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 September 30, 2004

 

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 November 1, 2004.

 

 

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 the Company and its management may contain, 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 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”). 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, laws, regulations and policies affecting banking, securities, insurance and monetary and financial matters as well as any laws otherwise affecting the Company.

 

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 to develop and maintain secure and reliable electronic systems including systems developed for the Company’s website and 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 attacks and military actions.

 

•                                          Business combinations and the integration of acquired businesses and assets 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)

 

		September 30, 2004			December 31, 2003
Assets
Cash and due from banks		$	38,565		$	42,500
Federal funds sold		58,295			26,844
Total cash and cash equivalents		96,860			69,344
Securities
Available for sale (amortized cost of $410,834 in 2004 and $458,746 in 2003)		408,526			458,146
Held to maturity (fair value of $74,129 in 2004 and $29,671 in 2003)		74,001			29,195
Federal Home Loan Bank Stock		5,273			5,039
Total securities		487,800			492,380
Loans, less allowance for loan losses of $13,186 in 2004 and $14,420 in 2003		1,059,402			1,073,767
Cash surrender value of company-owned life insurance		24,581			13,416
Premises and equipment, net		40,898			42,896
Other real estate		5,543			1,266
Accrued interest and other assets		17,485			17,626
Total assets		$	1,732,569		$	1,710,695
Liabilities and shareholders’ equity
Deposits
Demand-noninterest-bearing		$	147,999		$	143,440
Interest-bearing		1,402,441			1,386,491
Total deposits		1,550,440			1,529,931
Prepaid solutions cards		13,861			17,049
Accrued interest and other liabilities		14,347			13,803
Common stock in ESOP subject to contingent repurchase obligation		52,403			51,371
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		113,789			109,952
Accumulated other comprehensive loss		(1,391		)	(363		)
Unearned ESOP shares		—			(1,200		)
Amount reclassified on ESOP shares		(52,403		)	(51,371		)
Total shareholders’ equity		101,518			98,541
Total liabilities and shareholders’ equity		$	1,732,569		$	1,710,695

 

See accompanying notes to consolidated financial statements.

 

4

 

WEST SUBURBAN BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

(Dollars in thousands, except per share data)

(UNAUDITED)

 

		2004			2003
Interest income
Loans, including fees		$	43,946		$	47,980
Securities
Taxable		13,844			11,837
Exempt from federal income tax		1,357			920
Federal funds sold		208			142
Total interest income		59,355			60,879
Interest expense
Deposits		15,864			16,883
Other		31			29
Total interest expense		15,895			16,912
Net interest income		43,460			43,967
Provision for loan losses		200			2,150
Net interest income after provision for loan losses		43,260			41,817
Noninterest income
Service fees on deposit accounts		5,815			6,207
Debit card fees		1,295			1,314
Net realized (loss) gain on securities transactions		(2,005		)	2,315
Net gain on sales of loans held for sale		194			747
Litigation settlement		—			1,085
Prepaid solutions cards		4,127			1,931
Other		3,393			3,267
Total noninterest income		12,819			16,866
Noninterest expense
Salaries and employee benefits		16,544			15,904
Occupancy		2,999			2,947
Furniture and equipment		3,426			3,496
Advertising and promotion		1,070			962
Professional fees		1,009			762
Prepaid solutions cards		2,823			1,460
Other		4,625			4,429
Total noninterest expense		32,496			29,960
Income before income taxes		23,583			28,723
Income tax expense		6,771			9,283
Net income		$	16,812		$	19,440
Earnings per share		$	38.96		$	44.95
Average shares outstanding		431,546			432,495

 

See accompanying notes to consolidated financial statements.

 

5

 

WEST SUBURBAN BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

(Dollars in thousands, except per share data)

(UNAUDITED)

 

		2004			2003
Interest income
Loans, including fees		$	14,857		$	15,546
Securities
Taxable		4,508			4,121
Exempt from federal income tax		412			339
Federal funds sold		131			24
Total interest income		19,908			20,030
Interest expense
Deposits		5,574			5,230
Other		5			15
Total interest expense		5,579			5,245
Net interest income		14,329			14,785
Provision for loan losses		—			1,250
Net interest income after provision for loan losses		14,329			13,535
Noninterest income
Service fees on deposit accounts		2,042			1,937
Debit card fees		438			404
Net realized (loss) gain on securities transactions		(2,057		)	452
Net gain on sales of loans held for sale		42			185
Prepaid solutions cards		1,433			887
Other		1,100			1,232
Total noninterest income		2,998			5,097
Noninterest expense
Salaries and employee benefits		5,504			5,358
Occupancy		1,043			955
Furniture and equipment		1,064			1,061
Advertising and promotion		373			382
Professional fees		220			248
Prepaid solutions cards		878			673
Other		1,584			1,672
Total noninterest expense		10,666			10,349
Income before income taxes		6,661			8,283
Income tax expense		1,712			2,563
Net income		$	4,949		$	5,720
Earnings per share		$	11.45		$	13.23
Average shares outstanding		432,059			432,495

 

See accompanying notes to consolidated financial statements.

 

6

 

WEST SUBURBAN BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

(Dollars in thousands, except per share data)

(UNAUDITED)

 

		Common Stock and Surplus			Retained Earnings			Accumulated Other Compre- hensive Income			Unearned ESOP Shares			Amount Reclassified on ESOP Shares			Total Shareholders’ Equity			Common Stock in ESOP Subject to Contingent Repurchase Obligation
Balance, January 1, 2003		$	41,523		$	103,074		$	3,088		$	—		$	(40,241	)	$	107,444		$	40,241
Comprehensive income
Net income		—			19,440			—			—			—			19,440			—
Change in unrealized gain on available for sale securities, net of reclassification and tax effects		—			—			(2,334		)	—			—			(2,334		)	—
Total comprehensive income																	17,106
Cash dividends declared - $24.00 per share		—			(10,380		)	—			—			—			(10,380		)	—
Reclassification due to change in fair value of common stock in ESOP subject to contingent repurchase obligation		—			—			—			—			(4,712		)	(4,712		)	4,712
Balance, September 30, 2003		$	41,523		$	112,134		$	754		$	—		$	(44,953	)	$	109,458		$	44,953

 

		Common Stock and Surplus			Retained Earnings			Accumulated Other Compre- hensive Loss			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		—			16,812			—			—			—			16,812			—
Change in unrealized loss on available for sale securities, net of reclassification and tax effects		—			—			(1,028		)	—			—			(1,028		)	—
Total comprehensive income																	15,784
Cash dividends declared - $30.00 per share		—			(12,975		)	—			—			—			(12,975		)	—
Reclassification due to change in fair value of common stock in ESOP subject to contingent repurchase obligation		—			—			—			—			(1,032		)	(1,032		)	1,032
ESOP shares committed to be released		—			—			—			1,200			—			1,200			—
Balance, September 30, 2004		$	41,523		$	113,789		$	(1,391	)	$	—		$	(52,403	)	$	101,518		$	52,403

 

See accompanying notes to consolidated financial statements.

 

7

 

WEST SUBURBAN BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

(Dollars in thousands)

(UNAUDITED)

 

		2004			2003
Cash flows from operating activities
Net income		$	16,812		$	19,440
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		2,759			3,077
Provision for loan losses		200			2,150
Deferred income tax expense (benefit)		144			(888		)
Net premium amortization of securities		1,467			1,641
Net realized loss (gain) on securities transactions		2,005			(2,315		)
Federal Home Loan Bank stock dividends		(234		)	(284		)
Increase in cash surrender value of company-owned life insurance		(1,165		)	(789		)
Net gain on sales of loans held for sale		(194		)	(747		)
Sales of loans held for sale		12,409			63,092
Origination of loans held for sale		(11,686		)	(59,531		)
Net loss on sales of premises and equipment		11			4
Net loss on sales of other real estate		86			—
ESOP compensation expense		1,200			—
Write down of other real estate		—			40
Decrease in accrued interest and other assets		677			2
Increase in accrued interest and other liabilities		544			2,561
Net cash provided by operating activities		25,035			27,453
Cash flows from investing activities
Securities available for sale
Sales		250,225			121,740
Maturities and calls		106,979			253,277
Purchases		(312,816		)	(548,642		)
Securities held to maturity
Maturities and calls		5,794			11,483
Purchases		(50,548		)	(239		)
Net decrease in loans		8,093			14,866
Investment in company-owned life insurance		(10,000		)	(10,000		)
Purchases of premises and equipment		(776		)	(911		)
Sales of premises and equipment		4			1
Sales of other real estate		1,180			201
Net cash used in investing activities		(1,865		)	(158,224		)
Cash flows from financing activities
Net increase in deposits		20,509			94,657
Increase in federal funds purchased		—			12,560
(Decrease) increase in prepaid solutions cards		(3,188		)	9,318
Dividends paid		(12,975		)	(14,705		)
Net cash provided by financing activities		4,346			101,830
Net increase (decrease) in cash and cash equivalents		27,516			(28,941		)
Beginning cash and cash equivalents		69,344			66,788
Ending cash and cash equivalents		$	96,860		$	37,847
Supplemental disclosures
Cash paid for
Interest		$	16,094		$	17,891
Income taxes		6,516			10,243
Other real estate acquired through loan foreclosure		5,543			459

 

See accompanying notes to consolidated financial statements.

 

8

 

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 - 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:

 

		September 30, 2004									December 31, 2003
		Fixed Rate			Variable Rate			Total			Fixed Rate			Variable Rate			Total
Commercial loans and lines of credit		$	1,001		$	166,528		$	167,529		$	1,094		$	145,152		$	146,246
Check credit lines of credit		1,242			—			1,242			1,354			—			1,354
Mortgage loans		5,950			1,687			7,637			5,251			2,899			8,150
Home equity lines of credit		—			169,121			169,121			—			164,967			164,967
Letters of credit		—			31,860			31,860			—			33,780			33,780
Credit card lines of credit		—			70,187			70,187			—			72,293			72,293
Total		$	8,193		$	439,383		$	447,576		$	7,699		$	419,091		$	426,790

 

Fixed rate commercial loan commitments at September 30, 2004 generally had interest rates ranging from 4.75% to 9.00% with terms ranging from 1 to 5 years. Fixed rate check credit lines of credit had interest rates ranging from 12.90% to 18.00% at September 30, 2004. Fixed rate mortgage loan commitments at September 30, 2004 generally had interest rates ranging from 4.625% to 6.75% with terms ranging from 10 to 30 years.

 

Note 3 - - Common Stock in ESOP Subject to Contingent Repurchase Obligation

 

At September 30, 2004 and December 31, 2003, the ESOP held 83,179 and 82,671 shares of West Suburban common stock, respectively. At September 30, 2004 and December 31, 2003, respectively, 83,179 and 80,772 shares of West Suburban common stock were allocated to ESOP participants. Upon termination of their employment, participants who elect to receive their benefit payments 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 paid and the second purchase period begins on the first anniversary of the payment 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

 

9

 

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 September 30, 2004 and December 31, 2003, this contingent repurchase obligation reduced shareholders’ equity by $52,403 and $51,371, 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.

 

Note 4 - 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 2003, the Accounting Standards Executive Committee (“AcSEC”) issued Statement of Position 03-3, Accounting for Certain Loans and Debt Securities Acquired in a Transfer. AcSEC began this project to address practice issues relating to purchases of troubled loans (including purchases of individual loans, pools of loans or in connection with business combinations) and the treatment of the allowance for loan losses in such acquisitions. This Statement clarifies that a buyer cannot carry over the seller’s allowance for loan losses in connection with an acquisition of loans with credit deterioration. Deterioration may be demonstrated by such evidence as FICO scores (an automated rating process for credit reports), downgrading, decline in value of collateral or past-due status. The Statement is effective for the years beginning January 1, 2005 and only applies to loans purchased after the Statement is effective. At this time, management does not anticipate that the Statement will have a material impact on the Company’s financial condition or results of operations.

 

10

 

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 probable credit losses inherent in the loan portfolio. The allowance for loan losses represents the Company’s estimate of probable 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 probable losses that have been identified relating to specific borrowing relationships as well as probable losses for pools of loans. The allowance for loan losses is reassessed 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 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 probable credit losses inherent 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.

 

11

 

The following table presents the Company’s significant fixed and determinable contractual obligations and significant commitments by payment date as of September 30, 2004 (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		$	1,125,617		$	—		$	—		$	—		$	1,125,617
Time deposits		204,424			112,871			107,528			—			424,823
Operating leases		176			269			278			68			791
Prepaid solutions cards		13,861			—			—			—			13,861
Commitments to extend credit
Fixed Rate														8,193
Variable Rate														439,383

 

Balance Sheet Analysis

 

Asset Distribution.  Total consolidated assets at September 30, 2004 increased 1.3% from December 31, 2003. Total year-to-date average assets at September 30, 2004 increased 5.1% from September 30, 2003. An increase in federal funds sold was the largest component of the increase in total consolidated assets and was partially offset by decreases in loans and securities. Asset growth was funded primarily by higher levels of deposits.

 

Cash and cash equivalents at September 30, 2004 increased 39.7% from December 31, 2003 due to increases in federal funds sold balances. The higher balances are likely to be temporary and resulted primarily from proceeds from sales of available for sale securities.

 

The Company’s securities portfolio decreased 0.9% during the first nine months of 2004. This decrease was due to a decrease in the available for sale securities portfolio of 10.8%. During the third quarter of 2004, the Company repositioned its holdings in the securities portfolio by selling $184.6 million of available for sale securities. The repositioning was intended to shorten the duration, improve cash flow and reduce the interest rate risk of the portfolio. Additionally, the balances in the held to maturity portfolio increased 153.5% during the first nine months of 2004 due to purchases of new securities being classified as held to maturity. During this nine month period, the Company’s accumulated other comprehensive loss increased $1.0 million due to a change in unrealized losses on securities available for sale, net of reclassification and tax effects. 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 reclassification process include the current interest rate and economic environments as well as liquidity considerations.

 

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

 

		September 30, 2004			December 31, 2003			Dollar Change			Percent Change
Securities available for sale
Corporate		$	52,981		$	46,330		$	6,651		14.4	%
U.S. government agencies and corporations		314,629			323,579			(8,950		)	(2.8	)%
Mortgage-backed		33,830			38,041			(4,211		)	(11.1	)%
States and political subdivisions		6,326			33,466			(27,140		)	(81.1	)%
Total debt securities		407,766			441,416			(33,650		)	(7.6	)%
Preferred stock		760			16,730			(15,970		)	(95.5	)%
Total securities available for sale		$	408,526		$	458,146		$	(49,620	)	(10.8	)%
Securities held to maturity
U.S. government agencies and corporations		$	49,435		$	13,998		$	35,437		253.2	%
Mortgage-backed		7,869			1,959			5,910			301.7	%
States and political subdivisions		16,697			13,238			3,459			26.1	%
Total securities held to maturity		$	74,001		$	29,195		$	44,806		153.5	%

 

At September 30, 2004, the Company held $291.7 million of investment securities that had net unrealized losses.  Of these investment securities, at September 30, 2004, securities with an amortized cost of $49.4 million had unrealized losses for a continuous period of twelve months or more, which unrealized losses were $1.2 million as of that date.  In accordance with generally accepted accounting principles, unrealized losses on debt securities are not recognized if management has the intent and ability to hold the securities until the maturity date of the securities and no concerns exist with respect to the ability of the issuer to satisfy its obligations at maturity. At September 30, 2004, debt securities with an amortized cost of $48.4 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 $1.0 million. Management believes that the fair value of these debt securities will recover as the securities approach their maturity date. At September 30, 2004, an equity security 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 Management has both the intent and ability to hold the investment until such recovery occurs.

 

Total loans outstanding at September 30, 2004 decreased 1.4% from December 31, 2003 primarily due to decreased balances in the commercial real estate, real estate construction and indirect automobile loan portfolios. The decrease in the commercial real estate portfolio resulted primarily from loan payoffs and reduced demand. The real estate construction loan portfolio declined primarily due to loan repayments and the cyclical nature of the real estate construction industry. The decrease in the indirect automobile loan portfolio was primarily due to prepayments and scheduled repayments as well as the effect of promotional programs offered by new automobile dealers such as 0% financing. The Company expects to see this trend continue until the automobile dealers discontinue their promotional programs. These decreases were partially offset by increases in the home equity loan portfolio. The growth in the home equity loan portfolio resulted from a combination of promotional marketing efforts for this product and the current low interest rate environment. The growth in the home equity loan portfolio was primarily in fixed rate second mortgages.

 

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

 

		September 30, 2004			December 31, 2003			Dollar Change			Percent Change
Commercial		$	275,882		$	270,220		$	5,662		2.1	%
Consumer		7,794			10,040			(2,246		)	(22.4	) %
Indirect automobile		44,008			60,929			(16,921		)	(27.8	) %
Real estate
Residential		141,448			135,776			5,672			4.2	%
Commercial		205,443			217,865			(12,422		)	(5.7	) %
Home equity		236,276			205,272			31,004			15.1	%
Construction		147,202			171,975			(24,773		)	(14.4	)%
Held for sale		460			989			(529		)	(53.5	)%
Credit card		12,953			14,424			(1,471		)	(10.2	)%
Other		1,122			697			425			61.0	%
Total		1,072,588			1,088,187			(15,599		)	(1.4	)%
Allowance for loan losses		(13,186		)	(14,420		)	1,234			8.6	%
Loans, net		$	1,059,402		$	1,073,767		$	(14,365	)	(1.3	)%

 

Allowance for Loan Losses and Asset Quality.  The Company’s allowance for loan losses as a percent of nonperforming loans increased to 113% at September 30, 2004 from 94% at December 31, 2003 and the ratio of nonperforming loans to total loans decreased to 1.08% at September 30, 2004 from 1.41% at December 31, 2003.  The ratio of nonperforming assets to total assets increased to .99% at September 30, 2004 from .97% at December 31, 2003.

 

The Company’s loans 90 days or more past due increased $1.0 million. This increase was primarily due to one commercial and one residential real estate loan becoming 90 days or more past due. The level of nonaccrual loans decreased $4.8 million during the first nine months of 2004 primarily due to the completion of the foreclosure proceedings relating to three properties with an aggregate valuation of $5.5 million. The property acquired upon completion of the foreclosure proceedings accounted for the majority of the increase in other real estate partially offset by the sales of two other properties. Approximately $8.7 million of the Company’s nonaccrual loans at September 30, 2004 relate to three loan relationships for which $4.0 million of specific reserves have been established. Although the Company’s analysis as of that date indicates that the established specific reserves would be sufficient to absorb the probable losses with respect to the three loan relationships, no assurances can be provided that the actual losses will not exceed the specific reserves.

 

The ratio of the allowance for loan losses to total loans outstanding was 1.23% and 1.33% at September 30, 2004 and December 31, 2003, respectively.

 

The following table presents an analysis of the Company’s nonperforming loans and other real estate as of the dates indicated (dollars in thousands):

 

 

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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):

 

		2004									2003
		3rd Qtr			2nd Qtr			1st Qtr			4th Qtr			3rd Qtr
Provision - quarter		$	—		$	200		$	—		$	—		$	1,250
Provision - year to date		200			200			—			2,150			2,150
Net charge-offs - quarter		76			600			758			466			962
Net charge-offs - year to date		1,434			1,358			758			1,577			1,111
Allowance at period end		13,186			13,262			13,662			14,420			14,886
Allowance at period end to total loans		1.23		%	1.23		%	1.28		%	1.33		%	1.33		%

 

Company-Owned Life Insurance (“COLI”).  The cash surrender value of COLI increased to $24.6 million at September 30, 2004 from $13.4 million at December 31, 2003. The Company acquired $10.0 million of additional insurance in connection with its management of costs associated with certain employee benefits obligations.

 

Deposits.  Total deposits at September 30, 2004 increased 1.3% from December 31, 2003. The increase in total deposits primarily resulted from an increase in time deposits.  Management believes the increase in time deposits resulted from a promotional program that the Company has offered during the year. In general, management promotes its deposit products when feasible while preserving the Company’s net interest margin.

 

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

 

		September 30, 2004			December 31, 2003			Dollar Change			Percent Change
Demand-noninterest-bearing		$	147,999		$	143,440		$	4,559		3.2	%
NOW		301,455			309,634			(8,179		)	(2.6	)%
Money market checking		236,996			235,538			1,458			0.6	%
Savings		439,167			447,017			(7,850		)	(1.8	)%
Time deposits
Less than $100,000		323,813			303,362			20,451			6.7	%
$100,000 and greater		101,010			90,940			10,070			11.1	%
Total		$	1,550,440		$	1,529,931		$	20,509		1.3	%

 

During the first nine months of 2004, average balances in demand-noninterest-bearing deposits decreased $4.0 million from the 2003 period. Average balances in interest-bearing deposits increased $77.3 million from the 2003 period.

 

Prepaid Solutions Cards.  Prepaid solutions cards at September 30, 2004 decreased 18.7% from December 31, 2003. This liability reflects the outstanding balances of the Company’s prepaid solutions card customers. This decrease was primarily due to the usage of the prepaid solutions cards outpacing growth in accounts and balances and the transition of programs into and away from the Company.

 

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