Add
FSBK to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| FSBK > SEC Filings for FSBK > Form 10-Q on 4-Nov-2009 | All Recent SEC Filings |
4-Nov-2009
Quarterly Report
Comparison of Financial Condition at September 30, 2009 and December 31, 2008. Total assets were $855.9 million at September 30, 2009 compared to $875.9 million at December 31, 2008. Earning assets were $790.7 million at September 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 September 30, 2009 compared to 92.3% at December 31, 2008.
Interest-bearing overnight deposits in financial institutions increased to $24.9 million at September 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 $5.4 million at September 30, 2009, from $36.6 million at December 31, 2008. Maturities of investment securities available for sale were $5.0 million for the three months ended September 30, 2009 and $15.0 million during the nine months ended September 30, 2009. The Bank sold no investment securities available for sale during the three months ended September 30, 2009, however, during the nine months ended September 30, 2009, $20.9 million were sold, compared to none sold during the three and nine months ended September 30, 2008. Portions of the proceeds from investment maturities and sales were used to fund maturing borrowings, the decline in deposits or reinvested into interest-bearing overnight deposits.
Mortgage-backed securities available for sale increased to $85.7 million at September 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 nine months ended September 30, 2009, $5.7 million and $62.0 million of mortgage loans held for sale were securitized into mortgage-backed securities available for sale; compared to none for the three months and $4.0 million for the nine months ended September 30, 2008.
Mortgage-backed securities held for investment were $597,000 at September 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 declined in market value by a net of $194,000 at September 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 $7.4 million at September 30, 2009 compared to $5.6 million at December 31, 2008. Proceeds from loan sales were $15.6 million and $25.4 million for the three and nine months ended September 30, 2009, compared to $10.1 and $33.5 million sold during the three and nine months ended September 30, 2008. The proceeds from loans sold during the three and nine months ended September 30, 2009 were used to fund liquidity needs of the Bank, including loan originations, repayment of borrowings, deposit outflows and general operations of the Bank. Loans serviced for others were $281.9 million at September 30, 2009, compared to $255.5 million at December 31, 2008.
Net loans and leases receivable held for investment declined to $674.3 million at September 30, 2009 from $739.2 million at December 31, 2008. During the three and nine months ended September 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 was used to fund the liquidity needs of the Bank.
Non-accrual loans improved to $7.1 million at September 30, 2009, from $10.7 million at December 31, 2008, reflecting management's efforts of managing problem assets and improving the Bank's credit quality. Restructured loans were $4.3 million at both September 30, 2009 and December 31, 2008. The level of non-accrual and restructured loans is primarily attributable to the current economic environment. Downward pressure has impacted the market values of housing and other real estate, 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 loan 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 $12.5 million at September 30, 2009 from $7.7 million at 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 nine months ended September 30, 2009, the Bank recorded $449,000 and $1.8 million of fair value adjustments to other real estate owned, compared to $462,000 and $533,000 of fair value adjustments made during the three and nine months ended September 30, 2008. 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.
Total deposits declined to $709.9 million at September 30, 2009 from $716.4 million at December 31, 2008. Demand accounts (personal and business checking accounts and money market accounts) declined to $220.0 million at September 30, 2009 from $223.4 million at December 31, 2008, while time deposits and savings accounts declined to $489.8 million at September 30, 2009 from $493.1 million at December 31, 2008. During the three and nine months ended September 30, 2009, the Bank began repricing certain new and maturing time deposits at lower rates, and combined with the current volume of lower costing checking accounts, is effectively managing its deposit cost.
Borrowed money consisting of FHLB advances and repurchase agreements declined to $39.0 million at September 30, 2009 from $52.6 million at December 31, 2008. FHLB advances were $35.0 million at September 30, 2009 and $45.0 million at December 31, 2008. They are fixed rate advances with a weighted average cost of 3.0% and remaining terms ranging from 4 to 16 months, which the Bank has used as a long-term source of funds. Repurchase agreements (cash management accounts for commercial banking customers) were $4.0 million at September 30, 2009, compared to $7.6 million at December 31, 2008.
Stockholders' equity was $87.3 million at September 30, 2009 and $87.8 million at December 31, 2008. The equity to assets ratio was 10.2% at September 30, 2009 and 10.0% at December 31, 2008, reflecting the net effect of year-to-date earnings, dividend payments, stock option exercises, common stock purchases, the change 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 $985,000 at September 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 September 30, 2009, the Bank's regulatory capital ratios were in excess of all regulatory requirements and are as follows: Total Risk-Based Capital - 13.2%; Tier 1 Risk-Based Capital - 11.9 %; and Tier 1 Leverage Capital - 9.3%. See "Liquidity and Capital Resources" below for additional information.
On September 24, 2009, the Company declared a cash dividend of $0.20 per share, payable October 22, 2009 to stockholders of record as of October 7, 2009. This dividend payment represents a 111.1% payout ratio of the basic earnings per share for the quarter ended September 30, 2009, and is the Company's fiftieth consecutive quarterly cash dividend.
The Company purchased no shares of its common stock during the three and nine months ended September 30, 2009, compared to 15,000 and 140,241 purchased during the three and nine months ended September 30, 2008. 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. There were 1,513,626 treasury shares held at September 30, 2009 totaling $32.2 million, compared to 1,516,126 held at December 31, 2008 totaling $32.2 million. Treasury shares are used for general corporate purposes including the exercise of stock options and providing shares for potential future stock splits. There were 2,500 shares issued from the exercise of stock options during the three and nine months ended September 30, 2009, compared to no shares issued during the three months and 90,499 shares issued during the nine months ended September 30, 2008.
Comparison of Operating Results - Three and Nine Months Ended September 30, 2009 and 2008. Net income for the three and nine months ended September 30, 2009 was $1.8 million and $5.5 million, compared to $2.1 million and $9.0 million for the three and nine months ended September 30, 2008. Diluted earnings per share were $0.18 and $0.57 per share for the three and nine months ended September 30, 2009, compared to $0.21 and $0.93 per share for the three and nine months ended September 30, 2008.
The decline in net earnings during the three and nine months ended September 30, 2009 results primarily from: a reduction in net interest income which has been significantly impacted by declining interest rates during the comparative reporting periods; changes in the volume of earning and non-earning assets between the respective reporting periods; the volume of provisions for credit losses required to replenish net charge-offs and strengthen the allowance for credit losses; and increased FDIC insurance premiums related to increased risk based assessment rates and an industry wide mandatory special assessment; while being partially offset by a decline in the cost of funds and a consistent level of 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 remain 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% for both the three and nine months ended September 30, 2009, compared to 0.9% and 1.3% for the three and nine months ended September 30, 2008. ROE was 8.1% and 8.4% for the three and nine months ended September 30, 2009, compared to 9.4% and 13.7% for the three and nine months ended September 30, 2008. The efficiency ratio was 61.1% and 58.5% for the three and nine months ended September 30, 2009, compared to 55.3% and 50.9% for the three and nine months ended September 30, 2008.
Interest Income. Interest income was $12.2 million and $37.2 million for the three and nine months ended September 30, 2009, compared to $14.4 million and $46.0 million for the three and nine months ended September 30, 2008. The reduction in interest income volume is due primarily to the decline in interest rates during the comparative reporting periods and a decline in the volume of average interest-earning assets. Average interest-earning assets were $801.6 million and $809.1 million for the three and nine months ended September 30, 2009, compared to $830.8 million and $846.9 million for the three and nine months ended September 30, 2008. The reduction in average interest-earning assets reflects the net impact of the decrease in loans held for investment, sales and maturities of investment securities and mortgage backed securities, the increase in other real estate owned and the volume of non-performing loans discussed above. The yield on average interest-earning assets was 6.1% for both the three and nine months ended September 30, 2009, compared to 6.9% and 7.2% for the three and nine months ended September 30, 2008. The yield on average interest-earning assets has been directly impacted by the decline in interest rates and average interest-earning assets during the comparative reporting periods as discussed above.
Interest Expense. Interest expense declined to $3.9 million and $13.1 million for the three and nine months ended September 30, 2009, compared to $5.4 million and $18.2 million for the three and nine months ended September 30, 2008, reflecting a decline in interest rates between the comparative reporting periods and a decline in the volume of average interest-bearing liabilities. The effective cost of funds was 2.0% and 2.2% for the three and nine months ended September 30, 2009, compared to 2.7% and 3.0% for the three and nine months ended September 30, 2008. The Company was able to improve its cost of funds by the combination of deposit repricing, and the rollover of maturing time deposits and the repositioning of borrowings within the current lower interest rate environment. Average deposits and borrowings were $771.9 million and $778.1 million for the three and nine months ended September 30, 2009, compared to $799.7 million and $811.9 million for the three and nine months ended September 30, 2008.
Net Interest Income. Net interest income was $8.3 million and $24.1 million for the three and nine months ended September 30, 2009, compared to $9.0 million and $27.8 million for the three and nine months ended September 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 4.1% and 3.9% for the three and nine months ended September 30, 2009, compared to 4.2% for both the three and nine months ended September 30, 2008. The net yield on interest-earning assets (net interest income divided by average interest-earning assets) was 4.1% and 4.0% for the three and nine months ended September 30, 2009, compared to 4.3% and 4.4% for the three and nine months ended September 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 as discussed above.
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 $1.3 million and $4.5 million of provisions for credit losses in the three and nine months ended September 30, 2009, compared to $1.7 million and $2.9 million in the three and nine months ended September 30, 2008, reflecting the current volume of non-performing loans as previously discussed. The provision for credit losses was necessary to replenish net charge offs of $668,000 and $3.9 million recorded in the three and nine months ended September 30, 2009 compared to $431,000 and $1.1 million in the three and nine months ended September 30, 2008, 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 are 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 and impairment analysis. 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 has not changed its practices related to the determination of the adequacy of the allowance for credit losses. The Bank uses a variety of modeling and estimation tools for measuring credit risk and performing impairment analysis, which is the basis 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. Management of the Bank reassess the information upon which it bases the allowance for credit losses quarterly and believes their accounting decisions remain accurate. 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 $12.6 million at September 30, 2009, compared to $12.0 million December 31, 2008. The ratio of the allowance for credit losses to loans and leases was 1.8% at September 30, 2009 and 1.6% December 31, 2008. For additional information, see "Note 3. Allowance for Credit Losses" of "Notes to Consolidated Financial Statements (Unaudited)" and "Critical Accounting Policies".
Noninterest Income. Noninterest income was $2.4 million and $8.4 million for the three and nine months ended September 30, 2009, compared to $2.4 million and $7.9 million for the three and nine months ended September 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 servicing fees collected were $2.0 million and $6.0 million for the three and nine months ended September 30, 2009, compared to $2.1 million and $6.4 million for the three and nine months ended September 30, 2008. Fees, service charges earned and insufficient funds fees collected during each period are 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 loan sales and mortgage-backed securities of $247,000 and $935,000 during the three and nine months ended September 30, 2009, compared to $136,000 and $610,000 during the three and nine months ended September 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 recorded no gains from investment security sales during the three months ended September 30, 2009 and $918,000 during the nine months ended September 30, 2009, compared to no investment security sales in the three and nine months ended September 30, 2008.
Noninterest Expense. Noninterest expenses were $6.5 million and $19.0 million for the three and nine months ended September 30, 2009, compared to $6.3 million and $18.2 million for the three and nine months ended September 30, 2008. The largest component is compensation and fringe benefits at $3.5 million and $10.5 million for the three and nine months ended September 30, 2009, compared to $3.4 million and $10.4 million for the three and nine months ended September 30, 2008, reflecting the Bank's efforts in managing its human resources cost.
FDIC insurance premiums increased to $275,000 and $955,000 for the three and nine months ended September 30, 2009, from $109,000 and $153,000 for the three and nine months ended September 30, 2008, reflecting an industry wide mandatory special assessment totaling $400,000 at June 30, 2009 and increased risk based assessment rates. 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 increase of other real estate owned were $394,000 and $737,000 in the three and nine months ended September 30, 2009, compared to $501,000 and $612,000 in the three and nine months ended September 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 $3.5 million for the three and nine months ended September 30, 2009, compared to $1.3 million and $5.6 million for the three and nine months ended September 30, 2008. Changes in amounts of income tax provisions reflect changes in pretax income and estimated income tax rates in effect during each period. Effective income tax rates were 38.9% and 38.7% for the three and nine months ended September 30, 2009, compared to 38.7% and 38.6% for the three and nine months ended September 30, 2008. See "Critical Accounting Policies" 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 September 30, 2009, the Bank had cash, deposits in banks, investment securities, mortgage-backed securities and loans held for sale totaling $140.4 million, compared to $101.7 million at December 31, 2008, representing 19.0% 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 1 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 1 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 September 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.
Loan Impairment and Allowance for Credit Losses. 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, . . .
|
|