UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2009
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________.
Commission File Number: 0-27672
NORTH CENTRAL BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Iowa | | 42-1449849 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
825 Central Avenue, Fort Dodge, Iowa | | 50501 |
(Address of principal executive offices) | | (Zip Code) |
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ | Accelerated filer ¨ |
Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No þ
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class | | Outstanding at November 11, 2009 |
Common Stock, $.01 par value | | 1,346,448 |
NORTH CENTRAL BANCSHARES, INC.
INDEX
| Page |
| |
Part I. Financial Information | |
| |
Item 1. Financial Statements (Unaudited) | 1 |
| |
Consolidated Condensed Statements of Financial Condition at September 30, 2009 and December 31, 2008 | 1 |
| |
Consolidated Condensed Statements of Income for the Three Months and Nine Months Ended September 30, 2009 and 2008 | 2 |
| |
Consolidated Condensed Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2009 and 2008 | 3 |
| |
Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008 | 4 |
| |
Notes to Consolidated Condensed Financial Statements | 6 |
| |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 |
| |
Item 3. Quantitative and Qualitative Disclosure About Market Risk | 26 |
| |
Item 4T. Controls and Procedures | 26 |
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Part II. Other Information | |
| |
Item 1. Legal Proceedings | 26 |
| |
Item 1A. Risk Factors | 27 |
| |
Item 6. Exhibits | 28 |
| |
Signatures | 29 |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
| | September 30, | | | December 31, | |
| | 2009 | | | 2008 | |
ASSETS | | | | | | |
| | | | | | |
Cash and due from banks: | | | | | | |
Interest-bearing | | $ | 2,548,210 | | | $ | 6,563,494 | |
Noninterest-bearing | | | 9,217,624 | | | | 9,718,150 | |
Total cash and cash equivalents | | | 11,765,834 | | | | 16,281,644 | |
Securities available-for-sale | | | 25,142,249 | | | | 22,837,968 | |
Federal Home Loan Bank stock, at cost | | | 4,739,000 | | | | 4,692,400 | |
Loans receivable, (net of allowance for loan loss of $5,956,743 and $5,379,155 respectively) | | | 383,866,542 | | | | 400,786,505 | |
Loans held for sale | | | 745,458 | | | | 730,466 | |
Accrued interest receivable | | | 1,899,607 | | | | 2,096,784 | |
Foreclosed real estate | | | 1,422,770 | | | | 1,182,917 | |
Premises and equipment, net | | | 11,972,207 | | | | 12,113,092 | |
Rental real estate | | | 2,273,997 | | | | 2,358,688 | |
Title plant | | | 671,704 | | | | 671,704 | |
Deferred taxes | | | 1,404,799 | | | | 3,003,565 | |
Bank-owned life insurance | | | 5,481,738 | | | | 5,293,871 | |
Prepaid expenses and other assets | | | 1,869,945 | | | | 1,248,232 | |
| | | | | | | | |
Total assets | | $ | 453,255,850 | | | $ | 473,297,836 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
| | | | | | | | |
LIABILITIES | | | | | | | | |
Deposits | | $ | 328,751,602 | | | $ | 350,169,925 | |
Borrowed funds | | | 72,825,739 | | | | 82,348,915 | |
Advances from borrowers for taxes and insurance | | | 861,619 | | | | 1,923,758 | |
Dividend payable | | | 13,464 | | | | 13,434 | |
Accrued expenses and other liabilities | | | 2,702,506 | | | | 3,629,661 | |
| | | | | | | | |
Total liabilities | | | 405,154,930 | | | | 438,085,693 | |
| | | | | | | | |
STOCKHOLDERS' EQUITY | | | | | | | | |
Preferred stock ($.01 par value, authorized 3,000,000 | | | | | | | | |
shares; at September 30, 2009 10,200 shares | | | | | | | | |
issued and outstanding; at December 31, 2008 | | | | | | | | |
none issued and outstanding) | | | 10,114,032 | | | | - | |
Common stock ($.01 par value, authorized 15,500,000 | | | | | | | | |
shares; at September 30, 2009 1,346,448 shares | | | | | | | | |
issued and outstanding; at December 31, 2008, | | | | | | | | |
1,343,448 shares issued and outstanding) | | | 13,443 | | | | 13,421 | |
Additional paid-in capital | | | 17,961,497 | | | | 17,819,096 | |
Retained earnings, substantially restricted | | | 19,558,953 | | | | 17,240,779 | |
Accumulated other comprehensive gain | | | 452,995 | | | | 138,847 | |
| | | | | | | | |
Total stockholders' equity | | | 48,100,920 | | | | 35,212,143 | |
| | | | | | | | |
Total liabilities and stockholders' equity | | $ | 453,255,850 | | | $ | 473,297,836 | |
See Notes to Consolidated Condensed Financial Statements.
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2009 | | | 2008 | | | 2009 | | | 2008 | |
| | | | | | | | | | | | |
Interest income: | | | | | | | | | | | | |
Loans receivable | | $ | 5,878,253 | | | $ | 6,698,254 | | | $ | 18,063,597 | | | $ | 20,749,524 | |
Securities and cash deposits | | | 279,356 | | | | 267,728 | | | | 846,533 | | | | 859,625 | |
| | | 6,157,609 | | | | 6,965,982 | | | | 18,910,130 | | | | 21,609,149 | |
| | | | | | | | | | | | | | | | |
Interest expense: | | | | | | | | | | | | | | | | |
Deposits | | | 1,547,248 | | | | 2,543,881 | | | | 5,403,044 | | | | 8,379,181 | |
Borrowed funds | | | 858,484 | | | | 1,131,914 | | | | 2,745,765 | | | | 3,484,831 | |
| | | 2,405,732 | | | | 3,675,795 | | | | 8,148,809 | | | | 11,864,012 | |
| | | | | | | | | | | | | | | | |
Net interest income | | | 3,751,877 | | | | 3,290,187 | | | | 10,761,321 | | | | 9,745,137 | |
| | | | | | | | | | | | | | | | |
Provision for loan losses | | | 450,000 | | | | 60,000 | | | | 1,220,000 | | | | 280,000 | |
Net interest income after provision for loan losses | | | 3,301,877 | | | | 3,230,187 | | | | 9,541,321 | | | | 9,465,137 | |
| | | | | | | | | | | | | | | | |
Noninterest income: | | | | | | | | | | | | | | | | |
Fees and service charges | | | 1,148,759 | | | | 1,234,639 | | | | 3,168,446 | | | | 3,358,298 | |
Abstract fees | | | 223,456 | | | | 238,737 | | | | 722,947 | | | | 787,886 | |
Mortgage banking income | | | 177,131 | | | | 111,167 | | | | 823,868 | | | | 422,216 | |
Loan prepayment fees | | | 30,715 | | | | 900 | | | | 242,881 | | | | 5,531 | |
Other income | | | 353,149 | | | | 336,294 | | | | 1,119,894 | | | | 955,697 | |
| | | | | | | | | | | | | | | | |
Total noninterest income | | | 1,933,210 | | | | 1,921,737 | | | | 6,078,036 | | | | 5,529,628 | |
| | | | | | | | | | | | | | | | |
Investment securities gains (losses), net: | | | | | | | | | | | | | | | | |
Total other-than-temporary impairment losses | | | - | | | | (3,850,900 | ) | | | (23,343 | ) | | | (5,810,811 | ) |
Portion of loss recognized in other comprehensive income (loss) before taxes | | | - | | | | - | | | | - | | | | - | |
Net impairment losses recognized in earnings | | | - | | | | (3,850,900 | ) | | | (23,343 | ) | | | (5,810,811 | ) |
Realized securities gains (losses), net | | | 5,540 | | | | - | | | | (14,404 | ) | | | - | |
Total securities gains (losses), net | | | 5,540 | | | | (3,850,900 | ) | | | (37,747 | ) | | | (5,810,811 | ) |
| | | | | | | | | | | | | | | | |
Noninterest expense: | | | | | | | | | | | | | | | | |
Compensation and employee benefits | | | 1,856,575 | | | | 1,766,045 | | | | 5,568,730 | | | | 5,600,966 | |
Premises and equipment | | | 464,459 | | | | 423,783 | | | | 1,393,290 | | | | 1,279,964 | |
Data processing | | | 185,959 | | | | 229,002 | | | | 594,371 | | | | 715,286 | |
FDIC insurance expense | | | 143,544 | | | | 72,940 | | | | 615,948 | | | | 105,175 | |
Other expenses | | | 1,075,213 | | | | 1,064,178 | | | | 3,407,934 | | | | 3,233,287 | |
| | | | | | | | | | | | | | | | |
Total noninterest expense | | | 3,725,750 | | | | 3,555,948 | | | | 11,580,273 | | | | 10,934,678 | |
| | | | | | | | | | | | | | | | |
Income (loss) before income taxes | | | 1,514,877 | | | | (2,254,924 | ) | | | 4,001,337 | | | | (1,750,724 | ) |
| | | | | | | | | | | | | | | | |
Provision for income taxes | | | 513,100 | | | | 495,000 | | | | 1,323,500 | | | | 1,152,500 | |
| | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 1,001,777 | | | $ | (2,749,924 | ) | | $ | 2,677,837 | | | $ | (2,903,224 | ) |
| | | | | | | | | | | | | | | | |
Preferred stock dividends and accretion of discount | | $ | 131,991 | | | $ | - | | | $ | 382,875 | | | $ | - | |
| | | | | | | | | | | | | | | | |
Net income (loss) available to common stockholders | | $ | 869,786 | | | $ | (2,749,924 | ) | | $ | 2,294,962 | | | $ | (2,903,224 | ) |
| | | | | | | | | | | | | | | | |
Basic earnings (loss) per share | | $ | 0.65 | | | $ | (2.05 | ) | | $ | 1.71 | | | $ | (2.17 | ) |
| | | | | | | | | | | | | | | | |
Dilluted earnings (loss) per share | | $ | 0.65 | | | $ | (2.05 | ) | | $ | 1.71 | | | $ | (2.17 | ) |
| | | | | | | | | | | | | | | | |
Dividends declared per common share | | $ | 0.01 | | | $ | 0.01 | | | $ | 0.03 | | | $ | 0.71 | |
See Notes to Consolidated Condensed Financial Statements.
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 2008 and 2009
(Unaudited)
| | | | | | | | | | | | | | | | | Accumulated | | | | |
| | | | | | | | | | | Additional | | | | | | Other | | | Total | |
| | Comprehensive | | | Preferred | | | Common | | | Paid-in | | | Retained | | | Comprehensive | | | Stockholders' | |
| | Income (Loss) | | | Stock | | | Stock | | | Capital | | | Earnings | | | Income (Loss) | | | Equity | |
| | | | | | | | | | | | | | | | | | | | | |
Balance, January 1, 2008 | | | | | $ | - | | | $ | 13,392 | | | $ | 17,686,444 | | | $ | 24,483,022 | | | $ | (1,206,148 | ) | | $ | 40,976,710 | |
Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net (loss) | | $ | (2,903,224 | ) | | | | | | | - | | | | - | | | | (2,903,224 | ) | | | - | | | | (2,903,224 | ) |
Other comprehensive income, net of | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
reclassification adjustment and tax (Note 7) | | | 1,072,420 | | | | | | | | - | | | | - | | | | - | | | | 1,072,420 | | | | 1,072,420 | |
Total comprehensive (loss) | | $ | (1,830,804 | ) | | | | | | | | | | | | | | | | | | | | | | | | |
Dividends on common stock | | | | | | | | | | | - | | | | - | | | | (952,798 | ) | | | - | | | | (952,798 | ) |
Employee stock-based compensation | | | | | | | | | | | 20 | | | | 96,792 | | | | - | | | | - | | | | 96,812 | |
Issuance of 200 shares of common stock | | | | | | | | | | | 2 | | | | 4,538 | | | | - | | | | - | | | | 4,540 | |
Balance, September 30, 2008 | | | | | | $ | - | | | $ | 13,414 | | | $ | 17,787,774 | | | $ | 20,627,000 | | | $ | (133,728 | ) | | $ | 38,294,460 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, January 1, 2009 | | | | | | $ | - | | | $ | 13,421 | | | $ | 17,819,096 | | | $ | 17,240,779 | | | $ | 138,847 | | | $ | 35,212,143 | |
Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 2,677,837 | | | | - | | | | - | | | | - | | | | 2,677,837 | | | | | | | | 2,677,837 | |
Other comprehensive income, net of | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
reclassification adjustment and tax (Note 7) | | | 314,148 | | | | - | | | | - | | | | - | | | | - | | | | 314,148 | | | | 314,148 | |
Total comprehensive income | | $ | 2,991,985 | | | | | | | | | | | | | | | | | | | | | | | | | |
Dividends on preferred stock | | | | | | | - | | | | - | | | | - | | | | (306,000 | ) | | | | | | | (306,000 | ) |
Dividends on common stock | | | | | | | - | | | | - | | | | - | | | | (40,363 | ) | | | | | | | (40,363 | ) |
Employee stock-based compensation | | | | | | | - | | | | 22 | | | | 43,133 | | | | - | | | | - | | | | 43,155 | |
Issuance of preferred stock through the capital purchase program | | | | | | | 10,200,000 | | | | - | | | | - | | | | - | | | | - | | | | 10,200,000 | |
Discount on preferred stock | | | | | | | (99,268 | ) | | | - | | | | 99,268 | | | | - | | | | - | | | | - | |
Accretion of discount on preferred stock | | | | | | | 13,300 | | | | - | | | | - | | | | (13,300 | ) | | | | | | | - | |
Balance, September 30, 2009 | | | | | | $ | 10,114,032 | | | $ | 13,443 | | | $ | 17,961,497 | | | $ | 19,558,953 | | | $ | 452,995 | | | $ | 48,100,920 | |
See Notes to Consolidated Condensed Financial Statements
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
| | Nine Months Ended | |
| | September 30, | |
| | 2009 | | | 2008 | |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
Net income (loss) | | $ | 2,677,837 | | | $ | (2,903,224 | ) |
Adjustments to reconcile net income to net cash | | | | | | | | |
provided by operating activities: | | | | | | | | |
Provision for loan losses | | | 1,220,000 | | | | 280,000 | |
Depreciation | | | 675,338 | | | | 649,141 | |
Amortization and accretion | | | 383,596 | | | | 52,966 | |
Deferred taxes | | | 1,420,824 | | | | 48,551 | |
Stock-based compensation | | | 43,155 | | | | 85,115 | |
Excess tax benefit (expense) related to stock-based compensation | | | 18,550 | | | | (2,268 | ) |
(Gain) on sale of foreclosed real estate and loans, net | | | (823,694 | ) | | | (528,586 | ) |
Provision for impairment of investments | | | 23,343 | | | | 5,810,811 | |
Write-down of other real estate owned | | | 118,963 | | | | 359,696 | |
Loss on sale or disposal of equipment and other assets, net | | | 62 | | | | 6,299 | |
Loss on sale of investments | | | 14,404 | | | | - | |
Proceeds from sales of loans held-for-sale | | | 61,659,026 | | | | 34,533,178 | |
Originations of loans held-for-sale | | | (60,850,150 | ) | | | (33,105,072 | ) |
Change in assets and liabilities: | | | | | | | | |
Accrued interest receivable | | | 197,177 | | | | 201,175 | |
Prepaid expenses and other assets | | | (706,638 | ) | | | (251,235 | ) |
Accrued expenses and other liabilities | | | (920,599 | ) | | | (134,659 | ) |
| | | | | | | | |
Net cash provided by operating activities | | | 5,151,194 | | | | 5,101,888 | |
| | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | |
Net change in loans | | | 27,996,477 | | | | 50,178,568 | |
Purchase of loans | | | (14,428,954 | ) | | | (18,473,872 | ) |
Purchase of securities available-for-sale | | | (8,032,172 | ) | | | (10,800,499 | ) |
Proceeds from sale of securities available-for-sale | | | 832,000 | | | | 9,850 | |
Proceeds from maturities and calls of securities available-for-sale | | | 5,202,054 | | | | 1,468,059 | |
Proceeds from redemption of Federal Home Loan Bank stock | | | - | | | | 542,900 | |
Purchase of Federal Home Loan Bank stock | | | (46,600 | ) | | | (215,800 | ) |
Purchase of premises, equipment and rental real estate | | | (449,824 | ) | | | (344,840 | ) |
Proceeds from sale of premises and equipment | | | - | | | | 381 | |
Net proceeds from sale of foreclosed real estate | | | 1,428,536 | | | | 3,707,708 | |
| | | | | | | | |
Net cash provided by investing activities | | | 12,501,517 | | | | 26,072,455 | |
| | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
Net (decrease) in deposits | | | (21,418,323 | ) | | | (20,747,190 | ) |
Net (decrease) in advances from borrowers for taxes and insurance | | | (1,062,139 | ) | | | (1,043,641 | ) |
Proceeds from other borrowed funds | | | 8,500,000 | | | | 11,500,000 | |
Payments of other borrowed funds | | | (18,023,176 | ) | | | (21,522,306 | ) |
Proceeds from issuance of common stock, preferred stock and common stock warrant | | | 10,200,000 | | | | 4,504 | |
Excess tax benefit (expense) related to stock-based compensation | | | (18,550 | ) | | | 2,268 | |
Common and preferred dividends paid | | | (346,333 | ) | | | (1,408,344 | ) |
| | | | | | | | |
Net cash (used in) financing activities | | | (22,168,521 | ) | | | (33,214,709 | ) |
| | | | | | | | |
Net (decrease) in cash | | | (4,515,810 | ) | | | (2,040,366 | ) |
| | | | | | | | |
CASH AND DUE FROM BANKS | | | | | | | | |
Beginning | | | 16,281,644 | | | | 12,526,707 | |
Ending | | $ | 11,765,834 | | | $ | 10,486,341 | |
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS - Continued
(Unaudited)
| | Nine Months Ended September 30, | |
| | 2009 | | | 2008 | |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | | | | | | |
Cash payments for: | | | | | | |
Interest paid to depositors | | $ | 5,500,837 | | | $ | 8,834,215 | |
Interest paid on borrowings | | | 2,745,765 | | | | 3,484,831 | |
Income taxes | | | 48,162 | | | | 719,509 | |
| | | | | | | | |
SUPPLEMENTAL DISCLOSURE OF NONCASH OPERATING, | | | | | | | | |
INVESTING AND FINANCING ACTIVITIES | | | | | | | | |
Transfers from loans to other real estate owned | | $ | 1,804,082 | | | $ | 2,500,545 | |
See Notes to Consolidated Condensed Financial Statements.
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated condensed financial statements for the three and nine month periods ended September 30, 2009 and 2008 are unaudited. In the opinion of the management of North Central Bancshares, Inc. (the “Company”), these financial statements reflect all adjustments, consisting only of normal recurring accruals, necessary to present fairly these consolidated financial statements. The results of operations for the interim periods are not necessarily indicative of results that may be expected for an entire year. Certain information and footnote disclosures normally included in complete financial statements prepared in accordance with generally accepted accounting principles have been omitted in accordance with the requirements for interim financial statements. The financial statements and notes thereto should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.
The consolidated condensed financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
2. EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share is computed by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Income (loss) available to common stockholders is net income (loss) less preferred stock dividends and accretion of discount on preferred stock, treated as preferred stock dividends. Diluted earnings (loss) per common share reflects the potential dilution that would occur if the Company’s outstanding stock options and warrant were exercised and converted into common stock and restricted stock was vested. The dilutive effect is computed using the treasury stock method, which assumes all outstanding warrants are exercised. The incremental shares issuable upon exercise of the warrant, to the extent they would have been dilutive, are included in the denominator of the diluted earnings (loss) per common share calculation. The calculation of earnings (loss) per common share and diluted earnings (loss) per common share for the three and nine months ended September 30, 2009 and 2008 is presented below.
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2009 | | | 2008 | | | 2009 | | | 2008 | |
Basic earnings (loss) per common share: | | | | | | | | | | | | |
Net Income (loss) | | $ | 1,001,777 | | | $ | (2,749,924 | ) | | $ | 2,677,837 | | | $ | (2,903,224 | ) |
Preferred stock dividends and accretion of discount1 | | | 131,991 | | | | - | | | | 382,875 | | | | - | |
Net income (loss) available to common stockholders | | $ | 869,786 | | | $ | (2,749,924 | ) | | $ | 2,294,962 | | | $ | (2,903,224 | ) |
Weighted average common shares outstanding - basic | | | 1,342,948 | | | | 1,340,148 | | | | 1,341,779 | | | | 1,339,132 | |
Basic earnings (loss) per common share | | $ | 0.65 | | | $ | (2.05 | ) | | $ | 1.71 | | | $ | (2.17 | ) |
| | | | | | | | �� | | | | | | | | |
Diluted earnings (loss) per common share: | | | | | | | | | | | | | | | | |
Net income (loss) available to common stockholders | | | 869,786 | | | | (2,749,924 | ) | | | 2,294,962 | | | | (2,903,224 | ) |
Weighted average common shares outstanding – basic | | | 1,342,948 | | | | 1,340,148 | | | | 1,341,779 | | | | 1,339,132 | |
Effect of dilutive securities: | | | | | | | | | | | | | | | | |
Stock Options | | | 2233 | | | | - 2 | | | | 74 3 | | | | - 2 | |
Restricted Stock | | | 3,500 | | | | - 2 | | | | 3,307 | | | | - 2 | |
Common stock warrant4 | | | - | | | | - | | | | - | | | | - | |
Total diluted average common shares issued and outstanding | | | 1,346,671 | | | | 1,340,148 | | | | 1,345,160 | | | | 1,339,132 | |
Diluted earnings (loss) per common share | | $ | 0.65 | | | $ | (2.05 | ) | | $ | 1.71 | | | $ | (2.17 | ) |
1Preferred stock and the common stock warrant were issued on January 9, 2009, and therefore had no effect in 2008.
2For the 2008 periods, options to purchase 74,600 shares of common stock and restricted stock shares of 3,300 were not dilutive due to a net loss.
3For the 2009 periods, the stock options to purchase common stock totaled 67,400 shares. Of the total shares, only 2,200 were included in the calculation, representing average dilutive shares of 223 and 74 for the three and nine months periods ended September 30, 2009 respectively. The remaining shares were not dilutive due to the exercise price of the options exceeding the average closing price of the Company's common stock.
4The average closing price of the Company's common stock for the three and nine months ended September 30, 2009, was $15.09 and $13.37, respectively. This was less than $15.43 exercise price of the common stock warrant to purchase 99,157 shares of common stock, therefore, the warrant was not dilutive.
3. DIVIDENDS
On August 15, 2009, the Company paid an aggregate cash dividend of $127,500 on the Fixed Rate Cumulative Perpetual Preferred Stock, Series A issued to the United States Department of the Treasury. On August 28, 2009, the Company declared a cash dividend on its common stock, payable on October 9, 2009 to stockholders of record as of September 18, 2009.
4. CURRENT ACCOUNTING DEVELOPMENTS
In April 2009, the Financial Accounting Standards Board (FASB) issued guidance on Other-Than-Temporary Impairments (“OTTI”). This standard requires entities to separate an OTTI of a debt security into two components when there are credit-related losses associated with the impaired debt security for which management asserts that it does not have the intent to sell the security, and it is more likely than not that it will not be required to sell the security before recovery of its cost basis. The amount of the OTTI related to a credit loss is recognized in earnings, and the amount of the OTTI related to other factors is recorded in other comprehensive income (loss). The Company adopted this standard effective for the quarter ended June 30, 2009. The adoption of this standard did not have a material impact on the Company’s financial position or results of operations.
In April 2009, the FASB issued guidance on Determining Fair Value. Under this standard, if an entity determines there has been a significant decrease in the volume and level of activity for the asset or the liability in relation to the normal market activity for the asset or liability (or similar assets or liabilities), then transactions or quoted prices may not accurately reflect fair value. In addition, if there is evidence that the transaction for the asset or liability is not orderly; the entity shall place little, if any weight on that transaction price as an indicator of fair value. The Company adopted this standard effective for the quarter ended June 30, 2009. The adoption of this standard did not have a material impact on the Company’s financial position or results of operations.
In April 2009, the FASB issued guidance on Interim Disclosures about Fair Value of Financial Instruments. This standard requires disclosures about fair value of financial instruments in interim and annual financial statements. The Company adopted this standard effective for the quarter ended June 30, 2009. The adoption of this standard did not have an impact on the Company’s financial position or results of operations.
In May 2009, the FASB issued guidance on Subsequent Events. This standard establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The Company adopted this standard for the quarter ended June 30, 2009.
In June 2009, the FASB issued guidance on Accounting for Transfers of Financial Asset, to improve the reporting for the transfers of financial assets resulting from (1) practices that have developed that are not consistent with the original intent and key requirements of prior FASB guidance and (2) concerns of financial statement users that many of the financial assets (and related obligations) that have been derecognized should continue to be reported in the financial statements of transferors. This standard must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company does not expect the adoption of this standard will have a material impact on the Company’s consolidated financial statements.
On June 29, 2009, FASB issued an accounting pronouncement establishing the FASB Accounting Standards Codification (the “ASC”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity of US GAAP. This pronouncement was effective for financial statements issued for interim and annual periods ending after September 15, 2009, for most entities. On the effective date, all non-SEC accounting and reporting standards were superceded. The Company adopted this pronouncement for the quarterly period ended September 30, 2009, as required, and adoption did not have a material impact on the Company’s financial statements taken as a whole.
In August 2009, the FASB issued guidance on Fair Value Measurements which provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the following techniques:
| 1. | A valuation technique that uses (a) the quoted price of an identical liability when traded as an asset or (b) quoted prices for similar liabilities or similar liabilities when traded as assets. |
| 2. | Another valuation technique that is consistent with the principles of this standard. Examples include an income approach, such as a present value technique, or a market approach, such as a technique that is based on the amount at the measurement date that the reporting entity would pay to transfer the identical liability or would receive to enter into the identical liability. |
This standard is effective for financial statements issued for interim and annual periods ending after August 2009. The Company adopted this standard effective for the quarter ended September 30, 2009. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements or its financial position or results of operations.
5. OPERATING SEGMENTS
An operating segment is generally defined as a component of a business for which discrete financial information is available and whose results are reviewed by the chief operating decision-maker. The Company has determined that it has two reportable segments: a traditional banking segment and a nonbank segment. The traditional banking segment consists of the Company’s banking subsidiary, First Federal Savings Bank of Iowa (the “Bank”), and the holding company. The Bank operates as a federal savings bank providing deposit, loan and other related products to individuals and small businesses, primarily in the communities where their offices are located. The nonbank segment, which is set forth under the caption “All Others” below, consists of the operations of the subsidiaries under the Bank, and includes real estate abstracting services, insurance and investment services, and ownership of low-income housing tax credit apartment complexes.
Transactions between affiliates, the resulting revenues of which are shown in the inter-segment revenue category, are conducted at market prices that would be paid if the companies were not affiliates.
| | Three Months Ended September 30, 2009 | | | Nine Months Ended September 30, 2009 | |
| | Traditional | | | | | | | | | Traditional | | | | | | | |
| | Banking | | | All Others | | | Total | | | Banking | | | All Others | | | Total | |
| | | | | | | | | | | | | | | | | | |
Interest income | | $ | 6,157,609 | | | $ | - | | | $ | 6,157,609 | | | $ | 18,910,130 | | | $ | - | | | $ | 18,910,130 | |
Interest expense | | | 2,405,732 | | | | - | | | | 2,405,732 | | | | 8,148,809 | | | | - | | | | 8,148,809 | |
Net interest income | | | 3,751,877 | | | | - | | | | 3,751,877 | | | | 10,761,321 | | | | - | | | | 10,761,321 | |
Provision for loan losses | | | 450,000 | | | | - | | | | 450,000 | | | | 1,220,000 | | | | - | | | | 1,220,000 | |
Net interest income after | | | | | | | | | | | | | | | | | | | | | | | | |
provision for loan losses | | | 3,301,877 | | | | - | | | | 3,301,877 | | | | 9,541,321 | | | | - | | | | 9,541,321 | |
Noninterest income | | | 1,412,205 | | | | 521,005 | | | | 1,933,210 | | | | 4,438,260 | | | | 1,639,776 | | | | 6,078,036 | |
Securities gains (losses), net | | | 5,540 | | | | - | | | | 5,540 | | | | (37,747 | ) | | | - | | | | (37,747 | ) |
Noninterest expense | | | 3,402,384 | | | | 323,366 | | | | 3,725,750 | | | | 10,594,619 | | | | 985,654 | | | | 11,580,273 | |
Income before income taxes | | | 1,317,238 | | | | 197,639 | | | | 1,514,877 | | | | 3,347,215 | | | | 654,122 | | | | 4,001,337 | |
Provision for income taxes | | | 493,200 | | | | 19,900 | | | | 513,100 | | | | 1,245,400 | | | | 78,100 | | | | 1,323,500 | |
Net income | | $ | 824,038 | | | $ | 177,739 | | | $ | 1,001,777 | | | $ | 2,101,815 | | | $ | 576,022 | | | $ | 2,677,837 | |
Inter-segment revenue (expense) | | $ | 221,023 | | | $ | (221,023 | ) | | $ | - | | | $ | 663,986 | | | $ | (663,986 | ) | | $ | - | |
Total assets | | $ | 450,048,888 | | | $ | 3,206,962 | | | $ | 453,255,850 | | | $ | 450,048,888 | | | $ | 3,206,962 | | | $ | 453,255,850 | |
Total deposits | | $ | 328,751,602 | | | $ | - | | | $ | 328,751,602 | | | $ | 328,751,602 | | | $ | - | | | $ | 328,751,602 | |
| | Three Months Ended September 30, 2008 | | | Nine Months Ended September 30, 2008 | |
| | Traditional | | | | | | | | | Traditional | | | | | | | |
| | Banking | | | All Others | | | Total | | | Banking | | | All Others | | | Total | |
| | | | | | | | | | | | | | | | | | |
Interest income | | $ | 6,965,982 | | | $ | - | | | $ | 6,965,982 | | | $ | 21,609,149 | | | $ | - | | | $ | 21,609,149 | |
Interest expense | | | 3,675,795 | | | | - | | | | 3,675,795 | | | | 11,864,012 | | | | - | | | | 11,864,012 | |
Net interest income | | | 3,290,187 | | | | - | | | | 3,290,187 | | | | 9,745,137 | | | | - | | | | 9,745,137 | |
Provision for loan losses | | | 60,000 | | | | - | | | | 60,000 | | | | 280,000 | | | | - | | | | 280,000 | |
Net interest income after | | | | | | | | | | | | | | | | | | | | | | | | |
provision for loan losses | | | 3,230,187 | | | | - | | | | 3,230,187 | | | | 9,465,137 | | | | - | | | | 9,465,137 | |
Noninterest income | | | 1,431,562 | | | | 490,175 | | | | 1,921,737 | | | | 3,968,977 | | | | 1,560,651 | | | | 5,529,628 | |
Securities gains (losses), net | | | (3,850,900 | ) | | | - | | | | (3,850,900 | ) | | | (5,810,811 | ) | | | - | | | | (5,810,811 | ) |
Noninterest expense | | | 3,269,321 | | | | 286,627 | | | | 3,555,948 | | | | 10,021,190 | | | | 913,488 | | | | 10,934,678 | |
Income/(loss) before income taxes | | | (2,458,472 | ) | | | 203,548 | | | | (2,254,924 | ) | | | (2,397,887 | ) | | | 647,163 | | | | (1,750,724 | ) |
Provision for income taxes | | | 472,000 | | | | 23,000 | | | | 495,000 | | | | 1,067,500 | | | | 85,000 | | | | 1,152,500 | |
Net income/(loss) | | $ | (2,930,472 | ) | | $ | 180,548 | | | $ | (2,749,924 | ) | | $ | (3,465,387 | ) | | $ | 562,163 | | | $ | (2,903,224 | ) |
Inter-segment revenue (expense) | | $ | 184,368 | | | $ | (184,368 | ) | | $ | - | | | $ | 578,382 | | | $ | (578,382 | ) | | $ | - | |
Total assets | | $ | 471,700,426 | | | $ | 3,393,873 | | | $ | 475,094,299 | | | $ | 471,700,426 | | | $ | 3,393,873 | | | $ | 475,094,299 | |
Total deposits | | $ | 345,200,666 | | | $ | - | | | $ | 345,200,666 | | | $ | 345,200,666 | | | $ | - | | | $ | 345,200,666 | |
6. INVESTMENT INFORMATION
Securities available-for-sale as of September 30, 2009 was as follows:
| | | | | Gross | | | Gross | | | | |
| | Amortized | | | Unrealized | | | Unrealized | | | | |
| | Cost | | | Gains | | | (Losses) | | | Fair Value | |
Equity securities: | | | | | | | | | | | | |
Mutual fund | | $ | 442,193 | | | $ | 15,032 | | | $ | - | | | $ | 457,225 | |
| | | | | | | | | | | | | | | | |
Debt securities: | | | | | | | | | | | | | | | | |
State and local obligations | | | 2,503,360 | | | | 51,944 | | | | (740 | ) | | | 2,554,564 | |
Mortgage-backed securities | | | 19,921,474 | | | | 662,596 | | | | (23,819 | ) | | | 20,560,251 | |
U.S. Government agencies | | | 1,561,685 | | | | 9,266 | | | | (742 | ) | | | 1,570,209 | |
| | | 23,986,519 | | | | 723,806 | | | | (25,301 | ) | | | 24,685,024 | |
Total | | $ | 24,428,712 | | | $ | 738,838 | | | $ | (25,301 | ) | | $ | 25,142,249 | |
Securities available-for-sale as of December 31, 2008 was as follows:
| | | | | Gross | | | Gross | | | | |
| | Amortized | | | Unrealized | | | Unrealized | | | | |
| | Cost | | | Gains | | | (Losses) | | | Fair Value | |
Equity securities: | | | | | | | | | | | | |
Mutual fund | | $ | 1,229,939 | | | $ | - | | | $ | - | | | $ | 1,229,939 | |
FHLMC preferred stock | | | 82,000 | | | | - | | | | - | | | | 82,000 | |
| | | 1,311,939 | | | | - | | | | - | | | | 1,311,939 | |
| | | | | | | | | | | | | | | | |
Debt securities: | | | | | | | | | | | | | | | | |
State and local obligations | | | 1,742,349 | | | | 31,876 | | | | (1,781 | ) | | | 1,772,444 | |
Mortgage-backed securities | | | 19,562,233 | | | | 355,646 | | | | (164,294 | ) | | | 19,753,585 | |
| | | 21,304,582 | | | | 387,522 | | | | (166,075 | ) | | | 21,526,029 | |
Total | | $ | 22,616,521 | | | $ | 387,522 | | | $ | (166,075 | ) | | $ | 22,837,968 | |
Gross unrealized losses and estimated fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of September 30, 2009 and December 31, 2008, are summarized as follows:
| | | | | | | | September 30, 2009 | | | | |
| | Less than 12 Months | | | 12 Months or More | | | Total | |
| | | | | Unrealized | | | | | | Unrealized | | | | | | Unrealized | |
| | Fair Value | | | Losses | | | Fair Value | | | Losses | | | Fair Value | | | Losses | |
Debt securities: | | | | | | | | | | | | | | | | | | |
State and local obligations | | $ | 224,260 | | | $ | (740 | ) | | $ | - | | | $ | - | | | $ | 224,260 | | | $ | (740 | ) |
Mortgage-backed securities | | | 1,772,019 | | | | (15,767 | ) | | | 1,214,718 | | | | (8,052 | ) | | | 2,986,737 | | | | (23,819 | ) |
U.S. Government agencies | | | 507,397 | | | | (742 | ) | | | - | | | | - | | | | 507,397 | | | | (742 | ) |
Total | | $ | 2,503,676 | | | $ | (17,249 | ) | | $ | 1,214,718 | | | $ | (8,052 | ) | | $ | 3,718,394 | | | $ | (25,301 | ) |
| | | | | | | | December 31, 2008 | | | | |
| | Less than 12 Months | | | 12 Months or More | | | Total | |
| | | | | Unrealized | | | | | | Unrealized | | | | | | Unrealized | |
| | Fair Value | | | Losses | | | Fair Value | | | Losses | | | Fair Value | | | Losses | |
Debt securities: | | | | | | | | | | | | | | | | | | |
State and local obligations | | $ | 413,219 | | | $ | (1,781 | ) | | $ | - | | | $ | - | | | $ | 413,219 | | | $ | (1,781 | ) |
Mortgage-backed securities | | | 3,443,676 | | | | (75,207 | ) | | | 1,626,411 | | | | (89,087 | ) | | | 5,070,087 | | | | (164,294 | ) |
Total | | $ | 3,856,895 | | | $ | (76,988 | ) | | $ | 1,626,411 | | | $ | (89,087 | ) | | $ | 5,483,306 | | | $ | (166,075 | ) |
The unrealized losses for the above investment securities are generally due to changes in interest rates and, as such, are considered to be temporary by the Company. In addition, the Company has the intent not to sell these investment securities and/or it is not likely that the Company will be required to sell the securities before their anticipated recovery.
The amortized cost and fair value of debt securities as of September 30, 2009 and December 31, 2008 by contractual maturity are shown below. Certain securities have call features, which allow the issuer to call the security prior to maturity. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without any penalties. Therefore, these securities are not included in the maturity categories in the following maturity summary:
| | Debt Securities Available-for-Sale | |
| | September 30, 2009 | | | December 31, 2008 | |
| | Amortized | | | | | | Amortized | | | | |
| | Cost | | | Fair Value | | | Cost | | | Fair Value | |
| | | | | | | | | | | | |
Due in one year or less | | $ | 355,000 | | | $ | 354,504 | | | $ | 382,669 | | | $ | 384,225 | |
Due from one to five years | | | 1,577,849 | | | | 1,587,082 | | | | 630,000 | | | | 637,636 | |
Due from five to ten years | | | 1,078,651 | | | | 1,120,376 | | | | 729,680 | | | | 750,583 | |
Due over 10 years | | | 1,053,545 | | | | 1,062,811 | | | | - | | | | - | |
Mortgage-backed securities | | | 19,921,474 | | | | 20,560,251 | | | | 19,562,233 | | | | 19,753,585 | |
| | $ | 23,986,519 | | | $ | 24,685,024 | | | $ | 21,304,582 | | | $ | 21,526,029 | |
The following is a summary of securities sold, excluding the sale of Federal Home Loan Bank (“FHLB”) stock:
| | September 30, 2009 | | | December 31, 2008 | |
| | Net Proceeds | | | | | | Net Proceeds | | | | |
| | from Sale | | | Gain/(Loss) | | | from Sale | | | Gain/(Loss) | |
Equity securities: | | | | | | | | | | | | |
Mutual funds | | $ | 750,000 | | | $ | (14,404 | ) | | $ | 250,000 | | | $ | (41,558 | ) |
FHLMC preferred stock | | | 82,000 | | | | - | | | | 18,400 | | | | (77,300 | ) |
FNMA preferred stock | | | - | | | | - | | | | 19,400 | | | | (51,800 | ) |
Other equity securities | | | - | | | | - | | | | 9,850 | | | | - | |
| | $ | 832,000 | | | $ | (14,404 | ) | | $ | 297,650 | | | $ | (170,658 | ) |
7. OTHER COMPREHENSIVE INCOME (LOSS)
Under FASB guidance on OTTI, credit-related losses on debt securities with OTTI are recorded in current earnings, while the noncredit-related portion of the reduction in fair value is recorded in other comprehensive income (loss). The Company’s other component of other comprehensive income (loss) consists of the unrealized holding gains and losses on available for sale investment securities which are considered temporary in nature.
The components of other comprehensive income (loss), presented net of taxes for the nine months ended September 30, 2009 and 2008, are as follows:
| | Nine Months Ended September 30, | |
| | 2009 | | | 2008 | |
Net income (loss) | | $ | 2,677,837 | | | $ | (2,903,224 | ) |
Other comprehensive income: | | | | | | | | |
Securities for which a portion of an other-than-temporary impairment has been recorded in earnings: | | | | | | | | |
Unrealized holding losses | | | (37,747 | ) | | | (4,721,880 | ) |
Loss recognized in earnings | | | 37,747 | | | | 5,810,811 | |
Net unrealized gain on securities with other-than-temporary impairment before tax expense | | | - | | | | 1,088,931 | |
Tax expense | | | - | | | | 35,274 | |
Net unrealized (losses) on securities with other-than-temporary impairment, net of tax in other comprehensive income (loss) | | | - | | | | 1,124,205 | |
Other securities: | | | | | | | | |
Unrealized holding gains (losses) arising during the period | | | 492,090 | | | | (82,591 | ) |
Realized net (gains) losses recognized into net income (loss) | | | - | | | | - | |
Net unrealized gains (losses) on other securities before tax (expense) benefit | | | 492,090 | | | | (82,591 | ) |
Tax (expense) benefit | | | (177,942 | ) | | | 30,806 | |
Net unrealized gains (losses) on other securities, net of tax in other comprehensive income (loss) | | | 314,148 | | | | (51,785 | ) |
Other comprehensive income (loss) | | $ | 2,991,985 | | | $ | (1,830,804 | ) |
8. FAIR VALUE
The Company measures the fair value of assets and liabilities using a hierarchy system consisting of three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
| 1. | Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in markets; |
| 2. | Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and |
| 3. | Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
Fair value measurements for items measured at fair value at September 30, 2009 included:
| | Fair Value Measurements at Reporting Date | |
| | ($ in 000s) | |
| | | | | | | | | | | | |
| | Quoted Prices | | | | | | | | | | |
| | in Active Markets | | | Significant Other | | Significant | | | | |
| | for Identical Assets | | | Observable Inputs | | Unobservable Inputs | | | | |
Description | | (Level 1) | | | (Level 2) | | (Level 3) | | Total | |
Securities available-for-sale | | | | | | | | | | | | |
State and local obligations | | $ | - | | | $ | 2,555 | | $ | | - | | $ | | 2,555 | |
Mortgage-backed securities | | | - | | | | 20,560 | | | | - | | | | 20,560 | |
U.S. Government agencies | | | - | | | | 1,570 | | | | - | | | | 1,570 | |
Mutual funds | | | 457 | | | | - | | | | - | | | | 457 | |
Total securities available-for-sale | | $ | 457 | | | $ | 24,685 | | $ | | - | | $ | | 25,142 | |
A portion of the securities available-for-sale portfolio is an equity security consisting of a mortgage bond mutual fund investment. The fair values used by the Company are obtained from an independent pricing service, which represent quoted market prices for the identical securities (Level 1 inputs).
The securities available-for-sale (excluding equity securities) portfolio consists of mortgage-backed securities, government bonds, and municipal bond investments whereby the Company obtains fair values from an independent pricing service. The fair values are determined by pricing models that consider observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems (Level 2 inputs).
Certain assets are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the related individual assets at September 30, 2009:
| | Fair Value Measurements at Reporting Date | |
| | ($ in 000s) | |
| | | | | | | | | | | | |
| | Quoted Prices | | | | | | | | | | |
| | in Active Markets | | | Significant Other | | | Significant | | | | |
| | for Identical Assets | | | Observable Inputs | | | Unobservable Inputs | | | | |
Description | | (Level 1) | | | (Level 2) | | | (Level 3) | | | Total | |
Assets: | | | | | | | | | | | | |
Loans | | $ | - | | | $ | - | | | $ | 4,994 | | | $ | 4,994 | |
Other real estate owned | | $ | - | | | $ | - | | | $ | 1,423 | | | $ | 1,423 | |
Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or fair value. Fair value is measured based on the value of the collateral securing these loans and is classified at a Level 3 in the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable. Such collateral’s fair value is determined based on appraisals by qualified licensed appraisers hired by the Company, and/or management’s expertise and knowledge of the client and client’s business.
Generally accepted accounting principles require disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The methodologies for other financial assets and financial liabilities are discussed below:
The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:
Cash and due from banks: The carrying amount of cash and due from banks represents the fair value.
Federal Home Loan Bank stock: The fair value of this untraded stock is estimated at its carrying value because the Company is able to redeem the stock with the Federal Home Loan Bank at par value.
Loans held for sale: Fair values are based on quoted market prices of similar loans sold on the secondary market.
Loans: For variable-rate loans that reprice frequently and have experienced no significant change in credit risk, fair values are based on carrying values. Fair values for all other loans are estimated based on discounted cash flows, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality.
Deposits: Fair values disclosed for demand, NOW, savings and money market savings deposits equal their carrying amounts, which represent the amount payable on demand. Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregate expected monthly maturities on time deposits.
Borrowed funds: The fair value of borrowed funds is estimated based on discounted cash flows using currently available borrowing rates.
Accrued interest receivable and payable: The fair values of both accrued interest receivable and payable are their carrying amounts.
Commitments to extend credit: The fair values of commitments to extend credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and creditworthiness of the counterparties. At September 30, 2009 and December 31, 2008 the carrying amount and fair value of the commitments were not significant.
| | September 30, 2009 | | | December 31, 2008 | |
| | Carrying | | | Fair | | | Carrying | | | Fair | |
| | Amount | | | Value | | | Amount | | | Value | |
| | | | | (nearest 000) | | | | | | (nearest 000) | |
Financial assets: | | | | | | | | | | | | |
Cash and due from banks | | $ | 11,765,834 | | | $ | 11,766,000 | | | $ | 16,281,644 | | | $ | 16,282,000 | |
Securities | | | 25,142,249 | | | | 25,142,000 | | | | 22,837,968 | | | | 22,838,000 | |
FHLB stock | | | 4,739,000 | | | | 4,739,000 | | | | 4,692,400 | | | | 4,692,000 | |
Loans, net | | | 383,866,542 | | | | 387,300,000 | | | | 400,786,505 | | | | 401,837,000 | |
Loans held for sale | | | 745,458 | | | | 745,000 | | | | 730,466 | | | | 730,000 | |
Accrued interest receivable | | | 1,899,607 | | | | 1,900,000 | | | | 2,096,784 | | | | 2,097,000 | |
Financial liabilities: | | | | | | | | | | | | | | | | |
Deposits | | | 328,751,602 | | | | 331,793,000 | | | | 350,169,925 | | | | 354,654,000 | |
Borrowed funds | | | 72,825,739 | | | | 75,875,000 | | | | 82,348,915 | | | | 85,411,000 | |
Accrued interest payable | | | 499,661 | | | | 500,000 | | | | 597,448 | | | | 597,000 | |
9. RECLASSIFICATIONS
Certain amounts in the prior period financial statements have been reclassified, with no effect on net income or stockholders’ equity, to be consistent with the current period classification.
10. SUBSEQUENT EVENTS
The Company evaluated events occurring subsequent to September 30, 2009 through November 12, 2009, the date the financial statements are being filed and did not identify any subsequent events requiring disclosure pursuant to the provisions of this standard.
Item 2. Management’s Discussion and Analysis Of Financial Condition and Results Of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements consisting of estimates with respect to the consolidated financial condition, results of operations and business of the Company and its subsidiaries, including the Bank, that are subject to various factors which could cause actual results to differ materially from these estimates, including those set forth in Part I, Item 1A — Risk Factors of the Company’s 2008 Annual Report on Form 10-K and in Part II, Item 1A — Risk Factors of this Quarterly Report on Form 10-Q. These factors include changes in general, economic, market, legislative and regulatory conditions, and the development of an interest rate environment that adversely affects the interest rate spread or other income anticipated from the Company’s operations and investments. The Company’s actual results may differ from the results discussed in the forward-looking statements. The Company disclaims any obligation to publicly announce future events or developments that may affect the forward-looking financial statements contained herein.
Executive Overview
The purpose of this summary is to provide an overview of the items management focuses on when evaluating the condition of the Company and its success in implementing its business and shareholder value strategies. The Company’s business strategy is to operate the Bank as a well-capitalized, profitable and independent community oriented savings bank. The Company’s shareholder value strategy has three major themes: (1) enhancing shareholders’ value; (2) making its retail banking franchise more valuable; and (3) efficiently utilizing its capital.
Management believes the following were important factors in the Company’s performance during the quarter ended September 30, 2009:
| • | The credit crisis affecting the financial markets and residential housing that began in 2007 turned out to be just the flashpoint for a severe and prolonged recession. While recently published economic data indicates that the current downturn may be easing, the current economic environment continues to affect the Company, the Bank, and the financial industry generally, and it is not clear when or at what speed the economy will recover. |
| • | The Company has taken significant steps to reduce the risk of additional loan losses. During the quarter ended September 30, 2009 the Company increased its provision for loan losses to $450,000 compared to the $60,000 during the quarter ended September 30, 2008. The Company continues to monitor its loan portfolio with the objective of avoiding defaults or write-downs. Despite these actions, the possibility of additional losses can not be eliminated. The Board of Directors and all employees continue to work hard to make the best of these continuing challenging conditions. |
| • | Although the level of non-performing assets as a percentage of total assets increased to 3.01% as of September 30, 2009 from 1.95% as of December 31, 2008 the Company remains focused on credit quality and continues to take a pro-active approach to addressing and minimizing the financial impact of these assets. |
| • | The Company continues its focus on earnings through management of net interest margin, successfully increasing the margin to 3.51% for the three months ended September 30, 2009 from 2.90% for the three months ended September 30, 2008. |
| • | Net income of $1.00 million for the third quarter 2009 represents the Company’s third consecutive period of profitable results and the first period with earnings in excess of $1 million since the third quarter of 2007. |
| • | Capital remains strong with stockholders equity as a percentage of total assets increasing to 10.61% at September 30, 2009 from 10.20% at June 30, 2009. |
| • | The volume of originations of residential mortgages during the third quarter of 2009 has slowed from the highs during the second quarter 2009; however residential loan activity remains a significant focus of the Company. At September 30, 2009, the Company serviced $266 million in residential loans, which is the largest amount of residential loans serviced by the Company to date. |
| • | The bank has paid significantly higher FDIC premiums during 2009 due to market developments that have depleted the Deposit Insurance Fund and reduced the ratio of reserves to insured deposits. Further, the FDIC has adopted a new rule that requires all institutions to prepay, on December 30, 2009, estimated assessments for the fourth quarter of 2009 (typically paid one quarter in arrears), and for all of 2010, 2011, and 2012. For purposes of calculating the prepaid amount, the base assessment rate in effect at September 30, 2009 would be used for 2010. That rate would be increased by 3 basis points for 2011 and 2012 assessments. The prepayment calculation would also assume a 5 percent annual growth rate through the end of 2012.The expense of FDIC premiums continues to be a focus of the industry and the Company. |
CRITICAL ACCOUNTING POLICIES
This “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the disclosures included elsewhere in this report, are based on the Company’s consolidated financial statements. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The financial information contained in these statements is, for the most part, based on approximate measures of the financial effects of transactions and events that have already occurred. However, the preparation of these statements requires management to make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.
The Company’s accounting policies are described in the “Notes to Consolidated Financial Statements” of the Company’s 2008 Annual Report on Form 10-K. Based on its consideration of accounting policies that involve the most complex and subjective estimates and judgments, management has identified its most critical accounting policies to be those related to the allowance for loan losses and asset impairment judgments.
The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged off against the allowance for loan losses when management believes that collectibility of the principal is unlikely. The Company has policies and procedures for evaluating the overall credit quality of its loan portfolio, including timely identification of potential problem credits. On a quarterly basis, management reviews the appropriate level for the allowance for loan losses, incorporating a variety of risk considerations, both quantitative and qualitative. Quantitative factors include the Company’s historical loss experience, delinquency and charge-off trends, collateral values, known information about individual loans and other factors. Qualitative factors include the general economic environment in the Company’s market area and the expected trend of those economic conditions. To the extent that actual results differ from forecasts and management’s judgment, the allowance for loan losses may be greater or less than future charge-offs.
Asset impairment judgments include evaluating the decline in fair value of available-for-sale securities below their cost. Declines in fair value of available-for-sale securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses. In estimating OTTI losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent of the Company to not sell the security or whether it is more-likely-than-not that the Company will be required to sell the security before its anticipated recovery.
FINANCIAL CONDITION
Total assets decreased $20.0 million, or 4.2%, to $453.3 million at September 30, 2009, from $473.3 million at December 31, 2008. The decrease in assets was primarily due to a decrease in cash and cash equivalents and net loans receivable, offset in part by an increase in securities available-for-sale. Cash and cash equivalents decreased $4.5 million, or 27.7%, to $11.8 million at September 30, 2009, compared to $16.3 million at December 31, 2008. The decrease in cash and cash equivalents was primarily due to a decrease in deposits and borrowed funds during the nine months ended September 30, 2009. The increase in securities available-for-sale was primarily due to the purchase of $8.0 million of securities for the nine months ended September 30, 2009, offset in part by payments, maturities and the sale of securities.
Net loans receivable decreased by $16.9 million, or 4.2%, to $383.9 million at September 30, 2009, from $400.8 million at December 31, 2008, primarily due to payments and prepayments of $84.0 million and loan sales of $60.8 million during the nine months ended September 30, 2009. These payments, prepayments, and loan sales were offset in part by the origination of $86.9 million of first mortgage loans primarily secured by one-to four-family residences and commercial real estate, the origination of $30.1 million of consumer loans, and the purchase of $14.4 million of multifamily and commercial real estate loans during the nine months ended September 30, 2009. The Company sells most fixed-rate residential loans originated with maturities of 15 years or more in the secondary mortgage market in order to reduce interest rate risk.
Deposits decreased $21.4 million, or 6.1%, to $328.8 million at September 30, 2009, from $350.2 million at December 31, 2008, primarily reflecting decreases in certificates of deposits and brokered deposits of $20.5 million and $15.6 million, respectively, offset in part by increases in NOW, money market, and savings account balances of $1.4 million, $9.4 million and $3.0 million, respectively. The decrease in certificates of deposits and brokered deposits were primarily due to relationship pricing considerations including a strategic focus on other types of deposits and plans to reduce utilization of brokered deposits. Borrowings, primarily FHLB advances, decreased $9.5 million, or 11.6%, to $72.8 million at September 30, 2009, from $82.3 million at December 31, 2008. This decrease is due to the normal repayment of borrowings due to calls or maturities.
Total stockholders’ equity increased $12.9 million, or 36.6%, to $48.1 million at September 30, 2009, from $35.2 million at December 31, 2008, primarily due to the sale of the Series A Preferred Stock and the Warrant to the Treasury through the Capital Purchase Program in January and earnings for the nine months ended September 30, 2009.
The Office of Thrift Supervision (the “OTS”) requires the Bank to meet minimum tangible, leverage (core) and risk-based capital requirements. As of September 30, 2009, the Bank exceeded all of its regulatory capital requirements. The Bank’s required and actual capital levels as of September 30, 2009 and December 31, 2008 were as follows:
| | | | | | | | | | | | | | To Be Well-Capitalized | |
| | | | | | | | For Capital | | | Under Prompt Corrective | |
| | Actual | | | Adequacy Purposes | | | Action Provisions | |
| | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | |
| | (000’s) | | | | | | (000’s) | | | | | | (000’s) | | | | |
As of September 30, 2009: | | | | | | | | | | | | | | | | | | | | | |
Total Capital (to risk-weighted assets) | | $ | 47,977 | | | | 14.6 | % | | $ | 26,223 | | | | 8.0 | % | | $ | 32,779 | | | | 10.0 | % |
Tier I Capital (to risk-weighted assets) | | | 43,909 | | | | 13.4 | | | | 13,112 | | | | 4.0 | | | | 19,667 | | | | 6.0 | |
Tier I (Core) Capital (to adjusted assets) | | | 43,909 | | | | 9.7 | | | | 13,572 | | | | 3.0 | | | | 22,620 | | | | 5.0 | |
Tangible Capital (to adjusted assets) | | | 43,909 | | | | 9.7 | | | | 6,786 | | | | 1.5 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2008: | | | | | | | | | | | | | | | | | | | | | | | | |
Total Capital (to risk-weighted assets) | | $ | 37,768 | | | | 11.2 | % | | $ | 27,097 | | | | 8.0 | % | | $ | 33,872 | | | | 10.0 | % |
Tier I Capital (to risk-weighted assets) | | | 34,336 | | | | 10.1 | | | | 13,549 | | | | 4.0 | | | | 20,323 | | | | 6.0 | |
Tier I (Core) Capital (to adjusted assets) | | | 34,336 | | | | 7.3 | | | | 14,187 | | | | 3.0 | | | | 23,646 | | | | 5.0 | |
Tangible Capital (to adjusted assets) | | | 34,336 | | | | 7.3 | | | | 7,094 | | | | 1.5 | | | | - | | | | - | |
RESULTS OF OPERATIONS
The following table shows selected financial results and measures for the three and nine months ended September 30, 2009, compared with the same periods in 2008.
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2009 | | | 2008 | | | Change | | | Change % | | | 2009 | | | 2008 | | | Change | | | Change % | |
Net income (loss) | | $ | 1,001,777 | | | $ | (2,749,924 | ) | | $ | 3,751,701 | | | | 136.4 | % | | $ | 2,677,837 | | | $ | (2,903,224 | ) | | $ | 5,581,061 | | | | 192.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Average assets | | | 454,626,835 | | | | 489,868,443 | | | | (35,241,608 | ) | | | -7.19 | % | | | 466,262,878 | | | | 500,465,785 | | | | (34,202,907 | ) | | | -6.83 | % |
Average stockholders equity | | | 47,616,182 | | | | 40,405,982 | | | | 7,210,200 | | | | 17.84 | % | | | 46,481,104 | | | | 41,068,757 | | | | 5,412,347 | | | | 13.18 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Return on assets | | | 0.88 | % | | | -2.25 | % | | | 3.13 | % | | | | | | | 0.77 | % | | | -0.77 | % | | | 1.54 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Return on equity | | | 8.42 | % | | | -27.22 | % | | | 35.64 | % | | | | | | | 7.68 | % | | | -9.43 | % | | | 17.11 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Efficiency ratio | | | 65.54 | % | | | 68.23 | % | | | -2.69 | % | | | | | | | 68.77 | % | | | 71.59 | % | | | -2.82 | % | | | | |
Return on assets - annualized net income (loss) divided by average assets.
Return on equity - annualized net income (loss) divided by average stockholders equity.
Efficiency ratio - noninterest expense divided by the sum of noninterest income plus net interest income.
Net Income (Loss). Net income increased by $3.75 million to $1.00 million for the quarter ended September 30, 2009, compared to a net loss of $(2.75) million for the quarter ended September 30, 2008. The increase in net income was primarily due to a decrease in OTTI on the investment portfolio and an increase in net interest income, offset in part by an increase in provision for loan losses.
Net income increased by $5.58 million to $2.68 million for the nine months ended September 30, 2009, compared to a net loss of $(2.90) million for the nine months ended September 30, 2008. The increase in net income was primarily due to a decrease in OTTI on the investment portfolio and an increase in net interest income, offset in part by increases in provision for loan losses and FDIC insurance expense.
The following tables show average balances and related interest income or interest expense, with the resulting average yield or rate by category of interest-earning asset or interest-bearing liabilitities.
Data for the three months ended September 30:
| | Average Balance | | | Interest Income/Expense | | | Yield/Rate | |
| | 2009 | | | 2008 | | | Change | | | Change-% | | | 2009 | | | 2008 | | | Change | | | Change-% | | | 2009 | | | 2008 | | | Change | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans | | | 393,574,174 | | | | 423,848,385 | | | | (30,274,211 | ) | | | -7.14 | % | | | 5,878,253 | | | | 6,698,254 | | | | (820,001 | ) | | | -12.24 | % | | | 5.94 | % | | | 6.29 | % | | | -0.35 | % |
Securities available-for-sale | | | 30,350,837 | | | | 25,006,219 | | | | 5,344,618 | | | | 21.37 | % | | | 278,328 | | | | 245,205 | | | | 33,123 | | | | 13.51 | % | | | 3.67 | % | | | 3.92 | % | | | -0.25 | % |
Interest-bearing cash | | | 2,256,241 | | | | 4,742,581 | | | | (2,486,340 | ) | | | -52.43 | % | | | 1,028 | | | | 22,523 | | | | (21,495 | ) | | | -95.44 | % | | | 0.18 | % | | | 1.88 | % | | | -1.70 | % |
Total interest-earning assets | | | 426,181,252 | | | | 453,597,185 | | | | (27,415,933 | ) | | | -6.04 | % | | | 6,157,609 | | | | 6,965,982 | | | | (808,373 | ) | | | -11.60 | % | | | 5.75 | % | | | 6.12 | % | | | -0.37 | % |
Noninterest-earning assets | | | 28,445,583 | | | | 36,271,258 | | | | (7,825,675 | ) | | | -21.58 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | | 454,626,835 | | | | 489,868,443 | | | | (35,241,608 | ) | | | -7.19 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities and Equity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
NOW and money market savings | | | 96,197,168 | | | | 93,732,533 | | | | 2,464,635 | | | | 2.63 | % | | | 102,516 | | | | 213,173 | | | | (110,657 | ) | | | -51.91 | % | | | 0.42 | % | | | 0.90 | % | | | -0.48 | % |
Savings | | | 29,270,643 | | | | 25,794,547 | | | | 3,476,096 | | | | 13.48 | % | | | 13,051 | | | | 17,380 | | | | (4,329 | ) | | | -24.91 | % | | | 0.18 | % | | | 0.27 | % | | | -0.09 | % |
Certificates of Deposit | | | 184,351,601 | | | | 217,427,520 | | | | (33,075,919 | ) | | | -15.21 | % | | | 1,431,681 | | | | 2,313,328 | | | | (881,647 | ) | | | -38.11 | % | | | 3.08 | % | | | 4.22 | % | | | -1.14 | % |
Borrowed funds | | | 74,751,576 | | | | 89,655,328 | | | | (14,903,752 | ) | | | -16.62 | % | | | 858,484 | | | | 1,131,914 | | | | (273,430 | ) | | | -24.16 | % | | | 4.56 | % | | | 5.01 | % | | | -0.45 | % |
Total interest-bearing liabilities | | | 384,570,988 | | | | 426,609,928 | | | | (42,038,940 | ) | | | -9.85 | % | | | 2,405,732 | | | | 3,675,795 | | | | (1,270,063 | ) | | | -34.55 | % | | | 2.48 | % | | | 3.42 | % | | | -0.94 | % |
Noninterest-bearing liabilities | | | 22,439,665 | | | | 22,852,533 | | | | (412,868 | ) | | | -1.81 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total liabilities | | | 407,010,653 | | | | 449,462,461 | | | | (42,451,808 | ) | | | -9.45 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Equity | | | 47,616,182 | | | | 40,405,982 | | | | 7,210,200 | | | | 17.84 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total liabilities and equity | | | 454,626,835 | | | | 489,868,443 | | | | (35,241,608 | ) | | | -7.19 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest income | | | | | | | | | | | | | | | | | | | 3,751,877 | | | | 3,290,187 | | | | 461,690 | | | | 14.03 | % | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest rate spread | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 3.27 | % | | | 2.70 | % | | | 0.57 | % |
Net interest margin | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 3.51 | % | | | 2.90 | % | | | 0.61 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ratio of average interest-earnings assets to average interest-bearing liabilities | | | 110.82 | % | | | 106.33 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Data for the nine months ended September 30:
| | Average Balance | | | Interest Income/Expense | | | Yield/Rate | |
| | 2009 | | | 2008 | | | Change | | | Change-% | | | 2009 | | | 2008 | | | Change | | | Change-% | | | 2009 | | | 2008 | | | Change | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans | | | 397,062,355 | | | | 434,848,012 | | | | (37,785,657 | ) | | | -8.69 | % | | | 18,063,597 | | | | 20,749,524 | | | | (2,685,927 | ) | | | -12.94 | % | | | 6.07 | % | | | 6.35 | % | | | -0.28 | % |
Securities available-for-sale | | | 29,491,626 | | | | 22,031,482 | | | | 7,460,144 | | | | 33.86 | % | | | 834,535 | | | | 727,931 | | | | 106,604 | | | | 14.64 | % | | | 3.77 | % | | | 4.41 | % | | | -0.64 | % |
Interest-bearing cash | | | 9,143,607 | | | | 7,457,322 | | | | 1,686,285 | | | | 22.61 | % | | | 11,998 | | | | 131,694 | | | | (119,696 | ) | | | -90.89 | % | | | 0.18 | % | | | 2.35 | % | | | -2.17 | % |
Total interest-earning assets | | | 435,697,588 | | | | 464,336,816 | | | | (28,639,228 | ) | | | -6.17 | % | | | 18,910,130 | | | | 21,609,149 | | | | (2,699,019 | ) | | | -12.49 | % | | | 5.79 | % | | | 6.19 | % | | | -0.40 | % |
Noninterest-earning assets | | | 30,565,290 | | | | 36,128,969 | | | | (5,563,679 | ) | | | -15.40 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | | 466,262,878 | | | | 500,465,785 | | | | (34,202,907 | ) | | | -6.83 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities and Equity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
NOW and money market savings | | | 96,193,724 | | | | 94,057,285 | | | | 2,136,439 | | | | 2.27 | % | | | 351,034 | | | | 710,050 | | | | (359,016 | ) | | | -50.56 | % | | | 0.49 | % | | | 1.01 | % | | | -0.52 | % |
Savings | | | 28,402,468 | | | | 25,624,128 | | | | 2,778,340 | | | | 10.84 | % | | | 41,472 | | | | 56,662 | | | | (15,190 | ) | | | -26.81 | % | | | 0.20 | % | | | 0.29 | % | | | -0.09 | % |
Certificates of Deposit | | | 197,044,223 | | | | 225,625,846 | | | | (28,581,623 | ) | | | -12.67 | % | | | 5,010,538 | | | | 7,612,469 | | | | (2,601,931 | ) | | | -34.18 | % | | | 3.40 | % | | | 4.49 | % | | | -1.09 | % |
Borrowed funds | | | 75,948,164 | | | | 92,099,854 | | | | (16,151,690 | ) | | | -17.54 | % | | | 2,745,765 | | | | 3,484,831 | | | | (739,066 | ) | | | -21.21 | % | | | 4.83 | % | | | 5.04 | % | | | -0.21 | % |
Total interest-bearing liabilities | | | 397,588,579 | | | | 437,407,113 | | | | (39,818,534 | ) | | | -9.10 | % | | | 8,148,809 | | | | 11,864,012 | | | | (3,715,203 | ) | | | -31.31 | % | | | 2.74 | % | | | 3.61 | % | | | -0.87 | % |
Noninterest-bearing liabilities | | | 22,193,195 | | | | 21,989,915 | | | | 203,280 | | | | 0.92 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total liabilities | | | 419,781,774 | | | | 459,397,028 | | | | (39,615,254 | ) | | | -8.62 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Equity | | | 46,481,104 | | | | 41,068,757 | | | | 5,412,347 | | | | 13.18 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total liabilities and equity | | | 466,262,878 | | | | 500,465,785 | | | | (34,202,907 | ) | | | -6.83 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest income | | | | | | | | | | | | | | | | | | | 10,761,321 | | | | 9,745,137 | | | | 1,016,184 | | | | 10.43 | % | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest rate spread | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 3.05 | % | �� | | 2.58 | % | | | 0.47 | % |
Net interest margin | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 3.29 | % | | | 2.79 | % | | | 0.50 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ratio of average interest-earnings assets to average interest-bearing liabilities | | | 109.59 | % | | | 106.16 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Interest Income. Net interest income before provision for loan losses increased by $462,000, or 14.0%, to $3.75 million for the quarter ended September 30, 2009, from $3.29 million for the quarter ended September 30, 2008. The increase was due to an increase in net interest rate spread (i.e., the difference in the average yield on assets and average cost of liabilities) and a decrease in the average balance of interest-bearing liabilities, offset in part by a decrease in the average balance of interest-earning assets. The interest rate spread increased to 3.27% for the quarter ended September 30, 2009, from 2.70% for the quarter ended September 30, 2008. The increase in interest rate spread reflects a decrease in cost of funds, offset in part by a decrease in the yield on interest-earning assets.
Net interest income before provision for loan losses increased by $1.02 million, or 10.3%, to $10.76 million for the nine months ended September 30, 2009, from $9.75 million for the nine months ended September 30, 2008. The increase was due to an increase in net interest rate spread and a decrease in the average balance of interest-bearing liabilities, offset in part by a decrease in the average balance of interest-earning assets. The interest rate spread increased to 3.05% for the nine months ended September 30, 2009, from 2.58% for the nine months ended September 30, 2008. The increase in interest rate spread reflects a decrease in cost of funds, offset in part by a decrease in the yield on interest-earning assets.
Interest Income. Interest income decreased by $808,000, or 11.6%, to $6.16 million for the quarter ended September 30, 2009, compared to $6.97 million for the quarter ended September 30, 2008. The decrease in interest income was due to a decrease in the average balance of interest-earning assets and a decrease in the yield on interest-earning assets. The average balance of interest-earning assets decreased $27.4 million to $426.2 million for the quarter ended September 30, 2009, from $453.6 million for the quarter ended September 30, 2008. The average yield on interest-earning assets decreased to 5.75% for the quarter ended September 30, 2009, from 6.12% for the quarter ended September 30, 2008, primarily due to a decrease in market rates on first mortgage loans secured by one-to four-family real estate, commercial real estate, and multifamily residences and consumer loans. The decrease in the average balance of interest-earning assets primarily reflects decreases in the average balances of first mortgage loans secured by one-to four-family real estate and commercial real estate, consumer loans and interest-bearing cash, offset in part by an increase in the average balance of multifamily residences and securities available-for-sale. The decrease in the average balance of first mortgage loans was derived from payments, prepayments, and sales of loans offset in part by the origination and purchases of first mortgage loans secured by one-to four-family real estate and commercial real estate during the three months ended September 30, 2009. The increase in the average balance of securities available-for-sale was primarily due to the purchases of securities available-for sale, offset in part by payments, maturities, and sale of securities.
Interest income decreased by $2.7 million, or 12.5%, to $18.91 million for the nine months ended September 30, 2009, compared to $21.61 million for the nine months ended September 30, 2008. The decrease in interest income was due to a decrease in the average balance of interest-earning assets and a decrease in the yield on interest-earning assets. The average balance of interest-earning assets decreased $28.6 million to $435.7 million for the nine months ended September 30, 2009, from $464.3 million for the nine months ended September 30, 2008. The average yield on interest-earning assets decreased to 5.79% for the nine months ended September 30, 2009, from 6.19% for the nine months ended September 30, 2008, primarily due to a decrease in market rates on first mortgage loans secured by one-to four-family real estate, commercial real estate, and multifamily residences, consumer loans, securities available-for sale and interest-bearing cash. The decrease in the average balance of interest-earning assets primarily reflects decreases in the average balances of first mortgage loans secured by one-to four-family real estate and commercial real estate and multifamily residences, offset in part by an increase in the average balance of consumer loans, securities available-for-sale, and interest-bearing cash. The decrease in the average balance of first mortgage loans was derived from payments, prepayments, and sales of loans, offset in part by the origination and purchases of first mortgage loans secured by one-to four-family real estate and commercial real estate during the nine months ended September 30, 2009. The increase in the average balance of securities available-for-sale was primarily due to the purchases of securities available-for sale, offset in part by payments, maturities, and sale of securities.
Interest Expense. Interest expense decreased by $1.27 million, or 34.6%, to $2.41 million for the quarter ended September 30, 2009, compared to $3.68 million for the quarter ended September 30, 2008. The decrease in interest expense was due to a decrease in the average balance of interest-bearing liabilities and a decrease in the cost of funds on interest-bearing liabilities. The average balance of interest-bearing liabilities decreased $42.0 million to $384.6 million for the quarter ended September 30, 2009, from $426.6 million for the quarter ended September 30, 2008. The decrease in the average balance of interest-bearing liabilities primarily reflects a decrease in borrowed funds and certificates of deposit, offset in part by an increase in NOW and savings account balances. The decrease in the average balance of borrowed funds was primarily due to normal repayments of borrowings due to maturities. The average cost of funds was 2.48% for the quarter ended September 30, 2009, compared to 3.42% for the quarter ended September 30, 2008.
Interest expense decreased by $3.72 million, or 31.3%, to $8.15 million for the nine months ended September 30, 2009, compared to $11.86 million for the nine months ended September 30, 2008. The decrease in interest expense was due to a decrease in the average balance of interest-bearing liabilities and a decrease in the cost of funds on interest-bearing liabilities. The average balance of interest-bearing liabilities decreased $39.8 million to $397.6 million for the nine months ended September 30, 2009, from $437.4 million for the nine months ended September 30, 2008. The decrease in the average balance of interest-bearing liabilities primarily reflects a decrease in borrowed funds and certificates of deposit, offset in part by an increase in NOW, money market and savings account balances. The decrease in the average balance of borrowed funds was primarily due to normal repayments of borrowings due to maturities. The average cost of funds was 2.74% for the nine months ended September 30, 2009, compared to 3.61% for the nine months ended September 30, 2008.
Provision for Loan Losses. The Company’s provision for loan losses was $450,000 and $60,000 for the quarters ended September 30, 2009 and 2008, respectively, representing an increase of $390,000, or 650%. The Company’s provision for loan losses was $1,220,000 and $280,000 for the nine months ended September 30, 2009 and 2008, respectively. The increase in provision for loan losses for the 2009 periods compared to the same periods in 2008 was higher as a result of continuing recessionary conditions negatively impacting the construction and real estate development, commercial real estate, and consumer sectors. The Company establishes provisions for loan losses, which are charged to operations, in order to maintain the allowance for loan losses at a level which is deemed to be appropriate based upon an assessment of prior loss experience, industry standards, past due loans, economic conditions, the volume and type of loans in the Company’s portfolio, and other factors related to the collectibility of the Company’s loan portfolio. The Company’s total loan portfolio decreased $25.5 million, or 6.1% from September 30, 2008 to September 30, 2009. This decrease primarily consisted of decreases in loans secured by one-to four-family residential real estate of $20.5 million and commercial real estate of $8.8 million. Net charge-offs were $642,000 for the nine months ended September 30, 2009, compared to $294,000 for the nine months ended September 30, 2008.
The following table provides information regarding nonaccrual loans and nonperforming assets as of the dates indicated.
Nonaccrual loans and nonperforming assets as of:
| | September 30 | | | December 31 | |
| | 2009 | | | 2008 | |
| | (Dollars in thousands) | |
| | | | | | |
First mortgage loans: | | | | | | |
One- to four-family residential | | $ | 1,062 | | | $ | 915 | |
Multifamily and commercial properties | | | 9,902 | | | | 2,885 | |
Consumer loans | | | 508 | | | | 204 | |
Total nonaccrual loans | | | 11,472 | | | | 4,004 | |
| | | | | | | | |
90 days past due loans (still accruing interest) | | | - | | | | 1,071 | |
Other nonperforming loans | | | 664 | | | | 2,941 | |
Total foreclosed real estate | | | 1,423 | | | | 1,183 | |
Other nonperforming assets | | | 65 | | | | 12 | |
Total nonperforming assets | | $ | 13,624 | | | $ | 9,211 | |
| | | | | | | | |
Total nonaccrual loans to net loans receivable | | | 2.99 | % | | | 1.00 | % |
Total nonaccrual loans to total assets | | | 2.53 | % | | | 0.85 | % |
Total nonperforming assets to total assets | | | 3.01 | % | | | 1.95 | % |
The allowance for loan loss was $6.0 million at September 30, 2009, compared to $5.4 million at December 31, 2008. The allowance for loan losses at September 30, 2009 was 1.52% of loans and 49.08% of nonperforming loans, compared to 1.32% of loans and 67.10% of nonperforming loans at December 31, 2008, and 1.43% of loans and 52.84% of nonperforming loans at June 30, 2009. Additions to the allowance for loan loss were due to a deterioration of economic conditions, downgrades in internal risk ratings, primarily in certain land and land development loans, reductions in appraised values, and higher levels of charge-offs. Nonperforming loans were $12.14 million, or 3.10% of total loans, at September 30, 2009, compared to $8.02 million, or 1.97% of total loans, at December 31, 2008, and $10.78 million or 2.70% of total loans at June 30, 2009. Foreclosed real estate increased to $1.42 million at September 30, 2009 from $1.11 million at September 30, 2008.
The following table summarizes the activity in the allowance for loan losses for the three and nine months ended September 30, 2009 and 2008, as well as other common ratios related to the allowance for loan losses.
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2009 | | | 2008 | | | Change | | | 2009 | | | 2008 | | | Change | |
Balance at beginning of period | | $ | 5,698 | | | $ | 3,463 | | | $ | 2,235 | | | $ | 5,379 | | | $ | 3,487 | | | $ | 1,892 | |
Charge-offs | | | (199 | ) | | | (53 | ) | | $ | (146 | ) | | | (658 | ) | | | (309 | ) | | $ | (349 | ) |
Recoveries | | | 8 | | | | 3 | | | $ | 5 | | | | 16 | | | | 15 | | | $ | 1 | |
Net charge-offs | | | (191 | ) | | | (50 | ) | | $ | (141 | ) | | | (642 | ) | | | (294 | ) | | $ | (348 | ) |
Provision charged to operations | | | 450 | | | | 60 | | | | 390 | | | | 1,220 | | | | 280 | | | | 940 | |
Balance at end of period | | $ | 5,957 | | | $ | 3,473 | | | $ | 2,484 | | | $ | 5,957 | | | $ | 3,473 | | | $ | 2,484 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Average loans outstanding | | $ | 393,574 | | | $ | 423,848 | | | | | | | $ | 397,062 | | | $ | 434,848 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Ratio of net charge-offs during the period to average loans outstanding | | | 0.05 | % | | | 0.01 | % | | | | | | | 0.16 | % | | | 0.07 | % | | | | |
Ratio of allowance for loan losses to average loans outstanding | | | 1.51 | % | | | 0.82 | % | | | | | | | 1.50 | % | | | 0.80 | % | | | | |
Management believes that the allowance for loan losses was adequate as of September 30, 2009. While management estimates loan losses using the best available information, such as independent appraisals for significant collateral properties, no assurance can be made that future adjustments to the allowance will not be necessary based on changes in economic and real estate market conditions, further information obtained regarding problem loans, identification of additional problem loans, and other factors, both within and outside of management’s control.
The following table shows the changes in the noninterest income categories shown in the Consolidated Condensed Statements of Income for the periods presented.
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2009 | | | 2008 | | | Change | | | Change % | | | 2009 | | | 2008 | | | Change | | | Change % | |
Noninterest income: | | | | | | | | | | | | | | | | | | | | | | | | |
Fees and service charges | | | 1,148,759 | | | | 1,234,639 | | | | (85,880 | ) | | | -7.0 | % | | | 3,168,446 | | | | 3,358,298 | | | | (189,852 | ) | | | -5.7 | % |
Abstract fees | | | 223,456 | | | | 238,737 | | | | (15,281 | ) | | | -6.4 | % | | | 722,947 | | | | 787,886 | | | | (64,939 | ) | | | -8.2 | % |
Mortgage banking income | | | 177,131 | | | | 111,167 | | | | 65,964 | | | | 59.3 | % | | | 823,868 | | | | 422,216 | | | | 401,652 | | | | 95.1 | % |
Loan prepayment fees | | | 30,715 | | | | 900 | | | | 29,815 | | | | 3312.8 | % | | | 242,881 | | | | 5,531 | | | | 237,350 | | | | 4291.3 | % |
Other income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Increase in CSV - BOLI | | | 64,146 | | | | 64,514 | | | | (368 | ) | | | -0.6 | % | | | 187,867 | | | | 188,497 | | | | (630 | ) | | | -0.3 | % |
Investment and Insurance sales | | | 199,143 | | | | 153,339 | | | | 45,804 | | | | 29.9 | % | | | 626,683 | | | | 478,142 | | | | 148,541 | | | | 31.1 | % |
Foreclosured real estate net earnings | | | (39,099 | ) | | | (10,323 | ) | | | (28,776 | ) | | | 278.8 | % | | | (64,385 | ) | | | (109,807 | ) | | | 45,422 | | | | -41.4 | % |
Rental income | | | 125,734 | | | | 121,814 | | | | 3,920 | | | | 3.2 | % | | | 360,194 | | | | 361,789 | | | | (1,595 | ) | | | -0.4 | % |
All other | | | 3,225 | | | | 6,950 | | | | (3,725 | ) | | | -53.6 | % | | | 9,535 | | | | 37,076 | | | | (27,541 | ) | | | -74.3 | % |
Total other income | | | 353,149 | | | | 336,294 | | | | 16,855 | | | | 5.0 | % | | | 1,119,894 | | | | 955,697 | | | | 164,197 | | | | 17.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total noninterest income | | | 1,933,210 | | | | 1,921,737 | | | | 11,473 | | | | 0.6 | % | | | 6,078,036 | | | | 5,529,628 | | | | 548,408 | | | | 9.9 | % |
Noninterest Income. Total noninterest income increased by $11,000, or 0.6%, to $1.93 million for the quarter ended September 30, 2009, from $1.92 million for the quarter ended September 30, 2008. The increase in noninterest income was primarily due to increases in mortgage banking income, loan prepayment fees and other income, offset in part by decreases in fees and service charges and abstract fees. Mortgage banking income increased $66,000 for the quarter ended September 30, 2009 compared to the same period of 2008 due to an increase in loans originated for the secondary market. During the quarter ended September 30, 2009 loan prepayment fees increased $30,000 compared to the quarter ended September 30, 2008. Other income, which primarily includes investment and insurance sales and foreclosed real estate net earnings, increased $17,000 for the quarter ended September 30, 2009 compared to the same period of 2008 primarily due to an increase in income from the sale of annuities and securities, offset in part by a decrease in foreclosed real estate net earnings. Fees and service charges decreased $86,000 for the quarter ended September 30, 2009 compared to the same period of 2008 primarily due to a decrease in fees associated with checking accounts, including overdraft fees. Abstract fees decreased $15,000 for the quarter ended September 30, 2009 compared to the same period of 2008.
Total noninterest income increased by $548,000, or 9.9%, to $6.08 million for the nine months ended September 30, 2009, compared to $5.53 million for the nine months ended September 30, 2008. The increase in noninterest income was primarily due to increases in mortgage banking income, loan prepayment fees and other income, offset in part by decreases in fees and service charges, and abstract fees. Mortgage banking income increased $402,000 for the nine months ended September 30, 2009 compared to the same period of 2008 due to an increase in loans originated for the secondary market. During the nine months ended September 30, 2009, the Company recorded $243,000 in loan prepayment fees, compared to $6,000 for the nine months ended September 30, 2008. Other income, which primarily includes investment and insurance sales and foreclosed real estate net earnings, increased $164,000 for the nine months ended September 30, 2009 compared to the same period of 2008 primarily due to an increase in income from the sale of annuities and securities and an increase in foreclosed real estate net earnings. Fees and service charges decreased $190,000 for the nine months ended September 30, 2009 compared to the same period of 2008 primarily due to a decrease in fees associated with checking accounts, including overdraft fees. Abstract fees decreased $65,000 for the nine months ended September 30, 2009 compared to the same period of 2008.
Securities Losses. There was no OTTI taken on investments for the quarter ended September 30, 2009, compared to $3.85 million for the quarter ended September 30, 2008. There was a gain recognized on sale of investments due to the partial sale of a mortgage bond mutual fund investment of $6,000 for the quarter ended September 30, 2009. While no investments were sold in the quarter end September 30, 2008. OTTI on investments decreased to $23,000 for the nine months ended September 30, 2009, compared to $5.81 million, primarily due to OTTI taken on investments in Fannie Mae and Freddie Mac preferred stock, for the nine months ended September 30, 2008 which the Company no longer owns. Net loss on sale of investments increased by $14,000 for the nine months ended September 30, 2009 compared to the same period of 2008 due to the partial sales of a mortgage bond mutual fund investment.
The following table shows the changes in the noninterest expense categories shown in the Consolidated Condensed Statements of Income for the periods presented.
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2009 | | | 2008 | | | Change | | | Change % | | | 2009 | | | 2008 | | | Change | | | Change % | |
Noninterest expense: | | | | | | | | | | | | | | | | | | | | | | | | |
Compensation and employee benefits | | | 1,856,575 | | | | 1,766,045 | | | | 90,530 | | | | 5.1 | % | | | 5,568,730 | | | | 5,600,966 | | | | (32,236 | ) | | | -0.6 | % |
Premises and equipment | | | 464,459 | | | | 423,783 | | | | 40,676 | | | | 9.6 | % | | | 1,393,290 | | | | 1,279,964 | | | | 113,326 | | | | 8.9 | % |
Data processing | | | 185,959 | | | | 229,002 | | | | (43,043 | ) | | | -18.8 | % | | | 594,371 | | | | 715,286 | | | | (120,915 | ) | | | -16.9 | % |
FDIC insurance expense | | | 143,544 | | | | 72,940 | | | | 70,604 | | | | 96.8 | % | | | 615,948 | | | | 105,175 | | | | 510,773 | | | | 485.6 | % |
Other expense: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Advertising and promotions | | | 139,317 | | | | 152,826 | | | | (13,509 | ) | | | -8.8 | % | | | 374,998 | | | | 395,595 | | | | (20,597 | ) | | | -5.2 | % |
Professional fees | | | 209,049 | | | | 86,264 | | | | 122,785 | | | | 142.3 | % | | | 624,854 | | | | 228,412 | | | | 396,442 | | | | 173.6 | % |
Printing, postage, and supplies | | | 106,542 | | | | 112,700 | | | | (6,158 | ) | | | -5.5 | % | | | 329,296 | | | | 323,917 | | | | 5,379 | | | | 1.7 | % |
Checking account charges | | | 96,362 | | | | 98,181 | | | | (1,819 | ) | | | -1.9 | % | | | 283,284 | | | | 284,084 | | | | (800 | ) | | | -0.3 | % |
Insurance | | | 40,741 | | | | 52,667 | | | | (11,926 | ) | | | -22.6 | % | | | 123,949 | | | | 126,479 | | | | (2,530 | ) | | | -2.0 | % |
OTS general assessment | | | 35,255 | | | | 35,584 | | | | (329 | ) | | | -0.9 | % | | | 99,760 | | | | 103,541 | | | | (3,781 | ) | | | -3.7 | % |
Telephone | | | 35,284 | | | | 35,710 | | | | (426 | ) | | | -1.2 | % | | | 110,775 | | | | 109,720 | | | | 1,055 | | | | 1.0 | % |
Apartment operating costs | | | 87,680 | | | | 78,644 | | | | 9,036 | | | | 11.5 | % | | | 259,124 | | | | 259,183 | | | | (59 | ) | | | 0.0 | % |
Employee costs | | | 39,799 | | | | 37,209 | | | | 2,590 | | | | 7.0 | % | | | 132,362 | | | | 144,454 | | | | (12,092 | ) | | | -8.4 | % |
ATM expense | | | 15,357 | | | | 36,605 | | | | (21,248 | ) | | | -58.0 | % | | | 67,868 | | | | 117,489 | | | | (49,621 | ) | | | -42.2 | % |
Foreclosed real estate impairment | | | 34,500 | | | | 92,606 | | | | (58,106 | ) | | | -62.7 | % | | | 118,963 | | | | 359,696 | | | | (240,733 | ) | | | -66.9 | % |
All other | | | 235,327 | | | | 245,182 | | | | (9,855 | ) | | | -4.0 | % | | | 882,701 | | | | 780,717 | | | | 101,984 | | | | 13.1 | % |
Total other expense | | | 1,075,213 | | | | 1,064,178 | | | | 11,035 | | | | 1.0 | % | | | 3,407,934 | | | | 3,233,287 | | | | 174,647 | | | | 5.4 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total noninterest expense | | | 3,725,750 | | | | 3,555,948 | | | | 169,802 | | | | 4.8 | % | | | 11,580,273 | | | | 10,934,678 | | | | 645,595 | | | | 5.9 | % |
Noninterest Expense. Total noninterest expense increased by $170,000, or 4.8%, to $3.73 million for the quarter ended September 30, 2009, from $3.56 million for the quarter ended September 30, 2008. The increase in noninterest expense was primarily due to increases in compensation and employee benefits, FDIC insurance expense, premises and equipment and other expenses, offset in part by decreases in data processing expenses. Compensation and employee benefits increased $91,000 for the quarter ended September 30, 2009 compared to the same period of 2008 due to an increase in the number of full time equivalent employees, normal salary increases and increased pension plan expenses. FDIC insurance expense increased $71,000 for the quarter ended September 30, 2009 compared to the same period of 2008 due to an increase in assessment fees. The increase in premises and equipment of $41,000 was primarily due to increases in information technology enhancements and property taxes. Other expenses increased $11,000 for the quarter ended September 30, 2009 compared to the same period of 2008 primarily due to an increase in legal fees, audit and tax fees and other professional fees, offset by a decrease in impairment on other real estate owned. Data processing expenses decreased $43,000 primarily as a result of renewing a core processing contract at reduced rates. The Company’s efficiency ratio for the quarter ended September 30, 2009 and 2008 was 65.54% and 68.23%, respectively. The Company’s ratio of noninterest expense to average assets for the quarters ended September 30, 2009 and 2008 was 3.28% and 2.90%, respectively.
Total noninterest expense increased by $646,000, or 5.9%, to $11.58 million for the nine months ended September 30, 2009, from $10.93 million for the nine months ended September 30, 2008. The increase in noninterest expense was primarily due to increases in FDIC insurance expense, premises and equipment and other expenses, offset in part by decreases in salaries and employee benefits and data processing. FDIC insurance expense increased $511,000 for the nine months ended September 30, 2009 compared to the same period of 2008 due to a special assessment assessed by the FDIC. The increase in premises and equipment of $113,000 was primarily due to increases in information technology enhancements and property taxes. Other expenses increased $175,000 for the nine months ended September 30, 2009 compared to the same period of 2008 primarily due to an increase in legal fees, audit and tax fees and other professional fees, offset in part by a decrease in impairment on other real estate owned. Salaries and employee benefits expenses decreased as a result of a decrease in pension plan expenses, and data processing expenses decreased as a result of renewing a core processing contract at reduced rates. The Company’s efficiency ratio for the nine months ended September 30, 2009 and 2008 was 68.77% and 71.59%, respectively. The Company’s ratio of noninterest expense to average assets for the nine months ended September 30, 2009 and 2008 was 3.31% and 2.91%, respectively.
Income Taxes. Provision for income taxes increased by $18,000, or 3.66%, to $513,000 for the quarter ended September 30, 2009, compared to $495,000 for the quarter ended September 30, 2008. The increase in income taxes was primarily due to the increase in income before income taxes and an increase in the Company’s effective tax rate due to a decrease in tax exempt earnings primarily caused by the elimination of dividends on Fannie Mae and Freddie Mac preferred stock. During the third quarter of 2008, the Company recorded an OTTI with minimal tax benefit.
Provision for income taxes increased by $171,000, or 14.8%, to $1.32 million for the nine months ended September 30, 2009, compared to $1.15 million for the nine months ended September 30, 2008. The increase in income taxes was primarily due to the increase in the income before income taxes and an increase in the Company’s effective tax rate due to a decrease in tax exempt earnings primarily caused by the elimination of dividends on Fannie Mae and Freddie Mac preferred stock. For the nine months ended September 30, 2008, the Company recorded an OTTI with minimal tax benefit.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s primary sources of funds are deposits, amortization and prepayment of loans, borrowings such as FHLB advances, brokered certificates of deposit, maturities of securities and other investments, and earnings and funds provided from operations. During the first nine months of 2009 and 2008, principal payments, prepayments, and proceeds from the sale of loans totaled $144.9 million and $135.6 million, respectively. The net decrease in deposits during the first nine months of 2009 and 2008 totaled $21.4 million and $20.7 million, respectively. The proceeds from borrowed funds during the nine months ended September 30, 2009 and 2008 totaled $8.5 million and $11.5 million. During the first nine months of 2009 and 2008, the proceeds from the maturities, calls and sales of securities totaled $6.0 million and $1.5 million, respectively. Cash provided from operating activities during the first nine months of 2009 and 2008 totaled $5.2 million and $5.1 million, respectively. The Company’s primary use of funds is to originate and purchase loans, purchase securities available-for-sale, repay borrowed funds and other financing activities. During the first nine months of 2009 and 2008, the Company’s gross purchases and origination of loans totaled $131.5 million and $102.8 million, respectively. The purchase of securities available-for-sale for the nine months ended September 30, 2009 totaled $8.0 million compared to $11.0 million for the nine months ended September 30, 2008. The repayment of borrowed funds during the first six months of 2009 and 2008 totaled $18.0 million and $21.5 million, respectively. OTS regulations require the Company to maintain sufficient liquidity to ensure its safe and sound operation. For additional information about cash flows from the Company’s operating, financing and investing activities, see the Consolidated Condensed Statements of Cash Flows in the Company’s financial statements included in Part I, Item 1 of this report.
On January 9, 2009, the Company completed the issuance of $10.2 million of our Series A Preferred Stock and the Warrant under the TARP-CPP. Although the Bank would have remained “well capitalized” without these funds, this new equity investment further increases the capacity to support economic activity and growth in each of the communities served by the Bank through responsible lending.
On August 17, 2009, the Company paid an aggregate cash dividend of $127,500 on Series A Preferred Stock. On August 28, 2009, the Company declared a quarterly cash dividend to $0.01 per share payable on October 9, 2009 to shareholders of record as of the close of business on September 18, 2009. This dividend payment totaled $13,000.
On November 12, 2009, the FDIC Board of Directors approved a final rule that requires insured depository institutions to prepay their quarterly risk-based assessments for the fourth quarter of 2009 and full years 2010 through 2012 on December 30, 2009. This action was taken to meet immediate liquidity needs of the FDIC and restore the Deposit Insurance Fund to its federally mandated level without imposing additional special assessments. Under this new rule, the prepaid assessment amount will be calculated using the institution’s third quarter 2009 base assessment rate and corresponding assessment base (deposit data) for each quarter, with the assessment rate increasing 3 basis points for the purpose of calculating the 2011 and 2012 amounts and the assessment base increasing at a 5% annual growth rate for each quarter of the prepayment period. Based on this calculation, management believes the amount of the Company’s required payment will not have a material adverse effect on our liquidity or future results of operations and financial condition.
During the third quarter of 2009, macro-economic conditions and the ongoing recession continued to impact liquidity and credit quality across the financial markets. While the recession has impacted the local economies in which the Company operates and purchases out-of-state real estate loans, our liquidity position and capital resources remain strong and the Company anticipates that it will have sufficient funds to meet its current funding commitments.
OFF-BALANCE SHEET ARRANGEMENTS
The Company is a party to financial instruments with off-statement of financial condition risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist primarily of commitments to extend credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial condition. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in a particular class of financial instruments.
The Company uses the same credit policies in making commitments and conditional obligations as it does for instruments reflected in its statement of financial condition. The Company requires collateral or other security, to support financial instruments with credit risks.
No material changes in the Company’s off-statement of financial condition arrangements occurred during the nine months ended September 30, 2009.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In management’s opinion, there has not been a material change in the Company’s market risk profile during the nine months ended September 30, 2009. Please see the Company’s 2008 Annual Report on Form 10-K for a more detailed discussion of the Company’s interest rate sensitivity analysis.
Item 4T. Controls and Procedures
Management, including the Company’s President and Chief Executive Officer and the Company’s Chief Financial Officer and Treasurer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, the Company’s President and Chief Executive Officer and the Chief Financial Officer and Treasurer concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to the Company’s management, including the Company’s President and Chief Executive Officer and Chief Financial Officer and Treasurer, as appropriate to allow timely decisions regarding required disclosure.
There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation that occurred during the Company’s last fiscal quarter that have materially affected, or that are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its subsidiaries are not parties to any pending legal proceedings (other than ordinary litigation incidental to the entities’ businesses) and no property of these entities is the subject of any such proceeding. The Company does not know of any proceeding contemplated by a governmental authority against the Company, its subsidiaries, or any related property.
On April 13, 2009, Haskell Homes, Inc., Guy M. Haskell and Klyn R. Haskell (collectively, the “Plaintiffs”) filed a complaint in the Fifth Judicial District Court for Washington County, State of Utah against the Bank, as successor in interest to ANB Financial N.A. (“ANB”), in connection with certain loans originally made by ANB to the Plaintiffs for the development of certain real estate located in Washington County, Utah (the “Property”). On May 13, 2009, the Bank filed a notice of removal pursuant to which the case was removed to the U.S. District Court for the District of Utah. On July 31, 2009, the Bank entered into a settlement agreement with the Plaintiffs pursuant to which the Plaintiffs agreed to dismiss the lawsuit with prejudice. The settlement agreement provides that the Bank will accept a deed to the Property in lieu of foreclosure in satisfaction of the loans and related obligations. The settlement agreement also provides that if a portion of the Property is sold to a buyer referred to the Bank by the Plaintiffs within a specified time frame, the Bank will pay a 10% commission to one of the Plaintiffs. On August 11, 2009, the court approved the settlement agreement and dismissal of the case, and this matter is now closed.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed under “Part I—Item 1A—Risk Factors” in our Form 10-K for the year ended December 31, 2008, as supplemented and updated by the discussion below. These factors could materially adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this report.
Higher FDIC deposit insurance premiums and assessments could adversely affect our financial condition. Beginning in late 2008, the economic environment caused higher levels of bank failures, which dramatically increased FDIC resolution costs and led to a significant reduction in the Deposit Insurance Fund (“DIF”). FDIC insurance premiums have increased substantially in 2009 and we expect to pay significantly higher FDIC premiums in the future. Effective April 1, 2009, the FDIC adopted a final rule revising its risk-based assessment system. The changes to the assessment system involve adjustments to the risk-based calculation of an institution’s unsecured debt, secured liabilities and brokered deposits. The revisions effectively result in a range of possible assessments under the risk-based system of 7 to 77.5 basis points. In addition, on May 22, 2009, the FDIC implemented a five basis point special assessment on all insured institutions. This emergency assessment was calculated based on the institution’s assets as of June 30, 2009, totaled $209,000 for the Company, and was collected on September 30, 2009. Additional special assessments may be imposed by the FDIC for future periods. There can be no assurance that there will not be additional significant deposit insurance premium increases, special assessments or prepayments in order to restore the insurance fund’s reserve ratio. Increases in FDIC insurance premiums will add to our cost of operations and could have a significant impact on the profitability of our business.
On November 12, 2009, the FDIC Board of Directors approved a final rule that requires insured depository institutions to prepay their quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012, on December 30, 2009, unless an exemption is obtained. Under this new rule, an institution will account for the prepayment by recording the entire amount of its prepaid assessment as a prepaid expense (an asset) as of December 30, 2009, the date the payment will be made. Subsequently, each institution will record an expense (charge to earnings) for its regular quarterly assessment and an offsetting credit to the prepaid assessment until the asset is exhausted. Once the asset is exhausted, the institution would resume paying and accounting for quarterly deposit insurance assessments as they currently do. Although the FDIC has the authority to exempt institutions from the prepayment requirement when prepayment would impact the institution’s safety and soundness, the FDIC has stated it expects few exemptions to be granted, and the Company currently does not expect to apply for an exemption.
We also participate in the FDIC’s Temporary Liquidity Guarantee Program, or TLGP, for noninterest-bearing transaction deposit accounts. Banks that participate in the TLGP’s noninterest-bearing transaction account guarantee will pay the FDIC an annual assessment of 10 basis points on the amounts in such accounts above the amounts covered by FDIC deposit insurance. The general termination date for the transaction account guarantee portion of the TLGP is December 31, 2009. To promote an orderly phase-out of the program, on August 26, 2009, the FDIC adopted a final rule extending the program for six months, through June 30, 2010. For institutions that choose to remain in the program, the fee will be raised and adjusted to reflect the institution’s risk profile. Any institution currently participating in the program that wishes to opt out of the transaction account guarantee program extension must submit its opt-out election to the FDIC on or before November 2, 2009. We have decided to remain in the program, and therefore will be subject to additional fees for the extended portion of the program.
There can be no assurance regarding the impact of pending legislation or regulatory changes on the U.S. financial services industry and the U.S. financial system or that the phase-out of existing recovery programs will not adversely impact the system. The U.S. Congress, the Obama Administration and various industry and public interest groups are currently debating many aspects of the existing structure of the U.S. financial system, including regulatory restructuring; federal and national charter changes; issues involving systemic risk; appropriate capitalization levels; establishment of a new and independent Consumer Financial Protection Agency; permitting state regulators to supervise, oversee and/or enforce state laws on federal and nationally chartered depository institutions; the ability of federal and nationally chartered depository institutions to operate nationwide under a uniform set of federal laws; restrictions on mortgage lending, credit card lending and other areas affecting bank lending operations; laws impacting loan securitization and secondary mortgage lending activities; additional laws that could impose new regulatory burdens on insured depository institutions; increased assessments on depository institutions to pay for industry supervision and oversight; and changes in holding company oversight and supervision. All of these changes could all have a material adverse impact on our business, financial condition, results of operations, access to credit and the value of our securities. Similarly, the premature termination, manner or timing of the phase-out of existing programs implemented to assist the U.S. financial system in recovering from the recent financial crisis could have a material adverse impact on our business, financial condition, results of operations, access to credit or the value of our securities.
Item 6. Exhibits
Exhibit No. | | Description | | Reference No. |
3.1 | | Articles of Incorporation of North Central Bancshares, Inc. | | (1) |
| | | | |
3.2 | | Bylaws of North Central Bancshares, Inc., as amended | | (2) |
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3.3 | | Articles of Amendment to the Articles of Incorporation establishing Series A Preferred Stock | | (3) |
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31.1 | | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer | | * |
| | | | |
31.2 | | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer | | * |
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32.1 | | Section 1350 Certification of Chief Executive Officer | | * |
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32.2 | | Section 1350 Certificate of Chief Financial Officer | | * |
(1) | Incorporated herein by reference to the Quarterly Report on Form 10-Q filed with the SEC on August 12, 2009. |
(2) | Incorporated herein by reference to the Annual Report on Form 10-K filed with the SEC on March 29, 2004. |
(3) | Incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on January 7, 2009. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| NORTH CENTRAL BANCSHARES, INC. |
| | |
Date: November 12, 2009 | BY: | /s/ David M. Bradley |
| David M. Bradley, Chairman, President & CEO |
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Date: November 12, 2009 | BY: | /s/ Kyle C. Cook |
| Kyle C. Cook, Chief Financial Officer and Treasurer |