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| FSBK > SEC Filings for FSBK > Form 10-Q on 4-Aug-2009 | All Recent SEC Filings |
4-Aug-2009
Quarterly Report
Comparison of Financial Condition at June 30, 2009 and December 31, 2008. Total assets were $886.2 million at June 30, 2009 compared to $875.9 million at December 31, 2008. Earning assets were $819.1 million at June 30, 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 92.4% of total assets at June 30, 2009 compared to 92.3% at December 31, 2008.
Interest-bearing overnight deposits in financial institutions increased to $29.2 million at June 30, 2009, from $5.8 million at December 31, 2008, reflecting the reinvestment of proceeds from maturities and sales of investment securities. Overnight funds are available to fund loan originations, liquidity management activities and daily operations of the Bank.
Investment securities available for sale declined to $10.5 million at June 30, 2009, from $36.6 million at December 31, 2008. Maturities of investment securities available for sale was $10.0 million for both the three and six months ended June 30, 2009. The Bank sold $10.5 million and $20.9 million of investment securities available for sale during the three and six months ended June 30, 2009, compared to none sold during the three and six months ended June 30, 2008. The proceeds from investment maturities and sales were reinvested into interest-bearing overnight deposits as discussed above.
Mortgage-backed securities available for sale increased to $80.9 million at June 30, 2009 from $32.0 million at December 31, 2008. The Bank securitizes certain mortgage loans held for sale into mortgage-backed securities to support a more balanced sensitivity to future interest rate changes and to maintain sufficient liquidity levels. During the three and six months ended June 30, 2009, $34.9 million and $56.2 million of mortgage loans held for sale were securitized into mortgage-backed securities available for sale, compared to $3.4 million securitized during the both three and six months ended June 30, 2008.
Mortgage-backed securities held for investment were $647,000 at June 30, 2009, compared to $832,000 at December 31, 2008, reflecting scheduled principal payments.
Based on current market prices, investment and mortgage-backed securities available for sale decreased in market value by a net of $907,000 at June 30, 2009 from December 31, 2008. See "Note 4. Comprehensive Income" of "Notes to Consolidated Financial Statements (Unaudited)" for additional information.
Loans held for sale were $13.2 million at June 30, 2009 compared to $5.6 million at December 31, 2008. The Bank also sells certain mortgage loans to support a more balanced sensitivity to future interest rate changes. Proceeds from loan sales were $2.4 million and $9.8 million for the three and six months ended June 30, 2009, compared to $11.2 million and $23.4 million sold during both the three and six months ended June 30, 2008. Proceeds from loan 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 $268.3 million at June 30, 2009, compared to $255.5 million at December 31, 2008.
Loans and leases receivable held for investment declined to $692.7 million at June 30, 2009 from $739.2 million at December 31, 2008. During the three and six ended June 30, 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.
Non-accrual loans improved to $7.6 million at June 30, 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 June 30, 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 $10.4 million at June 30, 2009 from $7.7 million at the December 31, 2008, reflecting foreclosures of certain real estate properties, net of sales. Other real estate owned consists of residential and commercial properties, developed building lots and a developed residential subdivision. During the three and six months ended June 30, 2009, the Bank recorded $65,000 and $1.4 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 Hierarchy" of "Notes to Consolidated Financial Statements (Unaudited)" for additional information.
Deposits increased to $731.0 million at June 30, 2009, from $716.4 million at December 31, 2008. Demand accounts (personal and business checking accounts and money market accounts) increased to $225.6 million at June 30, 2009 from $223.4 million at December 31, 2008. Time deposits increased to $480.6 million at June 30, 2009 from $466.5 million at December 31, 2008. During the three and six months ended June 30, 2009, the Bank began repricing certain new and maturing time deposits at lower rates, and combined with the growth of lower costing checking accounts, is managing its deposit cost.
Borrowed money consisting of FHLB advances and repurchase agreements declined to $49.7 million at June 30, 2009 from $52.6 million at December 31, 2008. FHLB advances were $45.0 million at June 30, 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 for managing its cost of funds. Repurchase agreements (cash management accounts for commercial banking customers) were $4.7 million at June 30, 2009, compared to $7.6 million at December 31, 2008.
Stockholders' equity was $86.7 million at June 30, 2009 and $87.8 million at December 31, 2008. The equity to assets ratio was 9.8% at June 30, 2009 compared to 10.0% at December 31, 2008, reflecting the net effect of current period 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 $170,000 at June 30, 2009 compared to $1.2 million at December 31, 2008, reflecting the change in net market value and mix 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 June 30, 2009, the Bank's regulatory capital ratios were in excess of all regulatory requirements and are as follows: Total Risk-Based Capital - 12.9%; Tier 1 Risk-Based Capital - 11.6 %; and Tier 1 Leverage Capital - 9.2%. See "Liquidity and Capital Resources" below for additional information.
On June 25, 2009, the Company declared a cash dividend of $0.20 per share, payable July 23, 2009 to stockholders of record as of July 8, 2009. This dividend payment represents a 111.1% payout ratio of the basic earnings per share for the quarter ended June 30, 2009, and is the Company's forty-ninth consecutive quarterly cash dividend.
The Company purchased no shares of its common stock during the three and six months ended June 30, 2009. Common stock may be purchased through both private and open market transactions pursuant to a stock repurchase plan adopted by the board of directors. Shares acquired through a repurchase plan are held as treasury stock, at cost. Treasury shares were 1,516,126 totaling $32.2 million at both June 30, 2009 and December 31, 2008. 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 three and six months ended June 30, 2009.
Comparison of Operating Results - Three and Six Months Ended June 30, 2009 and 2008. Net income for the three and six months ended June 30, 2009 was $1.8 million and $3.8 million, compared to $3.0 million and $6.9 million for the three and six months ended June 30, 2008. Diluted earnings per share were $0.18 and $0.39 per share for the three and six months ended June 30, 2009, compared to $0.31 and $0.70 per share for the three and six months ended June 30, 2008.
The decline in net earnings during the three and six months ended June 30, 2009 results primarily from a $400,000 FDIC insurance charge related to an industry wide mandatory 5 basis point special assessment; the decline in net interest margin (significantly influenced by the Federal Reserve's prior year 4% rate cuts); changes in the volume of average earning assets between the respective reporting periods; and provisions for credit losses required to replenish net charge-offs and strengthen the allowance for credit losses, while being partially offset by a decline in the cost of funds and an increase in non-interest income.
The Bank continues to face challenges resulting from the impact of the current economy 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 adjustment remains uncertain, and may further impact the Bank if those adjustments are significant.
Key performance ratios are return on average assets (ROA), return on average equity (ROE), and efficiency. ROA was .8% and .9% for the three and six months ended June 30, 2009, compared to 1.3% and 1.5% for the three and six months ended June 30, 2008. ROE was 8.0% and 9.1% for the three and six months ended June 30, 2009, compared to 13.7% and 15.8% for the three and six months ended June 30, 2008. The Company's efficiency ratio was 58.6% and 57.2% for the three and six months ended June 30, 2009, compared to 49.1% and 48.8% for the three and six months ended June 30, 2008.
Interest Income. Interest income declined to $12.4 million and $25.0 million for the three and six months ended June 30, 2009, from $15.2 million and $31.6 million for the three and six months ended June 30, 2008. This decline is due primarily to current economic conditions, the decline in interest rates due to the prior year Federal Reserve rate cuts, and a decline in the volume of average interest-earning assets between the respective periods. Average interest-earning assets were $816.2 million and $814.8 million for the three and six months ended June 30, 2009, compared to $851.5 million and $855.8 million for the three and six months ended June 30, 2008, reflecting a slow down in loan origination volume and an increase in other real estate owned. The yield on average interest-earning assets was 6.1% for both the three and six months ended June 30, 2009, compared to 7.2% and 7.4% for the three and six months ended June 30, 2008.
Interest Expense. Interest expense on deposits and borrowings declined to $4.5 million and $9.2 million for the three and six months ended June 30, 2009, from $6.0 million and $12.8 million for the three and six months ended June 30, 2008, reflecting a decrease in interest rates between the respective periods and relative changes in the volume of average interest-bearing liabilities. The effective cost of funds was 2.3% for both the three and six months ended June 30, 2009, compared to 3.0% and 3.1% for the three and six months ended June 30, 2008. The Company was 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. Average deposits and borrowings were $784.6 million and $783.5 million for the three and six months ended June 30, 2009, compared to $814.3 million and $818.4 million for the three and six months ended June 30, 2008.
Net Interest Income. Net interest income declined to $7.9 million and $15.8 million for the three and six months ended June 30, 2009, from to $9.2 million and $18.8 million for the three and six months ended June 30, 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 both the three and six months ended June 30, 2009, compared to 4.2% and 4.3% for the three and six months ended June 30, 2008. The net yield on interest-earning assets (net interest income divided by average interest-earning assets) was 3.9% for both the three and six months ended June 30, 2009, compared to 4.3% and 4.4% for the three and six months ended June 30, 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.
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 $1.7 million and $3.2 million of provisions for credit losses in the three and six months ended June 30, 2009, compared to $1.1 million recorded in both the three and six months ended June 30, 2008. The provision for credit losses was necessary to replenish net charge offs of $894,000 and $3.2 million recorded in the three and six months ended June 30, 2009, and to strengthen the allowance for credit losses in anticipation of continued economic uncertainty.
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 is 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 allowance for credit losses was $12.0 million at both June 30, 2009 and December 31, 2008. The ratio of allowances for credit losses to net loans and leases was 1.7% at June 30, 2009 and 1.6% December 31, 2008. See "Note 3. Allowance for Credit Losses" of "Notes to Consolidated Financial Statements (Unaudited)" and "Critical Accounting Policies" below for additional information.
Noninterest Income. Noninterest income increased to $3.2 million and $6.0
million for the three and six months ended June 30, 2009, from $2.8 million and
$5.5 million for the three and six months ended June 30, 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 strives to maintain a consistent level of noninterest income across
both loan and deposit service offerings. Fees, service charges and loan
servicing fees were $2.1 million and $4.0 million for the three and six months
ended June 30, 2009, compared to $2.3 million and $4.3 million for the three and
six months ended June 30, 2008. Fees, service charges earned and insufficient
funds fees collected during each period is attributable to the volume of loan,
deposit account, and insufficient funds transactions processed during each
period, and the collection of related fees and service charges.
The Bank recorded gains from sales of loans and mortgage-backed securities of $430,000 and $688,000 during the three and six months ended June 30, 2009, compared to $245,000 and $474,000 during the three and six months ended June 30, 2008. The Bank sells certain fixed-rate residential mortgage loans and mortgage-backed securities to better manage market risk exposure for a more balanced sensitivity to future interest rate changes. The Bank also recorded $452,000 and $918,000 of gains from the sale of investment securities during the three and six months ended June 30, 2009, compared to no investment security sales in the three and six months ended June 30, 2008.
Noninterest Expense. Noninterest expenses were $6.5 million and $12.5 million for the three and six months ended June 30, 2009, compared to $5.9 million and $11.9 million for the three and six months ended June 30, 2008. Compensation is the largest component of noninterest expenses and remained relatively consistent at $3.6 million and $7.0 million for the three and six months ended June 30, 2009, compared to $3.5 million and $7.0 million for the three and six months ended June 30, 2008, reflecting the Bank's success in managing its human resources cost.
FDIC insurance premiums increased to $540,000 and $680,000 for the three and six months ended June 30, 2009, from $21,000 and $44,000 for the three and six months ended June 30, 2008, reflecting the FDIC's $400,000 mandatory 5 basis point special assessment at June 30, 2009. In addition, one-time FDIC insurance assessment credits received under the Federal Deposit Reform Act of 2005 were exhausted in the quarter ended June 30, 2008.
Expenses attributable to the increased volume of other real estate owned were $116,000 and $343,000 in the three and six months ended June 30, 2009, compared to $106,000 and $111,000 in the three and six months ended June 30, 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 $1.1 million and $2.4 million for the three and six months ended June 30, 2009, compared to $1.9 million and $4.4 million for the three and six months ended June 30, 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 39.2% and 38.6% respectively for both the three and six months ended June 30, 2009 and 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 June 30, 2009, the Bank had cash, deposits in banks, investment securities, mortgage-backed securities and loans held for sale totaling $152.1 million, compared to $101.7 million at December 31, 2008, representing 20.4% 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 June 30, 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 . . .
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