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| SUGR.OB > SEC Filings for SUGR.OB > Form 10-K on 26-Jun-2009 | All Recent SEC Filings |
26-Jun-2009
Annual Report
Overview-General
Our principal business is to acquire deposits from individuals and businesses in the communities surrounding our offices and to use these deposits to fund loans. We focus on providing our products and services to two segments of customers: individuals and small businesses.
Income. Our primary source of income is net interest income. Net interest income is the difference between interest income, which is the income that we earn on our loans and investments, and interest expense, which is the interest that we pay on our deposits and borrowings. Changes in levels of interest rates affect our net interest income.
A secondary source of income is non-interest income, which is revenue that we receive from providing products and services. The majority of our non-interest income generally comes from loan service charges and service charges on deposit accounts.
Allowance for Loan Losses. The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the need to establish allowances against losses on loans on a monthly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.
Expenses. The noninterest expenses we incur in operating our business consist of compensation and benefits expenses, occupancy expenses, equipment and data processing expenses and other miscellaneous expenses, such as advertising, supplies, telephone, postage and professional services.
Our largest noninterest expense is compensation and benefits, which consist primarily of salaries and wages paid to our employees, payroll taxes, expenses for health insurance, retirement plans and other employee benefits, including employee stock ownership plan allocations and restricted stock awards made under the 2007 Equity Incentive Plan. In the future, we may also recognize additional annual employee compensation expenses stemming from any stock option grants made under the 2007 Equity Incentive Plan. We cannot determine the actual amount of these new stock-related compensation and benefit expenses, if any, at this time because applicable accounting practices require that they be based on the fair market value of the shares of common stock at specific points in the future.
Our noninterest expenses also include expenses resulting from operating as a public company, consisting primarily of legal and accounting fees and expenses of shareholder communications and meetings.
Overview-Financial Highlights
Operating Results. Net earnings increased by $199,000 to $270,000 for the year ended March 31, 2009 primarily due to lower rates paid for deposits and FHLB borrowings.
Financial Condition. Total assets increased by $5.1 million to $91.7 million at March 31, 2009. The increase was attributable in part to larger balances in cash and cash equivalent accounts. In addition, deposits increased $7.9 million to $67.1 million at March 31, 2009 as a result of stock market volatility and a move by customers toward the safety of FDIC insured deposits.
Critical Accounting Policies
In the preparation of our financial statements, we have adopted various accounting policies that govern the application of U.S. generally accepted accounting principles. Our significant accounting policies are described in note 1 of the notes to the consolidated financial statements included in this Form 10-K.
Certain accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Actual results could differ from these judgments and estimates under different conditions, resulting in a change that could have a material impact on the carrying values of our assets and liabilities and our results of operations.
Allowance for Loan Losses. We consider the allowance for loan losses to be a critical accounting policy. The allowance for loan losses is the amount estimated by management as necessary to cover probable losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: loss exposure at default; the amount and timing of future cash flows on impacted loans; value of collateral; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the allowance at least monthly and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions and other factors related to the collectibility of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, the Office of Thrift Supervision, as an integral part of its examination process, periodically reviews our allowance for loan losses. Such agency may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings. See notes 1 and 3 of the notes to the consolidated financial statements included in this Form 10-K.
Balance Sheet Analysis
Loans. Our primary lending activity is the origination of loans secured by real estate. We originate real estate loans secured by one- to four-family residential real estate, commercial and multi-family real estate and undeveloped land. To a much lesser extent, we originate consumer loans.
The largest segment of our real estate loans is one- to four-family residential real estate loans. At March 31, 2009, one- to four-family residential real estate loans totaled $69.5 million, or 87.49% of total loans, compared to $69.9 million, or 87.33% of total loans, at March 31, 2008. One- to four-family residential real estate loans decreased modestly over this period as a result of a continuing decline in real estate sales and very competitive refinance rates in the local market. Multi-family and commercial real estate loans increased over this period as a result of a steady market for these properties in our market area. Consumer loans decreased in 2009 as a result of the contraction in auto sales and the increase in consumer debt.
The following table sets forth the composition of our loan portfolio at the dates indicated.
Table 1: Loan Portfolio Analysis
March 31,
2009 2008
(Dollars in thousands) Amount Percent Amount Percent
Real estate loans:
One-to four-family $ 69,479 87.49 % $ 69,904 87.33 %
Multi-family 1,124 1.42 966 1.21
Commercial 3,375 4.25 2,886 3.60
Land loans 1,584 1.99 1,723 2.15
Total real estate loans 75,562 95.15 75,479 94.29
Consumer loans:
Automobile 2,314 2.91 2,522 3.15
Home equity 1,158 1.46 1,526 1.91
Loans secured by deposit accounts 383 0.48 521 0.65
Total consumer loans 3,855 4.85 4,569 5.71
Total loans 79,417 100.00 % 80,048 100.00 %
Loans in process - -
Allowance for losses (165 ) (124 )
Net deferred loan fees (123 ) (120 )
Loans, net $ 79,129 $ 79,804
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At March 31, 2009, fixed-rate loans, balloon loans and adjustable-rate loans totaled $42.8 million, $36.2 million and $372,000, respectively.
The following table sets forth certain information at March 31, 2009 regarding the dollar amount of loan principal repayments becoming due during the years indicated. The table does not include any estimate of prepayments which significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less. The amounts shown below exclude net deferred loan fees. Our adjustable-rate mortgage loans generally do not provide for downward adjustments below the initial discounted contract rate. When market interest rates rise, as has occurred in recent periods, the interest rates on these loans may increase based on the contract rate (the index plus the margin) exceeding the initial interest rate floor.
Table 2: Contractual Maturities and Interest Rate Sensitivity
Real Estate Consumer Total
March 31, 2009 (Dollars in thousands) Loans Loans Loans
Amounts due in:
One year or less $ 1,323 $ 447 $ 1,770
More than one to five years 9,901 1,935 11,836
More than five years 65,496 315 65,811
Total $ 76,720 $ 2,697 $ 79,417
Interest rate terms on amounts due after one year:
Fixed-rate loans (including balloon loans) $ 75,219 $ 2,250 $ 77,469
Adjustable-rate loans 178 - 178
Total $ 75,397 $ 2,250 $ 77,647
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Investments. At March 31, 2009, our investment portfolio totaled $1.7 million and consisted solely of our investment in Federal Home Loan Bank of Chicago stock. Our investment in Federal Home Loan Bank of Chicago stock remained unchanged during the year ended March 31, 2009 due to a prohibition on excess stock redemptions imposed by the Federal Housing Finance Board. On October 10, 2007, the Federal Home Loan Bank of Chicago entered into a consensual cease and desist order with the Federal Housing Finance Board Office of Supervision, which limits the ability of the Federal Home Loan Bank of Chicago to redeem excess or voluntary stock or to pay dividends. The Federal Home Loan Bank of Chicago has not declared or paid a dividend since the second quarter of 2007 citing regulatory requirements, continuing pressure on net interest income, projected earnings levels, and market conditions. At March 31, 2009, $921,000 of our investment in Federal Home Loan Bank stock consisted of excess or voluntary stock. Based on the liquidity needs of Tempo Bank and subject to the stock redemption guidelines of the Federal Home Loan Bank of Chicago, Tempo Bank expects to redeem the majority of its excess or voluntary stock as soon as an official redemption policy has been announced by the Federal Home Loan Bank of Chicago.
We had no investments that had an aggregate book value in excess of 10% of our equity at March 31, 2009, except for our investment in Federal Home Loan Bank of Chicago.
Premises and Equipment, Net. Premises and equipment, net, increased $94,000 to $1.1 million at March 31, 2009 primarily as a result of the purchase of a tract of land for a possible future branch location.
Other Assets. Other assets, including prepaid income taxes, decreased due primarily to the timing of income tax payments.
Deposits. Our deposit base is comprised of noninterest-bearing NOW accounts, NOW accounts, savings accounts, money market accounts and certificates of deposit. We consider our deposit accounts other than certificates of deposit to be core deposits. Deposits increased $7.9 million for the year ended March 31, 2009, as certificates of deposit increased $5.1 million, and core deposits increased $2.8 million. Overall, deposits increased during the year ended March 31, 2009 primarily as a result of stock market volatility and a move by customers toward the safety of FDIC insured deposits.
Table 3: Deposits
March 31,
2009 2008
(Dollars in thousands) Amount Percent Amount Percent
Noninterest-bearing
NOW accounts $ 3,148 4.69 % $ 2,620 4.43 %
NOW accounts 4,211 6.28 4,420 7.47
Savings accounts 7,721 11.51 7,277 12.29
Money market accounts 5,355 7.99 3,324 5.62
Certificates of deposit 46,641 69.53 41,540 70.19
Total $ 67,076 100.00 % $ 59,181 100.00 %
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Table 4: Time Deposit Maturities of $100,000 or more
March 31, 2009 (Dollars in thousands) Amount Maturity Period Three months or less $ 2,317 Over three through six months 3,095 Over six through twelve months 3,025 Over twelve months 3,738 Total $ 12,175 |
Borrowings. We utilize FHLB advances to supplement our supply of funds for loans. In the table below, the weighted average interest rate during the year is based on the weighted average balances determined on a monthly basis.
Table 5: Borrowings
Year Ended
March 31,
(Dollars in thousands) 2009 2008
Maximum amount outstanding at any month end during the year:
FHLB advances $ 23,000 $ 23,000
Average amount outstanding during the year:
FHLB advances 19,125 20,083
Weighted average interest rate during the year:
FHLB advances 4.18 % 4.77 %
Balance outstanding at end of year:
FHLB advances 14,000 17,000
Weighted average interest rate at end of year:
FHLB advances 4.83 % 4.82 %
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Borrowings decreased during 2009 due to the repayment of overnight FHLB advances and maturity of other FHLB advances.
Other Liabilities. Other liabilities increased due primarily to increased accrued income taxes which increased due to the timing of payment of income taxes.
Stockholders' Equity. Stockholders' equity increased due primarily to net earnings of $270,000 for the year ended March 31, 2009, partially offset by the repurchase of common stock of $200,000.
Comparison of Results of Operations for the Years Ended March 31, 2009 and March
31, 2008 Table 6: Summary Income Statements Year Ended March 31, (Dollars in thousands) 2009 2008 2009 v. 2008 % Change Net interest income $ 2,339 $ 2,006 $ 333 16.63 % Provision for loan losses (59 ) (80 ) 21 (26.64 ) Noninterest income 197 175 22 12.20 Noninterest expense (2,036 ) (2,002 ) (34 ) 1.73 Income taxes (171 ) (28 ) (143 ) 511.09 Net earnings $ 270 $ 71 $ 199 279.25 % Return on average equity 2.91 % 0.78 % Return on average assets 0.30 0.08 |
Net Interest Income. Net interest income increased as a result of lower costs for deposits and borrowings. As a result, the interest rate spread increased to 2.26% for 2009 from 1.86% for 2008. The Bank's cost of funds declined due to much lower market interest rates paid on money market accounts and certificates of deposit, partially offset by an increase in the average balance of deposits. Borrowing costs decreased due to lower market rates paid on short-term advances from FHLB which were utilized during the year ended March 31, 2009.
Table 7: Analysis of Net Interest Income
Year Ended March 31, (Dollars in thousands) 2009 2008 2009 v. 2008 % Change Components of net interest income Loans $ 4,969 $ 4,880 $ 89 1.82 % Stock in FHLB of Chicago - 13 (13 ) (100.00 ) Other interest-earning assets 28 115 (87 ) (75.64 ) Total interest income 4,997 5,008 (11 ) (0.23 ) Deposits (1,858 ) (2,044 ) 186 (9.13 ) Borrowings (800 ) (958 ) 158 (16.51 ) Total interest expense (2,658 ) (3,002 ) 344 (11.48 ) Net interest income 2,339 2,006 333 16.63 % Average yields and rates paid Interest-earning assets 5.67 % 5.86 % (0.19 )% (3.24 )% Interest-bearing liabilities 3.41 4.00 (0.59 ) (14.75 ) Interest rate spread 2.26 1.86 0.40 21.51 Net interest margin 2.65 2.35 0.30 12.77 Average balances Loans $ 82,454 $ 81,084 $ 1,370 1.69 % Stock in FHLB of Chicago 1,660 1,660 - - Other interest-earning assets 4,082 2,756 1,326 48.11 Deposits 58,859 54,898 3,961 7.22 Borrowings 19,125 20,083 (958 ) (4.77 ) |
Provision for Loan Losses. The provision for loan losses was $59,000 for the year ended March 31, 2009, compared to $80,000 for the year ended March 31, 2008. The Bank recorded charge-offs of $18,000 and no recoveries for the year ended March 31, 2009 compared to charge-offs of $92,000 and recoveries of $6,000 for the year ended March 31, 2008.
The allowance for loan losses was $165,000, or 0.21% of total loans outstanding as of March 31, 2009, as compared with $124,000, or 0.16% of total loans outstanding as of March 31, 2008. An analysis of the changes in the allowance for loan losses is presented under "Risk Management - Analysis and Determination of the Allowance for Loan Losses."
Noninterest Income. Noninterest income increased due primarily to higher deposit account service charges. Deposit account service charges increased as a result of a more aggressive program of assessing non-sufficient fund fees to our customers.
Table 8: Noninterest Income Summary Year Ended March 31, (Dollars in thousands) 2009 2008 $ Change % Change Loan service charges $ 20 $ 24 $ (4 ) (16.87 )% Service charges on deposit accounts 157 133 24 17.85 Other 20 18 2 9.53 Total $ 197 $ 175 $ 22 12.20 % |
Noninterest Expense. All categories of noninterest expense were higher, except compensation and benefits and supplies expense. Compensation and benefits decreased primarily as a result of lower costs related to the Bank's multi-employer retirement plan, lower health insurance expenses and a lower ESOP expense. Retirement plan expenses decreased due to lower plan contributions required as a result of higher investment returns in the defined benefit plan. Health care costs declined as a result of our decision to change providers which has resulted in a cost savings. Equipment and data processing increased as a result of higher depreciation expense on computer equipment and higher data processing costs as a result of a new internet banking system, implementation of the Check 21 program and upgrades to data lines.
FDIC premium expense increased due to the growth of the Bank and a higher risk-based assessment which considers the supervisory rating and certain financial ratios of each financial institution. See also, "Item 1A-Risk Factors-Future FDIC Assessments Will Hurt Our Earnings."
Other noninterest expense increased due primarily to higher real estate taxes, maintenance expenses and utility costs on foreclosed real estate, a provision for loss on foreclosed real estate of $28,000 and modest increases in various other expenses.
Table 9: Noninterest Expense Summary Year Ended March 31, (Dollars in thousands) 2009 2008 $ Change % Change Compensation and benefits $ 1,033 $ 1,179 $ (146 ) (12.40 )% Occupancy expense 114 100 14 14.33 Equipment and data processing 363 328 35 10.52 FDIC premium expense 50 7 43 626.75 Advertising 44 39 5 13.79 Supplies expense 32 37 (5 ) (12.19 ) Professional and regulatory fees 152 138 14 10.21 Other 248 174 74 42.08 Total $ 2,036 $ 2,002 $ 34 1.73 % |
Income Taxes. Income taxes were $171,000 for 2009, reflecting an effective tax rate of 38.8%, compared to $28,000 for 2008, reflecting an effective tax rate of 28.3%. Income taxes increased due to higher pre-tax earnings.
Average Balances and Yields. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the years indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the years presented. For purposes of this table, average balances have been calculated using month-end balances, and nonaccrual loans are included in average balances only. Management does not believe that use of month-end balances instead of daily average balances has caused any material differences in the information presented. Loan fees are included in interest income on loans and are insignificant. None of the income reflected in the following table is tax-exempt income.
Table 10: Average Balance Table
Years Ended March 31,
2009 2008
Interest Interest
Average and Yield/ Average and Yield/
(Dollars in thousands) Balance Dividends Cost Balance Dividends Cost
Assets:
Interest-earning
assets:
Loans $ 82,454 $ 4,969 6.03 % $ 81,084 $ 4,880 6.02 %
Stock in FHLB of
Chicago 1,660 - - 1,660 13 0.79
Other interest-earning
assets 4,082 28 0.69 2,756 115 4.17
Total interest-earning
assets 88,196 4,997 5.67 85,500 5,008 5.86
Noninterest-earning
assets 2,852 2,164
Total assets 91,048 87,664
Liabilities and
Stockholders' Equity:
Interest-bearing
liabilities:
NOW accounts $ 4,353 $ 22 0.51 % $ 4,413 $ 23 0.52 %
Savings accounts 7,482 50 0.67 7,243 49 0.65
Money market accounts 4,628 118 2.55 2,683 82 3.12
Certificates of
deposit 42,396 1,668 3.93 40,559 1,890 4.66
Total interest-bearing
deposits 58,859 1,858 3.16 54,898 2,044 3.73
FHLB advances 19,125 799 4.18 20,083 958 4.77
Other borrowings - - - - - -
Total interest-bearing
liabilities $ 77,984 2,657 3.41 $ 74,981 3,002 4.00
Noninterest-bearing
NOW accounts 2,538 2,456
Other
noninterest-bearing
liabilities 1,261 1,130
Total liabilities 81,783 78,567
Stockholders' equity 9,265 9,097
Total liabilities and
stockholders' equity $ 91,048 $ 87,664
Net interest income $ 2,340 $ 2,006
Interest rate spread 2.26 % 1.86 %
Net interest margin 2.65 % 2.35 %
. . .
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