UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 June 30, 2010 |
OR |
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) |
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____________ to _____________ |
Commission File Number: 001-33682
FIRST ADVANTAGE BANCORP
(Exact name of registrant as specified in its charter)
Tennessee (State or other jurisdiction of incorporation or organization) | 26-0401680 (I.R.S. Employer Identification No.) |
1430 Madison Street, Clarksville, Tennessee (Address of principal executive offices) | 37040 (Zip Code) |
Registrant’s telephone number, including area code: (931) 552-6176
Former name, former address and former fiscal year, if changed since last report. N/A
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes No ___
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one): 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 by Rule 12b-2 of the Exchange Act). Yes ___ No X
The number of shares outstanding of the registrant’s common stock as of August 6, 2010 was 4,168,248.
FIRST ADVANTAGE BANCORP
Table of Contents
Page | ||
Part I. Financial Information | ||
Item 1. | Condensed Consolidated Balance Sheets as of June 30, 2010 (unaudited) and December 31, 2009 | 1 |
Unaudited - Condensed Consolidated Statements of Income for the Three Months and Six Months Ended June 30, 2010 and 2009 | 2 | |
Unaudited - Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2010 and 2009 | 3 | |
Unaudited - Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009 | 4 | |
Notes to Condensed Consolidated Financial Statements (unaudited) | 5 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 13 |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 26 |
Item 4. | Controls and Procedures | 26 |
Part II. Other Information | ||
Item 1. | Legal Proceedings | 26 |
Item 1A. | Risk Factors | 26 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 27 |
Item 3. | Defaults Upon Senior Securities | 28 |
Item 4. | (Removed and Reserved) | 28 |
Item 5. | Other Information | 28 |
Item 6. | Exhibits | 28 |
SIGNATURES | 29 |
First Advantage Bancorp | ||||||||
Condensed Consolidated Balance Sheets | ||||||||
(Dollars in thousands, except per share amounts) | ||||||||
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Cash and due from banks | $ | 5,845 | $ | 9,204 | ||||
Interest-bearing demand deposits with banks | 12,236 | 1,686 | ||||||
Time deposits at other banks | 747 | - | ||||||
Federal funds sold | 875 | 975 | ||||||
Cash and cash equivalents | 19,703 | 11,865 | ||||||
Available-for-sale securities, at fair value | 76,449 | 98,739 | ||||||
Other investments | 996 | - | ||||||
Loans held for sale | 2,837 | 2,265 | ||||||
Loans, net of allowance for loan losses of $2,985 and $2,813 at June 30, 2010 and December 31, 2009, respectively | 226,189 | 211,137 | ||||||
Premises and equipment, net | 7,810 | 7,903 | ||||||
Other real estate owned | 624 | 301 | ||||||
Federal Home Loan Bank stock | 2,988 | 2,988 | ||||||
Accrued interest receivable | 1,380 | 1,457 | ||||||
Income taxes receivable | 1,796 | 2,529 | ||||||
Deferred tax asset | 1,933 | 2,421 | ||||||
Other assets | 2,384 | 2,619 | ||||||
Total assets | $ | 345,089 | $ | 344,224 | ||||
Liabilities and Shareholders' Equity | ||||||||
Liabilities | ||||||||
Deposits | ||||||||
Demand | $ | 17,918 | $ | 19,426 | ||||
Savings, checking and money market | 117,313 | 109,706 | ||||||
Time certificates | 83,007 | 87,108 | ||||||
Total deposits | 218,238 | 216,240 | ||||||
Securities sold under agreement to repurchase | 8,571 | 6,883 | ||||||
Federal Home Loan Bank advances | 13,000 | 13,000 | ||||||
Borrowings with other banks | 35,000 | 35,000 | ||||||
Interest payable and other liablilities | 2,226 | 2,575 | ||||||
Total liabilities | 277,035 | 273,698 | ||||||
Commitments and contingencies | - | - | ||||||
Shareholders' Equity | ||||||||
Preferred stock, $0.01 par value, 10,000,000 shares authorized no shares outstanding at June 30, 2010 or December 31, 2009 | - | - | ||||||
Common stock, $0.01 par value 50,000,000 shares authorized, 4,795,795 shares issued and 4,188,048 outstanding at June 30, 2010 and 5,171,395 shares issued and 4,470,984 outstanding at December 31, 2009 | 48 | 52 | ||||||
Additional paid in capital | 48,524 | 51,915 | ||||||
Common stock acquired by benefit plan: | ||||||||
Restricted stock | (877 | ) | (837 | ) | ||||
Unallocated common stock held by: | ||||||||
Employee Stock Ownership Plan trust | (3,496 | ) | (3,496 | ) | ||||
Benefit plans | (2,786 | ) | (2,773 | ) | ||||
Retained earnings | 23,363 | 23,210 | ||||||
Accumulated other comprehensive income | 3,278 | 2,455 | ||||||
Total shareholders' equity | 68,054 | 70,526 | ||||||
Total liabilities and shareholders' equity | $ | 345,089 | $ | 344,224 | ||||
See accompanying notes to unaudited condensed consolidated financial statements. |
1
First Advantage Bancorp | ||||||||||||||||
Unaudited - Condensed Consolidated Statements of Income | ||||||||||||||||
(Dollars in thousands, except share and per share data) | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Interest and dividend income | ||||||||||||||||
Loans | $ | 3,388 | $ | 2,749 | $ | 6,608 | $ | 5,353 | ||||||||
Investment securities | 953 | 1,397 | 2,043 | 3,013 | ||||||||||||
Other | 68 | 66 | 123 | 136 | ||||||||||||
Total interest and dividend income | 4,409 | 4,212 | 8,774 | 8,502 | ||||||||||||
Interest expense | ||||||||||||||||
Deposits | 821 | 1,178 | 1,735 | 2,397 | ||||||||||||
Borrowings | 463 | 451 | 906 | 922 | ||||||||||||
Total interest expense | 1,284 | 1,629 | 2,641 | 3,319 | ||||||||||||
Net interest income | 3,125 | 2,583 | 6,133 | 5,183 | ||||||||||||
Provision for loan losses | 232 | 159 | 459 | 327 | ||||||||||||
Net interest income after provision for loan losses | 2,893 | 2,424 | 5,674 | 4,856 | ||||||||||||
Noninterest income | ||||||||||||||||
Service charges on deposit accounts and other fees | 298 | 297 | 604 | 577 | ||||||||||||
Loan servicing and other fees | 24 | 15 | 45 | 31 | ||||||||||||
Net gains on sales of mortgage loans held for sale | 342 | 419 | 563 | 698 | ||||||||||||
Net realized gain on sales of available-for-sale securities | 70 | 5 | 77 | 5 | ||||||||||||
Insurance and brokerage commissions | 25 | 33 | 70 | 62 | ||||||||||||
Other | 8 | 8 | 12 | 12 | ||||||||||||
Total noninterest income | 767 | 777 | 1,371 | 1,385 | ||||||||||||
Noninterest expense | ||||||||||||||||
Salaries and employee benefits | 1,623 | 1,523 | 3,149 | 2,992 | ||||||||||||
Net occupancy | 168 | 199 | 336 | 338 | ||||||||||||
Equipment | 186 | 170 | 362 | 320 | ||||||||||||
Data processing | 217 | 241 | 444 | 484 | ||||||||||||
Professional fees | 96 | 66 | 197 | 232 | ||||||||||||
Marketing | 68 | 110 | 136 | 164 | ||||||||||||
Office expense | 64 | 65 | 136 | 146 | ||||||||||||
Loan collection and repossession expense | 49 | 7 | 126 | 8 | ||||||||||||
Other | 450 | 590 | 917 | 1,092 | ||||||||||||
Total noninterest expense | 2,921 | 2,971 | 5,803 | 5,776 | ||||||||||||
Income before income taxes | 739 | 230 | 1,242 | 465 | ||||||||||||
Provision for income taxes | 408 | 89 | 584 | 155 | ||||||||||||
Net income | $ | 331 | $ | 141 | $ | 658 | $ | 310 | ||||||||
Per common share: | ||||||||||||||||
Basic net income per common share | $ | 0.08 | $ | 0.03 | $ | 0.15 | $ | 0.07 | ||||||||
Diluted net income per common share | $ | 0.08 | $ | 0.03 | $ | 0.15 | $ | 0.07 | ||||||||
Basic weighted average common shares outstanding | 4,303,639 | 4,520,674 | 4,404,871 | 4,531,018 | ||||||||||||
Diluted weighted average common shares outstanding | 4,342,942 | 4,577,458 | 4,438,658 | 4,591,225 | ||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements. |
2
First Advantage Bancorp | ||||||||||||||||||||||||||||
Unaudited - Condensed Consolidated Statements of Stockholders' Equity | ||||||||||||||||||||||||||||
Six Months Ended June 30, 2010 and 2009 | ||||||||||||||||||||||||||||
(Dollars in thousands, except per share amounts) | ||||||||||||||||||||||||||||
Common | Accumulated | |||||||||||||||||||||||||||
Additional | Stock | Other | Total | |||||||||||||||||||||||||
Common Stock | Paid-in | Retained | Acquired by | Comprehensive | Stockholders' | |||||||||||||||||||||||
Shares | Stock | Capital | Earnings | Benefit Plans | Income | Equity | ||||||||||||||||||||||
Balance at January 1, 2009 | 5,264,683 | $ | 53 | $ | 52,258 | $ | 23,872 | $ | (7,744 | ) | $ | 1,822 | $ | 70,261 | ||||||||||||||
Cumulative effect of change in accounting principle, adoption of FSP 115-2 and 124-2 | 22 | (22 | ) | - | ||||||||||||||||||||||||
Comprehensive income, net of tax: | ||||||||||||||||||||||||||||
Net income | - | - | 310 | - | - | 310 | ||||||||||||||||||||||
Change in unrealized depreciation of available-for-sale securities, net of tax | - | - | - | (279 | ) | (279 | ) | |||||||||||||||||||||
Total comprehensive income | - | - | - | - | - | 31 | ||||||||||||||||||||||
Treasury stock purchase/retire | (65,350 | ) | (1 | ) | (618 | ) | (619 | ) | ||||||||||||||||||||
Dividends paid ($0.05 per common share) | - | (455 | ) | - | - | (455 | ) | |||||||||||||||||||||
Purchase restricted stock plan shares | (53 | ) | (53 | ) | ||||||||||||||||||||||||
Stock-based compensation expense | - | 589 | - | - | - | 589 | ||||||||||||||||||||||
Balance at June 30, 2009 | 5,199,333 | $ | 52 | $ | 52,229 | $ | 23,749 | $ | (7,797 | ) | $ | 1,521 | $ | 69,754 | ||||||||||||||
Balance at January 1, 2010 | 5,171,395 | $ | 52 | $ | 51,915 | $ | 23,210 | $ | (7,106 | ) | $ | 2,455 | $ | 70,526 | ||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||
Net income | - | - | 658 | - | - | 658 | ||||||||||||||||||||||
Change in unrealized appreciation of available-for-sale securities, net of tax | 823 | 823 | ||||||||||||||||||||||||||
Total comprehensive income | - | - | - | - | - | 1,481 | ||||||||||||||||||||||
Treasury stock purchase/retire | (375,600 | ) | (4 | ) | (4,015 | ) | (4,019 | ) | ||||||||||||||||||||
Dividends paid ($0.05 per common share) | - | - | (505 | ) | - | - | (505 | ) | ||||||||||||||||||||
Purchase restricted stock plan shares | - | - | - | (53 | ) | - | (53 | ) | ||||||||||||||||||||
Stock-based compensation expense | - | 624 | - | - | - | 624 | ||||||||||||||||||||||
Balance at June 30, 2010 | 4,795,795 | $ | 48 | $ | 48,524 | $ | 23,363 | $ | (7,159 | ) | $ | 3,278 | $ | 68,054 | ||||||||||||||
See accompanying notes to unaudited condensed financial statements. |
3
First Advantage Bancorp | ||||||||
Unaudited - Condensed Consolidated Statements of Cash Flows | ||||||||
(Dollars in thousands) | ||||||||
Six Months Ended | ||||||||
June 30, | ||||||||
2010 | 2009 | |||||||
Operating activities | ||||||||
Net income | $ | 658 | $ | 310 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities | ||||||||
Provision for loan losses | 459 | 327 | ||||||
Depreciation, amortization and accretion | 468 | 516 | ||||||
Deferred income taxes | (22 | ) | (5 | ) | ||||
Funding of mortgage loans held for sale | (25,409 | ) | (32,571 | ) | ||||
Proceeds from sales of mortgage loans held for sale | 25,400 | 28,319 | ||||||
Net gains on sales of mortgage loans held for sale | (563 | ) | (698 | ) | ||||
Net realized gain on sales of available-for-sale securities | (77 | ) | (5 | ) | ||||
Net loss on disposal of premises and equipment | 5 | 1 | ||||||
Stock-based compensation | 624 | 589 | ||||||
Decrease in other assets | 313 | 215 | ||||||
Increase in other liabilities | 384 | 174 | ||||||
Net cash provided by (used in) operating activities | 2,240 | (2,828 | ) | |||||
Investing activities | ||||||||
Purchases of other investments | (996 | ) | - | |||||
Purchases of securities available-for-sale | (3,000 | ) | (24,071 | ) | ||||
Proceeds from maturities of and repayments of available-for-sale securities | 26,548 | 35,218 | ||||||
Net change in loans | (16,158 | ) | (10,244 | ) | ||||
Purchase of premises and equipment | (228 | ) | (739 | ) | ||||
Proceeds from sale of other real estate owned | 323 | - | ||||||
Net cash provided by investing activities | 6,489 | 164 | ||||||
Financing activities | ||||||||
Net increase in demand deposits, money market, checking and savings accounts | 6,099 | 18,518 | ||||||
Net change in certificates of deposit | (4,101 | ) | 2,883 | |||||
Net change in repurchase agreement and other short-term borrowings | 1,688 | 1,747 | ||||||
Net change Federal Home Loan Bank advances - short term | - | (10,550 | ) | |||||
Purchase and retirement of Company common stock | (4,019 | ) | (619 | ) | ||||
Dividends paid | (505 | ) | (455 | ) | ||||
Stock purchased - restricted stock compensation plans | (53 | ) | (53 | ) | ||||
Net cash (used in) provided by financing activities | (891 | ) | 11,471 | |||||
Increase in cash and cash equivalents | 7,838 | 8,807 | ||||||
Cash and cash equivalents, beginning of period | 11,865 | 12,243 | ||||||
Cash and cash equivalents, end of period | $ | 19,703 | $ | 21,050 | ||||
18,812 | 7,019 | |||||||
Supplemental cash flow information: | ||||||||
Other real estate owned acquired through foreclosure of real estate loans | 647 | 60 | ||||||
Transfer of other real estate to loans | 140 | - | ||||||
See accompanying notes to unaudited condensed consolidated financial statements. |
4
Notes to Condensed Consolidated Financial Statements (unaudited)
NOTE 1 – BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated interim financial statements include the accounts of First Advantage Bancorp (the “Company”), First Federal Savings Bank (“First Federal” or the “Bank”) and the Bank’s subsidiaries. First Federal is a federally chartered savings bank originally founded in 1953 and is headquartered in Clarksville, Tennessee. The Company uses the premises, equipment and other property of First Federal with the payment of appropriate rental fees, as required by applicable laws and regulations, under the terms of an expense allocation agreement. Accordingly, the information set forth in this interim report, including the condensed consolidated financial statements and related financial data contained herein relates primarily to First Federal. These financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation of the financial position, results of operations and cash flows for reporting the interim periods have been included. The results of operations for the six months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the full fiscal year or any other interim period. The condensed consolidated financial statements and notes thereto included in this report should be read in conjunction with the audited consol idated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 filed with the United States Securities and Exchange Commission (the “SEC”) on March 5, 2010.
Certain reclassifications considered to be immaterial have been made to prior period consolidated financial statements to conform to the current period consolidated financial statements.
In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and income and expenses during the reporting period. Actual results could differ significantly from those estimates.
NOTE 2 – RECENT ACCOUNTING UPDATES
In December 2009, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2009-16, Transfer and Servicing (“Topic 860”) – Accounting for Transfers of Financial Assets (“ASU 09-16”). ASC 860-10 requires more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. ASC 860-10 is effective at the start of a company̵ 7;s first fiscal year beginning after November 15, 2009, or January 1, 2010 for the Company. The adoption of ASC 860-10 did not have a material impact on the Company’s financial position, results of operations, or cash flows.
In December 2009, the FASB issued ASU 2009-17, Consolidation (“Topic 810”) – Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“ASU 09-17”). ASC 810-10 changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. ASC 810-10 is effective at the start of a comp any’s first fiscal year beginning after November 15, 2009. The Company’s adoption of ASC 810-10, effective January 1, 2010, did not have a material impact on the Company’s financial position, results of operations, or cash flows.
5
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (“Topic 820”): Improving Disclosures about Fair Value Measurements (“ASU 10-06”). ASU 10-06 revises two disclosure requirements concerning fair value measurements and clarifies two others. It requires separate presentation of significant transfers into and out of Levels 1 and 2 of the fair value hierarchy and disclosure of the reasons for such transfers. It will also require the presentation of purchases, sales, issuances and settlements within Level 3 on a gross basis rather than a net basis. The amendments also clarify that disclosures should be disaggregated by class of asset or liability and that disclosures abo ut inputs and valuation techniques should be provided for both recurring and non-recurring fair value measurements. The Company’s disclosures about fair value measurements are presented in Note 6: Fair Value Measurements. These new disclosure requirements were adopted by the Company during the current period, with the exception of the requirement concerning gross presentation of Level 3 activity, which is effective for fiscal years beginning after December 15, 2010. With respect to the portions of this ASU that were adopted during the current period, the adoption of this standard did not have a material impact on the Company’s financial position, results of operations, cash flows, or disclosures. Management does not believe that the adoption of the remaining portion of this ASU will have a material impact on the Company’s financial position, results of operation, cash flows, or disclosures.
In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (“Topic 310”). The guidance will significantly expand the disclosures that the Company must make about the credit quality of financing receivables and the allowance for credit losses. The objectives of the enhanced disclosures are to provide financial statement users with additional information about the nature of credit risks inherent in the Company’s financing receivables, how credit risk is analyzed and assessed when determining the allowance for credit losses, and the reasons for the change in the allowance for credit losses. The disclosures as of the end of the reporting period are effective for the Company’s int erim and annual periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for the Company’s interim and annual periods beginning on or after December 15, 2010. The adoption of this Update requires enhanced disclosures and is not expected to have a significant effect on the Company’s financial statements.
NOTE 3 – EARNINGS PER COMMON SHARE
Basic earnings per share (“EPS”) is calculated by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted EPS is computed in a manner similar to that of basic EPS except that the weighted-average number of common shares outstanding is increased to include the number of incremental common shares (computed using the treasury stock method) that would have been outstanding if all potentially dilutive common stock equivalents (such as stock options and unvested restricted stock) were vested during the period. The weighted average common shares outstanding equals the gross number of common shares issued less unallocated shares held by the First Federal Savings Bank Employee Stock Ownership Plan (“ESOP”), nonvested restricted stock awards under the Company’s 2007 Deferred Compensation Plan and nonvested restricted stock awards under the Company’s 2008 Equity Incentive Plan. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares to be issued include any restricted shares authorized under the Company’s 2007 Deferred Compensation Plan and the 2008 Equity Incentive Plan. Unallocated common shares held by the ESOP are shown as a reduction in stockholders’ equity and are included in the weighted-average number of common shares outstanding for diluted EPS calculations as they are committed to be released.
6
Basic and diluted earnings per share are computed as follows:
(Dollars in thousands, except per share amounts) | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income | $ | 331 | $ | 141 | $ | 658 | $ | 310 | ||||||||
Weighted-average shares - Basic EPS | 4,303,639 | 4,520,674 | 4,404,871 | 4,531,018 | ||||||||||||
Weighted-average restricted shares - | ||||||||||||||||
2007 Deferred Compensation Plan | 7,137 | 27,458 | 6,140 | 28,853 | ||||||||||||
2008 Equity Incentive Plan | 3,966 | 5,929 | - | 8,588 | ||||||||||||
Weighted-average shares - | ||||||||||||||||
ESOP committed to be released - diluted EPS | 28,200 | 23,397 | 27,647 | 22,766 | ||||||||||||
Weighted-average shares - Diluted EPS | 4,342,942 | 4,577,458 | 4,438,658 | 4,591,225 | ||||||||||||
Basic earnings per common share | $ | 0.08 | $ | 0.03 | $ | 0.15 | $ | 0.07 | ||||||||
Diluted earnings per common share | $ | 0.08 | $ | 0.03 | $ | 0.15 | $ | 0.07 |
NOTE 4 – ACTIVITY IN ALLOWANCE FOR LOAN LOSSES
The following table summarizes the activity in the allowance for loan losses for the periods indicated:
(Dollars in thousands) | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Balance, beginning of period | $ | 2,803 | $ | 2,329 | $ | 2,813 | $ | 2,175 | ||||||||
Provision charged to expense | 232 | 159 | 459 | 327 | ||||||||||||
Charge-offs | (55 | ) | (11 | ) | (300 | ) | (30 | ) | ||||||||
Recoveries | 5 | 4 | 13 | 9 | ||||||||||||
Balance, end of period | $ | 2,985 | $ | 2,481 | $ | 2,985 | $ | 2,481 |
NOTE 5 – INVESTMENT SECURITIES
For securities available-for-sale, the following table shows the amortized cost, unrealized gains and losses (pre-tax) included in accumulated other comprehensive income, and estimated fair value by security type as of the dates indicated.
7
June 30, 2010 | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||
Gross | Gross | Approximate | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Available-for-sale | Cost | Gains | Losses | Value | ||||||||||||
U. S. Treasury | $ | 4,748 | $ | 1,488 | $ | - | $ | 6,236 | ||||||||
U. S. Government agencies and corporations | 3,999 | 76 | - | 4,075 | ||||||||||||
Mortgage-backed securities | 50,512 | 3,190 | - | 53,702 | ||||||||||||
Collateralized mortgage obligations | 4,307 | 135 | (2 | ) | 4,440 | |||||||||||
State and political subdivisions | 7,547 | 286 | - | 7,833 | ||||||||||||
Corporate debt securities | 24 | 139 | - | 163 | ||||||||||||
Total | $ | 71,137 | $ | 5,314 | $ | (2 | ) | $ | 76,449 | |||||||
December 31, 2009 | ||||||||||||||||
Gross | Gross | Approximate | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Available-for-sale | Cost | Gains | Losses | Value | ||||||||||||
U. S. Treasury | $ | 4,765 | $ | 1,296 | $ | - | $ | 6,061 | ||||||||
U. S. Government agencies and corporations | 13,879 | 509 | (90 | ) | 14,298 | |||||||||||
Mortgage-backed securities | 62,825 | 2,337 | (76 | ) | 65,086 | |||||||||||
Collateralized mortgage obligations | 4,795 | - | (85 | ) | 4,710 | |||||||||||
State and political subdivisions | 8,466 | 178 | (90 | ) | 8,554 | |||||||||||
Corporate debt securities | 30 | - | - | 30 | ||||||||||||
Total | $ | 94,760 | $ | 4,320 | $ | (341 | ) | $ | 98,739 |
Contractual maturities of debt securities at June 30, 2010 were as follows. Securities not due at a single maturity or with no maturity date, primarily mortgage-backed securities and collateralized mortgage obligations, are shown separately.
(Dollars in thousands) | June 30, 2010 | |||||||
Available-for-sale | ||||||||
Amortized | Fair | |||||||
Cost | Value | |||||||
Due in one year or less | $ | - | $ | - | ||||
Due after one but within five years | - | - | ||||||
Due after five but within ten years | 10,933 | 12,650 | ||||||
Due after ten years | 5,386 | 5,657 | ||||||
16,319 | 18,307 | |||||||
Mortgage-backed securities and collateralized mortgage obligations | 54,818 | 58,142 | ||||||
$ | 71,137 | $ | 76,449 |
The following tables show the fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous loss position, as of the dates indicated.
8
June 30, 2010 | ||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Less Than 12 months | 12 months or more | Total | ||||||||||||||||||||||
Approximate | Gross | Approximate | Gross | Approximate | Gross | |||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Available-for-sale | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
U. S. Government agencies and corporations | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Mortgage-backed securities | - | - | - | - | - | - | ||||||||||||||||||
Collateralized mortgage obligations | 1,112 | (2 | ) | - | - | 1,112 | (2 | ) | ||||||||||||||||
State and political subdivisions | - | - | - | - | - | - | ||||||||||||||||||
Trust preferred securities | - | - | - | - | - | - | ||||||||||||||||||
Total | $ | 1,112 | $ | (2 | ) | $ | - | $ | - | $ | 1,112 | $ | (2 | ) | ||||||||||
December 31, 2009 | ||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Less Than 12 months | 12 months or more | Total | ||||||||||||||||||||||
Approximate | Gross | Approximate | Gross | Approximate | Gross | |||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Available-for-sale | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
U. S. Government agencies and corporations | $ | 4,910 | $ | (90 | ) | $ | - | $ | - | $ | 4,910 | $ | (90 | ) | ||||||||||
Mortgage-backed securities | 5,975 | (76 | ) | - | - | 5,975 | (76 | ) | ||||||||||||||||
Collateralized mortgage obligations | 4,710 | (85 | ) | - | - | 4,710 | (85 | ) | ||||||||||||||||
State and political subdivisions | 1,083 | (21 | ) | 545 | (69 | ) | 1,628 | (90 | ) | |||||||||||||||
Trust preferred securities | - | - | - | - | - | - | ||||||||||||||||||
Total | $ | 16,678 | $ | (272 | ) | $ | 545 | $ | (69 | ) | $ | 17,223 | $ | (341 | ) |
Declines in fair value of available-for-sale securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than amortized cost, (ii) the financial condition and near-term prospects of the issuer, (iii) whether the market decline was affected by macroeconomic conditions, and (iv) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary impairment decline exists involves a high degree of subjectivity and is based on information available to m anagement at a point in time.
Based on an evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for the Company’s available-for-sale securities are temporary.
9
NOTE 6 –FAIR VALUE
FASB’s ASC Topic 820, “Fair Value Measurements and Disclosures,” defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. In general, fair values of financial instruments are based upon quoted market prices, where available. If such quoted market prices are not available, fair value is primarily determined by matrix pricing, and in some cases, fair value is determined by an independent third party. Valuation adjustments may be made to ensure that financial statements are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality as well as unobservable parameters. 0; Any such valuation adjustments are applied consistently over time. The fair value hierarchy gives the highest priority to a valuation based on quoted prices in active markets for identical assets and liabilities (Level 1), moderate priority to a valuation based on quoted prices in active markets for similar assets and liabilities and/or based on assumptions that are observable in the market (Level 2), and the lowest priority to a valuation based on assumptions that are not observable in the market (Level 3). The following methods and assumptions are used by the Company to estimate the fair values of the Company’s financial assets and liabilities on a recurring basis:
Available-for-Sale Securities
The fair values of securities available for sale are determined by a matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Level 2 securities include U. S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions, asset-backed and other securities. Level 3 securities include preferred term securities that are not traded in an active market with a fair value determined by an independent third party.
Fair Value of Assets Measured on a Recurring Basis
Assets measured at fair value on a recurring basis are summarized below:
June 30, 2010 | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Assets: | ||||||||||||||||
Available for sale securities | $ | 76,449 | -- | $ | 76,286 | $ | 163 |
(Dollars in thousands) | ||||
Balance, January 1, 2010 | $ | 30 | ||
Purchases, sales, issuances and settlements | (6 | ) | ||
Unrealized gains included in other comprehensive income | 139 | |||
Balance, June 30, 2010 | $ | 163 |
Fair Value of Assets Measured on a Nonrecurring Basis
Certain assets may be recorded at fair value on a nonrecurring basis. These nonrecurring fair value adjustments typically result from the application of lower of cost or market accounting or a write-down occurring during the period. The following methods and assumptions are used by the Company to estimate the fair values of the Company’s financial assets and liabilities on a nonrecurring basis:
Loans Held For Sale
Loans held for sale are carried at the lower of cost or market value and represent loans that are awaiting delivery to a specific committed buyer. The fair value of loans held for sale is based on specific prices committed to be paid for each individual loan. As such, the Company classifies loans held for sale subject to fair value adjustments as Level 2.
10
Other assets held for sale represents real estate that is not intended for use in operations and recorded at lower of cost or estimated fair value on a nonrecurring basis. Fair value is based upon independent market prices, appraised values or management’s estimation of the value. When the fair value is based on an observable market price or current appraised value, the Company classifies the asset as Level 2.
Other Real Estate Owned
Other real estate owned is carried at lower of cost or estimated fair value. The estimated fair vale of the real estate is determined through current appraisals, or management’s best estimate of the value and adjusted as necessary, by management, to reflect current market conditions. As such, other real estate owned is generally classified as Level 3.
The “Fair Value Measurement and Disclosures” topic of the FASB ASC requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The estimated fair value approximates carrying value for cash and cash equivalents, accrued interest and the cash surrender value of life insurance policies. The methodologies for other financial assets and financial liabilities are discussed below.
11
The estimated fair values of financial instruments were as follows for the dates indicated:
At June 30, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Financial assets | ||||||||||||||||
Cash and cash equivalents | $ | 19,703 | $ | 19,703 | $ | 21,050 | $ | 21,050 | ||||||||
Available-for-sale securities | 76,449 | 76,449 | 117,221 | 117,221 | ||||||||||||
Loans held for sale | 2,837 | 2,837 | 5,816 | 5,816 | ||||||||||||
Loans, net of allowance for loan losses | 226,189 | 225,401 | 186,269 | 185,836 | ||||||||||||
FHLB stock | 2,988 | 2,988 | 2,988 | 2,988 | ||||||||||||
Financial liabilities | ||||||||||||||||
Deposits | $ | 218,238 | $ | 218,493 | $ | 208,208 | $ | 208,756 | ||||||||
Securities sold under agreement to repurchase | 8,571 | 8,571 | 6,794 | 6,794 | ||||||||||||
FHLB advances | 13,000 | 13,798 | 28,000 | 28,361 | ||||||||||||
Other borrowings | 35,000 | 37,631 | 35,000 | 35,631 | ||||||||||||
Unrecognized financial instruments | ||||||||||||||||
Loan commitments | $ | - | $ | - | $ | - | $ | - | ||||||||
Unused lines of credit | - | - | - | - |
General
For short-term financial instruments realizable in three months or less, the carrying amount approximates fair value.
Cash and Cash Equivalents and Interest Receivable
The carrying amount approximates fair value, primarily due to their short-term nature.
Federal Home Loan Bank Stock
It is not practicable to determine the fair value of Federal Home Loan Bank stock due to restrictions placed on its transferability.
Available-for-Sale Securities
Fair values equal quoted market prices, if available. If quoted market prices are not available, fair value is estimated based on quoted market prices of similar securities.
Loans Held for Sale
Loans held for sale are generally held for 90 days or less and; thus, the carrying amount approximates the fair value.
12
Loans
The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations.
Deposits
Deposits include non-interest bearing checking accounts and interest bearing deposits, including savings accounts, checking accounts and money market deposits. The carrying amount for these deposits approximates fair value. The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.
Securities Sold Under Agreement to Repurchase
The carrying amount approximates fair value because of the short time between the origination of the agreements and their expected realization.
Federal Home Loan Bank Advances
Rates currently available to the Bank for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt.
Commitments to Originate Loans, Forward Sale Commitments, Letters of Credit and Lines of Credit
The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of forward sale commitments is estimated based on current market prices for loans of similar terms and credit quality. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date.
NOTE 7 –SUBSEQUENT EVENTS
In connection with the preparation of the interim financial statements included in this Form 10-Q, the Company has evaluated events and transactions through the date on which such interim financial statements were issued and has determined that no significant events, other than those discussed below, occurred after June 30, 2010, but prior to the issuance of these financial statements, that would have a potential material impact on its Condensed Consolidated Financial Statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation
Management’s discussion and analysis of the Company’s financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited condensed consolidated financial statements and footnotes appearing in Part I, Item 1 of this report and the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, as previously filed with the SEC on March 5, 2010.
13
Forward-Looking Statements.
This quarterly report contains forward-looking statements that are based on assumptions and may describe future plans, strategies, and expectations of First Advantage Bancorp. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiary include, but are not limited to, changes in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the U.S. government, including p olicies of the U.S. Treasury and the Federal Reserve Board, the quality and composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in First Federal Savings Bank’s market area, changes in real estate market values in First Federal Savings Bank’s market area, changes in relevant accounting principles and guidelines and the inability of third party service providers to perform.
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.
Recent Regulatory Restructuring Legislation.
On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which significantly changes the regulation of financial institutions and the financial services industry. The Dodd-Frank Act includes provisions affecting large and small financial institutions alike, including several provisions that will profoundly affect how community banks, thrifts, and small bank and thrift holding companies, such as the Company, will be regulated in the future. Among other things, these provisions abolish the Office of Thrift Supervision and transfer its functions to the other federal banking agencies, relax rules regarding interstate branching, allow financial institutions to pay interest on business checking accounts, change the scope of federal deposit insurance coverage, and impose new capital requirements on bank and thrift holding companies. The Dodd-Frank Act also establishes the Bureau of Consumer Financial Protection as an independent entity within the Federal Reserve, which will be given the authority to promulgate consumer protection regulations applicable to all entities offering consumer financial services or products, including banks. Additionally, the Dodd-Frank Act includes a series of provisions covering mortgage loan origination standards affecting, among other things, originator compensation, minimum repayment standards, and pre-payments. The Dodd-Frank Act contains numerous other provisions affecting financial institutions of all types, many of which may have an impact on the operating environment of the Company in substantial and unpredictable ways. Consequently, the Dodd-Frank Act is likely to affect the Company’s cost of doing business, it may limit or expand the Company’s permissible activities, and it may affect the competitive balance within the Company’s industry and market areas. The nature and extent of future legislative and regulatory changes affecting financial institutions, including as a result of the Dodd-Frank Act, is very unpredictable at this time. The Company’s management is actively reviewing the provisions of the Dodd-Frank Act, many of which are phased-in over the next several months and years, and assessing its probable impact on the business, financial condition, and results of operations of the Company. However, the ultimate effect of the Dodd-Frank Act on the financial services industry in general, and the Company in particular, is uncertain at this time.
14
General.
The Bank provides commercial and retail banking services, including commercial loans, commercial real estate loans, one-to-four family residential mortgage loans, home equity loans and lines of credit and consumer loans as well as certificates of deposit, checking accounts, money-market accounts and savings accounts within its market area. At June 30, 2010, the Company had total assets of $345.1 million, deposits of $218.2 million and shareholders’ equity of $68.1 million. Unless otherwise indicated, all references to the Company refer collectively to the Company and the Bank.
Application of Critical Accounting Policies.
The discussion and analysis of the Company’s financial condition and results of operation is based upon the Company’s unaudited condensed consolidated financial statements, which have been prepared in conformity with GAAP for interim financial information and with the instructions for Form 10-Q. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company considers the allowance for loan losses and other-than-temporary impai rment of securities to be its only critical accounting policies.
Allowance for Loan Losses. The Company maintains the allowance for loan losses at a level that it considers to be adequate to provide for credit losses inherent in its loan portfolio. Management determines the level of the allowance by performing a quarterly analysis that considers concentrations of credit, past loss experience, current economic conditions, the amount and composition of the loan portfolio (including nonperforming and potential problem loans), the estimated fair value of underlying collateral, and other information relevant to assessing the risk of loss inherent in the loan portfolio. As a result of management’s analysis, a range of potential amounts of the allowance for loan losses is determined.
Currently, management closely monitors the impact of troop deployments at Fort Campbell Military Base, a local U. S. Army installation that plays a significant role in the economy of the Bank’s primary market area. Additionally, given the Bank’s concentration in real estate secured loans, management is continuing to closely monitor trends in the local real estate market to assess any related impact on the loan portfolio and potential delinquencies or credit losses.
The Company continually monitors the adequacy of the allowance for loan losses and makes additions to the allowance in accordance with the analysis described above. Because of uncertainties inherent in estimating the appropriate level of the allowance for loan losses, actual results may differ from management’s estimate of credit losses and the related allowance.
Other-than-temporary Impairment of Securities. Investments that we currently own could suffer declines in fair value that become other-than-temporary. We monitor our portfolio continuously and actively manage our investments to preserve values whenever possible. When, in the opinion of management, a decline in the fair value of an investment is considered to be other-than-temporary, such investment is written-down to its fair value. The amount written-down is recorded in earnings as an other-than-temporary impairment on investments. We did not record any other-than-temporary impairment of securities during the first six months of 2010.
15
Comparison of Financial Condition at June 30, 2010 and December 31, 2009
Total Assets. At June 30, 2010, total assets were $345.1 million, an increase of $865,000, or 0.25%, compared to $344.2 million at December 31, 2009.
Cash and Cash Equivalents. Cash and cash equivalents were $19.7 million at June 30, 2010 compared to $11.9 million at December 31, 2009. Excess funds generated primarily by calls and sells of investment securities contributed to an increase of $10.6 million in lower-yielding interest-bearing demand deposits at other banks to $12.2 million at June 30, 2010, compared to $1.7 million at December 31, 2009.
Investments. Our investment securities portfolio consists primarily of U.S. government and callable federal agency bonds and U.S. government agency mortgage-backed securities, with a relatively smaller investment in obligations of state and political subdivisions and other securities. Total securities were $76.4 million at June 30, 2010, a decrease of $22.3 million, or 22.6%, compared to $98.7 million as of December 31, 2009. The decrease was primarily due to the sale of certain investments, continued repayments on mortgage-backed bonds and calls of higher-yielding investments during the first half of 2010 which were replaced with more liquid investments.
Loans. Net loans increased $15.1 million, or 7.1%, to $226.2 million at June 30, 2010 compared to $211.1 million as of December 31, 2009. Our primary lending activity is the origination of loans secured by real estate, which grew to $184.7 million at June 30, 2010 compared to $169.9 million as of December 31, 2009. The Company does not originate sub-prime residential mortgage loans, nor does it hold any in its loan portfolio or hold any investment securities that are collateralized by sub-prime residential mortgage loans.
Loan Loss Allowance. The allowance for loan losses increased by $172,000, or 6.1%, to $3.0 million at June 30, 2010 compared to $2.8 million as of December 31, 2009. Non-performing assets increased by $1.8 million over the first six months of 2010. The quality of the Company’s loan portfolio continues to rely heavily on the resilience of the local real estate market and a significant deterioration in that market or other negative economic conditions, among other things, could have a negative impact on the Company’s financial condition and results of operations.
Non-performing assets (consisting of non-accrual loans and real estate owned) totaled $3.5 million at June 30, 2010 compared to $1.7 million at December 31, 2009. The increase was primarily related to two commercial real estate relationships secured by residential real estate, commercial real estate and land. Management continues to monitor these loans and believes that the loans are well collateralized. Additionally, the Bank’s management reviews the level of the allowance for loan losses on a regular basis and establishes the provision for loan losses based upon the volume and types of lending, delinquency levels, loss experience, the amount of impaired and classified loans, economic conditions and other relevant factors related to the collectability of the loan portfolio. The provisi on was increased primarily due to the growth in the loan portfolio and, to a lesser extent, weakened economic conditions and changes in the mix of loans in the Bank’s portfolio.
Deposits. Total deposits increased by $2.0 million, or 0.92%, to $218.2 million at June 30, 2010 compared to $216.2 million as of December 31, 2009. During the first six months of 2010, the Company experienced an increase of $7.6 million in savings, interest checking and money market accounts, while certificates of deposits decreased $4.1 million and demand deposits decreased $1.5 million.
Borrowings. Total borrowings with other banks remained unchanged and totaled $35.0 million at both June 30, 2010 and at December 31, 2009. FHLB advances also remained unchanged and totaled $13.0 million at both June 30, 2010 and December 31, 2009. Securities sold under agreements to repurchase totaled $8.6 million as of June 30, 2010 compared to $6.9 million as of December 31, 2009.
16
Shareholders’ Equity. Total shareholders’ equity decreased by $2.5 million, or 3.5%, to $68.1 million as of June 30, 2010, compared to $70.5 million as of December 31, 2009. In addition to net income of $658,000, other significant changes in shareholders’ equity during the first six months of 2010 included $505,000 of dividends paid and $4.0 million of common shares purchased and retired.
Comparison of Operating Results for the Three Months Ended June 30, 2010 and 2009
General. Net income for the three months ended June 30, 2010 was $331,000, an increase of 134.8% compared to net income of $141,000 for the three months ended June 30, 2009. The increase was primarily due to an increase of $469,000 in net interest income after the provision for loan loss and a $50,000 decrease in non-interest expense which was slightly offset by a decrease of $10,000 in non-interest income.
Net Interest Income. Net interest income increased $542,000, or 21.0%, to $3.1 million for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. Total interest income increased by $197,000 or 4.7%, to $4.4 million for the three months ended June 30, 2010 compared to the prior year period.
Interest income on loans increased by 23.2% to $3.4 million for the three months ended June 30, 2010 compared to the three months ended June 30, 2009 as average outstanding loans increased by $45.2 million, or 24.4%, to $230.5 million, while the yield on the portfolio had a slight decrease of six basis points from the same period one year ago.
Interest income on investment securities decreased by $444,000, or 31.8%, to $953,000 for the three months ended June 30, 2010 from the same period one year ago as average balances decreased $37.8 million and average yields remained unchanged. The primary reason for the decline in average balances during the period was accelerated prepayments on mortgage backed securities due to falling interest rates. Additionally, calls on higher yielding agency bonds were significant during the period, thereby contributing to the decline in average balances.
Total interest expense decreased by $345,000 or 21.2% to $1.3 million for the three months ended June 30, 2010 as compared to the three months ended June 30, 2009. The average balance of interest-bearing deposits increased 6.46% to $200.2 million for the quarter ended June 30, 2010 as compared to the quarter ended June 30, 2009. Interest paid on interest-bearing deposits decreased by $357,000, or 30.3%, to $821,000 for the three-month period ended June 30, 2010 as the average interest rate paid declined 87 basis points, primarily as a result of lower interest rates paid to customers as higher rate fixed-term deposits matured and on transaction accounts as market rates declined. The average interest rate paid on FHLB advances and other borrowings, which consisted of long-term FHLB advances and secur ities sold under agreement to repurchase, increased by 87 basis points in the second quarter of 2010 as average balances of FHLB advances and other borrowings decreased to an average of $19.8 million for the quarter ended June 30, 2010 compared to average balances of $28.3 million for the quarter ended June 30, 2009, which included long-term FHLB advances and securities sold under agreement to repurchase along with approximately $8.2 million of short-term FHLB borrowings bearing an interest rate of approximately 23 basis points. The average balance of long-term borrowings at other banks remained unchanged at $35.0 million for the quarter ended June 30, 2010 compared to the quarter ended June 30, 2009, as the interest rate paid on the borrowings increased by eight basis points during the same period.
17
The following table summarizes average balances and average yields and costs for the three months ended June 30, 2010 and 2009.
Average Balance Sheet for the | |||||||||||||||||||||||||
Three Months Ended June 30, | |||||||||||||||||||||||||
2010 | 2009 | ||||||||||||||||||||||||
Interest | Interest | ||||||||||||||||||||||||
Average | Income/ | Yield/ | Average | Income/ | Yield/ | ||||||||||||||||||||
Balance | Expense | Rate | Balance | Expense | Rate | ||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||
ASSETS: | |||||||||||||||||||||||||
Interest-earning assets: | |||||||||||||||||||||||||
Interest-earning deposits at other banks | $ | 9,910 | $ | 4 | 0.16 | % | $ | 6,431 | $ | 57 | 3.56 | % | |||||||||||||
Loans | 230,535 | 3,388 | 5.89 | % | 185,301 | 2,749 | 5.95 | % | |||||||||||||||||
Investment securities | 81,570 | 953 | 4.69 | % | 119,399 | 1,397 | 4.69 | % | |||||||||||||||||
Other interest-earning assets | 5,658 | 64 | 4.54 | % | 6,035 | 9 | 0.60 | % | |||||||||||||||||
Total interest-earning assets | 327,673 | 4,409 | 5.40 | % | 317,166 | 4,212 | 5.33 | % | |||||||||||||||||
Noninterest-earning assets | 18,671 | 20,197 | |||||||||||||||||||||||
Total | $ | 346,344 | $ | 337,363 | |||||||||||||||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY: | |||||||||||||||||||||||||
Interest-bearing deposits | 200,246 | 821 | 1.64 | % | 188,103 | 1,178 | 2.51 | % | |||||||||||||||||
FHLB advances and other borrowings | 19,808 | 131 | 2.65 | % | 28,327 | 126 | 1.78 | % | |||||||||||||||||
Long-term borrowings at other banks | 35,000 | 332 | 3.80 | % | 35,000 | 325 | 3.72 | % | |||||||||||||||||
Total Interest-Bearing Liabilities | 255,054 | 1,284 | 2.02 | % | 251,430 | 1,629 | 2.60 | % | |||||||||||||||||
Noninterest-bearing deposits | 17,752 | 14,675 | |||||||||||||||||||||||
Other noninterest-bearing liabilities | 5,041 | 2,328 | |||||||||||||||||||||||
Shareholders' equity | 68,497 | 68,930 | |||||||||||||||||||||||
Total | $ | 346,344 | $ | 337,363 | |||||||||||||||||||||
Net Interest Income | $ | 3,125 | $ | 2,583 | |||||||||||||||||||||
Net Interest Margin | 3.83 | % | 3.27 | % | |||||||||||||||||||||
Interest rate spread | 3.38 | % | 2.73 | % | |||||||||||||||||||||
Average interest-earning assets to | |||||||||||||||||||||||||
average interest-bearing liabilities | 128.47 | % | 126.14 | % |
18
Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rates (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. Changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionately between rate and volume.
Three Months Ended | ||||||||||||
June 30, 2010 Compared to June 30, 2009 | ||||||||||||
Increase (Decrease) Due To | ||||||||||||
Volume | Rate | Net | ||||||||||
(Dollars in thousands) | ||||||||||||
Interest earned on: | ||||||||||||
Interest-earning assets: | ||||||||||||
Interest-earning demand deposits | $ | (231 | ) | $ | 178 | $ | (53 | ) | ||||
Loans | 745 | (106 | ) | 639 | ||||||||
Investment securities | (432 | ) | (12 | ) | (444 | ) | ||||||
Other interest-earning assets | (132 | ) | 187 | 55 | ||||||||
Total Earning Assets | (50 | ) | 247 | 197 | ||||||||
Interest paid on: | ||||||||||||
Interest bearing deposits | 1,970 | (2,327 | ) | (357 | ) | |||||||
FHLB advances and other borrowings | (11 | ) | 16 | 5 | ||||||||
Long-term borrowings at other banks | (1,323 | ) | 1,330 | 7 | ||||||||
Total Interest-Bearing Liabilities | 636 | (981 | ) | (345 | ) | |||||||
Net Interest Income | $ | (686 | ) | $ | 1,228 | $ | 542 | |||||
Provision for Loan Losses. The Company recorded a provision for loan losses of $232,000 for the three months ended June 30, 2010 compared to a provision of $159,000 for the three months ended June 30, 2009. The Bank’s management reviews the level of the allowance for loan losses on a regular basis and establishes the provision for loan losses based upon the volume and types of lending, delinquency levels, loss experience, the amount of impaired and classified loans, economic conditions and other relevant factors related to the collectability of the loan portfolio. The provision was higher for the second quarter of 2010 primarily due to changes in economic conditions and in the mix of loans in the Bank’s portfolio and, to a lesser extent , growth in the Bank’s loan portfolio during that quarter.
Non-interest Income. The following table summarizes non-interest income for the three months ended June 30, 2010 and 2009 and the percentage change for each category of income.
Three Months Ended June 30, | ||||||||||||
2010 | 2009 | % Change | ||||||||||
(Dollars in thousands) | ||||||||||||
Non-interest Income | ||||||||||||
Service charges on deposit accounts and other fees | $ | 298 | $ | 297 | 0.34 | % | ||||||
Loan servicing and other fees | 24 | 15 | 60.00 | % | ||||||||
Net gains on sales of mortgage loans held for sale | 342 | 419 | (18.38 | )% | ||||||||
Net realized gain on sales of available-for-sale securities | 70 | 5 | 1300.00 | % | ||||||||
Insurance and brokerage commissions | 25 | 33 | (24.24 | )% | ||||||||
Other | 8 | 8 | - | % | ||||||||
Total noninterest income | $ | 767 | $ | 777 | (1.29 | )% |
Non-interest income for the three months ended June 30, 2010 decreased slightly to $767,000, compared to $777,000 for the three months ended June 30, 2009. The decrease in non-interest income was due primarily to declines in net gains on loan sales of $77,000 or 17.9%, as refinancing activity decreased during the second quarter of 2010 compared to the second quarter of 2009. This decrease was primarily offset by an increase of $65,000 in net realized gains on sales of available-for-sale securities during the second quarter of 2010 compared to the second quarter of 2009.
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Non-interest Expense. The following table summarizes non-interest expense for the three months ended June 30, 2010 and 2009 and the percentage change for each expense category.
Three Months Ended June 30, | ||||||||||||
2010 | 2009 | % Change | ||||||||||
(Dollars in Thousands) | ||||||||||||
Non-interest Expense | ||||||||||||
Salaries and employee benefits | $ | 1,623 | $ | 1,523 | 6.57 | % | ||||||
Net occupancy | 168 | 199 | (15.58 | )% | ||||||||
Equipment | 186 | 170 | 9.41 | % | ||||||||
Data processing | 217 | 241 | (9.96 | )% | ||||||||
Professional fees | 96 | 66 | 45.45 | % | ||||||||
Marketing | 68 | 110 | (38.18 | )% | ||||||||
Office expense | 64 | 65 | (1.54 | )% | ||||||||
Loan collection and repossession expense | 49 | 7 | 600.00 | % | ||||||||
Other | 450 | 590 | (23.73 | )% | ||||||||
Total non-interest expense | $ | 2,921 | $ | 2,971 | (1.68 | )% |
Total non-interest expense decreased $50,000, or 1.7% to $2.9 million for the three months ended June 30, 2010 as compared to the same period in 2009. Other expense decreased by $140,000, or 23.7%, to $450,000 for the three months ended June 30, 2010, compared to the same period in 2009, which was mainly attributable to lower FDIC assessments for the second quarter of 2010 compared to the second quarter of 2009. During the first quarter of 2009 the FDIC instituted an industry-wide increase in assessment rates and imposed a one-time special assessment on June 30, 2009. Decreases in net occupancy, marketing and data processing for the second quarter of 2010 were primarily reflective of non-recurring expenses which occurred during the second quarter of 2009.
The decreases in non-interest expense items were somewhat offset by higher incentive accruals which contributed to the increase of $100,000 in salaries and employee benefits for the second quarter of 2010 compared to the second quarter of 2009. Loan collection and repossession expense increased $42,000 during the second quarter of 2010 compared to the second quarter of 2009 primarily due to costs associated with foreclosures on one-to-four family residential loans and the costs associated with maintaining and repairing foreclosed properties. Professional fees increased $30,000 primarily due to the timing of expenses related to audit and consulting services.
Income Taxes. Income tax expense for the three months ended June 30, 2010 was $408,000 compared to $89,000 for the same period in 2009. The effective income tax rate for the three months ended June 30, 2010 was 55.2% compared to 38.7% for the three months ended June 30, 2009. During the second quarter of 2010 management adjusted the income tax accrual to more accurately reflect the Company’s income tax position.
Comparison of Operating Results for the Six Months Ended June 30, 2010 and 2009
General. Net income increased $348,000 to $658,000 for the six months ended June 30, 2010 compared to net income of $310,000 for the six months ended June 30, 2009. The increase in net income was primarily due to an increase of $950,000 in net interest income which was partially offset by an increase of $429,000 in the provision for income taxes and an increase of $132,000 in the provision for loan losses.
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Net Interest Income. Total interest income increased by $272,000 or 3.20%, to $8.8 million for the six months ended June 30, 2010 compared to the prior year period.
Interest income on loans increased by 23.4% to $6.6 million for the six months ended June 30, 2010 compared to the six months ended June 30, 2009 as average outstanding loans increased by $42.9 million, or 23.5%, to $225.3 million, while the yield on the portfolio remained unchanged.
Interest income on investment securities decreased by $970,000, or 32.2%, to $2.0 million for the six months ended June 30, 2010 as compared to the same period in 2009 as average balances decreased $35.9 million and average yields decreased 22 basis points. The primary reason for the decline in average balances during the 2010 period was accelerated prepayments on mortgage backed securities due to falling interest rates. Additionally, calls on higher yielding agency bonds were significant during the 2010 period thereby contributing to the decline in average balances and average yields.
Total interest expense decreased $678,000 or 20.4% to $2.6 million for the six months ended June 30, 2010 as compared to the six months ended June 30, 2009. The average balance of interest-bearing deposits increased 8.8% to $199.6 million as of June 30, 2010 compared to June 30, 2009. Interest paid on interest-bearing deposits decreased by $662,000, or 27.6%, to $1.7 million for the six-month period ended June 30, 2010 as the average interest rate paid declined 88 basis points, primarily as a result of lower interest rates paid to customers as higher rate fixed-term deposits matured and on transaction accounts as market rates declined.
Interest paid on FHLB advances and other borrowings decreased $16,000 or 5.9% for the first six months of 2010, compared to the same period last year. The average interest rate paid on FHLB advances and other borrowings, which consisted of long-term FHLB advances and securities sold under agreement to repurchase, increased by 95 basis points as of June 30, 2010 as average balances of FHLB advances and other borrowings decreased to an average of $19.6 million compared to average balances of $32.5 million as of June 30, 2009, which included long-term FHLB advances and securities sold under agreement to repurchase along with approximately $13.2 million of short-term FHLB borrowings bearing an interest rate of approximately 27 basis points. The average balance of long-term borrowings at other banks remained unchanged at $35.0 million as of June 30, 2010 compared to June 30, 2009; and the interest rate paid on the borrowings remained unchanged.
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The following table summarizes average balances and average yields and costs for the six months ended June 30, 2010 and 2009.
Average Balance Sheet for the | |||||||||||||||||||||||||
Six Months Ended June 30, | |||||||||||||||||||||||||
2010 | 2009 | ||||||||||||||||||||||||
Interest | Interest | ||||||||||||||||||||||||
Average | Income/ | Yield/ | Average | Income/ | Yield/ | ||||||||||||||||||||
Balance | Expense | Rate | Balance | Expense | Rate | ||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||
ASSETS: | |||||||||||||||||||||||||
Interest-earning assets: | |||||||||||||||||||||||||
Interest-earning deposits at other banks | $ | 7,159 | $ | 7 | 0.20 | % | $ | 4,726 | $ | 12 | 0.51 | % | |||||||||||||
Loans | 225,254 | 6,608 | 5.92 | % | 182,352 | 5,353 | 5.92 | % | |||||||||||||||||
Investment securities | 87,806 | 2,043 | 4.69 | % | 123,693 | 3,013 | 4.91 | % | |||||||||||||||||
Other interest-earning assets | 5,039 | 116 | 4.64 | % | 5,573 | 124 | 4.49 | % | |||||||||||||||||
Total interest-earning assets | 325,258 | 8,774 | 5.44 | % | 316,344 | 8,502 | 5.42 | % | |||||||||||||||||
Noninterest-earning assets | 19,558 | 20,636 | |||||||||||||||||||||||
Total | $ | 344,816 | $ | 336,980 | |||||||||||||||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY: | |||||||||||||||||||||||||
Interest-bearing deposits | 199,623 | 1,735 | 1.75 | % | 183,507 | 2,397 | 2.63 | % | |||||||||||||||||
FHLB advances and other borrowings | 19,553 | 256 | 2.64 | % | 32,512 | 272 | 1.69 | % | |||||||||||||||||
Long-term borrowings at other banks | 35,000 | 650 | 3.75 | % | 35,000 | 650 | 3.75 | % | |||||||||||||||||
Total Interest-Bearing Liabilities | 254,176 | 2,641 | 2.10 | % | 251,019 | 3,319 | 2.67 | % | |||||||||||||||||
Noninterest-bearing deposits | 17,430 | 14,026 | |||||||||||||||||||||||
Other noninterest-bearing liabilities | 3,769 | 2,376 | |||||||||||||||||||||||
Shareholders' equity | 69,441 | 69,559 | |||||||||||||||||||||||
Total | $ | 344,816 | $ | 336,980 | |||||||||||||||||||||
Net Interest Income | $ | 6,133 | $ | 5,183 | |||||||||||||||||||||
Net Interest Margin | 3.80 | % | 3.30 | % | |||||||||||||||||||||
Interest rate spread | 3.34 | % | 2.75 | % | |||||||||||||||||||||
Average interest-earning assets to | |||||||||||||||||||||||||
average interest-bearing liabilities | 127.97 | % | 126.02 | % |
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Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rates (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. Changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionately between rate and volume.
Six Months Ended | ||||||||||||
June 30, 2010 Compared to June 30, 2009 | ||||||||||||
Increase (Decrease) Due To | ||||||||||||
Volume | Rate | Net | ||||||||||
(Dollars in thousands) | ||||||||||||
Interest earned on: | ||||||||||||
Interest-earning assets: | ||||||||||||
Interest-earning demand deposits | $ | (1,623 | ) | $ | 1,562 | $ | (61 | ) | ||||
Loans | 1,255 | - | 1,255 | |||||||||
Investment securities | (718 | ) | (252 | ) | (970 | ) | ||||||
Other interest-earning assets | (49 | ) | 97 | 48 | ||||||||
Total Earning Assets | (1,135 | ) | 1,407 | 272 | ||||||||
Interest paid on: | ||||||||||||
Interest bearing deposits | 1,394 | (2,056 | ) | (662 | ) | |||||||
FHLB advances and other borrowings | 30 | (46 | ) | (16 | ) | |||||||
Long-term borrowings at other banks | - | - | - | |||||||||
Total Interest-Bearing Liabilities | 1,424 | (2,102 | ) | (678 | ) | |||||||
Net Interest Income | $ | (2,559 | ) | $ | 3,509 | $ | 950 |
Provision for Loan Losses. The Company recorded a provision for loan losses of $459,000 for the six months ended June 30, 2010 compared to a provision of $327,000 for the six months ended June 30, 2009. The Bank’s management reviews the level of the allowance for loan losses on a regular basis and establishes the provision for loan losses based upon the volume and types of lending, delinquency levels, loss experience, the amount of impaired and classified loans, economic conditions and other relevant factors related to the collectability of the loan portfolio. The provision was higher for the second half of 2010 primarily due to changes in economic conditions and in the mix of loans in the Bank’s portfolio and, to a lesser extent, growth in the Bank’s loan portfolio during that quarter.
Non-interest Income. The following table summarizes non-interest income for the six months ended June 30, 2010 and 2009 and the percentage change for each category of income.
Six Months Ended June 30, | ||||||||||||
2010 | 2009 | % Change | ||||||||||
(Dollars in thousands) | ||||||||||||
Non-interest income | ||||||||||||
Service charges on deposit accounts and other fees | 604 | 577 | 4.68 | % | ||||||||
Loan servicing and other fees | 45 | 31 | 45.16 | % | ||||||||
Net gains on sales of mortgage loans held for sale | 563 | 698 | (19.34 | ) % | ||||||||
Net realized gain on sales of available-for-sale securities | 77 | 5 | 1,440.00 | % | ||||||||
Insurance and brokerage commission | 70 | 62 | 12.90 | % | ||||||||
Other | 12 | 12 | - | % | ||||||||
Total noninterest income | $ | 1,371 | $ | 1,385 | (1.01 | ) % |
Non-interest income experienced a slight decrease of $14,000 for the six months ended June 30, 2010 compared to the corresponding period in 2009. The decrease was primarily due to lower net gains on sales of loans held for sale which declined $135,000 during the first half of 2010 compared to the first half of 2009 as refinancing activity decreased during the six months ended June 30, 2010 compared to the same period one year ago. This decrease was partially offset by an increase of $72,000 in net realized gains on sales of available-for-sale securities and an increase of $27,000 in service charges and other fees during the six-month period ended June 30, 2010 compared to the six-month period ended June 30, 2009.
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Non-interest Expense. The following table summarizes non-interest expense for the six months ended June 30, 2010 and 2009 and the percentage change for each expense category.
Six Months Ended June 30, | ||||||||||||
2010 | 2009 | % Change | ||||||||||
(Dollars in Thousands) | ||||||||||||
Non-interest expense | ||||||||||||
Salaries and employee benefits | $ | 3,149 | $ | 2,992 | 5.25 | % | ||||||
Net occupancy | 336 | 338 | (0.59 | ) % | ||||||||
Equipment | 362 | 320 | 13.13 | % | ||||||||
Data processing | 444 | 484 | (8.26 | ) % | ||||||||
Professional fees | 197 | 232 | (15.09 | ) % | ||||||||
Marketing | 136 | 164 | (17.07 | ) % | ||||||||
Office expense | 136 | 146 | (6.85 | ) % | ||||||||
Loan collection and repossession expense | 126 | 8 | 1475.00 | % | ||||||||
Other | 917 | 1,092 | (16.03 | ) % | ||||||||
Total non-interest expense | $ | 5,803 | $ | 5,776 | 0.47 | % |
Total non-interest expense was $5.8 million for the six months ended June 30, 2010, a $27,000 increase as compared to the same period in 2009. Salaries and employee benefits increased $157,000 during the first six months of 2010 compared to the first six months of 2009 primarily due to increased incentive accruals. Loan collection and repossession expense increased by $118,000 to $126,000 during the first six months of 2010 compared to the first six months of 2009 primarily due to costs associated with foreclosures on one-to-four family residential loans and one commercial real estate loan and the costs incurred to maintain and repair foreclosed properties. Equipment expense increased $42,000 for the six months ended June 30, 2010 compared to the six months ended June 30, 2009, primarily due to higher depreciation and maintenance contract expense.
These increases in non-interest expense were partially offset by lower professional fees which decreased $35,000 primarily due to a decline in audit and tax expense for the first six months of 2010 compared to the first six months of 2009. Data processing charges decreased by $40,000 for the first half of 2010 compared to the first half of 2009, primarily due to negotiated lower fees with our main core processing provider. Other non-interest expense decreased $175,000 for the six months ended June 30, 2010 compared to the same period of 2009. The decrease in other non-interest expense was primarily attributable to lower FDIC assessments for the first quarter of 2010 compared to the first quarter of 2009. During the first quarter of 2009, the FDIC imposed industry-wide increases in asses sment rates, which negatively affected non-interest expense for the period and throughout fiscal 2009, and also imposed a one-time special assessment which occurred at June 30, 2009.
Income Taxes. Income tax expense for the six months ended June 30, 2010 was $584,000 compared to $155,000 for the same period in 2009. The effective income tax rate for the six months ended June 30, 2010 was 47.0% compared to 33.3% for the six months ended June 30, 2009. The increase in the income tax expense was due to higher taxable income. Additionally, during the second quarter of 2010 management adjusted the income tax accrual to more accurately reflect the Company’s income tax position.
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Liquidity Management. Liquidity is the ability to meet current and future financial obligations of a short-term nature. The Bank’s primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of investment securities and borrowings from the Federal Home Loan Bank of Cincinnati, Federal Reserve Bank, repurchase agreements and federal funds purchased. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.
The Bank 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.
The Bank’s most liquid assets are cash and cash equivalents and interest-bearing deposits. The levels of these assets depend on its operating, financing, lending and investing activities during any given period. At June 30, 2010, cash and cash equivalents totaled $19.7 million. Securities classified as available-for-sale, totaling $76.4 million at June 30, 2010, provide additional sources of liquidity. In addition, at June 30, 2010, the Bank’s maximum collateral borrowing capacity was approximately $42.0 million from the Federal Home Loan Bank of Cincinnati and its maximum collateral borrowing capacity through the Discount Window at the Federal Reserve Bank was $41.9 million. At June 30, 2010, the Bank had $13.0 million of Federal Home Loan Bank advances outstanding. At June 30, 2010, the Bank did not h ave any advances outstanding through the Discount Window.
At June 30, 2010, the Company (on an unconsolidated basis) had liquid assets of $14.9 million. These funds are available to pay dividends, repurchase stock and for other general corporate purposes.
Capital Management. The Bank is subject to various regulatory capital requirements administered by the Office of Thrift Supervision, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At June 30, 2010, the Bank exceeded all of its regulatory capital requirements and was considered “well capitalized” under regulatory guidelines.
The following table includes the Bank’s capital ratios as of June 30, 2010:
Tier 1 Core Capital (to adjusted total assets) | 13.44 | % | ||
Tangible Equity Ratio (to tangible assets) | 13.44 | % | ||
Tier 1 Risk-Based Capital (to risk-weighted assets) | 18.20 | % | ||
Total Risk-Based Capital (to risk-weighted assets) | 19.18 | % |
Dividends. The Board of Directors of the Company declared and paid dividends per common share of $505,000 during the first half of 2010. The dividend payout ratio for the first six months of 2010, representing dividends per share divided by diluted earnings per share, was 66.7%. The dividend payout is continually reviewed by management and the Board of Directors.
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.
For the six months ended June 30, 2010, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.
25
Effects of Inflation and Changing Prices. The unaudited condensed consolidated interim financial statements and related financial data presented in this interim report have been prepared according to GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or the same extent as the prices of goods and services.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We believe that, at June 30, 2010, there has not been any material change in the disclosure regarding this item as set forth in our Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the SEC on March 5, 2010.
Item 4. Controls and Procedures.
The Company’s management, including the Company’s principal executive officer and principal financial officer, has evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the SEC (1) is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, the Company’s management, including the Company’s principal executive officer and principal financial officer has evaluated the Company’s “Internal Control Over Financial Reporting,” as such term is defined in Rule 13a-15(f) promulgated under the Exchange Act. Based on that evaluation, no change in the Company’s internal control over financial reporting occurred during the quarter ended June 30, 2010 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
At June 30, 2010, the Company was not a party to any pending legal proceedings. At June 30, 2010, First Federal Savings Bank was not a party to any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Such routine legal proceedings, in the aggregate, are believed by management to be immaterial to the Bank’s financial condition and results of operations.
Item 1A. Risk Factors.
For information regarding the Company’s risk factors, see “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the SEC on March 5, 2010. As of June 30, 2010, the risk factors of the Company have not changed materially from those disclosed in the Form 10-K except for the following additional risk factors.
26
Recently enacted regulatory reform may have a material impact on the Company’s operations.
On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which significantly changes the regulation of financial institutions and the financial services industry. The Dodd-Frank Act includes provisions affecting large and small financial institutions alike, including several provisions that will profoundly affect how community banks, thrifts, and small bank and thrift holding companies, such as the Company, will be regulated in the future. Among other things, these provisions abolish the Office of Thrift Supervision and transfer its functions to the other federal banking agencies, relax rules regarding interstate branching, allow financial institutions to pay interest on business ch ecking accounts, change the scope of federal deposit insurance coverage, and impose new capital requirements on bank and thrift holding companies. The Dodd-Frank Act also establishes the Bureau of Consumer Financial Protection as an independent entity within the Federal Reserve, which will be given the authority to promulgate consumer protection regulations applicable to all entities offering consumer financial services or products, including banks. Additionally, the Dodd-Frank Act includes a series of provisions covering mortgage loan origination standards affecting, among other things, originator compensation, minimum repayment standards, and pre-payments. The Dodd-Frank Act contains numerous other provisions affecting financial institutions of all types, many of which may have an impact on the operating environment of the Company in substantial and unpredictable ways. Consequently, the Dodd-Frank Act is likely to affect the Company’s cost of doing business , it may limit or expand the Company’s permissible activities, and it may affect the competitive balance within the Company’s industry and market areas. The nature and extent of future legislative and regulatory changes affecting financial institutions, including as a result of the Dodd-Frank Act, is very unpredictable at this time. The Company’s management is actively reviewing the provisions of the Dodd-Frank Act, many of which are phased-in over the next several months and years, and assessing its probable impact on the business, financial condition, and results of operations of the Company. However, the ultimate effect of the Dodd-Frank Act on the financial services industry in general, and the Company in particular, is uncertain at this time.
Flooding or other natural disasters could harm the Company’s business.
The severe flooding that occurred in the Company’s primary market area in early May 2010 could have a significant negative effect on the Company’s loan portfolio due to damage to properties pledged as collateral and by impairing certain borrowers’ abilities to repay their loans. As a result of the floods, the Company may be required to significantly increase its provision for loan losses in 2010. The negative impact of the floods may continue to affect the Company’s loan quality into the future. The severity and duration of the effects of the flooding will depend on a variety of factors that are beyond the Company’s control, including the amount and timing of government investment in t he area, the pace of rebuilding and economic recovery in Montgomery County and the surrounding area and the extent to which any property damage is covered by insurance. The effects described above are difficult to accurately predict or quantify at this time. As a result, uncertainties remain regarding the impact the flooding will have on the financial results of operations of the Company. Further, the area in which the Company operates may experience additional flooding or other natural disasters in the future, and some of those events may have effects similar to those caused by the May 2010 flooding.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The Company’s board of directors has authorized three stock repurchase programs. The stock repurchase programs allow the Company to proactively manage its capital position and return excess capital to shareholders. Under the first stock repurchase program, which was approved on December 17, 2008, the Company was authorized to repurchase up to 263,234 shares or 5.0%, of the Company’s outstanding common stock, through open market purchases or privately negotiated transactions, from time to time, depending on market conditions and other factors. The first stock repurchase program was completed during the first quarter of 2010. On March 4, 2010, a second repurchase program was approved which authorized the repurchase of up to 252,319 or 5.0% of the Company’s outstanding common s tock, through open market purchases or privately negotiated transactions, from time to time, depending on market conditions and other factors. On June 9, 2010, a third repurchase program was approved which authorized the repurchase of up to 240,524 or 5.0% of the Company’s outstanding common stock, through open market purchases or privately negotiated transactions, from time to time, depending on market conditions and other factors. There is no guarantee as to the exact number of shares to be repurchased by the Company.
27
The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company’s common stock during the most recent fiscal quarter.
Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Programs | Maximum Number of Shares That May Yet Be Purchased Under the Programs at the End of the Period | ||||||||||||
April 1, 2010 to April 30, 2010 | 65,100 | $ | 10.79 | 65,100 | 159,869 | |||||||||||
May 1, 2010 to May 31, 2010 | 1,900 | 10.78 | 1,900 | 157,969 | ||||||||||||
June 1, 2010 to June 30, 2010 | 104,700 | 10.78 | 104,700 | 293,793 | ||||||||||||
Total | 171,700 | $ | 10.79 | 171,700 | 293,793 |
Item 3. Defaults Upon Senior Securities.
Item 4. (Removed and Reserved).
Item 6. Exhibits
3.1 | Charter of First Advantage Bancorp (1) |
3.2 | Bylaws of First Advantage Bancorp (1) |
4.0 | Form of Stock Certificate of First Advantage Bancorp (1) |
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
32.0 | Section 1350 Certification |
(1) | Incorporated herein by reference to the exhibits to the Company’s Registration Statement on Form S-1 (File 333-144454), as amended, initially filed with the Securities and Exchange Commission on July 10, 2007. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FIRST ADVANTAGE BANCORP
Dated: August 9, 2010 | By: /s/Earl O. Bradley, III |
Earl O. Bradley, III | |
Chief Executive Officer | |
Dated: August 9, 2010 | By: /s/Patrick C. Greenwell |
Patrick C. Greenwell | |
Chief Financial Officer |
29