UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005.
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 incorporation or organization) | (I.R.S. Employer 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. 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 12, 2005, there were 2,975,625 shares of the issuer’s Common Stock, par value $0.01 per share, outstanding.
Transitional Small Business Disclosure Format (Check One): Yes ¨ No x
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SFSB, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
| June 30, 2005 | December 31, 2004 | |||||||
| (Unaudited) | (Audited) | |||||||
| ASSETS | ||||||||
Cash and due from banks | $ | 867,069 | $ | 745,668 | ||||
Federal funds sold | 3,643,418 | 14,851,279 | ||||||
Cash and cash equivalents | 4,510,487 | 15,596,947 | ||||||
Investment securities - available for sale | 8,048,231 | 7,980,711 | ||||||
Investment securities - held to maturity | 3,997,031 | 3,995,547 | ||||||
Mortgage backed securities - held to maturity | 5,824,995 | 6,981,460 | ||||||
Loans receivable - net of allowance for loan losses of 2005 $446,650; 2004 $413,000 | 126,638,700 | 117,900,265 | ||||||
Federal Home Loan Bank of Atlanta stock at cost | 1,303,000 | 1,445,600 | ||||||
Premises and equipment, at cost, less accumulated depreciation | 5,782,095 | 5,842,373 | ||||||
Accrued interest receivable | 507,303 | 426,633 | ||||||
Other assets | 246,320 | 263,863 | ||||||
Total assets | $ | 156,858,162 | $ | 160,433,399 | ||||
| LIABILITIES AND EQUITY | ||||||||
Liabilities | ||||||||
Deposits | $ | 108,920,321 | $ | 109,711,368 | ||||
Checks outstanding in excess of bank balance | 1,667,141 | 627,445 | ||||||
Borrowings | 21,500,000 | 26,500,000 | ||||||
Advance payments by borrowers for taxes and insurance | 1,613,243 | 329,387 | ||||||
Other liabilities | 355,235 | 645,098 | ||||||
Total liabilities | 134,055,940 | 137,813,298 | ||||||
Commitments and Contingencies | ||||||||
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 and outstanding at June 30, 2005 and December 31, 2004 | 29,756 | 29,756 | ||||||
Additional paid-in capital | 12,678,404 | 12,680,644 | ||||||
Retained earnings (substantially restricted) | 11,326,308 | 11,135,940 | ||||||
Unearned Employee Stock Ownership Plan shares | (1,137,140 | ) | (1,166,300 | ) | ||||
Accumulated other comprehensive loss | (95,106 | ) | (59,939 | ) | ||||
Total stockholders’ equity | 22,802,222 | 22,620,101 | ||||||
Total liabilities and stockholders’ equity | $ | 156,858,162 | $ | 160,433,399 | ||||
See notes to consolidated financial statements.
2
SFSB, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||
Interest and fees on loans | $ | 1,660,220 | $ | 1,351,827 | $ | 3,248,292 | $ | 2,662,733 | ||||||
Interest and dividends on investment securities | 104,870 | 81,985 | 201,101 | 163,062 | ||||||||||
Interest on mortgage backed securities | 53,552 | 70,291 | 110,922 | 161,254 | ||||||||||
Other interest income | 53,036 | 16,174 | 145,204 | 30,876 | ||||||||||
| Total interest income | 1,871,678 | 1,520,277 | 3,705,519 | 3,017,925 | ||||||||||
Interest on deposits | 709,750 | 590,351 | 1,382,621 | 1,206,406 | ||||||||||
Interest on short-term borrowings | 28,823 | 31,289 | 78,001 | 48,433 | ||||||||||
Interest on long-term borrowings | 121,763 | 79,127 | 237,303 | 159,237 | ||||||||||
Other interest expense | 45 | 45 | 64 | 65 | ||||||||||
| Total interest expense | 860,381 | 700,812 | 1,697,989 | 1,414,141 | ||||||||||
| Net interest income | 1,011,297 | 819,465 | 2,007,530 | 1,603,784 | ||||||||||
Provision for loan losses | 12,280 | 12,000 | 31,850 | 24,000 | ||||||||||
| Net interest income after provision for loan losses | 999,017 | 807,465 | 1,975,680 | 1,579,784 | ||||||||||
| Other Income (Loss) | ||||||||||||||
Loss on sale of ground rents | — | (102,166 | ) | — | (102,166 | ) | ||||||||
Rental income | 33,738 | 27,900 | 65,138 | 49,446 | ||||||||||
Other income | 16,318 | 18,433 | 33,868 | 35,990 | ||||||||||
Gain on sale of loans | — | — | 1,163 | — | ||||||||||
| Net other income | 50,056 | (55,833 | ) | 100,169 | (16,730 | ) | ||||||||
Non-Interest Expenses | ||||||||||||||
Compensation and other related expenses | 424,038 | 376,525 | 859,174 | 703,937 | ||||||||||
Occupancy expense | 97,841 | 93,564 | 204,499 | 195,505 | ||||||||||
Advertising expense | 52,493 | 45,527 | 91,503 | 98,716 | ||||||||||
Service bureau expense | 36,751 | 33,127 | 77,859 | 70,215 | ||||||||||
Furniture, fixtures and equipment | 58,395 | 53,535 | 112,629 | 108,270 | ||||||||||
Telephone, postage and delivery | 21,131 | 17,102 | 41,656 | 40,405 | ||||||||||
Other expenses | 189,293 | 130,104 | 381,161 | 246,905 | ||||||||||
| Total non-interest expenses | 879,942 | 749,484 | 1,768,481 | 1,463,953 | ||||||||||
| Income before income tax provision | 169,131 | 2,148 | 307,368 | 99,101 | ||||||||||
Income tax provision | 67,200 | (4,594 | ) | 117,000 | 34,506 | |||||||||
Net income | $ | 101,931 | $ | 6,742 | $ | 190,368 | $ | 64,595 | ||||||
Basic earnings per share | $ | 0.04 | N/A | $ | 0.07 | N/A | ||||||||
See notes to consolidated financial statements.
3
SFSB, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
Net income | $ | 101,931 | $ | 6,742 | $ | 190,368 | $ | 64,595 | ||||||||
Net unrealized (loss) gain on securities available for sale during the period (net of taxes of $(12,689), $(18,514), $(22,128) and $(18,508)) | (20,166 | ) | (29,425 | ) | (35,167 | ) | (29,416 | ) | ||||||||
Total Comprehensive Income (Loss) | $ | 81,765 | $ | (22,683 | ) | $ | 155,201 | $ | 35,179 | |||||||
See notes to consolidated financial statements.
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SFSB, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, | ||||||||
| 2005 | 2004 | |||||||
| Cash Flows From Operating Activities | ||||||||
Net income | $ | 190,368 | $ | 64,595 | ||||
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: | ||||||||
Non-cash compensation under Employee Stock Ownership Plan | 26,920 | — | ||||||
Net amortization of premiums and discounts | 12,471 | 22,418 | ||||||
Amortization of deferred loan fees | (38,930 | ) | (30,383 | ) | ||||
Provision for loan losses | 31,850 | 24,000 | ||||||
Gain on sale of loans | (1,163 | ) | — | |||||
Loans originated for sale | (155,000 | ) | — | |||||
Proceeds from loans sold | 156,163 | — | ||||||
Loss on ground rents | — | 102,166 | ||||||
Provision for depreciation | 89,456 | 161,530 | ||||||
Decrease in accrued interest receivable and other assets | (63,127 | ) | (73,322 | ) | ||||
Increase in accrued interest payable | 13,839 | 8,312 | ||||||
Decrease (increase) in other liabilities | (286,520 | ) | 49,353 | |||||
Net Cash (Used In) Provided by Operating Activities | (23,673 | ) | 328,669 | |||||
| Cash Flows from Investing Activities | ||||||||
Purchase of available for sale securities | (124,816 | ) | (86,807 | ) | ||||
Net increase in loans | (8,731,355 | ) | (21,616,165 | ) | ||||
Principal collected on mortgage backed securities | 1,142,510 | 1,792,140 | ||||||
Purchase of Federal Home Loan Bank of Atlanta stock | (82,400 | ) | (650,000 | ) | ||||
Redemption of Federal Home Loan Bank of Atlanta stock | 225,000 | — | ||||||
Purchases of premises and equipment | (29,178 | ) | (67,544 | ) | ||||
Proceeds from redemption of ground rents | — | 53,300 | ||||||
Net Cash Used in Investing Activities | (7,600,239 | ) | (20,575,076 | ) | ||||
Cash Flows from Financing Activities | ||||||||
Net (decrease) increase in deposits | (786,100 | ) | 2,602,183 | |||||
Increase in checks outstanding in excess of bank Balance | 1,039,696 | 3,321,826 | ||||||
(Repayment) proceeds from borrowings | (5,000,000 | ) | 13,000,000 | |||||
Increase in advance payments by borrowers for taxes and insurance | 1,283,856 | 1,300,206 | ||||||
Net Cash (Used In) Provided by Financing Activities | (3,462,548 | ) | 20,224,215 | |||||
Decrease in cash and cash equivalents | (11,086,460 | ) | (22,192 | ) | ||||
Cash and cash equivalents at beginning of year | 15,596,947 | 3,497,626 | ||||||
Cash and cash equivalents at end of period | $ | 4,510,487 | $ | 3,475,434 | ||||
| Supplemental Disclosures of Cash Flows Information: | ||||||||
Cash paid during the year for: | ||||||||
Income taxes | $ | 234,500 | $ | 79,600 | ||||
Interest expense | $ | 1,684,150 | $ | 1,405,829 | ||||
See notes to consolidated financial statements.
5
SLAVIE FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 – Principles of Consolidation
The consolidated financial statements include the accounts of SFSB, Inc. (“the Company”), its wholly-owned subsidiary, Slavie Federal Savings Bank (“the Bank”) and the Bank’s wholly-owned subsidiaries, Slavie Holdings, LLC (“Holdings”) and Slavie Financial Services, LLC. The accompanying consolidated financial statements include the accounts and transactions of these companies on a consolidated basis since inception. All intercompany transactions have been eliminated in the consolidated financial statements.
On December 30, 2004, the Bank reorganized from a federally chartered mutual savings bank to a federally chartered stock savings bank. Simultaneously, the Bank consummated the formation of a new holding company, SFSB, Inc. Also simultaneously, a mutual holding company was formed, Slavie Bancorp, MHC. In connection with the reorganization, the Company issued 2,975,625 shares of its common stock. A majority of that stock (1,636,594 shares) was issued to Slavie Bancorp, MHC. The remainder was sold and issued to depositors of the Bank and the Employee Stock Ownership Plan for a total price of $13,390,310. Costs associated with the conversion, totaling $679,910 were deducted from the sale proceeds. Prior to the consummation of the reorganization, the Company had no assets or liabilities. Accordingly, the Company’s financial statements consist of those of the Bank for periods prior to December 30, 2004.
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. As of June 30, 2005, approximately 81% of the available space to non-affiliated tenants was leased. During the year ended December 31, 2004, the Company dissolved its subsidiary, Slavie Financial Services, LLC.
Note 3 – Basis of Presentation
The accompanying unaudited 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 are unaudited; but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation thereof. The balances as of December 31, 2004 have been derived from the audited consolidated financial statements. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in SFSB, Inc.’s Annual Report on Form 10-KSB. The results of operations for the six months ended June 30, 2005 are not necessarily indicative of the results that may be expected for the full year.
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Note 4 – Earnings Per Share
The Company currently has a simple capital structure. Basic earnings per share for the three and six months ended June 30, 2005 is computed by dividing net income by the weighted average number of common shares outstanding of 2,861,425 and 2,860,700 for the respective periods. Unearned Employee Stock Ownership Plan (ESOP) shares are not included in outstanding shares. Earnings per share does not apply to the three and six months ended June 30, 2004 since the company was not a stock company at that time.
Note 5 – Regulatory Capital Requirements
At June 30, 2005, the Bank met each of the three minimum regulatory capital requirements. The following table summarizes the Bank’s regulatory capital position at June 30, 2005.
| Actual | For Capital Adequacy Purposes | To Be Well Capitalized Under | ||||||||||||||||
June 30, 2005 | Amount | % | Amount | % | Amount | % | ||||||||||||
| (Unaudited) | ||||||||||||||||||
Tangible (1) | $ | 16,469,969 | 10.47 | % | $ | 2,358,373 | 1.50 | % | N/A | N/A | ||||||||
Tier I capital (2) | 16,469,969 | 19.99 | % | N/A | N/A | $ | 4,943,125 | 6.00 | % | |||||||||
Core (leverage) (1) | 16,469,969 | 10.47 | % | 6,288,994 | 4.00 | % | 7,861,242 | 5.00 | % | |||||||||
Risk-weighted (2) | 16,916,619 | 20.54 | % | 6,590,833 | 8.00 | % | 8,238,541 | 10.00 | % | |||||||||
| (1) | To adjusted total assets. |
| (2) | To risk-weighted assets. |
Note 6 - Recent Accounting Pronouncements
In December, 2004, the Financial Accounting Standards Board (FASB) issued SFAS 123R, “Share-Based Payment” (“SFAS 123R”). This revised standard addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or that are based on a fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. Under the new standard, companies will no longer be able to account for share-based compensation transactions using the intrinsic method in accordance with APB 25. Instead, companies will be required to account for such transactions using a fair-value method and recognize the expense in the consolidated statement of income. For SFSB, Inc., SFAS 123R will be effective for annual periods beginning after December 15, 2005. The Company will adopt this standard in 2006. The Company is in the process of assessing the impact of the pronouncement’s requirements on its financial statements.
On March 31, 2004, the Financial Accounting Standards Board ratified Emerging Issues Task Force Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”(“EITF 03-1”), which provides guidance on recognizing other-than-temporary impairments on certain investments. EITF 03-1 is effective for other-than temporary impairment evaluations for investments accounted for under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” as well as non-marketable equity securities accounted for under the cost method for reporting periods beginning after June 15, 2004. On September 30, 2004, the FASB directed the FASB staff to delay the effective date for the measurement and recognition guidance contained in paragraphs 10-20 of EITF 03-01. This delay will be superseded concurrent with the final issuance of EITF 03-01a. During the delay, the Company continues to apply the relevant “other-than temporary” guidance under SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities.”
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
Some of the matters discussed below include forward-looking statements. 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 different from those anticipated or estimated for the reasons discussed below and the reasons under the heading “Information Regarding Forward Looking Statements.”
SFSB, Inc. (the “Company”) had not been organized as of June 30, 2004. References to “we” or “our” with respect to the three and six months ended June 30, 2004 refers to Slavie Federal Savings Bank (the “Bank”).
Overview
The Company’s loan growth in the second quarter improved after relatively flat loan growth during the first three months of 2005. Loan growth was flat during the first three months of 2005 because we were unable for most of the quarter to advertise our mortgage rates in the rate chart advertisement of our local newspaper due to a contractual dispute between the newspaper and the marketing company that sells the advertisements. The dispute was resolved in the last week of March and our rates appeared in the advertisement throughout the second quarter. As a result, we experienced increased loan growth during the quarter.
Earnings improved for the three and six months ended June 30, 2005 as compared to the same periods in 2004 due to loan growth, primarily during the second half of 2004, and the fact that in the second quarter of 2004 we sold our ground rent portfolio and recognized a loss on the sale of $102,166.
Assets declined during the six months of 2005 primarily because we repaid $5,000,000 of borrowings and returned $1,452,720 of funds deposited with us by potential purchasers in our stock offering whose subscription funds were returned in January 2005.
At June 30, 2005, we had a $1,080,183 accruing loan that was more than ninety days past due. This loan is an acquisition and development loan in which we hold an approximately 20% participation. Because we believe that collection of all principal and interest on this loan is probable, we continue to accrue interest on this loan.
As we look ahead at the remainder of the year, our loan pipeline remains steady and the economic conditions in the communities in which we operate remain solid. As a result, we anticipate that our loans and deposits will grow and we will continue to realize improved earnings over the prior year.
Key measurements and events for the three-month and six-month periods ended June 30, 2005 include the following:
| • | Total assets at June 30, 2005 decreased by 2.23% to $156,858,162 as compared to $160,433,399 as of December 31, 2004. |
| • | Net loans outstanding increased by 7.41% from $117,900,265 as of December 31, 2004 to $126,638,700 as of June 30, 2005. |
8
| • | Nonperforming loans at June 30, 2005 totaled $1,334,081. Nonaccrual loans totaled $253,898 and loans over ninety days and still accruing totaled $1,080,183. We believe an appropriate allowance for loan losses continues to be maintained. |
| • | Deposits at June 30, 2005 were $108,920,321, a decrease of $791,047 or 0.72% from $109,711,368 at December 31, 2004. |
| • | SFSB, Inc. realized net income of $101,931 and $190,368 for the three-month and six-month periods ended June 30, 2005. This compares to net income of $6,742 and $64,595 for the three-month and six-month periods ended June 30, 2004. |
| • | Net interest income, our main source of income, was $1,011,297 and $2,007,530 during the three-month and six-month periods ended June 30, 2005 compared to $819,465 and $1,603,784 for the same periods in 2004. This represents an increase of 23.41% and 25.17% for the three-months and six-months ended June 30, 2005 as compared to the same periods in 2004. |
| • | We had no loan charge-offs during the six month periods ending June 30, 2005 or June 30, 2004. |
| • | Non-interest income increased by $105,889 and $116,899, or 189.65% and 698.74%, for the three-month and six-month periods ended June 30, 2005, as compared to the three-month and six-month periods ended June 30, 2004. The increase was due to a non-recurring loss on the sale of our ground rent portfolio during the second quarter of 2004 of $102,166. |
| • | Non-interest expenses increased by $130,458 and $304,528, or 17.41% and 20.80%, for the three-month and six-month periods ended June 30, 2005, as compared to the same periods ended June 30, 2004. |
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.
9
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, 2005 and 2004 - Provision for Loan Losses and Analysis of Allowance for Loan Losses.”
Results of Operations for the Three and Six Months Ended June 30, 2005 and 2004
General. Net income increased $95,189 to $101,931 for the three months ended June 30, 2005 compared to $6,742 for the same period in the prior year. The increase was due primarily to a $191,832 increase in net interest income, offset by a $130,458 increase in non-interest expense.
Net income increased $125,773, to $190,368 for the six months ended June 30, 2005 compared to $64,595 for the same period in the prior year. The increase was due primarily to a $403,746 increase in net interest income, offset by a $304,528 increase in non-interest expense. Net income also increased in both periods because the second quarter of 2004 included a loss of $102,166 on the sale of our ground rent portfolio.
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 and 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.
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Three Months Ended June 30, 2005 | Three Months Ended June 30, 2004 | |||||||||||||||||
| 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) | $ | 123,319 | $ | 1,660 | 5.38 | % | $ | 103,168 | $ | 1,352 | 5.24 | % | ||||||
Mortgage-backed securities | 6,031 | 53 | 3.52 | 8,818 | 70 | 3.18 | ||||||||||||
Investment securities (available for sale) | 8,039 | 67 | 3.33 | 7,884 | 44 | 2.23 | ||||||||||||
Investment securities (held to maturity) | 3,997 | 38 | 3.80 | 3,994 | 38 | 3.81 | ||||||||||||
Other interest-earning assets | 5,675 | 53 | 3.74 | 3,499 | 16 | 1.83 | ||||||||||||
Total interest-earning assets | 147,061 | 1,871 | 5.09 | % | 127,363 | 1,520 | 4.77 | % | ||||||||||
Non-interest earning assets | 7,288 | 7,276 | ||||||||||||||||
Total assets | $ | 154,349 | $ | 134,639 | ||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||
Savings deposits | $ | 34,500 | 114 | 1.32 | % | $ | 29,126 | 56 | 0.77 | % | ||||||||
Demand and NOW accounts | 2,256 | 3 | 0.53 | 2,150 | 3 | 0.56 | ||||||||||||
Certificates of deposit | 69,815 | 593 | 3.40 | 67,707 | 531 | 3.14 | ||||||||||||
Escrows | 26 | — | — | 26 | — | — | ||||||||||||
Borrowings | 21,500 | 150 | 2.79 | 20,833 | 111 | 2.13 | ||||||||||||
Total interest-bearing liabilities | 128,097 | 860 | 2.69 | % | 119,842 | 701 | 2.34 | % | ||||||||||
Non-interest bearing liabilities | 3,507 | 3,810 | ||||||||||||||||
Total liabilities | 131,604 | 123,652 | ||||||||||||||||
Total equity(2) | 22,745 | 10,987 | ||||||||||||||||
Total liabilities and equity | $ | 154,349 | $ | 134,639 | ||||||||||||||
Net interest income | $ | 1,011 | $ | 819 | ||||||||||||||
Interest rate spread(3) | 2.40 | % | 2.43 | % | ||||||||||||||
Net interest-earning assets | $ | 18,964 | $ | 7,522 | ||||||||||||||
Net interest margin(4) | 2.75 | % | 2.57 | % | ||||||||||||||
Ratio of interest earning assets to interest bearing liabilities | 1.15x | 1.06x | ||||||||||||||||
| (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. |
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Six Months Ended June 30, 2005 | Six Months Ended June 30, 2004 | |||||||||||||||||
| 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) | $ | 120,935 | $ | 3,248 | 5.37 | % | $ | 98,265 | $ | 2,663 | 5.42 | % | ||||||
Mortgage-backed securities | 6,327 | 111 | 3.51 | 9,316 | 161 | 3.46 | ||||||||||||
Investment securities (available for sale) | 8,021 | 125 | 3.12 | 7,878 | 87 | 2.21 | ||||||||||||
Investment securities (held to maturity) | 3,996 | 76 | 3.80 | 3,993 | 76 | 3.81 | ||||||||||||
Other interest-earning assets | 9,356 | 145 | 3.10 | 3,781 | 31 | 1.64 | ||||||||||||
Total interest-earning assets | 148,635 | 3,705 | 4.99 | % | 123,233 | 3,018 | 4.90 | % | ||||||||||
Non-interest earning assets | 7,223 | 7,391 | ||||||||||||||||
Total assets | $ | 155,858 | $ | 130,624 | ||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||
Savings deposits | $ | 36,057 | 229 | 1.27 | % | $ | 29,487 | 127 | .86 | % | ||||||||
Demand and NOW accounts | 2,285 | 7 | 0.61 | 2,084 | 6 | 0.58 | ||||||||||||
Certificates of deposit | 68,718 | 1146 | 3.34 | 66,847 | 1,073 | 3.21 | ||||||||||||
Escrows | 19 | — | — | 19 | — | — | ||||||||||||
Borrowings | 23,167 | 315 | 2.72 | 18,667 | 208 | 2.23 | ||||||||||||
Total interest-bearing liabilities | 130,246 | $ | 1,697 | 2.61 | % | 117,104 | $ | 1,414 | 2.42 | % | ||||||||
Non-interest bearing liabilities | 2,894 | 2,545 | ||||||||||||||||
Total liabilities | 133,140 | 119,649 | ||||||||||||||||
Total equity(2) | 22,718 | 10,975 | ||||||||||||||||
Total liabilities and equity | $ | 155,858 | $ | 130,624 | ||||||||||||||
Net interest income | $ | 2,008 | $ | 1,604 | ||||||||||||||
Interest rate spread(3) | 2.38 | % | 2.48 | % | ||||||||||||||
Net interest-earning assets | $ | 18,389 | $ | 6,129 | ||||||||||||||
Net interest margin(4) | 2.70 | % | 2.60 | % | ||||||||||||||
Ratio of interest earning assets to interest bearing liabilities | 1.14x | 1.05x | ||||||||||||||||
| (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, 2005 compared to three months ended June 30, 2004.
Net interest income increased $191,832, or 23.41%, to $1,011,297 for the three months ended June 30, 2005 from $819,465 for the three months ended June 30, 2004. The increase was due primarily to an increase of $19,698,000 or 15.47%, in average interest earning assets to $147,061,000 from $127,363,000 partially offset by an increase of $8,255,000 or 6.89%, in average interest bearing liabilities to $128,097,000 from $119,842,000.
The yield on average interest earning assets and the cost of interest-bearing liabilities increased 32 and 35 basis points, respectively, during the three months ended June 30, 2005 as compared to the three months ended June 30, 2004, from 4.77% to 5.09% for the yield and 2.34% to 2.69% for the cost. Accordingly, the interest rate spread was 2.43% and 2.40% respectively for the three months ended June 30, 2004 and 2005.
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Our net interest margin increased to 2.75% from 2.57%, due to average interest earning assets growing at a faster rate than average interest bearing liabilities. The ratio of interest earning assets to interest bearing liabilities improved to 1.15 times for the three months ended June 30, 2005 from 1.06 times for 2004.
Six months ended June 30, 2005 compared to six months ended June 30, 2004.
Net interest income increased $403,746, or 25.17%, to $2,007,530 for the six months ended June 30, 2005 from $1,603,784 for the six months ended June 30, 2004.
The increase was due primarily to an increase of $25,402,000 or 20.61%, in average interest earning assets to $148,635,000 from $123,233,000 and a 9 basis point increase in the yield on average interest earning assets. These increases were partially offset by an increase of $13,142,000, or 11.22%, in average interest bearing liabilities to $130,246,000 from $117,104,000 and a 19 basis point increase in the cost of average interest-bearing liabilities.
Our interest rate spread decreased to 2.38% from 2.48%, 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 increased to 2.70% from 2.60% due to average interest earning assets growing at a faster rate than average interest bearing liabilities and more than offsetting the increase in the cost of average interest-bearing liabilities. The ratio of interest earning assets to interest bearing liabilities improved to 1.14 times for the six months ended June 30, 2005 from 1.05 times for 2004.
Interest Income.
Three months ended June 30, 2005 compared to three months ended June 30, 2004.
Interest income increased by $351,401, or 23.11%, to $1,871,678 for the three months ended June 30, 2005, from $1,520,277 for the three months ended June 30, 2004. The increase in interest income resulted primarily from increases of $308,393, or 22.81%, in interest and fee income from loans, $22,885, or 27.91%, in interest income from investment securities, and $36,862, or 227.91%, in interest income from other interest earning assets (primarily consisting of interest earned on cash and cash equivalents and Federal Home Loan Bank Stock), partially offset by a decrease of $16,739, or 23.81%, in interest income from mortgage backed securities.
The increase in interest income reflected a $19,698,000 or 15.47% increase in the average balance of interest-earning assets to $147,061,000 from $127,363,000, and a 32 basis point increase in the yield on average interest-earning assets to 5.09% for the three months ended June 30, 2005 from 4.77% for the three months ended June 30, 2004, reflecting an increase in market interest rates.
The increase in interest income and fees on loans was due to a $20,151,000 or 19.53% increase in average net loans receivable, from $103,168,000 to $123,319,000, and a 14 basis point increase in the yield on average net loans receivable.
Six months ended June 30, 2005 compared to six months ended June 30, 2004.
Interest income increased by $687,594, or 22.78%, to $3,705,519 for the six months ended June 30, 2005, from $3,017,925 for the six months ended June 30, 2004. The increase in interest income resulted primarily from an increase of $585,559, or 21.99%, in interest and fee income from loans, $38,039, or 23.33%, in interest income from investment securities and $114,328, or 370.28%, in interest income from other interest earning assets (primarily consisting of interest earned on cash and cash equivalents and Federal Home Loan Bank stock), partially offset by a decrease of $50,332, or 31.21%, in interest income from mortgage backed securities,
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The increase in interest income reflected a $25,402,000, or 20.61% increase in the average balance of interest-earning assets to $148,635,000 from $123,233,000, and a 9 basis point increase in the yield on average interest-earning assets to 4.99% for the six months ended June 30, 2005 from 4.90% for the six months ended June 30, 2004, reflecting an increase in market interest rates.
The increase in interest income and fees on loans was due to a $22,670,000, or 23.07% increase in average net loans receivable, from $98,265,000 to $120,935,000, offset by a 5 basis point decrease in average yield on net loans receivable. The yield declined because long term interest rates generally declined throughout the second part of 2004, and we made a large number of long-term fixed rate mortgage loans during that period.
The increase in interest income from other interest earning assets was due to a $5,575,000, or 147.45% increase in average other interest earning assets, from $3,781,000 to $9,356,000, and a 146 basis point increase in the average yield on these assets (as a result of increases in short term market interest rates). Other interest earning assets increased primarily as a result of the additional capital received from the stock offering.
Interest Expense.
Three months ended June 30, 2005 compared to three months ended June 30, 2004.
Interest expense, which consists of interest paid on deposits and borrowings, increased by $159,569, or 22.77%, to $860,381 for the three months ended June 30, 2005 from $700,812 for the three months ended June 30, 2004. The increase in interest expense resulted from an increase in the average balance and average cost of interest-bearing liabilities. The average balance of deposits increased to $106,571,000 from $98,983,000. The average cost of borrowings increased by 66 basis points as a result of longer term borrowing at higher interest rates and the average balance of borrowings increased to $21,500,000 from $20,833,000.
Six months ended June 30, 2005 compared to six months ended June 30, 2004.
Interest expense increased by $283,848, or 20.07%, to $1,697,989 for the six months ended June 30, 2005 from $1,414,141 for the six months ended June 30, 2004. The increase in interest expense resulted from an increase in the average balance and average cost of interest-bearing liabilities. The average balance of deposits increased to $107,060,000 from $98,418,000 and the average cost of deposits increased by 57 basis points as a result of increased market interest rates. The average balance of borrowings increased to $23,167,000 from $18,667,000 and the average cost of borrowings increased by 49 basis points as a result of longer term borrowings 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, management made a provision of $12,280 and $12,000 for the three months ended June 30, 2005 and June 30, 2004, and a provision of $31,850 and $24,000 for
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the six months ended June 30, 2005 and June 30, 2004. We had no charge-offs during the three or six-month periods ended June 30, 2005 and June 30, 2004. We used the same methodology and generally similar assumptions in assessing 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; |
| • | nonaccrual loans; |
| • | 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
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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 $446,000 or 0.35% of gross loans outstanding of $126,638,700 at June 30, 2005, compared to an allowance for loan losses of $387,000, or 0.34% of gross loans outstanding of $114,832,830 at June 30, 2004.
The following table summarizes the activity in the provision for loan losses for the three and six months ended June 30, 2005 and 2004.
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
| (Dollars in Thousands) | ||||||||||||||||
Balance at beginning of period | $ | 433 | $ | 375 | $ | 413 | $ | 362 | ||||||||
Charge-offs | — | — | — | — | ||||||||||||
Recoveries | 1 | — | 1 | 1 | ||||||||||||
Net charge-offs | 1 | — | 1 | 1 | ||||||||||||
Provision for loan losses | 12 | 12 | 32 | 24 | ||||||||||||
Ending balance | $ | 446 | $ | 387 | $ | 446 | $ | 387 | ||||||||
Ratio of net charge-offs (recoveries) during the period to average loans outstanding, net, during the period | — | — | — | — | ||||||||||||
Ratio of allowance of loan losses to total loans outstanding | 0.35 | % | 0.34 | % | 0.35 | % | 0.34 | % | ||||||||
Allowance for loan losses as a percent of total non-performing loans | 33.43 | % | 127.30 | % | 33.43 | % | 127.30 | % | ||||||||
Other Income.
Three months ended June 30, 2005 compared to three months ended June 30, 2004.
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 $105,889, or 189.65%, to $50,056 for the three months ended June 30, 2005, as compared to a loss of $55,833 for the three months ended June 30, 2004. In the second quarter of 2004, we incurred a $102,166 loss on the sale of our ground rent portfolio. Rental income from our headquarters building increased modestly by $5,838 during the second quarter of 2005 as compared to the second quarter of 2004. As of June 30, 2005, we had leased 81% of the total leaseable space in our headquarters building. Currently, we intend to utilize the remaining space for future expansion and have ceased actively attempting to lease the remaining space.
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Six months ended June 30, 2005 compared to six months ended June 30, 2004.
Non-interest income increased $116,899, or 698.74%, to $100,169 for the six months ended June 30, 2005, as compared to a loss of $16,730 for the six months ended June 30, 2004. The primary reason for the increase is because of the loss during the second quarter of 2004 on the sale of the ground rent portfolio. Rental income from our headquarters building increased $15,692 for the six months ended June 30, 2005 compared to the six months ended June 30, 2004.
Non-interest Expense.
Three months ended June 30, 2005 compared to three months ended June 30, 2004.
Non-interest expense was $879,942 for the three months ended June 30, 2005 as compared to $749,484 for the three months ended June 30, 2004, an increase of $130,458, or 17.41%. The increase was due primarily to a $47,513 increase in compensation and related expenses and a $59,189 increase in other expenses, consisting primarily of network support and maintenance, professional services, and office supplies.The increase in compensation and related expenses reflected, among other items, the hiring of a residential loan officer in March 2004 and a commercial lender in April 2004 and the accrual of ESOP expense of $17,447 in the current quarter (none in 2004). Much of the increase in professional services expenses is directly related to being a public company.
Six months ended June 30, 2005 compared to six months ended June 30, 2004.
Non-interest expense was $1,768,481 for the six months ended June 30, 2005, as compared to $1,463,953 for the six months ended June 30, 2004, an increase of $304,528 or 20.80%. The increase was due primarily to a $155,237, or 22.05%, increase in compensation and related expenses and a $134,256, or 54.38%, increase in other expenses, consisting primarily of network support and maintenance, professional services, office supplies and a robbery loss.Compensation and related expenses and other expenses increased for the same reasons that they increased during the three months ended June 30, 2005 as compared to the three months ended June 30, 2004. The accrual of ESOP expense was $26,920 as of June 30, 2005 (none in 2004). Much of the increase in professional services expenses is directly related to being a public company.
Income Tax Expense.
Three months ended June 30, 2005 compared to three months ended June 30, 2004.
The provision for income taxes increased to $67,200 for the three months ended June 30, 2005 from a benefit of $4,594 for the three months ended June 30, 2004, representing an increase of $71,794. The increase in the provision for income taxes was primarily due to our higher level of income before taxes. The benefit for June 30, 2004 contained an adjustment made in the second quarter to correct the effective tax rate to properly reflect the surtax exemption.
Six months ended June 30, 2005 compared to six months ended June 30, 2004.
The provision for income taxes increased to $117,000 for the six months ended June 30, 2005 from $34,506 for the six months ended June 30, 2004, representing an increase of $82,494. The increase in the provision for income taxes was primarily due to our higher level of income before taxes of $307,368 for the six months ended June 30, 2005, as compared to $99,101 for the six months ended June 30, 2004, and the related surtax exemption being phased out due to our higher level of taxable income.
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Analysis of Financial Condition
Assets.
General.
Our total assets decreased by $3,575,237 or 2.23%, to $156,858,162 at June 30, 2005, from $160,433,399 at December 31, 2004. The decrease in total assets resulted primarily from an $11,086,460, or 71.08 % decrease in cash and cash equivalents, from $15,596,947 at December 31, 2004 to $4,510,487 at June 30, 2005, and a $1,156,465, or 16.56% decrease in mortgage backed securities-held to maturity. These decreases were offset by an $8,738,435, or 7.41% increase in net loans receivable, from $117,900,265 at December 31, 2004 to $126,638,700 at June 30, 2005.
Cash and cash equivalents declined primarily because we repaid $5,000,000 of borrowings and returned $1,452,720 of funds deposited with us by potential purchasers in our stock offering whose subscription funds were returned in January 2005 and invested cash into new loans.
Investment Securities.
The investment portfolio at June 30, 2005 amounted to $17,870,257, a decrease of $1,087,461, or 5.74%, from $18,957,718 at December 31, 2004. Investment securities – available for sale, increased $67,520, or 0.85%, to $8,048,231 at June 30, 2005 from $7,980,711 at December 31, 2004, primarily as a result of dividends credited to the account. Mortgage backed securities – held to maturity, decreased $1,156,465, or 16.56%, to $5,824,995 at June 30, 2005 from $6,981,460 at December 31, 2004, as a result of principal repayments.
The carrying value of available for sale securities includes a net unrealized loss of $154,949 at June 30, 2005 (reflected as accumulated other comprehensive loss of $95,107 in equity after deferred taxes) as compared to a net unrealized loss of $97,652 ($59,939 net of taxes) as of December 31, 2004. In general, this increase in unrealized loss was a result of rising interest rates.
Loan Portfolio.
Loans receivable, net, increased $8,738,435, or 7.41%, to $126,638,700 at June 30, 2005 from $117,900,265 at December 31, 2004. The commercial loan portfolio increased $1,884,782, or 39.60%, to $6,643,915 at June 30, 2005 from $4,759,133 at December 31, 2004. One-to-four family residential loans increased $5,581,412, or 5.32% to $110,435,939 at June 30, 2005 from $104,854,527 at December 31, 2004. Our loan customers are generally located in Baltimore City, Baltimore County and Harford County, 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 consider repossessed assets and loans that are 90 days or more past due to be non-performing assets. 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 foreclosure or other repossession and updated
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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 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. We did not have any real estate owned or other repossessed assets at June 30, 2005 or December 31, 2004.
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. At June 30, 2005 and December 31, 2004, we had no loans that were considered impaired.
Non-accrual loans totaled $253,898, or 0.20% of net loans receivable at June 30, 2005 and $365,233, or 0.31% of net loans receivable at December 31, 2004. All of these loans were one-to-four family residential loans.
Accruing loans which were contractually passed due 90 days or more as to principal or interest payments totaled $1,080,183 or 0.85% of net loans receivable at June 30, 2005 and $0 at December 31, 2004. This amount relates to a commercial real estate acquisition and development loan in which we hold an approximately 20% participation. We have continued to accrue interest on this loan because we believe that collection of all principal and interest on this loan is probable. We expect that a national homebuilder will purchase the property to build residential units as soon as the borrower develops the property to “record plat,” at which time the loan will be paid in full. We expect the project to be complete by the end of the year.
Other than as disclosed, there are no other loans at June 30, 2005 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 $3,728,198, or 2.71%, to $134,085,100 at June 30, 2005, from $137,813,298 at December 31, 2004. The decrease in total liabilities resulted from a $791,047, or 0.72% decrease in deposits and a $5,000,000, or 18.87% decrease in borrowings, offset by a $1,283,856, or 389.77% increase in advance payments by borrowers for taxes and insurance and a $1,039,696, or 165.70% increase in checks outstanding in excess of bank balance. Advance payments by borrowers for taxes and insurance increased because the semi-annual taxes for June 2005 had not been paid as of June 30, 2005 (they are paid in July 2005) and because of the growth to the loan portfolio.
Deposits.
Deposits decreased $791,047, or 0.72%, to $108,920,321 at June 30, 2005 from $109,711,368 at December 31, 2004. Most of the decline in deposits was in savings and money market deposits, which decreased by $3,786,864 to $34,399,135 at June 30, 2005 from $38,185,999 at December 31, 2004, and demand and NOW accounts, which decreased by $964,889 to $3,073,561 at June 30, 2005 from $4,038,450 at December 31, 2004. These declines were offset by a gain in certificates of deposit of $3,960,861 to $71,447,780 at June 30, 2005 from $67,486, 919 at December 31, 2004. We believe that, as savings deposit rates are beginning to rise, some customers are moving funds into higher-yielding investments, thus accounting for the increase in certificates of deposits. The decrease in savings and money market deposits partially reflects $1,452,720 of funds deposited with us during the fourth quarter of 2004 by potential purchasers in our stock offering whose subscription funds were returned to them in January 2005.
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Borrowings.
At June 30, 2005, we were permitted to borrow up to $87,488,000 from the Federal Home Loan Bank of Atlanta. We had $21,500,000 and $26,500,000 of Federal Home Loan Bank advances as of June 30, 2005 and December 31, 2004, respectively, and we averaged $23,166,667 and $23,916,667 of Federal Home Loan Bank advances during the six months ended June 30, 2005 and the year ended December 31, 2004, respectively. The decrease in borrowings reflects the repayment of a maturing $5,000,000 advance in March, 2005. We have relied on borrowing to a significant extent since the third quarter of 2003 to fund loan growth.
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 competition.
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, 2005, cash and cash equivalents totaled $4,510,487. Securities classified as available-for-sale, which can provide additional sources of liquidity, totaled $8,048,231 at June 30, 2005. However, because all of these securities were in an unrealized loss position at June 30, 2005, 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, 2005. Also, at June 30, 2005, we had advances outstanding of $21,500,000 from the Federal Home Loan Bank of Atlanta. On that date, we had the ability to borrow an additional $65,988,000.
At June 30, 2005, we had outstanding commitments to originate loans of $4,923,650 (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. 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 $4,238,071 at June 30, 2005. 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 $30,581,985 or 28.08% of total deposits at June 30, 2005. 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 low interest rate environment. 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, 2006. We believe, however, that, based on past experience, a significant portion of our certificates of deposit will remain with us. We believe we have the ability to attract and retain deposits by adjusting the interest rates offered.
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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, 2005 consisted of $5,000,000 of short term fixed rate advances with an interest rate of 2.08% and $16,500,000 of long term fixed rate advances with rates ranging from 2.83% to 4.90%.
Our primary investing activity is the origination of loans, primarily one- to four-family residential mortgage loans, and the purchase of securities. Our primary financing activity consists of activity in deposit accounts and Federal Home Loan Bank of Atlanta advances. Asset growth has outpaced deposit growth over the past 15-18 months and the increased liquidity needed to fund the asset growth has been provided through increased Federal Home Loan Bank borrowings. 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.
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 increased $152,961, or 0.68%, to $22,773,062 at June 30, 2005 from $22,620,101 at December 31, 2004 primarily as a result of net income of $190,368, partially offset by a $35,167 increase in accumulated other comprehensive loss (resulting from unrealized losses on investments available for sale, net of tax). 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. In general, we do not require collateral or other security to support financial instruments with off-balance-sheet credit risk.
Financial Instruments Whose Contract Amount Represents Credit Risk | Contract Amount At | |||||
| June 30, 2005 | December 31, 2004 | |||||
Lines of credit-home equity | $ | 4,238,071 | $ | 3,602,774 | ||
Lines of credit-overdraft checking | 43,367 | 13,523 | ||||
Mortgage loan commitments | 4,923,650 | 2,428,520 | ||||
Lines of credit-home equity are lines of credit 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.
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Our outstanding commitments to make mortgages are at fixed rates ranging from 4.75% to 6.625% and 4.875% to 5.75% at June 30, 2005 and December 31, 2004, respectively. Loan commitments expire 60 days from the date of the commitment.
For the six months ended June 30, 2005, 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. 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, 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; 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; the 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 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 and Slavie Federal Savings Bank’s disclosure controls and procedures. Based upon that evaluation, SFSB, Inc.’s and Slavie Federal Savings Bank’s Chief Executive Officer and Chief Financial Officer concluded that SFSB, Inc.’s and Slavie Federal Savings Bank’s disclosure controls and procedures are effective. 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 or Slavie Federal Savings Bank’s internal controls 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, 2005, that have materially affected, or are reasonably likely to materially affect, SFSB, Inc.’s or Slavie Federal Savings Bank’s internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
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 19, 2005.
(b) At the annual meeting, Philip E. Logan and Robert M. Stahl IV were elected to serve a three-year term expiring upon the date of SFSB, Inc.’s 2008 Annual Meeting. The term of office of the following directors continued after the meeting: Leonard Blight, J. Benson Brown, Thomas J. Dreschler, Charles E. Wagner, Jr. and James D. Wise.
(c) 1. The following individuals were nominees for the Board of Directors for a term to expire at the 2008 annual meeting of stockholders. The number of votes for or withheld for each nominee is as follows:
| For | Withheld | Total | ||||
| Philip E. Logan | 2,848,276 | 32,200 | 2,880,476 | |||
| Robert M. Stahl IV | 2844,676 | 35,800 | 2,880,476 |
2. The ratification of the appointment of Beard Miller Company LLP as independent public accountants to audit the financial statements of SFSB, Inc. for 2005:
For | Against | Abstain | Broker Non-Votes | Total | ||||
| 2,870,076 | 10,200 | 200 | 0 | 2,880,476 |
Item 5. Other Information.
Not applicable.
Item 6. Exhibits.
| 10.1 | Amendment to Employment Agreement between Slavie Federal Savings Bank and Sophie T. Wittelsberger – Appointment as the Chief Financial Officer of Slavie Federal Savings Bank |
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| 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
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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 12, 2005 | By: | /s/ Philip E. Logan | ||
| Philip E. Logan, President | ||||
| (Principal Executive Officer) | ||||
| Date: August 12, 2005 | By: | /s/ Sophie Torin Wittelsberger | ||
Sophie Torin Wittelsberger, Chief Financial Officer | ||||
| (Principal Accounting and Financial Officer) | ||||
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