trust preferred
securities. Under this modification, beginning March 31, 2009, the Company
will be required to use a more restrictive formula to determine the amount of
trust preferred securities that can be included in regulatory Tier I capital.
At that time, the Company will be allowed to include in Tier I capital an
amount of trust preferred securities equal to no more than 25% of the sum of
all core capital elements, which is generally defined as stockholders equity
less certain intangibles, including goodwill, core deposit intangibles and
customer relationship intangibles, net of any related deferred income tax
liability. The regulations currently in effect limit the amount of trust
preferred securities that can be included in Tier I capital to 25% of the sum
of core capital elements without a deduction for permitted intangibles. The Company expects that its Tier I capital
ratios will be at or above the existing well-capitalized levels on March 31,
2009, the first date on which the modified capital regulations must be applied.
Capital
Resources
Current risk-based
regulatory capital standards generally require banks and bank holding companies
to maintain a ratio of core or Tier 1 capital (consisting principally of
common equity) to risk-weighted assets of at least 4%, a ratio of Tier 1
capital to average total assets (leverage ratio) of at least 4% and a ratio of
total capital (which includes Tier 1 capital plus certain forms of subordinated
debt, a portion of the allowance for loan losses, and preferred stock) to
risk-weighted assets of at least 8%. Risk-weighted assets are calculated by
multiplying the balance in each category of assets by a risk factor, which
ranges from zero for cash assets and certain government obligations to 100% for
high-risk loans, and adding the products together.
31
For regulatory and debt-covenant purposes, the Company maintains
capital above the minimum core standards.
The Company maintains capital at a well-capitalized level. Under the regulations adopted by the federal
regulatory authorities, a bank is well-capitalized if the institution has a
total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital
ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater, and is not
subject to any order or written directive by any such regulatory authority to
meet and maintain a specific capital level for any capital measure. Our subsidiary banks are required to maintain
similar capital levels under capital adequacy guidelines. At September 30, 2007, both of our subsidiary
banks were well-capitalized.
The following table provides the current capital ratios as of the dates
presented, along with the regulatory capital requirements:
Table 16
|
|
September 30,
2007
|
|
December 31,
2006
|
|
Minimum
Capital Requirement
|
|
Minimum Requirement
For Well Capitalized Institution
|
|
|
|
|
|
|
|
|
|
|
|
Leverage ratio
|
|
8.56
|
%
|
8.93
|
%
|
4.00
|
%
|
5.00
|
%
|
Tier 1 risk weighted ratio
|
|
9.16
|
%
|
9.92
|
%
|
4.00
|
%
|
6.00
|
%
|
Total risk weighted capital ratio
|
|
10.35
|
%
|
11.17
|
%
|
8.00
|
%
|
10.00
|
%
|
Contractual Obligations and Off-Balance Sheet Arrangements
The
Company is a party to credit-related 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,
stand-by letters of credit, and commercial letters of credit. Such commitments
involve, to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the consolidated balance sheets.
The
Companys exposure to credit loss is represented by the contractual amount of
these commitments. The Company follows the same credit policies in making
commitments as it does for on-balance sheet instruments.
At
September 30, 2007, the following financial instruments were outstanding whose
contract amounts represented credit risk:
Table 17
|
|
September 30, 2007
|
|
December 31, 2006
|
|
|
|
(In thousands)
|
|
Commitments to extend credit
|
|
$
|
615,941
|
|
$
|
555,757
|
|
Standby letters of credit
|
|
34,447
|
|
32,382
|
|
Commercial letters of credit
|
|
|
|
274
|
|
|
|
|
|
|
|
Totals
|
|
$
|
650,388
|
|
$
|
588,413
|
|
Liquidity
Based
on our existing business plan, we believe that our level of liquid assets is
sufficient to meet our current and presently anticipated funding needs.
We
rely on dividends from our Banks as a primary source of liquidity for the
holding company. We plan to continue to utilize the available dividends from
the Banks for holding company operations, subject to regulatory and other
restrictions. In general, the Banks are able to dividend earnings to the holding
company, subject to the Banks maintaining a well-capitalized ratio. We require
liquidity for the payment of interest on the subordinated debentures, for
operating expenses, principally salaries and benefits, for repurchases of our
common stock, and, if declared by our board of directors, for the payment of
dividends to our stockholders.
The
Banks rely on deposits as their principal source of funds and, therefore, must
be in a position to service depositors needs as they arise. Fluctuations in
the balances of a few large depositors may cause temporary increases and
decreases in liquidity from time to time. We deal with such fluctuations by
using existing liquidity sources.
32
We
believe that if the level of liquid assets (our primary liquidity) does not
meet our liquidity needs, other available sources of liquid assets (our
secondary liquidity), including the purchase of federal funds, sales of
securities under agreements to repurchase, sales of loans, discount window
borrowings from the Federal Reserve Bank, and our lines of credit with the
Federal Home Loan Bank of Topeka and U.S. Bank could be employed to meet those
current and presently anticipated funding needs.
Application of Critical Accounting Policies
and Accounting Estimates
Managements Discussion and
Analysis of financial condition and results of operations discusses the
Companys condensed consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States of America. The preparation of these condensed consolidated financial
statements requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent
liabilities at the date of the condensed consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period. On
an on-going basis, management evaluates its estimates and judgments, including
those related to customers and suppliers, allowance for loan losses, bad debts,
investments, financing operations, long-lived assets, contingencies and
litigation. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable
under the circumstances, the results of which have formed the basis for making
such judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from the
recorded estimates under different assumptions or conditions. A summary of critical accounting policies and
estimates are listed in the Managements Discussion and Analysis of Financial
Condition and Results of Operations section of the Companys 2006 Annual
Report Form 10-K for the fiscal year ended December 31, 2006. There have been no changes to these critical
accounting policies in 2007.
ITEM 3. Quantitative and
Qualitative
Disclosure about
Market Risk
Market
risk is the risk of loss in a financial instrument arising from adverse changes
in market prices and rates, foreign currency exchange rates, commodity prices
and equity prices. Our market risk arises primarily from interest rate risk
inherent in our lending and deposit taking activities. To that end, management
actively monitors and manages our interest rate risk exposure. We do not have
any market risk sensitive instruments entered into for trading purposes. We
manage our interest rate sensitivity by matching the re-pricing opportunities
on our earning assets to those on our funding liabilities. We use various
asset/liability strategies to manage the re-pricing characteristics of our
assets and liabilities designed to ensure that exposure to interest rate
fluctuations is limited to our guidelines of acceptable levels of risk-taking. Hedging
strategies, including the terms and pricing of loans and deposits and managing
the deployment of our securities, are used to reduce mismatches in interest
rate re-pricing opportunities of portfolio assets and their funding sources.
Our
Asset Liability Management Committee, or ALCO, addresses interest rate risk.
The committee is comprised of members of our senior management. The ALCO
monitors interest rate risk by analyzing the potential impact on the net
portfolio of equity value and net interest income from potential changes in
interest rates, and considers the impact of alternative strategies or changes
in balance sheet structure. The ALCO manages our balance sheet in part to
maintain the potential impact on net portfolio value and net interest income
within acceptable ranges despite changes in interest rates.
Our
exposure to interest rate risk is reviewed on at least a quarterly basis by the
ALCO and our board of directors. Interest rate risk exposure is measured using
interest rate sensitivity analysis to determine our change in net portfolio
value and net interest income in the event of hypothetical changes in interest
rates. If potential changes to net portfolio value and net interest income
resulting from hypothetical interest rate changes are not within board-approved
limits, the board may direct management to adjust the asset and liability mix
to bring interest rate risk within board-approved limits.
We
monitor and evaluate our interest rate risk position on a quarterly basis using
traditional gap analysis, earnings at risk analysis, and economic value at risk
analysis under 100 and 200 basis point change scenarios. Each of these analyses
measures different interest rate risk factors inherent in the balance sheet.
Traditional gap analysis, although not a complete view of these risks, provides
a fair representation of our current interest rate risk exposure.
Gap Analysis
A traditional measure of a financial institutions interest rate risk
is the static gap analysis. Traditional gap analysis calculates the dollar
amount of mismatches between assets and liabilities, at certain time periods,
whose interest rates are subject to repricing at their contractual maturity
date or repricing period. A static gap is the difference between the amount of assets
and liabilities that are expected to mature or re-price within a
33
specific period. Generally,
a positive gap benefits an institution during periods of rising interest rates,
and a negative gap benefits an institution during periods of declining interest
rates.
At
September 30, 2007, we had a negative gap of $167.2 million, or 6.4% of our
total assets, that would be subject to re-pricing within one year, with a total
positive gap of $231.3 million, or 8.8% of our total assets that would reprice
within 5 years. The liability sensitive
gap position for less than one year is largely the result of classifying
interest-bearing NOW accounts, money market accounts, and savings accounts as
immediately repriceable and therefore maturing in the less than one year
columns.
The
following table sets forth information concerning re-pricing opportunities for
our interest-earning assets and interest bearing liabilities as of September
30, 2007. The amount of assets and liabilities shown within a particular period
were determined in accordance with their contractual maturities, except that
adjustable rate products are included in the period in which they are first
scheduled to adjust and not in the period in which they mature. Such assets and
liabilities are classified by the earlier of their maturity or re-pricing date.
Table
18
|
|
Less Than 3 Months
|
|
3 Months to
1 Year
|
|
1 to 5 Years
|
|
Over 5
Years
|
|
Not Interest Rate
Sensitive
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Interest-bearing cash and cash equivalents
|
|
$
|
3,467
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
3,467
|
|
Investment securities
|
|
30,456
|
|
8,652
|
|
30,364
|
|
85,349
|
|
32,328
|
|
187,149
|
|
Loans, gross
|
|
1,049,598
|
|
194,566
|
|
432,227
|
|
166,825
|
|
15,213
|
|
1,858,429
|
|
All other assets
|
|
|
|
|
|
|
|
|
|
568,108
|
|
568,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
1,083,521
|
|
$
|
203,218
|
|
$
|
462,591
|
|
$
|
252,174
|
|
$
|
615,649
|
|
$
|
2,617,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
1,073,062
|
|
$
|
319,358
|
|
$
|
56,842
|
|
$
|
2,224
|
|
$
|
464,446
|
|
$
|
1,915,932
|
|
Assets under repurchase agreements and federal funds purchases
|
|
17,910
|
|
|
|
|
|
|
|
|
|
17,910
|
|
Borrowings
|
|
43,583
|
|
17
|
|
7,221
|
|
241
|
|
|
|
51,062
|
|
Subordinated debentures
|
|
|
|
|
|
|
|
41,239
|
|
|
|
41,239
|
|
All other liabilities
|
|
|
|
|
|
|
|
|
|
28,354
|
|
28,354
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
|
562,656
|
|
562,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
1,134,555
|
|
$
|
319,375
|
|
$
|
64,063
|
|
$
|
43,704
|
|
$
|
1,055,456
|
|
$
|
2,617,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period gap (assets minus liabilities)
|
|
(51,034
|
)
|
(116,157
|
)
|
398,528
|
|
208,470
|
|
(439,807
|
)
|
|
|
Cumulative gap
|
|
(51,034
|
)
|
(167,191
|
)
|
231,337
|
|
439,807
|
|
|
|
|
|
Cumulative rate sensitive gap %
|
|
(1.9
|
)%
|
(6.4
|
)%
|
8.8
|
%
|
16.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 4.
Controls and Procedures
As
of the end of the period covered by this report, an evaluation was carried out
by the Companys management, with the participation of the Chief Executive
Officer and the Chief Financial Officer, of the effectiveness of the Companys
disclosure controls and procedures (as defined in Rule 15d-15(e) under the
Securities Exchange Act of 1934). The Companys disclosure controls were
designed to provide a reasonable assurance that information required to be
disclosed in reports that we file or submit under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange Commission. It
should be noted that the design of any system of controls is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote. However, the controls
have been designed to provide reasonable assurance of achieving the controls
stated goals. Based on that evaluation, the Companys Chief Executive Officer
and Chief Financial Officer, have concluded that the Companys disclosure
controls and procedures are effective at September 30, 2007 to ensure that
information required to be disclosed in the reports that we file or submit
under the Securities Exchange Act of 1934 was
34
(i) accumulated and
communicated to management, including the Companys Chief Executive Officer and
Chief Financial Officer, to allow timely decisions regarding required
disclosure and (ii) recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the Securities and
Exchange Commission.
There
have been no changes in the Companys internal control over financial reporting
(as defined in Rule 15d-15(f) under the Securities Exchange Act of 1934) during
our most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial
reporting.
35