Evans Bancorp Inc. The Wall Street Analyst Forum Call Transcript

| About: Evans Bancorp, (EVBN)

Evans Bancorp Inc. (NYSEMKT:EVBN)

The Wall Street Analyst Forum Call

November 17, 2008 9:10 am ET


David Nasca - President and CEO

Gary Kajtoch - SVP and CFO

Unidentified Company Representative

Okay. So having said all that, I'd like to introduce the first company in this mornings program, Evans Bancorp, which is based just outside of Buffalo, New York City is the parent of Evans Bank, a commercial bank with nearly $500 million in assets and approximately $400 million in deposits. The bank has 11 branches throughout Western New York.

Evans National Leasing is a subsidiary of Evans Bank and is a general business equipment leasing company with customers throughout the United States. ENB Insurance Agency is a subsidiary of Evans Bancorp provides retail and commercial property, and casualty insurance throughout 15 offices in the Western New York region.

And ENB Associates, a subsidiary of ENB Insurance Agency provides non-deposit investment product such as annuities and mutual funds. Evans has been in business for over 85 years. It has been the one of the last truly community banks in the Western New York region.

So, without any further introduction, I would like to introduce David Nasca, who is the President and CEO of the company and Gary Kajtoch, who is the Senior Vice President and Chief Financial Officer.

David Nasca

Good morning. I am David Nasca. I am President and CEO of Evans Bancorp. Thank you for having me this morning. We're very pleased to be here to present you today and talk to you a little about our company’s opportunities. I hope you will see from presentation that we are excited about where we are going in our future.

Here, you people are probably more familiar with this than anybody. That's our safe harbor statement, which all of you are familiar with. We include forward-looking statements in our presentation. The statements are not historical fact or guarantees of future performance, events or results.

This is a profile of our company. We are an integrated financial services company with banking, insurance and investments. We're relationship-focused organization striving to serve as a trusted advisor to our customers. We're striving to be easy to interact with and creating an excellent work environment for top talent.

The information that you see here, we are listed on NASDAQ as EVBN. We are trading between $16.5 and $17 a share over the last 20 days. We have a market capital of $44 million. We have to 2.76 million shares outstanding.

Additionally, we have a dividend annualized of about $0.82 and yield of about 5.16. We have a payout ratio of 43.4%. As Gary mentioned, we are about a $503 million asset company. We have 12 branches. Actually, that was all news of [jury head]. We have 12 branches. One we opened in August. And you can see by ownership, institutional ownership at 8.3%, we're not really widely known at this point or widely followed.

Interesting point about the asset it’s $503 million, we are up from our $442 million last year. So that's $60 million increased about 13.6, deposits have grown 78 million. This year we've had a major move. One other thing you should know about our company is we're a new management team.

I got there about 18 months ago. We've got along with our new CFO and our new Head of Community Banking were generally a new team that's coming to this bank. It’s a management team that has experience of not usually found, its smaller organizations and small community banks.

We'd like to say that we are last community bank standing in Western Europe with a comprehensive product set. We're standing as fair contrast to our big competitors there. We have a large market opportunity. We feel to capture share. And we're going through a transformation of a company with a strong history 88 years through many cycles and a foundation is strong but somewhat sleepy.

We were a country bank and we are moving to one that's focused upon growth, profitability, and shareholder value.

We have a strong balance sheet with significant capital which we'll talk to you more about in the coming slides and we have a high quality loan portfolio with strong portfolio performance and low non-performings. We have no subprime debt, we have no brokered mortgages, we are a relationship driven organization that knows our borrowers and their business and in addition, we have a strong credit culture which is borne out by our asset quality statistics which you will see later with low charge-offs and low non-performing loans.

We use to say the last bullet, we use to say that were a value play. Well, we don’t say that any more because everybody is a value player right now in our industry but we do have a strong dividend, a healthy dividend which we have maintained and grown over a period of time.

We have a strong leadership team which I mentioned and over the last 18 months, the executive management team of the organization is substantially new with my addition, a new CFO, and a new community banking executive. All these of folks have experience with larger high growth organization such as M&T, First Niagara, Financial Group and Chase. So, we've brought in a management team that really is fairly strong for an organization that’s only $500 million.

We have a growth strategy. We have stated publicly that our goal is to grow our organization to about double its size, its current size over the next three to five years. We have the capital that will provide this opportunity to grow, but we have a five-legged stool that we like to talk about in terms of our growth strategy.

The first leg of that stool is expanding our retail network density. We are going to do this with the de novo branches and some acquisitions if possible. Although I will tell you that market is fairly well consolidated at this point, but we look at here at five to eight new branches over the next five years.

We are looking to capitalize on our insurance footprint, which you heard a little bit about before and expand our presence to deliver more points of sales with that insurance presence. We are working on brand development. Jerry gave you some names. We've re-branded ourselves around Evans; Evans Insurance, Evans Bank Corp, Evans Financial Services, those things have all changed. You are seeing the results of their branding in some the orange color here, but we are looking for greater brand equity and recognition and we're working to do that in our marketplace.

We are focusing on market segmentation. Western New York is about 85% micro and small businesses. That 85% is significantly underserved today. We feel we as community bank can provide the high touch personalized service that that market segment is looking for and that's an area of opportunity for us.

We are continuing to improve productivity as an organization making foundational enhancements like improving our call center. We are streamlining our operations as standardizing processes while lowering our transaction cost and we feel this will lead to an easier interaction with our organization.

Additionally, we are looking to evolve our insurance and financial services business. Currently, we have a major, we are probably the third largest bank owned insurance agency in New York State.

We have a very large presence in that business. Currently, we are probably 55% commercial versus 45% personal lines. Our goal over the next couple years is to change that mix to 75%, 25% commercial personal lines.

Additionally, we are looking to improve our market penetration for financial services. We are roughly a third of where we should be in terms of the penetration, core million dollars of deposit, so we are looking at those metrics. We've engaged new broker dealer LPL to reenergize that program and we are seeking to move forward on that.

When I talk about doubling our assets side, there are three reasons we look to do that. One is, we have very strong competition in Western New York. For those of you who that don't know the Buffalo area, it is the regional headquarters for HSBC USA, M&T Bank is headquartered there, First Niagara Financial Group, which is a $9 billion regional bank, is headquartered there, KeyCorp really got its original legs by acquiring [Goldman] empire in Western New York. So we have a lot of major regional headquarters or regular headquarters there.

So competition is strong. We have a lot of regulatory burden. You folks are seeing it as much as anybody in the Wall Street Journal what's happening with re-regulation of banking and some of the nationalization of our industry. And additionally, the technological enhancements required by customers all require us to be a little bigger size than we are today.

We've created some strategic goals for the organization. This seems like blocking and tackling, but I wanted to walk through our goals. Currently, we're $503 million in assets. We're seeking to be about $1 billion. That's a stake in the sand. If we're $800 million to a $1.2 billion, either of those are okay. We're not looking to really pinpoint it, but we need to be a little bit bigger.

We're seeking a narrow way of about greater than or equal to 14% on a consistent basis. We're little bumpy right now on that and we're currently at about 12.32%. We're seeking a narrow way of about return on assets of about 1.25%. We currently sit at 1.16%.

And our efficiency ratio, we're really focused on moving that lower towards the 60% range. Today, we're at about 63% and last year we were at about 66%. So we've made progress on the efficiency ratio, but we think it's important that we focus on that. Additional, we're seeking to grow our net interest income and insurances roughly 60% of that today. That helps us become less reliant on interest rate sensitivity.

We feel the organization is poised for growth. The slide you see here is the Western New York marketplace. We started out South of Buffalo down in Angola and Hamburg. Hamburg is where the Buffalo Bills play for those of you that don't know the area. And we've extended to the North. The Northern suburbs are the more prosperous suburbs currently. So we've moved into those suburbs.

We're well known and well positioned in the South. We're not as well known and somewhat underperforming in the new branches that we put up in the North, as we've just begun to get those on track. But we're really seeking, as I mentioned, to open about five new branches in the next five years. We've opened five in the last five years and we are not going to be on re-corner like M&T or HSBC.

We will be in individual markets. We will have a bigger presence with less footprints. We think that's important to maintain our expense ratios and keep the cost down. We can't compete on a re-corner like some of those banks today. So we're looking to be individual markets. So with 1% of the market, we think we have a great capacity to grow.

Now there are some challenges to being able to do this. I've made out six boxes here of challenges. We're in a traditionally slowed and no-growth local economy in Western New York, which is exacerbated somewhat by this economic crisis, but also we have a heavy exposure to the auto industry. Western New York was a steel pound. Those industries have suffered the rust belt faith that many of those industries have suffered, but our industry exposure to auto is impacting that market as well.

We have an operating structure today that's not fully optimized. I talked about the new branches. That expansion is a little bit underperforming, but we're making tremendous progress as you've seen by our growth the past year.

There's been unprecedented turmoil of historic proportions. I mean I probably don't need to say that to this group. We're seeing credit tightening. We're seeing margin compression as tighter spreads with greater competition in the business. Additionally, we're going to see increased and every financial institution is going to see increased FDIC assessments next year. A little bank like ours is probably going to take a $200,000 to $300,000 impact of the federal deposit insurance increased to re-liquidate or liquefy their funds with WaMu going out and 11 other bank going out, this actually it's now 16 other banks going out this year.

The FDIC has to re-capitalize the fund, and what they are doing is they are assessing all the strong banks that are still around. So, for our company, it’s going to be $200,000 to $300,000. These numbers are going to be very big for some of the bigger companies and I just mention that to you.

The company is going through major cultural change. We took a small town community bank culture and we're trying to drive change, performance and accountability in analytics. I mentioned the significance competition that we face in our market. I didn’t mention BoA, which is also regional headquarters there because they acquired Liberty Fleet North Star and fleet complex. And I talked about our brand awareness and the lack there off that we're trying to focus on.

All these challenges being said, we think there are some opportunities. We think we're uniquely positioned to take advantage of these opportunities because of our size, flexibility and our approach which in Western New York community banks have been a valued commodity in that market for a very long term.

We're well-capitalized, solid and safe. We'll walk you through the capital ratios in a few minutes. There is turmoil in the financial industry, which we see as in, we don’t see it as a good think but it's a good thing for us in terms of, because of our size, we can take advantage of the opportunities, we can subsist on a much lower growth rate than some of the bigger institutions in our marketplace.

We can cherry pick credits, which are currently falling through the cracks and others through the bigger banks as they tighten their credit policies. We can be flexible to handle business, that’s not cookie cutter today. I've often said, that our management team being a community bank has the ability to do one-off transaction, and that' really, certainly true in our marketplace.

We have a capacity for growth. We have a capacity that we can fill. We think we have terrific [upsight]. We are nimble and flexible enough to take advantage of the slow growing competitive environment.

We are only community bank with a comprehensive product set. There is a scarcity of community banks in our marketplace, but none of them have the full product set of insurance investments that we can provide. We're also able; we think to differentiate ourselves through superior customer experience.

We can provide a personalized high-touch experience for our customers, which is we feel very important in a fearful market, which we are experiencing today with the market as it is. We can also make decisions to the point of sale, which some of these bigger organizations can't. And that's very important to a marketplace like Western New York, where business is done very networked.

In my last comments before I turn it over the CFO, Gary Kajtoch, I wanted to give you a quick assessment of these Treasury's Troubled Assets Relief Programs. I wanted to walk you through, what's going on in the market and give you an update about TARP. We've given three presentations in the last two weeks and as we've talked this is real-time information. It changes everyday.

I change the slide about everyday with Treasury's changes in provisions to the TARP. But this is a look at the capital purchase program. I will just walk you through a couple of thoughts on this, and help get a level set.

The TARP program allows banks to opine that they are interested in investment from the U.S Treasury in preferred shares in the company. Anywhere from a minimum of 1% of a risk-based capital assets to 3% of our risk based capital assets. I put down on this screen and in front of you two different columns. The minimum and maximum columns, so you can see the difference and how it would impact our bank if took out an investment from treasury at the minimum levels or at the maximum levels.

The book value of the senior preferred, the treasury would take and put in our bank would be somewhere between $4 million at minimum to $12 million at maximum. They would get 15% senior preferred stock insurance or about $600,000 to a $1.8 million in terms of preferred stock issuance.

That preferred stock insurance provides warrants to the treasury. Those wants would be – the number of warrants would be 36,000 warrants to 107,000 warrants. Those warrants would provide a pro forma ownership in our company of between 1.28% to a maximum of 3.75%. So, treasury would be involved and the US government could be involved anywhere from 1.28% to 3.75%.

The next grouping down there is our current pro forma capital ratios and how they would change with the investment from treasury. Number one, our tangible equity to tangible assets currently sits at about 6.75%. It would rise to somewhere around 7.5% to almost 9%.

Our leverage ratio today is at about 9.26%. That would rise to 10% to 11.5% at maximum. Tier-1 risk-based capital, 1119%, previously this was pretty gaudy statistic when you look at 6% is the minimum capital to be considered well capitalized by the government. We are at almost doubled that and with the TARP, we'd move up to 12.17% to 14%.

If we assume our total risk-based capital ratio today it's about 12.44%, it would go to 13.41% to 15.35%. Now I show you these ratios because what's happening right now with treasury looking to make an investment in banks, they are by feat changing the capital ratios in the banking industry today, whereas 8% was considered a pretty strong capital ratio and we're at 11 for Tier-1. They are pushing companies up to a minimum of around 10%.

I only tell you this because I want to go through – we looked at some arguments for the investment our arguments against the investment. We have currently applied for TARP, but we have 30 days to decided and continue doing our analysis as to whether we would take the investment for treasure. Everybody had till last Friday that was the deadline for banks to opine to the government whether they would be applicants for that money.

The arguments for the investment; it’s a competitive cost of capital at 5%. We've done the math around that money and we think that it with dilution and with the warrants that it looks more like 7% but it's still competitive when you look at raising capital and generally a 13% to 15% cost.

It strengthens already strong balance sheets and capital. Theoretically, the government is only providing money to banks that are in strong capital position. They are looking to show up the strong ones and looking to have the weaker ones to get consolidated out of operations.

There are no [vote] seats. They are non-voting warrants today, however if those warrants are traded, the investor in the warrants could take a voting position. You have an ability to repay -- we have an ability to repay within three years. If you could issue qualified Tier-1 capital which means new common equity or new preferred shares, you can replace the TARP money by December 31, 2009 and it would cut the ones in half. We're not in a position to do that and the cost of that would be prohibitive for us. So we'd have to wait till the three-year point to unwind this investment. It gives us a little extra size, which might be some protection against unwarranted M&A interest.

Let me also tell you about the arguments against. The US government is a business partner. That's a tough deal we think. We have a strong capital position today. We think we can manage and accomplish our strategic plan without this investment. And if you kind of accomplish your strategic plan, the question gets asked, if you take the money, do you need that additional oversight? And we're a very strong community bank that provides a pretty hefty dividend. We're close to 5%.

That's a major impetus for people to invest in our shares. You're not allowed to issue dividend increases under this program. You're not allowed to do stock buybacks. There is compensatory re-regulation going on in executive compensation. That's not an issue because compensation re-regulation is going to happen whether you take the TARP or not. So we're not thinking that's a major impact there. But the regulatory restrictions are strict.

Additionally, we feel there is additional oversight on lending to assure credit availability. You're seeing Attorney General Cuomo is starting to ask for reports from the nine banks that took the first wave of TARP, the nine big banks asking for compensation information and lending information. We think this is only going to spread throughout the industry with this TARP.

And again, these are still the arguments for why not to do this. Decisions are required without full clarification of the program. I was talking to (Jerry) before the program. We have probably an inch thick worth of documents that we've looked at for warrants and preferred shares.

You go through and they're all normal terms, the last term of the contract, it's Section 5.3 of the document, is that the Treasury can change any of the provision to the program based on Congressional change, and that's coming in January. Basically, they say, here is all the terms unless we change them.

The public perception on this program is unknown. How is the public going to respond to banks that are strong and take this money? Is it going to be viewed as a bailout? Is it going to be viewed as they're taking taxpayer money and they don't need it? Or is it going to be viewed as, you weren't strong enough to get the money, why didn't you take the money? So there is still some confusion as to what the public perception will be.

The last thing I'd say about is new government administration that is implementing this, whether it's McCain or Obama, both have said they didn't like the execution of Treasury Secretary Paulson. So no matter what happens, either administration was going to change that. So we're looking at changes as we go forward.

I am going to turn this over to Gary Kajtoch, our CFO. He is going to walk you through the financial portion of our presentation. I will just come back to conclude.

Gary Kajtoch

Thank you, David. I'm very pleased to be here at this morning as well. Let's take a look at our asset base. As you can see, we've grown by about $167 million from 2003 to this year's third quarter. And this has really been due to our loan portfolios.

The decrease in 2007 is due to the fact in June of 2007 we've cleaned up our balance sheet, sold $45 million in low yielding securities that were matched with high rate municipal deposits. And although this transaction resulted in an after-tax loss on sale of the securities, it was a positive step for the bank that increased earnings power and freed up capital.

Our loans have grown from $188 million in 2003 to $385 million in 2008. That’s a 16% annualized growth rate. Commercial loans and leases have been the main drivers of that growth. In the first nine months of this year, we've added about $60 million in average balances. And over that time period, we've also changed our loan mix.

We look at the mix of loans from 2003 to 2008, we can see the shift. The percentage of commercial real estate in CNI loans has decreased due to the growth in our newest lending line, which is leasing which is now at about 14.5% of the portfolio.

A stage in going forward is to ensure that we have well diversified loan portfolio. We'd like to increase the percentage of commercial loans and also focus on several small and micro businesses because that’s where we believe, there is opportunities.

Our lease portfolio is currently $55 million and till this year, it’s fastest growing category on a balance sheet of the last few years This portfolio consists of small leases on an average $35,000 with average terms between three and four years to small businesses. And the yields are high averaging 13% to 15%.

The risk in these leases is also higher than our traditional loan portfolio. And for that reason, that we've tightened credit standards and placed limits on the portfolio. We believe that this allows us to reap the benefits of higher yielding assets without excessive concentration.

As a result of good loan growth of the last several years along with the sales securities in June of '07 and a more conservative posture with our investment portfolio during this financial crisis. Our loan has make-up a greater percentage of assets at 84.7%. And because loans are even higher rates of interest and securities, this changes and mix has helped increase our net interest margin.

Even more important than the overall growth in loans is their profitability. Here is just look at our credit and charge-off performance. Non-performing loans as a percent of total are at 0.2%, down from a higher 0.82% in 2004; charge-off have increases as we've written-off some of the non-performing loans from early years; and in addition, as expected charge-offs have increased due to the growth and our leasing portfolio.

The strong performance is really due to four factors. We have a strong credit culture and experienced lending team; we know our customer and we understand our markets. Its important to note that we're not exposed to the toxic assets that have been in the news lately namely, subprime mortgages, Fannie and Freddie stocks, CDOs et cetera. And as a result, we haven't experienced losses that many of the larger banks have.

Our total deposit base is roughly $404 million and it's grown by $137 million since 2003. Time deposits account for about 36% followed by savings account to 35%, checking account to 23% and [annuity] is actually 6%. And our goal is to continue to grow core deposits.

The growth that we've experienced since 2003s and part due to some of our de novo branches, the decrease from 2006 to 2007 is due to the balance sheet restructuring in June of '07. As mentioned early, we now installed securities but we also eliminate $45 million in high rate municipal development.

And we've been able to grow organically over the past years. As a matter of fact, we've grown those balances back in 2008. As a result of a focused effort to gather low cost core deposits, we've recently introduced the premium money market product that produced over $50 million in balances over the last few months.

In addition, our time deposit mix has shifted, from a majority of high priced jumbo CDs to a majority a less expensive small [dollar] CDs.

Our net interest margin averaged 4.67 this quarter, above the averages of our high performing peer group, local peers and our publicly-traded banks with assets less than a $1 billion. We've been able to improve our margins by growing loans and cheap core deposits, reprising our CD portfolio and by taking advantage of some wholesale opportunities earlier this year and locking into two funding.

Overall, revenue excluding the impact of last year’s balance sheet restructure has increased from $18.5 million in 2003 to $30.5 million in this year’s third quarter. That’s an 11% average growth rate. Strong loan growth and low cost core deposits are contributing factors. In addition, our fee income has increased over the past several years as well.

Non-interest income has increased by $4.1 million since 2003 growing at an average pace of 9.4% per year. In addition, it's now a significant portion of our total revenue. The $11.8 million that you see for the trailing 12 months represents about 40% of total revenues.

Fee income is especially important because it's less sensitive than interest income to changes in market rates. Our goal is to continue to grow fee income by focusing on financial services and insurance and improving the incentive system for our sales people.

Our insurance business has contributed $5.5 million in revenue through the third quarter this year. Insurance in financial services accounts for about 60% of our fee income. As you can see close to 90% of that is generated from retail and commercial property and casualty insurance filed by life and financial insurances and other fee income.

Our goal is to increase the percentage of commercial business over time to roughly 75%. That's where returns are better and where an insurance agency can get amply rewarded for excellent service.

Here, we take a look at our efficiency ratio. You can see it costs us roughly $0.63 for every $1 in revenue that we generate. This ratio has steadily come down over the last six years. The new management team has placed an increased emphasis and efficiency to ensure that we are well positioned for a challenging market.

We understand that de novo branching can be expensive in the short-term, hence for that reason, that we are focused on running efficiently. That being said, we still been able to make investments in systems, operations, people and branches also allowed our bank to grow profitably.

Last year, I would have said that our top line revenue growth from some of our new branches is not where it should be hence the higher ratio. But we're seeing good progress here and that's due to new retail management, metrics and accountability systems, better technology and marketing support for the branches.

This next slide shows two key performance measures, earnings per share and net income. We've presented these measures in two ways. First in grey, you see the reported earnings per share and net income in accordance with GAAP. Note that due to securities laws, our earnings per share and net income decreased in 2007 to a $1.23 and $3.4 million respectively. Both measures are now trending up in 2008.

We believe that net operating income is a better measure of our performance and that's in orange. The operating basis excludes the impact of one-time events like the sale of securities, as well as the impact of some acquisition related expenses. So on that basis, both earnings per share as well as net income are relatively flat for 2007 versus ’06 and up for 2008 and then also an upward [tracks] in 2003. We consider these results to be fairly good and at timing which we transition management and which the overall banking industry is struggling.

Return on equity for the trailing twelve months is 11.9% and on operating basis ROE was 12.9%. [You can] notice that the value has fluctuated between 12.5% and 14% over the last five years. Our goal as David mentioned is to achieve a sustainable 14% ROE.

On the right you see our dividend history from 2003 to 2008 and notice over that timeframe, we've steadily increased our dividend from $0.57 in 2003 to $0.78 in 2008. We also requested approval for and received authorization to repurchase an additional 100,000 shares of our outstanding stock, above the 45,000 shares that have been purchased over the last couple of years. And so far this year, we have repurchased over 13,000 shares. Going forward, this program will obviously depend on whether we enter the TARP program.

Here we take a look at how we faired against our peers with some important metrics. We compare ourselves against three distinct groups of banks. A select group of local banks, a group of high performing peer banks and finally all publicly traded banks with less than one billion dollars in assets and as you can see with loan growth of 25%, we're outperforming all of our peers.

Moving to the right, in 2008, on an annualized basis, we grew deposits by 32%, well above the performance of the other groups. The growth in these core deposits is obviously very beneficial as it helps increase the sustainability of our high net interest margin.

Our year-to-date return on equity at 13% is above the averages of peers as well. In general, our comparative results have been good despite that track. Our P/E ratio remains low relative to other banks. We'll get into that little bit more in a minute.

In summary, I would like to review our financial strategy. First, we are rationalizing the various aspects of our business by developing accountability systems and metrics. We are paying particular attention to operating efficiently which is key in this economic environment. We are also focusing on understanding and managing the risk of the bank to ensure that shareholders are properly compensated.

We believe that high performing banks are the ones that understand their risks, manage them effectively and they get paid for taking them. The best example of our efforts to understand and manage the risks involves our leasing portfolio. It has the highest risks and the highest return on our balance sheet but it also receives the most management attention.

We've tightened credit standards and limited the balances to roughly 15% of loans. We are also managing our funding cost and liquidity. In addition to growing our core deposits, we've taken steps to extend maturities on core as well as wholesale funds and lock in low cost funding.

Finally an important part of our strategy is to do a good job of managing our capital; both our dividend increases as well as our buyback program are driven by capital management philosophy that's based and creating shareholder value while at the same time maintaining a strong balance sheet.

Dave spoke earlier about the fact that we're in a process of analyzing the benefits of the TARP program. The key is to ensure that if we take the additional capital that we put it to good use. We believe that's important for banks to take the time to do their homework on this program. If the additional capital is not property put to work what was generally considered cheap capital can quickly become expensive debt.

In short, we are committed to maintaining our shareholder focus in every decision we make. And with that I'll turn it back over to David.

David Nasca

Let me just conclude by saying we think we have a good story and a strong company and a good foundation from which to evolve. We're going through a transformation process from a sleepy country bank to a performance-driven financial organization. We have a strategy for growth.

We're building the team to deliver results and we're establishing execution and performance metrics. Additionally, we're doing much more in the area of proactive investor communications, including today's presentation.

I'm going to stop here and open it up for any questions that you might have, and Gary or I will answer it. Yes, please?

Question-and-Answer Session

Unidentified Analyst

(Question Inaudible)

David Nasca


Unidentified Analyst

(Question Inaudible)

David Nasca

Okay. Let me restate the question for the folks around the webcast. The strike price for the warrant is the trailing 20-day average stock price. You're going to be approved, for example, we'll get notification at some point, and then we'll have 30 days to agree. Once we sign the documents and we close, the 20 days prior to that would be the strike price.

The second question was you asked, I thought that you could ask for approval from the Treasury to buyback shares and pay dividend. And the issue…

Unidentified Analyst

(Question Inaudible)

David Nasca

Right, and it's both of them actually. You can do both, getting approval from the Treasury. But our expectations speaking to the Washington lawyers on this is you should have a full expectation that it's going to be very difficult to get that approval.

We've been told that if you look at your dividend payout ratio, a smaller bank like ours might be able to say, we've always been paying out 43%. So to the extent we increase our company's performance, we could keep payout ratio, but we've been told to expect a very difficult time because the government does not want this money going back to shareholders.

They want it going back into lending to be honest with you. Whether it's going to happen, we've been told that small bank will have it a little easier than some of the big guys. They said the big guys are not going to get that approval. Did that answer, is that okay? Other questions, yes, please.

Unidentified Analyst

(Question Inaudible)

David Nasca

That's the issue, frankly. We've said all along that this money is cheap capital but if you can't put it to work, it could be expensive funding. That's one of the wrestles. We're growing, we're growing branches currently. The capital could be used for that. The capital could be used for acquisitions.

We've been told that will be acceptable by the government, but we're looking very strongly at what you can do with that money. There are not a lot of acquisitions in our market, our contiguous marketplace. That's the challenge. That's a $64 million question to be honest with you, so. Yes, please.

Unidentified Analyst

(Question Inaudible)

David Nasca

The question was how long, who are our main auditors and how long have they been on the job? Our main auditors are KPMG. They have been with the company – I've only been there 18 months, but I believe they have been over six years. Any last questions?

Thank you very much for having us today. We appreciate it.

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