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| FFHS > SEC Filings for FFHS > Form 10-Q on 15-May-2009 | All Recent SEC Filings |
15-May-2009
Quarterly Report
interest bearing savings accounts. Franklin pays a 10 basis points fee
(annualized) on the balance of each covered account in excess of $250,000, while
the extra deposit insurance is in place. After December 31, 2009, the TAGP will
expire and deposit insurance coverage will revert back to $100,000 per account.
The TLGP also includes the Debt Guarantee Program (DGP), under which the FDIC
guarantees certain senior unsecured debt of FDIC insured institutions and their
holding companies. The Company is eligible to participate in the DGP, although
the Company has not issued, and does not intend to issue, debt under the DGP.
Because the results of operations of Madison and DirectTeller were not material
to the Company's operations and financial condition, the following discussion
focuses primarily on Franklin.
Statements included in this document which are not historical or current facts
are "forward-looking statements" made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995, and are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical results. Factors that could cause financial performance to
differ materially from that expressed in any forward-looking statement include,
but are not limited to, credit risk, interest rate risk, competition, changes in
the regulatory environment and changes in general business and economic trends.
CRITICAL ACCOUNTING POLICIES
The allowance for loan 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 is based on the Company's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions. Changes in the overall local
economy in which the Company operates may impact the allowance for loan losses.
Generally, the Company establishes a specific reserve, instead of a charge-off,
on a loan if the underlying collateral is valued less than the book value. This
allows some flexibility in the future if the collateral value increases. Any
decline in the value of real estate owned is recognized by a write-down of the
book value.
Loans, including impaired loans, are generally classified as non-accrual if they
are past due for a period of more than 90 days, unless such loans are
well-secured and in the process of collection. Loans that are on a current
payment status or past due less than 90 days may also be classified as
non-accrual if repayment in full of principal and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest amounts
contractually due (including arrearages) are reasonably assured of repayment
within an acceptable period of time, and there is a sustained period of
repayment performance by the borrower, in accordance with the contractual terms
of the loan. While a loan is classified as non-accrual, interest income is
generally recognized on a cash basis.
A loan is defined as impaired when, based on current information and events, it
is probable that a creditor will be unable to collect all amounts due according
to the contractual terms of the loan agreement. The Company considers its
investment in one to-four family residential loans and consumer installment
loans to be homogeneous and therefore excluded from separate identification of
impairment. With respect to the Company's investment in non-residential and
multifamily residential real estate loans, the evaluation of impairment is based
on the lower of cost or fair value of the underlying collateral.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Consolidated assets decreased $1.40 million (0.4%) from $318.78 million at
December 31, 2008 to $317.38 million at March 31, 2009. During the first quarter
of 2009, cash and investments increased $2.72
million, loans receivable decreased $4.38 million, borrowings decreased
$17.33 million and deposits increased $16.71 million. The decrease in loans
receivable is due to an increase in the sale of loans, with servicing
transferred to the purchaser, At the beginning of 2009, Franklin increased its
loan origination staff, which will affect the way loans are retained in the
portfolio or sold in the future. The majority of loans originated during the
current quarter, and possibly in the future, will be sold with servicing
transferred to the purchaser. This may cause outstanding loan balances and
interest earned on loans to decline, but origination fees and profit on the sale
of loans to increase. The increase in deposits reflects consumer's moving funds
into insured deposit products from other investments.
Loan disbursements of $69.30 million occurred during the current quarter
compared to loan disbursements of $16.15 million during the three months ended
March 31, 2008. Mortgage loan sales of $54.77 million occurred during the
current three-month period compared to loan sales of $3.71 million in the first
quarter of 2008. The increase in loan disbursements during the current quarter
reflects the increase in the loan origination staff discussed earlier and lower
interest rates which caused many borrowers to refinance their existing loans. At
March 31, 2009, Franklin had $1.71 million of commitments to originate mortgage
loans, $27.15 million of mortgage loans in various stages of processing that
have not been committed, $2.11 million of undisbursed loan funds held on various
construction loans, commitments to sell $27.91 million of mortgage loans and
$18.84 million of undisbursed consumer and commercial lines of credit.
Management believes that sufficient cash flow and borrowing capacity exist to
fund these commitments. Included in loans receivable at March 31, 2009 were
$2.27 million of available-for-sale mortgage loans, at the lower of cost or
market, which were sold in April 2009.
The Company records a zero value for the mortgage loan commitment at inception.
Subsequent to inception, changes in the fair value of the loan commitment are to
be recognized based on changes in the fair value of the underlying mortgage loan
due to interest rate changes, changes in the probability the derivative loan
commitment will be exercised, and the passage of time. In estimating fair value,
the Company assigns a probability to a loan commitment based on an expectation
that it will be exercised and the loan will be funded. At March 31, 2009 and
December 31, 2008, the Company determined that the changes in the value of the
mortgage loan commitment were immaterial.
The Company carefully evaluates all loan sales agreements to determine whether
they meet the definition of a derivative under Statement of Financial Standards
"SFAS" No. 133 as facts and circumstances may differ significantly. If
agreements qualify, to protect against the price risk inherent in derivative
loan commitments, the Company utilizes both "mandatory delivery" and "best
efforts" forward loan sale commitments to mitigate the risk of potential
decreases in the values of loans that would result from the exercise of the
derivative loan commitments. Mandatory delivery contracts are accounted for as
derivative instruments. Generally, the Company's best efforts contracts also
meet the definition of derivative instruments after the loan to the borrower has
closed. Accordingly, forward loan sale commitments that economically hedge the
closed loan inventory are recognized at fair value on the consolidated balance
sheet in other assets and other liabilities with changes in their fair values
recorded in net gain on sale of loans. The Company has determined that the
estimate of the fair value of its forward loan sales commitments is immaterial
to the financial statements.
Liquid assets increased $2.72 million during the quarter ended March 31, 2009 to
$23.57 million. This increase reflects loan and mortgage-backed securities
repayments of $19.64 million, loan sales of $54.77 million and deposit growth of
$16.71 million, less loan disbursements of $69.30 million and repayment of
borrowings of $17.33 million. At March 31, 2009, liquid assets were 7.43% of
total assets.
The Company's investment and mortgage-backed securities are classified based on
its current intention to hold to maturity or have available for sale, if
necessary. The following table shows the gross unrealized gains or losses on
mortgage-backed securities and investment securities as of March 31, 2009. No
securities are classified as trading.
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(Dollars in thousands)
Available-for-sale
Investment securities $ 13,858 $ 87 $ 0 $ 13,945
Mortgage-backed securities 3,104 38 9 3,133
Held-to-maturity
Mortgage-backed securities 4,785 165 0 4,950
$ 21,747 $ 290 $ 9 $ 22,028
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Management has the intent to hold these securities for the foreseeable future.
The increase in market value is due to a decline in market interest rates. The
fair value of mortgage-backed securities with unrealized losses is expected to
recover as they approach their maturity dates.
At March 31, 2009, deposits were $239.82 million compared to $223.11 million at
December 31, 2008, an increase of $16.71 million. During the current quarter,
consumers moved funds into insured deposit products from uninsured investments,
such as stocks, bonds and mutual funds, due to the uncertainty in the financial
markets. As a result, core deposits increased $3.94 million and certificates
increased $12.77 million. Interest of $1.67 million during the current quarter
was credited to accounts. After eliminating the effect of interest credited,
deposits increased $15.04 during the quarter ended March 31, 2009.
At March 31, 2009, Franklin had outstanding FHLB advances of $51.15 million at
an average cost of
3.83%. During the quarter, Franklin used the unexpected deposit inflow to repay
borrowings by $17.33 million. During the next twelve months, required principal
reduction on these borrowings will be $20.07 million. Management believes that
the Company has sufficient cash flow to meet these commitments and maintain
desired liquidity levels.
At March 31, 2009, $13.49 million of assets were classified substandard, no
assets were classified doubtful, $1.90 million were classified loss and
$3.96 million were designated by management as special mention, compared to
$9.70 million as substandard, $2.23 million as loss and $3.80 million designated
as special mention at December 31, 2008. Non-accruing loans and accruing loans
delinquent 90 days or more, net of reserves, were $8.26 million at March 31,
2009 and $5.20 million at December 31, 2008. The increase in assets classified
substandard and non-accruing loans is due to the addition of a $759,000 mortgage
loan secured by a church, a single family home with a book value of
$1.66 million and 11 other mortgage loans secured by one-to four-family
properties with an aggregate net book value of $1.24 million. At March 31, 2009,
the recorded investment in loans for which impairment has been recognized was
approximately $5.49 million with related reserves of $1.72 million. Because of
the current state of the real estate market, and the economy in general,
Franklin believes that non-performing assets may increase. Resolving these
problem assets may be a long-term process. The decrease in total loss reserves
shown in the table below is the result of $452,000 in charge-offs, which
included $230,000 on a multi-family loan and $186,000 on one-to four-family
non-owner occupied properties.
The following table shows the activity that has occurred on loss reserves during
the three months ended March 31, 2009.
(Dollars in thousands)
Balance at beginning of period $ 3,668
Charge offs 452
Additions charged to operations 176
Transfers to real estate owned 0
Recoveries 0
Balance at end of period $ 3,392
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The Company's capital supports business growth, provides protection to depositors, and represents the investment of stockholders. The Company and Franklin continue to enjoy a strong capital position. At March 31, 2009, net worth was $24.18 million, which was 7.62% of assets. At the same date, book value per share was $14.39 compared to $14.19 per share at December 31, 2008. The following table summarizes, as of March 31, 2009, Franklin's regulatory capital position in dollars and as a percentage of assets.
Actual Required Excess Actual Required Excess
(Dollars in thousands)
Capital Standard
Core $ 23,252 $ 12,666 10,586 7.34 % 4.00 % 3.34 %
Risk-based 24,748 17,533 7,215 11.29 % 8.00 % 3.29 %
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The Company has voluntarily suspended payment of dividends in order to conserve
capital. Further, the Company entered into an agreement with the OTS not to pay
dividends or capital distributions, or repurchase shares, without OTS approval.
Management does not believe that any other matters in this agreement with the
OTS are material.
COMPREHENSIVE INCOME
Comprehensive income for the three months ended March 31, 2009 and 2008 was
$261,000 and $87,000, respectively. The difference between net income and
comprehensive income consists solely of the effect of unrealized gains and
losses, net of taxes, on available-for-sale securities.
RESULTS OF OPERATIONS
Net income was $260,000 ($0.15 per basic share) for the current quarter compared
to $104,000 ($0.06 per basic share) for the quarter ended March 31, 2008. The
increase in income before taxes during the current three-month period, when
compared to the same period in 2008, reflects increases of $100,000 in net
interest income and $565,000 in profits on the sale of loans, which were
partially offset by increases of $226,000 in noninterest expenses and $87,000 in
provisions for loan losses and a decrease of $83,000 in profits on the sale of
investments.
Net interest income, before provisions for loan losses, was $1.58 million for
the current quarter compared to $1.48 million for the first quarter of 2008. The
following rate/volume analysis describes the extent to which changes in interest
rates and the volume of interest related assets and liabilities have affected
net interest income during the periods indicated. As the table illustrates, the
increase in net interest income is primarily due to a decline in the interest
paid on liabilities, not increased income on interest-earning assets. At the
beginning of 2009, Franklin increased its loan origination staff, which will
affect the way loans are retained in the portfolio or sold in the future. The
majority of loans originated during the current quarter, and possibly in the
future, will be sold with servicing transferred to the purchaser. This may cause
outstanding loan balances and interest earned on loans to decline, but
origination fees and profit on the sale of loans to increase.
For the three month periods ended March 31,
2009 vs 2008
Total
Increase (decrease) due to increase
Volume Rate (decrease)
(Dollars in thousands)
Interest income attributable to:
Loans receivable (1) ($66 ) ($235 ) ($301 )
Mortgage-backed securities 35 21 56
Investment securities 19 (69 ) (50 )
FHLB stock 2 (9 ) (7 )
Total interest-earning assets ($10 ) ($292 ) ($302 )
Interest expense attributable to:
Demand deposits $ 0 ($39 ) ($39 )
Savings accounts 1 (48 ) (47 )
Certificates 85 (234 ) (149 )
FHLB advances and other borrowings (25 ) (142 ) (167 )
Total interest-bearing liabilities $ 61 ($463 ) ($402 )
Decrease in net interest income ($71 ) $ 171 $ 100
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(1) Includes non-accruing loans.
Managing interest rate risk is fundamental to banking. Financial institutions must manage the inherently different maturity and repricing characteristics of their lending and deposit products to achieve a desired level of earnings and to limit their exposure to changes in interest rates. Franklin is subject to interest rate risk to the degree that its interest-bearing liabilities, consisting principally of customer deposits and FHLB advances, mature or reprice more or less frequently, or on a different basis, than its interest-earning assets, which consist primarily of loans, mortgage-backed securities and investment securities. While having assets that mature or reprice more rapidly than liabilities may be beneficial in times of rising interest rates, such an asset/liability structure may have the opposite effect during periods of declining interest rates. Conversely, having liabilities that reprice or mature more rapidly than assets may adversely affect net interest income during periods of rising interest rates. As of December 31, 2008, Franklin was rated in the most favorable interest rate risk category under OTS guidelines.
As the tables below illustrate, average interest-earning assets decreased $176,000 to $301.58 million during the three months ended March 31, 2009, from $301.76 million for the three months ended March 31, 2008. Average interest-bearing liabilities increased $5.19 million from $290.75 million for the three months ended March 31, 2008, to $295.94 million for the current three-month period. Thus, average net interest-earning assets decreased $5.37 million when comparing the two periods. The interest rate spread (the yield on interest-earning assets less the cost of interest-bearing liabilities) was 2.02% for the three months ended March 31, 2009, compared to 1.81% for the same period in 2008. The increase in the interest rate spread was the result of a decrease in the cost of interest-bearing liabilities from 3.96% for the three months ended March 31, 2008, to 3.35% for the same three-month period in 2009. During the same period, the yield on interest-earning assets decreased from 5.77% to 5.37%. The majority of the decrease in the cost of interest-bearing liabilities is the result of decreases in the cost of savings deposits from 1.43% to 0.77%, demand deposits from 0.90% to 0.39% and certificates from 4.60% to 4.08% and the decrease in the yield on interest-earning assets is the result of a decrease in the yield on loans from 5.83% to 5.48% and investment securities from 5.62% to 4.08%.
For the three months ended March 31, 2009
Average
outstanding Yield/cost
(Dollars in thousands)
Average interest-earning assets
Loans $ 271,069 5.48 %
Mortgage-backed securities 8,065 5.06 %
Investment securities 17,458 4.08 %
FHLB stock 4,991 4.49 %
Total $ 301,583 5.37 %
Average interest-bearing liabilities
Demand deposits $ 31,402 0.39 %
Savings accounts 28,758 0.77 %
Certificates 174,355 4.08 %
FHLB advances 61,428 3.99 %
Total $ 295,943 3.35 %
Net interest-earning assets/interest rate spread $ 5,640 2.02 %
For the three months ended March 31, 2008
Average
outstanding Yield/cost
(Dollars in thousands)
Average interest-earning assets
Loans $ 275,748 5.83 %
Mortgage-backed securities 4,957 3.71 %
Investment securities 16,236 5.62 %
FHLB stock 4,818 5.23 %
. . .
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