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| FSBK > SEC Filings for FSBK > Form 10-Q on 6-May-2009 | All Recent SEC Filings |
6-May-2009
Quarterly Report
The Company's common stock is traded on the NASDAQ Global Select Market under the symbol "FSBK".
Comparison of Financial Condition at March 31, 2009 and December 31, 2008. Total assets were $875.9 million at both March 31, 2009 and December 31, 2008. Earning assets were $812.7 million at March 31, 2009 compared to $808.6 million at December 31, 2008, reflecting the net change in the composition of earning assets, as further discussed below. Earning assets were 92.8% of total assets at March 31, 2009 compared to 92.3% at December 31, 2008.
Interest-bearing overnight deposits in financial institutions were $7.2 million at March 31, 2009, compared to $5.8 million at December 31, 2008. Overnight funds are available to fund loan originations, liquidity management activities and daily operations of the Bank.
Investment securities available for sale were $26.0 million at March 31, 2009, compared to $36.6 million at December 31, 2008. There were no maturities of investment securities available for sale during the quarter ended March 31, 2009, compared to $3.0 million of maturities during the quarter ended March 31, 2008. Proceeds from investment maturities are used to fund liquidity management and daily operations of the Bank. The Bank sold $10.5 million of investment securities available for sale during the quarter ended March 31, 2009, compared to none sold during the quarter ended March 31, 2008.
Mortgage-backed securities available for sale were $50.4 million at March 31, 2009, compared to $32.0 million at December 31, 2008. The Bank may sell mortgage-backed securities to support a more balanced sensitivity to future interest rate changes and may also securitize mortgage loans held for sale into mortgage-backed securities to maintain sufficient liquidity levels. During each of the quarters ended March 31, 2009 and 2008, the Bank sold no mortgage-backed securities available for sale. During the quarter ended March 31, 2009, $21.3 million of mortgage loans held for sale were securitized into mortgage-backed securities available for sale, compared to none securitized during the quarter ended March 31, 2008.
Mortgage-backed securities held for investment were $729,000 at March 31, 2009, compared to $832,000 December 31, 2008, reflecting scheduled principal payments.
Based on current market prices, investment and mortgage-backed securities available for sale declined in value by a net of $103,000 at March 31, 2009. See "Note 4. Comprehensive Income" of "Notes to Consolidated Financial Statements (Unaudited)" for additional information.
Loans held for sale were $17.2 million at March 31, 2009 compared to $5.6 million at December 31, 2008. Proceeds from loan sales were $7.5 million for the quarter ended March 31, 2009, compared to $12.2 million for the quarter ended March 31, 2008. The Bank also sells certain mortgage loans to support a more balanced sensitivity to future interest rate changes. Proceeds from loans sales are used to fund liquidity needs of the Bank, including new loan originations, repayment of borrowings, deposit outflows and general operations of the Bank. Loans serviced for others were $254.2 million at March 31, 2009, compared to $255.5 million at December 31, 2008.
Net loans and leases receivable held for investment declined to $718.8 million at March 31, 2009 from $739.2 million at December 31, 2008. During the quarter ended March 31, 2009, certain loans held for investment were subjects of foreclosure and transferred to other real estate owned, as discussed below. In addition, a portion of the proceeds from principal repayments on loans held for investment are also used to fund the liquidity needs of the Bank, as discussed above.
Non-accrual loans improved to $6.9 million at March 31, 2009, from $10.7 million at December 31, 2008, reflecting management's efforts of improving the Bank's credit quality. Restructured loans were $4.3 million at both March 31, 2009 and December 31, 2008. The level of non-accrual and restructured loans is attributable to the current recessionary economic environment. Downward pressure has been placed on the housing and real estate markets, significantly impacting property values in the Bank's market area and credit quality of certain borrowers. Management believes it has thoroughly evaluated its non-performing loans and they are either well collateralized or adequately reserved. However, there can be no assurance in the future that regulators, increased risks in the loans portfolio, adverse changes in economic conditions or other factors will not require further adjustments to the allowance for credit losses.
Other real estate owned increased to $10.6 million at March 31, 2009 from $7.7 million at the December 31, 2008, reflecting foreclosures of certain non-performing loans, net of sales. Other real estate owned consists of residential and commercial properties, developed building lots and a partially developed residential subdivision. During the quarter ended March 31, 2009, the Bank recorded $1.3 million of fair value adjustments to other real estate owned. The Bank believes the adjusted carrying values of these properties are representative of their fair market values, although there can be no assurances that the ultimate sales will be equal to or greater than the carrying values. See "Note 6. Fair Value Heirarchy" of "Notes to Consolidated Financial Statements (Unaudited)" for additional information.
Deposits increased to $720.4 million at March 31, 2009, from $716.4 million at December 31, 2008. Demand accounts (personal and business checking accounts and money market accounts) increased to $224.2 million at March 31, 2009 from $223.4 million at December 31, 2008.
Time deposits increased to $469.6 million at March 31, 2009 from $466.5 million at December 31, 2008. During the quarter ended March 31, 2009, the Bank chose to not match higher time deposit rates being offered by certain competitive financial institutions in its market area, in order to control its time deposit cost. The Bank began repricing certain new and maturing time deposits at lower rates, and combined with the growth of lower costing checking accounts, is attempting to effectively manage its deposit cost.
Borrowed money consisting of FHLB advances and repurchase agreements declined to $49.6 million at March 31, 2009 from $52.6 million at December 31, 2008. FHLB advances were $45.0 million at March 31, 2009 and December 31, 2008, respectively, representing fixed rate advances with original terms ranging from 18 to 36 months at a weighted average cost of 3.01%, which the Bank has used as a long-term tool of managing its cost of funds. Repurchase agreements (cash management accounts for commercial banking customers) were $4.6 million at March 31, 2009, compared to $7.6 million at December 31, 2008.
Stockholders' equity was $87.8 million at both March 31, 2009 and December 31, 2008. The equity to assets ratio also remained constant at 10.0% at both March 31, 2009 and December 31, 2008, reflecting the net effect of current quarterly earnings, dividend payments, changes in accumulated other comprehensive income and the change in the volume of assets. See "Consolidated Statements of Stockholders' Equity" for additional information.
Accumulated other comprehensive income was $1.1 million at March 31, 2009 compared to $1.2 million at December 31, 2008, reflecting the change in net market value of the investment portfolio based on current market prices. See "Note 4. Comprehensive Income" of "Notes to Consolidated Financial Statements (Unaudited)" for additional information.
The Bank is subject to various capital requirements administered by federal and state banking agencies. As of March 31, 2009, the Bank's regulatory capital ratios were in excess of all regulatory requirements and are as follows: Total Risk-Based Capital - 12.7%; Tier 1 Risk-Based Capital - 11.4%; and Tier 1 Leverage Capital - 9.2%. See "Liquidity and Capital Resources" below for additional information.
On March 26, 2009, the Company declared a cash dividend of $0.20 per share, payable April 23, 2009 to stockholders of record as of April 8, 2009. This dividend payment represents a 95.2% payout ratio of the basic earnings per share for the quarter ended March 31, 2009, and is the Company's forty-eighth consecutive quarterly cash dividend.
The Company purchased no shares of its common stock during the quarter ended March 31, 2009, compared to 105,241 purchased during the quarter ended March 31, 2008. Common stock is purchased through both private and open market transactions pursuant to a stock repurchase plan adopted by the board of directors. Shares acquired through the repurchase plan are held as treasury stock, at cost. Treasury shares were 1,516,126 totaling $32.2 million at March 31, 2009 and December 31, 2008, respectively. Treasury shares are used for general corporate purposes including the exercise of stock options and providing shares for potential future stock splits.
There were no shares issued from the exercise of stock options during the quarter ended March 31, 2009, compared to 80,749 shares issued during the quarter ended March 31, 2008. During the quarter ended March 31, 2009, there were no shares, compared to 20,817 shares during the quarter ended March 31, 2008, that were tendered by stock option plan participants to pay for the exercise price of stock options being exercised and income taxes incident to such option exercises.
Comparison of Operating Results - Quarter ended March 31, 2009 and 2008. Net income for the quarter ended March 31, 2009 was $2.0 million, compared to $3.9 million for the quarter ended March 31, 2008. Diluted earnings per share were $0.21 per share for the quarter ended March 31, 2009, compared to $0.40 per share for the quarter ended March 31, 2008.
The decline in net earnings during the quarter ended March 31, 2009 results primarily from increased provision for credit losses, the decline in net interest margin (significantly influenced by the Federal Reserve's 400 basis point rate cuts since December 2007), increased FDIC insurance premiums and expenses associated with the increase in other real estate owned. Like many financial institutions in the Bank's market area, current period earnings have been influenced by an economy moving towards a recessionary environment. Economic pressure on the housing and real estate markets is impacting property values and credit quality issues. Competitive pressure continues to impact loan growth, deposit flows and rates paid for loans and deposits
The Bank has faced many challenges resulting from the current recessionary economic impact on the housing and real estate markets. The Bank continues to monitor and evaluate all significant loans in its portfolio, and will continue to manage its credit risk exposure in anticipation of future stabilization of the real estate market. Management believes competition and pricing pressures will continue on both deposits and loans during the remainder of 2009 and into 2010. The amount and timing of any future Federal Reserve rate cuts remains uncertain, and may further impact the Bank, particularly if those cuts are significant.
Key performance ratios are return on average assets (ROA), return on average equity (ROE), and efficiency. ROA was .9% and ROE was 9.1% for the quarter ended March 31, 2009. The efficiency ratio was 55.7% for the quarter ended March 31, 2009, reflecting the Bank's efforts of net interest income management, noninterest income management and controlling operating costs.
Interest Income. Interest income declined to $12.6 million for the quarter ended March 31, 2009, from $16.4 million for the quarter ended March 31, 2008. This decline has been significantly influenced by the Federal Reserve's 400 basis point rate cuts since December 2007, and a decline in the volume of average interest-earning assets between the respective periods. Average interest-earning assets were $812.8 million for the quarter ended March 31, 2009, compared to $858.7 million for the quarter ended March 31, 2008, reflecting the slow down in loan origination volume, the increase in other real estate owned and the level of non-performing loans, as discussed above. The yield on average interest-earning assets was 6.2% for the quarter ended March 31, 2009, compared to 7.6% for the quarter ended March 31, 2008.
Interest Expense. Interest expense declined to $4.6 million for the quarter ended March 31, 2009, from $6.8 for the quarter ended March 31, 2008, reflecting a decline in interest rates between the respective periods and a decline in the volume of average interest-bearing liabilities. Average deposits and borrowings were $781.5 million for the quarter ended March 31, 2009, compared to $822.1 million for the quarter ended March 31, 2008. The effective cost of funds was 2.4% for the quarter ended March 31, 2009, compared to 3.3% for the quarter ended March 31, 2008. The Company has been able to improve its cost of funds by the combination of deposit repricing, and the rollover of time deposits and the repositioning of borrowings within the lower interest rate environment.
Net Interest Income. Net interest income declined to $7.9 for the quarter ended March 31, 2009, compared to $9.6 million for the quarter ended March 31, 2008. The interest rate spread (the difference between the effective yield on average earning assets and the effective cost of average deposits and borrowings) was 3.8% for the quarter ended March 31, 2009, compared to 4.3% for the quarter ended March 31, 2008. The net yield on interest-earning assets (net interest income divided by average interest-earning assets) was 3.9% for the quarter ended March 31, 2009, compared to 4.5% for the quarter ended March 31, 2008. The decline in interest rate spread and net yield on interest-earning assets is a direct result of those same events impacting interest income and interest expense, as discussed above.
Provision for Credit Losses. The Bank's methodology for determining its provision for credit losses includes amounts specifically allocated to credits that are individually determined to be impaired, as well as general provisions allocated to groups of loans that have not been individually assessed for impairment. The Bank recorded $1.5 million provision for credit losses in the quarter ended March 31, 2009, compared to no provision in the quarter ended March 31, 2008. The provision for credit losses was necessary to replenish $2.3 million of net charge offs in the quarter ended March 31, 2009, and strengthen the Bank's ability to better manage the volume of non-performing loans, as discussed above.
Allowance for Credit Losses. The Bank maintains general and specific allowances for loan and lease losses and unfunded loan commitments (collectively the "allowance for credit losses") at levels the Bank believes are adequate to absorb probable losses inherent in the loan and lease portfolio and in unfunded loan commitments. The Bank has developed policies and procedures for assessing the adequacy of the allowance for credit losses that reflect the assessment of credit risk. This assessment includes an analysis of qualitative and quantitative trends in the levels of classified loans. In developing this analysis, the Bank relies on estimates and exercises judgment in assessing credit risk. Future assessments of credit risk may yield different results, depending on changes in the qualitative and quantitative trends, which may require increases or decreases in the allowance for credit losses.
The Bank uses a variety of modeling and estimation tools for measuring its credit risk, which are used in developing the allowance for credit losses. The factors supporting these allowances do not diminish the fact that the entire allowance for credit losses is available to absorb probable losses in both the loan and leases portfolio and in unfunded loan commitments. The Bank's principal focus is on the adequacy of the total allowance for credit losses. Based on the overall credit quality of the loan and lease receivable portfolio, the Bank believes it has established the allowance for credit losses pursuant to generally accepted accounting principles, and has taken into account the views of its regulators and the current economic environment. However, there can be no assurance in the future that regulators, increased risks in its loans and leases portfolio, changes in economic conditions and other factors will not require additional adjustments to the allowance for credit losses.
The Bank's allowance for credit losses was $11.2 million at March 31, 2009, compared to $12.0 million at December 31, 2008. The ratio of the allowance for credit losses to net loans and leases was 1.5% at March 31, 2009, compared to 1.6% at December 31, 2008. See "Note 3. Allowance for Credit Losses" of "Notes to Consolidated Financial Statements (Unaudited)" and "Critical Accounting Policies" for additional information.
Noninterest Income. Noninterest income was $2.8 million for the quarter ended March 31, 2009, compared to $2.7 million for the quarter ended March 31, 2008. Noninterest income consists of fees, service charges and servicing fees earned on loans, service charges and insufficient funds fees collected on deposit accounts, gains from loan and securities sales and other miscellaneous income.
The Bank continues to maintain a consistent level of noninterest income across both loan and deposit service offerings. Fees, service charges and servicing fees collected were $1.9 million for the quarter ended March 31, 2009, compared to $2.1 million for the quarter ended March 31, 2008. Fees, service charges and servicing fees collected during each period depends on the collection of fees and service charges related loan and deposit account transactions processed during each period, and servicing fees earned on loans serviced for others.
The Bank recorded $258,000 of gains from loan sales during the quarter ended March 31, 2009, compared to $230,000 during the quarter ended March 31, 2008. Fixed-rate residential mortgage loans were sold to reduce exposure to interest rate and credit risk, and provide a more balanced sensitivity to future interest rate changes. The Bank also recorded $466,000 of gains on the sale of investment securities during the quarter ended March 31, 2009, compared to none during the quarter ended March 31, 2008.
Noninterest Expense. Noninterest expenses were $6.0 million for both the quarter ended March 31, 2009 and the quarter ended March 31, 2008. The largest component of noninterest expense is compensation and fringe benefits, which declined to $3.4 million for the quarter ended March 31, 2009, from $3.6 million for the quarter ended March 31, 2008, reflecting the Bank' success in managing its human resources cost.
FDIC insurance premiums increased to $140,000 for the quarter ended March 31, 2009, from $22,000 for the quarter ended March 31, 2008. One-time FDIC insurance assessment credits received under the Federal Deposit Reform Act of 2005 were exhausted in the 2008 second quarter.
Expenses attributable to the current volume of other real estate owned were $227,000 in the quarter ended March 31, 2009, compared to $5,000 in the quarter March 31, 2008. Other noninterest expenses including premises and equipment, advertising, data processing, repairs and maintenance, office supplies, professional fees, taxes and insurance, etc., have remained relatively flat during the respective periods.
Income Taxes. Income tax expense was $1.2 million for the quarter ended March 31, 2009, compared to $2.4 million for the quarter ended March 31, 2008. The changes in the amounts of income tax provisions reflect the changes in pretax income and the estimated income tax rates in effect during each period. The effective income tax rates were 38.1% for the quarter ended March 31, 2009, compared to 38.2% for the quarter ended March 31, 2008. See "Critical Accounting Policies" below for additional information.
Liquidity and Capital Resources. Liquidity generally refers to the Bank's ability to generate adequate amounts of funds to meet its cash needs. Adequate liquidity guarantees that sufficient funds are available to meet deposit withdrawals, fund future loan commitments, maintain adequate reserve requirements, pay operating expenses, provide funds for debt service, pay dividends to stockholders, and meet other general commitments. The Bank must maintain certain regulatory liquidity requirements of liquid assets to deposits and short-term borrowings. At March 31, 2009, the Bank had cash, deposits in banks, investment securities, mortgage-backed securities and loans held for sale totaling $119.1 million, compared to $101.7 million at December 31, 2008, representing 15.7% and 13.9% of deposits and short-term borrowings for the respective periods.
The Bank believes it can meet future liquidity needs with existing funding sources. The Bank's primary sources of funds are deposits, payments on loans and mortgage-backed securities, maturities of investment securities, earnings and funds provided from operations, the ability to borrow from the FHLB of Atlanta and the availability of loans held for sale. While scheduled repayments of loans and mortgage-backed securities are relatively predictable sources of funds, deposit flows and general market interest rates, economic conditions and competition substantially influence loan prepayments. In addition, the Bank manages its deposit pricing in order to maintain a desired deposit mix.
The FDIC requires the Bank to meet a minimum leverage capital requirement of Tier I capital (consisting of retained earnings and common stockholder's equity, less any intangible assets) to assets ratio of 4%. The FDIC also requires the Bank to meet a ratio of total capital to risk-weighted assets of 8%, of which at least 4% must be in the form of Tier I capital. The North Carolina Office of the Commissioner of Banks requires the Bank to maintain a capital surplus of not less than 50% of common capital stock. The Bank was in compliance with all regulatory capital requirements at March 31, 2009 and December 31, 2008.
Critical Accounting Policies. The Company has identified the policies below as critical to its business operations and the understanding of its results of operations. The impact and any associated risks related to these policies on the Company's business operations is discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations where such policies affect reported and expected financial results.
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. Estimates affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Loans Impairment, Allowance for Loan and Lease Losses and Unfunded Loan Commitments. A loan or lease is considered impaired, based on current information and events, if it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan or lease agreement. Uncollateralized loans are measured for impairment based on the present value of expected future cash flows discounted at the historical effective interest rate, while all collateral-dependent loans are measured for impairment based on the fair value of the collateral. The Bank uses several factors in determining if a loan or lease is impaired. The internal asset classification procedures include a thorough review of significant loans, leases and lending relationships and include the accumulation of related data. This data includes loan and lease payment status, borrowers' financial data and borrowers' operating factors such as cash flows, operating income or loss, etc.
The allowance for credit losses is increased by charges to income and decreased by charge-offs (net of recoveries). Management's periodic evaluation of the adequacy of the allowance for credit losses is based on past loan and lease loss experience, known and inherent risks in loans and leases and unfunded loan commitments, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, and current economic conditions. While management believes that it has established the allowances for credit losses in accordance with accounting principles generally accepted in the United States of America and has taken into account the views of its regulators and the current economic environment, there can be no assurance in the future that regulators or risks in its loans and leases and unfunded loan commitments will not require additional adjustments to the allowance for credit losses.
Income Taxes. Deferred tax asset and liability balances are determined by application to temporary differences the tax rate expected to be in effect when taxes will become payable or receivable. Temporary differences are differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.
Off-Balance Sheet Arrangements. The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Company's exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
Forward Looking Statements. The Private Securities Litigation Reform Act of 1995 states that disclosure of forward looking information is desirable for investors and encourages such disclosure by providing a safe harbor for forward looking statements by corporate management. This Form 10-Q, including Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward looking statements that involve risk and uncertainty. In order to comply with terms of safe harbor, the Company notes that a variety of risks and uncertainties could cause its actual results and experience to differ materially from anticipated results or other expectations expressed in the Company's forward looking statements. There are risks and uncertainties that may affect the operations, performance, development, growth projections and results of the Company's business. They include, but are not limited to, economic growth, interest rate movements, timely development of technology enhancements for products, services and operating systems, the impact of competitive . . .
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