Item
2.
Management's
Discussion and Analysis
Introduction
Some
of
the matters discussed below include forward-looking statements within the
meaning of the federal securities laws. Forward-looking statements often use
words such as “believe,” “expect,” “plan,” “may,” “will,” “should,” “project,”
“contemplate,” “anticipate,” “forecast,” “intend” or other words of similar
meaning. You can also identify them by the fact that they do not relate strictly
to historical or current facts. Our actual results and the actual outcome of
our
expectations and strategies could be materially different from those anticipated
or estimated for the reasons discussed below and the reasons under the heading
“Information Regarding Forward Looking Statements.”
Overview
Earnings
reflected a net loss of $21,000 for the nine months ended September 30, 2007
as
compared to net loss of $50,000 for the same period in 2006. This improvement
was primarily due to an increase in interest income as a result of an increase
in higher yielding commercial loan originations and an increase in gain on
sale
of loans as a result of selling residential loan originations, as well as a
decrease in non-interest expenses. These increases were partially offset by
an
increase in interest expense as a result of an increase in deposits in an
interest rate environment in which our customers are moving their funds into
shorter term accounts with higher interest rates. Interest income increased
$236,000, or 3.49%, non-interest income increased $102,000, or 58.29%, our
provision for loan losses decreased $132,000, or 38.82% and non-interest
expenses decreased $251,000, or 9.18%. These improvements were offset by a
$666,000, or 16.96%, increase in interest expenses.
Assets
declined during the first nine months of 2007 primarily because of our use
of
cash to repay $7,500,000 of borrowings. The decrease is also the result of
a
decrease in cash and cash equivalents of $1,310,000, or 45.95%, to $1,541,000
at
September 30, 2007 from $2,851,000 at December 31, 2006, a decrease in mortgage
backed securities held to maturity of $726,000, or 22.69%, to $2,474,000 at
September 30, 2007 from $3,200,000 at December 31, 2006, and a decrease in
investment securities held to maturity of $1,000,000, or 25.00%, to $3,000,000
at September 30, 2007 from $4,000,000 at December 31, 2006. These decreases
were
partially offset by an increase in investment securities available for sale
of
$293,000, or 3.44%, to $8,819,000 at September 30, 2007 from $8,526,000 at
December 31, 2006.
As
discussed in the Asset Quality section of this report, we hold a 19%
participation (approximately $1,083,000 in unpaid principal balance) in an
acquisition and development loan. This loan is a foreclosed real estate
participation loan. Recently, a real estate developer has made an offer to
purchase the property and the lead participating bank accepted a letter of
intent on June 26, 2007. The lead participating bank executed a contract with
a
90 day feasibility study period on July 26, 2007, which was extended to expire
on November 15, 2007. With a pending settlement by year end, we expect to
recover the carrying amount of the real estate, although there can be no
assurance that this will be the case. Additionally, a $100,000 business line
of
credit loan, restructured in the third quarter of 2007, is classified as
impaired, because we believe that there is a substantial likelihood that we
will
not collect the total amount of the outstanding principal balance on this loan.
To
remain
competitive and offer even more product line choice to our customers, we have
implemented a health savings account for health care expenses and we continue
to
offer a seven month certificate of deposit with what we believe is an attractive
interest rate.
In
addition, we now offer a comprehensive and full service approach to managing
finances and investing in the future. The creation of Slavie Financial Services
and the addition of a certified financial planner in June 2007 enables us to
bring investment guidance and financial planning expertise to our customers,
while expanding our ability to provide personalized services that focus on
the
successful financial well being of our customers.
We
continue to implement strategies formed during strategic planning meetings
of
the Board of Directors and the Company’s officers over the past year. In our
continued efforts to boost the yield of our interest earning assets during
a
period of net interest margin compression, management is selling a larger
percentage of the Company’s residential loan originations to facilitate our goal
of increasing and diversifying the mix of commercial loans to residential loans
in our portfolio. This strategy has enabled us to increase our fee income on
loans sold. In February 2007, we hired an experienced commercial loan originator
to further our goal of increasing the average outstanding balance of our
commercial loan portfolio. In addition, we intensified our marketing strategy
by
offering incentives to attract new checking accounts in an effort to attain
our
goal of decreasing the yield on our interest bearing liabilities. Our directors,
officers, management and staff remain committed in a unified effort to improve
the Bank’s profitability.
Key
measurements and events for the three- and nine-month periods ended September
30, 2007 include the following:
|
|
·
|
Total
assets at September 30, 2007 decreased by 1.80% to $171,092,000 as
compared to $174,225,000 as of December 31,
2006.
|
|
|
·
|
Total
borrowings decreased by 19.23% from $39,000,000 as of December 31,
2006 to
$31,500,000 as of September 30,
2007.
|
|
|
·
|
Net
loans outstanding decreased by 0.65% from $147,118,000 as of December
31,
2006 to $146,164,000 as of September 30,
2007.
|
|
|
·
|
Nonperforming
loans and foreclosed real estate at September 30, 2007 remained relatively
unchanged at $1,487,000
compared
with a total of $1,486,000 at December 31, 2006. We believe an appropriate
allowance for loan losses continues to be
maintained.
|
|
|
·
|
Deposits
at September 30, 2007 were $114,685,000, an increase of $2,862,000
or
2.56% from $111,823,000 at December 31, 2006.
|
|
|
·
|
We
realized net income of $27,000 and a net loss of $21,000 for the
three-month and nine-month periods ended September 30, 2007. This
compares
to a net loss of $142,000 and $50,000 for the three-month and nine-month
periods ended September 30, 2006.
|
|
|
·
|
Net
interest income, our main source of income, was $817,000 and $2,398,000
during the three-month and nine-month periods ended September 30,
2007
compared to $888,000 and $2,828,000 for the same periods in 2006.
This
represents a decrease of 8.00% and 15.21% for the three months and
nine
months ended September 30, 2007 as compared to the same periods in
2006.
|
|
|
·
|
We
had a commercial non-real estate loan charge-off of $120,000 and
three
overdraft protection loan charge-offs totaling $2,000 during the
nine-month period ending September 30, 2007. We had no loan charge-offs
during the nine-month period ending September 30,
2006.
|
|
|
·
|
Non-interest
income increased by $50,000 and $102,000, or 90.91% and 58.29%, for
the
three-month and nine-month periods ended September 30, 2007, as compared
to the three-month and nine-month periods ended September 30, 2006.
The
increase between the periods is primarily the result of an increased
gain
on sale of loans.
|
|
|
·
|
Non-interest
expenses decreased by $21,000 and $251,000, or 2.42% and 9.18%, for
the
three-month and nine-month periods ended September 30, 2007, as compared
to the three- and nine-month periods ended September 30, 2006. The
decrease between the periods is the result of no longer carrying
the
occupancy expenses associated with the closing of the Edgewood branch
and
the decision not to award year end bonuses to all
employees.
|
A
detailed discussion of the factors leading to these changes can be found in
the
discussion below.
Critical
Accounting Policies
The
Company’s consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America or
GAAP, and follow general practices within the industry in which we operate.
Application of these principles requires management to make estimates,
assumptions, and judgments that affect the amounts reported in the financial
statements and accompanying notes. These estimates, assumptions, and judgments
are based on information available as of the date of the financial statements;
accordingly, as this information changes, the financial statements could reflect
different estimates, assumptions, and judgments. Certain policies inherently
have a greater reliance on the use of estimates, assumptions, and judgments
and
as such have a greater possibility of producing results that could be materially
different than originally reported. Estimates, assumptions, and judgments are
necessary when assets and liabilities are required to be recorded at fair value,
when a decline in the value of an asset not carried on the financial statements
at fair value warrants an impairment write-down or valuation allowance to be
established, or when an asset or liability needs to be recorded contingent
upon
a future event. Carrying assets and liabilities at fair value inherently results
in more financial statement volatility. The fair values and the information
used
to record valuation adjustments for certain assets and liabilities are based
either on quoted market prices or are provided by other third-party sources,
when available.
Based
on
the valuation techniques used and the sensitivity of financial statement amounts
to the methods, assumptions, and estimates underlying those amounts, management
has identified the determination of the allowance for loan losses as the
accounting area that requires the most subjective or complex judgments, and
as
such could be most subject to revision as new information becomes available.
Management’s
judgment is inherent in the determination of the provision and allowance for
loan losses, including in connection with the valuation of collateral and the
financial condition of the borrower. The establishment of allowance factors
is a
continuing exercise and allowance factors may change over time, resulting in
an
increase or decrease in the amount of the provision or allowance based upon
the
same volume and classification of loans. Changes in allowance factors or in
management’s interpretation of those factors will have a direct impact on the
amount of the provision, and a corresponding effect on income and assets. Also,
errors in management’s perception and assessment of the allowance factors could
result in the allowance not being adequate to cover losses in the portfolio,
and
may result in additional provisions or charge-offs, which would adversely affect
income and capital. For additional information regarding the allowance for
loan
losses, see “Results of Operations for the Three and Nine Months Ended September
30, 2007 and 2006 - Provision for Loan Losses and Analysis of Allowance for
Loan
Losses.”
Results
of Operations for the Three and Nine Months Ended September 30, 2007 and
2006
General
.
Net
income increased $169,000 to a net income of $27,000 for the three months ended
September 30, 2007 compared to a net loss of $142,000 for the same period in
the
prior year. The increase was due primarily to a $276,000 decrease in provision
for loan losses, a $63,000 increase in interest income, a $50,000 increase
in
non-interest income and a $21,000 decrease in non-interest expenses, offset
by a
$134,000 increase in interest expense.
Net
income increased $29,000, to a net loss of $21,000 for the nine months ended
September 30, 2007 compared to net loss of $50,000 for the same period in the
prior year. The increase was due primarily to a $236,000 increase in interest
income, a $102,000 increase in non-interest income, a $132,000 decrease in
provision for loan losses, and a $251,000 decrease in non-interest expenses,
offset by a $666,000 increase in interest expense.
Average
Balances, Net Interest Income, Yields Earned and Rates Paid.
The
following tables present for the periods indicated the total dollar amount
of
interest income from average interest earning assets and the resultant yields,
as well as the interest expense on average interest bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made
because no income was exempt from federal income taxes. All average balances
are
monthly average balances. We do not believe that the monthly averages differ
materially from what the daily averages would have been. Non-accruing loans
have
been included in the table as loans carrying a zero yield. The amortization
of
loan fees is included in computing interest income, however, such fees are
not
material.
|
|
|
Three
Months Ended
September
30, 2007
|
|
Three Months
Ended
September
30, 2006
|
|
|
|
|
Average
Outstanding
Balance
|
|
Interest
Earned/
Paid
|
|
Yield/
Rate
|
|
Average
Outstanding
Balance
|
|
Interest
Earned/
Paid
|
|
Yield/
Rate
|
|
|
|
|
(Dollars
in thousands)
|
|
(Dollars
in thousands)
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
receivable(1)
|
|
$
|
145,331
|
|
$
|
2,130
|
|
|
5.86
|
%
|
$
|
149,409
|
|
$
|
2,080
|
|
|
5.57
|
%
|
|
Mortgage-backed
securities
|
|
|
2,557
|
|
|
29
|
|
|
4.54
|
|
|
3,584
|
|
|
39
|
|
|
4.35
|
|
|
Investment
securities (available for sale)
|
|
|
8,787
|
|
|
117
|
|
|
5.33
|
|
|
8,389
|
|
|
102
|
|
|
4.86
|
|
|
Investment
securities (held to maturity)
|
|
|
3,333
|
|
|
32
|
|
|
3.84
|
|
|
4,000
|
|
|
38
|
|
|
3.80
|
|
|
Other
interest-earning assets
|
|
|
3,210
|
|
|
59
|
|
|
7.35
|
|
|
2,580
|
|
|
45
|
|
|
6.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-earning assets
|
|
|
163,218
|
|
|
2,367
|
|
|
5.80
|
%
|
|
167,962
|
|
|
2,304
|
|
|
5.49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
earning assets
|
|
|
7,920
|
|
|
|
|
|
|
|
|
7,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
171,138
|
|
|
|
|
|
|
|
$
|
175,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
|
$
|
15,687
|
|
$
|
38
|
|
|
0.97
|
%
|
$
|
20,314
|
|
$
|
62
|
|
|
1.22
|
%
|
|
Demand
and NOW accounts
|
|
|
7,507
|
|
|
59
|
|
|
3.14
|
|
|
4,849
|
|
|
16
|
|
|
1.32
|
|
|
Certificates
of deposit
|
|
|
90,696
|
|
|
1,104
|
|
|
4.87
|
|
|
82,892
|
|
|
920
|
|
|
4.44
|
|
|
Escrows
|
|
|
3
|
|
|
-
|
|
|
-
|
|
|
7
|
|
|
-
|
|
|
-
|
|
|
Borrowings
|
|
|
32,167
|
|
|
349
|
|
|
4.34
|
|
|
40,666
|
|
|
418
|
|
|
4.11
|
|
|
Total
interest-bearing liabilities
|
|
|
146,060
|
|
|
1,550
|
|
|
4.24
|
%
|
|
148,728
|
|
|
1,416
|
|
|
3.81
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
bearing liabilities
|
|
|
2,964
|
|
|
|
|
|
|
|
|
3,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
149,024
|
|
|
|
|
|
|
|
|
152,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
equity(2)
|
|
|
22,114
|
|
|
|
|
|
|
|
|
22,574
|
|
|
|
|
|
|
|
|
Total
liabilities and equity
|
|
$
|
171,138
|
|
|
|
|
|
|
|
$
|
175,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
$
|
817
|
|
|
|
|
|
|
|
$
|
888
|
|
|
|
|
|
Interest
rate spread(3)
|
|
|
|
|
|
|
|
|
1.56
|
%
|
|
|
|
|
|
|
|
1.68
|
%
|
|
Net
interest-earning assets
|
|
$
|
17,158
|
|
|
|
|
|
|
|
$
|
19,234
|
|
|
|
|
|
|
|
|
Net
interest margin(4)
|
|
|
|
|
|
|
|
|
2.00
|
%
|
|
|
|
|
|
|
|
2.11
|
%
|
|
Ratio
of interest earning assets to interest bearing liabilities
|
|
|
|
|
|
1.12x
|
|
|
|
|
|
|
|
|
1.12x
|
|
|
|
|
|
(1)
|
Loans
receivable are net of the allowance for loan
losses.
|
|
(2)
|
Total
equity includes retained earnings and accumulated other comprehensive
income (loss).
|
|
(3)
|
Net
interest rate spread represents the difference between the average
yield
on interest earning assets and the average cost of interest bearing
liabilities.
|
|
(4)
|
Net
interest margin represents net interest income as a percentage of
average
interest earning assets.
|
|
|
|
Nine
Months Ended
September
30, 2007
|
|
Nine
Months Ended
September
30, 2006
|
|
|
|
|
Average
Outstanding
Balance
|
|
Interest
Earned/
Paid
|
|
Yield/
Rate
|
|
Average
Outstanding
Balance
|
|
Interest
Earned/
Paid
|
|
Yield/
Rate
|
|
|
|
|
(Dollars
in thousands)
|
|
(Dollars
in thousands)
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
receivable(1)
|
|
$
|
145,344
|
|
$
|
6,228
|
|
|
5.71
|
%
|
$
|
146,795
|
|
$
|
6,080
|
|
|
5.52
|
%
|
|
Mortgage-backed
securities
|
|
|
2,807
|
|
|
94
|
|
|
4.45
|
|
|
3,934
|
|
|
122
|
|
|
4.14
|
|
|
Investment
securities (available for sale)
|
|
|
8,699
|
|
|
339
|
|
|
5.20
|
|
|
8,286
|
|
|
281
|
|
|
4.53
|
|
|
Investment
securities (held to maturity)
|
|
|
3,778
|
|
|
107
|
|
|
3.79
|
|
|
4,000
|
|
|
114
|
|
|
3.80
|
|
|
Other
interest-earning assets
|
|
|
4,710
|
|
|
224
|
|
|
6.35
|
|
|
3,790
|
|
|
159
|
|
|
5.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-earning assets
|
|
|
165,338
|
|
|
6,992
|
|
|
5.64
|
%
|
|
166,805
|
|
|
6,756
|
|
|
5.40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
earning assets
|
|
|
7,296
|
|
|
|
|
|
|
|
|
7,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
172,634
|
|
|
|
|
|
|
|
$
|
173,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
|
$
|
16,539
|
|
$
|
133
|
|
|
1.07
|
%
|
$
|
24,645
|
|
$
|
236
|
|
|
1.28
|
%
|
|
Demand
and NOW accounts
|
|
|
7,337
|
|
|
143
|
|
|
2.60
|
|
|
3,441
|
|
|
24
|
|
|
0.93
|
|
|
Certificates
of deposit
|
|
|
88,554
|
|
|
3,188
|
|
|
4.80
|
|
|
80,981
|
|
|
2,511
|
|
|
4.13
|
|
|
Escrows
|
|
|
6
|
|
|
-
|
|
|
-
|
|
|
12
|
|
|
-
|
|
|
-
|
|
|
Borrowings
|
|
|
34,222
|
|
|
1,130
|
|
|
4.40
|
|
|
38,889
|
|
|
1,157
|
|
|
3.97
|
|
|
Total
interest-bearing liabilities
|
|
|
146,658
|
|
|
4,594
|
|
|
4.18
|
%
|
|
147,968
|
|
|
3,928
|
|
|
3.54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
bearing liabilities
|
|
|
3,687
|
|
|
|
|
|
|
|
|
3,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
150,345
|
|
|
|
|
|
|
|
|
151,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
equity(2)
|
|
|
22,289
|
|
|
|
|
|
|
|
|
22,578
|
|
|
|
|
|
|
|
|
Total
liabilities and equity
|
|
$
|
172,634
|
|
|
|
|
|
|
|
$
|
173,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
$
|
2,398
|
|
|
|
|
|
|
|
$
|
2,828
|
|
|
|
|
|
Interest
rate spread(3)
|
|
|
|
|
|
|
|
|
1.46
|
%
|
|
|
|
|
|
|
|
1.86
|
%
|
|
Net
interest-earning assets
|
|
$
|
18,680
|
|
|
|
|
|
|
|
$
|
18,837
|
|
|
|
|
|
|
|
|
Net
interest margin(4)
|
|
|
|
|
|
|
|
|
1.93
|
%
|
|
|
|
|
|
|
|
2.28
|
%
|
|
Ratio
of interest earning assets to interest bearing liabilities
|
|
|
|
|
|
1.13
|
x
|
|
|
|
|
|
|
|
1.13
|
x
|
|
|
|
|
(1)
|
Loans
receivable are net of the allowance for loan
losses.
|
|
(2)
|
Total
equity includes retained earnings and accumulated other comprehensive
income (loss).
|
|
(3)
|
Net
interest rate spread represents the difference between the average
yield
on interest earning assets and the average cost of interest bearing
liabilities.
|
|
(4)
|
Net
interest margin represents net interest income as a percentage of
average
interest earning assets.
|
Net
Interest Income
.
Three
months ended September 30, 2007 compared to three months ended September 30,
2006
.
Net
interest income decreased $71,000, or 8.00%, to $817,000 for the three months
ended September 30, 2007 from $888,000 for the three months ended September
30,
2006. The decrease was primarily a result of a 43 basis point increase in the
cost of average interest bearing liabilities, from 3.81% to 4.24%, while the
yield on average interest earning assets only increased 31 basis points from
5.49% to 5.80% and the balance of average interest earning assets decreased
by
$4,744,000, or 2.82%, to $163,218,000 from $167,962,000. These factors, serving
to reduce net interest income, were partially offset by a $2,668,000, or 1.79%,
decrease in the balance of average interest bearing liabilities to $146,060,000
from $148,728,000.
Our
interest rate spread decreased to 1.56% for the quarter ended September 30,
2007
from 1.68% for the quarter ended September 30, 2006, reflecting the more rapid
increase in the cost of average interest bearing liabilities as compared to
the
increase in the yield of average interest earning assets. Our net interest
margin decreased to 2.00% from 2.11%, because the higher yield on average
interest earning assets was not enough to offset the increase in the cost of
our
average interest bearing liabilities. The ratio of interest earning assets
to
interest bearing liabilities remained steady at 1.12 times for the three months
ended September 30, 2007 and September 30, 2006.
Nine
months ended September 30, 2007 compared to nine months ended September 30,
2006
.
Net
interest income decreased $430,000, or 15.21%, to $2,398,000 for the nine months
ended September 30, 2007 from $2,828,000 for the nine months ended September
30,
2006. The decrease was primarily a result of a 64 basis point increase in the
cost of average interest bearing liabilities, from 3.54% to 4.18%, while the
yield on average interest earning assets only increased 24 basis points from
5.40% to 5.64% and the balance in average interest earning assets decreased
by
$1,467,000, or 0.88%, to $165,338,000 from $166,805,000. The decrease was
partially offset by a $1,310,000, or 0.89%, decrease in average interest bearing
liabilities to $146,658,000 from $147,968,000.
Our
interest rate spread decreased to 1.46% from 1.86%, reflecting the more rapid
increase in the cost of our average interest bearing liabilities as compared
to
the increase in the yield of our average interest earning assets. Our net
interest margin decreased to 1.93% from 2.28%, because the growth in average
interest earning assets was not enough to offset the increase in the cost of
average interest bearing liabilities. The ratio of interest earning assets
to
interest bearing liabilities remained steady at 1.13 times for the nine months
ended September 30, 2007 and September 30, 2006.
Interest
Income
.
Three
months ended September 30, 2007 compared to three months ended September 30,
2006
.
Interest
income increased by $63,000, or 2.73%, to $2,367,000 for the three months ended
September 30, 2007, from $2,304,000 for the three months ended September 30,
2006. The increase in interest income resulted primarily from increases of
$50,000, or 2.40%, in interest and fee income from loans, $9,000, or 6.43%,
in
interest income from investment securities and $14,000, or 31.11%, in interest
income from other interest earning assets (primarily consisting of interest
earned on federal funds sold and Federal Home Loan Bank stock), partially offset
by a decrease of $10,000, or 25.64%, in interest income from mortgage backed
securities.
The
increase in interest income reflects a $4,744,000, or 2.82%, decrease in the
balance of average interest-earning assets to $163,218,000 during the quarter
ended September 30, 2007 from $167,962,000 during the quarter ended September
30, 2006, and a 31 basis point increase in the yield on average interest-earning
assets to 5.80% for the three months ended September 30, 2007 from 5.49% for
the
three months ended September 30, 2006, reflecting an increase in market interest
rates.
The
increase in interest and fees on loans was due to a 29 basis point increase
in
the average yield on net loans receivable, offset by a $4,078,000, or 2.73%
decrease in the average balance of net loans receivable, from $149,409,000
during the quarter ended September 30, 2006 to $145,331,000 during the quarter
ended September 30, 2007.
The
increase in interest income from other interest-earning assets (federal funds
sold and Federal Home Loan Bank stock) was due to a $630,000, or 24.42%,
increase in the average balance of other interest-earning assets, from
$2,580,000 during the quarter ended September 30, 2006 to $3,210,000 during
the
quarter ended September 30, 2007.
The
decrease in interest income from mortgage-backed securities was primarily the
result of a $1,027,000 or 28.66% decline in the average balance of
mortgage-backed securities, which was partially offset by a 19 basis point
increase in the average yield on these securities.
Nine
months ended September 30, 2007 compared to nine months ended September 30,
2006
.
Interest
income increased by $236,000, or 3.49%, to $6,992,000 for the nine months ended
September 30, 2007, from $6,756,000 for the nine months ended September 30,
2006. The increase in interest income resulted primarily from increases of
$148,000, or 2.43%, in interest and fee income from loans and $51,000, or
12.91%, in interest income from investment securities, and a $65,000, or 40.88%,
in interest income from other interest earning assets (primarily consisting
of
interest earned on federal funds sold and Federal Home Loan Bank stock),
partially offset by a decrease of $28,000, or 22.95%, in interest income from
mortgage backed securities.
The
increase in interest income reflects a 24 basis point increase in the yield
on
average interest-earning assets to 5.64% for the nine months ended September
30,
2007 from 5.40% for the nine months ended September 30, 2006, reflecting an
increase in market interest rates.
The
increase in interest income and fees on loans was due to a 19 basis point
increase in the average yield on net loans receivable. The increase in interest
income from investment securities was primarily reflective of a 67 basis point
increase in the average yield and a $413,000, or 4.98%, increase in the average
balance of available for sale investment securities.
The
increase in interest income from other interest earning assets (federal funds
sold and Federal Home Loan Bank stock) was due to a $920,000, or 24.27% increase
in the average balance of other interest earning assets, from $3,790,000 during
the nine months ended September 30, 2006 to $4,710,000 during the nine months
ended September 30, 2007, and a 76 basis point increase in the average yield
on
these assets (as a result of increases in short term market interest rates).
The
decrease in interest income from mortgage-backed securities was primarily the
result of a $1,127,000 or 28.65% decline in the average balance of
mortgage-backed securities, which was partially offset by a 31 basis point
increase in the average yield on these securities.
Interest
Expense
.
Three
months ended September 30, 2007 compared to three months ended September 30,
2006
.
Interest
expense, which consists of interest paid on deposits and borrowings, increased
by $134,000, or 9.46%, to $1,550,000 for the three months ended September 30,
2007 from $1,416,000 for the three months ended September 30, 2006. The increase
in interest expense resulted from an increase in the cost of average
interest-bearing liabilities, while the balance of average interest-bearing
liabilities decreased slightly. The average balance of interest-bearing deposits
increased to $113,890,000 during the quarter ended September 30, 2007 from
$108,055,000 during the quarter ended September 30, 2006, and the average cost
of deposits increased by 53 basis points as a result of increased market
interest rates. The average balance of borrowings decreased to $32,167,000
during the quarter ended September 30, 2007 from $40,666,000 in the same quarter
of 2006 and the average cost of borrowings increased by 23 basis points as
a
result of borrowing at a higher interest rate.
Nine
months ended September 30, 2007 compared to nine months ended September 30,
2006
.
Interest
expense increased by $666,000, or 16.96%, to $4,594,000 for the nine months
ended September 30, 2007 from $3,928,000 for the nine months ended September
30,
2006. The increase in interest expense resulted from an increase in the average
balance of deposits and the cost of average interest-bearing liabilities, while
the balance of average interest-bearing liabilities decreased slightly. The
average balance of deposits increased to $112,430,000 from $109,067,000 and
the
average cost of deposits increased by 72 basis points as a result of increased
market interest rates. The average balance of borrowings decreased to
$34,222,000 during the nine months ended September 30, 2007 from $38,889,000
in
the same period of 2006 and the average cost of borrowings increased by 43
basis
points as a result of borrowings at higher interest rates.
Provision
for Loan Losses and Analysis of Allowance for Loan Losses
.
We
establish provisions for loan losses, which are charged to operations, at a
level estimated as necessary to absorb known and inherent losses that are both
probable and reasonably estimable at the date of the financial statements.
In
evaluating the level of the allowance for loan losses, management considers,
among other things, historical loss experience, the types of loans and the
amount of loans in the loan portfolio, adverse situations that may affect the
borrower’s ability to repay, estimated value of any underlying collateral, and
prevailing economic conditions (particularly as such conditions relate to our
market area). We charge losses on loans against the allowance when we believe
that collection of loan principal is unlikely. Recoveries on loans previously
charged off are added back to the allowance.
Based
on
our evaluation of these factors, and as discussed further below, management
made
a provision of $26,000 and $302,000 for the three months ended September 30,
2007 and September 30, 2006, and a provision of $208,000 and $340,000 for the
nine months ended September 30, 2007 and September 30, 2006, respectively.
There
was one commercial non-real estate loan charge-off during the nine-month period
ended September 30, 2007 which is discussed below under “General Valuation
Allowance on the Remainder of the Loan Portfolio.” We also had three overdraft
protection loans charge-offs totaling $2,000 during the nine-month period ended
September 30, 2007. There were no charge-offs during the nine-month period
ended
September 30, 2006. We used the same methodology
and
generally similar assumptions in computing the allowance for these periods.
We
have
developed a methodology for assessing the adequacy of the allowance for loan
losses. Our methodology consists of three key elements: (1) specific allowances
for identified problem loans, primarily collateral-dependent; (2) a general
valuation allowance on certain identified problem loans; and (3) a general
valuation allowance on the remainder of the loan portfolio.
Specific
Allowance on Identified Problem Loans.
The loan
portfolio is segregated first between loans that are on our “watch list” and
loans that are not. Our watch list includes:
|
·
|
loans
90 or more days delinquent;
|
|
·
|
loans
with anticipated losses;
|
|
·
|
loans
referred to attorneys for collection or in the process of
foreclosure;
|
|
·
|
loans
classified as substandard, doubtful or loss by either our internal
classification system or by regulators during the course of their
examination of us; and
|
|
·
|
troubled
debt restructurings and other non-performing
loans.
|
Two
of
our officers review each loan on the watch list and establish an individual
allowance allocation on certain loans based on such factors as: (1) the strength
of the customer’s personal or business cash flow; (2) the availability of other
sources of repayment; (3) the amount due or past due; (4) the type and value
of
collateral; (5) the strength of our collateral position; (6) the estimated
cost
to sell the collateral; and (7) the borrower’s effort to cure the delinquency.
We
also
review and establish, if necessary, an allowance for impaired loans for the
amounts by which the discounted cash flows (or collateral value or observable
market price) are lower than the carrying value of the loan. Under current
accounting guidelines, a loan is defined as impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts when due under the contractual terms of the loan agreement.
General
Valuation Allowance on Certain Identified Problem Loans.
We
also
establish a general allowance for watch list loans that do not have an
individual allowance. We segregate these loans by loan category and assign
allowance percentages to each category based on inherent losses associated
with
each type of lending and consideration that these loans, in the aggregate,
represent an above-average credit risk and that more of these loans will prove
to be uncollectible compared to loans in the general portfolio.
General
Valuation Allowance on the Remainder of the Loan Portfolio.
We
establish another general allowance for loans that are not on the watch list
to
recognize the inherent losses associated with lending activities, but which,
unlike specific allowances, has not been allocated to particular problem assets.
This general valuation allowance is determined by segregating the loans by
loan
category and assigning allowance percentages based on our historical loss
experience and delinquency trends. The allowance may be adjusted for significant
factors that, in management’s judgment, affect the collectibility of the
portfolio as of the evaluation date. These significant factors may include
changes in lending policies and procedures, changes in existing general economic
and business conditions affecting our primary lending areas, credit quality
trends, collateral value, loan volumes and concentrations, seasoning of the
loan
portfolio, specific industry conditions within portfolio segments, recent loss
experience in a particular segment of the portfolio, duration of the current
business cycle and bank regulatory examination results. The applied loss factors
are reevaluated annually to ensure their relevance in the current
environment.
Although
we believe that we use the best information available to establish the allowance
for loan losses, the evaluation is inherently subjective as it requires
estimates that are susceptible to significant revisions as more information
becomes available or as future events change. If circumstances differ
substantially from the assumptions used in making our determinations, future
adjustments to the allowance for loan losses may be necessary and our results
of
operations could be adversely affected. In addition, the Office of Thrift
Supervision, as an integral part of its examination process, periodically
reviews our allowance for loan losses. The Office of Thrift Supervision may
require us to increase the allowance for loan losses based on its judgments
about information available to it at the time of its examination, which would
adversely affect our results of operations.
The
allowance for loan losses totaled $937,000 or 0.64% of gross loans outstanding
of $147,556,000 at September 30, 2007, compared to an allowance for loan losses
of $814,000 or 0.54% of gross loans outstanding of $151,575,000 at September
30,
2006. The increase to the loan loss reserve is due to the increased commercial
loan balances, which historically create a mix of riskier loan products. As
of
September 30, 2007, we have specific reserves of $100,000 within the allowance
for loan losses because we believe there is a substantial likelihood that we
will not collect the total amount of the outstanding principal balance on a
commercial non-real estate loan that is classified as impaired. The corporate
commercial loan borrower filed Chapter 7 corporate bankruptcy in the third
quarter of 2006 and filed Chapter 7 personal bankruptcy in the second quarter
of
2007. We restructured the remaining debt to facilitate repayment of the loan
in
the third quarter of 2007.
The
following table summarizes the activity in the provision for loan losses for
the
three and nine months ended September 30, 2007 and 2006.
|
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
(Dollars
in Thousands)
|
|
|
Balance
at beginning of period
|
|
$
|
912
|
|
$
|
512
|
|
$
|
850
|
|
$
|
474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
(1
|
)
|
|
-
|
|
|
(121
|
)
|
|
-
|
|
|
Recoveries
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Net
Charge-offs
|
|
|
(1
|
)
|
|
-
|
|
|
(121
|
)
|
|
-
|
|
|
Provision
for loan losses
|
|
|
26
|
|
|
302
|
|
|
208
|
|
|
340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$
|
937
|
|
$
|
814
|
|
$
|
937
|
|
$
|
814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of net charge-offs (recoveries) during the period to average loans
outstanding, net, during the period
|
|
|
-
|
|
|
-
|
|
|
0.08
|
%
|
|
-
|
|
|
Ratio
of allowance for loan losses to total loans outstanding
|
|
|
0.64
|
%
|
|
0.54
|
%
|
|
0.64
|
%
|
|
0.54
|
%
|
|
Allowance
for loan losses as a percent of total non-performing loans
|
|
|
62.55
|
%
|
|
71.59
|
%
|
|
62.55
|
%
|
|
71.59
|
%
|
Other
Income
.
Three
months ended September 30, 2007 compared to three months ended September 30,
2006
.
Historically,
our non-interest income has been relatively modest and one of our strategic
initiatives is to increase our non-interest income. Non-interest income
increased $50,000, or 90.91%, to $105,000 for the three months ended September
30, 2007, as compared to $55,000 for the three months ended September 30, 2006.
The primary reason for the increase in non-interest income is a $17,000, or
1700.00%, increase in gain on sale of loans and a $27,000, or 142.11%, increase
in other income (primarily consisting of processing fees and late charges on
loans, and income from checking accounts and ATM usage). Rental income from
our
headquarters building increased by $6,000, or 17.14%. While a tenant has vacated
a portion of our leaseable space, the tenant continues to pay the rent due
pursuant to the agreed upon rent schedule while they seek to sublet the space.
As of September 30, 2007, we leased 100% of the total leaseable space in our
headquarters building. We expect this figure to remain constant for the fourth
quarter of 2007 as we do not anticipate any vacant leaseable space in our
headquarters building, other than due to the tenant mentioned
above.
Nine
months ended September 30, 2007 compared to nine months ended September 30,
2006
.
Non-interest
income increased $102,000, or 58.29%, to $277,000 for the nine months ended
September 30, 2007, as compared to $175,000 for the nine months ended September
30, 2006. The primary reason for the increase in non-interest income is a
$49,000, or 612.50%, increase in gain on sale of loans and a $46,000, or 86.79%,
increase in other income. Rental income from our headquarters building has
remained relatively steady.
Non-interest
Expense
.
Three
months ended September 30, 2007 compared to three months ended September 30,
2006
.
Non-interest
expense was $848,000 for the three months ended September 30, 2007 as compared
to $869,000 for the three months ended September 30, 2006, a decrease of
$21,000, or 2.42%. The decrease was due
primarily
to a $17,000, or 34.00%, decrease in furniture, fixtures and equipment expenses,
an $8,000, or 17.02%, decrease in advertising expenses, and a $7,000, or 1.52%,
decrease in compensation and related expenses, partially offset by an increase
of $10,000, or 6.45%, in other expenses (primarily consisting of IT support,
bank services fees, professional services fees, including legal, audit and
accounting, insurance premiums and office supply expenses). The decrease in
furniture, fixtures and equipment expenses is due to the full depreciation
of
items purchased in 2001 to establish our new offices in Harford County, the
decrease in advertising expenses is due to spending more of the yearly
advertising budget in the first half of the year and the decrease in
compensation expense is the result of replacing departing full-time salaried
employees with part-time hourly employees in the quarter ending September 30,
2007. The increase in other expenses is the result of an increase in
correspondent bank services fees, printing and filing expenses and dues and
subscription expenses as these costs have risen significantly.
Nine
months ended September 30, 2007 compared to nine months ended September 30,
2006
.
Non-interest
expense was $2,482,000 for the nine months ended September 30, 2007, as compared
to $2,733,000 for the nine months ended September 30, 2006, a decrease of
$251,000
or
9.18%.
The decrease was due
primarily
to decreases of $108,000, or 27.98%, in occupancy expenses, $70,000, or 5.05%,
in compensation and related expenses, $63,000, or 39.13%, in furniture, fixtures
and equipment expenses and $38,000, or 7.63%, in other expenses, partially
offset by increases of $28,000, or 23.53%, in advertising expenses. The decrease
in occupancy expenses is the result of no longer carrying the costs associated
with the operation of the Edgewood branch, which we closed in 2006. The decease
in other expenses is the result of a decrease in legal fees as fewer legal
issues have arisen as we have gained experience with the requirements of being
a
public company, as well as a concerted effort to reduce costs in such areas
of
operation as office supplies, insurance premiums and loan expenses. The decrease
in compensation expenses is the result of a decision not to award year end
bonuses to all employees and replacing departing full-time salaried employees
with part-time hourly employees. The furniture, fixtures and equipment expenses
for the nine months ended September 30, 2007 is due to the same factors as
stated above for the three-month period.
Income
Tax Expense
.
Three
months ended September 30, 2007 compared to three months ended September 30,
2006
.
The
provision for income taxes was $21,000 for the three months ended September
30,
2007, an increase of $107,000 from a benefit for income tax of $86,000 for
the
three months ended September 30, 2006, representing a 124.42%, increase in
the
income tax provision. The provision for income taxes was due to our positive
income before taxes. The effective tax rate was 43.75%
and
37.72% for the three months ended September 30, 2007 and September 30, 2006,
respectively.
Nine
months ended September 30, 2007 compared to nine months ended September 30,
2006
.
The
provision for income taxes was $6,000 for the nine months ended September 30,
2007, an increase of $26,000 from a benefit for income tax of $20,000 for the
nine months ended September 30, 2006, representing a 130.00%, increase in the
income tax provision
.
The
provision for income taxes was due to non-deductible stock-based compensation
awarded during the nine-month period ended September 30, 2007. The effective
tax
rate was 40.00% and 28.57% for the nine months ended September 30, 2007 and
September 30, 2006, respectively, as nondeductible expenses were a
proportionately larger part of pre-tax results
.
Analysis
of Financial Condition
Assets.
General
.
Our
total
assets decreased by $3,133,000 or 1.80%, to $171,092,000 at September 30, 2007,
from $174,225,000 at December 31, 2006. The decrease in total assets resulted
primarily from $1,310,000,
or
45.95%
decrease in cash and cash equivalents, from $2,851,000 at December 31, 2006
to
$1,541,000 at September 30, 2007, a $1,000,000,
or
25.00%
decrease in investment securities - held to maturity, from $4,000,000 at
December 31, 2006 to $3,000,000 at September 30, 2007, a $726,000, or 22.69%,
decrease in mortgage backed securities held to maturity, from $3,200,000 at
December 31, 2006 to $2,474,000 at September 30, 2007, and a
$277,000,
or
13.20%, decrease in Federal Home Loan Bank stock, to $1,821,000 at September
30,
2007 from $2,098,000 at December 31, 2006. These decreases were offset by a
$293,000, or 3.44% increase in investment securities - available for sale,
from
$8,526,000 at December 31, 2006 to $8,819,000 at September 30, 2007.
Investment
Securities
.
The
investment portfolio at September 30, 2007 amounted to $14,293,000, a decrease
of $1,433,000, or 9.11%,
from
$15,726,000 at December 31, 2006. Investment securities - available for sale,
increased $293,000, or 3.44%, to $8,819,000 at September 30, 2007 from
$8,526,000 at December 31, 2006, primarily as a result of dividends credited
to
the account. Mortgage backed securities - held to maturity, decreased
$1,000,000, or 25.00%, to $3,000,000 at September 30, 2007 from $4,000,000
at
December 31, 2006, as a result of a principal repayment on a matured investment.
As we are not continuing to purchase mortgage-backed securities, we expect
continued decreases in this asset both in amount and as a percentage of our
assets
.
The
carrying value of available for sale securities includes a net unrealized loss
of $267,000 at September 30, 2007 (reflected as accumulated other comprehensive
loss of $164,000 in equity after deferred taxes) as compared to a net unrealized
loss of $222,000 ($136,000 net of taxes) as of December 31, 2006. In general,
the increase in unrealized loss was a result of an instability in the
mortgage-backed securities market.
Loan
Portfolio
.
Loans
receivable, net, decreased $954,000, or 0.65%, to $146,164,000 at September
30,
2007 from $147,118,000 at December 31, 2006. The commercial loan portfolio
increased $5,572,000, or 65.15%, to $14,124,000 at September 30, 2007 from
$8,552,000 at December 31, 2006. Acquisition and development loans increased
$1,608,000, or 50.02%, to $4,823,000 at September 30, 2007 from $3,215,000
at
December 31, 2006. One-to-four family residential loans decreased $8,291,000,
or
7.04%, to $109,464,000 at September 30, 2007 from $117,755,000 at December
31,
2006. The decrease is primarily due to a strategic initiative to sell a larger
percentage of our residential mortgage loan originations to facilitate our
goal
of increasing and diversifying the mix of commercial loans to residential loans
in our loan portfolio. Our loan customers are generally located in the Baltimore
Metropolitan area and its surrounding counties in Maryland.
Asset
Quality
.
Loans
are
reviewed on a regular basis and are generally placed on non-accrual status
when
they become more than 90 days delinquent. When we classify a loan as
non-accrual, we no longer accrue interest on such loan and reverse any interest
previously accrued but not collected. Typically, payments received on a
non-accrual loan are applied to the outstanding principal and interest as
determined at the time of collection of the loan. We return a non-accrual loan
to accrual status when factors indicating doubtful collection no longer exist
and the loan has been brought current.
Real
estate and other assets that we acquire as a result of foreclosure or by
deed-in-lieu of foreclosure or repossession are classified as real estate owned
or other repossessed assets until sold. Such assets are recorded at fair value
less estimated selling costs at foreclosure or other repossession and updated
quarterly at the lower of cost or estimated fair value less estimated selling
costs. Any portion of the outstanding loan balance in excess of fair value
at
the time of foreclosure is charged off against the allowance for loan losses.
If, upon ultimate disposition of the property, net sales proceeds exceed the
net
carrying value of the property, a gain on sale of real estate or other assets
is
recorded. We have one foreclosed real estate participation loan totaling
$1,083,000 at September 30, 2007. This asset is an acquisition and development
real estate participation that became delinquent in the fourth quarter of 2004
and was placed on non-accrual status in the third quarter of 2005. Both the
principal of the borrower and the entity that owns the collateral property
filed
for bankruptcy in the fourth quarter of 2006. An automatic stay that was imposed
in connection with the bankruptcy filings and had prevented the sale of the
property was lifted in the second quarter of 2007 and the property was sold
at
auction to the lead participating bank, requiring us to reclassify the
participation as foreclosed real estate in the same quarter. Subsequently,
a
real estate developer made an offer to purchase the property and the lead
participating bank accepted a letter of intent and executed a contract with
a
feasibility study period, currently scheduled to expire on November 15, 2007.
Prior to the expiration of the feasibility period, the buyer may terminate
this
agreement at any time and for any reason in its sole discretion. With a
settlement date currently scheduled in the fourth quarter of 2007, subject
to
satisfaction of outstanding conditions, we expect to recover the carrying amount
of the real estate, although there can be no assurance that this will be the
case. We did not have any real estate owned or other repossessed assets at
December 31, 2006.
Non-accrual
loans totaled $404,000, or 0.28%, $1,485,000, or 1.01%, and $1,137,000, or
0.75%, of net loans receivable at September 30, 2007, December 31, 2006 and
September 30, 2006, respectively. Of the non-accrual loans at September 30,
2007, $304,000 consisted of two one-to-four residential mortgage loans at
September 30, 2007 and $100,000 consisted of a commercial non-real estate loan.
The decrease in the amount of non-accrual loans is due to the reclassification
of the participation loan as foreclosed real estate during the second quarter
of
2007, as discussed above.
Under
current accounting guidelines, a loan is defined as impaired when, based on
current information and events, it is probable that a creditor will be unable
to
collect all amounts when due under the contractual terms of the loan
agreement. We consider one- to four-family mortgage loans and consumer
installment loans to be homogeneous and, therefore, do not separately evaluate
them for impairment. All other loans are evaluated for impairment on an
individual basis. We generally classify non-accrual loans as impaired.
As
of
September 30, 2007, we have classified a commercial non-real estate loan as
impaired as was discussed in the “Provision for Loan Losses and Analysis of
Allowance for Loan Losses” section of this report. At the end of the first nine
months, in anticipation of a minimal recovery of principal on this loan, we
charged a portion of the loan balances against our allowance for loan losses
and
we have reserved $100,000, or 100%, of the remaining balance of the loan to
our
allowance for loan losses. The remaining debt was restructured at the end of
the
third quarter of 2007.
Other
than as disclosed in the paragraphs above, there are no other loans at September
30, 2007 about which management has serious doubts concerning the ability of
the
borrowers to comply with the present loan repayment terms.
Liabilities.
General
.
Total
liabilities decreased by $2,852,000, or 1.88%, to $149,008,000 at September
30,
2007, from $151,860,000 at December 31, 2006. The decrease in total liabilities
resulted from a $7,500,000, or 19.23% decrease in borrowings, offset by
increases of $2,862,000, or 2.56%, in deposits, $1,055,000, or 274.74%, in
checks outstanding in excess of bank balance, $417,000, or 137.62%, in other
liabilities, and $314,000, or 89.71%, in advance payments by borrowers for
taxes. The decrease in borrowings is the result of paying down the Federal
Home
Loan Bank advances when our liquidity is favorable. Advance payments by
borrowers for taxes and insurance increased because of the increased property
taxes of the loan portfolio. The balance in checks outstanding in excess of
bank
balance at the end of a period is dependent on the number and amounts of checks
issued on the account at our correspondent’s bank and when such checks are
presented for payment. Any excess funds are automatically transferred into
an
interest-earning federal funds account. Therefore, changes in checks outstanding
in excess of bank balance as reflected on the balance sheet, generally, do
not
reflect any underlying changes in the Company’s financial condition. The other
liabilities consist primarily of accrued federal and state income taxes and
accrued interest on Federal Home Loan Bank borrowings.
Deposits
.
Deposits
increased $2,862,000, or 2.56%, to $114,685,000 at September 30, 2007 from
$111,823,000 at December 31, 2006. Certificates
of
deposits increased $4,563,000, or 5.31%, to $90,560,000 at September 30, 2007
from $85,997,000 at December 31, 2006. NOW and money market demand accounts
decreased by $666,000, or 3.98%, to $16,068,000 at September 30, 2007 from
$16,734,000 at December 31, 2006 and savings deposits decreased $1,035,000,
or
11.38%, to $8,057,000 at September 30, 2007, from $9,092,000 at December 31,
2006. We believe that, as deposit rates have risen, some customers are moving
funds into higher-yielding investments, thus accounting for the increase in
certificate of deposit and money market deposit accounts and the decline in
lower rate paying core deposit accounts.
Borrowings
.
At
September 30, 2007, we were permitted to borrow up to $51,327,000 from the
Federal Home Loan Bank of Atlanta. We had $31,500,000 and $39,000,000 of Federal
Home Loan Bank advances outstanding as of September 30, 2007 and December 31,
2006, respectively, and we averaged
$34,222,000
and $39,250,000 of Federal Home Loan Bank advances during the nine months ended
September 30, 2007 and the year ended December 31, 2006, respectively. The
decrease in borrowings reflects $7,500,000 Federal Home Loan Bank advance pay
downs and $33,500,000 in the rollover of advances, offset by maturing advances
of $33,500,000 in the first nine months of 2007.
Liquidity
Management
Liquidity
is the ability to meet current and future financial obligations of a short-term
nature. Our primary sources of funds consist of deposit inflows, borrowings
from
the Federal Home Loan Bank of Atlanta, scheduled amortization and prepayment
of
loans and mortgage-backed securities, maturities and calls of held to maturity
investment securities and earnings and funds provided from operations. While
scheduled principal repayments on loans and mortgage-backed securities are
a
relatively predictable source of funds, deposit flows, calls of securities
and
loan prepayments are greatly influenced by market interest rates, economic
conditions, and rates offered by our competitors.
We
regularly adjust our investments in liquid assets based upon our assessment
of
(1) expected loan demand, (2) expected deposit flows, (3) yields available
on
interest-earning deposits and securities and (4) the objectives of our
asset/liability management policy.
Our
most
liquid assets are cash and cash equivalents. The levels of these assets depend
on our operating, financing, lending and investing activities during any given
period. At September 30, 2007, cash and cash equivalents totaled $1,541,000.
Securities classified as available-for-sale, which can provide additional
sources of liquidity, totaled $8,819,000 at September 30, 2007. However, because
all of these securities were in an unrealized loss position at September 30,
2007, and because management has the intent and ability to hold these securities
until recovery or maturity, management does not consider these securities as
a
source of liquidity at September 30, 2007.
Also,
at
September 30, 2007, we had advances outstanding of $31,500,000 from the Federal
Home Loan Bank of Atlanta. On that date, we had the ability to borrow an
additional $19,827,000.
At
September 30, 2007, we had outstanding commitments to originate loans of
$1,470,000 (excluding the undisbursed portions of loans). These commitments
do
not necessarily represent future cash requirements since certain of these
instruments may expire without being funded, although this is unusual. We also
extend lines of credit to customers, primarily home equity lines of credit.
The
borrower is able to draw on these lines as needed, thus the funding is generally
unpredictable. Unused home equity lines of credit amounted to $4,929,000 at
September 30, 2007. Since the majority of unused lines of credit expire without
being funded, it is anticipated that our obligation to fund the above commitment
amount will be substantially less than the amounts reported.
Certificate
of deposit accounts scheduled to mature within one year totaled $58,226,000
or
50.77% of total deposits at September 30, 2007. Management believes that the
large percentage of deposits in shorter-term certificates of deposit reflects
customers’ hesitancy to invest their funds in long-term certificates of deposit
in the current interest rate environment in which long-term rates are lower
than
short-term rates. If these deposits do not remain with us, we will be required
to seek other sources of funds, including other certificates of deposit and/or
additional borrowings. Depending on market conditions, we may be required to
pay
higher rates on such deposits or other borrowings than we currently pay on
the
certificates of deposit due on or before September 30, 2008. We believe,
however, based on past experience, a significant portion of our certificates
of
deposit will remain with us. We also believe we have the ability to attract
and
retain deposits by adjusting the interest rates offered.
Our
borrowings are with the Federal Home Loan Bank of Atlanta and are secured by
Federal Home Loan Bank of Atlanta stock that we own and a blanket lien on
mortgages. Borrowings at September 30, 2007 consisted of
$5,000,000
in
a
short
term fixed rate FHLB advance bearing an interest rate of 5.28% and $26,500,000
long term convertible rate FHLB advances with fixed interest rates ranging
from
3.63% to 4.90%. If not repaid or converted to a different product, the
convertible rate advances will convert from a fixed to a floating rate after
the
initial borrowing periods ranging from three to 60 months.
Our
primary investing activity is the origination of loans, primarily one- to
four-family residential mortgage loans and commercial loans, and the purchase
of
securities. Our primary financing activity consists of activity in deposit
accounts and Federal Home Loan Bank of Atlanta advances. Deposit growth has
continued to outpace asset growth over the past two-six months and the increased
liquidity has been placed in a federal funds account with our correspondent
bank, used to pay down borrowed funds and to fund commercial and acquisition
and
renovation loans. Deposit flows are affected by the overall level of interest
rates, the interest rates and products offered by us and our local competitors
and other factors. We generally manage the pricing of our deposits to be
competitive. Occasionally, we offer promotional rates on certain deposit
products to attract deposits.
We
are
not aware of any known trends, events or uncertainties that will have or are
reasonably likely to have a material effect on our liquidity, capital or
operations, nor are we aware of any current recommendation by regulatory
authorities, which if implemented, would have a material effect on liquidity,
capital or operations.
Stockholders’
Equity
Total
stockholders’ equity decreased $281,000, or 1.26%, to $22,084,000 at September
30, 2007 from $22,365,000 at December 31, 2006 primarily as a result of the
purchase of $427,000 in additional Treasury stock and a net loss of $21,000.
The
net loss is primarily due to the increase in the allowance for loan losses
in
anticipation of a potential loan default and an increase in interest expenses
as
a result of increases in deposits yielding higher interest rates. We are
considered “well capitalized” under the risk-based capital guidelines applicable
to us.
Off-balance
Sheet Arrangements
In
the
normal course of operations, we engage in a variety of financial transactions
that, in accordance with generally accepted accounting principles, are not
recorded in our financial statements. These transactions involve, to varying
degrees, elements of credit, interest rate, and liquidity risk. Such
transactions are used primarily to manage customers’ requests for funding and
take the form of loan commitments and lines of credit. Our exposure to credit
loss from non-performance by the other party to the above-mentioned financial
instruments is represented by the contractual amount of those instruments.
We
use the same credit policies in making commitments and conditional obligations
as we do for on-balance sheet instruments.
|
Financial
Instruments Whose
|
|
|
|
|
|
|
Contract
Amount Represents
|
|
Contract
Amount At
|
|
|
Credit
Risk
|
|
September
30, 2007
|
|
December
31, 2006
|
|
|
|
|
(Dollars
in thousands)
|
|
|
Lines
of credit - commercial
|
|
|
|
|
|
|
|
|
Lines
of credit - home equity
|
|
|
4,929
|
|
|
5,335
|
|
|
Lines
of credit - overdraft checking
|
|
|
120
|
|
|
118
|
|
|
Mortgage
loan commitments
|
|
|
1,470
|
|
|
830
|
|
Commercial
lines of credit are generally secured by a blanket lien on assets of the
borrower. Revolving Lines of Credit (RLOC) are typically used for short term
working capital needs and are based most heavily on the accounts receivable
and
inventory components of the borrower’s balance sheet. RLOC have terms of one
year, are subject to annual reaffirmation and carry variable rates of interest.
We generally receive a one percent fee, based on the commitment
amount.
Equipment
lines of credit are secured by equipment being purchased and sometimes by a
blanket lien on assets of the borrower as well. Each advance is repaid over
three to five years and carries a variable or prevailing fixed rate of interest.
We will generally advance up to 80% of the cost of the new or used equipment.
These credit facilities are revolving in nature and the commitment is subject
to
annual reaffirmation.
For
both
types of credit facilities listed above, we evaluate each customer’s credit
worthiness on a case-by-case basis.
Home
equity lines of credit are secured by second deeds of trust on residential
real
estate. They have fixed expiration dates as long as there is no violation of
any
condition established in the contract. We evaluate each customer’s credit
worthiness on a case-by-case basis.
Overdraft
lines of credit on checking accounts are unsecured. Linked to any Slavie Federal
personal checking account, the line will automatically make a deposit to the
customer’s checking account if the balance falls below the amount needed to pay
an item presented for payment.
Our
outstanding commitments to make mortgages are at fixed rates ranging from 6.25%
to 7.50% and 5.625 to 7.125% at September 30, 2007 and December 31, 2006,
respectively. Loan commitments expire 60 days from the date of the
commitment.
For
the
nine months ended September 30, 2007, we engaged in no off-balance sheet
transactions reasonably likely to have a material effect on our financial
condition, results of operations or cash flows.
Information
Regarding Forward-Looking Statements
In
addition to the historical information contained in Part I of this Quarterly
Report on Form 10-QSB, the discussion in Part I of this Quarterly Report on
Form
10-QSB contains certain forward-looking statements within the meaning of Section
27A of the Securities Exchange Act of 1933, as amended, and Section 21E of
the
Securities Exchange Act of 1934, as amended. Forward-looking statements often
use words such as “believe,” “expect,” “plan,” “may,” “will,” “should,”
“project,” “contemplate,” “anticipate,” “forecast,” “intend” or other words of
similar meaning. You can also identify them by the fact that they do not relate
strictly to historical or current facts.
Our
goals, objectives, expectations and intentions, including statements regarding
improved profitability, leaseable space in our headquarters building, our
holdings of mortgage-backed securities, the mix of loans in our portfolio,
retention of deposits, the allowance for loan losses, repayment of non-accrual
loans, liquidity management, and financial and other goals are forward looking.
These statements are based on our beliefs, assumptions and on information
available to us as of the date of this filing, and involve risks and
uncertainties. These risks and uncertainties include, among others, those
discussed in this Quarterly Report on Form 10-QSB and in our Annual Report
on
Form 10-KSB for the year ended December 31, 2006; the effect of rising interest
rates on our profits and asset values; risks related to our intended increased
focus on commercial real estate and commercial business loans; our limited
recognition and reputation in our markets; adverse economic conditions in our
market area; our dependence on key personnel; competitive factors within our
market area; the effect of developments in technology on our business; adverse
changes in the overall national economy as well as adverse economic conditions
in our specific market area; adequacy of the allowance for loan losses; expenses
as a result of our stock benefit plans; and changes in regulatory requirements
and/or restrictive banking legislation.
Our
actual results and the actual outcome of our expectations and strategies could
differ materially from those discussed herein and you should not put undue
reliance on any forward-looking statements. All forward-looking statements
speak
only as of the date of this filing, and we undertake no obligation to make
any
revisions to the forward-looking statements to reflect events or circumstances
after the date of this filing or to reflect the occurrence of unanticipated
events.