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| FETM.OB > SEC Filings for FETM.OB > Form 10-Q on 15-May-2009 | All Recent SEC Filings |
15-May-2009
Quarterly Report
same period in 2008. Net loss per share, basic and diluted, was ($0.76) in the
first three months of 2009 compared to ($0.29) net loss per share basic and
diluted for the same period in 2008.
Net Interest Income
Net interest income and average balances and yields on major categories of
interest-earning assets and interest-bearing liabilities for the three months
ended March 31, 2009 and 2008 are summarized in Table 2. The effects of changes
in average interest rates and average balances are detailed in Table 1 below.
Table 1
THREE MONTHS ENDED
MARCH 31,
2009 COMPARED TO 2008
INCREASE (DECREASE)
DUE TO
YIELD/
(000s omitted) TIME VOL RATE TOTAL
Taxable securities $ (6 ) $ (149 ) $ 29 $ (126 )
Tax-exempt securities (2 ) (4 ) 58 52
Federal funds sold (1 ) (92 ) 0 (93 )
Total loans (82 ) (196 ) (735 ) (1,013 )
Loans held for sale 0 2 (6 ) (4 )
Total earning assets (91 ) (439 ) (654 ) (1,184 )
Interest bearing demand deposits (5 ) (17 ) (197 ) (219 )
Savings deposits (2 ) (10 ) (81 ) (93 )
Time CD's $100,000 and over (21 ) (259 ) (202 ) (482 )
Other time deposits (13 ) (11 ) (312 ) (336 )
Other borrowings (5 ) (30 ) (140 ) (175 )
Total interest bearing liabilities (46 ) (327 ) (932 ) (1,305 )
Net Interest Income $ (45 ) $ (112 ) $ 278 $ 121
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As indicated in Table 1, during the three months ended March 31, 2009, net
interest income increased compared to the same period in 2008. While interest
rates and volume on loans have decreased over the past year, deposit interest
expense decreased at a more rapid pace. This is due to the immediate repricing
ability of liquid deposits and the nature of the short term CDs that customers
had been acquiring.
Net interest income (displayed with consideration of full tax equivalency),
average balance sheet amounts, and the corresponding yields for the three months
ended March 31, 2009 and 2008 are shown in Table 2. Net interest income for the
three months ended March 31, 2009 was $4,191,000, an increase of $121,000, or
2.97%, over the same period in 2009. Net interest margin increased due to a
decline in prevailing market rates, which reduced interest income on loans. The
decreases on loans was offset by management's ability to effectively re-price
deposits downward on rate bearing deposits as well as increase the average
balance of non-interest bearing deposits.
Management reviews economic forecasts and strategy on a monthly basis.
Accordingly, the Corporation will continue to strategically manage the balance
sheet structure in an effort to create stability in net interest income. The
Corporation expects to continue to seek out new loan opportunities while
continuing to maintain sound credit quality.
As indicated in Table 2, for the three months ended March 31, 2009, the
Corporation's net interest margin (with consideration of full tax equivalency)
was 3.52% compared with 3.14% for the same period in 2008. This increase is a
result of management's ability to make large downward repricing steps on
interest bearing liabilities. Additionally non-interest bearing deposits
increased when comparing the period ended March 31, 2009 to the period ended
March 31, 2008.
Average earning assets decreased 7.4% or approximately $38,835,000 comparing the
three months of 2009 to the same time period in 2008. Strategic shrinking of the
balance sheet has led to the dramatic decrease. Loans, the highest yielding
component of earning assets, represented 88.3% of earning assets in 2009
compared to 83.9% in 2008. Average interest bearing liabilities decreased 6.9%
or $31,805,000 comparing the first three months of 2009 to the same time period
in 2008. Non-interest bearing deposits amounted to 15.1% of average earning
assets in the first three months of 2009 compared with 13.7% in the same time
period of 2008.
Management continually monitors the Corporation's balance sheet in an effort to
insulate net interest income from significant swings caused by interest rate
volatility. If market rates change in 2009, corresponding changes in funding
costs will be considered to avoid the potential negative impact on net interest
income. The Corporation's policies in this regard are further discussed in the
section titled "Interest Rate Sensitivity Management."
Table 2 Average Balance and Rates
THREE MONTHS ENDED MARCH 31,
2009 2008
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
(000s omitted)(Annualized) BALANCE EXPENSE RATE BALANCE EXPENSE RATE
ASSETS
Securities:
U.S. Treasury and
Government Agencies $ 36,469 $ 377 4.19 % $ 50,229 $ 517 4.14 %
State and Political (1) 14,409 220 6.18 % 14,801 168 4.57 %
Other 3,638 43 4.79 % 5,151 29 2.26 %
Total Securities 54,516 640 4.76 % 70,181 714 4.09 %
Fed Funds Sold 0 0 0.00 % 11,716 93 3.19 %
Loans:
Commercial 333,313 5,082 6.18 % 343,848 5,876 6.87 %
Tax Free (1) 2,752 44 6.48 % 2,009 32 6.37 %
Real Estate-Mortgage 37,606 591 6.37 % 38,247 612 6.44 %
Consumer 52,227 735 5.71 % 53,366 945 7.12 %
Total loans 425,898 6,452 6.14 % 437,470 7,465 6.86 %
Allowance for Loan Losses (10,421 ) (7,804 )
Net Loans 415,477 6,452 6.30 % 429,666 7,465 6.99 %
Loans Held for Sale 2,089 25 4.85 % 1,971 29 5.92 %
TOTAL EARNING ASSETS
CONTINUING OPERATIONS $ 482,503 $ 7,117 5.98 % $ 521,338 $ 8,301 6.40 %
Cash Due from Banks 16,689 13,983
Assets of held for sale
operations 44,880 49,573
All Other Assets 49,856 45,583
TOTAL ASSETS $ 575,640 $ 622,673
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LIABILITIES & SHAREHOLDERS' EQUITY: Deposits: Interest bearing - DDA $ 89,959 $ 216 0.97 % $ 93,624 $ 435 1.87 % Savings Deposits 69,370 97 0.57 % 73,461 190 1.04 % Time CD's $100,000 and Over 131,924 1,414 4.35 % 153,017 1,896 4.98 % Other Time CD's 109,694 888 3.28 % 110,668 1,224 4.45 % Total Deposits 400,947 2,615 2.65 % 430,770 3,745 3.50 % Other Borrowings 29,809 311 4.23 % 31,791 486 6.15 % INTEREST BEARING LIABILITIES $ 430,756 $ 2,926 2.75 % $ 462,561 $ 4,231 3.68 % Non-Interest bearing - DDA 64,973 63,393 Liabilities of held for sale operations 41,364 43,158 All Other Liabilities 1,907 3,709 Shareholders' Equity 36,640 49,852 TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 575,640 $ 622,673 Net Interest Rate Spread 3.23 % 2.72 % Net Interest Income /Margin $ 4,191 3.52 % $ 4,070 3.14 % |
(1) Presented on a fully taxable equivalent basis using a federal income tax rate of 34%.
Allowance and Provision For Loan Losses
The Corporation maintains formal policies and procedures to control and monitor
credit risk. Management believes the allowance for loan losses is adequate to
provide for probable incurred losses in the loan portfolio. While the
Corporation's loan portfolio has no significant concentrations in any one
industry or any exposure in foreign loans, the loan portfolio has a
concentration connected with construction and land development loans. Specific
strategies have been deployed to reduce the concentration level and limit
exposure to this type of lending in the future. The Michigan economy, employment
levels and other economic conditions in the Corporation's local markets may have
a significant impact on the level of credit losses. Management continues to
identify and devote attention to credits that are not performing as agreed. Of
course, deterioration of economic conditions could have an impact on the
Corporation's credit quality, which could impact the need for greater provision
for loan losses and the level of the allowance for loan losses as a percentage
of gross loans. Non-performing loans are discussed further in the section titled
"Non-Performing Assets."
The allowance for loan losses reflects management's judgment as to the level
considered appropriate to absorb probable losses in the loan portfolio. The
Corporation's methodology in determining the adequacy of the allowance is based
on ongoing quarterly assessments and relies on several key elements, which
include specific allowances for identified problem loans and a formula-based
risk-allocated allowance for the remainder of the portfolio. This includes a
review of individual loans, size, and composition of the loan portfolio,
historical loss experience, current economic conditions, financial condition of
borrowers, the level and composition of non-performing loans, portfolio trends,
estimated net charge-offs and other pertinent factors. While we consider the
allowance for loan losses to be adequate based on information currently
available, future adjustments to the allowance may be necessary due to changes
in economic conditions, delinquencies, or loss rates. Although portions of the
allowance have been allocated to various portfolio segments, the allowance is
general in nature and is available for the portfolio in its entirety.
At March 31, 2009, the allowance was $11,405,000, or 2.68% of total loans
compared to $10,455,000, or 2.43%, at December 31, 2008, increasing the
allowance $950,000 during the first three months of 2009. Non performing loan
levels, discussed later, increased during the period and net charge-offs have
increased to $705,000 during the first three months of 2009 compared to $247,000
during the first three months of 2008. Management has reviewed historical losses
and following analysis of those losses, believes that the allowance is
appropriate given identified risk in the loan portfolio based on asset quality.
Table 3 below summarizes loan losses and recoveries for the first three months
of 2009 and 2008. During the first three months of 2009, the Corporation
experienced net charge-offs of $705,000 or .17% of gross loans compared with net
charge-offs of $247,000 or .06% of gross loans in the first three months of
2008. The provision for loan loss was $1,655,000 in the first three months of
2009 and $980,000 for the same time period in 2008. As a result of continuing
credit quality deterioration and the review of historical losses by loan type,
additional provision for loan losses was taken in the first quarter. The
substantial increase in provision for loan loss was to provide specific reserves
for non-performing construction and land development loans, increased
charge-offs and continuing decline in the Michigan economy.
Davison State Bank had net charge-offs of $129,000 in the first three months of
2009 and no loan loss provision for the first quarter of 2009.
Table 3 Analysis of the Allowance for Loan Losses
Three Months Ended March 31,
(000s omitted) 2009 2008
Balance at Beginning of Period $ 10,455 $ 7,592
Charge-Offs:
Commercial, Financial and Agriculture (627 ) (301 )
Real Estate-Mortgage (36 ) (23 )
Installment Loans to Individuals (101 ) (105 )
Total Charge-Offs (764 ) (429 )
Recoveries:
Commercial, Financial and Agriculture 35 148
Real Estate-Mortgage 3 0
Installment Loans to Individuals 21 34
Total Recoveries 59 182
Net Charge-Offs (705 ) (247 )
Provision 1,655 980
Balance at End of Period $ 11,405 $ 8,325
Ratio of Net Charge-Offs to Gross Loans 0.17 % 0.06 %
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Non-Interest Income
Non-interest income decreased during the three months ended March 31, 2009 as
compared to the same period in 2008, primarily due to the decrease in service
charges on deposits and trust and investment services income and an increase in
gain on sale of mortgage loans. Overall non-interest income, of continuing
operations, was $1,140,000 for the three months ended March 31, 2009 compared to
$1,401,000 for the same period in 2008. This represents a decrease of 18.6%.
The most significant category of non-interest income is service charges on
deposit accounts. These fees from continuing operations were $436,000 in the
first three months of 2009, compared to $623,000 for the same period of 2008.
This represents a decrease of 30.0% from year to year. The decrease is a result
of a 32.8% decrease in NSF charges as customers have become more mindful of the
usage of the overdraft privilege product.
Gain on the sale of mortgage loans originated by the Banks and sold into the
secondary market increased 99.2% to $235,000 in the three months ended March 31,
2009 compared to $118,000 in the same period in 2008. As market conditions
continue to be favorable for mortgage rates, consumers in the market have
flocked to refinance their homes, taking advantage of historically low rates.
Management sees this as a short term rise in mortgage refinance and believes
that it will taper off as the year continues.
Trust, investment and financial planning services income decreased $92,000 or
20.2% in the first three months of 2009 compared to the same period in the prior
year. A portion of the decrease is a result of the decline in market values in
which funds are invested into, and income is earned from. In addition, as many
consumers have feared market conditions, they have withdrawn their brokerage
relationships, thus impacting income.
Other operating income decreased by $99,000 or 48.5% to $105,000 in the first
three months of 2009 compared to $204,000 in the same time period in 2008. The
primary driver of the decrease was a loss on the equity investment. A partial
offset of $66,000 can be associated with the collection of building rent from a
property now owned by one of the subsidiary banks. The Banks also increased
service fees collected in relation to debit card services were up by $7,000 year
over year. In addition, one of the Banks received proceeds from a bank owned
life insurance policy providing a benefit of $203,000. Drawing from those
increases, the Banks recognized slightly larger losses on sales of real estate
owned and a reduced collection of fees from servicing other institutions. The
Corporation also realized a $515,000 loss on its equity investment in Valley
Capital Bank headquartered in Mesa, Arizona. This is compared to a $167,000 loss
in the first quarter of 2008. As a DeNovo, Valley Capital Bank was
anticipated to have operating losses during their start-up phase. Valley Capital
Bank is receiving the same economic pressure as other financial institutions
resulting in an increased loan loss provision and other real estate expenses.
Accordingly, the Corporation has recognized its share of the operating loss,
using the equity method of accounting on this investment.
Non-Interest Expense
Total non-interest expense, from continued operations, increased 8.0% to
$5,836,000 in the three months ended March 31, 2009, compared with $5,406,000 in
the same period of 2008. The increase was largely attributed to the estimated
loss on sale of Davison State Bank of $700,000 and an additional $150,000 in
estimated transaction costs in conjunction with an agreement to sell this bank.
In addition, increases in loan and collection expenses related to other real
estate owned, were the largest year-over-year increases. Decreases in salaries
and benefits, furniture and equipment depreciation and advertising expenses,
partially offset the large increases.
Salary and benefit costs, the Corporation's largest non-interest expense
category, were $2,552,000 in the first three months of 2009, compared with
$2,824,000, or a decrease of 9.6%, for the same time period in 2008. The
decrease in cost was due to strategic staff reduction and realignment along with
the elimination of performance incentive payments.
Occupancy expenses, at $503,000, decreased in the three months ended March 31,
2009 compared to the same period in 2008 by $2,000 or 0.4%. The expenses
remained nearly flat from year-to-year as management worked to maintain expenses
through contract and service negotiation.
During the three months ended March 31, 2009, furniture and equipment expenses
were $424,000 compared to $471,000 for the same period in 2008, a decrease of
10.0%. This is the result of decreases, totaling $68,000, in depreciation on
furniture and equipment, as some items have become fully depreciated. The
decreases were partially offset by increases to rental and maintenance of
furniture and equipment. Management continues to scrutinize vendors to improve
contract terms and ensure that only necessary services are being paid for.
Loan and collection expenses, from continuing operations, at $385,000, were up
$237,000 or 160.1% during the three months ended March 31, 2009 compared to the
same time period in 2008. The increase was primarily attributable to an increase
in other loan expense relating to other real estate owned, in the form of
property taxes and property maintenance. As the Banks continue to become owners
of these properties, resulting from the unfavorable changing economy in
Michigan, we anticipate these expenses to be above desired levels until the
economic situation begins to become more favorable.
Advertising expenses of $41,000 in the three months ended March 31, 2009
decreased 51.8% compared with $85,000 for the same period in 2008. The
Corporation has taken a close review of how advertising, sponsorship and
donation funds are shared with the community. As a result, we have reduced our
advertising in local markets and reduced sponsorships of community events, while
still remaining a participating sponsor.
Other operating expenses, from continued operations, were $1,931,000 in the
three months ended March 31, 2009 compared to $799,000 in the same time period
in 2008, an increase of $558,000 or 40.6%. The Corporation recorded a
preliminary loss on the sale of Davison State Bank of $700,000, along with the
accrual of $150,000 in related transaction costs in conjunction with an
agreement to sell this bank. The sale is expected to close later in 2009. These
transactions along with a significant increase in FDIC assessment expense were
the main increases from year to year. The FDIC insurance assessments will
continue to increase, due to the 10 basis point special assessment approved by
the FDIC in 2009. Offsetting these increases were reductions in transportation
expense, director fees, ATM/Debit card expenses, dues and memberships,
conferences and education and other losses.
Financial Condition
Proper management of the volume and composition of the Corporation's earning
assets and funding sources is essential for ensuring strong and consistent
earnings performance, maintaining adequate liquidity and limiting exposure to
risks caused by changing market conditions. The Corporation's securities
portfolio is structured to provide a source of liquidity through maturities and
to generate an income stream with relatively low levels of principal risk. The
Corporation does not engage in securities trading. Loans comprise the largest
component of earning assets and are the Corporation's highest yielding assets.
Customer deposits are the primary source of funding for earning assets while
short-term debt and other sources of funds could be further utilized if market
conditions and liquidity needs change.
The Corporation's total assets were $577 million at March 31, 2009 compared to
total assets of $579 million at December 31, 2008. This includes assets from
discontinued operations of $44 million at March 31, 2009 and $46 million at
December 31, 2008. Loans comprised 72.8% of total assets at March 31, 2009
. . .
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