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| BKOR > SEC Filings for BKOR > Form 10-Q on 14-Aug-2009 | All Recent SEC Filings |
14-Aug-2009
Quarterly Report
Comparison of Results of Operations for the Three-Month Periods Ending June 30, 2009 and 2008
Net Income
For the three months ended June 30, 2009, the Company's net income decreased 37 percent to $242,000 compared to $384,000 for the same period in 2008. Net income available to common stockholders decreased 80 percent to $78,000 in 2009 compared to $384,000 in 2008. Net income per diluted share decreased 50 percent to $0.04 compared to $0.08 for the prior year period. Returns on average assets and average equity were 0.36 percent and 2.97 percent, respectively, for the three months ended June 30, 2009, compared to 0.53 percent and 8.80 percent for the three months ended June 30, 2008.
The increase in net income was a result of increases in net interest income and a decline in income tax expense, offset by declines in noninterest income, and increases in the provision for loan losses, and noninterest expense. The decrease in net income available to common shareholders was a result to preferred stock dividends and accretion of discount in 2009 totalling $164,000. There were no preferred stock dividends and accretion of discount in 2008.
Net Interest Income
Net interest income was $3.0 million for the three months ended June 30, 2009 compared to $2.2 million for the prior year. The 36 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 June 30, 2009 was 3.61 percent compared to 3.28 percent for the prior year period. The average yield on earning assets for the three months ended June 30, 2009 was 6.32 percent compared to 6.49 percent for the prior year period, and the average cost of interest-bearing liabilities was 2.71 percent for the three months ended June 30, 2009 compared to 3.54 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 June 30, 2009 was $303,000 compared to $99,000 recorded in the prior year period. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level management deems appropriate. In evaluating the allowance for loan losses, management considers 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 1.23 percent at June 30, 2009, and 1.00 percent at December 31 and June 30, 2008.
Noninterest Income
Noninterest income totaled $865,000 for the three months ended June 30, 2009, down $32,000, or 4 percent, from $897,000 for the same period in 2008.
Service fees and charges, which represent a relatively stable and predictable source of noninterest income, totaled $205,000 for the three months ended June 30, 2009, a 16 percent increase over the $177,000 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 $145,000 for the three months ended June 30, 2009, a 6 percent increase over the $137,000 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 $162,000 for the three months ended June 30, 2009, a 34 percent decrease under the $244,000 earned in 2008. A large part of this decrease 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 $181,000 for the three months ended June 30, 2009, a 2 percent decrease under the $185,000 earned in the same period in 2008.
Income earned on bank owned life insurance totaled $65,000 for the three months ended June 30, 2009, a 63 percent increase over the $40,000 earned in the same period in 2008. This increase was due to higher rates on the underlying insurance policies in 2009 as compared to 2008.
Other service charges and fees totaled $107,000 for the three months ended June 30, 2009, a 6 percent decrease under the $114,000 earned in 2008. The decline was primarily caused by lower income earned off of customer debit card transactions in 2009 as compared to 2008, as well as lower income from other bank products and services.
Noninterest Expense
Noninterest expenses were $3.1 million for the three months ended June 30, 2009 compared to $2.4 million for the prior year period. The $700,000 or 29 percent increase reflects the continuing efforts and associated expenses related to servicing existing Bank clients as well as attracting new clients, as well as other real estate expenses and writedowns of $182,000 in the three months ended June 30, 2009 that were not present in the same prior year period.
Salaries and employee benefits for the three months ended June 30, 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 and additional personnel hired in 2009, offset by lower investment and insurance commissions to the Bank's financial advisors and lower bonuses to managers and executives due to the generally weak economic conditions that are negatively affecting the Bank's and the Company's financial performance.
Occupancy expenses for the three months ended June 30, 2009 were $178,000 reflecting a $49,000 increase when compared to $129,000 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 expenses for the three months ended June 30, 2009 were $174,000 reflecting a $34,000 increase when compared to $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.
Data and item processing expenses for the three months ended June 30, 2009 were $155,000 reflecting a $27,000 increase when compared to $128,000 for the same period in 2008. The increase in this expense was driven both by an increase in the number of products provided, such as mobile banking and merchant capture, as well as a continued increase in the number of Bank clients, which tends to influence increases in expenses such as items processing, bill payment, internet banking, and telephone banking.
Stationary and supplies for the three months ended June 30, 2009 were $53,000 reflecting a $17,000 increase when compared to $36,000 for the same period in 2008. The increase was due to increased mailings to clients and prospective clients as well as expenses associated with the opening in early July of 2009 of the Company's new 14,000 square foot corporate center.
Other real estate owned expenses and write-downs totaled $182,000 for the three months ended June 30, 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 June 30, 2009, a belief supported by the sale of two other real estate owned properties in the second quarter of 2009, and one sale subsequent to June 30, 2009.
FDIC assessment expense for the three months ended June 30, 2009 was $219,000 reflecting a $157,000 increase when compared to $62,000 for the same period in 2008. The FDIC mandated a special assessment for all financial institutions in the second quarter of 2009 equivalent to 5 basis points on total assets minus tier one capital. For the Bank the special assessment amounted to $162,000. The FDIC has not determined if additional special assessments will be required of all banks in a future period.
Professional and telecommunication expenses 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.
Accounts receivable financing expense, which is largely influenced by the fee income from accounts receivable financing, was relatively unchanged from 2008 to 2009.
Total other than temporary impairment losses were $105,000 for the three months ended June 30, 2009, and was a result of management's determination that one private label mortgage-backed security was other than temporarily impaired.
Other expenses for the three months ended June 30, 2009 were $285,000 reflecting a $55,000 increase when compared to the $230,000 for the same period in 2008. Increases in appraisal fees, loan collection expense, employee training, and charge offs from deposit accounts and activity contributed to the majority of the increase between the two periods.
Income Taxes
Income tax expense was $131,000 for the three months ended June 30, 2009 and $211,000 for the same period in 2008. The decrease in income tax expense from 2008 to 2009 was primarily due to lower net income before provision for income taxes in 2008 as compared to 2009.
Comparison of Results of Operations for the Six-Month Periods Ending June 30, 2009 and 2008
Net Income
For the six months ended June 30, 2009, the Company's net income decreased 23 percent to $342,000 compared to $445,000 for the same period in 2008. Net income available to common stockholders decreased 84 percent to $70,000 in 2009 compared to $445,000 in 2008. Net income per diluted share decreased 50 percent to $0.04 compared to $0.08 for the prior year period. Returns on average assets and average equity were 0.20 percent and 2.12 percent, respectively, for the six months ended June 30, 2009, compared to 0.32 percent and 5.08 percent for the prior year period.
The increase in net income was a result of increases in net interest income and noninterest income and a decline in income tax expense, offset by increases in the provision for loan losses, and noninterest expense. The decrease in net income available to common shareholders was a result to preferred stock dividends and accretion of discount in 2009 totalling $164,000. There were no preferred stock dividends and accretion of discount in 2008.
Net Interest Income
Net interest income was $5.5 million for the six months ended June 30, 2009 compared to $4.1 million for the prior year. The 34 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 six months ended June 30, 2009 was 3.30 percent compared to 3.18 percent for the prior year period. The average yield on earning assets for the six months ended June 30, 2009 was 6.21 percent compared to 6.74 percent for the prior year period, and the average cost of interest-bearing liabilities was 2.91 percent for the six months ended June 30, 2009 compared to 3.87 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 six months ended June 30, 2009 was $669,000 compared to $263,000 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 1.23 percent at June 30, 2009, and 1.00 percent at December 31 and June 30, 2008.
Noninterest Income
Noninterest income totaled $1.7 million for the six months ended June 30, 2009, and was relatively unchanged from the same prior year period.
Service fees and charges, which represent a relatively stable and predictable source of noninterest income, totaled $408,000 for the six months ended June 30, 2009, a 16 percent increase over the $353,000 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 $301,000 for the six months ended June 30, 2009, a 30 percent increase over the $232,000 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 $336,000 for the six months ended June 30, 2009, a 25 percent decrease under the $450,000 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 $355,000 for the six months ended June 30, 2009, a 1 percent increase over the $352,000 earned in the same period in 2008.
Income earned on bank owned life insurance totaled $97,000 for the six months ended June 30, 2009, a 21 percent increase over the $80,000 earned in the same period in 2008. This increase was due to higher rates on the underlying insurance policies in 2009 as compared to 2008.
Other service charges and fees benefited from an increase in income earned off of customer debit card transactions, and totaled $197,000 for the six months ended June 30, 2009, a 7 percent increase over the $184,000 earned in 2008.
Noninterest Expense
Noninterest expenses were $5.9 million for the six months ended June 30, 2009 compared to $4.8 million for the prior year period. The increase of $1.1 million, or 23 percent, reflects the continuing efforts and associated expenses related to servicing existing Bank clients and attracting new clients, as well as other real estate expenses and writedowns of $302,000 in the six months ended June 30, 2009 that were not present in the same prior year period.
Salaries and employee benefits for the six months ended June 30, 2009 were $2.8 million reflecting a $300,000 increase when compared to the $2.5 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 and additional personnel hired in 2009, offset by lower investment and insurance commissions to the Bank's financial advisors and lower bonuses to managers and executives due to the generally weak economic conditions that are negatively affecting the Bank's and Company's financial performance.
Occupancy expenses for the six months ended June 30, 2009 were $365,000 reflecting a $102,000 increase when compared to $263,000 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. Lastly, the Bank had five months of occupancy expenses in 2008 compared to six months of expenses in 2009 related to the Bank's fifth banking office, which opened on January 31, 2008.
Equipment expenses for the six months ended June 30, 2009 were $344,000 reflecting a $64,000 increase when compared to $280,000 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.
Data and item processing expenses for the six months ended June 30, 2009 were $300,000 reflecting a $88,000 increase when compared to $212,000 for the same period in 2008. The increase in this expense was driven both by an increase in the number of products such as mobile banking and merchant capture as well as a continued increase in the number of bank clients, which tends to influence increases in expenses such as items processing, bill payment, internet banking, and telephone banking.
Stationary and supplies for the six months ended June 30, 2009 were $108,000 reflecting a $10,000 increase when compared to $98,000 for the same period in 2008. The increase was due to increased mailings to clients and prospective clients as well as expenses associated with the opening in early July of 2009 of the Company's new 14,000 square foot corporate center.
Other real estate owned expenses and write-downs totaled $302,000 for the six months ended June 30, 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 June 30, 2009, a belief supported by the sale of two other real estate owned properties in the second quarter of 2009 and one sale subsequent to June 30, 2009.
FDIC assessment expense for the six months ended June 30, 2009 was $292,000 reflecting a $180,000 increase when compared to $112,000 for the same period in 2008. The FDIC mandated a special assessment for all financial institutions in the second quarter of 2009 equivalent to 5 basis points on total assets minus tier one capital. For the Bank the special assessment amounted to $162,000. The FDIC has not determined if additional special assessments will be required of all banks in a future period.
Professional and telecommunication expenses 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.
Accounts receivable financing expense, which is influenced by the fee income from accounts receivable financing, decreased $36,000 to $109,000 for the six months ended June 30, 2009, compared to $145,000 for the same period in 2008. This expense represents the amount paid by the Bank to the vendor that provides the servicing of the accounts receivable program. For the most part, the expense represents a participation, expressed as a percentage of revenue, in the Bank's income from financing the receivable, and can vary anywhere from 25 to 35 percent. However, in the prior year this expense was higher due to the cost of acquiring several new customers from an area bank that was exiting the accounts receivable financing business.
Total other than temporary impairment losses were $105,000 for the six months ended June 30, 2009, and was a result of management's determination that one private label mortgage-backed security was other than temporarily impaired.
Other expenses for the six months ended June 30, 2009 were $516,000 reflecting a $70,000 increase when compared to $446,000 for the same period in 2008. Increases in appraisal fees, loan collection expense, employee training, and charge offs from deposit accounts and activity contributed to the majority of the increase between the two periods.
Income Taxes
Income tax expense was $185,000 for the six months ended June 30, 2009 and $247,000 for the same period in 2008. The decrease in income tax expense from 2008 to 2009 was primarily due to lower net income before provision for income taxes in 2008 as compared to 2009.
Analysis of Financial Condition from December 31, 2008 to June 30, 2009
Total assets increased to $350.1 million at June 30, 2009, or 9 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 $8.7 million, $19.6 million, $1.0 million, and $2.0 million, respectively.
Cash and Due from Banks
Cash and due from banks totaled $12.7 million at June 30, 2009, up $8.7 million, or 219 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 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.
Subsequent to June 30, 2009, the Bank moved its primary correspondent banking relationship to the Federal Reserve Bank of Richmond. The Bank did not suffer any losses 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 June 30, 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 $55.2 million at June 30, 2009, up $19.6 million, or 55 percent, from $35.6 million at December 31, 2008. Funds from deposit growth were used to purchase during 2009 Small Business Administration ("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 $11.5 million at June 30, 2009, down $1.7 million, or 12.9 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 $244.0 million at June 30, 2009, up $1.0 million, 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 $3.0 million at June 30, 2009, up $584,000, or 23 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 decreased from 1.09% at December 31, 2008 to 1.06% at June 30, 2009, and these nonperforming assets, which include loans greater than ninety days past due, decreased from $2.7 million at December 31, 2008 to $2.3 million at June 30, 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 June 30, 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 1.23% at June 30, 2009. In management's opinion, the nonperforming assets that were added to total nonperforming assets in the first and second quarters 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 $298.4 million at June 30, 2009, up $27.8 million, or 10 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 June 30, 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 FHLB of Atlanta advance of $7.0 million at maturity.
Property and equipment, net
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