UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

ý                                 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period ended March 31, 2005

 

OR

 

o                                 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For transition period from               to               

 

Commission File Number 0-17609

 

WEST SUBURBAN BANCORP, INC.

(Exact name of Registrant as specified in its charter)

 

Illinois		36-3452469
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
711 South Meyers Road, Lombard, Illinois		60148
(Address of principal executive offices)		(Zip Code)
Registrant’s telephone number including area code:      (630) 629-4200

 

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 ý No o.

 

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o.

 

Indicate the number of shares outstanding of each of the Issuer’s class of common stock as of the latest practicable date.

 

15,000,000 shares of Common Stock, no par value, were authorized, and 432,495 shares of Common Stock were issued and outstanding, as of May 9, 2005.

 

 

WEST SUBURBAN BANCORP, INC.

 

Form 10-Q Quarterly Report

 

Table of Contents

 

 

 

PART I
Item 1.	Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
PART II
Item 1.	Legal Proceedings
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits
Form 10-Q Signatures

 

Special Note Concerning Forward-Looking Statements

 

This document (including information incorporated by reference) contains, and future oral and written statements of West Suburban Bancorp, Inc. (“West Suburban”) and West Suburban Bank (the “Bank” and collectively with West Suburban and its other direct and indirect subsidiaries, the “Company”) and its management, forward-looking statements within the meaning of such term in the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.

 

The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations and future prospects of the Company include, but are not limited to, the following:

 

•                                          The strength of the United States economy in general and the strength of the local economies in which the Company conducts its operations which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of the Company’s assets.

 

•                                          The effects of, and changes in, federal, state and local laws, regulations and policies affecting banking, securities, taxation, insurance and monetary and financial matters, as well as any laws and regulations otherwise affecting the Company, including laws and regulations intended to enhance national security.

 

2

 

•                                          The effects of changes in interest rates (including the effects of changes in the rate of prepayments of the Company’s assets) and the policies of the Board of Governors of the Federal Reserve System.

 

•                                          The ability of the Company to compete with other financial institutions as effectively as the Company currently intends due to increases in competitive pressures in the financial services sector.

 

•                                          The inability of the Company to obtain new customers and to retain existing customers.

 

•                                          The timely development and acceptance of products and services, including products and services offered through alternative delivery channels such as the Internet.

 

•                                          Technological changes implemented by the Company and by other parties, including third party vendors, which may be more difficult or more expensive than anticipated or which may have unforeseen consequences to the Company and its customers including technological changes implemented for, or related to, the Company’s website or new products such as prepaid solutions cards, payroll cards and other similar products and services.

 

•                                          The ability of the Company, and certain of its vendors, to develop and maintain secure and reliable electronic systems including systems developed for the Company’s website or new products such as prepaid solutions cards, payroll cards and other similar products and services.

 

•                                          The ability of the Company to retain key executives and employees and the difficulty that the Company may experience in replacing key executives and employees in an effective manner.

 

•                                          Consumer spending and saving habits which may change in a manner that affects the Company’s business adversely.

 

•                                          The economic impact of terrorist activities and military actions.

 

•                                          Business combinations and the integration of acquired businesses which may be more difficult or expensive than expected.

 

•                                          The costs, effects and outcomes of existing or future litigation.

 

•                                          Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the Financial Accounting Standards Board.

 

•                                          The ability of the Company to manage the risks associated with the foregoing as well as anticipated.

 

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Additional information concerning the Company and its business, including other factors that could materially affect the Company’s financial results, is included in the Company’s filings with the Securities and Exchange Commission.

 

3

 

PART I

 

ITEM 1.   FINANCIAL STATEMENTS

 

WEST SUBURBAN BANCORP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

(UNAUDITED)

 

		March 31, 2005			December 31, 2004
Assets
Cash and due from banks		$	35,823		$	40,402
Federal funds sold		24,430			10,998
Total cash and cash equivalents		60,253			51,400
Securities
Available for sale (amortized cost of $514,922 in 2005 and $486,663 in 2004)		502,997			481,595
Held to maturity (fair value of $70,215 in 2005 and $71,690 in 2004)		70,801			71,936
Federal Home Loan Bank Stock		5,425			5,352
Total securities		579,223			558,883
Loans, less allowance for loan losses of $10,466 in 2005 and $10,527 in 2004		1,031,347			1,046,125
Cash surrender value of bank-owned life insurance		30,700			30,296
Premises and equipment, net		40,113			40,641
Other real estate		466			3,156
Accrued interest and other assets		19,841			17,548
Total assets		$	1,761,943		$	1,748,049
Liabilities and shareholders’ equity
Deposits
Demand-noninterest-bearing		$	138,153		$	153,081
Interest-bearing		1,443,187			1,416,661
Total deposits		1,581,340			1,569,742
Prepaid solutions cards		13,887			11,646
Accrued interest and other liabilities		18,920			16,207
Common stock in ESOP subject to contingent repurchase obligation		52,476			53,959
Shareholders’ equity
Common stock, no par value; 15,000,000 shares authorized; 432,495 shares issued and outstanding		3,457			3,457
Surplus		38,066			38,066
Retained earnings		113,458			111,985
Accumulated other comprehensive loss		(7,185		)	(3,054		)
Amount reclassified on ESOP shares		(52,476		)	(53,959		)
Total shareholders’ equity		95,320			96,495
Total liabilities and shareholders’ equity		$	1,761,943		$	1,748,049

 

See accompanying notes to consolidated financial statements.

 

4

 

WEST SUBURBAN BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

(Dollars in thousands, except per share data)

(UNAUDITED)

 

		2005			2004
Interest income
Loans, including fees		$	15,470		$	14,662
Securities
Taxable		4,595			4,331
Exempt from federal income tax		226			456
Federal funds sold		156			62
Total interest income		20,447			19,511
Interest expense
Deposits		6,487			5,018
Other		7			3
Total interest expense		6,494			5,021
Net interest income		13,953			14,490
Provision for loan losses		—			—
Net interest income after provision for loan losses		13,953			14,490
Noninterest income
Service fees on deposit accounts		1,728			1,807
Debit card fees		445			400
Net realized gain (loss) on securities transactions		6			(14		)
Net gain on sales of loans held for sale		17			79
Prepaid solutions cards		1,992			1,353
Bank-owned life insurance		264			118
Other		1,331			995
Total noninterest income		5,783			4,738
Noninterest expense
Salaries and employee benefits		5,793			5,517
Occupancy		1,035			1,015
Furniture and equipment		1,206			1,182
Advertising and promotion		417			352
Professional fees		355			304
Prepaid solutions cards		1,374			1,043
Other		1,129			1,334
Total noninterest expense		11,309			10,747
Income before income taxes		8,427			8,481
Income tax expense		2,629			2,723
Net income		$	5,798		$	5,758
Earnings per share		$	13.41		$	13.36
Average shares outstanding		432,495			430,992

 

See accompanying notes to consolidated financial statements.

 

5

 

WEST SUBURBAN BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

(Dollars in thousands, except per share data)

(UNAUDITED)

 

		Common Stock and Surplus			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Unearned ESOP Shares			Amount Reclassified on ESOP Shares			Total Shareholders’ Equity			Common Stock in ESOP Subject to Contingent Repurchase Obligation
Balance, January 1, 2004		$	41,523		$	109,952		$	(363	)	$	(1,200	)	$	(51,371	)	$	98,541		$	51,371
Comprehensive income
Net income		—			5,758			—			—			—			5,758			—
Change in unrealized (loss) gain on available for sale securities, net of reclassification and tax effects		—			—			2,720			—			—			2,720			—
Total comprehensive income																	8,478
Cash dividends declared - $10.00 per share		—			(4,325		)	—			—			—			(4,325		)	—
Reclassification due to change in fair value of common stock in ESOP subject to contingent repurchase obligation		—			—			—			—			(387		)	(387		)	387
ESOP shares committed to be released		—			—			—			500			—			500			—
Balance, March 31, 2004		$	41,523		$	111,385		$	2,357		$	(700	)	$	(51,758	)	$	102,807		$	51,758

 

		Common Stock and Surplus			Retained Earnings			Accumulated Other Comprehensive Loss			Unearned ESOP Shares			Amount Reclassified on ESOP Shares			Total Shareholders’ Equity			Common Stock in ESOP Subject to Contingent Repurchase Obligation
Balance, January 1, 2005		$	41,523		$	111,985		$	(3,054	)	$	—		$	(53,959	)	$	96,495		$	53,959
Comprehensive income
Net income		—			5,798			—			—			—			5,798			—
Change in unrealized loss on available for sale securities, net of reclassification and tax effects		—			—			(4,131		)	—			—			(4,131		)	—
Total comprehensive income																	1,667
Cash dividends declared - $10.00 per share		—			(4,325		)	—			—			—			(4,325		)	—
Reclassification due to change in fair value of common stock in ESOP subject to contingent repurchase obligation		—			—			—			—			1,483			1,483			(1,483		)
Balance, March 31, 2005		$	41,523		$	113,458		$	(7,185	)	$	—		$	(52,476	)	$	95,320		$	52,476

 

See accompanying notes to consolidated financial statements.

 

6

 

WEST SUBURBAN BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

(Dollars in thousands)

(UNAUDITED)

 

		2005			2004
Cash flows from operating activities
Net income		$	5,798		$	5,758
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		868			959
Provision for loan losses		—			—
Deferred income tax expense		1,433			38
Net premium amortization of securities		348			574
Net realized loss (gain) loss on securities transactions		(6		)	14
Amortization of deferred loan fees		314			386
Federal Home Loan Bank stock dividends		(73		)	(81		)
Increase in cash surrender value of bank-owned life insurance		(404		)	(637		)
Net gain on sales of loans held for sale		(17		)	(79		)
Sales of loans held for sale		1,113			6,049
Origination of loans held for sale		(1,037		)	(5,850		)
Net gain on sales of other real estate		(149		)	(13		)
ESOP compensation expense		—			500
Increase in accrued interest and other assets		(1,001		)	(2,031		)
Increase in accrued interest and other liabilities		2,713			4,036
Net cash provided by operating activities		9,900			9,623
Cash flows from investing activities
Securities available for sale
Sales		879			14,682
Maturities and calls		7,745			67,755
Purchases		(37,224		)	(155,697		)
Securities held to maturity
Maturities and calls		1,135			2,350
Purchases		—			(3,013		)
Net decrease in loans		13,985			14,499
Investment in bank-owned life insurance policies		—			(10,000		)
Purchases of premises and equipment		(340		)	(229		)
Sales of other real estate		3,259			264
Net cash used in investing activities		(10,561		)	(69,389		)
Cash flows from financing activities
Net increase in deposits		11,598			32,746
Increase in prepaid solutions cards		2,241			1,517
Dividends paid		(4,325		)	(4,325		)
Net cash provided by financing activities		9,514			29,938
Net increase (decrease) in cash and cash equivalents		8,853			(29,828		)
Beginning cash and cash equivalents		51,400			69,344
Ending cash and cash equivalents		$	60,253		$	39,516
Supplemental disclosures
Cash paid for Interest		$	5,968		$	4,508
Other real estate acquired through loan foreclosure		420			2,447

 

See accompanying notes to consolidated financial statements.

 

7

 

WEST SUBURBAN BANCORP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollars in thousands, except per share data)

 

Note 1 - Basis of Presentation

 

The condensed consolidated financial statements include the accounts of West Suburban Bancorp, Inc. (“West Suburban”) and West Suburban Bank (the “Bank” and collectively with West Suburban and its other direct and indirect subsidiaries, the “Company”). Significant intercompany accounts and transactions have been eliminated. The unaudited interim consolidated financial statements are prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and footnote disclosures normally accompanying the annual financial statements have been omitted. The interim financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the latest Annual Report on Form 10-K filed by the Company. The condensed consolidated financial statements include all adjustments (none of which were other than normal recurring adjustments) necessary for a fair statement of the results for the interim periods. The results for the interim periods are not necessarily indicative of the results to be expected for the entire fiscal year. Certain reclassifications have been made in prior periods’ financial statements to conform to the current period’s presentation.

 

Note 2 - Securities

 

Securities with unrealized losses for the periods ended March 31, 2005 and December 31, 2004 not recognized in income are presented below by the length of time the securities have been in a continuous unrealized loss position:

 

		March 31, 2005
		Less than 12 months						12 months or more						Total
		Fair Value			Unrealized loss			Fair Value			Unrealized loss			Fair Value			Unrealized loss
Corporate		$	46,259		$	1,373		$	—		$	—		$	46,259		$	1,373
U.S. government agencies and corporations		305,762			6,586			34,171			1,650			339,933			8,236
Mortgage-backed		138,532			2,329			17,126			863			155,658			3,192
States and political subdivisions		5,621			114			2,980			96			8,601			210
Preferred stock		—			—			842			160			842			160
Total temporarily impaired		$	496,174		$	10,402		$	55,119		$	2,769		$	551,293		$	13,171

 

		December 31, 2004
		Less than 12 months						12 months or more						Total
		Fair Value			Unrealized loss			Fair Value			Unrealized loss			Fair Value			Unrealized loss
Corporate		$	39,671		$	594		$	—		$	—		$	39,671		$	594
U.S. government agencies and corporations		291,506			2,573			32,199			790			323,705			3,363
Mortgage-backed		108,449			1,045			17,497			666			125,946			1,711
States and political subdivisions		9,563			183			7,730			7			17,293			190
Preferred stock		—			—			760			243			760			243
Total temporarily impaired		$	449,189		$	4,395		$	58,186		$	1,706		$	507,375		$	6,101

 

8

 

Unrealized losses on debt securities have not been recognized as management has the intent and ability to hold the securities until the maturity date of the securities and no concerns exist with the respect to the ability of the issuer to satisfy its obligations at maturity. Management believes that the fair value of these debt securities with unrealized losses will recover as the securities approach their maturity date and/or repricing date. At March 31, 2005, preferred stock with an amortized cost of $1.0 million had unrealized losses for a continuous period of twelve months or more and the amount of the unrealized losses as of that date was $.2 million. The Company has determined this unrealized loss to be temporary as management expects the security to recover its original costs as interest rates increase and the Company has both the intent and ability to hold the investment until such recovery occurs. The preferred stock is issued by the Federal Home Loan Mortgage Corporation. Management does not believe any individual unrealized loss as of March 31, 2005 represents anything other than temporary impairment.

 

Note 3 - Financial Instruments with Off-Balance Sheet Risk

 

Unused lines of credit and other commitments to extend credit not reflected in the financial statements are as follows:

 

		March 31, 2005												December 31, 2004
		Fixed Rate				Variable Rate				Total				Fixed Rate				Variable Rate			Total
Commercial loans and lines of credit		$	1,387			$	184,909			$	186,296			$	956			$	168,157		$	169,113
Check credit lines of credit		1,238				—				1,238				1,262				—			1,262
Mortgage loans		5,385				3,212				8,597				5,170				1,750			6,920
Home equity lines of credit		—				176,447				176,447				—				170,301			170,301
Letters of credit		—				31,460				31,460				—				31,973			31,973
Credit card lines of credit		—				73,973				73,973				—				76,003			76,003
Total		$		8,010		$		470,001		$		478,011		$		7,388		$	448,184		$	455,572

 

Fixed rate commercial loan commitments at March 31, 2005 generally had interest rates ranging from 4.75% to 9.00% with terms ranging from 1 to 5 years. Fixed rate mortgage loan commitments at March 31, 2005 generally had interest rates ranging from 5.375% to 6.125% with terms ranging from 10 to 30 years. Fixed rate check credit lines of credit had interest rates of 18.00% at March 31, 2005.

 

Note 4 - - Common Stock in ESOP Subject to Contingent Repurchase Obligation

 

At March 31, 2005 and December 31, 2004, the ESOP held 83,295 and 83,270 shares of West Suburban common stock, respectively. Upon termination of their employment, participants who elect to receive their benefit distributions in the form of West Suburban common stock may require the Company to purchase the common stock distributed at fair value during two 60-day periods. The first purchase period begins on the date the benefit is distributed and the second purchase period begins on the first anniversary of the distribution date. This contingent repurchase obligation is reflected in the Company’s financial statements as “Common stock in ESOP subject to contingent repurchase obligation” and reduces shareholders’ equity by an amount that represents the independently appraised fair value of all West Suburban common stock held by the ESOP and allocated to participants, without regard to whether it is likely that the shares would be distributed or that the recipients of the shares would be likely to exercise their right to require the Company to purchase the shares. At March 31, 2005 and December 31, 2004, this contingent repurchase obligation reduced shareholders’ equity by $52,476 and $53,959, respectively. The Company believes that the ESOP will continue to have a sufficient amount of cash to distribute benefit payments to former employees and that the exercise of the right of former employees to cause the Company to purchase West Suburban common stock is unlikely.

 

9

 

Note 5 - New Accounting Pronouncements

 

In November 2003, the Emerging Issues Task Force (“EITF”) issued consensus requirements concerning Issue 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments relating to disclosures for investment securities that require additional numerical and narrative disclosures for debt and marketable equity securities that have unrealized losses. The requirements applied to December 31, 2003 year-end disclosures and were adopted by the Company in 2003. In March 2004, the guidance relating to Issue 03-1 was expanded to include and address the recognition and measurement of impairment losses. Although the Financial Accounting Standards Board (“FASB”) previously announced that the guidance with respect to the recognition and measurement of impairment losses would be effective for reporting periods beginning after June 15, 2004, in late September, FASB postponed the effectiveness of that guidance. Management intends to continue to monitor the developments relating to the implementation of EITF Issue 03-1.

 

In December 2004, FASB issued Statement 123 (revised), “Share-based Payment” which requires companies to record compensation cost for stock options provided to employees in return for employee service. The cost is measured at the fair value of the options when granted, and this cost is expensed over the employee service period, which is normally the vesting period of the options. This will apply to awards granted or modified after the first quarter or year beginning after June 15, 2005. Compensation cost will also be recorded for prior option grants that vest after the date of adoption. Because the Company does not currently offer stock options, management does not anticipate that Statement 123 will have an impact on the Company’s financial condition or results of operations.

 

ITEM 2.                           MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Critical Accounting Policies

 

The Company’s financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. These accounting principles, which can be complex, are significant to our financial condition and our results of operations and require management to apply significant judgment with respect to various accounting, reporting and disclosure matters. Management must use estimates, assumptions and judgments to apply these principles where actual measurements are not possible or practical. These estimates, assumptions and judgments are based on information available as of the date of this report and, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statements. Changes in such estimates may have a significant impact on the financial statements. Management has reviewed the application of these policies with the Audit Committee of West Suburban’s Board of Directors. Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements included herein.

 

In management’s view, the accounting policies that are critical to the Company are those relating to estimates, assumptions and judgments regarding the determination of the adequacy of the allowance for loan losses.

 

Allowance for Loan Losses. The Company maintains an allowance for loan losses at a level management believes is sufficient to absorb credit losses in the loan portfolio. The allowance for loan losses represents the Company’s estimate of losses in the loan portfolio at each balance sheet date and is based on the review of available and relevant information. The allowance contains allocations for losses that have been identified relating to specific borrowing relationships as well as losses for pools of loans. The allowance for loan losses is evaluated monthly by the Company to determine the appropriate level of the allowance. The amount of the allowance for loan losses is determined based on a variety of factors, including assessment of the credit risk of the loans in the loan portfolio, volume of the loans, delinquent loans, evaluation of current economic conditions in the market area, actual charge-offs during the period and historical loss experience. Loan quality is continually monitored by management and reviewed by the loan committee on a monthly basis.

 

All categories of loans are evaluated on a category by category basis. In addition, individual commercial, construction and commercial mortgage loans are evaluated to determine if a specific loss allocation is needed for problem loans deemed to have a shortfall in collateral. Management also considers the borrower’s current economic status including liquidity and future business viability. Other factors used in the allocation of the allowance include levels and trends of past dues and charge-offs along with concentrations of credit within the commercial and

 

10

 

commercial real estate loan portfolios. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events occur. Along with the allocation of the allowance on a category by category basis and the specific allocations for individual borrowing relationships, the allowance includes a relatively small portion that remains unallocated.

 

Management adjusts the allowance for loan losses by recording a provision for loan losses in an amount sufficient to maintain the allowance at the level determined appropriate. Loans are charged-off when deemed to be uncollectible by management. The Company believes that the allowance for loan losses is adequate to provide for estimated credit losses in the loan portfolio.

 

Contractual Obligations, Commitments, Off-Balance Sheet Arrangements and Contingent Liabilities

 

Through the normal course of operations, the Company has entered into certain contractual obligations and other commitments. Such obligations generally relate to the funding of operations through deposits, as well as leases for premises and equipment. As a financial services provider, the Company routinely enters into commitments to extend credit. While contractual obligations represent future cash requirements of the Company, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval as comparable loans made by the Company.

 

The following table presents the Company’s significant fixed and determinable contractual obligations and significant commitments by payment date as of March 31, 2005 (dollars in thousands). The payment amounts represent those amounts contractually due to the recipient and do not include any carrying value adjustments.

 

		One Year or Less			Over One Year to Three Years			Over Three Years to Five Years			Over Five Years			Total
Deposits without a stated maturity		$	1,143,489		$	—		$	—		$	—		$	1,143,489
Time deposits		179,942			167,526			90,383			—			437,851
Operating leases		142			193			111			270			716
Prepaid solutions cards		13,887			—			—			—			13,887
Commitments to extend credit
Fixed Rate														8,010
Variable Rate														470,001

 

Balance Sheet Analysis

 

Asset Distribution.  Total consolidated assets at March 31, 2005 increased .8% from December 31, 2004. An increase in investment securities available for sale was the largest component of the increase in total consolidated assets and was partially offset by a decrease in loans. Asset growth was funded primarily by higher levels of deposits. Additionally, total year-to-date average assets at March 31, 2005 increased 2.3% from March 31, 2004.

 

Cash and cash equivalents at March 31, 2005 increased 17.2% from December 31, 2004 due to increases in federal funds sold balances. The higher balances are likely to be temporary as it is generally the Company’s practice to redeploy its cash and cash equivalents into higher earning assets, including loans and investment securities.

 

The Company’s securities portfolio increased 3.6% during the first three months of 2005. This increase was primarily due to an increase in the available for sale securities portfolio of 4.4%. The Company has continued to make significant investments in mortgage backed securities during the first three months of 2005. Investing in mortgage backed securities and classifying the majority of new purchases as available for sale increases the Company’s liquidity, and is an important element in the Company’s liquidity management in the current rising interest rate environment. Also, the Company considers monthly paydowns on mortgage-backed securities as a consistent source of cash flows. This practice also allows the Company to better manage its liquidity risk and obtain a higher yield over the entire interest rate cycle compared to other investments such as federal funds sold.

 

During the first three months of 2005, the Company’s accumulated other comprehensive loss increased $4.1 million due to a change in unrealized losses on securities available for sale, net of reclassification and tax effects. Unrealized

 

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losses on securities available for sale increased due to the increase in market interest rates. The Company will continue to monitor its level of available for sale and held to maturity securities and will classify new securities in the appropriate category at the time of purchase. Factors reviewed during the classification process include the current interest rate and economic environments as well as liquidity considerations.

 

The carrying values of the Company’s major categories of securities are summarized in the following table (dollars in thousands):

 

		March 31, 2005			December 31, 2004			Dollar Change			Percent Change
Securities available for sale
Corporate		$	50,317		$	50,931		$	(614	)	(1.2	)%
U.S. government agencies and corporations		294,791			303,489			(8,698		)	(2.9	)%
Mortgage-backed		152,219			120,649			31,570			26.2	%
States and political subdivisions		4,828			5,766			(938		)	(16.3	)%
Preferred stock		842			760			82			10.8	%
Total securities available for sale		502,997			481,595			21,402			4.4	%
Securities held to maturity
U.S. government agencies and corporations		43,378			43,405			(27		)	(0.1	)%
Mortgage-backed		11,849			12,430			(581		)	(4.7	)%
States and political subdivisions		15,574			16,101			(527		)	(3.3	)%
Total securities held to maturity		70,801			71,936			(1,135		)	(1.6	)%
Federal Home Loan Bank Stock		5,425			5,352			73			1.4	%
Total securities		$	579,223		$	558,883		$	20,340		3.6	%

 

Total loans outstanding at March 31, 2005 decreased 1.4% from December 31, 2004 primarily due to decreased balances in the commercial real estate, home equity and indirect automobile loan portfolios. The Company has begun a new marketing effort intended to attract new commercial and commercial real estate customers. The Company also

 

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intends to continue aggressively marketing its home equity products. The Company anticipates that it will continue to experience decreases in the indirect automobile loan portfolio primarily due to prepayments and scheduled repayments, as well as the effect of promotional programs offered by new automobile dealers. Balances in the Company’s categories of loans are summarized in the following table (dollars in thousands):

 

		March 31, 2005				December 31, 2004				Dollar Change			Percent Change
Commercial		$		266,103		$	267,799			$	(1,696	)	(0.6	)%
Consumer		7,567				7,552				15			0.2	%
Indirect automobile		35,013				38,651				(3,638		)	(9.4	)%
Real estate
Residential		150,033				146,259				3,774			2.6	%
Commercial		201,330				207,978				(6,648		)	(3.2	)%
Home equity		232,419				237,622				(5,203		)	(2.2	)%
Construction		135,599				135,264				335			0.2	%
Held for sale		271				329				(58		)	(17.6	)%
Credit card		13,064				14,682				(1,618		)	(11.0	)%
Other		414				516				(102		)	(19.8	)%
Total		1,041,813				1,056,652				(14,839		)	(1.4	)%
Allowance for loan losses		(10,466			)	(10,527			)	61			(0.6	)%
Loans, net		$	1,031,347			$		1,046,125		$	(14,778	)	(1.4	)%

 

Allowance for Loan Losses and Asset Quality.  The Company’s allowance for loan losses as a percent of nonperforming loans increased to 338% at March 31, 2005 from 217% at December 31, 2004 and the ratio of nonperforming loans to total loans decreased to .30% at March 31, 2005 from .46% at December 31, 2004. The ratio of nonperforming assets to total assets decreased to .20% at March 31, 2005 from .46% at December 31, 2004.

 

The Company’s loans 90 days or more past due decreased $.4 million primarily due to the payoff of two residential real estate loans with an aggregate principle balance of $.1 million and a loan having a principle balance of $.2 million being transferred to other real estate owned during the first three months of 2005.

 

Non-accrual loans decreased $1.3 million during the first three months of 2005. This decrease was primarily due to one loan relationship which had a principal reduction and partial charge-off in the aggregate amount of $1.2 million.

 

The ratio of the allowance for loan losses to total loans outstanding was 1.00% at March 31, 2005 and December 31, 2004.  The following table presents an analysis of the Company’s nonperforming loans and other real estate as of the dates indicated (dollars in thousands):

 

		March 31, 2005			December 31, 2004
Loans past due 90 days or more still on accrual		$	611		$	1,036
Nonaccrual loans		2,481			3,815
Total nonperforming loans		$	3,092		$	4,851
Nonperforming loans as a percent of total loans		0.30		%	0.46		%
Allowance for loan losses as a percent of nonperforming loans		338		%	217		%
Other real estate		$	466		$	3,156
Nonperforming assets as a percent of total assets		0.20		%	0.46		%

 

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The following table presents an analysis of the Company’s provision for loan losses for the periods stated (dollars in thousands):

 

		2005			2004
		1st Qtr			4th Qtr			3rd Qtr			2nd Qtr			1st Qtr
Provision - quarter		$	—		$	—		$	—		$	200		$	—
Provision - year to date		—			200			200			200			—
Net charge-offs - quarter		61			2,659			76			600			758
Net charge-offs - year to date		61			4,093			1,434			1,358			758
Allowance at period end		10,466			10,527			13,186			13,262			13,662
Allowance at period end to total loans		1.00		%	1.00		%	1.23		%	1.23		%	1.28		%

 

Bank-owned Life Insurance.  The cash surrender value of bank-owned life insurance increased to $30.7 million at March 31, 2005 from $30.3 million at December 31, 2004. The Company acquires life insurance in connection with its strategy to fund and manage its obligations under certain employee benefit plans.

 

Other Real Estate.  During the first three months of 2005, the Company acquired properties with an aggregate carrying value of $.4 million and sold properties with an aggregate carrying value of $3.1 million representing a decrease as of March 31, 2005 of $2.7 million. The Company recorded a gain of $.1 million on sales of other real estate.

 

Deposits.  Total deposits at March 31, 2005 increased .7% from December 31, 2004. The increases in total deposits primarily resulted from increases in savings and time deposits. The Company has raised rates in order to maintain its core deposit base. Additionally, the Company believes time deposits will continue to increase due to promotional efforts. In general, management promotes its deposit products when appropriate and prices its products in a manner intended to maintain the Company’s net interest margin at an adequate level.

 

Balances in the Company’s major categories of deposits are summarized in the following table (dollars in thousands):

 

		March 31, 2005				December 31, 2004				Dollar Change				Percent Change
Demand-noninterest-bearing		$	138,153			$	153,081			$	(14,928		)	(9.8	)%
NOW		327,214				323,979				3,235				1.0	%
Money market checking		220,645				222,215				(1,570			)	(0.7	)%
Savings		457,477				447,256				10,221				2.3	%
Time deposits
Less than $100,000		329,159				322,184				6,975				2.2	%
$ 100,000 and greater		108,692				101,027				7,665				7.6	%
Total		$		1,581,340		$		1,569,742		$		11,598		0.7	%

 

During the first three months of 2005, average balances in demand-noninterest-bearing deposits increased $.5 million from the same 2004 period. Average balances in interest-bearing deposits increased $42.5 million from the same 2004 period.

 

Prepaid Solutions Cards.  Prepaid solutions cards at March 31, 2005 increased 19.2% from December 31, 2004. This increase was primarily due to an increase in the number of prepaid solutions cards outstanding. The Company will continue to attempt to increase volume by entering into additional programs with new and existing customers.

 

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