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 Exchange Act

for the Transition Period from           to          .

 

No. 0-14555

(Commission File Number)

 

LEESPORT FINANCIAL CORP.

(Exact name of Registrant as specified in its charter)

 

 

(610) 208-0966

(Registrants telephone number, including area code)

 

 

(Former name, former address and former fiscal year,

if changed since last report)

 

Check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 o No ý

 

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

 

FORWARD LOOKING STATEMENTS

 

Leesport Financial Corp. (the “Company”) may from time to time make written or oral “forward-looking statements,” including statements contained in the Company’s filings with the Securities and Exchange Commission (including this Quarterly Report on Form 10-Q and the exhibits hereto and thereto), in its reports to shareholders and in other communications by the Company, which are made in good faith by the Company pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include statements with respect to the Company’s beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties, and are subject to change based on various factors (some of which are beyond the Company’s control).  The words “may,” “could,” “should,” would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” and similar expressions are intended to identify forward-looking statements.  The following factors, among others, could cause the Company’s financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; inflation, interest rate, market and monetary fluctuations; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors’ products and services; the willingness of users to substitute competitors’ products and services for the Company’s products and services; the success of the Company in gaining regulatory approval of its products and services, when required; the impact of changes in financial services laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes; acquisitions; changes in consumer spending and saving habits; and the success of the Company at managing the risks involved in the foregoing.

 

The Company cautions that the foregoing list of important factors is not exclusive.  Readers are also cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date of this report.  The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company.

 

2

 

Part I — FINANCIAL INFORMATION

 

Item 1 — Financial Statements

 

LEESPORT FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands, except per share data)

 

		March 31,			December 31,
		2005			2004
		(Unaudited)
ASSETS
Cash and due from banks		$	25,875		$	22,643
Interest-bearing deposits in banks		1,442			1,412
Total cash and cash equivalents		27,317			24,055
Mortgage loans held for sale		17,747			9,799
Securities available for sale		181,408			165,778
Securities held to maturity, fair value - 2005 - $6,328; 2004 - $6,298		6,345			6,403
Loans, net of allowance for loan losses 2005 - $7,338; 2004 - $7,248		584,101			589,080
Premises and equipment, net		8,410			8,600
Identifiable intangible assets		5,630			5,790
Goodwill		38,840			38,227
Bank owned life insurance		11,477			11,355
Other assets		19,438			18,295
Total assets		$	900,713		$	877,382
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits:
Non-interest bearing		$	112,260		$	107,442
Interest bearing		508,790			504,849
Total deposits		621,050			612,291
Securities sold under agreements to repurchase		51,595			52,800
Federal funds purchased		52,787			36,092
Long-term debt		55,000			54,500
Junior subordinated debt		20,150			20,150
Other liabilities		9,326			10,614
Total liabilities		809,908			786,447
Shareholders' equity
Common stock, $5.00 par value; authorized 20,000,000 shares; issued: 5,039,937 shares at March 31, 2005 and 5,031,021 shares at December 31, 2004		25,198			25,154
Surplus		51,441			51,210
Retained earnings		16,520			15,592
Accumulated other comprehensive loss		(1,674		)	(119		)
Treasury stock; 34,691 shares at March 31, 2005 and 46,645 shares at December 31, 2004, at cost		(680		)	(902		)
Total shareholders’ equity		90,805			90,935
Total liabilities and shareholders’ equity		$	900,713		$	877,382

 

See Notes to Consolidated Financial Statements.

 

3

 

LEESPORT FINANCIAL CORP. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

(Dollar amounts in thousands, except per share data)

 

		Three Months Ended
		March 31, 2005			March 31, 2004
Interest income:
Interest and fees on loans		$	9,673		$	5,352
Interest on securities:
Taxable		1,569			1,639
Tax-exempt		165			229
Dividend income		144			102
Other interest income		11			3
Total interest income		11,562			7,325
Interest expense:
Interest on deposits		3,020			2,049
Interest on short-term borrowings		324			165
Interest on securities sold under agreement to repurchase		273			179
Interest on long-term debt		434			301
Interest on junior subordinated debt		333			193
Total interest expense		4,384			2,887
Net Interest Income		7,178			4,438
Provision for loan losses		430			360
Net Interest Income after provision for loan losses		6,748			4,078
Other income:
Customer Service Fees		604			426
Mortgage banking activities		1,187			229
Commissions and fees from insurance sales		3,078			2,701
Brokerage and investment advisory commissions and fees		209			129
Gain (loss) on sale of loans		246			(34		)
Other Income		520			450
Net realized gains on sales of securities		38			154
Total other income		5,882			4,055
Other expense:
Salaries and employee benefits		6,102			3,854
Occupancy expense		1,114			537
Furniture and equipment expense		600			446
Marketing and advertising expense		343			305
Amortization of identifiable intangible assets		160			84
Professional services		309			255
Outside processing		677			521
Insurance expense		202			100
Other expense		877			513
Total other expense		10,384			6,615
Income before income taxes		2,246			1,518
Income taxes		467			290
Net income		$	1,779		$	1,228

 

See Notes to Consolidated Financial Statements.

 

4

 

		Three Months Ended
		March 31, 2005			March 31, 2004
EARNINGS PER SHARE DATA
Average shares outstanding		4,997,887			3,570,881
Basic earnings per share		$	0.36		$	0.34
Average shares outstanding for diluted earnings per share		5,068,915			3,640,488
Diluted earnings per share		$	0.35		$	0.34
Cash dividends declared per share		$	0.17		$	0.162

 

See Notes to Consolidated Financial Statements.

 

5

 

LEESPORT FINANCIAL CORP.

UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Three Months Ended March 31, 2005 and 2004

(Dollar amounts in thousands, except per share data)

 

 

		Common Stock											Accumulated
		Number of											Comprehensive
		Shares								Retained			Other Income			Treasury
		Issued		Par Value			Surplus			Earnings			(Loss)			Stock			Total
Balance, December 31, 2004		5,031,021		$	25,154		$	51,210		$	15,592		$	(119	)	$	(902	)	$	90,935
Comprehensive Income:
Net Income		—		—			—			1,779			—			—			1,779
Change in net unrealized gains (losses) on securities available for sale, net of reclassification adjustment and tax effect		—		—			—			—			(1,555		)	—			(1,555		)
Total comprehensive income																			224
Reissuance of treasury stock		—		—			78			—			—			222			300
Fractional shares in connection with stock dividend paid							(10		)	(1		)	—			—			(11		)
Common stock issued in connection with directors' compensation		6,202		31			125			—			—			—			156
Common stock issued in connection with director and employee stock purchase plans		2,714		13			38			—			—			—			51
Cash dividends declared ($0.17 per share)		—		—			—			(850		)	—			—			(850		)
Balance, March 31, 2005		5,039,937		$	25,198		$	51,441		$	16,520		$	(1,674	)	$	(680	)	$	90,805

 

 

		Common Stock											Accumulated
		Number of											Comprehensive
		Shares								Retained			Other Income			Treasury
		Issued		Par Value			Surplus			Earnings			(Loss)			Stock			Total
Balance, December 31, 2003		3,439,310		$	17,197		$	18,426		$	18,535		$	273		$	(1,054	)	$	53,377
Comprehensive Income:
Net Income		—		—			—			1,228			—			—			1,228
Change in net unrealized gains (losses) on securities available for sale, net of reclassification adjustment and tax effect		—		—			—			—			1,730			—			1,730
Total comprehensive income																			2,958
Reissuance of treasury stock		—		—			66			—			—			299			365
Common stock issued in connection with directors' compensation		6,683		33			124			—			—			—			157
Common stock issued in connection with director and employee stock purchase plans		11,577		58			203			—			—			—			261
Cash dividends declared ($0.162 per share)		—		—			—			(581		)	—			—			(581		)
Balance, March 31, 2004		3,457,570		$	17,288		$	18,819		$	19,182		$	2,003		$	(755	)	$	56,537

 

See Notes to Consolidated Financial Statements.

 

6

 

LEESPORT FINANCIAL CORP.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands)

 

 

		Three Months Ended
		March 31,			March 31,
		2005			2004
Cash Flows From Operating Activities
Net Income		$	1,779		$	1,228
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		430			360
Provision for depreciation and amortization of premises and equipment		412			305
Amortization of identifiable intangible assets		160			84
Deferred income taxes		1,079			(148		)
Director stock compensation		156			157
Net amortization securities premiums and discounts		95			134
Amortization of mortgage servicing rights		5			32
Increase in mortgage servicing rights		(150		)	(28		)
Net realized (gain) loss on sale of foreclosed real estate		(13		)	—
Net realized gains on sales of securities		(38		)	(154		)
Proceeds from sales of loans held for sale		55,561			9,561
Net gains on sale of loans		(1,261		)	(138		)
Loans originated for sale		(62,247		)	(9,972		)
Earnings on investment in life insurance		(122		)	(191		)
Decrease (Increase) in accrued interest receivable and other assets		(337		)	(434		)
Increase (decrease) in accrued interest payable and other liabilities		(1,850		)	4,879
Net Cash Provided by (Used in) Operating Activities		(6,341		)	5,675
Cash Flow From Investing Activities
Available for sale securities:
Purchases		(26,011		)	(5,514		)
Principal repayments, maturities and calls		6,167			6,838
Proceeds from sales		1,815			18,181
Net decrease (increase) in federal funds sold		—			1,100
Net increase in loans receivable		(9,151		)	(4,042		)
Proceeds from sale of loans		13,699			2,837
Net (increase) decrease in Federal Home Loan Bank Stock		63			1,197
Proceeds from sale of foreclosed real estate		—			16
Purchases of premises and equipment		(222		)	(326		)
Purchase of limited partnership investment		(1,050		)	(975		)
Net Cash Used In Investing Activities		(14,690		)	19,312

 

See Notes to Consolidated Financial Statements.

 

7

 

		Three Months Ended
		March 31,			March 31,
		2005			2004
Cash Flow From Financing Activities
Net increase in deposits		8,759			12,796
Net increase (decrease) in federal funds purchased		16,695			(31,215		)
Net increase (decrease) in securities sold under agreements to repurchase		(1,205		)	1,576
Proceeds from long-term debt		3,000			—
Repayments of long-term debt		(2,500		)	—
Proceeds from the exercise of stock options and stock purchase plans		51			261
Reissuance of treasury stock		300			—
Cash dividends paid		(807		)	(558		)
Net cash disbursed with sale of financial centers		—			—
Net Cash (Used In) Provided By Financing Activities		24,293			(17,140		)
Increase in cash and cash equivalents		3,262			7,847
Cash and cash equivalents:
January 1		24,055			15,238
December 31		$	27,317		$	23,085
Cash payments for:
Interest		$	4,527		$	3,296
Taxes		$	—		$	405

 

See Notes to Consolidated Financial Statements.

 

8

 

LEESPORT FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

1.                              Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  All significant intercompany accounts and transactions have been eliminated.  In the opinion of management, all adjustments (including normal recurring adjustments) considered necessary for a fair presentation of the results for the interim periods have been included.  For comparative purposes, prior years’ consolidated financial statements have been reclassified to conform to report classifications of the current year.  The reclassifications had no effect on net income.

 

The balance sheet at December 31, 2004 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

 

The results of operations for the three month period ended March 31, 2005 are not necessarily indicative of the results to be expected for the full year.  For purpose of reporting cash flows, cash and cash equivalents include cash and due from banks, and interest bearing deposits in other banks.  For further information, refer to the Consolidated Financial Statements and Footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

 

2.                               Earnings Per Common Share

 

Basic earnings per share represent income available to common shareholders divided by the weighted-average number of common shares outstanding during the period.  Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares (stock options) had been issued, as well as any adjustments to income that would result from the assumed issuance.

 

Earnings per common share for the respective periods indicated have been computed based upon the following:

 

		Three Months Ended
		March 31,			March 31,
		2005			2004
		(Dollar amounts in thousands)
Net income available to shareholders		$	1,779		$	1,228
Average shares outstanding		4,997,887			3,570,881
Effect of dilutive stock options		71,028			69,607
Average number of shares used to calculate diluted earnings per share		5,068,915			3,640,488

 

9

 

3.                               Comprehensive Income

 

Accounting principles generally require that recognized revenue, expense, gains and losses be included in net income.  Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.  The components of other comprehensive income (loss) and related tax effects were as follows:

 

		Three Months Ended
		March 31,			March 31,
		2005			2004
		(Dollar amounts in thousands)
Unrealized holding gains (losses) on available for sale securities		$	(2,528	)	$	2,760
Reclassification adjustment for unrealized gains remaining to be amortized from transfer of available for sale securities to held to maturity		139			—
Reclassification adjustment for (gains) losses realized in income		(38		)	(154		)
Net unrealized gains (losses)		(2,427		)	2,606
Income tax effect		872			(876		)
Other comprehensive income (loss)		$	(1,555	)	$	1,730

 

 

4.                               Guarantees

 

Outstanding letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.  The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for standby letters of credit is represented by the contractual amount of those instruments.  The Company had $10,967,000 of financial and performance standby letters of credit as of March 31, 2005.  The Bank uses the same credit policies in making conditional obligations as it does for on-balance sheet instruments.

The majority of these standby letters of credit expire within the next 24 months.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments.  The Company requires collateral and personal guarantees supporting these letters of credit as deemed necessary.  Management believes that the proceeds obtained through a liquidation of such collateral and the enforcement of personal guarantees would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees.  The current amount of the liability as of March 31, 2005 for guarantees under standby letters of credit is not material.

 

10

 

5.                                 Segment Information

 

The Company’s insurance operations and investment operations are managed separately from the traditional banking and related financial services that the Company also offers.  The insurance operation provides coverage for commercial, individual, surety bond, and group and personal benefit plans.  The investment operation provides services for individual financial planning, retirement and estate planning, investments, corporate and small business pension and retirement planning.  Effective January 1, 2005, the Company’s wealth management subsidiary, Leesport Wealth Management, LLC, changed its name to Madison Financial Advisors, LLC.

 

		Banking
		and
		Financial			Insurance			Investment
		Services			Services			Services			Total
		(Dollar amounts in thousands)
Three months ended March 31, 2005
Net interest income and other income from external sources		$	9,773		$	3,078		$	209		$	13,060
Income (loss) before income taxes		1,626			641			(21		)	2,246
Three months ended March 31, 2004
Net interest income and other income from external sources		$	5,663		$	2,701		$	129		$	8,493
Income before income taxes		1,005			510			3			1,518

 

6.                                 Stock Option Plans

 

The Company has an Employee Stock Incentive Plan (ESIP) that covers all officers and key employees of the Company and its subsidiaries and is administered by a committee of the Board of Directors.  The total number of shares of common stock that may be issued pursuant to the ESIP is 441,525.  The option price for options issued under the Plan must be at least equal to 100% of the fair market value of the common stock on the date of grant and shall not be less than the stock’s par value.  Options granted under the Plan have various vesting periods ranging from immediate up to 5 years, 20% exercisable not less than one year after the date of grant, but no later than ten years after the date of grant in accordance with the vesting.  Vested options expire on the earlier of ten years after the date of grant, three months from the participant’s termination of employment or one year from the date of the participant’s death or disability.

 

The Company has an Independent Directors Stock Option Plan (IDSOP).  The total number of shares of common stock that may be issued pursuant to the ESIP is 110,381.  The Plan covers all directors of the Company who are not employees and former directors who continue to be employed by the Company.  The option price for options issued under the Plan will be equal to the fair market value of the Company’s common stock on the date of grant. Options are exercisable from the date of grant and expire on the earlier of ten years after the date of grant, three months from the date the participant ceases to be a director of the Company or the cessation of the participant’s employment, or twelve months from the date of the participant’s death or disability.

 

11

 

The Company accounts for the above stock option plans under the recognition and measurement principles of APB opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations.  No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.  The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation” to stock-based compensation:

 

		Three Months Ended
		March 31,			March 31,
		2005			2004
		(Dollar amounts in thousands
		except share data)
Net income, as reported		$	1,779		$	1,228
Deduct total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(42		)	(48		)
Pro forma net income		$	1,737		$	1,180
Basic earnings per share:
As reported		$	0.36		$	0.34
Pro forma		$	0.35		$	0.33
Diluted earnings per share:
As reported		$	0.35		$	0.34
Pro forma		$	0.34		$	0.33

 

 

7.                                 Debt and Borrowings

 

Total debt increased by $16.0 million, or 39.1% annualized, to $179.5 million at March 31, 2005 from $163.5 million at December 31, 2004.  The increase in total debt and borrowings was primarily due to the Company purchasing overnight federal funds which increased to $52.8 million at March 31, 2005 from $36.1 million at December 31, 2004.  The purchase of these funds was primarily the result of increases in available for sale investment securities which increased to $181.4 million at March 31, 2005 from $165.8 million at December 31, 2004.

 

8.                                 Acquisitions

 

On October 1, 2004, the Company acquired 100% of the outstanding voting shares of Madison Bancshares group, Ltd., the holding company for Madison Bank (“Madison”), a Pennsylvania state-chartered commercial bank and its wholly owned subsidiary, Philadelphia Financial Mortgage Company (“PFM” or “Philadelphia Financial”).  Madison and PFM are both now divisions of Leesport Bank.  Included in the sale were approximately $198.1 million in total loans, $30.1 million in goodwill and identifiable intangible assets and $180.1 million in total deposits.

 

On September 30, 2003, the Company paid cash of $1.0 million for Madison Insurance Consultants, LLC (“MIC” formerly CrosStates Insurance Consultants, Inc.), a full service insurance agency that specializes in personal and casualty insurance headquartered in Langhorne, Pennsylvania, and recorded a liability of $1.4 million, payable to the shareholder of MIC in cash and stock at the then current market value.  This liability is included in other liabilities.  After the first and second years following the acquisition, $1.0 million and $0.4 million, respectively, will be paid to the former shareholder of MIC.  On October 1, 2004, the Company paid the shareholder of MIC $500,000 in cash and $500,000 in fair market value of the Company’s stock.  Also, there are contingent payments totaling up to $1.2 million, payable to the former shareholder in cash and stock at the then current market value based on MIC achieving certain annual revenue levels through September 30, 2005.  On March 17, 2005, the Company amended the asset purchase agreement increasing the payment to the shareholder in the second year following the acquisition of MIC to $1.0 million.  The $0.6 million increase was recorded as goodwill and a liability payable to the shareholder in stock at the then current market value.

 

12

 

9.                                 Investment in Limited Partnership

 

On December 29, 2003, the Bank entered into a limited partner subscription agreement with Midland Corporate Tax Credit XVI Limited Partnership, where the Bank will receive special tax credits and other tax benefits. The Bank subscribed to a 6.2% interest in the partnership, which is subject to an adjustment depending on the final size of the partnership at a purchase price of $5 million. This investment is included in other assets and is not guaranteed.  It is accounted for in accordance with Statement of Position (SOP) 78-9, “Accounting for Investments in Real Estate Ventures,” using the equity method. This agreement was accompanied by a payment of $1.7 million.  The associated non-interest bearing promissory note payable included in other liabilities was zero at March 31, 2005 and $1.1 million at December 31, 2004.  Installments were paid as requested.  The Company funded the final installment of $1.1 million in January 2005.

 

10.                           Recent Accounting Pronouncements

 

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123(R), “Share-Based Payment.”  Statement No. 123(R) replaces Statement No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.”  Statement No. 123(R) requires compensation costs related to share-based payment transactions to be recognized in the financial statements over the period that an employee provides service in exchange for the award.  Public companies are required to adopt the new standard using a modified prospective method and may elect to restate prior periods using the modified retrospective method.  Under the modified prospective method, companies are required to record compensation cost for new and modified awards over the related vesting period of such awards prospectively and record compensation cost prospectively for the unvested portion, at the date of adoption, of previously issued and outstanding awards over the remaining vesting period of such awards.  No change to prior periods presented is permitted under the modified prospective method.  Under the modified retrospective method, companies record compensation costs for prior periods retroactively through restatement of such periods using the exact pro forma amounts disclosed in the companies’ footnotes.  Also, in the period of adoption and after, companies record compensation cost based on the modified prospective method.

 

On April 14, 2005, the Securities and Exchange Commission (“SEC”) adopted a new rule that amends the compliance dates for Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”). Under the new rule, the Company is required to adopt SFAS No. 123R in the first annual period beginning after June 15, 2005.  The Company has not yet determined the method of adoption or the effect of adopting SFAS No. 123R, and it has not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS No. 123.

 

In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB No. 107”), “Share-Based Payment”, providing guidance on option valuation methods, the accounting for income tax effects of share-based payment arrangements upon adoption of SFAS No. 123(R), and the disclosures in MD&A subsequent to the adoption. The Company will provide SAB No. 107 required disclosures upon adoption of SFAS No. 123(R) on January 1, 2006.

 

In December 2003, the Accounting Standards Executive Committee issued Statement of Position 03-3 (SOP 03-3), “Accounting for Certain Loans or Debt Securities Acquired in a Transfer.”  SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities acquired in a transfer, including business combinations, if those differences are attributable, at least in part, to credit quality.  SOP 03-3 is effective for loans and debt securities acquired in fiscal years beginning after December 15, 2004.  The Company adopted the provisions of SOP 03-3 on January 1, 2005.

 

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Item 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Critical Accounting Policies

 

Note 1 to the Company’s consolidated financial statements (included in Item 8 of the Form 10-K for the year ended December 31, 2004) lists significant accounting policies used in the development and presentation of its financial statements.  This discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of the Company and its results of operations.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, other than temporary impairment losses on available for sale securities and the valuation of deferred tax assets.  In estimating other-than temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

 

Results of Operations

 

OVERVIEW

 

Net income for the Company for the quarter ended March 31, 2005 was $1.78 million, an increase of 44.9%, as compared to $1.23 million for the same period in 2004.  Basic and diluted earnings per share were $.36 and $.35, respectively, for the first quarter of 2005 compared to basic and diluted earnings per share of $.34 and $.34, respectively, for the same period of 2004.  Earnings per share amounts reflect a 5% stock dividend distributed to shareholders on January 14, 2005.

 

The following are the key ratios for the Company as of March 31:

 

 

 

Net Interest Income

 

Net interest income is a primary source of revenue for the Company.  Net interest income results from the difference between the interest and fees earned on loans and investments and the interest paid on deposits to customers and other non-deposit sources of funds, such as repurchase agreements and short and long-term borrowed funds.  Net interest margin is the difference between the gross (tax-effected) yield on earning assets and the cost of interest bearing funds as a percentage of earning assets.  All discussion of net interest margin is on a fully taxable equivalent basis.

 

Net interest income for the three months ended March 31, 2005 was $7.4 million, an increase of $2.8 million, or 60.3%, compared to the $4.6 million reported for the first quarter of 2004.  The net interest margin increased to 3.80% for the first quarter of 2005 from 3.33% for the first quarter of 2004.

 

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The following summarizes net interest margin information:

 

		Three Months Ended March 31,
		2005								2004
					Interest								Interest
		Average			Income/			%		Average			Income/			%
		Balance			Expense			Rate		Balance			Expense			Rate
		(Dollar amounts in thousands, except percentages)
Interest-Earning Assets:
Loans: (1) (2)
Commercial		$	429,175		$	6,879		6.41		$	236,707		$	3,613		6.14
Mortgage		57,387			943			6.57		37,620			585			6.22
Consumer		124,169			1,927			6.29		84,964			1,176			5.57
Other		96			—			—		233			—			—
Investments (2)		174,666			1,993			4.56		195,687			2,108			4.31
Federal funds sold		—			—			—		33			—			—
Other short-term investments		1,458			11			3.06		73			3			16.53
Total interest-earning assets		$	786,951		$	11,753		5.97		$	555,317		$	7,485		5.42
Interest-Bearing Liabilities:
Transaction accounts		$	270,855		$	906		1.36		$	177,903		$	515		1.16
Certificates of deposit		235,743			2,114			3.64		168,066			1,535			3.67
Securities sold under agreement to repurchase		48,366			273			2.26		39,230			179			1.81
Short-term borrowings		46,156			324			2.85		52,274			165			1.27
Long-term borrowings		54,872			434			3.16		34,500			301			3.45
Junior subordinated debt		20,150			333			6.70		15,000			193			5.17
Total interest-bearing liabilities		676,142			4,384			2.63		486,973			2,888			2.39
Noninterest-bearing deposits		109,177			—					64,601			—
Total cost of funds		$	785,319		4,384			2.26		$	551,574		2,888			2.11
Net interest margin (fully taxable equivalent)					$	7,369		3.80					$	4,597		3.33

(1)          Loan fees have been included in the interest income totals presented.  Nonaccrual loans have been included in average loan balances.

 

(2)          Interest income on loans and investments is presented on a taxable equivalent basis using an effective tax rate of 34%.

 

Average interest-earning assets for the quarter ended March 31, 2005 were $787.0 million, a $231.7 million, or 41.7%, increase over average interest-earning assets of $555.3 million for the first quarter of 2004.  The yield on average interest-earning assets increased by 55 basis points, to 5.97% for the first quarter of 2005, compared to 5.42% for the same period in 2004.

 

Average interest-bearing liabilities for the quarter ended March 31, 2005 were $676.1 million, a $189.1 million, or 38.8%, increase over average interest-bearing liabilities of $487.0 million for the first quarter of 2004.  In addition, the average noninterest-bearing deposits increased to $109.2 million for the three months ended March 31, 2005, from $64.6 million for the same time period of 2004.  The interest rate on the total cost of funds increased by 15 basis points, to 2.26% for the three months ended March 31, 2005, compared to 2.11% for the same period in 2004.

 

The increase in net interest income during the first quarter of 2005, as compared to the same period in 2004, was primarily the result of an increase in average earning assets, due mainly to commercial and installment loans acquired from Madison, the targeted short-term interest rate, as established by the Federal Reserve Bank (“FRB”), increasing, which resulted in an increase in the prime rate from 4.00% at March 31, 2004, to 5.75% at March 31, 2005, an increase in the commercial loan portfolio yield, an increase in the installment loan portfolio yield and an increase in the investment

 

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