SB Financial Group - 10-Q quarterly report FY

 

(Exact name of registrant as specified in its charter)

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report.)

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 proceeding 12 months (or for such shorter period the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large Accelerate Filero Accelerated Filero Non-Accelerated Filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

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

The interim condensed consolidated financial statements of Rurban Financial Corp. (“Rurban” or the “Company”) are unaudited; however, the information contained herein reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of financial condition and results of operations for the interim periods presented. All adjustments reflected in these financial statements are of a normal recurring nature in accordance with Rule 10-01 of Regulation S-X. Results of operations for the three months ended March 31, 2006 are not necessarily indicative of results for the complete year.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The financial statements reflect all adjustments that are, in the opinion of management, necessary to fairly present the financial position, results of operations and cash flows of the Company. Those adjustments consist only of normal recurring adjustments. Results of operations for the three months ended March 31, 2006 are not necessarily indicative of results for the complete year.

The condensed consolidated balance sheet of the Company as of December 31, 2005 has been derived from the audited consolidated balance sheet of the Company as of that date.

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, 2005.

Effective January 1, 2006, the Company adopted Statement of Financial Standards (“SFAS”) No. 123(R) using the “modified prospective” method, and accordingly, will not restate prior period results. SFAS 123(R) requires compensation expense to be recognized for all stock options granted after the date of adoption and for all previously granted stock options that vest after the date of adoption. The fair value of stock options is determined using the Black-Scholes valuation model, which is consistent with the Company’s valuation methodology previously utilized for options in the footnote disclosures required under SFAS No. 123. The impact of this adoption on financial statements for the period ended March 31, 2006 is not considered material.

Prior to January 1, 2006, the Company accounted for its stock option plan under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Under APB Opinion No. 25, no stock-based employee compensation cost was reflected in net income, as all options granted under the Company’s stock option plan had an exercise price equal to the market value of the underlying common stock on the grant date.

As of March 31, 2006, the Company had 19,000 nonvested options outstanding and there was $89,100 of total unrecognized compensation cost related to these nonvested options. This cost is expected to be recognized monthly on a straight-line basis as each option is vested through December 21, 2010.

The following table illustrates the effect on net income and earnings per share if expense had been measured using the fair value recognition provisions of SFAS No. 123(R).

Earnings per share have been computed based on the weighted average number of shares outstanding during the periods presented. For the periods ended March 31, 2006 and 2005, stock options totaling 281,407 and 66,308 common shares, respectively, were not considered in computing EPS as they were anti-dilutive. The number of shares used in the computation of basic and diluted earnings per share was:

Total loans on the balance sheet are comprised of the following classifications at:

The following is a summary of the activity in the allowance for loan losses account for the three months ended March 31, 2006 and 2005 and the year ended December 31, 2005.

The following schedule summarizes nonaccrual, past due and impaired loans at:

Individual loans determined to be impaired, including non-accrual loans, were as follows:

The Company, State Bank and Exchange Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators. If undertaken, these actions could have a direct material adverse effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company, State Bank and Exchange Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company, State Bank and Exchange Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). As of March 31, 2006 and 2005, the Company, State Bank and Exchange Bank exceeded all “well-capitalized” requirements to which they are subject.

As of December 31, 2005, the most recent notification to the regulators categorized the State Bank and Exchange Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, State Bank and Exchange Bank must maintain capital ratios as set

forth in the following table. There are no conditions or events since that notification that management believes have changed State Bank’s or Exchange Bank’s categorization as well capitalized.

The Company’s consolidated, State Bank’s and Exchange Bank’s actual capital amounts (in millions) and ratios are also presented in the following table.

There are various contingent liabilities that are not reflected in the consolidated financial statements, including claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material effect on the Company’s consolidated financial condition or results of operations.

In March 2006, SFAS No. 156, “Accounting for Servicing of Financial Assets,” was issued. SFAS No. 156 amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” as it relates to the accounting for separately recognized servicing assets and servicing liabilities by requiring that all separately recognized servicing assets and servicing liabilities be initially measured by fair value, if practicable. SFAS No. 156 also permits the subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value. The Company is currently measuring the effects of SFAS No. 156 and looks to adopt it in the fourth quarter of 2006. At this time, the Company deems this adoption to be immaterial to the financial position or results of operations.

As of March 31, 2006, loan commitments and unused lines of credit totaled $128,612,000, standby letters of credit totaled $667,000 and no commercial letters of credit were outstanding.

The reportable segments are determined by the products and services offered, primarily distinguished between banking and data processing operations. Other segments include the accounts of the holding company, Rurban, which combined provides management and operational services to its subsidiaries; Rurban Operations Corp., which provides operational services for the company’s subsidiaries as described in Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations; and Reliance Financial Services, N.A., which provides trust and financial services to customers nationwide. Information reported internally for performance assessment follows.

Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. Forward-looking statements provide current expectations or forecasts of future events and are not guarantees of future performance. Examples of forward-looking statements include: (a) projections of income or expense, earnings per share, the payments or non-payments of dividends, capital structure and other financial items; (b) statements of plans and objectives of the Company or our management or Board of Directors, including those relating to products or services; (c) statements of future economic performance; and (d) statements of assumptions underlying such statements. Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying those statements. Forward-looking statements are based on management’s expectations and are subject to a number of risks and uncertainties. Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements. Risks and uncertainties that could cause actual results to differ materially include, without limitation, changes in interest rates, changes in the competitive environment, and changes in banking regulations or other regulatory or legislative requirements affecting bank holding companies. Additional detailed information concerning a number of important factors which could cause actual results to differ materially from the forward-looking statements contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations is available in the Company’s filings with the Securities and Exchange Commission, under the Securities Exchange Act of 1934, including the disclosure under the heading “Item 1A. Risk Factors” of Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005. Undue reliance should not be placed on the forward-looking statements, which speak only as of the date hereof. Except as may be required by law, the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made to reflect unanticipated events.

Rurban is a bank holding company registered with the Federal Reserve Board. Rurban’s wholly-owned subsidiaries, State Bank and Exchange Bank, are engaged in commercial banking. Rurban’s subsidiary, Rurbanc Data Services, Inc. (“RDSI”), provides computerized data processing services to community banks and businesses.

Rurban Statutory Trust I (“RST”) was established in August 2000. In September 2000, RST completed a pooled private offering of 10,000 Capital Securities with a liquidation amount of $1,000 per security. The proceeds of the offering were loaned to the Company in exchange for junior subordinated debentures of the Company with terms substantially similar to the Capital Securities. The sole assets of RST are the junior subordinated debentures, and the back-up obligations, in the aggregate, constitute a full and unconditional guarantee by the Company of the obligations of RST under the Capital Securities.

Rurban Statutory Trust II (“RST II”) was established in August 2005. In September 2005, RST II completed a pooled private offering of 10,000 Capital Securities with a liquidation amount of $1,000 per security. The proceeds of the offering were loaned to the Company in exchange for junior subordinated debentures of the Company with terms substantially similar to the Capital Securities. The sole assets of RST II are the junior subordinated debentures, and the back-up obligations, in the aggregate, constitute a full and unconditional guarantee by the Company of the obligations of RST II under the Capital Securities.

Rurban Operations Corp. (“ROC”) was formed in December 2005 and its first day of operation commenced January 3, 2006. ROC serves as a central location for the performance of the following functions that will provide services for all of the Company’s subsidiaries: human resources, marketing, facilities maintenance, loan operations, loan accounting, collections, file room, internet banking, credit analysis, VISA processing, mortgage operations, technology, training and development, deposit operations, operations administration, accounting, and a call center.

Reliance Financial Services, N.A. (“Reliance”), a wholly owned subsidiary of State Bank, provides trust and financial services to customers nationwide.

Note 1 to the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 describes the significant accounting policies used in the development and presentation of the Company’s financial statements. The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The Company’s financial position and results of operations can be affected by these estimates and assumptions and are integral to the understanding of reported results. Critical accounting policies are those policies that management believes are the most important to the portrayal of the Company’s financial condition and results, and they require management to make estimates that are difficult, subjective, or complex.

Allowance for Loan Losses — The allowance for loan losses provides coverage for probable losses inherent in the Company’s loan portfolio. Management evaluates the adequacy of the allowance for loan losses each quarter based on changes, if any, in underwriting activities, loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, regulatory guidance and economic factors. This evaluation is inherently subjective, as it requires the use of significant management estimates. Many factors can affect management’s estimates of specific and expected losses, including volatility of default probabilities, rating migrations, loss severity and economic and political conditions. The allowance is increased through provisions charged to operating earnings and reduced by net charge-offs.

The Company determines the amount of the allowance based on relative risk characteristics of the loan portfolio. The allowance recorded for commercial loans is based on reviews of individual credit relationships and an analysis of the migration of commercial loans and actual loss experience. The allowance recorded for homogeneous consumer loans is based on an analysis of loan mix, risk characteristics of the portfolio, fraud loss and bankruptcy experiences, and historical losses, adjusted for current trends, for each homogeneous category or group of loans. The allowance for credit losses relating to impaired loans is based on the loan’s observable market price, the collateral for certain collateral-dependent loans, or the discounted cash flows using the loan’s effective interest rate.

Regardless of the extent of the Company’s analysis of customer performance, portfolio trends or risk management processes, certain inherent but undetected losses are probable within the loan portfolio. This is due to several factors, including inherent delays in obtaining information regarding a customer’s financial condition or changes in their unique business conditions, the subjective nature of individual loan evaluations, collateral assessments and the interpretation of economic trends. Volatility of economic or customer-specific conditions affecting the identification and estimation of losses for larger

non-homogeneous credits and the sensitivity of assumptions utilized to establish allowances for homogenous groups of loans are also factors. The Company estimates a range of inherent losses related to the existence of these exposures. The estimates are based upon the Company’s evaluation of imprecise risk associated with the commercial and consumer allowance levels and the estimated impact of the current economic environment. To the extent that actual results differ from management’s estimates, additional loan loss provisions may be required that could adversely impact earnings for future periods.

Goodwill and Other Intangibles — The Company records all assets and liabilities acquired in purchase acquisitions, including goodwill and other intangibles, at fair value as required by SFAS 141. Goodwill is subject, at a minimum, to annual tests for impairment. Other intangible assets are amortized over their estimated useful lives using straight-line or accelerated methods, and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount. The initial goodwill and other intangibles recorded and subsequent impairment analysis requires management to make subjective judgments concerning estimates of how the acquired asset will perform in the future. Events and factors that may significantly effect the estimates include, among others, customer attrition, changes in revenue growth trends, specific industry conditions and changes in competition. A decrease in earnings resulting from these or other factors could lead to an impairment of goodwill that could adversely impact earnings of future periods.

In March 2006, SFAS No. 156, “Accounting for Servicing of Financial Assets,” was issued. SFAS No. 156 amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” as it relates to the accounting for separately recognized servicing assets and servicing liabilities by requiring that all separately recognized servicing assets and servicing liabilities be initially measured by fair value, if practicable. SFAS No. 156 also permits the subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value. The Company is currently measuring the effects of SFAS No. 156 and looks to adopt it in the fourth quarter of 2006. At this time, the Company deems that this adoption to be immaterial to the financial position or results of operations.

Net income for the first quarter of 2006 was $523,000, or $0.10 per diluted share, versus $638,000, or $0.14 per diluted share, for the first quarter of 2005. The quarterly decrease in net income is mainly driven by the provision for loan losses being $246,000 in the first quarter of 2006. Several recoveries were recorded in first quarter of 2005 resulting in no loan loss provision. The company believes the first quarter of 2006 is more indicative of where the provision will be on a quarterly basis. The acquisition of the Exchange Bank in the greater Toledo market is included in the Company’s condensed consolidated statements of operations for the first time in the first quarter of 2006.

Net interest income increased $867,000 to $3.9 million for the three months ended March 31, 2006 compared to $3.0 million for the first quarter 2005. The increase in net interest income is attributed to the 9 basis point improvement in the net interest margin to 3.37% compared to 3.28% in the first quarter of 2005. This improvement in net interest income is primarily due to the impact of the Exchange Bank acquisition. The improvement in the asset quality ratio also positively impacted the company’s net interest income.

The provision for loan losses was $246,000 for the first quarter of 2006 compared to $0 for the first quarter of 2005. Loan loss reserves were 1.29% of total loans in the first quarter of 2006 compared to 1.81% in the first quarter of 2005. This reduction in the loan loss reserve to loans ration is a result of the greatly improved asset quality ratios. The non-performing loans to assets ratio improved to 1.56% at the end if the first quarter of 2006 compared to 4.10% for the first quarter 2005.

Non-interest income increased $396,000 to $5.0 million in the first quarter of 2006 compared to $4.6 million for the first quarter of 2005. The increase in non-interest income was mainly the result of the increase in data processing fees of $84,000 associated with the expansion of RDSI’s customer base in 2005. Total customer service fees were up $113,000 and mortgage banking activities were up $53,000 and are a direct result of the Exchange Bank acquisition.

Non-interest expense increased $1.3 million to $8.0 million for the first quarter of 2006 compared to $6.7 million for the first quarter of 2005. Exchange Bank’s non-interest expense totaled $1.3 million for the first quarter of 2006. On-going operating expenses at State Bank were well-controlled, and declining on a quarterly basis since the acquisition of the Lima branches in the second quarter of 2005. The operating expenses within the loan workout company, RFCBC, also decreased significantly in the first quarter of 2006 compared to the first quarter of 2005. Management continues to monitor expenses daily and looks to gain additional efficiencies as additional backroom operations are fully integrated with the recent acquisitions.

At March 31, 2006, total assets were $538.2 million, an increase of $7.7 million from December 31, 2005. The increase was primarily attributable to an increase in loans and federal funds sold of $10.7 million and $4.2 million, respectively. The increase was partially offset by decreases in available for sale securities of $9.2 million. The entire securities portfolio of Exchange Bank was liquidated in the first quarter of 2006 and only a portion was reinvested in securities.

At March 31, 2006, the increase in total liabilities and shareholders’ equity of $7.7 million from December 31, 2005 was mainly attributable to increases in total deposits and repurchase agreements of $13.7 million and $9.3 million, respectively. These increases were somewhat offset by decreases in notes payable, federal funds purchased and other liabilities of $0.9, $4.6 and $6.6 million, respectively. The reduction to notes payable was attributable to RDSI paying down debt. The $6.6 million reduction in other liabilities was due to the payout to shareholders of Exchange Bank during the first quarter of 2006.

As of March 31, 2006, total assets increased $123.7 million from March 31, 2005. The majority of the increase was due to the acquisitions of the Lima branches and Exchange Bank. The increase was offset by the reduction of problem loan balances within the loan workout company RFCBC.

The Company reported a net profit for the first quarter of 2006 of $523,000, or $0.10 per diluted share, versus a net loss of $344,000, or $0.08 per diluted share, for the fourth quarter of 2005. The

first quarter profit was mainly due to an improvement in the net interest margin coupled with a reduction in the provision for loan losses as a result of continued improvements in credit quality. Also impacting the variance for the linked quarter was the sale of approximately $8.4 million in troubled loans at RFCBC resulting in a loss on sale of loans of $499,000 in the fourth quarter of 2005. The acquisition of the Exchange Bank in the first quarter of 2006 also impacted the company’s overall performance as this was the first quarter that Exchange Bank was included in the condensed consolidated statements of operations.

Net interest income increased $717,000 or 23% to $3.9 million for the first quarter of 2006 when compared to the fourth quarter of 2005. This increase was driven by the inclusion of earning assets from Exchange Bank during the first quarter of 2006.

A comparison of financial results for the quarter ended March 31, 2006 to the previous quarter ended December 31, 2005 is as follows:

On a linked quarter basis, total loans increased $11 million and total assets increased $7 million. The majority of the loan growth in the first quarter was from commercial lending efforts.

Total revenue (net interest income plus noninterest income) was $8.9 million for the first quarter of 2006 compared to $7.6 million for the fourth quarter of 2005, up $1.2 million or 16%. This increase is mainly due to the acquisition of Exchange Bank as of December 31, 2005. The linked quarter favorable variance was also due to the loss on the sale of troubled loans in the fourth quarter of 2005.

Net interest income increased $717,000 in the first quarter of 2006 when compared to the fourth quarter of 2005. The increase was attributed primarily to the increased volume in loans and the increase in the prime rate. The tax equivalent net interest margin for the first quarter of 2006 was 3.37% compared to 3.18% for the previous quarter. The increase in net interest margin was principally a result of higher margin from Exchange Bank.

The provision for loan losses was $246,000 for the first quarter of 2006 compared to $613,000 in the fourth quarter of 2005. The decrease in the provision in the first quarter was the result of the continued review and determination of the level of reserves necessary to absorb probable losses in the loan portfolio. The results of the first quarter are discussed in the “Allowance for Loan Losses” section.

Non-interest income increased by $531,000 to $5.0 million in the first quarter of 2006 compared to $4.5 million in the fourth quarter of 2005. This increase is mainly due to the Exchange acquisition and the loss on sale of the troubled loans recorded in the fourth quarter 2005.

Non-interest expense for the first quarter of 2006 was $8.0 million compared to $7.6 million for the fourth quarter of 2005, an increase of $318,000 or 4%. Of the quarterly increase, $1.3 million was contributed from the Exchange Bank acquisition. This increase was mostly offset by the on-going expenses at the other affiliates being well-controlled and monitored.

Loans increased $11 million from December 31, 2005 to March 31, 2006. During the first quarter of 2006, the Company realized the majority if its loan growth in Commercial loans. The Company is continuing its focus on sales in all its markets and management is encouraged by the progress made in the first quarter of 2006.

As of and For the Quarter Ended
(dollars in millions)

Non-performing assets at March 31, 2006 decreased to $8.4 million or 1.56% of total assets, versus $8.9 million, or 1.67% at December 31, 2005, a decrease of $0.5 million. This decrease is attributed to our continued improvement in asset quality. Of the $8.4 million of non-performing assets, a commercial building valued at $2.1 million is currently being marketed for sale. The $0.6 million in net charge-offs for the first quarter was primarily related to the write-down of previously identified problem loans.

The Company grades its loans using an eight grade system. Loans with concerns are classified as either:

The Company’s allowance for loan losses has four components. Those components are shown in the following table. Commercial, commercial real estate and agricultural loans of over $100,000 ($25,000 at Exchange Bank) are individually reviewed and assessed regarding the need for an individual allocation.

The amount of loans classified as doubtful decreased $0.5 million to $5.6 million for the quarter ended March 31, 2006 and substandard loans decreased $2.1 million to $5.6 million. Allowance allocations on doubtful loans decreased $0.9 million and the allowance allocations on substandard loans decreased $0.1 million from December 31, 2005. The allowance for loan losses at March 31, 2006 was $4.3 million or 1.29% of loans compared to $4.7 million or 1.44% at December 31, 2005.

At March 31, 2006, actual capital levels (in millions) and minimum required levels were:

Liquidity relates primarily to the Company’s ability to fund loan demand, meet deposit customers’ withdrawal requirements and provide for operating expenses. Assets used to satisfy these needs consist of cash and due from banks, federal funds sold, interest earning deposits in other financial institutions, securities available-for sale and loans held for sale. These assets are commonly referred to as liquid assets. Liquid assets were $146.8 million at March 31, 2006 compared to $152.4 million at December 31, 2005.

The Company’s residential first mortgage portfolio of $88.5 million at March 31, 2006 and $89.1 million at December 31, 2005, which can and has been used to collateralize borrowings, is an additional source of liquidity. Management believes its current liquidity level is sufficient to meet its liquidity needs. At March 31, 2006, all eligible mortgage loans were pledged under a Federal Home Loan Bank (“FHLB”) blanket lien.

The cash flow statements for the periods presented provide an indication of the Company’s sources and uses of cash as well as an indication of the ability of the Company to maintain an adequate level of liquidity. A discussion of the cash flow statements at March 31, 2006 and 2005 follows.

The Company experienced positive cash flows from operating activities at March 31, 2006 and 2005. Net cash from operating activities was $125,922 and $553,005, respectively, at March 31, 2006 and 2005.

Net cash flow from investing activities was $(11.5) million and $1.9 million at March 31, 2006 and 2005 respectively. The changes in net cash from investing activities at March 31, 2006 include loan growth of $11.4 million and the payment to the Exchange shareholders of $6.5 million partially offset by an decrease in securities of $8.5 million. The changes in net cash from investing activities at March 31, 2005 include an decrease in securities of $4.6 million partially offset by loan growth of $2.0 million.

Net cash flow from financing activities was $15.2 million and $37,550 at March 31, 2006 and 2005, respectively. The net cash variance was primarily due to an increase in total deposits of $13.7 million at March 31, 2006 compared to an increase of total deposits of $5.3 million at March 31, 2005.

Significant additional off-balance-sheet liquidity is available in the form of FHLB advances, unused federal funds lines from correspondent banks, and the national certificate of deposit market.

Approximately $77.5 million of the Company’s $88.5 million residential first mortgage loan portfolio qualifies to collateralize FHLB borrowings and was pledged to meet FHLB collateralization requirements as of March 31, 2006. In addition to residential first mortgage loans, $14.2 million in investment securities are pledged to meet FHLB collateralization requirements. Based on the current collateralization requirements of the FHLB, approximately $21.1 million of additional borrowing capacity existed at March 31, 2006.

As of March 31, 2006, the Company had unused federal funds lines totaling $20.9 million from four correspondent banks. At December 31, 2005, the Company had $20.9 million in federal fund lines. Federal funds borrowed were $0 at March 31, 2006 and $4.6 million at December 31, 2005.