Middlefield Banc - 10-Q quarterly report FY

 

 

 

MIDDLEFIELD BANC CORP.

INDEX

MIDDLEFIELD BANC CORP.

CONSOLIDATED BALANCE SHEET
(Unaudited)

See accompanying unaudited notes to the consolidated financial statements.

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF INCOME
(Unaudited)

See accompanying unaudited notes to the consolidated financial statements.

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)

See accompanying unaudited notes to the consolidated financial statements.

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)

See accompanying notes to unaudited consolidated financial statements.

MIDDLEFIELD BANC CORP.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The consolidated financial statements of Middlefield Banc Corp. (“Middlefield”) includes its wholly owned subsidiary, The Middlefield Banking Company (the “Bank”). All significant inter-company items have been eliminated.

The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles and the instructions for Form 10-Q and Article 10 of Regulation S-X. In Management’s opinion, the financial statements include all adjustments, consisting of normal recurring adjustments, that Middlefield considers necessary to fairly state Middlefield’s financial position and the results of operations and cash flows. 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 necessary informational disclosures and footnotes as required by U. S. generally accepted accounting principles. The accompanying financial statements should be read in conjunction with the financial statements and notes thereto included with Middlefield’s Form 10-K (File No. 33-23094). The results of Middlefield’s operations for any interim period are not necessarily indicative of the results of Middlefield’s operations for any other interim period or for a full fiscal year.

The Company maintains a stock option plan for key officers, employees, and non-employee directors. Had compensation expense for the stock option plans been recognized in accordance with the fair value accounting provisions of FAS No. 123, Accounting for Stock-Based Compensation, net income applicable to common stock, basic, and diluted net income per common share would have been as follows:

Middlefield provides dual presentation of Basic and Diluted earnings per share. Basic earnings per share utilizes net income as reported as the numerator and the actual average shares outstanding as the denominator. Diluted earnings per share includes any dilutive effects of options, warrants, and convertible securities.

There are no convertible securities that would affect the numerator in calculating basic and diluted earnings per share; therefore, net income as presented on the Consolidated Statement of Income (Unaudited) will be used as the numerator. The following tables set forth the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share computation.

Effective December 1, 2001, the Bank adopted a Directors Retirement Plan to provide post-retirement payments over a ten-year period to members of the Board of Directors who have completed five or more years of service. The Plan requires payment of 25 percent of the final average annual board fees paid to a director in the three years preceding the director’s retirement.

The following table illustrates the components of the net periodic pension cost for the Directors retirement plans as of June 30, 2005:

The components of comprehensive income consist exclusively of unrealized gains and losses on available for sale securities. For the six months ended June 30, 2005, this activity is shown under the heading Comprehensive Income as presented in the Consolidated Statement of Changes in Stockholders’ Equity (Unaudited). For the six months ended June 30, 2004, comprehensive income totaled $1,657,860.

The following discussion and analysis provides further detail to the financial condition and results of operations of the Company. The MD&A should be read in conjunction with the notes and financial statements presented in this report.

General. The Company’s assets increased by $12.8 million or 4.4% from December 31, 2004 to June 30, 2005 to a balance of $304.0 million. Loans receivable, cash and cash equivalents and accrued interest and other assets, increased $7.8 million, $1.1 million and $606,000 respectively. The increase in total assets reflects a corresponding increase in total liabilities of $11.3 million or 4.3% and an increase in stockholders’ equity of $1.4 million or 5.7%. The increase in total liabilities was primarily the result of growth in deposits of $9.3 million along with an increase in borrowings from the Federal Home Loan Bank of Cincinnati. The increase in stockholders’ equity was the result of increases in additional paid in capital and retained earnings of $316,000 and $1.1 million, respectively, as well as a decrease in comprehensive loss of $27,000.

Cash on hand and due from banks. Cash on hand and due from banks represent cash equivalents. Cash equivalents increased a combined $1.1 million or 20.5% to $6.4 million at June 30, 2005 from $5.3 million at December 31, 2004. Deposits from customers into savings and checking accounts, loan and security repayments and proceeds from borrowed funds typically increase these accounts. Decreases result from customer withdrawals, new loan originations, security purchases and repayments of borrowed funds. The increase for the first six months can principally be attributed to increases in deposits.

Securities. The Company’s securities portfolio increased by $3.3 million or 5.7% to $60.7 million at June 30, 2005 from $57.4 million at December 31, 2004. During the first half of the year ended June 30, 2005 the Company recorded purchases of available for sale securities of $7.8 million, consisting of purchases of government agencies and municipal bonds. Offsetting the purchases of securities were repayments and maturities of securities of $4.5 million during the six months ended June 30, 2005. In addition, the securities portfolio increased approximately $27,000 due to increases in the market value. These fair value adjustments represent temporary fluctuations resulting from changes in market rates in relation to average yields in the available for sale portfolio. If securities are held to their respective maturity dates, no fair value gain or loss is realized.

Loans receivable. The loans receivable category consists primarily of single family mortgage loans used to purchase or refinance personal residences located within the Company’s market area and commercial real estate loans used to finance properties that are used in the borrowers businesses or to finance investor-owned rental properties, and to a lesser extent commercial and consumer loans. Net loans receivable increased $7.8 million or 3.6% to $223.5 million at June 30, 2005 from $215.7 million at December 31, 2004. Included in this increase were increases in commercial loans of $8.1 million or 13.6% and home equity loans of $3.1 million or 15.0%, as well as decreases in mortgage loans of $3.6 million during the six months ended June 30, 2005. The Corporation’s lending philosophy is to focus on the commercial loan portfolio and to attempt to grow the portfolio. To attract and build the commercial loan portfolio, the Corporation has taken a proactive approach in contacting new and current clients to ensure that the Corporation is servicing its client’s needs. These lending relationships generally offer more attractive returns than residential loans and also offer opportunities for attracting larger balance deposit relationships. However, the shift in loan portfolio mix from residential real estate to commercial oriented loans may increase credit risk.

Non-performing loans. Non-performing loans included non-accrual loans, renegotiated loans, loans 90 days or more past due, other real estate loans, and repossessed assets. A loan is classified as non-accrual when, in the opinion of management, there are serious doubts about collectibility of interest and principal. At the time the accrual of interest is discontinued, future income is recognized only when cash is received. Renegotiated loans are those loans which terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of the deterioration of the borrower. Non-performing loans amounted to $1.8 million or 0.82% and $1.5 million or 0.68% of total loans at June 30, 2005 and December 31, 2004, respectively. The increase for the first half of the year was due in part to a loan secured by commercial real estate with minimal loss anticipated.

Deposits. The Company considers various sources when evaluating funding needs, including but not limited to deposits, which are a significant

source of funds totaling $249.2 million or 90% of the Company’s total funding sources at June 30, 2005. Total deposits increased $9.3 million or 3.9% to $249.2 million at June 30, 2005 from $239.9 million at December 31, 2004. The increase in deposits is primarily related to the growth of certificates of deposits that totaled $116.4 million at June 30, 2005 an increase of $12.6 million or 12.1% for the year. Non interest-bearing and interest bearing demand accounts increased $1.8 million or 4.9% and $1.1 million, or 12.4% respectively, while money market and saving deposits decreased $701,000, or 4.5%, and $5.4 million, or 7.2%, respectively, during the six months ended June 30, 2005.

Borrowed funds. The Company utilizes short and long-term borrowings as another source of funding used for asset growth and liquidity needs. These borrowings primarily include FHLB advances and repurchase agreements. Borrowed funds increased $2 million or 8% to $27.6 million at June 30, 2005 from $25.6 million at December 31, 2004. FHLB advances increased $2.0 million or 8.5% while short-term borrowings increased $31,000 or 1.70%. The increase in FHLB advances was a result of the funding needs to support the growth of the loan and investment portfolio during the first half of the year.

Stockholders’ equity. Stockholders’ equity increased $1.4 million or 5.7% to $26.2 million at June 30, 2005 from $24.8 million at December 31, 2004. The increase in stockholders’ equity was the result of increases in additional paid in capital and retained earnings of $316,000 and $1.1 million, respectively, as well as, an decrease in accumulated other comprehensive loss of $27,000. The decrease of accumulated other comprehensive loss was the result of a increase in the mark to market of the Company’s securities available for sale portfolio.

General. The Company recorded net income of $917,000 and $1,631,000 for the three and six months ended June 30, 2005, respectively, as compared to net income of $909,000 and $1,594,000, respectively, for the same periods in the prior year. The $8,000, or 1% increase in net income for the quarter ended June 30, 2005, as compared to the same period in the prior year was primarily attributable to an increase in net interest income after provision for loan losses of $138,000 and a increase in non-interest income of $41,000, partially offset by a increase in non-interest expense of $164,000 and an increase in provision for income taxes of $7,000.

Net interest income. Net interest income, the primary source of revenue for the Company, is determined by the Company’s interest rate spread, which is defined as the difference between income on earning assets and the cost of funds supporting those assets, and the relative amounts of interest earning assets and interest bearing liabilities. Management periodically adjusts the mix of assets and liabilities, as well as the rates earned or paid on those assets and liabilities in order to manage and improve net interest income. The level of interest rates and changes in the amount and composition of interest earning assets and liabilities affect the Company’s net interest income. Historically from an interest rate risk perspective, it has been management’s perception that differing interest rate environments can cause sensitivity to the Company’s net interest income, these being extended low long-term interest rates or rapidly rising short-term interest rates. Net interest income increased $169,000 or 6.8% to $2.6 million for the three months ended June 30, 2005, compared to $2.5 million for the same period in the prior year. This increase in net interest income can be attributed to an increase in interest income of $385,000, partially offset by an increase in interest expense of $217,000. Net interest income increased $321,000, or 6.6%, for the six months ended June 30, 2005 compared to the same period in the prior year. This increase in net interest income can be attributed to an increase in interest income of $702,000, partially offset by a increase in interest expense of $382,000. Even though the Company showed an increase in net interest income, a slight decline in net interest margin was experienced. This was a result in an increase in the cost of interest-bearing liabilities of 17 basis points to 2.76% for the quarter ended June 30, 2005 compared to 2.59% for the same period in the prior year and an increase of 11 basis points to 2.71% for the six months ended June 30, 2005 compared to 2.60% for the same period in the prior year. This increase in the cost of funds offset the increase in the yield on interest earning assets of 7 basis points to 6.16% for the quarter ended June 30, 2005 compared to 6.09% for the same period in the prior year and for the six months ended June 30, 2005 there was no change in yield on interest earning assets of 6.11%.

Interest income. Interest income increased $385,000, or 9.9%, for the three months ended June 30, 2005, compared to the same period in the prior year. This increase can be attributed to increases in interest earned on loans receivable and securities available for sale of $290,000 and $91,000, respectively.

Interest earned on loans receivable increased $290,000, or 8.6%, for the three months ended June 30, 2005, compared to the same period in the prior year. This increase was primarily attributable to an increase in the average balance of loans outstanding of $19.5 million, or 9.7%, to $221.2 million for the three months ended June 30, 2005 compared to $201.7 million for the same period in the prior year. The increase in the average balance was partially offset by a decline in the yield on the loans to 6.65% for the three months ended June 30, 2005 from 6.71% for the same period in the prior year.

Interest earned on securities increased $91,000, or 19.0%, for the three months ended June 30, 2005, compared to the same period in the prior year. This increase was primarily the result of an improvement in the average balance of the securities portfolio of $8.2 million, or 15.7%, to $60.4 million at June 30, 2005 from $52.2 million for the same period in the prior year. The improvement can also be attributed to the increase in the tax equivalent yield on securities to 4.48% for the three months ended June 30, 2005 from 4.20% for the same period in the prior year.

Interest income increased $702,000, or 9.1%, for the six months ended June 30, 2005, compared to the same period in the prior year. This

increase was primarily attributable to an increase in the average balance of loans outstanding of $20.4 million, or 10.2%, to $219.1 million for the six months ended June 30, 2005 compared to $198.7 million for the same period in the prior year. The increase in the average balance was partially offset by a decline in the yield on the loans to 6.59% for the six months ended June 30, 2005 from 6.73% for the same period in the prior year.

Interest earned on loans receivable increased $535,000, or 8.0%, for the six months ended June 30, 2005, compared to the same period in the prior year. This increase was primarily attributable to an increase in the average balance of loans outstanding for the first half of the year which was partially offset by a decline in the yield on loans.

Interest earned on securities increased $155,000, or 16.2%, for the six months ended June 30, 2005, compared to the same period in the prior year. This increase was primarily attributable to an increase in the average balance of investment securities of $5.2 million, or 9.7%, to $59 million for the six months ended June 30, 2005 compared to $53.7 million for the same period in the prior year. The improvement can also be attributed the an increase in the tax equivalent yield on securities to 4.47% for the six months ended June 30, 2005 from 4.08% for the same period in the prior year.

Interest expense. Interest expense increased $217,000, or 15.4%, for the three months ended June 30, 2005, compared to the same period in the prior year. This increase in interest expense can be attributed to increases in interest incurred on deposits, short-term borrowing and other borrowing $161,000, $15,000 and $41,000, respectively.

Interest incurred on deposits, the largest component of the Company’s interest-bearing liabilities, increased $161,000, or 13.3%, for the three months ended June 30, 2005, compared to the same period in the prior year. This increase was primarily attributable to a increase in the cost of interest-bearing deposits to 2.76% from 2.59% for the quarters ended June 30, 2005 and 2004, respectively. Additionally the average balance of interest-bearing deposits increased by $18.1 million, or 8.3%, to $236.5 million for the three months ended June 30, 2005, compared to $218.4 million for the same period in the prior year. The Company diligently monitors the interest rates on its products as well as the rates being offered by its competition and utilizing rate surveys to keep its total interest expense costs down.

Interest incurred on borrowed funds, increased $56,000, or 27.7%, for the three months ended June 30, 2005, compared the same period in the prior year. This increase was primarily attributable to an increase in the cost of these funds to 4.24% from 4.20% for the quarters ended June 30, 2005 and 2004, respectively. Adding to the increase in the cost of funds was an rise in the average balance of borrowed funds of $5.1 million, or 26.3%, to $24.5 million for the three months ended June 30, 2004, compared to $19.4 million for the same period in the prior year. This increase is reflected in the quarterly rate volume report presented below which depicts that the increase to the costs associated with the interest-bearing liabilities.

Interest expense increased $382,000, or 13.7%, for the six months ended June 30, 2005, compared to the same period in the prior year. This increase in interest expense can be attributed to increases in interest incurred on deposits, short-term borrowing and other borrowing of $268,000, $33,000 and $80,000, respectively.

Interest incurred on deposits, the largest component of the Company’s interest-bearing liabilities, increased $268,000, or 11.2%, for the six months ended June 30, 2005, compared to the same period in the prior year. This increase was primarily attributable to an increase in the cost of interest-bearing deposits to 2.54% for the six months ended June 30, 2005 compared to 2.45% for the same period in the prior year. In addition to the increase in the cost of interest-bearing deposits was an increase in the average balance of interest-bearing deposits of $14.3 million, or 7.3%, to $210.0 million for the six months ended June 30, 2005, compared to $195.7 million for the same period in the prior year.

Interest incurred on borrowed funds increased $113,000, or 28.5%, for the six months ended June 30, 2005, compared to the same period in the prior year. This increase was primarily attributable to an increase in the average balance of borrowed funds of $5.6 million, or 29.8%, to $24.6 million for the six months ended June 30, 2005, compared to $19.0 million for the six months ended June 30, 2004. Partially offsetting the increase in the cost of these funds was a decrease in the cost of these funds to 4.16% for the six months ended June 30, 2005, compared to 4.21% for the same period in the prior year.

Provision for loan losses. The provision for loan losses for the quarter ended June 30, 2005 is the result of normal operations for the quarter and YTD. In determining the appropriate level of allowance for loan losses, management considers historical loss experience, the financial condition of borrowers, economic conditions (particularly as they relate to markets where the Company originates loans), the status of non-performing assets, the estimated underlying value of the collateral and other factors related to the collectability of the loan portfolio. The Company’s total allowance for losses on loans at June 30, 2005 and December 31, 2004 amounted to $2.7 million or 1.20% and $2.6 million or 1.22%, respectively, of the Company’s total loan portfolio. The Company’s allowance for losses on loans as a percentage of non-performing loans was 146.0% and 334.4% at June 30, 2005 and December 31, 2004, respectively.

Non-interest income. Non-interest income increased $41,000 or 8.4% to $527,000 for the three months ended June 30, 2005, compared to $486,000 for the same period in the prior year. This increase can be attributed primarily to increases in fees and service charges, earnings on

 

bank-owned life insurance (BOLI) and other income of $7,000, $5,000 and $28,000, respectively.

Fees and service charges increased $7,000 or 2.0% to $388,000 for the three months ended June 30, 2005, compared to $381,000 for the same period in the prior year. Other income increased $28,000 or 49.5% to $85,000 for the three months ended June 30, 2005, compared to $57,000 for the same period in the prior year. Revenue from investment services represented the majority of this quarterly growth.

Non-interest income increased $125,000 or 14.2% to $1.0 million for the six months ended June 30, 2005, compared to $883,000 for the same period in the prior year. This increase can be attributed primarily to increases in fees and service charges and other income of $79,000 and $57,000, respectively. Partially offsetting these increases was a decrease to earnings on bank-owned life insurance (BOLI) of $12,000.

Fees and service charges increased $79,000 or 12.0% to $742,000 for the six months ended June 30, 2005, compared to $7,000 for the same period in the prior year. The increase to fees generated from checking accounts is a result of the Company introducing a new overdraft service in the second quarter of 2004.

Non-interest expense. Non-interest expense increased $164,000 or 9.7% to $1.8 million for the three months ended June 30, 2005, from $1.7 million for the same period in the prior year. This increase was the result of increases in data processing, other expense and salaries and employee benefits of $64,000, $61,000 and $17,000, respectively. The change in data processing cost was due to the added expense of new accounts and products for the period. The change in other cost was in part due to the expense of an internal switch to new documents needed for our check and document imaging equipment purchase in the 4^th quarter of 2004. The increase to compensation and employee benefits is primarily related to increases in health care costs and retirement plans as well as normal salary increases between the periods.

Non-interest expense increased $396,000 or 11.4% to $3.9 million for the six months ended June 30, 2005, from $3.5 million for the same period in the prior year. This increase was the result of increases in other expense, salaries and employee benefits and data processing costs of $165,000, $113,000 and $84,000, respectively. The change in other cost was in part due to the expense of an internal switch to new documents needed for our check and document imaging equipment purchase in the 4^th quarter of 2004. The increase to compensation and employee benefits is primarily related to increases in health care costs and retirement plans as well as normal salary increases between the periods. The change in data processing cost was due to the added expense of new accounts and products for the period.

Provision for income taxes. The Company recognized $611,000 in income tax expense, which reflected an effective tax rate of 27.5% for the six months, ended June 30, 2005, as compared to $658,000 with an effective tax rate of 29.2% for the respective 2004 period.

The Company’s critical accounting estimates involving the more significant judgments and assumptions used in the preparation of the consolidated financial statements as of June 30, 2005, have remained unchanged from December 31, 2004.

Average Balance Sheet and Yield/Rate Analysis. The following table sets forth, for the periods indicated, information concerning the total dollar amounts of interest income from interest-earning assets and the resultant average yields, the total dollar amounts of interest expense on interest-bearing liabilities and the resultant average costs, net interest income, interest rate spread and the net interest margin earned on average interest-earning assets. For purposes of this table, average balances are calculated using monthly averages and the average loan balances include non-accrual loans and exclude the allowance for loan losses, and interest income includes accretion of net deferred loan fees. Interest and yields on tax-exempt securities (tax-exempt for federal income tax purposes) are shown on a fully tax equivalent basis utilizing a federal tax rate of 34%. Yields and rates have been calculated on an annualized basis utilizing monthly interest amounts.

Analysis of Changes in Net Interest Income. The following tables analyzes the changes in interest income and interest expense, between the three and six month periods ended June 30, 2005 and 2004, in terms of: (1) changes in volume of interest-earning assets and interest-bearing liabilities and (2) changes in yields and rates. The table reflects the extent to which changes in the Company’s interest income and interest expense are attributable to changes in rate (change in rate multiplied by prior period volume), changes in volume (changes in volume multiplied by prior period rate) and changes attributable to the combined impact of volume/rate (change in rate multiplied by change in volume). The changes attributable to the combined impact of volume/rate are allocated on a consistent basis between the volume and rate variances. Changes in interest income on securities reflects the changes in interest income on a fully tax equivalent basis.

Management’s objective in managing liquidity is maintaining the ability to continue meeting the cash flow needs of its customers, such as borrowings or deposit withdrawals, as well as its own financial commitments. The principal sources of liquidity are net income, loan payments, maturing and principal reductions on securities and sales of securities available for sale, federal funds sold and cash and deposits with banks. Along with its liquid assets, the Company has additional sources of liquidity available to ensure that adequate funds are available as needed. These include, but are not limited to, the purchase of federal funds, and the ability to borrow funds under line of credit agreements with correspondent banks and a borrowing agreement with the Federal Home Loan Bank of Cincinnati, Ohio and the adjustment of interest rates to obtain depositors. Management feels that it has the capital adequacy, profitability and reputation to meet the current and projected needs of its customers.

For the six months ended June 30, 2005, the adjustments to reconcile net income to net cash from operating activities consisted mainly of depreciation and amortization of premises and equipment, the provision for loan losses, net amortization of securities and net changes in other assets and liabilities. Cash and cash equivalents increased as a result of the purchasing of government agency securities. For a more detailed illustration of sources and uses of cash, refer to the condensed consolidated statements of cash flows.

Substantially all of the Company’s assets and liabilities relate to banking activities and are monetary in nature. The consolidated financial statements and related financial data are presented in accordance with U.S. GAAP. GAAP currently requires the Company to measure the financial position and results of operations in terms of historical dollars, with the exception of securities available for sale, impaired loans and other real estate loans that are measured at fair value. Changes in the value of money due to rising inflation can cause purchasing power loss.

Management’s opinion is that movements in interest rates affect the financial condition and results of operations to a greater degree than changes in the rate of inflation. It should be noted that interest rates and inflation do effect each other, but do not always move in correlation with each other. The Company’s ability to match the interest sensitivity of its financial assets to the interest sensitivity of its liabilities in its asset/liability management may tend to minimize the effect of changes in interest rates on the Company’s performance.

The Company is subject to the regulatory requirements of The Federal Reserve System as a one-bank holding company. The affiliate bank is subject to regulations of the Federal Deposit Insurance Corporation (FDIC) and the State of Ohio, Division of Financial Institutions.

The Company is subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the Banks’ operations.

The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion and plans for capital restoration are required.

The minimum requirements are:

The following table illustrates the Company’s risk-weighted capital ratios at June 30, 2005:

The primary objective of the Company’s asset and liability management function is to maximize the Company’s net interest income while simultaneously maintaining an acceptable level of interest rate risk given the Company’s operating environment, capital and liquidity requirements, performance objectives and overall business focus. The principal determinant of the exposure of the Company’s earnings to interest rate risk is the timing difference between the repricing and maturity of interest-earning assets and the repricing or maturity of its interest-bearing liabilities. The Company’s asset and liability management policies are designed to decrease interest rate sensitivity primarily by shortening the maturities of interest-earning assets while at the same time extending the maturities of interest-bearing liabilities. The Board of Directors of the Company continues to believe in strong asset/liability management in order to insulate the Company from material and prolonged increases in interest rates. As a result of this policy, the Company emphasizes a larger, more diversified portfolio of residential mortgage loans in the form of mortgage-backed securities. Mortgage-backed securities generally increase the quality of the Company’s assets by virtue of the insurance or guarantees that back them, are more liquid than individual mortgage loans and may be used to collateralize borrowings or other obligations of the Company.

The Company’s Board of Directors has established an Asset and Liability Management Committee consisting of four outside directors, the President and Chief Executive Officer, Executive/Vice President/ Chief Operating Officer, Senior Vice President/Chief Financial Officer and Senior Vice President/Commercial Lending. This committee, which meets quarterly, generally monitors various asset and liability management policies and strategies, which were implemented by the Company over the past few years. These strategies have included: (i) an emphasis on the investment in adjustable-rate and shorter duration mortgage-backed securities; (ii) an emphasis on the origination of single-family residential adjustable-rate mortgages (ARMs), residential construction loans and commercial real estate loans, which generally have adjustable or floating interest rates and/or shorter maturities than traditional single-family residential loans, and consumer loans, which generally have shorter terms and higher interest rates than mortgage loans; (iii) increase the duration of the liability base of the Company by extending the maturities of savings deposits, borrowed funds and repurchase agreements.

The Company has established the following guidelines for assessing interest rate risk:

Net interest income simulation. Given a 200 basis point parallel and gradual increase or decrease in market interest rates, net interest income may not change by more than 10% for a one-year period.

Portfolio equity simulation. Portfolio equity is the net present value of the Company’s existing assets and liabilities. Given a 200 basis point immediate and permanent increase or decrease in market interest rates, portfolio equity may not correspondingly decrease or increase by more than 20% of stockholders’ equity.

The following table presents the simulated impact of a 200 basis point upward and a 200 basis point downward shift of market interest rates on net interest income and the change in portfolio equity. This analysis was done assuming that the interest-earning asset and interest-bearing liability levels at June 30, 2005 remained constant. The impact of the market rate movements was developed by simulating the effects of rates changing gradually over a one-year period from the June 30, 2005 levels for net interest income. The impact of market rate movements was developed by simulating the effects of an immediate and permanent change in rates at June 30, 2005 for portfolio equity:

The Corporation maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Corporation’s reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

As of the end of the period covered by this quarterly report, an evaluation was carried out under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(e) and 15d-14(e) under the Securities Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are, to the best of their knowledge, effective to ensure that information required to be disclosed by the Corporation in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Subsequent to the date of their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that there were no significant changes in internal control or in other factors that could significantly affect its internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

A material weakness is a significant deficiency (as defined in Public Company Accounting Oversight Board Auditing Standard No. 2), or a combination of significant deficiencies, that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by management or employees in the normal course of performing their assigned functions.

There have not been any changes in the Corporation’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the Corporation’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

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The following represents the results of matters submitted to a vote of the stockholders at the annual meeting held on May 11, 2005:

(c) The recommendation of the Board of Directors to ratify the appointment of S. R. Snodgrass, A.C. as the Company’s independent auditors, as described in the Proxy Statement for the Annual Meeting, was approved with 957,916 shares in favor, and 1,778 shares against, and 18,177 shares abstaining.

     None

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned and hereunto duly authorized.