UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2008.
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: 0-50275
BCB Bancorp, Inc.
-----------------
(Exact name of registrant as specified in its charter)
New Jersey 26-0065262
---------- ----------
(State or other jurisdiction of incorporation (IRS Employer I.D. No.)
or organization)
104-110 Avenue C Bayonne, New Jersey 07002
---------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(201) 823-0700
--------------
(Registrant's telephone number, including area code)
-------------------------------------------------------------------------
(Former name, former address and former fiscal year if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and larger accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [ ]
Smaller Reporting Company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court.
[ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of November 10, 2008, BCB
Bancorp, Inc., had 4,585,761 shares of common stock, no par value outstanding.
BCB BANCORP INC., AND SUBSIDIARIES
INDEX
Page
PART I. CONSOLIDATED FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition as of
September 30, 2008 and December 31, 2007 (unaudited) ..................... 1
Consolidated Statements of Income, (Loss) for the three and nine
months ended September 30, 2008 and September 30, 2007 (unaudited) ....... 2
Consolidated Statement of Changes in Stockholders' Equity
for the nine months ended September 30, 2008 (unaudited) ................. 3
Consolidated Statements of Cash Flow for the nine months
ended September 30, 2008 and September 30, 2007 (unaudited) .............. 4
Notes to Unaudited Consolidated Financial Statements ..................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................... 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk ....... 20
Item 4. Controls and Procedures .......................................... 22
PART II. OTHER INFORMATION ........................................................ 23
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
BCB BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition at
September 30, 2008 and December 31, 2007
(Unaudited)
(in thousands except for share data)
At At
30-Sep-08 31-Dec-07
--------- ---------
ASSETS
------
Cash and amounts due from depository institutions $ 2,927 $ 2,970
Interest-earning deposits 4,821 8,810
--------- ---------
Total cash and cash equivalents 7,748 11,780
--------- ---------
Securities available for sale 1,016 2,056
Securities held to maturity, fair value $150,907 and $165,660
respectively 152,406 165,017
Loans held for sale 1,310 2,132
Loans receivable, net of allowance for loan losses of $4,854 and
$4,065 respectively 400,150 364,654
Premises and equipment 5,682 5,929
Federal Home Loan Bank of New York stock 6,299 5,560
Interest receivable, net 3,597 3,776
Other real estate owned 1,435 287
Deferred income taxes 1,782 1,352
Other assets 1,062 934
--------- ---------
Total assets $ 582,487 $ 563,477
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
-----------
Non-interest bearing deposits $ 32,317 $ 35,897
Interest bearing deposits 371,163 362,922
--------- ---------
Total deposits 403,480 398,819
Short-term Borrowings 14,500 --
Long-term Debt 114,124 114,124
Other Liabilities 2,326 2,024
--------- ---------
Total Liabilities 534,430 514,967
--------- ---------
STOCKHOLDERS' EQUITY
--------------------
Common stock, stated value $0.06
10,000,000 shares authorized; 5,148,136 and
5,078,858 shares respectively, issued 329 325
Additional paid-in capital 46,525 45,795
Treasury stock, at cost, 507,992 and 440,651 shares,
respectively (8,394) (7,385)
Retained Earnings 9,741 9,749
Accumulated other comprehensive income (loss) (144) 26
--------- ---------
Total stockholders' equity 48,057 48,510
--------- ---------
Total liabilities and stockholders' equity $ 582,487 $ 563,477
========= =========
See accompanying notes to consolidated financial statements.
1
BCB BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Income (Loss)
For the three and nine months ended
September 30, 2008 and 2007
(Unaudited)
(in thousands except for per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2008 2007 2008 2007
--------------------- ---------------------
Interest income:
Loans ............................................... $ 6,949 $ 6,271 $ 20,217 $ 17,903
Securities .......................................... 2,348 2,353 6,968 6,459
Other interest-earning assets ....................... 7 323 188 926
--------- --------- --------- ---------
Total interest income ............................ 9,304 8,947 27,373 25,288
--------- --------- --------- ---------
Interest expense:
Deposits:
Demand ........................................... 247 271 789 674
Savings and club ................................. 337 442 1,036 1,442
Certificates of deposit .......................... 2,209 2,641 6,950 7,498
--------- --------- --------- ---------
2,793 3,354 8,775 9,614
--------- --------- --------- ---------
Borrowed money ................................... 1,294 1,231 3,834 2,934
--------- --------- --------- ---------
Total interest expense ........................ 4,087 4,585 12,609 12,548
--------- --------- --------- ---------
Net interest income .................................... 5,217 4,362 14,764 12,740
Provision for loan losses .............................. 300 200 850 200
--------- --------- --------- ---------
Net interest income after provision for loan losses .... 4,917 4,162 13,914 12,540
--------- --------- --------- ---------
Non-interest income:
Fees and service charges ......................... 165 146 470 436
Gain on sales of loans originated for sale ....... 15 108 115 358
Other than temporary write-down on security ...... (2,756) -- (2,756) --
Other ............................................ 7 7 23 21
--------- --------- --------- ---------
Total non-interest income (loss) .............. (2,569) 261 (2,148) 815
--------- --------- --------- ---------
Non-interest expense:
Salaries and employee benefits ................... 1,368 1,463 4,121 4,264
Occupancy expense of premises .................... 281 268 806 748
Equipment ........................................ 511 487 1,513 1,425
Advertising ...................................... 59 73 181 268
Other ............................................ 488 486 1,452 1,268
--------- --------- --------- ---------
Total non-interest expense .................... 2,707 2,777 8,073 7,973
--------- --------- --------- ---------
Income (Loss) before income tax provision .............. (359) 1,646 3,693 5,382
Income tax provision ................................... 890 616 2,362 1,962
--------- --------- --------- ---------
Net Income (Loss) ...................................... $ (1,249) $ 1,030 $ 1,331 $ 3,420
========= ========= ========= =========
Net Income (Loss) per common share .....................
basic ...................................... $ (0.27) $ 0.22 $ 0.29 $ 0.70
========= ========= ========= =========
diluted .................................... $ (0.27) $ 0.21 $ 0.28 $ 0.68
========= ========= ========= =========
Weighted average number of common shares outstanding-
basic ...................................... 4,640 4,743 4,620 4,866
========= ========= ========= =========
diluted .................................... 4,640 4,862 4,708 4,993
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
2
BCB BANCORP INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
For the nine months ended September 30, 2008
(Unaudited)
(in thousands except for share data)
Accumulated
Other
Additional Treasury Retained Comprehensive
Common Stock Paid-In Capital Stock Earnings Income (Loss) Total
------------ --------------- --------- -------- ------------- --------
Balance, December 31, 2007 $ 325 $ 45,795 $ (7,385) $ 9,749 $ 26 $ 48,510
Exercise of Stock Options (69,278 shares) 4 618 -- -- -- 622
Tax benefit from exercise of stock options -- 112 -- -- -- 112
Treasury Stock Purchases (67,341 shares) -- -- (1,009) -- -- (1,009)
Cash dividend ($0.29 per share) declared -- -- -- (1,339) -- (1,339)
Net income for the nine months ended
September 30, 2008 -- -- -- 1,331 -- 1,331
Unrealized gain (loss) on securities,
available for sale, net of
deferred income tax of $114 -- -- -- -- (170) (170)
--------
Total Comprehensive income -- -- -- -- -- 1,161
------------ --------------- --------- -------- ------------- --------
Balance, September 30, 2008 $ 329 $ 46,525 $ (8,394) $ 9,741 $ (144) $ 48,057
------------ --------------- --------- -------- ------------- --------
See accompanying notes to consolidated financial statements.
3
BCB BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the nine months ended
September 30, 2008 and 2007
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
------------------------
2008 2007
------------------------
Cash flows from operating activities:
Net Income $ 1,331 $ 3,420
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation .................................................... 306 291
Amortization and accretion, net ................................. (529) (471)
Provision for loan losses ....................................... 850 200
Other than temporary write-down of security ..................... 2,756 --
Deferred income tax ............................................. (316) 30
Loans originated for sale ....................................... (5,137) (19,666)
Proceeds from sale of loans originated for sale ................. 6,074 20,701
(Gain) on sale of loans originated for sale ..................... (115) (358)
Decrease (Increase) in interest receivable ...................... 179 (72)
(Increase) in other assets ...................................... (128) (214)
(Decrease) Increase in accrued interest payable ................. (121) 197
Increase (Decrease) in other liabilities ........................ 535 (51)
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Net cash provided by operating activities .................... 5,685 4,007
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Cash flows from investing activities:
Purchase of FHLB stock ............................................. (739) (1,836)
Proceeds from calls of securities held to maturity ................. 68,870 --
Purchases of securities held to maturity ........................... (60,606) (20,000)
Proceeds from repayments on securities held to maturity ............ 4,398 2,705
Purchases of securities available for sale ......................... (2,000) --
Proceeds from sale of real estate owned ............................ 287 --
Net (increase) in loans receivable ................................. (37,062) (30,400)
Improvements to other real estate owned ............................ (241) --
Additions to premises and equipment ................................ (59) (417)
---------- ----------
Net cash (used in) investing activities ...................... (27,152) (49,948)
---------- ----------
Cash flows from financing activities:
Net increase in deposits ........................................... 4,661 25,221
Net change in short-term debt ...................................... 14,500 --
Proceeds of long-term debt ......................................... -- 40,000
Purchases of treasury stock ........................................ (1,009) (5,251)
Cash dividend paid ................................................. (1,339) (1,131)
Exercise of stock options .......................................... 622 44
---------- ----------
Net cash provided by financing activities .................... 17,435 58,883
---------- ----------
Net increase in cash and cash equivalents ............................. (4,032) 12,942
Cash and cash equivalents-begininng ................................... 11,780 25,837
---------- ----------
Cash and cash equivalents-ending ...................................... $ 7,748 $ 38,779
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes .................................................... $ 2,461 $ 2,176
Interest ........................................................ $ 12,730 $ 12,351
Transfer of loans to Real Estate Owned $ 1,194 $ 1,446
See accompanying notes to consolidated financial statements.
4
BCB Bancorp Inc., and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of BCB Bancorp, Inc. (the "Company") and the Company's wholly owned
subsidiaries, BCB Community Bank (the "Bank") and BCB Holding Company Investment
Company. The Company's business is conducted principally through the Bank. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and, therefore, do not
necessarily include all information that would be included in audited financial
statements. The information furnished reflects all adjustments that are, in the
opinion of management, necessary for a fair presentation of consolidated
financial condition and results of operations. All such adjustments are of a
normal recurring nature. The results of operations for the three and nine months
ended September 30, 2008 are not necessarily indicative of the results to be
expected for the fiscal year ended December 31, 2008 or any other future interim
period.
These statements should be read in conjunction with the Company's audited
consolidated financial statements and related notes for the year ended December
31, 2007, which are included in the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission.
Note 2 - Earnings (Loss) Per Share
Basic net income (loss) per common share is computed by dividing net income
(loss) by the weighted average number of shares of common stock outstanding. The
diluted net income (loss) per common share is computed by adjusting the weighted
average number of shares of common stock outstanding to include the effects of
outstanding stock options, if dilutive, using the treasury stock method.
Note 3 - Fair Values of Financial Instruments
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("Statement") No. 157, Fair Value
Measurements, which defines fair value, establishes a framework for measuring
fair value under GAAP, and expands disclosures about fair value measurements.
Statement No. 157 applies to other accounting pronouncements that require or
permit fair value measurements. The new guidance is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and for
interim periods within those fiscal years.
The primary effect of Statement No. 157 on the Company was to expand the
required disclosures pertaining to the methods used to determine fair values.
5
Statement No. 157 establishes a fair value hierarchy that prioritizes the inputs
to valuation methods used to measure fair value. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for identical assets and
liabilities (Level 1 measurements) and the lowest priority to unobservable
inputs (Level 3 measurements). The three levels of the fair value hierarchy
under Statement No. 157 are as follows:
Level 1: Unadjusted quoted prices in active markets that are accessible at
the measurement date for identical, unrestricted assets or liabilities.
Level 2: Quoted prices in markets that are not active, or inputs that are
observable either directly or indirectly, for substantially the full term
of the asset or liability.
Level 3: Prices or valuation techniques that require inputs that are both
significant to the fair value measurement and unobservable (i.e. supported
with little or no market activity).
An asset or liability's level within the fair value hierarchy is based on the
lowest level of input that is significant to the fair value measurement.
For assets measured at fair value on a recurring basis, the fair value
measurements by level within the fair value hierarchy used at September 30, 2008
are as follows, (in thousands):
(Level 1) (Level 2)
Quoted Prices in Significant (Level 3)
Active Markets Other Significant
Sept. 30, for Identical Observable Unobservable
Description 2008 Assets Inputs Inputs
-----------------------------------------------------------------------------------------
Securities available for sale $ 1,016 $ 1,016 $ -- $ --
-----------------------------------------------------------------------------------------
Total $ 1,016 $ 1,016
The fair value for the securities illustrated in the aforementioned table were
obtained through a primary broker/dealer from readily available price quotes as
of September 30, 2008.
Note 4 - Investment Securities
The Company recorded an Other Than Temporary Impairment charge of $2.8 million
on its $3.0 million investment in Federal National Mortgage Association, (FNMA)
preferred stock during the current quarter. The OTTI charge resulted from a
significant decline in the market value of these securities following the
announcement by the Federal Housing Finance Agency (FHFA) that FNMA would be
placed under conservatorship. Additionally, the FHFA eliminated the payment of
dividends on common stock and preferred stock and assumed the powers of the
Board and management of FNMA. Based on these factors, the Company evaluated the
6
impairment as other than temporary. Given a lack of eligible capital gain for
federal and state income tax purposes to offset capital losses at September 30,
2008, no tax benefit was recognized for the OTTI charge. A tax benefit of $1.1
million on the OTTI charge will be recognized in the fourth quarter of 2008 as a
result of the Emergency Economic Stabilization Act of 2008 enacted in October
2008 which allows entities to treat losses on these securities as ordinary
losses for tax purposes.
Note 5 - New Accounting Pronouncements
In February 2007, the FASB issued Statement No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities-Including an amendment of FASB
Statement No. 115." Statement No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. Unrealized gains
and losses on items for which the fair value option has been elected will be
recognized in earnings at each subsequent reporting date. Statement No. 159 is
effective for our Company January 1, 2008. The adoption of Statement No. 159 had
no impact on our consolidated financial statements.
In March 2007, the FASB ratified Emerging Issues Task Force ("EITF") Issue No.
06-10 "Accounting for Collateral Assignment Split-Dollar Life Insurance
Agreements" (EITF 06-10"). EITF 06-10 provides guidance for determining a
liability for postretirement benefit obligation as well as recognition and
measurement of the associated asset on the basis of the terms of the collateral
assignment agreement. EITF 06-10 is effective for fiscal years beginning after
December 15, 2007. The application of EITF 06-10 had no impact on the
consolidated financial statements.
In June 2007, the EITF reached a consensus on Issue No. 06-11, "Accounting for
Income Tax Benefits of Dividends on Share-Based Payment Awards" ("EITF 06-11").
EITF 06-11 states that an entity should recognize a realized tax benefit
associated with dividends on nonvested equity shares, nonvested equity share
units and outstanding equity share options charged to retained earnings as an
increase in additional paid in capital. The amount recognized in additional paid
in capital should be included in the pool of excess tax benefits available to
absorb potential future tax deficiencies on share-based payment awards. EITF
06-11 should be applied prospectively to income tax benefits of dividends on
equity-classified share-based payment awards that are declared in fiscal years
beginning after December 15, 2007. The application of EITF 06-11 had no impact
on the consolidated financial statements.
FASB Statement No. 160 "Noncontrolling Interests in Consolidated Financial
Statements--an amendment of ARB No. 51" was issued in December of 2007. This
Statement establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. The
guidance will become effective as of the beginning of a company's fiscal year
beginning after December 15, 2008. The Company believes that this new
pronouncement will not have a material impact on its consolidated financial
statements.
Staff Accounting Bulletin ("SAB") No. 109, "Written Loan Commitments Recorded at
Fair Value Through Earnings" expresses the views of the staff regarding written
loan commitments
7
that are accounted for at fair value through earnings under generally accepted
accounting principles. To make the staff's views consistent with current
authoritative accounting guidance, the SAB revises and rescinds portions of SAB
No. 105, "Application of Accounting Principles to Loan Commitments."
Specifically, the SAB revises the SEC staff's views on incorporating expected
net future cash flows related to loan servicing activities in the fair value
measurement of a written loan commitment. The SAB retains the staff's views on
incorporating expected net future cash flows related to internally-developed
intangible assets in the fair value measurement of a written loan commitment.
The staff expects registrants to apply the views in Question 1 of SAB No. 109 on
a prospective basis to derivative loan commitments issued or modified in fiscal
quarters beginning after December 15, 2007. The application of SAB 109 had no
impact on the consolidated financial statements.
SAB No. 110 amends and replaces Question 6 of Section D.2 of Topic 14,
"Share-Based Payment," of the Staff Accounting Bulletin series. Question 6 of
Section D.2 of Topic 14 expresses the views of the staff regarding the use of
the "simplified" method in developing an estimate of expected term of "plain
vanilla" share options and allows usage of the "simplified" method for share
option grants prior to December 31, 2007. SAB No. 110 allows public companies
which do not have historically sufficient experience to provide a reasonable
estimate to continue use of the "simplified" method for estimating the expected
term of "plain vanilla" share option grants after December 31, 2007. SAB No. 110
is effective January 1, 2008. The Company uses the "simplified" method as
permitted under SAB No. 110.
In February 2008, the FASB issued FASB Staff Position ("FSP") 157-2, "Effective
Date of FASB Statement No. 157," that permits a one-year deferral in applying
the measurement provisions of Statement No. 157 to non-financial assets and
non-financial liabilities (non-financial items) that are not recognized or
disclosed at fair value in an entity's financial statements on a recurring basis
(at least annually). Therefore, if the change in fair value of a non-financial
item is not required to be recognized or disclosed in the financial statements
on an annual basis or more frequently, the effective date of application of
Statement No. 157 to that item is deferred until fiscal years beginning after
November 15, 2008 and interim periods within those fiscal years. This deferral
does not apply, however, to an entity that applied Statement No. 157 in interim
or annual financial statements prior to the issuance of FSP 157-2. The Company
is currently evaluating the potential impact, if any, of the adoption of FSP
157-2 on its consolidated financial statements.
In May 2008, the FASB issued Statement No. 162, "The Hierarchy of Generally
Accepted Accounting Principles." This Statement identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements. This Statement is effective 60 days
following the SEC's approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, "The Meaning of Present Fairly in Conformity with
Generally Accepted Accounting Principles." The Company is currently evaluating
the potential impact the new pronouncement will have on its consolidated
financial statements.
8
In June 2008, the FASB issued FSP EITF 03-6-1, "Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities." This
FSP clarifies that all outstanding unvested share-based payment awards that
contain rights to nonforfeitable dividends participate in undistributed earnings
with common shareholders. Awards of this nature are considered participating
securities and the two-class method of computing basic and diluted earnings per
share must be applied. This FSP is effective for fiscal years beginning after
December 15, 2008. The Company is currently evaluating the potential impact the
new pronouncement will have on its consolidated financial statements.
In October 2008, the FASB issued FSP SFAS No. 157-3, "Determining the Fair Value
of a Financial Asset When The Market for That Asset Is Not Active" (FSP 157-3),
to clarify the application of the provisions of Statement No. 157 in an inactive
market and how an entity would determine fair value in an inactive market. FSP
157-3 is effective immediately and applies to our September 30, 2008 financial
statements. The application of the provisions of FSP 157-3 did not materially
affect our results of operations or financial condition as of and for the
periods ended September 30, 2008.
9
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Financial Condition
Total assets increased by $19.0 million or 3.4% to $582.5 million at September
30, 2008 from $563.5 million at December 31, 2007. The Bank continued to grow
assets, funded primarily through cash flow provided by retail deposit growth,
repayments and prepayments of loans and mortgage backed securities as well as
the utilization of Federal Home Loan Bank advances. During the first nine months
of 2008 the Company decreased its interest earning deposits to fund loan
originations which provide higher yields than the money market instruments
representing a high level of our interest earning deposits. Asset growth
stabilized as management is concentrating on controlled growth and maintaining
adequate liquidity in the anticipation of funding outstanding loan commitments.
The composition of the Bank's assets has shifted more to loans reflecting
management's desire to obtain higher yields from loan products than are
obtainable from other types of investments. We intend to continue to grow at a
measured pace consistent with our capital levels, the current economic
environment and as business opportunities permit.
Total cash and cash equivalents decreased by $4.1 million or 34.7% to $7.7
million at September 30, 2008 from $11.8 million at December 31, 2007.
Investment securities classified as available-for-sale decreased by $1.04
million or 50.5% to $1.02 million at September 30, 2008 from $2.06 million at
December 31, 2007. Additionally, investment securities classified as
available-for-sale decreased by $2.71 million or 72.7% to $1.02 million at
September 30, 2008 from $3.73 million at June 30, 2008. The Company recorded an
other than temporary impairment (OTTI) charge of $2.8 million on its $3.0
million investment in two Federal National Mortgage Association, (FNMA)
preferred stock issues during the current quarter. The OTTI charge resulted from
a significant decline in the market value of these securities following the
announcement by the Federal Housing Finance Agency (FHFA) that FNMA would be
placed under conservatorship. Additionally, the FHFA eliminated the payment of
dividends on common stock and preferred stock and assumed the powers of the
Board and management of FNMA. Based on these factors, the Company evaluated the
impairment as other than temporary. Given a lack of eligible capital gain for
federal and state income tax purposes to offset capital losses at September 30,
2008, no tax benefit was recognized for the OTTI charge. A tax benefit of $1.1
million on the OTTI charge will be recognized in the fourth quarter of 2008 as a
result of the Emergency Economic Stabilization Act of 2008 enacted in October
2008 which allows entities to treat losses on these securities as ordinary
losses for tax purposes.
Investment securities classified as held-to-maturity decreased by $12.6 million
or 7.6% to $152.4 million at September 30, 2008 from $165.0 million at December
31, 2007. This decrease was primarily attributable to call options exercised on
$68.9 million of callable agency securities during the nine months ended
September 30, 2008, partially offset by
10
the reinvestment of $60.7 million into the investment portfolio and $4.4 million
of repayments and prepayments in the mortgage backed securities portfolio. The
balance of the proceeds was deployed to the loan portfolio in an effort to
increase yield with higher yielding loan products.
Loans receivable increased by $35.5 million or 9.7% to $400.2 million at
September 30, 2008 from $364.7 million at December 31, 2007. The increase
resulted primarily from a $30.8 million increase in real estate mortgages
comprising residential, commercial, construction and participation loans with
other financial institutions, net of amortization, a $4.2 million increase in
commercial loans comprising business loans and commercial lines of credit, net
of amortization, and a $762,000 increase in consumer loans, net of amortization.
The balance of loans in process as of September 30, 2008 was $20.0 million. At
September 30, 2008 the allowance for loan losses was $4.9 million or 109.24% of
non-performing assets.
Deposits increased by $4.7 million or 1.2% to $403.5 million at September 30,
2008 from $398.8 million at December 31, 2007. The increase resulted primarily
from an increase of $3.7 million in time deposit accounts, and a $1.1 million
increase in savings and club accounts, partially offset by a $114,000 decrease
in transaction accounts. During the nine months ended September 30, 2008, the
Federal Open Market Committee, (FOMC) decreased short term interest rates in an
effort to lessen the impact of a possible recession. This has significantly
resulted in an upward sloping normalization of the yield curve. As shorter term
interest rates have decreased, our cost of short term time deposits have also
decreased.
The balance of borrowed money increased by $14.5 million or 12.7% to $128.6
million at September 30, 2008 from $114.1 million at December 31, 2007. The
purpose of the borrowings reflects the use of long term advances as well as an
overnight line of credit from the Federal Home Loan Bank to augment deposits as
the Bank's funding source for originating loans and investing in Government
Sponsored Enterprise (GSE) investment securities.
Stockholders' equity decreased by $453,000 to $48.1 million at September 30,
2008 from $48.5 million at December 31, 2007. The decrease in stockholders'
equity is primarily attributable to the payment of three quarterly cash
dividends totaling $1.3 million as well as $1.0 million paid to repurchase
67,341 shares of common stock, partially offset by net income of the Company of
$1.3 million for the nine months ended September 30, 2008 and $622,000 from
69,278 shares issued from stock option exercises. At September 30, 2008 the
Bank's Tier 1, Tier 1 Risk-Based and Total Risk Based Capital Ratios were 9.02%,
13.16% and 14.38% respectively.
On October 14, 2008, the U.S. Treasury announced that it would purchase equity
stakes in a number of banks and savings and loan associations. Under the Capital
Purchase Program of the Troubled Assets Relief Program (TARP), $250 billion of
the $700 billion authorized by the Emergency Economic Stabilization Act of 2008
will be made available by the U.S. Treasury to a variety of U.S. financial
institutions in exchange for
11
preferred stock. In connection with its purchase of preferred stock, the U.S.
Treasury will receive warrants to purchase common stock with an aggregate market
price equal to 15% of the preferred investment. Financial institutions that take
part in the TARP Capital Purchase Program will be required to adopt the U.S.
Treasury's standards for executive compensation and corporate governance for the
period during which the U.S. Treasury holds equity issued under the TARP Capital
Purchase Program. The U.S. Treasury also announced that nine major financial
institutions had already agreed to participate in the TARP Capital Purchase
Program, and numerous other financial institutions have subsequently agreed to
take part.
On October 14, 2008, the FDIC announced the establishment of the Temporary
Liquidity Guarantee Program, which was designed to strengthen confidence and
encourage liquidity in the banking system by guaranteeing the (1) newly issued
senior unsecured debt and (2) non-interest-bearing transaction accounts of
participating institutions. All eligible entities will be covered under the
program unless they opt out of one or both of these components by December 5,
2008 (an extension from the original opt-out date of November 12, 2008).
Following that deadline, institutions that have opted out of either or both
components cannot then opt in. Similarly, institutions that have opted in by the
December 5th deadline may not then opt out. The Temporary Liquidity Guarantee
Program will be in effect through December 31, 2009.
As of this date, we have not applied to the U.S. Treasury to receive equity
capital through the TARP Capital Purchase Program nor have we applied to the
FDIC to opt in or out of the Temporary Liquidity Guarantee Program. However, as
the details and ramifications of these and any other plans that may be
introduced, are clarified, we will continue to review them in order to determine
whether or not we should participate in them.
Results of Operations
Three Months
Net income decreased by $2.28 million to a net loss of $1.25 million for the
three months ended September 30, 2008 from net income of $1.03 million for the
three months ended September 30, 2007. The decrease in net income was due to
primarily to an OTTI charge, as previously discussed, on two securities in our
securities available-for-sale portfolio, an increase in provision for loan
losses, a decrease in non-interest income and an increase in income tax expense,
partially offset by an increase in net interest income and a decrease in
non-interest expense.
Net interest income increased by $855,000 or 19.6% to $5.2 million for the three
months ended September 30, 2008 from $4.4 million for the three months ended
September 30, 2007. This increase in net interest income resulted primarily from
an increase of $23.6 million or 4.3% in the average balance of interest earning
assets to $569.3 million for the three months ended September 30, 2008 from
$545.7 million for the three months ended September 30, 2007, partially offset
by a slight decrease in the average yield on interest earning assets to 6.54%
for the three months ended September 30, 2008 from 6.56% for the three months
ended September 30, 2007. The average balance of interest bearing
12
liabilities increased by $28.0 million or 6.0% to $495.7 million for the three
months ended September 30, 2008 from $467.7 million for the three months ended
September 30, 2007 and the average cost of interest bearing liabilities
decreased by 62 basis points to 3.30% for the three months ended September 30,
2008 from 3.92% for the three months ended September 30, 2007. As a consequence,
our net interest margin increased to 3.67% for the three months ended September
30, 2008 from 3.20% for the three months ended September 30, 2007.
Interest income on loans receivable increased by $678,000 or 10.8% to $6.95
million for the three months ended September 30, 2008 from $6.27 million for the
three months ended September 30, 2007. The increase was primarily attributable
to an increase in the balance of average loans receivable of $56.3 million or
16.4% to $400.0 million for the three months ended September 30, 2008 from
$343.7 million for the three months ended September 30, 2007, partially offset
by a decrease in the average yield on loans receivable to 6.93% for the three
months ended September 30, 2008 from 7.26% for the three months ended September
30, 2007. The increase in average loans reflects management's philosophy to
deploy funds in higher yielding instruments, specifically commercial real estate
loans, in an effort to achieve higher returns. The decrease in average yield
reflects the competitive price environment prevalent in the Bank's primary
market area on loan facilities as well as the repricing downward of certain
rates on loan facilities tied to variable indices, consistent with the decrease
in the prime lending rate through the reduction in rates forwarded by the FOMC's
philosophy of easing market rates. The current economic environment may have an
adverse impact on this business strategy as more conservative loan underwriting
standards may preclude loan origination opportunities, thereby possibly limiting
loan growth to an undetermined degree.
Interest income on securities decreased by $5,000 or 0.2% to $2.348 million for
the three months ended September 30, 2008 from $2.353 million for the three
months ended September 30, 2007. This decrease was primarily due to a decrease
in the average balance of securities held-to-maturity of $8.9 million or 5.2% to
$162.9 million for the three months ended September 30, 2008 from $171.8 million
for the three months ended September 30, 2007, partially offset by an increase
in the average yield on securities held-to-maturity to 5.77% for the three
months ended September 30, 2008 from 5.48% for the three months ended September
30, 2007. The decrease in average balance reflects management's philosophy to
deploy funds in higher yielding instruments, specifically commercial real estate
loans, in an effort to achieve higher returns.
Interest income on other interest-earning assets decreased by $316,000 to $7,000
for the three months ended September 30, 2008 from $323,000 for the three months
ended September 30, 2007. This decrease was primarily due to a $23.2 million
decrease in the average balance of other interest-earning assets to $5.1 million
for the three months ended September 30, 2008 from $28.3 million for the three
months ended September 30, 2007 and a decrease in the average yield on other
interest-earning assets to 0.63% for the three months ended September 30, 2008
from 4.57% for the three months ended September 30, 2007. The decrease in the
average yield reflects the lower short-term interest rate environment for
overnight deposits during the three months ended September
13
30, 2008 as compared to the three months ended September 30, 2007. The decrease
in the average balance primarily reflects management's philosophy to deploy
funds into loans in an effort to achieve higher returns.
Total interest expense decreased by $498,000 or 10.8% to $4.1 million for the
three months ended September 30, 2008 from $4.6 million for the three months
ended September 30, 2007. The decrease resulted primarily from a decrease in the
average cost of interest bearing liabilities to 3.30% for the three months ended
September 30, 2008 from 3.92% for the three months ended September 30, 2007,
partially offset by an increase in the balance of average interest bearing
liabilities of $28.0 million or 6.0% to $495.7 million for the three months
ended September 30, 2008 from $467.7 million for the three months ended
September 30, 2007. The decrease in the average cost reflects the lower short
term interest rate environment which occurred following the Federal Reserve's
significant reduction of short-term interest rates.
The provision for loan losses totaled $300,000 and $200,000 for the three month
periods ended September 30, 2008 and 2007, respectively. The provision for loan
losses is established based upon management's review of the Bank's loans and
consideration of a variety of factors including, but not limited to, (1) the
risk characteristics of the loan portfolio, (2) current economic conditions, (3)
actual losses previously experienced, (4) the level of loan growth and (5) the
existing level of reserves for loan losses that are possible and estimable.
During the three months ended September 30, 2008, the Bank experienced $7,000 in
net charge-offs, (consisting of $8,000 in charge-offs and $1,000 in recoveries).
During the three months ended September 30, 2007, the Bank experienced $61,000
in net charge-offs (consisting of $61,000 in charge-offs and no recoveries). The
Bank had non-performing loans totaling $3.0 million or 0.74% of gross loans at
September 30, 2008, $282,000 or 0.07% of gross loans at June 30, 2008 and $1.7
million or 0.48% of gross loans at September 30, 2007. The allowance for loan
losses was $4.9 million or 1.20% of gross loans at September 30, 2008, $4.6
million or 1.15% of gross loans at June 30, 2008 and $3.7 million or 1.04% of
gross loans at September 30, 2007. The amount of the allowance is based on
estimates and the ultimate losses may vary from such estimates. Management
assesses the allowance for loan losses on a quarterly basis and makes provisions
for loan losses as necessary in order to maintain the adequacy of the allowance.
While management uses available information to recognize losses on loans, future
loan loss provisions may be necessary based on changes in the aforementioned
criteria. In addition various regulatory agencies, as an integral part of their
examination process, periodically review the allowance for loan losses and may
require the Bank to recognize additional provisions based on their judgment of
information available to them at the time of their examination. Management
believes that the allowance for loan losses was adequate at September 30, 2008.
Total non-interest income decreased by $2.8 million to a loss of $2.6 million
for the three months ended September 30, 2008 from income of $261,000 for the
three months ended September 30, 2007. The decrease in non-interest income
resulted primarily from an OTTI charge of $2.8 million on $3.0 million of FNMA
preferred stock during the third quarter, as discussed previously. The Bank also
recorded a decrease in gain on sale of
14
loans originated for sale of $93,000 or 86.1% to $15,000 for the three months
ended September 30, 2008, from $108,000 for the three months ended September 30,
2007. The decrease in gain on sale of loans originated for sale reflects the
softening one- to four-family residential real estate market. The Company
recently made a strategic decision to eliminate our Retail Mortgage Division as
a separate division. Due to a continuing softening in the one- to four-family
residential real estate market, it was decided that this division's operation,
on an on-going basis, was determined to be cost prohibitive. The aforementioned
decreases in non-interest income were partially offset by an increase in general
fees, service charges and other income of $19,000 or 12.4% to $172,000 for the
three months ended September 30, 2008 from $153,000 for the three months ended
September 30, 2007.
Total non-interest expense decreased by $70,000 or 2.5% to $2.7 million for the
three months ended September 30, 2008 from $2.8 million for the three months
ended September 30, 2007. Salaries and employee benefits expense decreased by
$95,000 or 6.5% to $1.37 million for the three months ended September 30, 2008
from $1.46 million for the three months ended September 30, 2007. This decrease
was primarily attributable to a decrease in the number of full time equivalent
employees to 82 for the three months ended September 30, 2008 from 92 for the
three months ended September 30, 2007, partially offset by salary increases in
conjunction with annual reviews. Equipment expense increased by $24,000 or 4.9%
to $511,000 for the three months ended September 30, 2008 from $487,000 for the
three months ended September 30, 2007. The primary component of this expense
item is data service provider expense. Occupancy expense, advertising and other
non-interest expense increased by $1,000 or 0.1% to $828,000 for the three
months ended September 30, 2008 from $827,000 for the three months ended
September 30, 2007 as the Bank has endeavored to manage our non-interest expense
category somewhat conservatively during this challenging economic environment.
Other non-interest expense is comprised of directors' fees, stationary, forms
and printing, professional fees, legal fees, check printing, correspondent bank
fees, telephone and communication, shareholder relations and other fees and
expenses. During 2009 the Bank expects a significant increase in non-interest
expenses as a result of higher FDIC deposit insurance assessment.
Income tax expense increased $274,000 or 44.5% to $890,000 for the three months
ended September 30, 2008 from $616,000 for the three months ended September 30,
2007. The increase in income tax expense reflects the increase in net income
exclusive of the OTTI charge of $2.8 million discussed earlier. Excluding the
effect of the OTTI charge on income, the consolidated effective income tax rate
for the three months ended September 30, 2008 was 37.1% as compared to 37.4% for
the three months ended September 30, 2007.
Nine Months of Operations
Net income decreased by $2.1 million to $1.3 million for the nine months ended
September 30, 2008 from $3.4 million for the nine months ended September 30,
2007. The decrease in net income was due to primarily to an OTTI charge, as
previously
15
discussed, on two securities in our securities available-for-sale portfolio, an
increase in provision for loan losses, a decrease in non-interest income, an
increase in non-interest expense and an increase in income tax expense,
partially offset by an increase in net interest income.
Net interest income increased by $2.02 million or 15.9% to $14.76 million for
the nine months ended September 30, 2008 from $12.74 million for the nine months
ended September 30, 2007. The increase in net interest income resulted primarily
from an increase of $43.0 million or 8.3% in the average balance of interest
earning assets to $560.7 million for the nine months ended September 30, 2008
from $517.7 million for the nine months ended September 30, 2007, while the
average yield on interest earning assets remained static at 6.51% for the
respective nine month time periods ended September 30, 2008 and 2007. The
average balance of interest bearing liabilities increased by $45.9 million or
10.4% to $487.0 million for the nine months ended September 30, 2008 from $441.1
million for the nine months ended September 30, 2007, while the average cost of
interest bearing liabilities decreased to 3.45% for the nine months ended
September 30, 2008 from 3.79% for the nine months ended September 30, 2007. As a
consequence, our net interest margin increased to 3.51% for the nine months
ended September 30, 2008 from 3.28% for the nine months ended September 30,
2007.
Interest income on loans receivable increased by $2.3 million or 12.8% to $20.2
million for the nine months ended September 30, 2008 from $17.9 million for the
nine months ended September 30, 2007. The increase was primarily attributable to
an increase in the balance of average loans receivable of $56.5 million or 17.1%
to $386.0 million for the nine months ended September 30, 2008 from $329.5
million for the nine months ended September 30, 2007, partially offset by a
decrease in the average yield on loans receivable to 6.96% for the nine months
ended September 30, 2008 from 7.20% for the nine months ended September 30,
2007. The increase in average loans reflects management's philosophy to deploy
funds in higher yielding instruments, specifically commercial real estate loans,
in an effort to achieve higher returns. The current economic environment may
have an adverse impact on this business strategy as more conservative loan
underwriting standards may preclude loan origination opportunities, thereby
possibly limiting loan growth to an undetermined degree.
Interest income on securities increased by $509,000 or 7.8% to $7.0 million for
the nine months ended September 30, 2008 from $6.5 million for the nine months
ended September 30, 2007. The increase was primarily due to an increase in the
average balance of securities of $2.1 million or 1.3% to $161.2 million for the
nine months ended September 30, 2008 from $159.1 million for the nine months
ended September 30, 2007 and an increase in the average yield on securities to
5.76% for the nine months ended September 30, 2008 from 5.41% for the nine
months ended September 30, 2007. The increase in average balance reflects
management's philosophy to deploy funds in investments absent the opportunity to
invest in higher yielding loans in an effort to achieve higher returns. The
increase in average yield reflects the higher long term interest rate
environment during the nine months ended September 30, 2008.
16
Interest income on other interest-earning assets decreased by $738,000 or 79.7%
to $188,000 for the nine months ended September 30, 2008 from $926,000 for the
nine months ended September 30, 2007. This decrease was primarily due to a
decrease of $14.9 million or 55.6% in the average balance of other
interest-earning assets to $11.9 million for the nine months ended September 30,
2008 from $26.8 million for the nine months ended September 30, 2007 and a
decrease in the average yield on other interest-earning assets to 2.11% for the
nine months ended September 30, 2008 from 4.60% for the nine months ended
September 30, 2007. The decrease in the average yield reflects the lower
short-term interest rate environment for overnight deposits in 2008 as compared
to 2007. The decrease in the average balance primarily reflects management's
philosophy to deploy funds in higher yielding instruments, specifically
commercial real estate loans, in an effort to achieve higher returns.
Total interest expense increased by $61,000 or 0.5% to $12.61 million for the
nine months ended September 30, 2008 from $12.55 million for the nine months
ended September 30, 2007. The increase resulted primarily from an increase in
the balance of average interest bearing liabilities of $45.9 million or 10.4% to
$487.0 million for the nine months ended September 30, 2008 from $441.1 million
for the nine months ended September 30, 2007, partially offset by a decrease in
the average cost of interest bearing liabilities to 3.45% for the nine months
ended September 30, 2008 from 3.79% for the nine months ended September 30,
2007.
The provision for loan losses totaled $850,000 and $200,000 for the nine-month
periods ended September 30, 2008 and 2007, respectively. The provision for loan
losses is established based upon management's review of the Bank's loans and
consideration of a variety of factors including, but not limited to, (1) the
risk characteristics of the loan portfolio, (2) current economic conditions, (3)
actual losses previously experienced, (4) the level of loan growth and (5) the
existing level of reserves for loan losses that are possible and estimable.
During the nine months ended September 30, 2008, the Bank experienced $60,000 in
net charge-offs (consisting of $101,000 in charge-offs and $41,000 in
recoveries). During the nine months ended September 30, 2007, the Bank
experienced $275,000 in net charge-offs (consisting of $283,000 in charge-offs
and $8,000 in recoveries), primarily as a result of the repossession of a loan
to facilitate the construction of approximately ten residential units done in
participation with another financial institution. The Bank had non-performing
loans totaling $3.0 million or 0.74% of gross loans at September 30, 2008, $4.6
million or 1.16% of gross loans at December 31, 2007 and $1.7 million or 0.48%
of gross loans at September 30, 2007. The allowance for loan losses was $4.9
million or 1.20% of gross loans at September 30, 2008, $4.1 million or 1.10% of
gross loans at December 31, 2007 and $3.7 million or 1.16% of gross loans at
September 30, 2007. The amount of the allowance is based on estimates and the
ultimate losses may vary from such estimates. Management assesses the allowance
for loan losses on a quarterly basis and makes provisions for loan losses as
necessary in order to maintain the adequacy of the allowance. While management
uses available information to recognize losses on loans, future loan loss
provisions may be necessary based on changes in the aforementioned criteria. In
addition various regulatory agencies, as an integral part of their examination
process, periodically review the allowance for loan
17
losses and may require the Bank to recognize additional provisions based on
their judgment of information available to them at the time of their
examination. Management believes that the allowance for loan losses was adequate
at September 30, 2008.
Total non-interest income decreased by $2.96 million to a loss of $2.15 million
for the nine months ended September 30, 2008 from income of $815,000 for the
nine months ended September 30, 2007. The decrease in non-interest income
resulted primarily from an OTTI charge of $2.8 million on $3.0 million of FNMA
preferred stock during the third quarter, as discussed previously. The Bank also
recorded a decrease in gain on sale of loans originated for sale of $243,000 or
67.9% to $115,000 for the nine months ended September 30, 2008, from $358,000
for the nine months ended September 30, 2007. The decrease in gain on sale of
loans originated for sale reflects the softening one- to four-family residential
real estate market. The Company recently made a strategic decision to eliminate
our Retail Mortgage Division as a separate division. Due to a continuing
softening in the one- to four-family residential real estate market, it was
decided that this division's operation, on an on-going basis, was determined to
be cost prohibitive. The aforementioned decreases in non-interest income were
partially offset by an increase in general fees, service charges and other
income of $36,000 or 7.9% to $493,000 for the nine months ended September 30,
2008 from $457,000 for the nine months ended September 30, 2007.
Total non-interest expense increased by $100,000 or 1.3% to $8.1 million for the
nine months ended September 30, 2008 from $8.0 million for the nine months ended
September 30, 2007. Salaries and employee benefits expense decreased by $143,000
or 3.4% to $4.12 million for the nine months ended September 30, 2008 from $4.26
million for the nine months ended September 30, 2007. This decrease was
primarily attributable to a decrease in the number of full time equivalent
employees to 82 for the nine months ended September 30, 2008 from 92 for the
nine months ended September 30, 2007, partially offset by annual salary
increases in conjunction with annual reviews. Equipment expense increased by
$88,000 or 6.3% to $1.5 million for the nine months ended September 30, 2008
from $1.4 million for the nine months ended September 30, 2007. The primary
component of this expense item is data service provider expense which increases
with the growth of the Bank's assets. Occupancy expense increased by $58,000 or
7.8% to $806,000 for the nine months ended September 30, 2008 from $748,000 for
the nine months ended September 30, 2007. Advertising expense decreased by
$87,000 or 32.5% to $181,000 for the nine months ended September 30, 2008 from
$268,000 for the nine months ended September 30, 2007. Other non-interest
expense increased by $184,000 or 14.5% to $1.45 million for the nine months
ended September 30, 2008 from $1.27 million for the nine months ended September
30, 2007. The increase in other non-interest expense is primarily attributable
to increases in expenses commensurate with a growing franchise. Other
non-interest expense is comprised of directors' fees, stationary, forms and
printing, professional fees, legal fees, check printing, correspondent bank
fees, telephone and communication, shareholder relations and other fees and
expenses. During 2009 the Bank expects a significant increase in non-interest
expenses as a result of higher FDIC deposit insurance assessment.
18
Income tax expense increased by $400,000 or 20.0% to $2.4 million for the nine
months ended September 30, 2008 from $2.0 million for the nine months ended
September 30, 2007. The increase in income tax expense reflects the increase in
net income exclusive of the OTTI charge of $2.8 million discussed earlier.
Excluding the effect of the OTTI charge on income, the consolidated effective
income tax rate for the nine months ended September 30, 2008 was 36.6% as
compared to 36.5% for the nine months ended September 30, 2007.
19
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Management of Market Risk
General. The majority of our assets and liabilities are monetary in nature.
Consequently, one of our most significant forms of market risk is interest rate
risk. Our assets, consisting primarily of mortgage loans, have longer maturities
than our liabilities, consisting primarily of deposits. As a result, a principal
part of our business strategy is to manage interest rate risk and reduce the
exposure of our net interest income to changes in market interest rates.
Accordingly, our Board of Directors has established an Asset/Liability Committee
which is responsible for evaluating the interest rate risk inherent in our
assets and liabilities, for determining the level of risk that is appropriate
given our business strategy, operating environment, capital, liquidity and
performance objectives, and for managing this risk consistent with the
guidelines approved by the Board of Directors. Senior management monitors the
level of interest rate risk on a regular basis and the Asset/Liability
Committee, which consists of senior management and outside directors operating
under a policy adopted by the Board of Directors, meets as needed to review our
asset/liability policies and interest rate risk position.
The following table presents the Company's net portfolio value ("NPV"). These
calculations were based upon assumptions believed to be fundamentally sound,
although they may vary from assumptions utilized by other financial
institutions. The information set forth below is based on data that included all
financial instruments as of September 30, 2008. Assumptions have been made by
the Company relating to interest rates, loan prepayment rates, core deposit
duration, and the market values of certain assets and liabilities under the
various interest rate scenarios. Actual maturity dates were used for fixed rate
loans and certificate accounts. Investment securities were scheduled at either
the maturity date or the next scheduled call date based upon management's
judgment of whether the particular security would be called in the current
interest rate environment and under assumed interest rate scenarios. Variable
rate loans were scheduled as of their next scheduled interest rate repricing
date. Additional assumptions made in the preparation of the NPV table include
prepayment rates on loans and mortgage-backed securities, core deposits without
stated maturity dates were scheduled with an assumed term of 48 months, and
money market and noninterest bearing accounts were scheduled with an assumed
term of 24 months. The NPV at "PAR" represents the difference between the
Company's estimated value of assets and estimated value of liabilities assuming
no change in interest rates. The NPV for a decrease of 300 basis points has been
excluded since it would not be meaningful, in the interest rate environment as
of September 30, 2008. The following sets forth the Company's NPV as of
9/30/2008.
NPV as a % of Assets
Change in Net Portfolio $ Change from % Change from --------------------
Calculation Value PAR PAR NPV Ratio Change
----------- ------------- ------------- ------------- --------- --------
+300bp $ 24,582 $(35,763) -59.26% 4.62% -566 bps
+200bp 38,779 (21,566) -35.74 7.06 -322 bps
+100bp 53,084 (7,261) -12.03 9.35 -93 bps
PAR 60,345 -- -- 10.28 -- bps
-100bp 57,834 (2,511) -4.16 9.68 -60 bps
-200bp 52,747 (7,598) -12.59 8.70 -158 bps
bp - basis points
20
The table above indicates that at September 30, 2008, in the event of a 100
basis point decrease in interest rates, we would experience a 4.16% decrease in
NPV. In the event of a 100 basis point increase in interest rates, we would
experience a 12.03% decrease in NPV.
Certain shortcomings are inherent in the methodology used in the above interest
rate risk measurement. Modeling changes in NPV require making certain
assumptions that may or may not reflect the manner in which actual yields and
costs respond to changes in market interest rates. In this regard, the NPV table
presented assumes that the composition of our interest-sensitive assets and
liabilities existing at the beginning of a period remains constant over the
period being measured and assumes that a particular change in interest rates is
reflected uniformly across the yield curve regardless of the duration or
repricing of specific assets and liabilities. Accordingly, although the NPV
table provides an indication of our interest rate risk exposure at a particular
point in time, such measurements are not intended to and do not provide a
precise forecast of the effect of changes in market interest rates on our net
interest income, and will differ from actual results.
21
ITEM 4.
Controls and Procedures
Under the supervision and with the participation of the Company's management,
including the Chief Executive Officer, Chief Financial Officer and Principal
Accounting Officer, the Company has evaluated the effectiveness of the design
and operation of its disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period
covered by this quarterly report. Based upon that evaluation, the Chief
Executive Officer, Chief Financial Officer and Principal Accounting Officer
concluded that, as of the end of the period covered by this quarterly report,
the Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed in the reports that the Company files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. There has been no change in the Company's
internal control over financial reporting during the most recent fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
22
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1.A. RISK FACTORS
If Economic Conditions Deteriorate in our Primary Market, Our Results of
Operations and Financial Condition could be Adversely Impacted as Borrowers'
Ability to Repay Loans Declines and the Value of the Collateral Securing Loans
Decreases.
Our financial results may be adversely affected by changes in prevailing
economic conditions, including decreases in real estate values, changes in
interest rates which may cause a decrease in interest rate spreads, adverse
employment conditions, the monetary and fiscal policies of the federal
government and other significant external events. Decreases in real estate
values could potentially adversely affect the value of property used as
collateral for our mortgage loans. In the event that we are required to
foreclose on a property securing a mortgage loan, there can be no assurance that
we will recover funds in an amount equal to any remaining loan balance as a
result of prevailing general economic conditions, real estate values and other
factors associated with the ownership of real property. As a result, the market
value of the real estate underlying the loans may not, at any given time, be
sufficient to satisfy the outstanding principal amount of the loans.
Consequently, we would sustain loan losses and potentially incur a higher
provision for loan loss expense. Adverse changes in the economy may also have a
negative effect of the ability of borrowers to make timely repayments of their
loans, which could have an adverse impact on earnings.
Our Securities Portfolio may be Negatively Impacted by Fluctuations in Market
Value.
Our securities portfolio may be impacted by fluctuations in market value,
potentially reducing accumulated other comprehensive income and/or earnings.
Fluctuations in market value may be caused by changes in interest rates, lower
market prices for securities and lower investor demand. Our securities portfolio
is evaluated for other-than-temporary impairment on at least a quarterly basis.
If this evaluation shows an impairment to cash flow connected with one or more
securities, a potential loss to earnings may occur.
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Our Non-Interest Expense Will Increase As A Result of Increases In FDIC
Insurance Premiums
The Federal Deposit Insurance Corporation ("FDIC") imposes an assessment against
institutions for deposit insurance. This assessment is based on the risk
category of the institution and currently ranges from 5 to 43 basis points of
the institution's deposits. Federal law requires that the designated reserve
ratio for the deposit insurance fund be established by the FDIC at 1.15% to
1.50% of estimated insured deposits. If this reserve ratio drops below 1.15% or
the FDIC expects that it to do so within six months, the FDIC must, within 90
days, establish and implement a plan to restore the designated reserve ratio to
1.15% of estimated insured deposits within five years (absent extraordinary
circumstances).
Recent bank failures coupled with deteriorating economic conditions have
significantly reduced the deposit insurance fund's reserve ratio. As of June 30,
2008, the designated reserve ratio was 1.01% of estimated insured deposits at
March 31, 2008. As a result of this reduced reserve ratio, on October 16, 2008,
the FDIC published a proposed rule that would restore the reserve ratios to its
required level. The proposed rule would raise the current deposit insurance
assessment rates uniformly for all institutions by 7 basis points (to a range
from 12 to 50 basis points) for the first quarter of 2009. The proposed rule
would also alter the way the FDIC calculates federal deposit insurance
assessment rates beginning in the second quarter of 2009 and thereafter.
Under the proposed rule, the FDIC would first establish an institution's initial
base assessment rate. This initial base assessment rate would range, depending
on the risk category of the institution, from 10 to 45 basis points. The FDIC
would then adjust the initial base assessment (higher or lower) to obtain the
total base assessment rate. The adjustments to the initial base assessment rate
would be based upon an institution's levels of unsecured debt, secured
liabilities, and brokered deposits. The total base assessment rate would range
from 8 to 77.5 basis points of the institution's deposits. There can be no
assurance that the proposed rule will be implemented by the FDIC or implemented
in its proposed form.
In addition, the Emergency Economic Stabilization Act of 2008 (ESSA) temporarily
increased the limit on FDIC insurance coverage for deposits to $250,000 through
December 31, 2009, and the FDIC took action to provide coverage for newly-issued
senior unsecured debt and non-interest bearing transaction accounts in excess of
the $250,000 limit, for which institutions will be assessed additional premiums.
These actions will significantly increase our non-interest expense in 2009 and
in future years as long as the increased premiums are in place.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
Securities sold within the past three years without registering the securities
under the Securities Act of 1933
Other than as stated below, the Company has not sold any securities during the
past three years.
The Company conducted a secondary public stock offering during the fourth
quarter of 2005. The Company sold 1,265,000 shares of its common stock for an
aggregate offering price of $19.3 million. The Company offered 1,100,000 shares
of its common stock, (with an over-allotment option of 165,000 shares) to the
public at a price of $15.25. The stock offering was underwritten by Janney
Montgomery Scott LLC on a firm commitment basis. The Company's registration
statement on Form S-1 (Commission File No. 333-128214) was declared effective by
the Securities and Exchange Commission on December 13, 2005. The Company also
filed a rule 462 registration statement on Form S-1 (Commission File No.
333-130307) which was effective upon filing December 14, 2005. The sale of 1.1
million shares was completed on December 19, 2005, and the over-allotment was
exercised in full on January 5, 2006.
During 2005, the Company announced a stock repurchase plan which provides for
the purchase of up to 187,096 shares, adjusted for the 25% stock dividend paid
on October 27, 2005. On April 26, 2007, the Company announced a second stock
repurchase plan which provides for the repurchase of 5% or 249,080 shares of the
outstanding shares of the Company's common stock. On November 20, 2007, the
Company announced a third stock repurchase plan to repurchase 5% or 234,002
shares of the Company's common stock. This plan commenced upon the completion of
the prior plan. The Company's stock purchases during the last three months are
as follows:
Shares Average Total Number of Maximum Number of Shares
Period Purchased Price Shares Purchased That May Yet be Purchased
-------- --------- ------- ---------------- -------------------------
7/1-7/31 -- $ -- -- 162,186
8/1-8/31 -- $ -- -- 162,186
9/1-9/30 -- $ -- -- 162,186
Total -- $ -- -- 162,186
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibit 31.1 and 31.2 Officers' Certification filed pursuant to section 302 of
the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 Officers' Certification filed pursuant to section 906 of the
Sarbanes-Oxley Act of 2002.
26