UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2008
or
| ¨ | TRANSITION REPORT PURUSANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 000-52946
VIRGINIA SAVINGS BANCORP, INC.
(Exact name of registrant as specified in its Charter)
| VIRGINIA | 20-8947933 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I. R. S. Employer Identification No.) |
| 600 Commerce Avenue, Front Royal, Virginia 22630 | ||
| (Address of Principal Executive Offices) (Zip Code) | ||
(540) 635-4137
Registrant’s telephone number, including area code
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer ¨ | |
Non-accelerated filer ¨ | Smaller reporting company x | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
As of November 14, 2008, there were issued and outstanding 1,899,984 shares of the registrant’s common stock.
VIRGINIA SAVINGS BANCORP, INC.
QUARTERLY REPORT ON FORM 10-Q
September 30, 2008
INDEX
2
The accompanying notes are an integral part of these consolidated financial statements.
3
The accompanying notes are an integral part of these consolidated financial statements.
4
The accompanying notes are an integral part of these consolidated financial statements.
5
The accompanying notes are an integral part of these consolidated financial statements.
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VIRGINIA SAVINGS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Virginia Savings Bancorp, Inc. (“the Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Item 310 of Regulation S-K. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included.
In preparing the consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Actual results could differ from those estimates. Operating results for the three and nine months ended September 30, 2008 are not necessarily indicative of the results that may be expected for any other interim period or the entire year ending December 31, 2008. The unaudited consolidated financial statements and related notes thereto presented herein should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s annual report on Form 10-KSB for the year ended December 31, 2007.
Note 2 – Earnings Per Share
Basic net (loss) income per share was computed on the weighted average number of shares outstanding. Diluted earnings per share are computed on a weighted average basis under the “if converted” method assuming conversion as of January 1, 2008 and 2007. Potential converted shares represent the conversion of the 100,000 shares of convertible preferred stock of the wholly owned subsidiary of the Company, Virginia Savings Bank, F.S.B. (“the Bank”), that is convertible in the ratio of two shares of common stock to three shares of preferred stock. There was no dilutive impact as the Company reported a loss for the three and nine months ended September 30, 2008 and the assumed conversion was anti-dilutive for 2007 periods. With the exception of preferred stock dividends, there were no adjustments to net (loss) income in the computation of diluted earnings per share for any of the periods presented. The following table shows the computation of basic and diluted (loss) earnings per share for the three and nine months ended September 30, 2008 and 2007.
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| Nine Months Ended Sept. 30, | ||||||||
| 2008 | 2007 | |||||||
Net (loss) Income | $ | (305,269 | ) | $ | 671,491 | |||
Preferred Stock Dividends | * | (56,250 | ) | |||||
Net (loss) Income Available to Common Stock | $ | (305,269 | ) | $ | 615,241 | |||
Weighted average shares outstanding | 1,899,984 | 1,899,984 | ||||||
Basic and Diluted (Loss) Earnings Per Share | $ | (0.16 | ) | $ | 0.32 | |||
| Three Months Ended Sept. 30, | ||||||||
| 2008 | 2007 | |||||||
Net (loss) Income | $ | (243,630 | ) | $ | 160,786 | |||
Preferred Stock Dividends | * | (18,750 | ) | |||||
Net (loss) Income Available to Common Stock | $ | (243,630 | ) | $ | 142,036 | |||
Weighted average shares outstanding | 1,899,984 | 1,899,984 | ||||||
Basic and Diluted (Loss) Earnings Per Share | $ | (0.13 | ) | $ | 0.07 | |||
| * | Not applicable to the computation due to the loss incurred. |
Note 3 – Guarantees
The Bank issues stand-by letters of credit that are unconditional commitments guaranteeing performance by a customer to a third party. These guarantees are issued primarily to support private borrowing arrangements, generally limited to real estate transactions. The credit risk involved in issuing these guarantees is essentially the same as that involved in extending loans to customers. At September 30, 2008 and December 31, 2007, with consideration given to collateral and risk of default, management does not believe its exposure to these letters of credit is significant. These stand-by letters of credit were approximately $330,700 and $268,900, respectively, with current expiration dates through September 10, 2009.
The Bank also issues standard representations, warranties and indemnifications in the course of selling mortgage loans and other types of loans. The Bank has not been required to act on such guarantees in the past and does not believe that any payments pursuant to them would materially change the financial condition or results of operations as presented herein.
Note 4 – Fair Value of Financial Instruments
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements”, which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. FASB Statement No. 157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years.
The primary effect upon the Company following adoption of SFAS 157 was to expand the required disclosures regarding the methods used to determine fair values. SFAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The
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hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under SFAS 157 are as follows:
| Level 1: | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. |
| Level 2: | Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability. |
| Level 3: | Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported with little or no market activity). |
An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
For assets that the Company measures at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2008 are as follows:
| September 30, 2008 | Level 1* | Level 2** | Level 3*** | |||||||||
Investments available for sale | $ | 8,193,940 | $ | 8,193,940 | ||||||||
Impaired loans | 2,649,527 | 2,649,527 | ||||||||||
Foreclosed real estate | 3,506,842 | 3,506,842 | ||||||||||
Mortgage servicing rights | 211,123 | — | — | 211,123 | ||||||||
Total | $ | 14,561,432 | $ | — | $ | 8,193,940 | $ | 6,367,492 | ||||
| * | Quoted prices in active markets for identical assets |
| ** | Significant other observable inputs |
| *** | Significant unobservable inputs |
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The following table presents a summary of activity in the level 3 items:
| Activity in level 3 Items | Nine Months Ended 9/30/08 | Three Months Ended 9/30/08 | ||||||
Impaired loans - Beginning balance | $ | 5,130,556 | $ | 2,420,403 | ||||
Loan returned to accrual status | (207,456 | ) | — | |||||
Property repossessed or foreclosed upon | (3,095,330 | ) | (756,707 | ) | ||||
Properties sold at foreclosure auction | (1,755,782 | ) | (72,667 | ) | ||||
Account paid off | (213,579 | ) | (141,591 | ) | ||||
Accounts added | 2,791,118 | 1,200,089 | ||||||
Ending balance | $ | 2,649,527 | $ | 2,649,527 | ||||
Foreclosed real estate - Beginning balance | $ | 653,941 | $ | 2,732,568 | ||||
Transfer of loans from portfolio | 5,020,520 | 2,180,939 | ||||||
Post acquisition loss in value | (105,000 | ) | (85,542 | ) | ||||
Sales of real estate owned | (2,366,189 | ) | (1,281,189 | ) | ||||
Payment from first trust holder | (260,000 | ) | (260,000 | ) | ||||
Disbursements on partially completed houses | 463,570 | 220,066 | ||||||
Ending balance | $ | 3,506,842 | $ | 3,506,842 | ||||
Mortgage servicing rights - Beginning balance | $ | 241,003 | $ | 222,884 | ||||
Amortization of servicing rights | 29,880 | 11,761 | ||||||
Ending balance | $ | 211,123 | $ | 211,123 | ||||
The following valuation techniques were used to measure the fair value of assets in the table above.
Investment securities available for sale –The Company accounts for investments securities available for sale at fair value with unrealized gains and losses reflected net of taxes in comprehensive income or loss. The Company obtains quoted market prices from the Federal Home Loan Bank of Atlanta, the Company’s servicing agent for the specific investment securities included in this category.
Loans– Loans included in the above table are those which were accounted for under SFAS 114,Accounting by Creditors for Impairment of a Loan, under which the Company has measured impairment generally based on the fair value of the loan’s collateral. Fair value is determined based upon independent third party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. The fair value consists of the loan balances less their valuation allowances as determined under SFAS 114.
Foreclosed real estate – Fair values of foreclosed real estate were based on independent third party appraisals of the properties or discounted cash flows based upon the expected sales proceeds upon disposition of the assets. These values were generally determined based on the sales prices of similar properties in the proximate vicinity. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. See discussion of foreclosed real estate underCritical Accounting Policies.
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Mortgage servicing rights– The Company accounts for mortgage servicing rights at the lower of their carrying amount or fair value and has measured the fair value of the mortgage servicing rights based upon the discounted cash flows of the assets’ future income streams. The Company obtains published data from the Federal Home Loan Mortgage Corporation for similar conventional mortgage loans that match critical data elements used in the determination of fair values of the loans serviced. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Note 5 – Subsequent Event
On November 6, 2008, the Company made application to the Department of the Treasury (“Treasury”) to participate in its Capital Asset Purchase Program through its regulator, the Office of Thrift Supervision. Under the Treasury guidelines, the Company is eligible to apply for up to 3.0% of Virginia Savings Bank’s total risk-weighted assets as of September 30, 2008. Management made application for $3,250,000 of preferred shares which is slightly less than the maximum amount allowed under the guidelines.
Under the Treasury guidelines, the Company is also required to issue common stock warrants equal to 15% of the preferred shares it would issue under this program. Such warrants are to be valued based on the average of closing prices of common stock traded in the 20 trading days prior to the date of execution of the capital purchase agreement. As of the date of the application, Treasury had not identified how these warrants would be priced for a holding company, such as the Company, whose shares are not traded in an active market and for which trading volume is extremely limited.
Note 6 – New Accounting Pronouncements
SAB 109
Staff Accounting Bulletin No. 109 (SAB 109), “Written Loan Commitments Recorded at Fair Value Through Earnings” expresses the views of the staff regarding written loan commitments that are accounted for at fair value through earnings under generally accepted accounting principles. To make the staff’s views consistent with current authoritative accounting guidance, the SAB revises and rescinds portions of SAB No. 105, “Application of Accounting Principles to Loan Commitments.” Specifically, the SAB revises the SEC staff’s views on incorporating expected net future cash flows related to loan servicing activities in the fair value measurement of a written loan commitment. The SAB retains the staff’s views on incorporating expected net future cash flows related to internally-developed intangible assets in the fair value measurement of a written loan commitment. The staff expects registrants to apply the views in Question 1 of SAB 109 on a prospective basis to derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. SAB 109 has not had a material impact on its the Company financial statements.
FSP FAS 157-2
In February 2008, the FASB issued FASB Staff Position (FSP) 157-2, “Effective Date of FASB Statement No. 157,” that permits a one-year deferral in applying the measurement provisions of Statement No. 157 to non-financial assets and non-financial liabilities (non-financial items) that are not recognized or disclosed at fair value in an entity’s financial statements on a recurring basis (at least annually). Therefore, if the change in fair value of a non-financial item is not required to be recognized or disclosed in the financial statements on an annual basis or more frequently, the effective date of application of
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Statement 157 to that item is deferred until fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. This deferral does not apply, however, to an entity that applied Statement 157 in interim or annual financial statements prior to the issuance of FSP 157-2. The Company is currently evaluating the impact, if any, that the adoption of FSP 157-2 will have on the Company’s operating income or net earnings.
FSP 157-3
In October 2008, the FASB issued FSP SFAS No. 157-3,“Determining the Fair Value of a Financial Asset When The Market for That Asset Is Not Active” (FSP 157-3), to clarify the application of the provisions of SFAS 157 in an inactive market and how an entity would determine fair value in an inactive market. FSP 157-3 is effective immediately and applies to our September 30, 2008 financial statements. The application of the provisions of FSP 157-3 did not materially affect our results of operations or financial condition as of and for the periods ended September 30, 2008.
FSP FAS 140-3
In February 2008, the FASB issued a FASB Staff Position (FSP) FAS 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.” This FSP addresses the issue of whether or not these transactions should be viewed as two separate transactions or as one “linked” transaction. The FSP includes a “rebuttable presumption” that presumes linkage of the two transactions unless the presumption can be overcome by meeting certain criteria. The FSP will be effective for fiscal years beginning after November 15, 2008 and will apply only to original transfers made after that date; early adoption will not be allowed. The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements.
FASB Statement No. 162
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” This Statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements.
FSP 133-1 and FIN 45-4
In September 2008, the FASB issued FSP 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161” (FSP 133-1 and FIN 45-4). FSP 133-1 and FIN 45-4 amends and enhances disclosure requirements for sellers of credit derivatives and financial guarantees. It also clarifies that the disclosure requirements of SFAS No. 161 are effective for quarterly periods beginning after November 15, 2008, and fiscal years that include those periods. FSP 133-1 and FIN 45-4 is effective for reporting periods (annual or interim) ending after November 15, 2008. The implementation of this standard will not have a material impact on our consolidated financial position and results of operations.
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EITF 08-5
In September 2008, the FASB ratified EITF Issue No. 08-5, “Issuer’s Accounting for Liabilities Measured at Fair Value With a Third-Party Credit Enhancement” (EITF 08-5). EITF 08-5 provides guidance for measuring liabilities issued with an attached third-party credit enhancement (such as a guarantee). It clarifies that the issuer of a liability with a third-party credit enhancement should not include the effect of the credit enhancement in the fair value measurement of the liability. EITF 08-5 is effective for the first reporting period beginning after December 15, 2008. The Company is currently assessing the impact of EITF 08-5 on its consolidated financial position and results of operations.
Note 7 – Reclassifications
Certain prior period amounts have been reclassified to conform to the current period’s method of presentation. These reclassifications had no effect upon previously reported results of operations or retained earnings.
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Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This quarterly report of the Company contains forward-looking statements within the meaning of the Securities Exchange Act of 1934. The words “will,” “believe,” “expect,” “should,” and “anticipate” and words of similar construction are intended in part to help identify forward-looking statements. All forward-looking statements involve risks and uncertainty and certain factors could cause actual results to differ materially from the anticipated results or other expectations expressed in forward-looking statements. Risks and uncertainties that may affect future results include, but are not limited to, changes in the economy, interest rate movements, timely developments of technology resources for customer services and operating systems, the impact of competitive services and pricing, Congressional legislation and similar matters. Management cautions readers not to place undue reliance on forward-looking statements, which are subject to influence by the foregoing risk factors and unanticipated future events.
Critical Accounting Policies
The Company’s accounting policies are in accordance with accounting principles generally accepted in the United States and conform to practices generally followed in the banking industry. Certain of these policies involve a significant amount of judgment and estimates based on assumptions for which the actual results are uncertain. Different assumptions in the preparation of these estimates could result in material changes in the Company’s financial position and results of operations. Our judgments and estimates are based upon historical experience and other factors management believes to be reasonable within the context of the circumstances in which they are applied.
There are four areas of accounting policy and practice that are particularly sensitive to management’s judgment and in which significant estimates are used. These are allowances for losses on loans, allowances for losses on foreclosed real estate, allowances for losses on mortgage servicing rights, and other than temporary impairment of investment securities. Other accounting policies also involve the use of judgment and significant estimates but the impact of these processes are not material to the Company’s financial condition or results of operations.
The Financial Accounting Standards Board (“FASB”) Statement Number 114, “Accounting by Creditors for Impairment of a Loan” (“FASB 114”), provides guidelines for the valuation of impaired loans. More extensive guidelines have been published by bank regulatory bodies. The latter provide for the classification of problem loans as substandard, doubtful and loss. There is also a regulatory special mention category for performing loans that are the subject of heightened management concern as potential problem loans.
It is the Bank’s general policy to place loans in a non-accrual status when they become 90 days delinquent. Loans may, however, be placed in a non-accrual status regardless of their term of delinquency if the borrower exhibits signs of financial distress or if the collateral property decreases in value significantly below the loan balance. Generally, if a borrower has multiple loans, all of his loans, including currently performing loans, will be placed in a non-accrual status if there are indications that the borrower is having serious financial difficulties. Once loans other than low balance consumer loans are placed in a non-accrual status, they will be evaluated for individual impairment. At September 30, 2008, the Bank had 14 loans in a non-accrual status with regard to interest income. Of these 14 loans, 13 were evaluated for individual impairment. The remaining loan is a small balance consumer loan.
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The 13 loans evaluated for individual impairment were to four borrowers. These evaluations resulted in increases to specific loan loss allowances of $191,600 during the quarter.
Under FASB Statement Number 5, “Accounting for Contingencies” (“FASB 5”), loan loss allowances on large groups of homogeneous loans are provided based upon the Bank’s historical loss experience for similar types of loans. As part of its loan loss analysis under FASB 5, management also considers concentrations of credit and current economic conditions as they may impact borrowers’ ability to meet their financial obligations.
Management identified four classifications of loans that represent high concentrations of credit. Each of these credit concentration areas fall in a range of 100% to 200% of shareholders’ equity. These loan products are home equity lines of credit, balloon loans, non-residential real estate loans and builder construction loans. Of concern to management and the board of directors is the concentration of loans to builders for the speculative construction of homes, which at September 30, 2008 approximated $9.7 million. Home equity lines of credit and balloon lines are collateralized by residential one-to-four family properties, and had balances of approximately $12.7 million and $30.9 million, respectively, at September 30, 2008. Non-residential real estate loans approximated $20.5 million at September 30, 2008.
During its quarterly evaluation of the adequacy of the Company’s general loan allowances, management concluded that the percentage amounts applied to performing loans to derive general loss allowances were adequate as of quarter end. We reached that conclusion after consideration of the reduction in non-accrual loans from the levels experienced earlier this year, that balances in high concentration credit areas are diminishing, particularly in builder construction loans, and that there has not been a significant change in environmental factors since the previous quarter end.
Management believes that as of September 30, 2008 the loan loss allowances provided are adequate to absorb the losses inherent in the Bank’s loan portfolio. We, however, caution that continued deterioration of real estate values and general economic conditions may result in the need for further additions to loan loss allowances if collateral values fall below loan balances on non-performing loans, and if home builders and other large borrowers who depend upon sales of real estate properties for repayment of their loans do not realize sufficient cash flows to repay their loans in full when they become due.
While management segments the loan portfolio into several categories for purposes of evaluating the adequacy of loan loss allowances and makes tentative allocations of these allowances to specific loan products, all general loss reserves are available to absorb losses from any sector of the loan portfolio.
The Bank evaluates the fair value of foreclosed real estate. Such evaluations are based upon observable market values of comparable properties obtained through appraisals when available. In the absence of adequate appraisal values, the properties are valued using the discounted present
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value of the anticipated future cash flows. In addition to the appraisal values, the Bank considers costs which may be necessary to make the property salable, and selling costs to dispose of the property. The net realizable values derived through this process are measured against the recorded book value of the loan. The Bank records foreclosed real estate at fair value at the foreclosure date through a credit to other income or recovery to allowance if positive or a charge to the allowance if negative. Foreclosed real estate properties are evaluated for impairment not less frequently than quarterly after the initial evaluation is performed at the time of acquisition, as post acquisition, such properties are recorded at the lower of cost or fair value. Any increase to the allowance for losses on foreclosed real estate made after the initial valuation is recorded as an expense.
During the quarter ended September 30, 2008, foreclosed real estate increased $774,300. See Footnote 4 to the consolidated financial statements which includes a schedule of activity in foreclosed real estate for the three and nine months ended September 30, 2008.
FASB Statement Number 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities”, requires that mortgage servicing rights be evaluated for impairment on a periodic basis. It has been the Bank’s policy to make such evaluations on a quarterly basis prior to the publication of public and regulatory financial reports. Impairment evaluation of mortgage servicing rights is a complex process involving several key assumptions. Among the factors considered are: the original contract term of the underlying mortgages, the contractual interest rates, the remaining term of the mortgages, current interest rates and management’s original and current assumptions as to the anticipated life of the mortgages.
The anticipated life of the mortgages is greatly impacted by pre-payment speed which is the most critical assumption made by management both in the original recording of the mortgage servicing rights and in subsequent impairment evaluations. The longer the mortgage life, the higher the value of the mortgage servicing rights will be because the servicing rights will continue to generate income into the future in the form of loan servicing fees. The Bank obtains published pre-payment speeds for similar conventional mortgage loans that match the Bank’s contract interest rates, year originated, and the original terms of the loans serviced. Such data was used by management in its September 30, 2008 measurement of impairment of its mortgage servicing rights. At that date, the Bank’s mortgage servicing rights were not impaired and no valuation allowance was recorded on the Bank’s books.
The Company reviews its investment securities portfolio on a quarterly basis to identify and evaluate investments that have indications of possible other than temporary impairment. Such securities are written down to their net realizable value when there is impairment in value that is other than temporary. The determination of whether or not other than temporary impairment exists is a matter of judgment. Factors considered in determining whether a loss is temporary include the length of time and the extent to which fair value has been less than the cost basis, the financial condition and credit quality of the security issuer, and the Bank’s ability to hold the investment securities for a period of time sufficient to allow for any anticipated recovery in market value. At September 30, 2008, the Company’s single held to maturity investment security had a fair value an immaterial amount slightly above book value.
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The Company’s available for sale investment securities had a net market value approximately $19,000 below book value. An unrealized loss in that amount was recorded as a reduction in the securities’ carrying value with an offset to other comprehensive loss that is a component of stockholders’ equity. These unrealized losses are not considered to be other than temporary and are primarily the result of interest rate changes and not credit concerns of the issuers.
Financial Condition
At September 30, 2008, the total assets of the Company were $143.9 million, a decrease of $15.0 million since December 31, 2007. Cash and cash equivalents increased $11.6 million since December 31, 2007. $10.4 million of this increase occurred during the third quarter as the result of calls of investment securities. During the nine months year-to-date (“YTD”) in 2008, loans receivable decreased $6.2 million from the December 31, 2007 yearend balance. The Bank’s loan disbursements to customers were $28.1 million during the nine months YTD in 2008 compared to $36.6 million in the same period in 2007. Loan principal reductions were $34.1 million for the nine months YTD in 2008 versus $47.4 million during the nine months YTD in 2007. The foregoing loan disbursement and loan principal reduction amounts include activity in the Bank’s revolving lines of credit. Principal reductions for the nine months YTD 2008 include approximately $4.5 million of loans foreclosed thus far in 2008.
Investment securities decreased a net amount of $23.8 million for the nine months YTD in 2008. Investment securities totaling $35.7 million have been called by the issuing agencies or have matured. Proceeds from these calls have been used to reduce short-term borrowings, to purchase $11.9 million of new securities, and to fund deposit withdrawals.
Deposits decreased $3.0 million during the nine months YTD in 2008. Core deposit accounts, primarily checking and passbook savings accounts, increased $6.1 million since the beginning of the year. Certificate of deposit accounts decreased $9.0 million during the same time period. At September 30, 2008, the Company had no short-term borrowings. Short-term borrowings decreased $11.8 million since the beginning of the year.
Asset Quality
Asset quality refers to the underlying credit characteristics of borrowers and the likelihood that defaults on contractual loan payments will result in charge-offs of loan balances. Asset quality is generally a function of economic conditions, but can be managed through conservative underwriting and sound collection policies and procedures. At September 30, 2008, the Company had problem loans of approximately $7.2 million or 5.0% of total assets, that were classified sub-standard. In addition, the Company also had $3.5 million of foreclosed real estate which was also classified sub-standard. At December 31, 2007, similarly classified assets were $7.9 million and equaled 5.0% of assets. Non-accrual loans, for which only cash income is recognized, were $2.6 million and have decreased from $5.1 at December 31, 2007. SeeCritical Accounting Policies for a discussion of the Bank’s policy and procedure for developing loan loss allowances and valuing foreclosed real estate.
Nine Months Ended Sept. 30, 2008 Compared to Nine Months Ended Sept. 30, 2007
The Company experienced a $305,300 loss for nine months YTD September 30, 2008, a decrease of $976,800 from the $671,500 of net income for the same period in 2007. Net interest income decreased $1,054,800, a 25.6% decrease from the same period last year. Other income increased $976,100. Non-interest expenses increased $222,400, or 5.5%, and pre-tax income decreased by $1,524,000.
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Net interest margin, the difference between interest income and interest expense, is the primary source of operating revenues for the Company. Table 1 below presents, for the nine months ended September 30, 2008 and 2007, the average balances, related interest income and expense amounts, and average yields and costs which influence the Bank’s net interest margin. Table 2 reflects the changes in interest income and interest expense between the periods which resulted from changes in average volumes and average rates.
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| Average Balance Sheet | Table 1 | |
| Dollars in thousands |
| For The Nine Months Ended September 30, | ||||||||||||||||||
| 2008 | 2007 | |||||||||||||||||
| Average Volume | Income/ Expense | Yield/ Rate | Average Volume | Income/ Expense | Yield/ Rate | |||||||||||||
Assets | ||||||||||||||||||
Interest Earning Assets | ||||||||||||||||||
Loans receivable (1) | $ | 110,139 | $ | 5,374 | 6.51 | % | $ | 123,096 | $ | 6,975 | 7.55 | % | ||||||
Investment securities | 19,312 | 521 | 3.60 | % | 34,010 | 890 | 3.49 | % | ||||||||||
FHLB Stock | 491 | 19 | 5.16 | % | 1,273 | 57 | 5.97 | % | ||||||||||
Other interest earning assets (2) | 4,390 | 98 | 2.98 | % | 2,012 | 114 | 7.55 | % | ||||||||||
Total Interest Earning Assets | $ | 134,332 | $ | 6,012 | 5.97 | % | $ | 160,391 | $ | 8,036 | 6.68 | % | ||||||
Other Assets | ||||||||||||||||||
Cash and due from banks | 5,327 | 4,505 | ||||||||||||||||
Premises and equipment, net | 5,481 | 3,956 | ||||||||||||||||
Accrued interest receivable | 695 | 939 | ||||||||||||||||
Mortgage servicing rights | 222 | 270 | ||||||||||||||||
Other assets | 2,304 | 668 | ||||||||||||||||
Total Other Assets | 14,029 | 10,338 | ||||||||||||||||
Total Assets | $ | 148,361 | $ | 170,729 | ||||||||||||||
Interest-Bearing Liabilities | ||||||||||||||||||
Checking accounts | $ | 21,107 | $ | 120 | 0.76 | % | $ | 19,145 | $ | 28 | 0.44 | % | ||||||
Money market accounts | 1,954 | 11 | 0.75 | % | 3,001 | 17 | 0.76 | % | ||||||||||
Passbook savings | 18,402 | 213 | 1.54 | % | 18,822 | 168 | 1.19 | % | ||||||||||
Certificates of deposit | 81,290 | 2,471 | 4.05 | % | 84,898 | 2,878 | 4.52 | % | ||||||||||
Short-term borrowings | 3,780 | 130 | 4.59 | % | 20,201 | 823 | 5.43 | % | ||||||||||
Total Interest-Bearing Liabilities | $ | 126,533 | $ | 2,945 | 3.10 | % | $ | 146,067 | $ | 3,914 | 3.35 | % | ||||||
Non-interest bearing deposits | 7,922 | 9,638 | ||||||||||||||||
Other Liabilities | 751 | 972 | ||||||||||||||||
Stockholders’ equity (3) | 13,155 | 14,052 | ||||||||||||||||
Total Liabilities and Equity | $ | 148,361 | $ | 170,729 | ||||||||||||||
Net Interest Income/Spread | $ | 3,067 | 2.86 | % | $ | 4,122 | 3.33 | % | ||||||||||
| (1) | Includes loans held for sale and non-accrual loans. |
| (2) | The yield on other interest earning assets is computed using average daily general ledger balances. Due to the Bank’s issuance of large dollar amounts of cashier checks in 2007 and 2008, this balance is significantly less than the interest earning balances at our correspondent bank because of float. |
| (3) | Average balances are based on average daily balances except for stockholders’ equity which is computed on month end balances. |
19
| Analysis of Change in Net Interest Income | Table 2 | |
| Dollars in thousands |
| Nine Months Ended September 30, 2008 vs 2007 | ||||||||||||||||
| Increase (Decrease) Due to | ||||||||||||||||
| Volume | Rate | Vol/Rate | Total | |||||||||||||
Interest Income on: | ||||||||||||||||
Loans Receivable (1) | $ | (734 | ) | $ | (969 | ) | $ | 102 | $ | (1,601 | ) | |||||
Investment Securities | (385 | ) | 27 | (11 | ) | (369 | ) | |||||||||
FHLB Stock | (35 | ) | (7 | ) | 4 | (38 | ) | |||||||||
Interest & Dividends on Investments | (420 | ) | 20 | (7 | ) | (407 | ) | |||||||||
Other Interest Earning Investments | 135 | (69 | ) | (82 | ) | (16 | ) | |||||||||
Total Interest on Earning Assets | (1,019 | ) | (1,018 | ) | 13 | (2,024 | ) | |||||||||
Interest Expense on: | ||||||||||||||||
Checking Accounts | — | 91 | 1 | 92 | ||||||||||||
Money Market | (6 | ) | — | — | (6 | ) | ||||||||||
Passbook | (4 | ) | 50 | (1 | ) | 45 | ||||||||||
Certificates of Deposit | (122 | ) | (312 | ) | 13 | (421 | ) | |||||||||
Interest on Deposits | (132 | ) | (171 | ) | 13 | (290 | ) | |||||||||
Short-term Borrowings | (669 | ) | (54 | ) | 44 | (679 | ) | |||||||||
Total Interest on Liabilities | (801 | ) | (225 | ) | 57 | (969 | ) | |||||||||
Net Interest Income | $ | (218 | ) | $ | (793 | ) | $ | (44 | ) | $ | (1,055 | ) | ||||
| (1) | Includes loans held for sale. |
Net interest income decreased $1,055,000 from the nine months YTD in 2007 to the nine months YTD in 2008. This is the net of a $2,024,000 decrease in interest income and a decrease of $969,000 in interest expense.
Interest on loans receivable decreased $1,601,000 in 2008 from 2007. Table 2 above indicates that the decrease in interest income from loans was due to a decrease in the average volume of loans outstanding and a decrease in income caused by lower interest rates in the current period. The average balance of loans outstanding, as reported in Table 1, decreased by $13.0 million from 2007 to 2008, while the average yield on loans receivable decreased by 104 basis points. In 2008, loans receivable had an average yield of 6.51%, which is down from 7.55% in 2007. The data in Table 2 indicates that the lower volume of loans outstanding in 2008 decreased interest income by $734,000, and that lower interest rates decreased income by $969,000. The Bank had an average balance of $3.58 million of non-performing loans during the nine months YTD in 2008. The average contractual interest rate on these loans was 7.82%. The amount of non-accrual interest on these loans was approximately $226,400 for the YTD. The effect of this decrease in interest on loans receivable was a decrease in average yield of 27 basis points.
20
Interest and dividend income on investments decreased by $407,000. Interest income on investment securities decreased by $369,000 in 2008 from 2007 due to a lower average balance outstanding in 2008 partially offset by an increase in the average interest rate. The average balance of investment securities decreased by $14.7 million and the average rate increased by 11 basis points. The remaining sources of dividend and interest income decreased $54,000. The Bank’s overall yield on interest earning assets as 5.97% in 2008, a 71 basis point decrease from the 6.68% achieved in 2007.
Interest expense decreased $969,000. Interest on deposits decreased by a net amount of $290,000. Interest on transaction accounts increased $131,000. This is the net of a $141,000 rate related increase caused by a 42 basis point increase in interest rates and a $10,000 volume related expense decrease. Interest expense on certificates of deposit decreased $421,000. Of this amount, $122,000 was due to a $3.6 million decrease in the average balance of certificates of deposit outstanding and $312,000 was due to an 84 basis point decrease in the average interest rate on certificates of deposit. Interest on short-term borrowings decreased $679,000. The average balance of borrowings decreased $16.4 million and caused interest expense to decrease $669,000. Lower interest rates in 2008 caused interest expense to decrease $54,000. Because of a lack of growth in loans receivable in 2008, the Bank used a portion of the proceeds from investment security calls to reduce its use of short-term borrowings.
The Company’s overall cost of interest bearing liabilities decreased of 25 basis points, in 2008 versus 2007, decreasing from 3.35% in 2007 to 3.10% in 2008.
The Company made a $1,272,100 provision for loan losses in the nine months YTD in 2008 as compared to a $57,400 provision for loan losses in 2007. The Bank accounts for the credit risk associated with its lending activities through its provision for loan losses. The provision is the expense recognized in the statement of operations to adjust the loan loss allowance to an appropriate balance as determined by the Bank’s credit risk analysis procedures. See “Critical Accounting Policies” for a discussion of the Bank’s methodology for determining loan loss allowances.
The $1,272,100 provision for loan losses is in recognition of concentrations of credit risk in the Bank’s loan portfolio, the Bank’s recent experiences in management of foreclosed real estate, environmental concerns over both the local and national real estate markets, and other economic uncertainties potentially affecting the performance of the loan portfolio.
Total other income increased $976,800 from the nine months ended September 30, 2007 to 2008.
Loan fees and late charges decreased $58,500, or 28.7% from 2007. This decrease was due to a $23,100 decrease in late charges on delinquent loans, an $8,900 decrease in credit card fees following the sale of the Bank’s credit card portfolio late in 2007, and a $26,500 decrease in fees for short-term loan extensions.
Income from mortgage banking activities decreased $80,000, or 51.8%. The Bank had no sales of loans to its primary correspondent in 2008 compared to 2007 during which it recorded gains on such sales of $25,300. Fees for loans originated on behalf of other correspondents decreased $50,800. There was a $3,900 net decrease in loan servicing fees.
21
Fees from transaction accounts increased 37.9% or $233,100 due to a $192,000 increase in insufficient fund fees. The Bank introduced an overdraft protection program for customers late in the second quarter of 2007 which contributed to the increase in insufficient fund fees. ATM fees increased $10,900 from last year. All other transaction account fees increased a net amount of $17,000 in the current period over 2007.
The Bank recorded a net gain on foreclosed real estate of $844,200. There was no comparable amounts in the nine months ended September 30, 2007. This gain was the net of a $886,800 valuation adjustment on foreclosed real estate and $42,600 net loss on the disposition of foreclosed real estate. SeeCritical Accounting Policies for a discussion regarding evaluations of foreclosed real estate.
Non-interest expenses increased $222,400, or 5.6%, in the nine months ended September 30, 2008 compared to 2007. Expenses in both 2008 and 2007 include costs not typically incurred by the Company in its normal operations. Professional fees related to the formation of a holding company totaled $141,600 in 2007. Foreclosure related expenses in 2008 totaled $341,100. After these items are deducted from total non-interest expenses in the respective periods for analytical purposes, normal expenses related to on-going operations increased only 0.6% or $22,900.
Directors’ fees and expenses decreased $27,100, or 16.0%, due to a reduction in per meeting fees totaling $5,900 and the implementation of a lower cost insurance benefit plan that reduced costs by $23,500.
Professional fees decreased $103,700, or 34.0%. Expenses related to the formation of a holding company totaling $141,600 in 2007 were of a onetime nature. Fees for accounting and other professional services increased $36,900 in 2008. There was a net decrease of $2,400 for all other items.
Data processing expenses increased $50,300, or 8.0%, primarily due to an increase in deposit account servicing costs and data communication costs.
Marketing expenses decreased $71,700, or 48.2%. As part of its cost reduction efforts, management reassessed its marketing budget at mid-year and significantly reduced its advertising plans for the year and reduced its accrued marketing expenses accordingly
Foreclosure expenses related to 30 loans totaling $4.5 million foreclosed upon in the nine months YTD were $341,100. There was no foreclosure expense in 2007.
Income tax benefit for the nine months YTD in 2008 was $201,800, a decrease of $547,300 from prior year income tax expense. The effective tax rate for the nine months ended September 30, 2008 was a negative 39.8% versus a positive 34.0% in the same period in 2007. Interest on U.S. Government agency securities is exempt from state taxation. This exemption had a proportionately greater impact on the state income tax calculation in 2008 because of the decline from a pre-tax income status in 2007 to a pre-tax loss status in 2008.
22
Three Months Ended Sept. 30, 2008 Compared to Three Months Ended Sept. 30, 2007
The Company had a $243,600 loss in the third quarter of 2008 versus a $160,800 net income in the third quarter of 2007. Pre-tax income decreased $625,100 in 2008 versus 2007. The net interest margin decreased $238,900, the loan loss allowance increased by $249,200, other income decreased $33,500 and non-interest expense increased $103,500.
Net interest margin, the difference between interest income and interest expense, is the primary source of operating revenues for the Company. Table 3 below presents, for the quarters ended September 30, 2008 and 2007, the average balances, related interest income and expense amounts, and average yields and costs which influence the Bank’s net interest margin. Table 4 reflects the changes in interest income and interest expense between the periods which resulted from changes in average volumes and average rates.
23
| Average Balance Sheet | Table 3 | |
Dollars in thousands |
| For The Three Months Ended September 30, | ||||||||||||||||||
| 2008 | 2007 | |||||||||||||||||
| Average Volume | Income/ Expense | Yield/ Rate | Average Volume | Income/ Expense | Yield/ Rate | |||||||||||||
Assets | ||||||||||||||||||
Interest Earning Assets | ||||||||||||||||||
Loans receivable (1) | $ | 106,725 | $ | 1,719 | 6.44 | % | $ | 119,346 | $ | 2,252 | 7.55 | % | ||||||
Investment securities | 15,156 | 166 | 4.38 | % | 34,010 | 301 | 3.54 | % | ||||||||||
FHLB Stock | 322 | 2 | 2.48 | % | 1,168 | 18 | 6.16 | % | ||||||||||
Other interest earning assets (2) | 5,744 | 32 | 2.23 | % | 2,366 | 42 | 7.10 | % | ||||||||||
Total Interest Earning Assets | $ | 127,947 | $ | 1,919 | 6.00 | % | $ | 156,890 | $ | 2,613 | 6.66 | % | ||||||
Other Assets | ||||||||||||||||||
Cash and due from banks | 4,827 | 4,257 | ||||||||||||||||
Premises and equipment, net | 6,094 | 4,486 | ||||||||||||||||
Accrued interest receivable | 685 | 849 | ||||||||||||||||
Mortgage servicing rights | 218 | 259 | ||||||||||||||||
Real estate owned | 3,107 | 361 | ||||||||||||||||
Other assets | 927 | 346 | ||||||||||||||||
Total Other Assets | 15,858 | 10,558 | ||||||||||||||||
Total Assets | $ | 143,805 | $ | 167,448 | ||||||||||||||
Interest-Bearing Liabilities | ||||||||||||||||||
Checking accounts | $ | 22,656 | $ | 54 | 0.95 | % | $ | 17,709 | $ | 11 | 0.25 | % | ||||||
Money market accounts | 1,721 | 3 | 0.70 | % | 2,867 | 5 | 0.70 | % | ||||||||||
Passbook savings | 18,977 | 79 | 1.67 | % | 18,598 | 61 | 1.31 | % | ||||||||||
Certificates of deposit | 78,415 | 721 | 3.68 | % | 86,175 | 997 | 4.63 | % | ||||||||||
Short-term borrowings | 167 | 1 | 2.40 | % | 17,650 | 239 | 5.42 | % | ||||||||||
Total Interest-Bearing Liabilities | $ | 121,936 | $ | 858 | 2.81 | % | $ | 142,999 | $ | 1,313 | 3.67 | % | ||||||
Non-interest bearing deposits | 8,384 | 9,453 | ||||||||||||||||
Other Liabilities | 470 | 924 | ||||||||||||||||
Stockholders’ equity (3) | 13,015 | 14,072 | ||||||||||||||||
Total Liabilities and Equity | $ | 143,805 | $ | 167,448 | ||||||||||||||
Net Interest Income/Spread | $ | 1,061 | 3.19 | % | $ | 1,300 | 2.99 | % | ||||||||||
| (1) | Includes loans held for sale and non-accrual loans. |
| (2) | The yield on other interest earning assets is computed using average daily general ledger balances. Due to the Bank’s issuance of large dollar amounts of cashier checks in 2007 and 2008, this balance is significantly less than the interest earning balances at our correspondent bank because of float. |
| (3) | Average balances are based on average daily balances except for stockholders’ equity which is computed on month end balances. |
24
| Analysis of Change in Net Interest Income | Table 4 | |
| Dollars in thousands |
| Three Months Ended September 30, 2008 vs 2007 | ||||||||||||||||
| Increase (Decrease) Due to | ||||||||||||||||
| Volume | Rate | Vol/Rate | Total | |||||||||||||
Interest Income on: | ||||||||||||||||
Loans Receivable (1) | $ | (238 | ) | $ | (329 | ) | $ | 35 | $ | (532 | ) | |||||
Investment Securities | (167 | ) | 68 | (38 | ) | (137 | ) | |||||||||
FHLB Stock | (13 | ) | (9 | ) | 7 | (15 | ) | |||||||||
Interest & Dividends on Investments | (180 | ) | 59 | (31 | ) | (152 | ) | |||||||||
Other Interest Earning Investments | 59 | (29 | ) | (41 | ) | (11 | ) | |||||||||
Total Interest on Earning Assets | (359 | ) | (299 | ) | (37 | ) | (695 | ) | ||||||||
Interest Expense on: | ||||||||||||||||
Checking Accounts | 3 | 31 | 9 | 43 | ||||||||||||
Money Market | (2 | ) | — | — | (2 | ) | ||||||||||
Passbook | 1 | 16 | 1 | 18 | ||||||||||||
Certificates of Deposit | (90 | ) | (204 | ) | 18 | (276 | ) | |||||||||
Interest on Deposits | (88 | ) | (157 | ) | 28 | (217 | ) | |||||||||
Short-term Borrowings | (237 | ) | (123 | ) | 121 | (239 | ) | |||||||||
Total Interest on Liabilities | (325 | ) | (280 | ) | 149 | (456 | ) | |||||||||
Net Interest Income | $ | (34 | ) | $ | (19 | ) | $ | (186 | ) | $ | (239 | ) | ||||
| (1) | Includes loans held for sale. |
Net interest income decreased $239,000 from third quarter 2007 to the third quarter 2008. This is the net of a $695,000 decrease in interest income and a decrease of $456,000 in interest expense.
Interest on loans receivable decreased $532,000 in 2008 from 2007. Table 4 above indicates that the decrease in interest income from loans was due to a decrease in the average volume of loans outstanding and a decrease in income caused by lower interest rates in the current period. The average balance of loans outstanding, as reported in Table 3, decreased by $12.6 million from 2007 to 2008, while the average yield on loans receivable decreased by 111 basis points. In 2008, loans receivable had an average yield of 6.44%, which is down from 7.55% in 2007. The data in Table 4 indicates that the lower volume of loans outstanding in 2008 decreased interest income by $238,000, and that lower interest rates decreased income by $329,000. The Bank had an average balance of $2.4 million of non-performing loans during the quarter just ended. The average contractual interest rate on these loans was 7.40%. The amount of non-accrual interest on these loans was approximately $44,500 for the quarter. The effect of this decrease in interest on loans receivable was a decrease in average yield of 17 basis points.
Interest and dividend income on investment securities decreased by $152,000. The average balance of investment securities decreased by $18.9 million in 2008 from 2007 and the average interest rate increased by 84 basis points. Interest income on other interest earning investments increased by $11,000 in 2008 from 2007.
25
The Company’s average interest earning assets decreased by $28.9 million and the overall yield on interest earning assets was 6.00% in 2008, an 66 basis point decrease from the 6.66% achieved in 2007.
Interest expense decreased $456,000. Interest on deposits decreased $217,000, of which $157,000 was due to lower interest rates. Interest on certificates of deposit decreased $276,000 primarily from lower interest rates. The average interest rate paid on certificates of deposits decreased 95 basis points from 2007 to 2008. Interest on short-term borrowings decreased $239,000. The average balance of borrowings decreased $17.5 million and caused interest expense to decrease $237,000. Lower interest rates in 2008 caused interest expense to decrease $123,000. Because of a lack of growth in loans receivable in 2008, the Bank applied a portion of the proceeds from investment security calls to reduce its use of short-term borrowings.
The Company’s overall cost of interest bearing liabilities decreased 86 basis points in 2008 versus 2007.
The Company booked a $318,700 addition to its provision for loan losses in the third quarter of 2008 as compared to a $69,500 provision for loan losses in third quarter 2007. The Bank accounts for the credit risk associated with its lending activities through its provision for loan losses. The provision is the expense recognized in the statement of operations to adjust the loan loss allowance to an appropriate balance as determined by the Bank’s credit risk analysis procedures. See “Critical Accounting Policies” for a discussion of the Bank’s methodology for determining loan loss allowances. Also see the discussion of loan loss provision under“Nine Months Ended September 30, 2008 compared to Nine Months ended September 30, 2007.”
Total other income decreased $33,500 from the three months ended September 30, 2007 to 2008.
Loan fees and late charges decreased $30,600, or 45.9% from 2007. This decrease was due to a $7,600 decrease in late charges on delinquent loans, and a $20,800 decrease for short-term renewals of loan extensions. All other loan fee income decreased a net amount of $2,200.
Income from mortgage banking activities decreased $20,900, or 58.4%. The Company had a $15,000 decrease in fees on loans originated for correspondents in 2008 compared to 2007 and a $5,900 net decrease in loan servicing fee income.
The Bank recorded a gain on foreclosed real estate of $12,700 during the third quarter of 2008. There was no comparable amount in the three months ended September 30, 2007.
Non-interest expenses increased $103,500, or 7.6%, in the three months ended September 30, 2008 compared to 2007.
Directors’ fees and expenses decreased $38,900, or 72.7%. See the discussion underNine Months Ended September. 30, 2008 Compared to Nine Months Ended September. 30, 2007
26
Professional fees decreased $39,500, or 37.4%. Expenses related to the formation of a holding company totaling $47,300 in 2007 were of a onetime nature. Fees for accounting and other professional services increased $15,000 in 2008. There was a net decrease of $7,200 for all other items, principally legal fees.
Data processing expenses increased $17,900 due to higher costs for processing deposit accounts and a $14,700 increase in networking costs including installation fees for communications upgrades. All other costs decreased a net amount of $6,500.
Marketing expenses decreased $24,800, or 50.0%. As part of its cost reduction efforts, management reassessed its marketing budget at mid-year and significantly reduced its advertising plans for the year.
Foreclosure and other expenses related to the 5 loans totaling $757,000 foreclosed upon in the third quarter of the year were $75,400. There was no foreclosure expense in 2007. The Company also recorded a $92,600 provision for losses on foreclosed real estate.
Other expenses increased $10,600, or 6.5%. FDIC insurance premiums increased $32,000. There has been a general decrease in the other accounts included in other expenses totaling $21,400.
The Company recorded an income tax benefit of $136,800 in the third quarter of 2008 versus an income tax expense of $83,900 in the third quarter of 2007, a difference of $220,700. The effective tax rates were a negative 36.0% in 2008 and a positive 34.3% in 2007 See the discussion of income tax expense under“Nine Months Ended September 30, 2008 compared to Nine Months ended September 30, 2007.”
Liquidity and Capital Resources
At September 30, 2008, the Company had approximately $16.6 million of liquid assets in the form of cash and cash equivalent investments. The Company also has $8.2 million of investment securities that are classified as available for sale and $2.0 million of investments classified as held to maturity. As of September 30, 2008, the Company has pledged $1.0 million of available for sale bonds as collateral for public deposits of Virginia counties. The Company has approximately $31.8 million of pre-approved credit from the FHLB with funding available on a same day basis and did not have any borrowings outstanding against this line of credit at September 30, 2008. The Company also has a line of credit availability from the Community Bankers Bank of Richmond, Virginia for federal funds purchases.
The Company’s current liquidity position is more than adequate to meet its lending needs and to fund potential customer withdrawals from deposit accounts.
At September 30, 2008, the Company’s common stockholders’ equity was equal to 8.2% of total assets, as compared to 7.76% at December 31, 2007. Stockholders’ equity decreased by $551,500 during the nine months YTD in 2008. This is the sum of $305,300 in operating losses, dividends paid or accrued in the amount of $227,200 and a $19,000 other comprehensive loss.
The Office of Thrift Supervision (“OTS”) regulations require savings banks to maintain minimum capital standards: a 4.0% of tangible assets Tier 1 (core) capital requirement, and an 8.0% risk based capital requirement. These capital requirements are applicable to the Company’s wholly owned subsidiary, Virginia Savings Bank, F.S.B. The OTS does not have specific capital requirements applicable to thrift holding companies.
27
The Bank is required to file a quarterly report on its financial condition, results of operations and other financial information with the OTS. OTS financial reporting rules follow the same generally accepted accounting principles (“GAAP”) applicable to this Report on Form 10-Q except for certain specified areas in which regulatory accounting principles (“RAP”) differ from GAAP. One of these areas is accounting for properties acquired through foreclosure. GAAP indicates that these properties should be accounted for at their fair value on the foreclosure date and at the lower of cost or fair value thereafter. OTS RAP specifies that they be reported at the lower of their historical cost or their fair value. Application of RAP to the Bank’s accounting for real estate acquired through foreclosure resulted in approximately $603,000 less in prior period earnings and tangible capital, as reported to the OTS, than the amounts determined under GAAP and reported in this Report on Form 10-Q. This difference between GAAP and RAP will continue to exist until the Bank disposes of the properties. Table 5 reflects the $603,000 lower amount of capital reported to OTS.
Actual and required regulatory capital requirements at September 30, 2008 and 2007 follow:
| Capital Position | Virginia Savings Bank, F.S.B. | Table 5 |
| Capital Amounts | For Capital Adequacy Purposes | To be Well Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||
| Actual Amount | % of Assets | Required Amount | % of Assets | Required Amount | % of Assets | |||||||||||||
September 30, 2008 | ||||||||||||||||||
Tangible (1) | $ | 11,838,232 | 8.26 | % | $ | 2,149,540 | 1.50 | % | $ | N/A | N/A | |||||||
Tier I (2) | 10,838,232 | 9.94 | % | N/A | N/A | 6,543,692 | 6.00 | % | ||||||||||
Core (1) | 10,838,232 | 7.56 | % | 5,732,108 | 4.00 | % | 8,593,162 | 5.00 | % | |||||||||
Total (2) | 12,972,332 | 11.89 | % | 8,724,922 | 8.00 | % | 10,906,153 | 10.00 | % | |||||||||
September 30, 2007 | ||||||||||||||||||
Tangible (1) | $ | 13,849,961 | 8.30 | % | $ | 2,348,549 | 1.50 | % | $ | N/A | N/A | |||||||
Tier I (2) | 12,828,061 | 11.30 | % | N/A | N/A | 6,808,273 | 6.00 | % | ||||||||||
Core (1) | 12,828,061 | 7.70 | % | 6,662,796 | 4.00 | % | 8,328,495 | 5.00 | % | |||||||||
Total (2) | 14,305,861 | 12.59 | % | 9,077,698 | 8.00 | % | 11,347,122 | 10.00 | % | |||||||||
| (1) | To adjusted total assets. |
| (2) | To risk-weighted assets. |
To be considered a well-capitalized institution under the Federal Deposit Insurance Corporation Improvement Act of 1991, the Bank must have a core capital ratio of at least 5.0%, a Tier I risk-based capital ratio of at least 6%, and a total risk-based capital ratio of at least 10%. The most recent notification from the OTS categorized the Bank as well capitalized.
28
Off-Balance Sheet Arrangements
The Bank routinely engages in off-balance sheet arrangements in the normal course of business to meet the financial needs of its customers. These arrangements consist of outstanding mortgage loan commitments, letters of credit and lines of credit and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the statement of financial condition. The contractual amounts of these instruments are an indication of the extent of involvement the Bank has in each class of off-balance sheet financial instruments. The Bank’s 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. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
The Bank had outstanding commitments to make mortgage loans secured by real property, exclusive of the undisbursed portion of loans in process, of approximately $716,000 at September 30, 2008, all of which expire within one year. Loans in process represent the undisbursed portion of construction loans already on the Bank’s books. Disbursements are made at each stage of the construction process after an inspection by a qualified real estate appraiser. At September 30, 2008, the Bank had loans in process commitments of approximately $2.2 million that expire within nine months.
The Bank also issues stand-by letters of credit that are unsecured conditional commitments issued by the Bank guaranteeing performance by a customer to a third party. These guarantees are issued primarily to support private borrowing arrangements. At September 30, 2008, the Bank had $330,700 of stand-by letters of credit outstanding with expiration dates through September 10, 2009.
Lines of credit are loan commitments to individuals and companies that have fixed expiration dates as long as there is no violation of any condition established in the contract. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The Company, at September 30, 2008, had secured lines of credit with available balances of $13.5 million and unsecured lines of credit with available balances of $1.6 million. Many of these commitments are expected to expire without being fully drawn down. The total commitment amounts do not therefore necessarily represent future cash requirements.
The risks involved in these off-balance sheet arrangements are essentially the same as those involved in extending loan facilities to customers. No amount has been recognized in the statement of financial condition as of September 30, 2008 as a liability for credit loss due to off-balance sheet arrangements. Management does not anticipate any difficulties in funding these commitments.
29
Item 4—Controls and Procedures
Management’s Disclosure Controls
Management of the Company is responsible for the preparation of the accompanying financial statements and for their integrity and objectivity. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States. Management also prepares the other information in this quarterly report and is responsible for its accuracy and consistency with the financial statements.
Management has implemented what it believes are appropriate disclosure controls and procedures. These controls and procedures are designed to insure that management receives all pertinent information that may be required to be disclosed in its annual and quarterly reports. Such information is not limited to financial data but also includes non-financial information that should be considered for disclosure in the annual and quarterly reports.
Management believes that as of September 30, 2008 its structure of disclosure controls and procedures are effective in meeting their intended purposes. The most recent review of these systems, conducted as of September 30 2008, did not reveal any material deficiencies that would adversely affect the Company’s ability to properly and accurately record and report financial data. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of these evaluations.
In the ordinary course of its operations, the Company is a party to various legal proceedings. Based upon information currently available, management believes that such legal proceedings, in the aggregate, will not have a material adverse effect on the business, financial condition or results of operations of the Company.
Exhibit | Description | |
| 31-1 | Rule 13a-14(a)/15d-14(a) CEO Certification | |
| 31-2 | Rule 13a-14(a)/15d-14(a) CFO Certification | |
| 32 | Section 1350 Certification | |
30
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
VIRGINIA SAVINGS BANCORP, INC.
(Registrant)
| By: | /s/ W. Michael Funk | |||||
| November 14, 2008 | W. Michael Funk | |||||
| Date | President & Chief Executive Officer | |||||
| By: | /s/ Noel F. Pilon | |||||
| November 14, 2008 | Noel F. Pilon | |||||
| Date | Senior Vice President & Chief Financial Officer | |||||
31
