UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One) | |
x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2007 | |
| | |
o | 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: 000-51037
SFSB, INC.
(Exact name of small business issuer as specified in its charter)
United States | | 20-2077715 |
(State or other jurisdiction of | | (I.R.S. Employer |
incorporation or organization) | | Identification No.) |
| | |
1614 Churchville Road, Bel Air, Maryland 21015
Address of principal executive offices
(443) 265-5570
Issuer’s telephone number
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:
At August 9, 2007, there were 2,883,293 shares of the issuer’s Common Stock, par value $0.01 per share, outstanding.
Transitional Small Business Disclosure Format (Check One): Yes o No x
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SFSB, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
| | June 30, 2007 | | December 31, 2006 | |
| | (Dollars in thousands, except share data) | |
ASSETS | | | | | |
Cash and due from banks | | $ | 793 | | $ | 881 | |
Federal funds sold | | | 3,585 | | | 1,970 | |
Cash and cash equivalents | | | 4,378 | | | 2,851 | |
| | | | | | | |
Investment securities - available for sale | | | 8,712 | | | 8,526 | |
Investment securities - held to maturity | | | 4,000 | | | 4,000 | |
Mortgage backed securities - held to maturity | | | 2,730 | | | 3,200 | |
Loans receivable - net of allowance for loan losses of | | | | | | | |
2007 $912; 2006 $850 | | | 143,933 | | | 147,118 | |
Foreclosed Real Estate | | | 1,083 | | | — | |
Federal Home Loan Bank of Atlanta stock, at cost | | | 1,821 | | | 2,098 | |
Premises and equipment, net | | | 5,213 | | | 5,265 | |
Accrued interest receivable | | | 522 | | | 560 | |
Other assets | | | 448 | | | 607 | |
Total assets | | $ | 172,840 | | $ | 174,225 | |
| | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | |
| | | | | | | |
Liabilities | | | | | | | |
Deposits | | $ | 114,290 | | $ | 111,823 | |
Checks outstanding in excess of bank balance | | | 654 | | | 384 | |
Borrowings | | | 33,500 | | | 39,000 | |
Advance payments by borrowers for taxes and insurance | | | 1,760 | | | 350 | |
Other liabilities | | | 481 | | | 303 | |
Total liabilities | | | 150,685 | | | 151,860 | |
| | | | | | | |
Stockholders’ Equity | | | | | | | |
Preferred stock, no par value, 1,000,000 shares authorized, none issued and outstanding | | | — | | | — | |
Common stock, par value $.01, 9,000,000 shares authorized, 2,975,625 shares issued at June 30, 2007 and December 31, 2006 and 2,883,293 and 2,907,759 shares outstanding at June 30, 2007 and December 31, 2006, respectively | | | 30 | | | 30 | |
Additional paid-in capital | | | 12,845 | | | 12,788 | |
Retained earnings (substantially restricted) | | | 11,345 | | | 11,393 | |
Unearned Employee Stock Ownership Plan shares | | | (1,021 | ) | | (1,050 | ) |
Treasury Stock at cost, June 30, 2007, 92,332 shares and December 31, 2006, 67,866 shares | | | (886 | ) | | (660 | ) |
Accumulated other comprehensive loss | | | (158 | ) | | (136 | ) |
Total stockholders’ equity | | | 22,155 | | | 22,365 | |
Total liabilities and stockholders’ equity | | $ | 172,840 | | $ | 174,225 | |
| | | | | | | |
| | | | | | | |
See notes to consolidated financial statements.SFSB, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
| | Three Months Ended | | Six Months Ended | |
| | June 30, | | June 30, | |
| | 2007 | | 2006 | | 2007 | | 2006 | |
| | (Dollars in thousands, except for per share data) | |
Interest and fees on loans | | $ | 2,056 | | $ | 2,026 | | $ | 4,098 | | $ | 4,000 | |
Interest and dividends on investment securities | | | 151 | | | 132 | | | 297 | | | 255 | |
Interest on mortgage backed securities | | | 31 | | | 40 | | | 65 | | | 83 | |
Other interest income | | | 85 | | | 58 | | | 165 | | | 114 | |
Total interest income | | | 2,323 | | | 2,256 | | | 4,625 | | | 4,452 | |
| | | | | | | | | | | | | |
Interest on deposits | | | 1,149 | | | 920 | | | 2,263 | | | 1,773 | |
Interest on short-term borrowings | | | 108 | | | 83 | | | 257 | | | 158 | |
Interest on long-term borrowings | | | 263 | | | 293 | | | 524 | | | 581 | |
Total interest expense | | | 1,520 | | | 1,296 | | | 3,044 | | | 2,512 | |
| | | | | | | | | | | | | |
Net interest income | | | 803 | | | 960 | | | 1,581 | | | 1,940 | |
Provision for loan losses | | | 149 | | | 24 | | | 182 | | | 38 | |
Net interest income after provision for loan losses | | | 654 | | | 936 | | | 1,399 | | | 1,902 | |
| | | | | | | | | | | | | |
Other Income | | | | | | | | | | | | | |
Rental income | | | 41 | | | 40 | | | 80 | | | 79 | |
Other income | | | 33 | | | 15 | | | 53 | | | 34 | |
Gain on sale of loans | | | 31 | | | 2 | | | 39 | | | 7 | |
Total other income | | | 105 | | | 57 | | | 172 | | | 120 | |
| | | | | | | | | | | | | |
Non-Interest Expenses | | | | | | | | | | | | | |
Compensation and other related expenses | | | 426 | | | 465 | | | 860 | | | 923 | |
Occupancy expense | | | 90 | | | 87 | | | 185 | | | 293 | |
Advertising expense | | | 64 | | | 46 | | | 108 | | | 72 | |
Service bureau expense | | | 40 | | | 37 | | | 83 | | | 78 | |
Furniture, fixtures and equipment | | | 31 | | | 55 | | | 65 | | | 111 | |
Telephone, postage and delivery | | | 19 | | | 20 | | | 38 | | | 44 | |
Other expenses | | | 146 | | | 189 | | | 295 | | | 343 | |
Total non-interest expenses | | | 816 | | | 899 | | | 1,634 | | | 1,864 | |
| | | | | | | | | | | | | |
(Loss) Income before income tax provision | | | (57 | ) | | 94 | | | (63 | ) | | 158 | |
Income tax (benefit) provision | | | (19 | ) | | 38 | | | (15 | ) | | 66 | |
Net (loss) income | | $ | (38 | ) | $ | 56 | | $ | (48 | ) | $ | 92 | |
| | | | | | | | | | | | | |
Basic Earnings (Loss) per Share | | $ | (0.01 | ) | $ | 0.02 | | $ | (0.02 | ) | $ | 0.03 | |
| | | | | | | | | | | | | |
Diluted Earnings (Loss) per Share | | $ | (0.01 | ) | $ | 0.02 | | $ | (0.02 | ) | $ | 0.03 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
See notes to consolidated financial statements.
SFSB, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | Three Months Ended | | Six Months Ended | |
| | June 30, | | June 30, | |
| | 2007 | | 2006 | | 2007 | | 2006 | |
| | (Dollars in thousands) | |
| | | | | | | | | |
Net (loss) income | | $ | (38 | ) | $ | 56 | | $ | (48 | ) | $ | 92 | |
| | | | | | | | | | | | | |
Net unrealized loss on securities available for sale during the period (net of taxes of $(17), $(6), $(14) | | | | | | | | | | | | | |
and $(13)) | | | (28 | ) | | (10 | ) | | (22 | ) | | (20 | ) |
| | | | | | | | | | | | | |
Total Comprehensive (Loss) Income | | $ | (66 | ) | $ | 46 | | $ | (70 | ) | $ | 72 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
See notes to consolidated financial statements.
SFSB, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | Six Months Ended | |
| | June 30, | |
| | 2007 | | 2006 | |
| | (Dollars in thousands) | |
Cash Flows From Operating Activities | | | | | |
Net (loss) income | | $ | (48 | ) | $ | 92 | |
Adjustments to Reconcile Net (Loss) Income to Net Cash Provided by Operating Activities: | | | | | | | |
Non-cash compensation under stock-based compensation plans and Employee Stock Ownership Plan | | | 87 | | | 92 | |
Net amortization of premiums and discounts of investment securities | | | 5 | | | 7 | |
Amortization of deferred loan fees | | | (23 | ) | | (32 | ) |
Provision for loan losses | | | 182 | | | 38 | |
Gain on sale of loans | | | (39 | ) | | (7 | ) |
Loans originated for sale | | | (4,688 | ) | | (717 | ) |
Proceeds from loans sold | | | 4,727 | | | 724 | |
Provision for depreciation | | | 116 | | | 264 | |
Decrease (increase) in accrued interest receivable and other assets | | | 211 | | | (104 | ) |
Increase in accrued interest payable | | | 6 | | | 3 | |
Increase in other liabilities | | | 173 | | | 8 | |
Net Cash Provided by Operating Activities | | | 710 | | | 368 | |
| | | | | | | |
Cash Flows from Investing Activities | | | | | | | |
Purchase of available for sale securities | | | (222 | ) | | (179 | ) |
Net decrease (increase) in loans | | | 1,943 | | | (2,050 | ) |
Principal collected on mortgage backed securities | | | 465 | | | 708 | |
Purchase of Federal Home Loan Bank of Atlanta stock | | | | | | (98 | ) |
Redemption of Federal Home Loan Bank of Atlanta stock | | | 277 | | | | |
Purchases of premises and equipment | | | (65 | ) | | (23 | ) |
Net Cash Provided by (Used in) Investing Activities | | | 2,398 | | | (1,642 | ) |
| | | | | | | |
Cash Flows from Financing Activities | | | | | | | |
Net increase in deposits | | | 2,465 | | | 344 | |
Increase (decrease) in checks outstanding in excess of bank balance | | | 270 | | | (1,609 | ) |
Proceeds from long-term borrowings | | | 5,000 | | | 6,500 | |
Repayment of long-term borrowings | | | (5,000 | ) | | (6,500 | ) |
Net change in short-term borrowings | | | (5,500 | ) | | 2,000 | |
Increase in advance payments by borrowers for taxes and insurance | | | 1,410 | | | 1,402 | |
Issuance of common stock | | | 67 | | | | |
Purchase of treasury stock | | | (293 | ) | | (422 | ) |
Net Cash (Used in) Provided by Financing Activities | | | (1,581 | ) | | 1,715 | |
| | | | | | | |
Increase (decrease) in cash and cash equivalents | | | 1,527 | | | 441 | |
Cash and cash equivalents at beginning of period | | | 2,851 | | | 1,342 | |
Cash and cash equivalents at end of period | | $ | 4,378 | | $ | 1,783 | |
| | | | | | | |
Supplemental Disclosures of Cash Flows Information: | | | | | | | |
Income taxes paid | | $ | — | | $ | 165 | |
Interest expense paid | | $ | 3,037 | | $ | 2,509 | |
Transfer of loan to foreclosed real estate | | $ | 1,083 | | $ | — | |
| | | | | | | |
| | | | | | | |
See notes to consolidated financial statements.
SLAVIE FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Principles of Consolidation
The consolidated financial statements include the accounts of SFSB, Inc. (“the Company”), its wholly-owned subsidiaries, Slavie Federal Savings Bank (“the Bank”) and the Bank’s wholly-owned subsidiary, Slavie Holdings, LLC (“Holdings”). The accompanying consolidated financial statements include the accounts and transactions of these companies on a consolidated basis since inception. All intercompany accounts and transactions have been eliminated in the consolidated financial statements.
Slavie Bancorp, MHC, a mutual holding company whose activity is not included in the accompanying consolidated financial statements, owns 56.3% of the outstanding common stock of the Company as of June 30, 2007.
Note 2 - Business
The Company's primary business is the ownership and operation of the Bank. The Bank’s primary business activity is the acceptance of deposits from the general public and the use of the proceeds for investments and loan originations. The Bank is subject to competition from other financial institutions. The Bank is subject to the regulations of certain federal agencies and undergoes periodic examinations by those regulatory authorities.
Holdings, formed on August 18, 1999 as a Maryland limited liability company, was created to acquire and manage certain real property located at 1614 Churchville Road, Bel Air, Maryland. This property includes the main office and corporate headquarters of the Bank. In addition, the property houses mixed use office space which is available for lease.
Note 3 - Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instructions to SEC Form 10-QSB. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements.
The foregoing consolidated financial statements in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation thereof. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-KSB. The results of operations for the six months ended June 30, 2007 are not necessarily indicative of the results that may be expected for the full year.
Note 4 - Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the appropriate period. Unearned Employee Stock Ownership Plan (“ESOP”) shares are not included in outstanding shares. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average shares outstanding as adjusted for the dilutive effect of outstanding stock options and unvested stock awards. Potential common shares related to stock options and unvested stock awards are determined based on the “treasury stock” method. Information related to the calculation of earnings (loss) per share is summarized for the three and six months ended June 30 as follows:
| | Three Months Ended | | Six Months Ended | |
| | June 30, 2007 | | June 30, 2007 | |
| | Basic | | Diluted | | Basic | | Diluted | |
| | (Dollars in thousands, except per share data) | |
| | | | | | | | | |
Net (loss) income | | $ | (38 | ) | $ | (38 | ) | $ | (48 | ) | $ | (48 | ) |
| | | | | | | | | | | | | |
Weighted average shares outstanding | | | 2,795 | | | 2,795 | | | 2,794 | | | 2,794 | |
| | | | | | | | | | | | | |
Diluted Securities | | | | | | | | | | | | | |
Stock Options | | | | | | | | | | | | | |
Unvested Stock Awards | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Adjusted Weighted average shares | | | 2,795 | | | 2,795 | | | 2,794 | | | 2,794 | |
| | | | | | | | | | | | | |
Per Share Amount | | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.02 | ) |
| | Three Months Ended | | Six Months Ended | |
| | June 30, 2006 | | June 30, 2006 | |
| | Basic | | Diluted | | Basic | | Diluted | |
| | (Dollars in thousands, except per share data) | |
| | | | | | | | | |
Net income | | $ | 56 | | $ | 56 | | $ | 92 | | $ | 92 | |
| | | | | | | | | | | | | |
Weighted average shares outstanding | | | 2,813 | | | 2,813 | | | 2,824 | | | 2,824 | |
| | | | | | | | | | | | | |
Diluted Securities | | | | | | | | | | | | | |
Stock Options | | | | | | 6 | | | | | | 5 | |
Unvested Stock Awards | | | | | | 3 | | | | | | 3 | |
| | | | | | | | | | | | | |
Adjusted Weighted average shares | | | 2,813 | | | 2,822 | | | 2,824 | | | 2,832 | |
| | | | | | | | | | | | | |
Per Share Amount | | $ | 0.02 | | $ | 0.02 | | $ | 0.03 | | $ | 0.03 | |
Note 5 - Regulatory Capital Requirements
At June 30, 2007, the Bank met each of the three minimum regulatory capital requirements. The following table summarizes the Bank’s regulatory capital position at June 30, 2007 and December 31, 2006.
| | | | | | | | | | To Be Well | |
| | | | | | | | | | Capitalized Under | |
| | | | | | For Capital | | Prompt Corrective | |
| | Actual | | Adequacy Purposes | | Action Provision | |
| | Amount | | % | | Amount% | | % | | Amount% | | % | |
| | (Dollars in thousands) | |
June 30, 2007 | | | | | | | | | | | | | |
Tangible (1) | | $ | 16,800 | | | 9.70 | % | $ | 2,598 | | | 1.50 | % | | N/A | | | N/A | |
Tier I capital (2) | | | 16,800 | | | 16.79 | % | | N/A | | | N/A | | $ | 6,004 | | | 6.00 | % |
Core (leverage) (1) | | | 16,800 | | | 9.70 | % | | 6,928 | | | 4.00 | % | | 8,660 | | | 5.00 | % |
Risk-weighted (2) | | | 17,712 | | | 17.70 | % | | 8,005 | | | 8.00 | % | | 10,007 | | | 10.00 | % |
| | | | | | | | | | | | | | | | | | | |
December 31, 2006 | | | | | | | | | | | | | | | | | | | |
Tangible (1) | | $ | 16,775 | | | 9.62 | % | $ | 2,617 | | | 1.50 | % | | N/A | | | N/A | |
Tier I capital (2) | | | 16,775 | | | 16.93 | % | | N/A | | | N/A | | $ | 5,944 | | | 6.00 | % |
Core (leverage) (1) | | | 16,775 | | | 9.62 | % | | 6,978 | | | 4.00 | % | | 8,723 | | | 5.00 | % |
Risk-weighted (2) | | | 17,625 | | | 17.79 | % | | 7,926 | | | 8.00 | % | | 9,907 | | | 10.00 | % |
| | | | | | | | | | | | | | | | | | | |
(1) | To adjusted total assets. |
(2) | To risk-weighted assets. |
Note 6 - Stock-Based Compensation
The compensation cost charged against income for stock-based compensation plans, excluding ESOP, was $30,000 and $60,000 for the three and six months ended June 30, 2007. The total income tax benefit recognized was $8,000 and $17,000 for the three and six months ended June 30, 2007. The compensation cost charged against income was $32,000 and $64,000 for the three and six months ended June 30, 2006.
Item 2. Management's Discussion and Analysis
Introduction
Some of the matters discussed below include forward-looking statements within the meaning of the federal securities laws. Forward-looking statements often use words such as “believe,” “expect,” “plan,” “may,” “will,” “should,” “project,” “contemplate,” “anticipate,” “forecast,” “intend” or other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts. Our actual results and the actual outcome of our expectations and strategies could be materially different from those anticipated or estimated for the reasons discussed below and the reasons under the heading “Information Regarding Forward Looking Statements.”
Overview
Earnings declined to a net loss of $48,000 for the six months ended June 30, 2007 as compared to net income of $92,000 for the same period in 2006. This decrease was primarily due to an increase in interest expense as a result of an increase in deposits in an interest rate environment in which our customers are moving their funds into shorter term accounts with higher interest rates and an increase in our provision for loan losses. Interest income increased $173,000, or 3.89%, non-interest income increased $52,000, or 43.33%, and non-interest expenses decreased $230,000, or 12.34%. These improvements were offset by a $532,000, or 21.18%, increase in interest expenses and a $144,000, or 378.95%, increase our provision for loan losses.
Assets decreased during the first six months of 2007 primarily because we decreased our loan portfolio by $3,185,000, or 2.16%, to $143,933,000 at June 30, 2007 from $147,118,000 at December 31, 2006. The decrease is also the result of a decrease in mortgage backed securities held to maturity of $470,000, or 14.69%, to $2,730,000 at June 30, 2007 from $3,200,000 at December 31, 2006 and a decrease in Federal Home Loan Bank of Atlanta stock of $277,000, or 13.20%, to $1,821,000 at June 30, 2007 from $2,098,000 at December 31, 2006. These decreases were partially offset by an increase in cash and cash equivalents of $1,527,000, or 53.56%, to $4,378,000 at June 30, 2007 from $2,851,000 at December 31, 2006 and an increase in investment securities available for sale of $186,000, or 2.18%, to $8,712,000 at June 30, 2007 from $8,526,000 at December 31, 2006.
As discussed in detail in the Asset Quality section of this report, we hold a 19% participation (approximately $1,083,000 in unpaid principal balance) in an acquisition and development loan. This loan became delinquent in late 2004 and was placed on non-accrual status in late 2005. Due to unresolved land development issues with the local municipality, the borrower had been unable to sell the property. Both the principal of the borrower and the entity that owns the collateral property filed for bankruptcy in late 2006. The automatic stay that was imposed in connection with the bankruptcy filings and had prevented the sale of the property was lifted on April 10, 2007 and the property was sold at auction to the lead participating bank on May 30, 2007, requiring us to place the loan in the foreclosed real estate category. Subsequently, a real estate developer has made an offer to purchase the property and the lead participating bank accepted a letter of intent on June 26, 2007. The lead participating bank executed a contract with a 90 day feasibility study period on July 26, 2007 that would enable us to recover the carrying amount of the real estate, although there can be no assurance that this will be the case.
In addition to the acquisition and development loan mentioned above, we classified two commercial non-real estate loans as impaired in 2006. One of these commercial loans is a business line of credit to a company that ceased operations as of July 31, 2006; the other is an unsecured term loan to the principal of the same company. The company filed for Chapter 7 bankruptcy on September 26, 2006 and the borrower filed personal bankruptcy on June 28, 2007. At the end of the first quarter of 2007, in anticipation of a minimal recovery of principal on these loans, we charged down $120,000 of the original loan balances of $260,000, which were in default and fully reserved, against our provision for loan losses. A meeting of creditors was scheduled on July 26, 2007 in objection of the exemptions deadline, but the borrower is still expected to restructure the remaining debt by August 26, 2007, although there is no written agreement at this time.
To remain competitive and offer even more product line choice to our customers, we have implemented a health savings account for health care expenses and we continue to offer a seven month certificate of deposit with what we believe is an attractive interest rate.
In addition, we now offer a comprehensive and full service approach to managing finances and investing in the future. The creation of Slavie Financial Services and the addition of a certified financial planner in June 2007 enables us to bring investment guidance and financial planning expertise to our customers, while expanding our ability to provide personalized services that focus on the successful financial well being of our customers.
We continue to implement strategies formed during strategic planning meetings of the Board of Directors and the Company’s officers over the past year. In our continued efforts to boost the yield of our interest earning assets during a period of net interest margin compression, management is selling a larger percentage of the Company’s residential loan originations to facilitate our goal of increasing and diversifying the mix of commercial loans to residential loans in our portfolio. This strategy has enabled us to increase our fee income on loans sold. In February 2007, we hired an experienced commercial loan originator to further our goal of increasing the average outstanding balance of our commercial loan portfolio. In addition, we intensified our marketing strategy by offering incentives to attract new checking accounts in an effort to attain our goal of decreasing the yield on our interest bearing liabilities. Our directors, officers, management and staff remain committed in a unified effort to improve the Bank’s profitability.
Key measurements and events for the three- and six-month periods ended June 30, 2007 include the following:
| · | Total assets at June 30, 2007 decreased by 0.79% to $172,840,000 as compared to $174,225,000 as of December 31, 2006. |
| · | Total borrowings decreased by 14.10% from $39,000,000 as of December 31, 2006 to $33,500,000 as of June 30, 2007. |
| · | Net loans outstanding decreased by 2.16% from $147,118,000 as of December 31, 2006 to $143,933,000 as of June 30, 2007. |
| · | Nonperforming assets at June 30, 2007 totaled $1,498,000 compared with a total of $1,486,000 at December 31, 2006. We believe an appropriate allowance for loan losses continues to be maintained. |
| · | Deposits at June 30, 2007 were $114,290,000, an increase of $2,467,000 or 2.22% from $111,823,000 at December 31, 2006. |
| · | We realized a net loss of $38,000 and $48,000 for the three-month and six-month periods ended June 30, 2007. This compares to net income of $56,000 and $92,000 for the three-month and six-month periods ended June 30, 2006. |
| · | Net interest income, our main source of income, was $803,000 and $1,581,000 during the three-month and six-month periods ended June 30, 2007 compared to $960,000 and $1,940,000 for the same period in 2006. This represents a decrease of 16.35% and 18.51% for the three months and six months ended June 30, 2007 as compared to the same period in 2006. |
| · | We had a commercial non-real estate loan charge-off of $120,000 and two overdraft protection loan charge-offs totaling $1,100 during the six-month period ending June 30, 2007. We had no loan charge-offs during the six-month period ending June 30, 2006. |
| · | Non-interest income increased by $48,000 and $52,000, or 84.21% and 43.33%, for the three-month and six-month periods ended June 30, 2007, as compared to the three-month and six-month periods ended June 30, 2006. |
| · | Non-interest expenses decreased by $83,000 and $230,000, or 9.23% and 12.34%, for the three-month and six-month periods ended June 30, 2007, as compared to the three- and six-month periods ended June 30, 2006. The decrease between the periods is the result of no longer carrying the occupancy expenses associated with the closing of the Edgewood branch and the decision not to increase the salary compensation of the executive officers and not to award year end bonuses to all employees. |
A detailed discussion of the factors leading to these changes can be found in the discussion below.
Critical Accounting Policies
The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America or GAAP, and follow general practices within the industry in which we operate. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation allowance to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available.
Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for loan losses as the accounting area that requires the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.
Management’s judgment is inherent in the determination of the provision and allowance for loan losses, including in connection with the valuation of collateral and the financial condition of the borrower. The establishment of allowance factors is a continuing exercise and allowance factors may change over time, resulting in an increase or decrease in the amount of the provision or allowance based upon the same volume and classification of loans. Changes in allowance factors or in management’s interpretation of those factors will have a direct impact on the amount of the provision, and a corresponding effect on income and assets. Also, errors in management’s perception and assessment of the allowance factors could result in the allowance not being adequate to cover losses in the portfolio, and may result in additional provisions or charge-offs, which would adversely affect income and capital. For additional information regarding the allowance for loan losses, see “Results of Operations for the Three and Six Months Ended June 30, 2007 and 2006 - Provision for Loan Losses and Analysis of Allowance for Loan Losses.”
Results of Operations for the Three and Six Months Ended June 30, 2007 and 2006
General. Net income decreased $94,000 to a net loss of $38,000 for the three months ended June 30, 2007 compared to net income of $56,000 for the same period in the prior year. The decrease was due primarily to a $224,000 increase in interest expense and a $125,000 increase in provision for loan losses, offset by a $67,000 increase in interest income, a $48,000 increase in non-interest income and an $83,000 decrease in non-interest expenses.
Net income decreased $140,000, to a net loss of $48,000 for the six months ended June 30, 2007 compared to net income of $92,000 for the same period in the prior year. The decrease was due primarily to a $532,000 increase in interest expense and a $144,000 increase in provision for loan losses, offset by a $173,000 increase in interest income, a $230,000 decrease in non-interest expenses and a $52,000 increase in other income.
Average Balances, Net Interest Income, Yields Earned and Rates Paid. The following tables present for the periods indicated the total dollar amount of interest income from average interest earning assets and the resultant yields, as well as the interest expense on average interest bearing liabilities, expressed both in dollars and rates. No tax equivalent adjustments were made because no income was exempt from federal income taxes. All average balances are monthly average balances. We do not believe that the monthly averages differ materially from what the daily averages would have been. Non-accruing loans have been included in the table as loans carrying a zero yield. The amortization of loan fees is included in computing interest income, however, such fees are not material.
| | Three Months Ended June 30, 2007 | | Three Months Ended June 30, 2006 | |
| | Average Outstanding Balance | | Interest Earned/ Paid | | Yield/ Rate | | Average Outstanding Balance | | Interest Earned/ Paid | | Yield/ Rate | |
| | Dollars in Thousands | | Dollars in Thousands | |
Interest-earning assets: | | | | | | | | | | | | | |
Loans receivable (1) | | $ | 144,668 | | $ | 2,056 | | | 5.68 | % | $ | 146,513 | | $ | 2,026 | | | 5.53 | % |
Mortgage-backed securities | | | 2,816 | | | 31 | | | 4.40 | | | 3,932 | | | 40 | | | 4.07 | |
Investment securities (available for sale) | | | 8,704 | | | 113 | | | 5.19 | | | 8,272 | | | 93 | | | 4.50 | |
Investment securities (held to maturity) | | | 4,000 | | | 38 | | | 3.80 | | | 4,000 | | | 39 | | | 3.90 | |
Other interest-earning assets | | | 5,628 | | | 85 | | | 6.04 | | | 3,846 | | | 58 | | | 6.03 | |
| | | | | | | | | | | | | | | | | | | |
Total interest-earning assets | | | 165,816 | | | 2,323 | | | 5.60 | % | | 166,563 | | | 2,256 | | | 5.42 | % |
| | | | | | | | | | | | | | | | | | | |
Non-interest earning assets | | | 6,885 | | | | | | | | | 7,039 | | | | | | | |
Total assets | | $ | 172,701 | | | | | | | | $ | 173,602 | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | |
Savings deposits | | $ | 16,580 | | | 48 | | | 1.16 | % | $ | 25,804 | | | 83 | | | 1.29 | % |
Demand and NOW accounts | | | 7,292 | | | 42 | | | 2.30 | | | 2,678 | | | 4 | | | 0.60 | |
Certificates of deposit | | | 88,183 | | | 1,059 | | | 4.80 | | | 81,070 | | | 833 | | | 4.11 | |
Escrows | | | 9 | | | — | | | — | | | 19 | | | — | | | — | |
Borrowings | | | 33,833 | | | 371 | | | 4.39 | | | 38,000 | | | 376 | | | 3.96 | |
Total interest-bearing liabilities | | | 145,897 | | | 1,520 | | | 4.17 | % | | 147,571 | | | 1,296 | | | 3.51 | % |
| | | | | | | | | | | | | | | | | | | |
Non-interest bearing liabilities | | | 4,461 | | | | | | | | | 3,500 | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Total liabilities | | | 150,358 | | | | | | | | | 151,071 | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Total equity (2) | | | 22,343 | | | | | | | | | 22,531 | | | | | | | |
Total liabilities and equity | | $ | 172,701 | | | | | | | | $ | 173,602 | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Net interest income | | | | | $ | 803 | | | | | | | | $ | 960 | | | | |
Interest rate spread (3) | | | | | | | | | 1.43 | % | | | | | | | | 1.91 | % |
Net interest-earning assets | | $ | 19,919 | | | | | | | | $ | 18,992 | | | | | | | |
Net interest margin (4) | | | | | | | | | 1.94 | % | | | | | | | | 2.31 | % |
Ratio of interest earning assets to interest bearing liabilities | | | | | | 1.14x | | | | | | | | | 1.12x | | | | |
| | | | | | | | | | | | | | | | | | | |
(1) | Loans receivable are net of the allowance for loan losses. |
(2) | Total equity includes retained earnings and accumulated other comprehensive income (loss). |
(3) | Net interest rate spread represents the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities. |
(4) | Net interest margin represents net interest income as a percentage of average interest earning assets. |
| | Six Months Ended June 30, 2007 | | Six Months Ended June 30, 2006 | |
| | Average Outstanding Balance | | Interest Earned/ Paid | | Yield/ Rate | | Average Outstanding Balance | | Interest Earned/ Paid | | Yield/ Rate | |
| | Dollars in Thousands | | Dollars in Thousands | |
Interest-earning assets: | | | | | | | | | | | | | |
Loans receivable (1) | | $ | 145,350 | | $ | 4,098 | | | 5.64 | % | $ | 145,488 | | $ | 4,000 | | | 5.50 | % |
Mortgage-backed securities | | | 2,933 | | | 65 | | | 4.43 | | | 4,109 | | | 83 | | | 4.04 | |
Investment securities (available for sale) | | | 8,655 | | | 222 | | | 5.13 | | | 8,235 | | | 179 | | | 4.35 | |
Investment securities (held to maturity) | | | 4,000 | | | 75 | | | 3.75 | | | 3,999 | | | 76 | | | 3.80 | |
Other interest-earning assets | | | 5,460 | | | 165 | | | 6.04 | | | 4,396 | | | 114 | | | 5.19 | |
Total interest-earning assets | | | 166,398 | | | 4,625 | | | 5.56 | % | | 166,227 | | | 4,452 | | | 5.36 | % |
| | | | | | | | | | | | | | | | | | | |
Non-interest earning assets | | | 6,984 | | | | | | | | | 7,062 | | | | | | | |
Total assets | | $ | 173,382 | | | | | | | | $ | 173,289 | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | |
Savings deposits | | $ | 16,965 | | | 95 | | | 1.12 | % | $ | 26,810 | | | 174 | | | 1.30 | % |
Demand and NOW accounts | | | 7,253 | | | 84 | | | 2.32 | | | 2,738 | | | 8 | | | 0.58 | |
Certificates of deposit | | | 87,483 | | | 2,084 | | | 4.76 | | | 80,025 | | | 1,591 | | | 3.98 | |
Escrows | | | 7 | | | — | | | — | | | 15 | | | — | | | — | |
Borrowings | | | 35,250 | | | 781 | | | 4.43 | | | 38,000 | | | 739 | | | 3.89 | |
Total interest-bearing liabilities | | | 146,958 | | | 3,044 | | | 4.14 | % | | 147,588 | | | 2,512 | | | 3.40 | % |
| | | | | | | | | | | | | | | | | | | |
Non-interest bearing liabilities | | | 4,048 | | | | | | | | | 3,121 | | | | | | | |
Total liabilities | | | 151,006 | | | | | | | | | 150,709 | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Total equity (2) | | | 22,376 | | | | | | | | | 22,580 | | | | | | | |
Total liabilities and equity | | $ | 173,382 | | | | | | | | $ | 173,289 | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Net interest income | | | | | $ | 1,581 | | | | | | | | $ | 1,940 | | | | |
Interest rate spread (3) | | | | | | | | | 1.42 | % | | | | | | | | 1.96 | % |
Net interest-earning assets | | $ | 19,440 | | | | | | | | $ | 18,639 | | | | | | | |
Net interest margin (4) | | | | | | | | | 1.90 | % | | | | | | | | 2.33 | % |
Ratio of interest earning assets to interest bearing liabilities | | | | | | 1.13x | | | | | | | | | 1.12x | | | | |
| | | | | | | | | | | | | | | | | | | |
(1) | Loans receivable are net of the allowance for loan losses. |
(2) | Total equity includes retained earnings and accumulated other comprehensive income (loss). |
(3) | Net interest rate spread represents the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities. |
(4) | Net interest margin represents net interest income as a percentage of average interest earning assets. |
Net Interest Income.
Three months ended June 30, 2007 compared to three months ended June 30, 2006.
Net interest income decreased $157,000, or 16.35%, to $803,000 for the three months ended June 30, 2007 from $960,000 for the three months ended June 30, 2006. The decrease was primarily a result of a 66 basis point increase in the cost of average interest bearing liabilities, from 3.51% to 4.17%, while the yield on average interest earning assets only increased 18 basis points from 5.42% to 5.60% and the balance in average interest earning assets decreased by $747,000, or 0.45%, to $165,816,000 from $166,563,000. These were partially offset by a $1,674,000, or 1.13%, decrease in average interest bearing liabilities to $145,897,000 from $147,571,000.
Our interest rate spread decreased to 1.43% for the quarter ended June 30, 2007 from 1.91% for the quarter ended June 30, 2006, reflecting the more rapid increase in the cost of our average interest bearing liabilities as compared to the increase in the yield of our interest earning assets. Our net interest margin decreased to 1.94% from 2.31%, because the growth in average interest earning assets was not enough to offset the increase in the cost of interest bearing liabilities. The ratio of interest earning assets to interest bearing liabilities remained relatively steady at 1.14 times for the three months ended June 30, 2007 and 1.12 times for the same period in 2006.
Six months ended June 30, 2007 compared to six months ended June 30, 2006.
Net interest income decreased $359,000, or 18.51%, to $1,581,000 for the six months ended June 30, 2007 from $1,940,000 for the six months ended June 30, 2006. The decrease was primarily a result of a 74 basis point increase in the cost of average interest bearing liabilities, from 3.40% to 4.14%, while the yield on average interest earning assets only increased 20 basis points from 5.36% to 5.56%. The decrease was partially offset by a $630,000, or 0.43%, decrease in average interest bearing liabilities to $146,958,000 from $147,588,000 and an increase of $171,000, or 0.10%, in average interest earning assets to $166,398,000 from $166,227,000.
Our interest rate spread decreased to 1.42% from 1.96%, reflecting the more rapid increase in the cost of our average interest bearing liabilities as compared to the increase in the yield of our average interest earning assets. Our net interest margin decreased to 1.90% from 2.33%, because the growth in average interest earning assets was not enough to offset the increase in the cost of interest bearing liabilities. The ratio of interest earning assets to interest bearing liabilities remained relatively steady at 1.13 times for the six months ended June 30, 2007 from 1.12 times for 2006.
Interest Income.
Three months ended June 30, 2007 compared to three months ended June 30, 2006.
Interest income increased by $67,000, or 2.97%, to $2,323,000 for the three months ended June 30, 2007, from $2,256,000 for the three months ended June 30, 2006. The increase in interest income resulted primarily from increases of $30,000, or 1.48%, in interest and fee income from loans, $19,000, or 14.39%, in interest income from investment securities and $27,000, or 46.55%, in interest income from other interest earning assets (primarily consisting of interest earned on federal funds sold and Federal Home Loan Bank stock), partially offset by a decrease of $9,000, or 22.50%, in interest income from mortgage backed securities.
The increase in interest income reflects a $747,000, or 0.45%, decrease in the average balance of interest-earning assets to $165,816,000 during the quarter ended June 30, 2007 from $166,563,000 during the quarter ended June 30, 2006, and an 18 basis point increase in the yield on average interest-earning assets to 5.60% for the three months ended June 30, 2007 from 5.42% for the three months ended June 30, 2006, reflecting an increase in market interest rates.
The increase in interest income and fees on loans was due to a 15 basis point increase in the average yield on net loans receivable, offset by a $1,845,000, or 1.26% decrease in average net loans receivable, from $146,513,000 during the quarter ended June 30, 2006 to $144,668,000 during the quarter ended June 30, 2007.
The increase in interest income from other interest-earning assets (primarily federal funds sold) was due to a $1,782,000, or 46.33%, increase in average other interest-earning assets, from $3,846,000 during the quarter ended June 30, 2006 to $5,628,000 during the quarter ended June 30, 2007.
The decrease in interest income from mortgage-backed securities was primarily the result of a $1,116,000 or 28.38% decline in the average balance of mortgage-backed securities, which was partially offset by a 33 basis point increase in the yield on these securities.
Six months ended June 30, 2007 compared to six months ended June 30, 2006.
Interest income increased by $173,000, or 3.86%, to $4,625,000 for the six months ended June 30, 2007, from $4,452,000 for the six months ended June 30, 2006. The increase in interest income resulted primarily from increases of $98,000, or 2.45%, in interest and fee income from loans, $42,000, or 16.47%, in interest income from investment securities and $51,000, or 44.74%, in interest income from other interest earning assets (primarily consisting of interest earned on federal funds sold and Federal Home Loan Bank stock), partially offset by a decrease of $18,000, or 21.69%, in interest income from mortgage backed securities.
The increase in interest income reflects a $171,000, or 0.10%, increase in the average balance of interest-earning assets to $166,398,000 from $166,227,000, and a 20 basis point increase in the yield on average interest-earning assets to 5.56% for the six months ended June 30, 2007 from 5.36% for the six months ended June 30, 2006, reflecting an increase in market interest rates.
The increase in interest income and fees on loans was due to a 14 basis point increase in average yield on net loans receivable. The increase in interest income from investment securities was primarily reflective of a 78 basis point increase in the average yield and a $420,000, or 5.10%, increase in the average balance of available for sale investment securities.
The increase in interest income from other interest-earning assets (primarily federal funds sold) was due to a $1,064,000, or 24.20%, increase in average other interest-earning assets, from $4,396,000 during the six months ended June 30, 2006 to $5,460,000 during the six months ended June 30, 2007, and a 85 basis point increase in the average yield on these assets (as a result of increases in short term market interest rates).
The decrease in interest income from mortgage-backed securities was primarily the result of a $1,176,000 or 28.62% decline in the average balance of mortgage-backed securities, which was partially offset by a 39 basis point increase in the yield on these securities.
Interest Expense.
Three months ended June 30, 2007 compared to three months ended June 30, 2006.
Interest expense, which consists of interest paid on deposits and borrowings, increased by $224,000, or 17.28%, to $1,520,000 for the three months ended June 30, 2007 from $1,296,000 for the three months ended June 30, 2006. The increase in interest expense resulted from an increase in the average cost of interest-bearing liabilities, while the average balance of interest-bearing liabilities decreased slightly. The average balance of interest-bearing deposits increased to $112,055,000 during the quarter ended June 30, 2007 from $109,552,000 during the quarter ended June 30, 2006, and the average cost of deposits increased by 74 basis points as a result of increased market interest rates. The average balance of borrowings decreased to $33,833,000 during the quarter ended June 30, 2007 from $38,000,000 in the same quarter of 2006 and the average cost of borrowings increased by 43 basis points as a result of borrowing at a higher interest rate.
Six months ended June 30, 2007 compared to six months ended June 30, 2006.
Interest expense increased by $532,000, or 21.18%, to $3,044,000 for the six months ended June 30, 2007 from $2,512,000 for the six months ended June 30, 2006. The increase in interest expense resulted from an increase in the average cost of interest-bearing liabilities, while the average balance of interest-bearing liabilities decreased slightly. The average balance of deposits increased to $111,701,000 from $109,573,000 and the average cost of deposits increased by 81 basis points as a result of increased market interest rates. The average balance of borrowings decreased to $35,250,000 during the six months ended June 30, 2007 from $38,000,000 in the same period of 2006 and the average cost of borrowings increased by 54 basis points as a result of borrowing at higher interest rates.
Provision for Loan Losses and Analysis of Allowance for Loan Losses. We establish provisions for loan losses, which are charged to operations, at a level estimated as necessary to absorb known and inherent losses that are both probable and reasonably estimable at the date of the financial statements. In evaluating the level of the allowance for loan losses, management considers, among other things, historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions (particularly as such conditions relate to our market area). We charge losses on loans against the allowance when we believe that collection of loan principal is unlikely. Recoveries on loans previously charged off are added back to the allowance.
Based on our evaluation of these factors, and as discussed further below, management made a provision of $149,000 and $24,000 for the three months ended June 30, 2007 and June 30, 2006, and a provision of $182,000 and $38,000 for the six months ended June 30, 2007 and June 30, 2006, respectively. There was one commercial non-real estate loan charge-off during the six-month period ended June 30, 2007 for $120,000 which is discussed below under “General Valuation Allowance on the Remainder of the Loan Portfolio.” There were no charge-offs during the six-month period ended June 30, 2006. We used the same methodology and generally similar assumptions in computing the allowance for these periods.
We have developed a methodology for assessing the adequacy of the allowance for loan losses. Our methodology consists of three key elements: (1) specific allowances for identified problem loans, including certain impaired or collateral-dependent loans; (2) a general valuation allowance on certain identified problem loans; and (3) a general valuation allowance on the remainder of the loan portfolio.
Specific Allowance on Identified Problem Loans. The loan portfolio is segregated first between loans that are on our “watch list” and loans that are not. Our watch list includes:
| · | loans 90 or more days delinquent; |
| · | loans with anticipated losses; |
| · | loans referred to attorneys for collection or in the process of foreclosure; |
| · | loans classified as substandard, doubtful or loss by either our internal classification system or by regulators during the course of their examination of us; and |
| · | troubled debt restructurings and other non-performing loans. |
Two of our officers review each loan on the watch list and establish an individual allowance allocation on certain loans based on such factors as: (1) the strength of the customer’s personal or business cash flow; (2) the availability of other sources of repayment; (3) the amount due or past due; (4) the type and value of collateral; (5) the strength of our collateral position; (6) the estimated cost to sell the collateral; and (7) the borrower’s effort to cure the delinquency.
We also review and establish, if necessary, an allowance for certain impaired loans for the amounts by which the discounted cash flows (or collateral value or observable market price) are lower than the carrying value of the loan. Under current accounting guidelines, a loan is defined as impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due under the contractual terms of the loan agreement.
General Valuation Allowance on Certain Identified Problem Loans. We also establish a general allowance for watch list loans that do not have an individual allowance. We segregate these loans by loan category and assign allowance percentages to each category based on inherent losses associated with each type of lending and consideration that these loans, in the aggregate, represent an above-average credit risk and that more of these loans will prove to be uncollectible compared to loans in the general portfolio.
General Valuation Allowance on the Remainder of the Loan Portfolio. We establish another general allowance for loans that are not on the watch list to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, has not been allocated to particular problem assets. This general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages based on our historical loss experience and delinquency trends. The allowance may be adjusted for significant factors that, in management’s judgment, affect the collectibility of the portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary lending areas, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, specific industry conditions within portfolio segments, recent loss experience in a particular segment of the portfolio, duration of the current business cycle and bank regulatory examination results. The applied loss factors are reevaluated annually to ensure their relevance in the current environment.
Although we believe that we use the best information available to establish the allowance for loan losses, the evaluation is inherently subjective as it requires estimates that are susceptible to significant revisions as more information becomes available or as future events change. If circumstances differ substantially from the assumptions used in making our determinations, future adjustments to the allowance for loan losses may be necessary and our results of operations could be adversely affected. In addition, the Office of Thrift Supervision, as an integral part of its examination process, periodically reviews our allowance for loan losses. The Office of Thrift Supervision may require us to increase the allowance for loan losses based on its judgments about information available to it at the time of its examination, which would adversely affect our results of operations.
The allowance for loan losses totaled $912,000 or 0.63% of gross loans outstanding of $145,010,000 at June 30, 2007, compared to an allowance for loan losses of $512,000, or 0.35%, of gross loans outstanding of $147,439,000 at June 30, 2006. The increase to the loan loss reserve is due to the increased balance of impaired loans. As of June 30, 2007, we have specific reserves of $140,000 within the allowance for loan losses because we believe there is a substantial likelihood that we will not collect the total amount of the outstanding principal balance on two commercial non-real estate loans that are classified as impaired. In mid-July 2006, a corporate commercial loan borrower informed the Bank that it was contemplating ceasing business operations, which it did as of July 31, 2006. The principal of this company also borrowed additional funds from the Bank directly. Both of these loans were cross-guaranteed, cross-defaulted and cross-collateralized. Once the company ceased operations, the borrower and guarantor were in non-financial default on these loans, even though the loans were current as of that date. On September 11, 2006, the Bank gave written notice to the borrower and the guarantor that they had defaulted on their loan agreements. Subsequently, the company filed for Chapter 7 bankruptcy on September 26, 2006 and the borrower filed for Chapter 7 personal bankruptcy on June 28, 2007. The borrower has made a partial settlement offer, to which the Bank made a counter offer. A written agreement to restructure the remaining debt is expected by August 26, 2007, although there can be no assurance that this will be the case or that we will recover any amounts on these loans.
The following table summarizes the activity in the provision for loan losses for the three and six months ended June 30, 2007 and 2006.
| | Three Months Ended | | Six Months Ended | |
| | June 30, | | June 30, | |
| | 2007 | | 2006 | | 2007 | | 2006 | |
| | (Dollars in Thousands) | |
| | | | | | | | | |
Balance at beginning of period | | $ | 764 | | $ | 488 | | $ | 850 | | $ | 474 | |
| | | | | | | | | | | | | |
Charge-offs | | | (1 | ) | | — | | | (120 | ) | | — | |
Recoveries | | | — | | | — | | | — | | | — | |
Net charge-offs | | | (1 | ) | | — | | | (120 | ) | | — | |
Provision for loan losses | | | 149 | | | 24 | | | 182 | | | 38 | |
Ending balance | | $ | 912 | | $ | 512 | | $ | 912 | | $ | 512 | |
| | | | | | | | | | | | | |
Ratio of net charge-offs (recoveries) during the period to average loans outstanding, net, during the period | | | — | | | — | | | 0.08 | % | | — | |
Ratio of allowance for loan losses to total loans outstanding | | | 0.63 | % | | 0.35 | % | | 0.63 | % | | 0.35 | % |
Allowance for loan losses as a percent of total non-performing loans | | | 219.76 | % | | 38.47 | % | | 219.76 | % | | 38.47 | % |
Other Income.
Three months ended June 30, 2007 compared to three months ended June 30, 2006.
Historically, our non-interest income has been relatively modest and one of our strategic initiatives is to increase our non-interest income. Non-interest income increased $48,000, or 84.21%, to $105,000 for the three months ended June 30, 2007, as compared to $57,000 for the three months ended June 30, 2006. The primary reason for the increase in non-interest income is a $29,000, or 1450.00%, increase in gain on sale of loans and an $18,000, or 120.00%, increase in other income (primarily consisting of processing fees and late charges on loans, and income from checking accounts and ATM usage). Rental income from our headquarters building has remained relatively steady. While a tenant has vacated a portion of our leaseable space, the tenant continues to pay the rent due pursuant to the agreed upon rent schedule while they seek to sublet the space. As of June 30, 2007, we leased 100% of the total leaseable space in our headquarters building. We expect this figure to remain constant for the third quarter of 2007 as we do not anticipate any vacant leaseable space in our headquarters building, other than due to the tenant mentioned above.
Six months ended June 30, 2007 compared to six months ended June 30, 2006.
Non-interest income increased $52,000, or 43.33%, to $172,000 for the six months ended June 30, 2007, as compared to $120,000 for the six months ended June 30, 2006. The primary reason for the increase in non-interest income is a $32,000, or 457.14%, increase in gain on sale of loans and a $19,000, or 55.88%, increase in other income. Rental income from our headquarters building has remained relatively steady.
Non-interest Expense.
Three months ended June 30, 2007 compared to three months ended June 30, 2006.
Non-interest expense was $816,000 for the three months ended June 30, 2007 as compared to $899,000 for the three months ended June 30, 2006, a decrease of $83,000, or 9.23%. The decrease was due primarily to a $39,000, or 8.39%, decrease in compensation and related expenses, a $24,000, or 43.64%, decrease in furniture, fixtures and equipment expenses and a $43,000, or 22.75%, decrease in other expenses (primarily consisting of IT support, bank services fees, professional services fees, including legal, audit and accounting, insurance premiums and office supply expenses), partially offset by an increase of $18,000, 39.13%, in advertising expenses. The decrease in compensation expense is the result of not increasing executive officers’ salaries and of replacing departing full-time salaried employees with part-time hourly employees in the quarter ending June 30, 2007. The decrease in furniture, fixtures and equipment expenses is due to the full depreciation of items purchased in 2001 to establish our new offices in Harford County and the decrease in other expenses is the result of a decrease in legal fees as fewer legal issues have arisen as we have gained experience with the requirements of being a public company, as well as a concerted effort to reduce costs in such areas of operation as office supplies, insurance premiums and loan expenses.
Six months ended June 30, 2007 compared to six months ended June 30, 2006.
Non-interest expense was $1,634,000 for the six months ended June 30, 2007, as compared to $1,864,000 for the six months ended June 30, 2006, a decrease of $230,000 or 12.34%. The decrease was due primarily to a $108,000, or 36.86%, decrease in occupancy expenses, a $63,000, or 6.83%, decrease in compensation and related expenses, a $46,000, or 41.44%, decrease in furniture, fixtures and equipment expenses and a $48,000, or 13.99%, decrease in other expenses, partially offset by an increase of $36,000, or 50.00%, in advertising expenses. The decrease in occupancy expenses is the result of no longer carrying the costs associated with the operation of the Edgewood branch, which we closed in 2006. The decrease in compensation expenses, furniture, fixtures and equipment expenses and other expenses for the six months ended June 30, 2007 is due to the same factors as stated above for the three month period.
Income Tax Expense.
Three months ended June 30, 2007 compared to three months ended June 30, 2006.
The benefit for income taxes was $19,000 for the three months ended June 30, 2007 compared to a provision for income tax of $38,000 for the three months ended June 30, 2006, representing a $57,000, or 150.00%, decrease in the income tax provision. The benefit for income taxes was due to our loss before taxes of $57,000 for the three months ended June 30, 2007, as compared to income before taxes of $94,000 for the three months ended June 30, 2006.
Six months ended June 30, 2007 compared to six months ended June 30, 2006.
The benefit for income taxes was $15,000 for the six months ended June 30, 2007 compared to a provision for income tax of $66,000 for the six months ended June 30, 2006, representing an $81,000, or 122.73%, decrease in the income tax provision. The benefit for income taxes was due to our loss before taxes of $63,000 for the six months ended June 30, 2007, as compared to income before taxes of $158,000 for the six months ended June 30, 2006.
Analysis of Financial Condition
Assets.
General.
Our total assets decreased by $1,385,000 or 0.79%, to $172,840,000 at June 30, 2007, from $174,225,000 at December 31, 2006. The decrease in total assets resulted primarily from a $3,185,000, or 2.16% decrease in net loans receivable, from $147,118,000 at December 31, 2006 to $143,933,000 at June 30, 2007, a $470,000, or 14.69%, decrease in mortgage backed securities- held to maturity, from $3,200,000 at December 31, 2006 to $2,730,000 at June 30, 2007 and a $277,000 decrease in Federal Home Loan Bank stock, from $2,098,000 at December 31, 2006 to $1,821,000 at June 30, 2007. These decreases were offset by a $1,527,000, or 53.56% increase in cash and cash equivalents, from $2,851,000 at December 31, 2006 to $4,378,000 at June 30, 2007 and a $186,000, or 2.18% increase in investment securities - available for sale, from $8,526,000 at December 31, 2006 to $8,712,000 at June 30, 2007.
Investment Securities.
The investment portfolio at June 30, 2007 amounted to $15,442,000, a decrease of $284,000, or 1.81%, from $15,726,000 at December 31, 2006. Investment securities - available for sale, increased $186,000, or 1.01%, to $8,712,000 at June 30, 2007 from $8,526,000 at December 31, 2006, primarily as a result of dividends credited to the account. Mortgage backed securities - held to maturity, decreased $470,000, or 14.69%, to $2,730,000 at June 30, 2007 from $3,200,000 at December 31, 2006, as a result of principal repayments. As we are not continuing to purchase mortgage-backed securities, we expect continued decreases in this asset both in amount and as a percentage of our assets.
The carrying value of available for sale securities includes a net unrealized loss of $258,000 at June 30, 2007 (reflected as accumulated other comprehensive loss of $158,000 in equity after deferred taxes) as compared to a net unrealized loss of $222,000 ($136,000 net of taxes) as of December 31, 2006. In general, the increase in unrealized loss was a result of a slight decrease in the interest rate yield curve.
Loan Portfolio
Loans receivable, net, decreased $3,185,000, or 2.16%, to $143,933,000 at June 30, 2007 from $147,118,000 at December 31, 2006. The commercial loan portfolio increased $3,748,000, or 43.83%, to $12,301,000 at June 30, 2007 from $8,552,000 at December 31, 2006. One-to-four family residential loans decreased $4,965,000, or 4.22% to $112,790,000 at June 30, 2007 from $117,755,000 at December 31, 2006. The decrease is primarily due to a strategic initiative to sell a larger percentage of our residential mortgage loan originations to facilitate our goal of increasing and diversifying the mix of commercial loans to residential loans in our loan portfolio. Our loan customers are generally located in the Baltimore Metropolitan area and its surrounding counties in Maryland.
Asset Quality.
Loans are reviewed on a regular basis and are generally placed on non-accrual status when they become more than 90 days delinquent. When we classify a loan as non-accrual, we no longer accrue interest on such loan and reverse any interest previously accrued but not collected. Typically, payments received on a non-accrual loan are applied to the outstanding principal and interest as determined at the time of collection of the loan. We return a non-accrual loan to accrual status when factors indicating doubtful collection no longer exist and the loan has been brought current.
We hold a 19% participation (approximately $1,083,000 in unpaid principal balance) in an acquisition and development loan. This loan became delinquent in the fourth quarter of 2004 and was placed on non-accrual status in the third quarter of 2005. Due to unresolved land development issues with the local municipality, the borrower had been unable to sell the property. In mid-September 2006, the participating lenders had the collateral property docketed for foreclosure. The principal of the borrower and the entity that owns the collateral property filed bankruptcy in November 2006, which caused the cancellation of the scheduled foreclosure auction that had also been scheduled for November 2006. The automatic stay was lifted on April 10, 2007 and the participating lenders proceeded with the sale of the property at auction on May 30, 2007. The lead participating bank purchased the property at that time, requiring us to place the loan in the foreclosed real estate category. Subsequently, a real estate developer has made an offer to purchase the property and we accepted a letter of intent on June 26, 2007. An executed contract with a 90 day feasibility study period was received on July 26, 2007 that would enable us to recover the carrying amount of the real estate, although there can be no assurance that this will be the case. Prior to expiration of the 90-day feasibility period, the buyer may terminate this agreement at any time and for any reason in its sole discretion. Resolution of this matter will extend at least into the third quarter of 2007.
Real estate and other assets that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure or repossession on collateral-dependent loans are classified as real estate owned or other repossessed assets until sold. Such assets are recorded at fair value less estimated selling costs at foreclosure or other repossession and updated quarterly at the lower of cost or estimated fair value less estimated selling costs. Any portion of the outstanding loan balance in excess of fair value at the time of foreclosure is charged off against the allowance for loan losses. If, upon ultimate disposition of the property, net sales proceeds exceed the net carrying value of the property, a gain on sale of real estate or other assets is recorded. As discussed above, we have one foreclosed real estate participation loan totaling $1,083,000 at June 30, 2007. We did not have a real estate owned or other repossessed assets at December 31, 2006.
Non-accrual loans totaled $415,000, or 0.29%, $1,485,000, or 1.01%, and $1,331,000, or 0.91%, of net loans receivable at June 30, 2007, December 31, 2006 and June 30, 2006, respectively.
Of the non-accrual loans at June 30, 2007, $140,000 consisted of two commercial non-real estate loans, and $275,000 consisted of a one-to-four residential mortgage loan at June 30, 2007.
Under current accounting guidelines, a loan is defined as impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due under the contractual terms of the loan agreement. We consider one- to four-family mortgage loans and consumer installment loans to be homogeneous and, therefore, do not separately evaluate them for impairment. All other loans are evaluated for impairment on an individual basis. We generally classify non-accrual loans as impaired and we are doing so with respect to the $1,083,000 commercial land acquisition and development participation loan as management believes that we will not be able to collect all amounts due under the contractual terms of the loan agreement.
As of June 30, 2007, we have classified two commercial non-real estate loans as impaired as was discussed in detail in the “Provision for Loan Losses and Analysis of Allowance for Loan Losses” section of this report. At the end of the first six months, in anticipation of a minimal recovery of principal on these loans, we charged a portion of the loan balances against our allowance for loan losses and we have reserved $140,000, or 100%, of the remaining balance of the loans to our allowance for loan losses. Final disposition of this matter is still pending as of the date of this report.
Other than as disclosed in the paragraphs above, there are no other loans at June 30, 2007 about which management has serious doubts concerning the ability of the borrowers to comply with the present loan repayment terms.
Liabilities.
General.
Total liabilities decreased by $1,175,000, or 0.77%, to $150,685,000 at June 30, 2007, from $151,860,000 at December 31, 2006. The decrease in total liabilities resulted from a $5,500,000, or 14.10% decrease in borrowings, offset by increases of $2,467,000, or 2.21% in deposits, $1,410,000, or 402.86% in advance payments by borrowers for taxes and insurance and $270,000, or 70.31% in checks outstanding in excess of bank balance. The decrease in borrowings is the result of paying down the Federal Home Loan Bank advances when our liquidity is favorable. Advance payments by borrowers for taxes and insurance increased because the July 2007 semi-annual property taxes had not been paid as of June 30, 2007. The balance in checks outstanding in excess of bank balance at the end of a period is dependent on the number and amounts of checks issued on the account at our correspondent’s bank and when such checks are presented for payment. Any excess funds are automatically transferred into an interest-earning federal funds account. Therefore, changes in checks outstanding in excess of bank balance as reflected on the balance sheet, generally, do not reflect any underlying changes in the Company’s financial condition. The other liabilities consist primarily of accrued federal and state income taxes and accrued interest on Federal Home Loan Bank borrowings.
Deposits
Deposits increased $2,467,000, or 2.21%, to $114,290,000 at June 30, 2007 from $111,823,000 at December 31, 2006. Certificates of deposits increased $2,310,000 to $88,306,000 at June 30, 2007 from $85,996,000 at December 31, 2006, and NOW and money market demand accounts increased by $461,000 to $17,196,000 at June 30, 2007 from $16,735,000 at December 31, 2006. Savings deposits decreased $304,000 to $8,788,000 at June 30, 2007 from $9,092,000 at December 31, 2006. We believe that, as deposit rates have risen, some customers are moving funds into higher-yielding investments, thus accounting for the increase in certificate of deposit and money market deposit accounts and the decline in lower rate paying core deposit accounts.
Borrowings.
At June 30, 2007, we were permitted to borrow up to $51,852,000 from the Federal Home Loan Bank of Atlanta. We had $33,500,000 and $39,000,000 of Federal Home Loan Bank advances outstanding as of June 30, 2007 and December 31, 2006, respectively, and we averaged $35,250,000 and $39,250,000 of Federal Home Loan Bank advances during the six months ended June 30, 2007 and the year ended December 31, 2006, respectively. The decrease in borrowings reflects $5,500,000 Federal Home Loan Bank advance pay downs and $25,500,000 in the rollover of advances, offset by maturing advances of $25,500,000 in the first half of 2007.
Liquidity Management
Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, borrowings from the Federal Home Loan Bank of Atlanta, scheduled amortization and prepayment of loans and mortgage-backed securities, maturities and calls of held to maturity investment securities and earnings and funds provided from operations. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows, calls of securities and loan prepayments are greatly influenced by market interest rates, economic conditions, and rates offered by our competitors.
We regularly adjust our investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities and (4) the objectives of our asset/liability management policy.
Our most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At June 30, 2007, cash and cash equivalents totaled $4,378,000. Securities classified as available-for-sale, which can provide additional sources of liquidity, totaled $8,712,000 at June 30, 2007. However, because all of these securities were in an unrealized loss position at June 30, 2007, and because management has the intent and ability to hold these securities until recovery or maturity, management does not consider these securities as a source of liquidity at June 30, 2007. Also, at June 30, 2007, we had advances outstanding of $33,500,000 from the Federal Home Loan Bank of Atlanta. On that date, we had the ability to borrow an additional $18,352,000.
At June 30, 2007, we had outstanding commitments to originate loans of $1,147,000 (excluding the undisbursed portions of loans). These commitments do not necessarily represent future cash requirements since certain of these instruments may expire without being funded, although this is unusual. We also extend lines of credit to customers, primarily home equity lines of credit. The borrower is able to draw on these lines as needed, thus the funding is generally unpredictable. Unused home equity lines of credit amounted to $5,425,000 at June 30, 2007. Since the majority of unused lines of credit expire without being funded, it is anticipated that our obligation to fund the above commitment amount will be substantially less than the amounts reported.
Certificates of deposit accounts scheduled to mature within one year totaled $57,393,000 or 50.22% of total deposits at June 30, 2007. Management believes that the large percentage of deposits in shorter-term certificates of deposit reflects customers’ hesitancy to invest their funds in long-term certificates of deposit in the current interest rate environment in which long-term rates are lower than short-term rates. If these deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and/or additional borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before June 30, 2008. We believe, however, that, based on past experience, a significant portion of our certificates of deposit will remain with us. We also believe we have the ability to attract and retain deposits by adjusting the interest rates offered.
Our borrowings are with the Federal Home Loan Bank of Atlanta and are secured by Federal Home Loan Bank of Atlanta stock that we own and a blanket lien on mortgages. Borrowings at June 30, 2007 consisted of $7,000,000 short term fixed rate FHLB advances bearing interest at rates ranging from 5.28% to 5.43% and $26,500,000 long term convertible rate FHLB advances with fixed interest rates ranging from 3.63% to 4.90%. If not repaid or converted to a different product, the convertible rate advances will convert from a fixed to a floating rate after the initial borrowing periods ranging from three months to five years.
Our primary investing activity is the origination of loans, primarily one- to four-family residential mortgage loans, commercial loans, and the purchase of securities. Our primary financing activity consists of activity in deposit accounts and Federal Home Loan Bank of Atlanta advances. Deposit growth has begun to outpace asset growth in recent months and the increased liquidity has been placed in a federal funds account with our correspondent bank, used to pay down borrowed funds and to fund commercial and acquisition and renovation loans. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive. Occasionally, we offer promotional rates on certain deposit products to attract deposits.
We are not aware of any known trends, events or uncertainties that will have or are reasonably likely to have a material effect on our liquidity, capital or operations, nor are we aware of any current recommendation by regulatory authorities, which if implemented, would have a material effect on liquidity, capital or operations.
Stockholders’ Equity
Total stockholders’ equity decreased $210,000, or 0.94%, to $22,155,000 at June 30, 2007 from $22,365,000 at December 31, 2006 primarily as a result of the purchase of $226,000 in additional Treasury stock and a net loss of $48,000. The net loss is primarily due to an increase in the provision for loan losses due to the expected default of two commercial non-real estate loans and an acquisition and development participation loan. We are considered “well capitalized” under the risk-based capital guidelines applicable to us.
Off-balance Sheet Arrangements
In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. Our exposure to credit loss from non-performance by the other party to the above-mentioned financial instruments is represented by the contractual amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments.
Financial Instruments Whose | | | | | |
Contract Amount Represents | | Contract Amount At | |
Credit Risk | | June 30, 2007 | | December 31, 2006 | |
| | (Dollars in thousands) | |
Lines of credit - commercial | | $ | 1,585 | | $ | 1,210 | |
Lines of credit - home equity | | | 5,425 | | | 5,335 | |
Lines of credit - overdraft checking | | | 125 | | | 118 | |
Mortgage loan commitments | | | 1,147 | | | 830 | |
Commercial lines of credit are generally secured by a blanket lien on assets of the borrower. Revolving Lines of Credit (RLOC) are typically used for short term working capital needs and are based most heavily on the accounts receivable and inventory components of the borrower’s balance sheet. RLOC have terms of one year, are subject to annual reaffirmation and carry variable rates of interest. We generally receive a one percent fee, based on the commitment amount.
Equipment lines of credit are secured by equipment being purchased and sometimes by a blanket lien on assets of the borrower as well. Each advance is repaid over a term of three to five years and carries a variable or prevailing fixed rate of interest. We will generally advance up to 80% of the cost of the new or used equipment. These credit facilities are revolving in nature and the commitment is subject to annual reaffirmation.
For both types of credit facilities listed above, we evaluate each customer’s credit worthiness on a case-by-case basis.
Home equity lines of credit are secured by second deeds of trust on residential real estate. They have fixed expiration dates as long as there is no violation of any condition established in the contract. We evaluate each customer’s credit worthiness on a case-by-case basis.
Overdraft lines of credit on checking accounts are unsecured. Linked to any Slavie Federal personal checking account, the line will automatically make a deposit to the customer’s checking account if the balance falls below the amount needed to pay an item presented for payment.
Our outstanding commitments to make mortgages are at fixed rates ranging from 6.50% to 10.50% and 5.625% to 7.125% at June 30, 2007 and December 31, 2006, respectively. Loan commitments expire 60 days from the date of the commitment.
For the six months ended June 30, 2007, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.
Information Regarding Forward-Looking Statements
In addition to the historical information contained in Part I of this Quarterly Report on Form 10-QSB, the discussion in Part I of this Quarterly Report on Form 10-QSB contains certain forward-looking statements within the meaning of Section 27A of the Securities Exchange Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements often use words such as “believe,” “expect,” “plan,” “may,” “will,” “should,” “project,” “contemplate,” “anticipate,” “forecast,” “intend” or other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts.
Our goals, objectives, expectations and intentions, including statements regarding profitability, growth and operating strategy, liquidity, asset quality of our loan and investment portfolio, the allowance for loan losses, repayment of non-accrual loans, interest rate sensitivity, liquidity management, market risk and financial and other goals are forward looking. These statements are based on our beliefs, assumptions and on information available to us as of the date of this filing, and involve risks and uncertainties. These risks and uncertainties include, among others, those discussed in this Quarterly Report on Form 10-QSB and in our Annual Report on Form 10-KSB for the year ended December 31, 2006; the effect of rising interest rates on our profits and asset values; risks related to our intended increased focus on commercial real estate and commercial business loans; our limited recognition and reputation in our markets; adverse economic conditions in our market area; our dependence on key personnel; competitive factors within our market area; the effect of developments in technology on our business; adverse changes in the overall national economy as well as adverse economic conditions in our specific market area; adequacy of the allowance for loan losses; expenses as a result of our stock benefit plans; and changes in regulatory requirements and/or restrictive banking legislation.
Our actual results and the actual outcome of our expectations and strategies could differ materially from those discussed herein and you should not put undue reliance on any forward-looking statements. All forward-looking statements speak only as of the date of this filing, and we undertake no obligation to make any revisions to the forward-looking statements to reflect events or circumstances after the date of this filing or to reflect the occurrence of unanticipated events.
Item 3. Controls and Procedures
As of the end of the period covered by this quarterly report on Form 10-QSB, SFSB, Inc.’s Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of SFSB, Inc.’s disclosure controls and procedures. Based upon that evaluation, SFSB, Inc.’s Chief Executive Officer and Chief Financial Officer concluded that SFSB, Inc.’s disclosure controls and procedures are effective as of June 30, 2007. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by SFSB, Inc. in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
In addition, there were no changes in SFSB, Inc.’s internal control over financial reporting (as defined in Rule 13a-15 or Rule 15d-15 under the Securities Act of 1934, as amended) during the quarter ended June 30, 2007, that have materially affected, or are reasonably likely to materially affect, SFSB, Inc.’s internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The table below summarizes our repurchases of equity securities during the second quarter of 2007.
SMALL BUSINESS ISSUER PURCHASES OF SECURITIES
Period | | Total Number of Shares Purchased(1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) | | Maximum Number of Shares that May Yet Be Purchased Under The Plans or Programs(1) | |
April 1 - 30, 2007 | | | 0 | | | n/a | | | 0 | | | 42,151 | |
| | | | | | | | | | | | | |
May 1 -31, 2007 | | | 0 | | | n/a | | | 0 | | | 42,151 | |
| | | | | | | | | | | | | |
June 1 - 30, 2007 | | | 31,756 | | $ | 9.22 | | | 31,756 | | | 10,395 | |
| | | | | | | | | | | | | |
Total Second Quarter | | | 31,756 | | $ | 9.22 | | | 31,756 | | | 10,395 | |
| | | | | | | | | | | | | |
(1) | On November 21, 2005, our board of directors adopted a stock repurchase program to acquire up to 53,561 shares, or approximately 4% of our outstanding common stock held by persons other than Slavie Bancorp, MHC. On May 10, 2006, our board of directors approved the repurchase of up to an additional 66,951 shares, or approximately 5% of our outstanding common stock held by persons other than Slavie Bancorp, MHC. On August 6, 2007, our board of directors approved the repurchase of up to an additional 62,334 shares, or approximately 5% of our outstanding common stock held by persons other than Slavie Bancorp, MHC. Stock purchases are made from time to time in the open market at the discretion of management. The repurchase program is dependent upon market conditions and other applicable legal requirements. As of June 30, 2007, SFSB, Inc. had repurchased 56,556 shares on the open market at an average cost of $9.48 per share to fund a stock-based compensation plan. In accordance with the terms of the stock repurchase program, as approved by the board, we are authorized to purchase an additional 10,395 shares at June 30, 2007 and an aggregate of 72,729 shares as of the date of this filing. |
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Securities Holders.
(a) SFSB, Inc. held its annual meeting of stockholders on May 17, 2007.
(b) At the annual meeting, Thomas J. Drechsler and Charles E. Wagner, Jr. were elected to serve a three-year term expiring upon the date of SFSB, Inc.’s 2010 Annual Meeting. The term of office of the following directors continued after the meeting: J. Benson Brown, Philip E. Logan, Robert M. Stahl IV, and James D. Wise.
(c) 1. The following individuals were nominees for the Board of Directors for a term to expire at the 2010 annual meeting of stockholders. The number of votes for or withheld for each nominee is as follows:
| | For | | Withheld | | Total | |
Thomas J. Drechsler | | | 2,810,871 | | | 57,950 | | | 2,868,821 | |
Charles E. Wagner, Jr. | | | 2,810,871 | | | 57,950 | | | 2,868,821 | |
| | | | | | | | | | |
2. The ratification of the appointment of Beard Miller Company LLP as independent public accountants to audit the financial statements of SFSB, Inc. for 2007:
For | | Against | | Abstain | | Broker Non-Votes | | Total | |
2,844,021 | | | 23,300 | | | 1,500 | | | 0 | | | 2,868,821 | |
Item 5. Other Information.
None.
Item 6. Exhibits.
| 31.1 | Rule 13a-14(a) Certification of Chief Executive Officer |
| 31.2 | Rule 13a-14(a) Certification of Chief Financial Officer |
| | Section 1350 Certification of Chief Executive Officer and Chief Financial Officer |
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | SFSB, Inc. |
| | |
| | | |
Date: August 9, 2007 | | By: | /s/ Philip E. Logan
|
| | | Philip E. Logan, President |
| | | (Principal Executive Officer) |
| | | |
| | | |
Date: August 9, 2007 | | By: | /s/ Sophie T. Wittelsberger
|
| | | Sophie Torin Wittelsberger, Chief Financial Officer |
| | | (Principal Accounting and Financial Officer) |
| | | |