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FABK > SEC Filings for FABK > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for FIRST ADVANTAGE BANCORP

Form 10-Q for FIRST ADVANTAGE BANCORP


13-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation

Management's discussion and analysis of the Company's financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited condensed consolidated financial statements and footnotes appearing in Part I, Item 1 of this report and the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the SEC on March 9, 2012.

Forward-Looking Statements.

This quarterly report contains forward-looking statements that are based on assumptions and may describe future plans, strategies, and expectations of First Advantage Bancorp. These forward-looking statements are generally identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiary include, but are not limited to, changes in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality and composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in First Advantage Bank's market area, changes in real estate market values in First Advantage Bank's market area, changes in relevant accounting principles and guidelines and the inability of third party service providers to perform.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.


General.

The Bank provides commercial and retail banking services, including commercial loans, commercial real estate loans, one-to-four family residential mortgage loans, home equity loans and lines of credit and consumer loans as well as certificates of deposit, checking accounts, money-market accounts and savings accounts within its market area. At September 30, 2012, the Company had total assets of $362.5 million, deposits of $253.0 million and shareholders' equity of $66.5 million. Unless otherwise indicated, all references to the Company refer collectively to the Company and the Bank.

Recent Developments.

As previously announced in June 2012, the Bank gained regulatory approval to establish a loan production and deposit production office in Nashville, Tennessee. As we began establishing our presence in Nashville, we expanded our staff and implemented the expansion of our leased space on West End Avenue. In September 2012, our application for the office to become a full service branch was approved. Our intended focus will be on small to mid-sized commercial customers offering a full array of commercial products, including a Small Business Administration (SBA) sponsored loan program.

Personnel costs, lease expense and addition of fixed assets and leasehold improvements have had an immediate impact on earnings during the startup phase, while prospective loan interest income and fee income from deposit services have not yet had the opportunity to offset these costs. Over the long-term, we expect to realize more interest and fee income on loans as well as fees generated from treasury management services along with service charge income on deposit accounts.

Application of Critical Accounting Policies.

The discussion and analysis of the Company's financial condition and results of operation is based upon the Company's unaudited condensed consolidated financial statements, which have been prepared in conformity with GAAP for interim financial information and with the instructions for Form 10-Q. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that 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. The Company considers the allowance for loan losses and other-than-temporary impairment of securities to be its only critical accounting policies.

Allowance for Loan Losses. The Company maintains the allowance for loan losses at a level that it considers to be adequate to provide for credit losses inherent in its loan portfolio. Management determines the level of the allowance by performing a quarterly analysis that considers concentrations of credit, past loss experience, current economic conditions, the amount and composition of the loan portfolio (including nonperforming and potential problem loans), the estimated fair value of underlying collateral, and other information relevant to assessing the risk of loss inherent in the loan portfolio. As a result of management's analysis, a range of potential amounts of the allowance for loan losses is determined.

Currently, management closely monitors the impact of troop deployments at Fort Campbell Military Base, a local U. S. Army installation that plays a significant role in the economy of the Bank's primary market area. Additionally, given the Bank's concentration in real estate secured loans, management is continuing to closely monitor trends in the local real estate market to assess any related impact on the loan portfolio and potential delinquencies or credit losses.

The Company continually monitors the adequacy of the allowance for loan losses and makes additions to the allowance in accordance with the analysis described above. Because of uncertainties inherent in estimating the appropriate level of the allowance for loan losses, actual results may differ from management's estimate of credit losses and the related allowance.

Other-than-temporary Impairment of Securities. Investments that we currently own could suffer declines in fair value that are other-than-temporary. We monitor our portfolio continuously and actively manage our investments to preserve values whenever possible. When, in the opinion of management, a decline in the fair value of an investment is considered to be other-than-temporary, such investment is written-down to its fair value. The amount written-down is recorded in earnings as an other-than-temporary impairment on investments. We did not record any other-than-temporary impairment of securities during the first nine months of 2012.


Comparison of Financial Condition at September 30, 2012 and December 31, 2011

Total Assets. At September 30, 2012, total assets were $362.5 million, a decrease of $3.6 million, compared to $366.1 million at December 31, 2011. On April 30, 2012, the Bank extinguished a maturing long-term debt obligation in the amount of $10.0 million using cash, thereby resulting in a $10.0 million reduction in total assets and liabilities from that transaction.

Cash and Cash Equivalents. Cash and cash equivalents were $26.7 million at September 30, 2012 compared to $10.8 million at December 31, 2011. The reduction in loan balances and investment balances and the increase in deposits contributed to the $16.0 million increase in cash and cash equivalents.

Investments. Our investment securities portfolio consists primarily of U.S. government and callable federal agency bonds and U.S. government agency mortgage-backed securities, with a relatively smaller investment in obligations of state and political subdivisions and other securities. Total securities were $58.5 million at September 30, 2012, a decrease of $11.7 million, or 16.7%, compared to $70.3 million as of December 31, 2011.

Loans. Net loans decreased $2.3 million to $257.2 million at September 30, 2012 compared to $259.5 million as of December 31, 2011. Our primary lending activity is the origination of loans secured by real estate, which grew to $218.5 million at September 30, 2012 compared to $212.9 million as of December 31, 2011. This growth was offset by a collective decline in consumer and commercial loans of $7.0 million. The Company does not originate sub-prime residential mortgage loans, nor does it hold any in its loan portfolio or hold any investment securities that are collateralized by sub-prime residential mortgage loans.

Allowance for Loan Losses. The allowance for loan losses increased $791,000, or 18.3%, to $5.1 million at September 30, 2012 compared to $4.3 million as of December 31, 2011.

The level of classified assets increased approximately $2.6 million from $11.5 million at December 31, 2011 to $14.1 million at September 30, 2012 primarily related to increases in land and multi-family/nonresidential loan portfolios. Classified assets are primarily loans rated special mention or substandard in accordance with regulatory guidance. These assets warrant and receive increased management oversight and loan loss reserves are evaluated and adjusted to account for the increased credit risk of these assets.

Deposits. Total deposits increased by $20.4 million, or 8.8% to $253.0 million at September 30, 2012 compared to $232.6 million as of December 31, 2011. The increase in total deposits was primarily related to an increase in time certificates of $19.4 million, or 27.6% to $89.5 million at September 30, 2012. Demand deposits increased $3.8 million during the period, while savings, checking, and money market accounts declined by $2.8 million in the same period.

Borrowings. Long-term debt with other banks decreased $10.0 million, or 28.6%, to $25.0 million at September 30, 2012 compared to $35.0 million at December 31, 2011. The reduction in borrowings was the result of a scheduled maturity of a structured leverage transaction originated in 2008. FHLB advances remained unchanged and totaled $13.0 million at both September 30, 2012 and December 31, 2011. Securities sold under agreements to repurchase totaled $2.9 million as of September 30, 2012 compared to $4.2 million as of December 31, 2011.


Other Liabilities. Total other liabilities decreased by $2.3 million, or 51.0% to $2.2 million at September 30, 2012.

Shareholders' Equity. Total shareholders' equity remained unchanged at $66.5 million at both September 30, 2012 and December 31, 2011.

Comparison of Operating Results for the Three Months Ended September 30, 2012 and 2011

General. Net income for the three months ended September 30, 2012 was $442,000, a decrease of $84,000 or 16.0% compared to net income of $526,000 for the three months ended September 30, 2011. The decrease was primarily due to a decrease of $346,000 in net interest income after the provision for loan losses.

Net Interest Income. Net interest income increased $187,000, or 5.5%, to $3.6 million for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. Total interest income totaled $4.3 million for the three months ended September 30, 2012 compared to $4.4 million for the three months ended September 30, 2011.

Interest income on loans increased by 3.0% to $3.7 million for the three months ended September 30, 2012 compared to the three months ended September 30, 2011 as average outstanding loans increased by $20.0 million, or 8.4%, to $259.8 million, while the yield on the portfolio decreased twenty-seven basis points from the same period in 2011. Late in 2011, the Bank purchased approximately $14.0 million in loans from another institution which contributed to the growth in average outstanding balances.

Interest income on investment securities decreased by $132,000, or 18.5%, to $580,000 for the three months ended September 30, 2012 from the same period in 2011 as average balances decreased $7.6 million and average yields decreased thirty-three basis points.

Total interest expense decreased by $208,000 or 21.4% to $762,000 for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011. The average balance of interest-bearing deposits increased 10.7% to $222.4 million for the quarter ended September 30, 2012 as compared to the quarter ended September 30, 2011. Interest paid on interest-bearing deposits decreased by $84,000, or 15.9%, to $444,000 for the three month period ended September 30, 2012 as the average interest rate paid declined twenty-five basis points, primarily as a result of lower interest rates paid to customers as higher rate fixed-term deposits matured and on transaction accounts as market rates declined. The average interest rate paid on FHLB advances and other borrowings, which consisted of long-term FHLB advances and securities sold under agreement to repurchase, decreased by thirteen basis points in the third quarter of 2012 as average balances of FHLB advances and other borrowings decreased to an average of $16.9 million for the quarter ended September 30, 2012 compared to average balances of $18.4 million for the quarter ended September 30, 2011. The average balance of long-term borrowings at other banks decreased to an average of $25.0 million for the quarter ended September 30, 2012 compared to $35.0 million the quarter ended September 30, 2011 due to a scheduled paydown of long-term debt. The interest rate paid on the borrowings decreased by twenty-four basis points during the same period.


The following table summarizes average balances and average yields and costs for the three months ended September 30, 2012 and 2011.

                                                         Average Balance Sheet for the
                                                       Three Months Ended September 30,
                                         2012                                       2011

                                       Interest                                   Interest
                         Average       Income/        Yield/        Average       Income/        Yield/
                         Balance       Expense         Rate         Balance       Expense         Rate
                                                      (Dollars in thousands)
ASSETS:

Interest-earning
assets:
Interest-earning
deposits at other
banks                   $  17,453     $       10          0.23 %   $  19,179     $       15          0.31 %
Loans                     259,839          3,688          5.65 %     239,812          3,580          5.92 %
Investment securities      61,596            580          3.75 %      69,231            712          4.08 %
Other
interest-earning
assets                      5,107             51          3.97 %       4,456             43          3.83 %
Total
interest-earning
assets                    343,995          4,329          5.01 %     332,678          4,350          5.19 %

Noninterest-earning
assets                     15,318                                     16,934
Total                   $ 359,313                                  $ 349,612

LIABILITIES AND SHAREHOLDERS'
EQUITY:
Interest-bearing
deposits                  222,365            444          0.79 %     200,911            528          1.04 %
FHLB advances and
other borrowings           16,900            102          2.40 %      18,356            117          2.53 %
Long-term borrowings
at other banks             25,000            216          3.44 %      35,000            325          3.68 %
  Total
interest-bearing
liabilities               264,265            762          1.15 %     254,267            970          1.51 %

Noninterest-bearing
deposits                   26,581                                     24,699
Other
noninterest-bearing
liabilities                 1,757                                      2,851
Shareholders' equity       66,710                                     67,795

Total                   $ 359,313                                  $ 349,612


Net Interest Income                   $    3,567                                 $    3,380


Net Interest Margin                                       4.13 %                                     4.03 %


Interest rate spread                                      3.86 %                                     3.68 %

Average
interest-earning
assets to
average
interest-bearing
liabilities                                             130.17 %                                   130.84 %


Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rates (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. Changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionately between rate and volume.

                                                  Three Months Ended
                                   September 30, 2012 Compared to September 30, 2011
                                              Increase (Decrease) Due To
                                   Volume                 Rate                 Net
                                               (Dollars in thousands)
      Interest earned on:
        Interest-earning
    assets:
         Interest-earning
    demand deposits            $             7         $       (12 )       $        (5 )
         Loans                             539                (431 )               108
         Investment
    securities                              60                (192 )              (132 )
         Other
    interest-earning assets                  1                   7                   8
       Total Earning Assets                607                (628 )               (21 )

      Interest paid on:
        Interest bearing
    deposits                             1,322              (1,406 )               (84 )
        FHLB advances and
    other borrowings                         6                 (21 )               (15 )
        Long-term borrowings
    at other banks                         (40 )               (69 )              (109 )
      Total Interest-Bearing
    Liabilities                          1,288              (1,496 )              (208 )
      Change in Net Interest
    Income                     $          (681 )       $       868         $       187

Provision for Loan Losses. The Company recorded a provision for loan losses of $768,000 for the three months ended September 30, 2012 compared to a provision of $235,000 for the three months ended September 30, 2011. During the third quarter of 2012, the Bank received an appraisal which indicated a shortfall in value of the collateral securing one non-residential commercial real estate loan totaling $3.1 million. Consequently a specific impairment of $888,000 was recorded and the provision was increased accordingly. This loan continues to pay based on the restructured contractual terms and is not past due and has not been placed on non-accrual status. Management believes that the specific reserves carried are adequate to cover potential future losses related to this relationship. The Bank's management reviews the level of the allowance for loan losses on a regular basis and establishes the provision for loan losses based upon the volume and types of lending, delinquency levels, loss experience, the amount of impaired and classified loans, economic conditions and other relevant factors related to the collectability of the loan portfolio.


Non-interest Income. The following table summarizes non-interest income for the three months ended September 30, 2012 and 2011 and the percentage change for each category of income.

                                           Three Months Ended September 30,
                                        2012             2011          % Change
                                                  (Dollars in thousands)
         Non-interest Income
         Service charges on
         deposit accounts and
         other fees                  $      296       $      327           (9.48) %
         Loan servicing and other
         fees                                38               35             8.57 %
         Net gains on sales of
         mortgage loans held for
         sale                               279              191            46.07 %
         Net (loss) gain on sales
         of other real estate
         owned                              (28 )              1        (2900.00) %
         Net realized gain on
         available-for-sale
         securities                           -               25                - %
         Net realized gain on
         sales of other assets
         held-for-sale                      546                -                - %
         Insurance and brokerage
         commissions                         39               58          (32.76) %
         Other                                4                5          (20.00) %
         Total non-interest income   $    1,174       $      642            82.87 %

Total non-interest income for the three months ended September 30, 2012 increased by $532,000 to $1.2 million, compared to $642,000 for the three months ended September 30, 2011. The increase in total non-interest income for the three months ended September 30, 2012 was primarily the result a $546,000 gain on sale of other assets held-for-sale during the period. This gain was partially offset by a decrease of $31,000 in service charges on deposit accounts and other fees during the third quarter of 2012 as compared to the third quarter of 2011. Increased mortgage refinance activity during 2012 due to the extended low rate environment resulted in increased gains on mortgage loan sales.

Non-interest Expense. The following table summarizes non-interest expense for the three months ended September 30, 2012 and 2011 and the percentage change for each expense category.

                                                   Three Months Ended September 30,
                                                 2012             2011        % Change
                                                         (Dollars in Thousands)
   Non-interest Expense
   Salaries and employee benefits             $    1,796       $    1,491         20.46 %
   Net occupancy expense                             223              178         25.28 %
   Equipment expense                                 182              177          2.82 %
   Data processing fees                              243              239          1.67 %
   Professional fees                                 267              231         15.58 %
   Marketing expense                                  94              117       (19.66) %
   Supplies and communication                         96               89          7.87 %
   Loan collection and repossession expense           50                5        900.00 %
   Other                                             460              401         14.71 %
   Total non-interest expense                 $    3,411       $    2,928         16.50 %

Total non-interest expense increased by $483,000, or 16.5% to $3.4 million for the three months ended September 30, 2012 as compared to the same period in 2011. The increase was primarily found in salaries and employee benefits expense, which increased by $305,000 or 20.5%, and net occupancy expense which was $223,000 in the third quarter of 2012 as compared to $178,000 in the third quarter of 2011. These increased expenses are related to the startup of the Bank's new Nashville branch office. These increases in non-interest expense were somewhat offset by a decrease in marketing expense of $23,000, or 19.7% as compared to the same period one year ago.


Income Taxes. Income tax expense for the three months ended September 30, 2012 was $120,000 compared to $333,000 for the same period in 2011. The effective income tax rate for the three months ended September 30, 2012 was 21.4% compared to 38.8% for the three months ended September 30, 2011. The effective tax rate for the quarter declined due to the decrease in pre-tax income relative to last year and the fact permanent differences, such as tax exempt interest, were static on a comparative basis.

Comparison of Operating Results for the Nine Months Ended September 30, 2012 and 2011

General. Net income for the nine months ended September 30, 2012 was $2.0 million, an increase of 43.2% compared to net income of $1.4 million for the nine months ended September 30, 2011. The increase in net income was primarily due to an increase in noninterest income of $983,000, or 51.6%, at September 30, 2012 as compared to September 30, 2011.

Net Interest Income. The Company experienced an increase of $742,000, or 7.3% in net interest income to $10.9 million for the nine months ended September 30, 2012 compared to $10.2 million for the nine months ended September 30, 2011. Total interest income increased $222,000, or 1.7% to $13.4 million for the nine months ended September 30, 2012 while total interest expense decreased $520,000, or 17.4% to $2.5 million for the nine months ended September 30, 2012 as compared to the same period in 2011.

Interest income on loans increased 5.2% to $11.3 million during the nine months ended September 30, 2012 as the average outstanding balance increased by 8.3% or $20.0 million to $261.1 million, while the yield on the portfolio decreased eighteen basis points from the same period in 2011. Intense competition for quality loans has influenced the rates charged for loans in 2012.

Interest income on investment securities decreased by $330,000, or 14.9%, to $1.9 million for the nine months ended September 30, 2012 from the same 2011 period as average balances decreased 4.2% to $66.7 million at September 30, 2012 and average yields decreased forty-eight basis points. Accelerated prepayments on mortgage-backed securities and calls on agency bonds have resulted in lower investment balances.

The average balance of interest-bearing deposits increased to $216.5 million for the nine months ended September 30, 2012 compared to an average balance of $198.1 million for the nine months ended September 30, 2011. Interest paid on interest-bearing deposits declined by $310,000, or 18.5%, to $1.4 million for the nine month period ended September 30, 2012 as the average interest rate paid declined twenty-nine basis points, primarily as a result of lower interest rates paid to customers as higher rate fixed-term deposits matured and lower rates paid on transaction accounts as market rates declined. Interest paid on FHLB advances and other borrowings, which consisted of long-term FHLB advances and . . .

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