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| BKOR > SEC Filings for BKOR > Form 10-Q on 15-May-2009 | All Recent SEC Filings |
15-May-2009
Quarterly Report
Comparison of Results of Operations for the Three-Month Periods Ending March 31, 2009 and 2008
Net Income
For the three months ended March 31, 2009, the Company increased in net income 64 percent to $100,000 compared to $61,000 for the same period in 2008. The Company recorded a loss in income available to common stockholders of $8,000 in 2009 compared to income available to common stockholders of $61,000 in 2008. Net income per diluted share decreased 100 percent to $0.00 compared to $0.03 for the prior year period. Returns on average assets and average equity were 0.12 percent and 1.83 percent, respectively, for the three months ended March 31, 2009, compared to 0.09 percent and 1.39 percent for the prior year period.
The increase in net income was a result of increases in net interest income, offset by declines in noninterest income, and increases in the provision for loan losses, noninterest expense, and income tax expense.
Net Interest Income
Net interest income was $2.5 million for the three months ended March 31, 2009 compared to $1.9 million for the prior year. The 29 percent increase in net interest income was due both to growth in average earning assets and an increase in the net interest margin in 2009 compared to 2008.
Net interest margin is interest income earned on loans, securities, and other earning assets, less interest expense paid on deposits and borrowings, expressed as a percentage of total average earning assets. The net interest margin for the three months ended March 31, 2009 was 3.24 percent compared to 3.00 percent for the prior year period. The average yield on earning assets for the current period was 6.09 percent compared to 6.89 percent for the prior year period, and the average cost of interest-bearing liabilities was 3.11 percent for the current period compared to 4.19 percent for the prior year period. The net interest margin has increased during the past year as interest-bearing liabilities have repriced downward faster than interest-earning assets.
Provision for Loan Losses
The Company's provision for loan losses for the three months ended March 31, 2009 was $366,000 compared to $164,000 recorded in the prior year period. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level we deem appropriate. In evaluating the allowance for loan losses, we consider factors that include growth and composition of the loan portfolio, historical loan loss experience, individual loans that may have estimated losses, and other relevant factors such as unemployment and changes in general interest rates. The increase in the provision for loan losses from 2008 to 2009 was primarily due to management's determination that a higher allowance for loan losses was needed due to the potential for higher loan charge-offs in future periods. The allowance for loan losses to total loans was 1.11 percent at March 31, 2009, and 1.00 percent at December 31 and March 31, 2008.
Noninterest Income
Noninterest income totaled $828,000 for the three months ended March 31, 2009, up $74,000, or 10 percent, from $754,000 for the same period in 2008.
Service fees and charges, which represent a relatively stable and predictable source of noninterest income, totaled $203,000 for the three months ended March 31, 2009, a 15 percent increase over the $176,000 of service fees and charges earned for same period in 2008.
Mortgage loan fee income was positively impacted in 2009 by low mortgage rates as well as more mortgage originators in 2009 compared to 2008, and totaled $156,000 for the three months ended March 31, 2009, a 64 percent increase over the $95,000 of mortgage loan fee income earned for 2008.
The Bank's Investment Services Group, which services its banking offices, and the Oak Ridge Wealth Management division, which was formed in 2005 and operates independently of the Bank, comprise all of the investment and insurance commissions noninterest income category. Investment and insurance commissions totaled $174,000 for the three months ended March 31, 2009, a 16 percent decrease over the $206,000 earned in 2008. A large part of the decrease in this category was due to a decline in fees tied to the market value of assets under management due to lower market prices in 2009 on most investments.
Fee income from accounts receivable financing totaled $174,000 for the three months ended March 31, 2009, a 4 percent increase over the $167,000 earned in the same period in 2008. The small increase in income was caused by an increase in new customers offset by a general decline in account receivable balances due to the weak economy.
Income earned on bank owned life insurance totaled $31,000 for the three months ended March 31, 2009, a 23 percent decrease over the $40,000 earned in the same period in 2008, due to lower rates on the underlying insurance policies in 2009 as compared to 2008.
Other service charges and fees benefited from the Bank's increased number of product offerings and deposit accounts, and totaled $90,000 for the three months ended March 31, 2009, a 29 percent increase over the $70,000 earned in 2008.
Noninterest Expense
Noninterest expenses were $2.7 million for the three months ended March 31, 2009 compared to $2.4 million for the prior year period. The $300,000 or 10 percent increase reflects the continuing efforts and associated expenses related to servicing existing Bank clients as well as attracting new clients.
Salaries and employee benefits for the three months ended March 31, 2009 were $1.4 million reflecting a $100,000 increase when compared to the $1.3 million for the same period in 2008. Most of the increase is due to average salary increases of approximately 4% that were effective January 1, 2009.
Occupancy expense for the three months ended March 31, 2009 was $186,000 reflecting a $52,000 increase when compared to the $134,000 for the same period in 2008. Increases in repairs and maintenance expenses associated with the Bank's infrastructure and increases in rental expense for the new location for the Bank's wealth management division contributed to the overall upward movement in this expense category.
Equipment expense for the three months ended March 31, 2009 was $170,000 reflecting a $30,000 increase when compared to the $140,000 for the same period in 2008. Increased depreciation expense associated with 2008 and 2009 equipment purchases contributed to the majority of the increase in this expense category.
Stationary and supplies for the three months ended March 31, 2009 was $55,000 reflecting a $7,000 decrease when compared to the $62,000 for the same period in 2008. The decrease was due to an overall awareness of Bank employees to monitor unnecessary expenses in this area, as well as a decline in paper associated with account statements due to the introduction of e-statements for customers in 2008.
Other real estate owned expenses and write-downs totaled $119,000 for the three months ended March 31, 2009. There was no real estate owned or associated expenses or write-downs in 2008. The write-downs in real estate owned were due to the continuing evaluation of the net realizeable values of these types of assets that are on the Bank's balance sheet. A general decline in local housing and real estate values during the first quarter of 2009 contributed to the write-downs. Bank management believes that the local real estate market has improved slightly since March 31, 2009.
FDIC assessment expense for the three months ended March 31, 2009 was $73,000 reflecting a $23,000 increase when compared to the $50,000 for the same period in 2008. The increase is largely due to the Bank's growth from 2008 to 2009. On February 27, 2009, the Board of Directors of the Federal Deposit Insurance Corporation (FDIC) voted to amend the restoration plan for the Deposit Insurance Fund. The Board took action by imposing a special assessment on insured institutions of 20 basis points, implementing changes to the risk-based assessment system, and increased regular premium rates for 2009, which banks must pay on top of the special assessment. The 20 basis point special assessment on the industry will be as of June 30, 2009 payable on September 30, 2009. As a result of the special assessment and increased regular assessments, the Company projects it will experience an increase in FDIC assessment expense of approximately $840,000 from 2008 to 2009. The 20 basis point special assessment represents $600,000 of this increase. On March 5, 2009, the FDIC Chairman announced that the FDIC intends to lower the special assessment from 20 basis points to 10 basis points. The approval of the cutback is contingent on whether Congress clears legislation that would expand the FDIC's line of credit with the Treasury to $100 billion. Legislation to increase the FDIC's borrowing authority on a permanent basis is also expected to advance to Congress, which should aid in reducing the burden on the industry. The assessment rates, including the special assessment, are subject to change at the discretion of the Board of Directors of the FDIC.
Professional, telecommunication and other expenses were relatively unchanged from 2008 to 2009, reflecting a strategy by the Bank to manage expenses due to the overall weak economic environment.
Income Taxes
Income tax expense was $54,000 for the three months ended March 31, 2009 and $36,000 for the same period in 2008. The increase in income tax expense from 2008 to 2009 was primarily due to a higher net income before provision for income taxes in 2008 as compared to 2009.
Analysis of Financial Condition from December 31, 2008 to March 31, 2009
Total assets increased to $345.3 million at March 31, 2009, or 5 percent, from $320.7 million at December 31, 2008. The primary contributors to the growth between the two periods were increases in cash and due from banks, available-for-sale securities, loans receivable, and property and equipment of $9.9 million, $12.8 million, $4.7 million, and $1.2 million, respectively.
Cash and Due from Banks
Cash and due from banks totaled $13.9 million at March 31, 2009, up $9.9 million, or 247 percent, from $4.0 million at December 31, 2008. The large increase was due to the inability of the Bank's primary correspondent bank to place Federal Funds sold with other banks. On Friday, May 1, 2009, Silverton Bank, National Association ("Silverton"), Atlanta, Georgia, the Bank's primary correspondent bank, was closed by the Office of the Comptroller of the Currency (OCC). Subsequently, the Federal Deposit Insurance Corporation (FDIC) was named Receiver.
Silverton Bridge Bank, N.A. has been chartered as a new national bank by the OCC and controlled by the FDIC in accordance with section 11(n) of the Federal Deposit Insurance Act. A bridge bank allows a failed bank to be liquidated in an orderly fashion.
The Bank expects to move its primary correspondent banking relationship to another bank in the second quarter of 2009 that will allow excess funds to be invested or earn interest. No losses to the Bank are expected as a result of the failure of Silverton.
Federal Funds Sold
Due to the lack of a Federal Funds program offering by the Bank's correspondent bank, Federal Funds sold declined $3.3 million from December 31, 2008 to March 31, 2009.
Investment Securities
The Company's portfolios of investment securities, which are classified as either available-for-sale or held-to-maturity, consist of government sponsored enterprise, government sponsored enterprises guaranteed mortgage-backed securities, and mortgage backed securities not guaranteed by government sponsored enterprises.
Available-for-sale securities totaled $48.4 million at March 31, 2009, up $12.8 million, or 36 percent, from $35.6 million at December 31, 2008. The large increase was due to the purchase during 2009 of SBA government guaranteed securities and mortgage backed securities not guaranteed by government-sponsored enterprises, offset by repayments on existing available-for-sale securities.
Held-to-maturity securities totaled $12.5 million at March 31, 2009, down $638,000, or 5 percent, from $13.2 million at December 31, 2008. The decrease was due to repayments on existing held-to-maturity securities.
Loans Receivable
The Company makes both commercial and consumer loans to borrowers in all neighborhoods within its market areas, including low- and moderate-income areas. The Company emphasizes commercial loans to small and medium sized businesses, real estate loans, and consumer loans.
Net loans receivable totaled $247.4 million at March 31, 2009, up $4.3 million, or 2 percent, from $243.0 million at December 31, 2008. The increase in loans is a result of the Bank's continuing expansion in the Triad. Although the number of loan opportunities that meet the Bank's underwriting standards has declined, there are some opportunities with existing and new clients of the Bank.
Allowance for Loan Losses and Asset Quality
The allowance for loan losses totaled $2.8 million at March 31, 2009, up $327,000, or 13 percent, from $2.5 million at December 31, 2008.
The allowance for loan losses is maintained at a level considered adequate by management to provide for anticipated loan losses based on management's assessment of various factors affecting the loan portfolio, including a review of problem loans, business conditions and loss experience and an overall evaluation of the quality of the underlying collateral. The allowance is increased by provisions charged to operations and reduced by loans charged off, net of recoveries.
Nonperforming assets to period-end loans increased from 1.09% at December 31, 2008 to 1.67% at March 31, 2009, and nonperforming assets increased from $1.9 million at December 31, 2008 to $4.2 million at March 31, 2009. Management has performed a detailed review of the value of both the collateral securing the nonperforming loans and other real estate owned that comprise total nonperforming assets. This review occurred subsequent to March 31, 2009, and this valuation was the primary factor in the increase in the allowance for loan losses from 1.00% at December 31, 2008 to 1.11% at March 31, 2009. In management's opinion, the nonperforming assets that were added to total nonperforming assets in the first quarter of 2009 were not impaired during the fourth quarter of 2008. Substantially all of the increase in nonperforming assets between the two periods is comprised of loans secured by, or assets owned by the Bank that are either residential lots or residences.
Deposits
Deposits totaled $294.3 million at March 31, 2009, up $23.8 million, or 9 percent, from $270.6 million at December 31, 2008. The increase in noninterest-bearing deposits was due to a Company wide focus on gathering noninterest-bearing deposits, particularly deposits held by business and non-profit entities, as well as the Company's continued expansion into Greensboro, North Carolina. The Bank also believes that some portion of this increase can be attributed to the negative perception of larger financial institutions that has persisted since the current economic slowdown began.
Borrowings
Borrowings, which consist of short and long-term debt, and junior subordinated notes related to trust preferred securities, totaled $23.2 million at March 31, 2009, down $7.0 million, or 23 percent, from $30.2 million at December 31, 2008. The increase in deposits noted above provided the Bank with additional liquidity to repay a Federal Home Loan Bank of Atlanta advance of $7.0 million at maturity.
Stockholders' Equity
Stockholders' equity totaled $26.0 million at March 31, 2009, up approximately $7.8 million, or 43.0 percent, from $18.2 million at December 31, 2008. The majority of the increase was due to the issuance of $7.7 million in preferred stock to the U.S. Treasury as part of its Troubled Asset Relief Program Capital Purchase Program.
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