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| FFSX > SEC Filings for FFSX > Form 10-Q on 21-Nov-2008 | All Recent SEC Filings |
21-Nov-2008
Quarterly Report
Forward-Looking Statements
This report may contain certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), that involve substantial risks and uncertainties. When used in
this report, or in the documents incorporated by reference herein, the words
"anticipate", "believe", "estimate", "expect", "intend", "may", and similar
expressions identify such forward-looking statements. Actual results,
performance or achievements could differ materially from those contemplated,
expressed or implied by the forward-looking statements contained herein. These
forward-looking statements are based largely on the expectations of the
Company's management and are subject to a number of risks and uncertainties,
including but not limited to economic, competitive, regulatory, and other
factors affecting the Company's operations, markets, products and services, as
well as expansion strategies and other factors discussed elsewhere in this
report filed by the Company with the Securities and Exchange Commission
("SEC"). Many of these factors are beyond the Company's control.
Results of Operations
Quarter Overview The Company's recognized a net loss for the three months ended September 30, 2008, of $798,000 or $0.24 per diluted share compared to net income of $415,000 or $0.13 per diluted share in the same period last year. These amounts represent an annualized return on average assets ("ROA") of (0.57%) and 0.26%, respectively, and an annualized return on average equity ("ROE") of (9.85%) and 2.39%, respectively. During the most recent quarter the Company recognized $1.8 million of "other than temporary" impairment charges on the Company's trust-preferred pooled securities portfolio. Excluding this write down, management estimates the Company would have reported net income of $330,000 or $0.10 per diluted share.
The following paragraphs discuss the aforementioned changes in more detail along with other changes in the components of net income during the three month period ended September 30, 2008 and 2007.
Net Interest Income Net interest income for three-month period ended September 30, 2008, was $4.5 million compared to $4.1 million for the three-month period ended September 30, 2007. The net interest margin improved 72 basis points to 3.62% for the three months ended September 30, 2008, from 2.90% for the three months ended September 30, 2008September 30, 2007. The increase in margin was due to a generally lower interest rate environment that decreased the cost of the Company's interest-bearing liabilities faster than the yields on interest-earning assets. The margin improvement was partially offset by a decrease in the Company's average interest-earning assets. Average earning assets for the three months ended September 30, 2008decreased $67.4 million to $501.7 million as compared to the same period last year.
The following tables set forth information regarding the average balances of the Company's assets, liabilities, and equity, as well as the average yield on assets and average cost of liabilities for the periods indicated. The information is based on daily average balances during the three-month periods ended September 30, 2008 and 2007.
Three months ended September 30,
2008 2007
Average Average Average Average
(Dollars in thousands) Balance Interest Yield/Cost Balance Interest Yield/Cost
Interest-earning assets:
Loans receivable (1) $ 407,076 $ 6,212 6.05 % $ 432,897 $ 7,430 6.81 %
Investment securities (2) 94,467 1,470 6.34 % 132,316 2,025 6.21 %
Deposits in other financial
institutions 120 1 1.69 % 3,885 51 5.15 %
Total interest-earning assets 501,663 7,683 6.11 % 569,098 9,506 6.66 %
Non-interest-earning assets 54,054 62,422
Total assets $ 555,717 $ 631,520
Interest-bearing liabilities:
Deposit liabilities $ 391,081 2,539 2.58 % $ 448,957 4,562 4.03 %
Borrowings 82,049 639 3.09 % 65,940 864 5.20 %
Total interest-bearing
liabilities 473,130 3,178 2.67 % 514,897 5,426 4.18 %
Non-interest-bearing:
Deposit liabilities 45,955 42,388
Other liabilities 4,214 4,826
Total liabilities 523,299 562,111
Stockholders' equity 32,418 69,409
Total liabilities and
stockholders' equity $ 555,717 $ 631,520
Net interest income $ 4,505 $ 4,080
Interest rate spread 3.44 % 2.48 %
Net interest margin 3.62 % 2.90 %
Ratio of average
interest-earning assets
to average interest-bearing
liabilities 106.03 % 110.53 %
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(1) Average balances include nonaccrual loans and loans held for sale. Interest
income includes amortization of deferred loan fees, which is not material.
(2) Investment securities income is presented without the benefit of the tax
effect of tax exempt income; yields are presented on a tax-effected basis.
(3) Net interest margin represents net interest income, tax-effected, as a
percentage of average earning assets.
Provision for Losses on Loans The provision for loan losses for the three months ended September 30, 2008, was $713,000 as compared to $21,000 for the quarter ended September 30, 2007. The increase was a result of the Company recognizing a specific allowance of $700,000 on a loan for the development of commercial properties in Des Moines, Iowa. The project is behind schedule and an appraisal that was received during the most recent quarter showed that the property has suffereda significant decrease in the value of the project. As a result, a specific allowance was warranted.
The Company's allowance for loan losses totaled $5.5 million as of September 30, 2008, compared to $1.7 million as of September 30, 2007. The Company's methodology for establishing allowance for loan loss is heavily influenced by the level of the Company's non-performing and classified loans. Non-performing loans and classified assets have increased over the last year due to the well-publicized difficulties in the overall markets for commercial and residential real estate. Although management believes that the Company's present level of allowance for loan losses is adequate, there can be no assurance that future adjustments to the allowance will not be necessary, which could adversely affect the Company's results of operations. For additional discussion, refer to "Financial Condition - Non-Performing and Classified Assets."
The following table summarizes the activity in the Company's allowance for loan losses for the three months ended September 30, 2008 and 2007.
Three months ended
September 30
(Dollars in Thousands) 2008 2007
Balance at beginning of period $ 5,894 $ 1,797
Provision for loan losses 713 21
Charge-offs:
Commercial real estate loans (221 ) -
Commercial business loans (860 ) (56 )
Consumer loans (62 ) (46 )
Total loans charged-off (1,143 ) (102 )
Recoveries 23 27
Charge-offs, net of recoveries (1,120 ) (75 )
Balance at end of period $ 5,487 $ 1,743
Allowance for loan losses to total loans 1.48 % 0.40 %
Allowance for loan losses to non-performing loans 62.67 % 45.40 %
Net annualized charge-offs to average loans outstanding 1.10 % 0.07 %
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Non-Interest Income Excluding "other than temporary" write downs, non-interest income totaled $1.5 million for the three months ended September 30, 2008 and 2007. The following paragraphs discuss the principal components of non-interest income and the primary reasons for the changes from 2007 to 2008.
Service Charges on Deposit Accounts Service charges on deposit accounts
increased 32% or $0.2 million to $1.0 million for the three months ended
September 30, 2008 as compared to the same time period last year. The increase
was due to a higher level of overdraft and interchange fees collected on debit
card transactions. The higher level of fees collected was primarily due to a
significant increase in the number of checking accounts opened over the last
year.
Service Charges on Commercial and Consumer Loan Service charges on commercial
and consumer loans decreased $59,000 to $38,000 for the three month period ended
September 30, 2008, as compared to the same period in the previous year. The
decrease was primarily due to the decline in the number of commercial and
consumer loans prepaying as compared to the previous year.
"Other than Temporary" Impairment The Company recognized $1.8 million in "other than temporary" impairment charges for the three months ended September 30, 2008 as compared to zero for the three months ended September 30, 2007. The "other than temporary" impairment charge related to six trust-preferred pooled securities that the Company owns. Two bonds with an original par value of $6.0 million were downgraded from investment grade status to non-investment grade status during fiscal year 2008 resulting in an "other than temporary" impairment charge of $0.2 million for the three months ended September 30, 2008. Two bonds with an original par value of $6.0 million incurred a $1.0 million "other than temporary" charge due to differences between the expected cash flow and the cash flow that a current market participant would use to evaluate these securities as required by EITF 99-20. In that analysis, the Company assumed that the default rates of the underlying collateral would be similar to the default rates experienced in the savings and loan crisis (1988 through 1992) and then declining to a historical default rate which includes the aforementioned five years. If actual default rates are less than the aforementioned scenario, the cash flows of the security will increase and may equal what was expected when the security was purchased. Two securities with an original par value of $4.0 million incurred an "other than temporary charge" of $0.6 million for the three months ended September 30, 2008. This "other than temporary" impairment charge was a result of the Office of Thrift Supervision ("OTS") concluding these two securities are over the loans to one borrower limit and the Company has agreed to sell the portion of the securities that is over the loans to one borrower limit when liquidity returns to the marketplace. Since the Company does not have the ability to hold these securities until market value recovery an "other than temporary" impairment charge was recognized. Please refer to "Financial Condition - Securities Available-for-Sale and Held-to-Maturity" for more information.
Mortgage Banking Revenue Mortgage banking revenue consists of gain on sale, collection of loan fees, and mortgage servicing income. Mortgage banking revenue declined $114,000 from $194,000 for the three
months ended September 30, 2007, to $80,000 for the three months ended September 30, 2008. The decrease was attributable to the decline in fixed rate mortgage origination volumes.
Other Income Other income decreased $90,000 to $219,000 during the three month period ended September 30, 2008, as compared to the same period in the previous year. The change was primarily due to a decrease in sales of the Company's fixed annuity and mutual funds.
Non-Interest Expense Non-interest expense for the three months ended September 30, 2008, was $4.9 million compared to $5.0 million for the three months ended September 30, 2007. The following paragraphs discuss the principal components of non-interest expense and the primary reasons for the changes from 2007 to 2008.
Personnel Expense Compensation and employee benefits was $2.6 million for the three months ended September 30, 2008, compared to $2.8 million for the three months ended September 30, 2007. The decrease in compensation and benefit expense was attributed to a decline in costs associated with the Company's defined benefit pension plan partially offset by merit increases. The number of full-time equivalent employees was 189 as of September 30, 2008, as compared to 191at the same time last year.
Office Property and Equipment Office property and equipment expense increased $8,000 to $709,000 for the three months ended September 30, 2008, compared to the same period in the previous year. The increase was primarily due to increased maintenance costs at the Company's banking centers.
Data Processing, ATM and Debit Card Transaction Costs, and Other Item Processing Expense Data processing, ATM and debit card transaction costs increased to $482,000 for the three months ended September 30, 2008, from $370,000 for the three months ended September 30, 2007. This increase was partially due to the increased number of new checking accounts opened during the last twelve months as compared to the previous year. In addition, the Company has been successful at increasing the number of internet and mobile banking users and the number of debit card transactions has increased. As a result, processing costs to service these channels have increased as compared to the previous year.
Professional, Insurance, and Regulatory Professional, insurance, and regulatory expense increased $96,000 to $351,000 for the three months ended September 30, 2008, as compared to the three months ended September 30, 2007. The recent clarifications of the "mark-to-market" or "fair value" accounting rules resulted in the Company incurring additional accounting and consulting costs.
Advertising, Donations, and Public Relations Expenses related to advertising, donations and public relations decreased to $222,000 for the three months ended September 30, 2008, from $464,000 for the three months ended September 30, 2007. The decrease was due to non-recurring costs related to the Bank's name change that occurred in the previous year.
Communication, Postage, and Office Supplies Communications, postage, and office supplies expense decreased by $9,000 from $211,000 for the three months ended September 30, 2007, to $202,000 for the three months ended September 30, 2008. These decreases were primarily due to costs associated with the Bank's name change that occurred in the previous year. In addition, the Company has been successful in switching the delivery of account statements from paper to electronic delivery.
Loss on other real estate owned Loss on other real estate owned increased $19,000 to $74,000 for the three months ended September 30, 2008, compared to $55,000 for the three months ended September 30, 2007. The increase was due to an overall decline in real estate market values that has occurred over the past year.
Other Non-Interest Expense Other non-interest expense increased by $24,000 to $212,000 for the three month period ended September 30, 2008, as compared to the same period in the previous year. This increase was due to costs incurred by the Company to dispose of foreclosed property.
Income Tax Expense (Benefit) Income tax (benefit) for the three months ended September 30, 2008, was $595,000 compared to income tax expense of $115,000 for the three months ended September 30, 2007. The income tax (benefit) or expense for the three months ended September 30, 2008 and 2007 represented (43%) and 22% of pre-tax
income (loss), respectively. The effective tax rate increased in the current year period due to the loss benefit in addition to tax exempt income.
Financial Condition
Overview Total assets decreased by $15.6 million or 3%, to $549.4 million at September 30, 2008, from $565.0 million at June 30, 2008. During the quarter funds from the maturity of investment securities, and loans receivable were primarily used to fund a decline in the Company's deposit liabilities. The following paragraphs discuss the aforementioned changes in more detail along with other changes in the components of the assets and liabilities for the period ended September 30, 2008.
Securities Available-for-Sale and Held-for-Investment Total securities decreased by $7.6 million to $83.6 million at September 30, 2008, from $91.2 million at June 30, 2008. The decrease was primarily due to the decline in market value of the Company's trust preferred Company's Collateralized Debt Obligations (CDOs). Trust preferred CDOs represent a participation interest in a pool of trust preferred debt or subordinated notes of banks, thrifts, insurance companies and REITS. As of September 30, 2008, the collateral of the CDOs purchased by the Company are approximately 76% bank, 24% insurance companies, and less than one percent was either homebuilders or real estate investment trusts ("REITS"). Investments were generally rated "A" or "triple-B" by independent rating agencies at the time of purchase. During the quarter ended September 30, 2008, two bonds with a book value of $1.0 million were downgraded to below investment grade, four bonds with a book value of $24.6 million were downgraded from "A to "triple-B" by Moody's rating service but remained rated "A" by Fitch rating service, and eight bonds with a book value of $28.4 million remain either "A" or "triple-B" rated by Moody's or Fitch rating service. It should be noted that bonds that were not downgraded remained on watch for possible downgrade by the appropriate rating service.
Federal law and regulation generally permit the Bank to invest up to 35% of its assets in commercial paper and corporate debt securities. Notwithstanding this investment limit, guidance issued by the Office of Thrift Supervision ("OTS") imposes lower limits on such investments. The Company was advised by the OTS that the aggregate amount of the Company's portfolio of trust-preferred pooled securities ($54.0 million amortized cost at September 30, 2008) exceeds OTS regulatory guidelines. The Company filed a plan with the OTS on May 15, 2008, to come into compliance with such regulatory guidelines and the timeframe for doing so. As part of such plan, the Company asked the OTS' approval to allow the Company to retain such securities, notwithstanding the regulatory guidelines. On September 25, 2008, the Company received a letter from the OTS that stated the OTS had no objection to the Company's plan. However, the OTS did conclude two bonds were in excess of the OTS' loans to one borrower limit (LTOB). As a result, the Company classified the portion over the LTOB limit as "other than temporarily impaired" at September 30, 2008 due to a lack of ability by the Company to hold these securities to maturity and/or forecasted recovery. The Company intends to sell these two securities over the LTOB limit when liquidity returns to the market place. During the quarter ended September 30, 2008, the Company recognized an additional "other than temporary" impairment charge on six trust preferred securities that the Company owns. Please refer to "Results of Operations - Other than Temporary Impairment," above, and "Financial Condition - Stockholders' Equity," below, for additional discussion relating to the Company's trust-preferred securities ("TPSs") portfolio.
The table below sets forth information regarding the Company's trust preferred collateralized debt obligations at September 30, 2008.
OTTI charge
in quarter
ended
Original Rating Current Rating Payment Amortized Market Unrealized September 30,
Issuer Moodys/Fitch Moodys/Fitch in Kind (1) Cost Value Gain/(Loss) 2008
TPS considered "other than temporarily" impaired:
Security A Baa2/BBB Ba1/BBB No $ 430,000 $ 430,000 - 219,816
Security B (2) A3/A- Baa3/A- No 757,367 757,367 - 240,776
Security C (2) A3/A- Baa1/A- Yes 1,279,367 1,279,367 - 311,607
Security D NR/BBB NR/BBB No 464,155 464,155 - 97,901
Security E NR/BBB NR/BBB Yes 1,891,566 1,891,566 - 894,619
Security F NR/BBB NR/CCC Yes 590,000 590,000 - 35,000
TPS not considered "other than temporarily" impaired:
Security B A3/A- Baa3/A- No 7,300,000 3,730,899 (3,569,101 )
Security C A3/A- Baa1/A- No 7,300,000 3,569,143 (3,730,857 )
Security I A2/A A2/A No 6,025,165 4,331,400 (1,693,765 )
Security J A2/A A2/A No 1,991,195 1,415,025 (576,170 )
Security K A3/A- Baa1/A No 1,972,098 1,388,474 (583,624 )
Security L NR/BBB NR/BBB Yes 5,035,323 2,833,103 (2,202,220 )
Security M A3/A- A3/A- No 4,990,640 3,231,938 (1,758,702 )
Security N NR/BBB NR/BBB No 2,974,352 1,950,877 (1,023,475 )
Security O NR/BBB NR/BBB No 5,000,000 2,916,500 (2,083,500 )
Security P A3/A- Baa2/A- No 6,000,000 3,646,800 (2,353,200 )
$ 54,001,228 $ 34,426,614 $ (19,574,614 ) $ 1,799,719
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(1) The structure of these securities allows for payment in kind or the capitalization of interest to principal.
(2) Portion of the security that is over the Bank's Loans to One Borrower Limit.
Loans Receivable Loans receivable decreased by $43.0 million to $370.8 million as of September 30, 2008, from $413.8 million at June 30, 2008. The decrease is partially attributable to the transfer of loans receivable to assets held for sale. The following table sets forth information regarding the Company's loan portfolio, by type of loan, on the dates indicated.
September 30, 2008 June 30, 2008
(Dollars in Thousands) Amount % Amount %
One- to four-family residential (1) $ 91,532 25.06 $ 111,933 27.45
Multi-family residential (1) 37,499 10.27 40,451 9.92
Non-residential real estate (1) 120,457 32.98 132,794 32.56
Commercial business loans 49,735 13.62 62,217 15.26
Home equity and second mortgage loans 30,407 8.32 33,003 8.09
Auto loans 4,837 1.32 4,648 1.14
Other non-mortgage loans (2) 36,066 9.87 28,700 7.04
Loans in process, unearned discounts and
premiums,
and net deferred loan fees and costs 223 0.06 (33 ) (0.01 )
Subtotal 370,756 101.50 413,713 101.45
Allowance for loan losses (5,487 ) (1.50 ) (5,894 ) (1.45 )
Total loans, net $ 365,269 100.00 $ 407,819 100.00
(1) Includes construction loans.
(2) Includes other secured and unsecured
personal loans.
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Office property and equipment Office property and equipment decreased from $18.8 million at June 30, 2008, to $16.9 million at September 30, 2008. The decrease was due to the transfer of property and equipment of a banking center to assets held for sale depreciation of the Company's office equipment.
FHLB Stock The Company's FHLB stock decreased from $4.3 million at June 30, 2008, to $3.8 million at September 30, 2008. The decrease was a direct result of the decrease in FHLB advances, which decreases the level of FHLB stock required to be held.
Foreclosed and Repossessed Assets Foreclosed and repossessed assets increased . . .
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