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| FBSS > SEC Filings for FBSS > Form 10-K on 16-Mar-2009 | All Recent SEC Filings |
16-Mar-2009
Annual Report
FORWARD-LOOKING STATEMENTS
In addition to the historical information contained herein, this report contains
forward-looking statements. Forward-looking statements are based on certain
assumptions and describe future plans, strategies, and expectations of the
Company and the Bank, and are generally identifiable by use of the words
"believe," "expect," "intend," "anticipate," "estimate," "project" "may," "will"
or similar expressions. Although we believe our plans, intentions and
expectations reflected in these forward-looking statements are reasonable, we
can give no assurance that these plans, intentions, or expectations will be
achieved. Our ability to predict results or the actual effect of future plans or
strategies is inherently uncertain, and actual results could differ materially
from those contemplated. Factors that could have a material adverse effect on
our operations and future prospects include, but are not limited to, changes in:
interest rates, general economic conditions, the legislative/regulatory climate,
monetary and fiscal policies of the U.S. Government, including policies of the
U.S. Treasury and the Board of Governors of the Federal Reserve System, the
quality or composition of the Bank's loan or investment portfolios, demand for
loan products, deposit flows, competition, demand for financial services in our
market area, our plans to expand our branch network and increase our market
share, and accounting principles, policies and guidelines. These risks and
uncertainties should be considered in evaluating forward-looking statements in
this report and you should not place undue reliance on such statements, which
reflect our position as of the date of this report.
For additional discussion of risk factors that may cause our actual future results to differ materially from the results indicated within forward-looking statements, please see "Risk Factors" in Item 1A of this report.
CRITICAL ACCOUNTING POLICIES
GENERAL. The Company's financial statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). The financial information contained within our statements is, to a significant extent, based on measures of the financial effects of transactions and events that have already occurred.
A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. We use historical loss factors as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use in our estimates. In addition, GAAP itself may change from one previously acceptable accounting method to another method. Although the economics of the Company's transactions would be the same, the timing of events that would impact the Company's transactions could change.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is an estimate of the
losses that may be sustained in our loan portfolio. The allowance is based on
three basic principles of accounting: (i) Statement of Financial Accounting
Standards ("SFAS") No. 5, "Accounting for Contingencies," which requires that
losses be accrued when they are probable of occurring and estimable,
(ii) SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," which
requires that losses be accrued based on the differences between the value of
collateral, present value of future cash flows or values that are observable in
the secondary market and the loan balance and (iii) SEC Staff Accounting
Bulletin No. 102, "Selected Loan Loss Allowance Methodology and Documentation
Issues," which requires adequate documentation to support the allowance for loan
losses estimate.
The Company's allowance for loan losses has two basic components: the specific allowance and the general allowance. Each of these components is determined based upon estimates that can and do change when the actual events occur. The specific allowance is used to individually allocate an allowance for larger balance, non-homogeneous loans. The specific allowance uses various techniques to arrive at an estimate of loss. First, analysis of the borrower's overall financial condition, resources and payment record, the prospects for support from financial guarantors, and the fair market value of collateral are used to estimate the probability and severity of inherent losses. Then the migration of historical default rates and loss severities, internal risk ratings, industry and market conditions and trends, and other environmental factors are considered. The use of these values is inherently subjective and our actual losses could be greater or less than the estimates. The general allowance is used for estimating the loss on pools of smaller-balance, homogeneous loans; including 1-4 family mortgage loans, installment loans, other consumer loans, and outstanding loan commitments. Also, the general allowance is used for the remaining pool of larger balance, non-homogeneous loans which were not allocated a specific allowance upon their review. The general allowance begins with estimates of probable losses inherent in the homogeneous portfolio based upon various statistical analyses. These include analysis of historical and peer group delinquency and credit loss experience, together with analyses that reflect current trends and conditions. The Company also considers trends and changes in the volume and term of loans, changes in the credit process and/or lending policies and procedures, and an evaluation of overall credit quality. The general allowance uses a historical loss view as an indicator of future losses. As a result, even though this history is regularly updated with the most recent loss information, it could differ from the loss incurred in the future. The general allowance also captures losses that are attributable to various economic events, industry or geographic sectors whose impact on the portfolio have occurred but have yet to be recognized in the specific allowances.
EXECUTIVE OVERVIEW
This discussion is intended to focus on certain financial information regarding the Company and the Bank and may not contain all the information that is important to the reader. The purpose of this discussion is to provide the reader with a more thorough understanding of our financial statements. As such, this discussion should be read carefully in conjunction with the consolidated financial statements and accompanying notes contained elsewhere in this report.
The Bank is the primary independent community bank in its immediate market area as measured by deposit market share. It seeks to be the primary financial service provider for its market area by providing the right mix of consistently high quality customer service, efficient technological support, value-added products, and a strong commitment to the community.
Net income of $3.65 million in 2008 was a 26.2% decrease from 2007 net income of $4.95 million. The Company and the Bank's primary operating businesses are in commercial and retail lending, deposit accounts and core deposits, and assets under WMS management. Loans, net of reserve, increased 6.3% in 2008 compared with a decline of 1.7% in 2007 and growth of 9.2%, 12.8%, and 14.4% of net loans in 2006, 2005, and 2004, respectively.
Deposits decreased 1.1% in 2008 compared with a decrease of 2.8% in 2007, an increase of 6.2% in 2006, and an increase of 4.5% from year-end 2004 to year-end 2005. The market value of assets under WMS management decreased 18.1% from 2007 to 2008, but increased 1.9% and 17.8%, respectively, from 2006 to 2007 and from 2005 to 2006. The changes in assets under WMS management reflect, in large part, the changes in the overall U.S. and international bond and stock markets.
Net interest income is the largest component of net income, and equals the difference between income generated on interest-earning assets and interest expense incurred on interest-bearing liabilities. Future trends regarding net interest income are dependent on the absolute level of market interest rates, the shape of the yield curve, the amount of lost income from non-performing assets, the amount of prepaying loans, the mix and amount of various deposit types, and many other factors, as well as the overall volume of interest-earning assets. These factors are individually difficult to predict, and when taken together, the uncertainty of future trends compounds. Based on management's current projections, net interest income may increase in 2009 and beyond as average interest-earning assets increase, but this may be offset in part or in whole by a possible contraction in the Bank's net interest margin resulting from competitive market conditions and a flat or inverted yield curve. A steeper yield curve is projected to result in an increase in net interest income, while a flatter or inverted yield curve is projected to result in a decrease in net interest income. The specific nature of the Bank's variability in net interest income due to changes in interest rates, also known as interest rate risk, is to a large degree the result of the Bank's deposit base structure. During 2008, demand deposits, NOW, and savings deposits averaged 17%, 21%, and 8% of total average deposits, respectively, while the more interest-rate sensitive Premium money market accounts, money market accounts, and certificates of deposit averaged 17%, 6% and 31% of total average deposits, respectively.
The Bank's non-performing assets totaled $4.28 million or 0.97% of total loans and other real estate owned at December 31, 2008, as compared with $2.13 million or 0.51% of total loans at December 31, 2007. The provision for loan losses was $3.2 million for 2008 compared with $717,000 for 2007. Loan chargeoffs, net of recoveries, totaled $2.6 million or 0.62% of total average loans for 2008, compared with $1.00 million or 0.24% of total average loans for 2007.
Management seeks to continue the expansion of its branch network. The Bank has leased properties in Bristow, Virginia and Haymarket, Virginia, where it plans to build its ninth and tenth full-service branch offices, respectively, both scheduled to open during 2009 and 2010, respectively. The Bank is looking toward these new retail markets for growth in deposits and WMS income. Management seeks to increase the level of its fee income from deposits and WMS through the increase of its market share within its marketplace.
The following table presents a quarterly summary of earnings for the last two years.
EARNINGS
Three Months Ended 2008 Three Months Ended 2007
Dec. 31 Sep. 30 June 30 Mar. 31 Dec. 31 Sep. 30 June 30 Mar. 31
(In thousands, except per share data)
Interest income $ 7,035 $ 7,201 $ 7,061 $ 7,274 $ 7,730 $ 7,706 $ 7,746 $ 7,762
Interest expense 2,258 2,351 2,194 2,584 2,940 3,097 3,044 3,187
Net Interest Income 4,777 4,850 4,867 4,690 4,790 4,609 4,702 4,575
Provision for loan losses 1,506 431 834 456 357 120 120 120
Net interest income after provision
for loan losses 3,271 4,419 4,033 4,234 4,433 4,489 4,582 4,455
Other income 1,431 1,251 1,651 1,569 1,589 1,538 1,513 1,423
Other expense 3,793 4,256 4,395 4,396 4,245 4,283 4,265 4,189
Income before income taxes 909 1,414 1,289 1,407 1,777 1,744 1,830 1,689
Income tax expense 142 479 347 398 487 534 550 516
Net income $ 767 $ 935 $ 942 $ 1,009 $ 1,290 $ 1,210 $ 1,280 $ 1,173
Net income per share, basic $ 0.22 $ 0.26 $ 0.27 $ 0.29 $ 0.37 $ 0.34 $ 0.36 $ 0.33
Net income per share, diluted $ 0.22 $ 0.26 $ 0.26 $ 0.28 $ 0.36 $ 0.34 $ 0.36 $ 0.33
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2008 COMPARED WITH 2007
Net income of $3.65 million in 2008 was a 26.3% decrease from 2007 net income of $4.95 million. Earnings per share on a fully diluted basis were $1.03 in 2008 compared to $1.39 in 2007. Profitability as measured by return on average equity decreased from 12.16% in 2007 to 8.65% in 2008. Profitability as measured by return on average assets decreased from 1.01% in 2007 to 0.73% in 2008. The year to year decline in net income was primarily due to the $2.51 million increase in the provision for loan losses from 2007 to 2008.
2007 COMPARED WITH 2006
Net income of $4.95 million in 2007 was a 11.6% decrease from 2006 net income of $5.60 million. Earnings per share on a fully diluted basis were $1.39 in 2007 compared to $1.56 in 2006. Profitability as measured by return on average equity decreased from 14.86% in 2006 to 12.16% in 2007. Profitability as measured by return on average assets decreased from 1.14% in 2006 to 1.01% in 2007.
NET INTEREST INCOME AND EXPENSE
2008 COMPARED WITH 2007
Net interest income increased $509,000 or 2.7% to $19.19 million for the year ended December 31, 2008 from $18.68 million for the year ended December 31, 2007. The increase in net interest income was due to the Company's net interest margin increasing from 4.14% in 2007 to 4.19% in 2008, and the impact of total average earning assets increasing from $457.5 million in 2007 to $465.4 million in 2008. The percentage of average earning assets to total assets decreased in 2008 to 92.9% from 93.1% in 2007.
Total interest income decreased $2.37 million or 7.7% to $28.57 million in 2008 from $30.94 million in 2007. This decrease was due to the 61 basis point decrease in the average yield on assets, partially offset by the increase in total average earning assets of $7.9 million or 1.7%, from 2007 to 2008. The yield on earning assets declined from 6.82% in 2007 to 6.21% in 2008 due to the decline in market interest rates in the economy at large.
Average loan balances increased 2.2% from $415.5 million in 2007 to $424.7 million in 2008. The tax-equivalent average yield on loans decreased to 6.33% in 2008 compared with 7.01% in 2007. Together, this resulted in a $2.24 million decrease in interest and fee income from loans for 2008 compared with 2007.
Average investment security balances decreased $1.9 million from $39.3 million in 2007 to $37.4 million in 2008. The tax-equivalent average yield on investments increased from 5.00% in 2007 to 5.20% in 2008. Together, there was a decrease in interest and dividend income on security investments of $77,000 or 4.0%, from $1.90 million in 2007 to $1.83 million in 2008. On a tax-equivalent basis, the year-to-year decrease in interest and dividend income on security investments was $16,000. Interest income on federal funds sold decreased $59,000 from 2007 to 2008 as average balances and yield declined $572,000 and 235 basis points, respectively, from 2007 to 2008.
Total interest expense decreased $2.88 million or 23.5% from $12.27 million in 2007 to $9.39 million in 2008 primarily due to the decline in market interest rates in the economy. Interest paid on deposits decreased $2.55 million or 25.9% from $9.85 million in 2007 to $7.30 million in 2008. Average premium money market account balances decreased $3.0 million from 2007 to 2008 while their average rate decreased from 3.99% to 2.23% over the same period resulting in $1.32 million less interest expense in 2008. Average time deposit balances decreased $1.4 million from 2007 to 2008 while the average rate on time deposits decreased from 4.44% to 3.67% resulting in $1.02 million less interest expense in 2008. Average NOW deposit balances increased $11.9 million from 2007 to 2008 while the average rate on NOW accounts decreased from 1.28% to 0.95% resulting in $124,000 less interest expense in 2008.
Interest expense on federal funds purchased decreased $125,000 from 2007 to 2008 due to the decline in the average rate paid from 5.42% in 2007 to 2.18% in 2008. Interest expense on FHLB of Atlanta advances decreased $33,000 from 2007 to 2008 due to the decline in the average rate paid from 5.28% in 2007 to 3.66% in 2008, partially offset by the $14.3 million increase in average FHLB advances. The average rate on total interest-bearing liabilities decreased from 3.30% in 2007 to 2.42% in 2008.
2007 COMPARED WITH 2006
Net interest income decreased $574,000 or 3.0% to $18.68 million for the year ended December 31, 2007 from $19.25 million for the year ended December 31, 2006. The decrease in net interest income was due to the Company's net interest margin decreasing from 4.28% in 2006 to 4.14% in 2007, primarily due to the flat and inverted yield curve through the first three quarters of 2007, as well as competitive pricing. Partially offsetting the impact of the declining net interest margin was the relatively small impact of total average earning assets increasing from $455.5 million in 2006 to $457.5 million in 2007. The percentage of average earning assets to total assets increased in 2007 to 93.1% from 92.8% in 2006.
The net interest margin pressure caused by the economic environment of a flat and inverted yield curve proved to be challenging for the Bank during much of 2007. At June 30, 2004, just as the Federal Open Market Committee (the "Fed") began raising the federal funds rate, the yield on a three month maturity treasury bond was 1.37% or 253 basis points below the 3.90% yield on a five year treasury and 332 basis points below the 4.69% yield on a 10 year treasury. At October 30, 2006, that yield had inverted to the point that a three month treasury was yielding 5.12%, while the five year and ten year treasury were yielding 4.74% and 4.77%, respectively. The yield curve changed from a more than 250 basis point premium for a longer investment to a position where there is no premium or, in fact, a discount. This presented funding and interest margin management pressures, as a flat or inverted yield curve significantly increased competition for deposits and their cost. While deposit costs rapidly increased, the lack of a similar movement in longer-term rates limited the yield increase on fixed rate loans. During the fourth quarter of 2007, the Fed began lowering the federal funds rate, and the shape of the yield curve became less flat and more positively sloped. As a result, the net interest margin for the fourth quarter of 2007 improved to 4.16% as compared to 3.98% for the fourth quarter of 2006.
Total interest income increased $792,000 or 2.6% to $30.94 million in 2007 from $30.15 million in 2006. This increase was due to the increase in total average earning assets of $2.0 million or 0.4%, from 2006 to 2007, as well as the 15 basis point increase in the average yield.
Average loan balances increased from $409.6 million in 2006 to $415.5 million in 2007. The average yield on loans increased to 7.01% in 2007 compared with 6.90% in 2006. Together, this resulted in an $877,000 increase in interest and fee income from loans for 2007 compared with 2006.
Average investment security balances decreased $4.3 million from $43.6 million in 2006 to $39.3 million in 2007. The tax-equivalent average yield on investments increased from 4.63% in 2006 to 5.00% in 2007. Together, there was a decrease in interest and dividend income on security investments of $91,000 or 4.5%, from $1.99 million in 2006 to $1.90 million in 2007. Interest income on federal funds sold decreased $1,000 from 2006 to 2007 as average balances and yield were virtually the same in both 2006 and 2007.
Total interest expense increased $1.37 million or 12.5% from $10.90 million in 2006 to $12.27 million in 2007 primarily due to the outflow of deposits from the Bank's noninterest-bearing demand deposits and the growth in the Bank's Premium money market account, as well as its time deposit accounts and NOW deposit accounts. Interest paid on deposits increased $1.97 million or 25.0% from $7.88 million in 2006 to $9.85 million in 2007. Average Premium money market account balances increased $21.3 million from 2006 to 2007 while their average rate increased from 3.98% to 3.99% over the same period resulting in an additional $856,000 of interest expense in 2007. Average time deposit balances increased $5.2 million from 2006 to 2007 while the average rate on time deposits increased from 4.06% to 4.44% resulting in an additional $693,000 of interest expense in 2007. Average NOW deposit balances increased $5.2 million from 2006 to 2007 while the average rate on NOW accounts increased from 0.59% to 1.28% resulting in an additional $528,000 of interest expense in 2007.
Interest expense on federal funds purchased decreased $209,000 from 2006 to 2007 due to the $3.9 million decrease in average federal funds purchased. Interest expense on FHLB of Atlanta advances decreased $333,000 from 2006 to 2007 due to the $7.3 million decrease in average FHLB advances. The average rate on total interest-bearing liabilities increased from 2.99% in 2006 to 3.30% in 2007.
The following table sets forth information relating to the Company's average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated and the average yields and rates paid for the periods indicated. These yields and costs are derived by dividing income or expense by the average daily balances of assets and liabilities, respectively, for the periods presented.
AVERAGE BALANCES, INCOME AND EXPENSES, AND AVERAGE YIELDS AND RATES
12 Months Ended
12 Months Ended December 31, 2008 12 Months Ended December 31, 2007 December 31, 2006
Average Income/ Average Average Income/ Average Average Income/ Average
Balances Expense Rate Balances Expense Rate Balances Expense Rate
(Dollars in thousands)
ASSETS:
Loans
Taxable $ 414,000 $ 26,275 6.35 % $ 406,545 $ 28,551 7.02 % $ 400,218 $ 27,647 6.91 %
Tax-exempt(1) 8,304 610 7.35 % 7,613 554 7.28 % 8,069 595 7.37 %
Nonaccrual(2) 2,405 - 1,329 - 1,283 -
Total Loans 424,709 26,885 6.33 % 415,487 29,105 7.01 % 409,570 28,242 6.90 %
Securities
Taxable 32,077 1,591 4.96 % 36,679 1,781 4.86 % 42,615 1,941 4.55 %
Tax-exempt(1) 5,362 356 6.64 % 2,619 182 6.95 % 1,015 80 7.85 %
Total securities 37,439 1,947 5.20 % 39,298 1,963 5.00 % 43,630 2,021 4.63 %
Deposits in banks 2,030 36 1.77 % 921 34 3.64 % 501 26 5.25 %
Federal funds sold 1,227 33 2.69 % 1,800 92 5.04 % 1,832 92 5.03 %
Total earning assets 465,405 28,901 6.21 % 457,506 31,194 6.82 % 455,533 30,381 6.67 %
Less: Reserve for loan losses (4,359 ) (4,451 ) (4,426 )
Cash and due from banks 14,115 15,037 16,457
Bank premises and equipment, net 8,226 7,399 7,996
Other assets 17,722 16,057 15,217
Total Assets $ 501,109 $ 491,548 $ 490,777
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LIABILITIES & SHAREHOLDERS' EQUITY: Deposits Demand deposits $ 67,541 $ 75,446 $ 84,988 Interest-bearing deposits NOW accounts 84,294 799 0.95 % 72,403 923 1.28 % 67,190 395 0.59 % Money market accounts 21,764 306 1.41 % 26,516 391 1.47 % 36,159 504 1.39 % Premium money market accounts 68,420 1,524 2.23 % 71,385 2,850 3.99 % 50,134 1,994 3.98 % Savings accounts 31,482 148 0.47 % 32,499 137 0.42 % 36,972 131 0.35 % Time deposits 123,424 4,524 3.67 % 124,850 5,547 4.44 % 119,650 4,854 4.06 % . . . |
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