Item 5. Market for Registrant’s Common Equity
ITEM 5.
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
BV Financials common stock is traded on the OTC Electronic Bulletin Board under the symbol BVFL.OB. As of September 17, 2009, the
Company had approximately 134 holders of record. The following table sets forth, for the quarters indicated, the daily high and low sales price for and dividends declared on the common stock for fiscal 2009 and 2008. The prices do not necessarily
reflect inter-dealer prices without retail markup, markdown or commission and may not reflect actual transactions.
High
Low
Dividends
Fiscal 2009:
Fourth Quarter
$
3.60
$
2.59
$
0.05
Third Quarter
4.25
2.65
0.05
Second Quarter
5.75
3.60
0.05
First Quarter
6.00
5.00
0.05
Fiscal 2008:
Fourth Quarter
$
7.15
$
5.50
$
0.05
Third Quarter
7.90
6.50
0.05
Second Quarter
8.50
7.00
0.05
First Quarter
8.75
7.65
0.05
BV Financial is not subject to Office of Thrift Supervision regulatory restrictions on the
payment of dividends. However, BV Financials ability to pay dividends may depend, in part, upon its receipt of dividends from Bay-Vanguard Federal because BV Financial has no source of income other than earnings from the investment of the net
proceeds from the offering that it retained. Payment of cash dividends on capital stock by a savings institution is limited by OTS regulations. No insured depository institution may make a capital distribution if, after making the distribution, the
institution would be undercapitalized. See Regulation and SupervisionFederal Savings Institution RegulationLimitation on Capital Distributions.
As of June 30, 2009, BV Financial satisfied all prescribed capital requirements. Future dividend payments will depend on the Companys
profitability, approval by its Board of Directors and prevailing OTS regulations.
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The following table provides certain information with regard to shares repurchased by the Company in the
fourth quarter of fiscal 2009.
Period
Total
Number of
Shares
Purchased (1)
Average
Price Paid
Per Share
Total Number
of Shares
Purchased as
Part of Publicly
Announced Plans or
Programs
Maximum
Number of Shares
that May Yet be
Purchased Under
the Plans or Programs
April 1, 2009 through April 30, 2009
$
47,830
May 1, 2009 through May 31, 2009
47,830
June 1, 2009 through June 30, 2009
47,830
Total
$
(1)
On March 20, 2008, BV Financial announced the adoption of a stock repurchase program to acquire up to 97,830 shares, or 10%, of BV Financials outstanding shares of common
stock, excluding shares held by Bay-Vanguard M.H.C. The program will continue until it is completed or terminated by the Board of Directors.
ITEM 6.
SELECTED FINANCIAL DATA
Not applicable as BV
Financial is a smaller reporting company.
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The objective of this section is to help potential investors understand our views on our results of operations and financial condition. You should read
this discussion in conjunction with the financial statements and notes to the financial statements included in this annual report on Form 10-K.
Overview
Income . Our primary source of income is net interest income. Net interest income is the
difference between interest income, which is the income that we earn on our loans and investments, and interest expense, which is the interest that we pay on our deposits and borrowings. To a much lesser extent, we also recognize income from service
charge incomemostly from service charges on deposit accounts and fees for late loan paymentsand from the increase in surrender value of our bank-owned life insurance.
Allowance for Loan Losses . The allowance for loan losses is a valuation allowance for losses inherent in the loan
portfolio. We evaluate the need to establish allowances against losses on loans on a quarterly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.
Expenses. The expenses we incur in operating our business consist of compensation and related expenses, occupancy expenses, data processing
expenses, telephone and postage expenses, advertising expenses, professional fees, equipment expenses and other miscellaneous expenses.
Compensation and related expenses consist primarily of the salaries and wages paid to our employees, payroll taxes and expenses for health insurance, retirement plans and other employee benefits, including the
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employee stock ownership plan. Expense for the employee stock ownership plan is based on the average market value of the shares committed to be released. An
equal number of shares will be released each year over the 15-year term of the loan. Expense for shares of restricted stock awards and stock options is based on the fair market value of the shares on the date of grant. Compensation and related
expenses is recognized on a straight-line basis over the vesting period.
Occupancy expenses, which are the fixed and variable costs of
land and building, consist primarily of lease payments, real estate taxes, depreciation charges, maintenance and costs of utilities. Depreciation of premises is computed using the straight-line method based on the useful lives of the related assets,
which range from 15 to 40 years. Leasehold improvements are amortized over the shorter of the useful life of the asset or term of the lease.
Data processing expenses include fees paid for third-party data processing service.
Telephone and postage expenses include our
communication lines between branch offices, our Internet access and our mailing expenses, including certain deposit statements.
Advertising expenses include expenses for print advertisements, promotions and premium items.
Professional fees primarily include
fees paid to our independent registered public accountants, as well as our attorneys, predominantly in relation to problem assets and due to the costs of operating a public company.
Equipment expense includes expenses and depreciation charges related to office and banking equipment. Depreciation of equipment is computed using the
straight-line method based on the useful lives of the related assets, which range from three to ten years.
FDIC insurance premium expense
includes premiums paid for federal insurance on deposits.
Other expenses include amortization of intangible assets, charitable
contributions, regulatory assessments, office supplies and other miscellaneous operating expenses.
Critical Accounting Policies
We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying
value of certain assets or on income to be critical accounting policies. We consider the allowance for loan losses, fair value measurement for financial assets, the determination of other than temporary impairment of investments, intangible asset
impairment and the deferred tax asset valuation allowance to be critical accounting policies.
Allowance for Loan
Losses . The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses,
which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: loss exposure at default; the amount and timing
of future cash flows on impaired loans; the value of collateral; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. We recorded charge-offs of
$581,000 and $21,000 in relation to foreclosed real estate and repossessed assets in fiscal 2009 and 2008, respectively. Additionally, we had net charge-offs to average loans of 0.68% for fiscal 2009 compared to net charge offs to average loans of
0.02% for fiscal 2008.
Management reviews the level of the allowance on a quarterly basis, at a minimum, and establishes the provision for
loan losses based on an evaluation of the portfolio, past loss experience, economic conditions and business conditions affecting our primary market area, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan
portfolio, the duration of the current business cycle and other factors related to the collectibility of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future additions
to the allowance may be necessary if certain future events occur that cause actual results to differ from the assumptions used in making the evaluation. For example, a further downturn
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in the local economy could cause increases in non-performing loans. Additionally, a further decline in real estate values could cause some of our loans to
become inadequately collateralized. In either case, this may require us to increase our provision for loan losses, which would negatively impact earnings. Further, the Office of Thrift Supervision, as an integral part of its examination process,
periodically reviews our allowance for loan losses. Such agency may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. An increase to the allowance required
to be made by the Office of Thrift Supervision would negatively impact our earnings. Additionally, a large loss could deplete the allowance and require increased provisions to replenish the allowance, which would negatively affect earnings. See
notes 1 and 3 to the notes to consolidated financial statements included in this Form 10-K.
At each of June 30, 2009 and 2008, over
89.2% of the loan portfolio consisted of real estate loans. However, over 19.0% of the real estate loans consisted of multi-family and commercial real estate and construction loans, which carry a higher risk of default than one-to four-family
residential real estate loans. The level of the allowance for loan losses has changed due to a provision for loan losses of $729,000 for fiscal 2008, offset by $583,000 in charge-offs. The allowance for loan losses also reflects changes in the size
of loan portfolio, which decreased by 4.4% for fiscal 2009 and increased by 6.2% fiscal 2008, respectively.
Fair Value Measurement
for Financial Assets and Financial Liabilities. SFAS 157 establishes a three level fair value hierarchy that prioritizes the inputs to valuation techniques 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).
Management has presented certain financial instruments measured at fair value on either a recurring or nonrecurring basis by level within the hierarchy. Management obtains fair values from various broker pricing
sources on a monthly basis, at a minimum, and reviews the fair values for reasonableness. Although the Company believes that it uses the best information available to establish fair values for these certain financial instruments, future changes to
the fair value may be significant if certain future events occur that cause actual results to differ from the assumptions used in making determinations about fair value. For example, market data used as inputs to calculate pricing for a particular
financial instrument may change dramatically.
Other-than-Temporary Impairment of Investment Securities. There are certain
securities in the Companys portfolio in an unrealized loss position that management believes at this time are temporarily impaired. If the fair value of these securities does not recover in a reasonable period of time or management can no
longer demonstrate the ability and intent to hold them until recovery, a write-down through the consolidated statements of income would be necessary.
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the
length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the Companys intent to not sell the security and hold the security until the
specified maturity or repricing date. In analyzing the issuers financial condition, management considers industry analysts reports, financial performance and projected target prices of investment analysts.
Intangible Asset Impairment. The Company has goodwill and core deposit intangible assets arising from a branch purchase. The goodwill is
evaluated annually for impairment while the core deposit intangible is being amortized over seven years and also evaluated annually for impairment. Goodwill impairment was tested at May 31, 2009. A valuation analysis identified impairment, and
as a result, the Company recorded an impairment charge of $3.9 million, which eliminated all goodwill at the Company. The goodwill impairment charge did not affect the Companys regulatory capital or cash flow.
Deferred Tax Asset Valuation Allowance. We use the asset and liability method of accounting for income taxes as prescribed in Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. We
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Table of Contents
exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to
make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change. Any reduction in
estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. Management determined during the fiscal year ended June 30, 2009 that a deferred tax asset valuation allowance was warranted for its
mutual fund security based on the Companys ability to generate future capital gains if necessary to offset capital losses. In addition, management determined that no deferred tax asset valuation allowance was warranted for its goodwill
impairment write-down due to the expectation of taxable income going forward and the availability of tax planning strategies to generate future income to offset operating losses.
Operating Strategy
Our mission is to operate and grow a profitable community-oriented financial
institution. We plan to achieve this by executing our strategy of:
aggressively attracting core deposits;
continuing to emphasize the origination of one- to four-family residential real estate loans;
pursuing opportunities to increase multi-family and commercial real estate lending in our market area;
continuing to use conservative underwriting practices to maintain the high quality of our loan portfolio; and
providing exceptional service to attract and retain customers.
Aggressively attract core deposits
Core deposits (accounts other than certificates of deposit)
comprised 53.4% of our total deposits at June 30, 2009. We value core deposits because they represent longer-term customer relationships and a lower cost of funding compared to certificates of deposit. We aggressively seek core deposits through
competitive pricing and targeted advertising.
Continue to emphasize the origination of one- to four-family residential real estate
loans
Our primary lending activity is the origination of residential mortgage loans secured by homes in our market area. We intend to
continue emphasizing the origination of residential mortgage loans going forward. At June 30, 2009, 70.3% of our total loans were one- to four-family residential real estate loans. We believe that our emphasis on residential lending, which
carries a lower credit risk, contributes to our high asset quality.
Pursue opportunities to increase multi-family and commercial real
estate lending in our market area
Multi-family and commercial real estate loans provide us with the opportunity to earn more income
because they tend to have higher interest rates than residential mortgage loans. Additionally, we offer adjustable-rate multi-family and commercial real estate loans. Adjustable-rate loans, which reprice periodically, help to offset the adverse
effects of an increase in interest rates, which improves our interest rate risk management. Multi-family and commercial real estate loans increased $3.0 million for the year ended June 30, 2009 and comprised approximately 13.5% of total loans.
There are many multi-family and commercial properties located in our market area, and we will continue to pursue these opportunities, while continuing to originate any such loans in accordance with what we believe are our conservative underwriting
guidelines.
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Continue to use conservative underwriting practices to maintain the high quality of our loan portfolio
We believe that high asset quality is a key to long-term financial success. We have sought to maintain a high level of asset quality
and moderate credit risk by using underwriting standards which we believe are conservative. While our non-performing loans (loans that are 90 or more days delinquent) at June 30, 2009 decreased to 0.8% of our total loan portfolio and 0.6% of
our total assets, the decrease was attributable to two residential construction loans totaling $2.2 million being removed from non-accrual status due to $1.8 million in payoffs and $426,000 in charge-offs. We intend to continue our efforts to
originate multi-family and commercial real estate loans and our philosophy of managing large loan exposures through our conservative approach to lending.
Provide exceptional service to attract and retain customers
As a community-oriented financial
institution, we emphasize providing exceptional customer service as a means to attract and retain customers. We deliver personalized service and respond with flexibility to customer needs. We believe that our community orientation is attractive to
our customers and distinguishes us from the large banks that operate in our market area. We have also provided Internet banking since 1997.
Balance
Sheet Analysis
Loans . Our primary lending activity is the origination of loans secured by real estate. We
originate real estate loans secured by one- to four-family residential real estate, and to a much lesser extent, secured by multi-family and commercial real estate. At June 30, 2009, real estate loans totaled $110.0 million, or 89.2% of total
loans, compared to $115.1 million, or 89.9%, of total loans at June 30, 2008.
The largest segment of our real estate loans is one- to
four-family residential real estate loans. At June 30, 2009, one- to four-family residential real estate loans totaled $86.6 million, which represented 78.7% of real estate loans and 70.3% of total loans compared to $90.5 million at
June 30, 2008, which represented 78.6% of real estate loans and 70.7% of total loans. One- to four-family residential real estate loans decreased $3.9 million, or 4.3%, for the year ended June 30, 2009 due to borrower payoffs from their
refinancing with a competitor offering a lower rate, loan roll-off and a reduced demand for these loans.
Multi-family and commercial real
estate loans totaled $16.6 million at June 30, 2009, which represented 15.1% of real estate loans and 13.5% of total loans, compared to $13.6 million at June 30, 2008, which represented 11.8% of real estate loans and 10.6% of total loans.
Multi-family and commercial real estate loans increased $3.0 million, or 22.4%, for the year ended June 30, 2009 due to the continued emphasis of this type of lending.
We purchase and originate loans secured by mobile homes. Mobile home loans totaled $11.5 million at June 30, 2009, which represented 9.3% of total
loans, compared to $11.8 million at June 30, 2008, which represented 9.2% of total loans. To mitigate our exposure to this type of lending, we have limited the amount of mobile home loans to 15% of our loan portfolio. Mobile home loans
decreased in fiscal 2009 due to roll-off exceeding additional purchases from Forward National and Mainland Financial. A further discussion of our mobile home loans is contained in BusinessLending ActivitiesMobile Home
Loans.
We also originate construction loans secured by residential, multi-family and commercial real estate and loans to
individuals to acquire land upon which they intend to build a residence. This portfolio totaled $6.8 million at June 30, 2009, which represented 5.5% of total loans, compared to $11.1 million at June 30, 2008, which represented 8.7% of
total loans. Construction loans decreased $4.3 million, or 38.9%, for the year ended June 30, 2009 primarily due to management reducing exposure in this area, the completion of the construction period for some loans and resulting conversion to
permanent loans, and the foreclosure of a $1.0 million construction loan resulting in a charge-off of $426,000.
We also originate a
variety of consumer loans, including loans secured by passbook or certificate accounts. Consumer loans totaled $888,000 and represented 0.7% of total loans at June 30, 2009, compared to $824,000, or 0.7% of total loans, at June 30, 2008.
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The following table sets forth the composition of our loan portfolio at the dates indicated.
At June 30,
2009
2008
Amount
Percent
Amount
Percent
(Dollars in thousands)
Real estate loans:
One- to four-family (1)
$
86,589
70.24
%
$
90,494
70.66
%
Multi-family and commercial
16,614
13.48
13,572
10.60
Construction
6,797
5.51
11,125
8.68
Total real estate loans
110,000
89.23
115,191
89.94
Mobile home loans
11,471
9.31
11,810
9.22
Other consumer loans
888
0.72
824
0.65
Total consumer loans
12,359
10.03
12,634
9.87
Commercial
909
0.74
244
0.19
Total gross loans
123,268
100.00
%
128,069
100.00
%
Loans in process
(3,178
)
(2,533
)
Deferred loan costs, net
16
Allowance for loan losses
(855
)
(709
)
Total loans receivable, net
$
119,235
$
124,843
(1)
Includes second mortgage loans, home equity loans and home equity lines of credit.
The following table sets forth certain information at June 30, 2009 regarding the dollar amount of loans maturing during the periods indicated. The table does not include any estimate of prepayments, which
significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less.
One- to
Four-
Family
Multi-
Family
and
commercial
Construction
Mobile
Home
Other
Consumer
Commercial
Total
Loans
(In thousands)
Amounts due in:
One year or less
$
1,693
$
344
$
5,460
$
6
$
8
$
750
$
8,261
More than one year to five years
9,825
2,018
1,337
256
543
159
14,138
More than five years
75,071
14,252
11,209
337
100,869
Total amount due
$
86,589
$
16,614
$
6,797
$
11,471
$
888
$
909
$
123,268
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The following table sets forth the dollar amount of all loans at June 30, 2009 that are due after
June 30, 2010 and have either fixed interest rates or floating or adjustable interest rates.
Due After June 30, 2010
Fixed-Rates
Floating or
Adjustable-Rates
Total
(In thousands)
One- to four-family
$
73,919
$
10,977
$
84,896
Multi-family and commercial
6,552
9,718
16,270
Construction
1,337
1,337
Mobile home
11,465
11,465
Other consumer loans
880
880
Commercial
159
159
Total loans
$
94,312
$
20,695
$
115,007
The following table shows loan activity during the periods indicated.
Year Ended June 30,
2009
2008
(In thousands)
Total loans at beginning of period
$
124,843
$
116,051
Loans originated:
One- to four-family
9,376
10,795
Multi-family and commercial
5,634
2,936
Construction
3,975
3,048
Mobile home
263
545
Other consumer
290
311
Total loans originated
19,538
17,635
Loans and participations purchased
1,621
5,250
Deduct:
Principal loan repayments
22,858
13,049
Loans and participations sold
3,290
890
Transfer to foreclosed real estate/repossessed assets
619
42
Other
112
Net loan activity
(5,608
)
8,792
Total loans at end of period
$
119,235
$
124,843
Securities. Our securities portfolio consists primarily of U.S. Treasury and
U.S. government agency securities, mortgage-backed securities and a mutual fund that invests in adjustable-rate loans. Securities decreased approximately $4.8 million, or 26.0%, in the year ended June 30, 2009 primarily due to $9.0 million of
U.S. government agency securities being called or maturing and $2.5 million principal collected on mortgage-backed securities offset by $7.0 million of U.S. government agency securities purchases. All of our mortgage-backed securities were issued by
Ginnie Mae, Fannie Mae or Freddie Mac.
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The following table sets forth the carrying amounts and fair values of our securities portfolio at the
dates indicated.
At June 30,
2009
2008
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
(In thousands)
Held-to-maturity securities:
Obligations of the U.S. Treasury and U.S. Government agencies
$
4,052
$
4,079
$
2,000
$
2,013
Mortgage-backed securities
7,485
7,610
7,788
7,648
Total held-to-maturity securities
11,537
11,689
9,788
9,661
Available-for-sale securities:
Obligations of the U.S. Treasury and U.S. Government agencies
5,000
4,947
Marketable equity securities
2,547
2,547
Mortgage-backed securities
1,146
1,179
1,351
1,344
Total available-for-sale securities
1,146
1,179
8,898
8,838
Trading securities:
Marketable equity securities
1,076
1,076
Total trading securities
1,076
1,076
Total securities
$
13,759
$
13,944
$
18,686
$
18,499
At June 30, 2009, we had no investments that had an aggregate book value in excess of 10% of
our equity at June 30, 2009. Management analyzed its exposure to U.S. federal agencies securities and mortgage-backed securities held and found no other-than-temporary impairment at June 30, 2009.
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The following table sets forth the maturities and weighted average yields of securities at June 30,
2009. Weighted average yields are not presented on a tax-equivalent basis as the investment portfolio does not include any tax-exempt obligations.
One Year or Less
More than
One Year to
Five Years
More than
Five Years to
Fifteen Years
More than
Fifteen Years
Total
Carrying
Amount
Weighted
Average
Yield
Carrying
Amount
Weighted
Average
Yield
Carrying
Amount
Weighted
Average
Yield
Carrying
Amount
Weighted
Average
Yield
Carrying
Amount
Weighted
Average
Yield
(Dollars in thousands)
Held-to-maturity securities:
Obligations of the U.S. Treasury and
U.S. Government agencies
$
1,000
1.25
%
$
3,052
1.45
%
$
%
$
%
$
4,052
4.47
%
Mortgage-backed securities
2,616
3.33
1,917
4.22
2,952
5.65
7,485
2.31
Total held-to-maturity securities
$
1,000
1.25
$
5,668
2.81
$
1,917
4.22
$
2,952
5.65
$
11,537
3.71
Available-for-sale securities:
Mortgage-backed securities
$
%
$
36
6.50
%
$
123
5.50
%
$
1,020
5.15
%
$
1,179
5.22
%
Total available-for-sale securities
$
$
36
6.50
$
123
5.50
$
1,020
5.15
$
1,179
5.22
Trading securities:
Marketable equity securities
$
1,076
5.09
%
$
%
$
%
$
%
$
1,076
5.09
%
Total trading securities
$
1,076
5.09
$
$
$
$
1,076
5.09
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Deposits . Our primary source of funds is our deposit accounts, which are comprised
of demand deposits, savings accounts and time deposits. These deposits are provided primarily by individuals within our market area. We do not use brokered deposits as a source of funding. Deposits increased $584,000, or 0.4%, for the year ended
June 30, 2009 primarily due to a $3.1 million increase in time deposits and a $150,000 increase in savings accounts, offset by a $2.6 million decrease in NOW and money market accounts. The Bank aggressively marketed time deposits early in
fiscal year 2009 attracting new monies while also seeing movement from other deposit categories.
The following table sets forth the
balances of our deposit products at the dates indicated.
At June 30,
2009
2008
(In thousands)
Non-interest bearing accounts
$
6,041
$
6,040
NOW and money market accounts
50,896
53,520
Savings accounts
16,604
16,454
Certificates of deposit
64,075
61,018
Total
$
137,616
$
137,032
The following table indicates the amount of jumbo certificates of deposit by time remaining until
maturity as of June 30, 2009. Jumbo certificates of deposit require minimum deposits of $100,000.
Maturity Period
Amount
(In thousands)
Three months or less
$
7,316
Over three through six months
1,645
Over six through twelve months
4,798
Over twelve months
9,620
Total
$
23,379
The following table sets forth time deposits classified by rates at the dates indicated.
At June 30,
2009
2008
(In thousands)
1.00 - 1.99%
$
4,511
$
2.00 - 2.99%
11,804
6,019
3.00 - 3.99%
14,634
8,579
4.00 - 4.99%
18,247
29,662
5.00 - 5.99%
14,759
16,395
6.00 - 6.99%
120
363
Total
$
64,075
$
61,018
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The following table sets forth the amount and maturities of time deposits at June 30, 2009.
Amount Due
Total
Percent of
Total
Certificate
Accounts
One Year
or Less
More Than
One Year
to Two
Years
More Than
Two Years
to Three
Years
More Than
Three Years
to Four
Years
More Than
Four
Years
(Dollars in thousands)
1.00 - 1.99%
$
3,733
$
778
$
$
$
$
4,511
7.04
%
2.00 - 2.99%
10,690
855
120
14
125
11,804
18.42
3.00 - 3.99%
11,562
847
332
277
1,616
14,634
22.84
4.00 - 4.99%
11,693
3,485
924
1,030
1,115
18,247
28.48
5.00 - 5.99%
970
11,893
564
1,332
14,759
23.03
6.00 - 6.99%
100
20
120
0.19
Total
$
38,748
$
17,878
$
1,940
$
1,321
$
4,188
$
64,075
100.00
%
The following table sets forth the deposit activity for the periods indicated.
Year Ended June 30,
2009
2008
(In thousands)
Beginning balance
$
137,032
$
98,492
Decrease before branch acquisition and interest credited
(3,148
)
(17,655
)
Increase due to branch acquisition
51,521
Interest credited
3,732
4,674
Net increase in deposits
584
38,540
Ending balance
$
137,616
$
137,032
Borrowings . We use advances from the Federal Home Loan Bank to supplement our
supply of lendable funds or to meet deposit withdrawal requirements. The following tables present certain information regarding our advances with the Federal Home Loan Bank during the periods and at the dates indicated.
For the Years Ended
June 30,
2009
2008
(Dollars in thousands)
Maximum amount of advances outstanding at any month end
$
12,500
$
16,000
Average advances outstanding
9,062
9,605
Weighted average rate paid on advances
7.00
%
4.86
%
At June 30,
2009
2008
(Dollars in thousands)
Balance outstanding at end of year
$
$
7,500
Weighted average rate on advances at end of year
%
4.68
%
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Table of Contents
Results of Operations for the Years Ended June 30, 2009 and 2008
Overview.
% Change
2009
2008
2009/2008
(Dollars in thousands)
Net loss
$
(2,717
)
$
(330
)
723.3
%
Return on average assets
(1.70
)%
(0.20
)%
750.0
%
Return on average equity
(20.09
)%
(2.44
)%
723.4
%
Average equity to average assets
8.45
%
8.15
%
3.7
%
Dividend payout ratio
(17.09
)%
(142.86
)%
(88.0
)%
Net loss increased $2.4 million, or 723.3%, for fiscal 2009 due primarily to a $3.9 million
goodwill impairment write-down, a $401,000 increase in the provision for loan losses and a $471,000 loss in securities trading, offset by a $1.7 million increase in benefit for income taxes.
Net Interest Income. Net interest income increased $420,000, or 11.3%, to $4.1 million for fiscal 2009. The increase in net
interest income for fiscal 2009 was primarily attributable to a decrease in interest expense to lower interest rates. Our net interest margin increased from 2.48% for fiscal 2008 to 2.80% for fiscal 2009 and our interest rate spread increased from
2.13% for fiscal 2008 to 2.54% for fiscal 2009.
Total interest income decreased $355,000, or 4.0%, to $8.5 million for fiscal 2009,
resulting from lower average balances and interest rates earned. During fiscal 2009, average interest-earning assets decreased by $2.3 million, or 1.6%, to $147.1 million, while the average yield decreased 15 basis points to 5.77%. The composition
of interest-earning assets consists of loans, securities and interest-bearing deposits. Interest on loans increased $286,000, or 3.8%, to $7.8 million for fiscal 2009 due to an increase in the average balance, offset by a decrease in the average
yield from 6.26% to 6.21%. During fiscal 2009, other interest income decreased $677,000, or 97.1%, due to a decrease in the average balance on federal funds and a decrease in the average yield on overnight federal funds from 4.11% to 0.29%. Interest
on securities increased 5.9% due to an increase in the average balance, offset by a decrease in the average yield from 5.03% to 4.29%.
Total interest expense decreased $775,000 or 15.1%, to $4.4 million for fiscal 2009 primarily due to decreases in interest paid on deposits, offset by an increase in interest paid on borrowings. The average interest rate paid on deposits
decreased 75 basis points to 2.95%. The interest paid on Federal Home Loan Bank advances increased due to an increase in the average rate paid from 4.86% to 7.00%, offset by a decrease in average balance of Federal Home Loan Bank advances from $9.6
million for fiscal 2008 to $9.1 million for fiscal 2009. The increase in the average rate paid was due to prepayment penalties in connection with the prepayment of higher-interest rate advances.
Average Balances and Yields. The following table presents information regarding average balances of assets and liabilities, the
total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. The yields and costs for
the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. For purposes of this table, average balances have been calculated using daily average
balances.
34
Table of Contents
Year Ended June 30,
2009
2008
Average
Balance
Interest
and
Dividends
Average
Yield/
Rate
Average
Balance
Interest
and
Dividends
Average
Yield/
Rate
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans (1)
$
125,825
$
7,819
6.21
%
$
120,324
$
7,533
6.26
%
Securities taxable
15,110
648
4.29
12,164
612
5.03
Interest-bearing deposits
563
4
0.71
537
23
4.28
Federal Funds
5,589
17
0.29
16,411
675
4.11
Total interest-earning assets
147,087
8,488
5.77
149,436
8,843
5.92
Non-interest-earning assets
13,039
16,792
Total assets
$
160,126
$
166,228
Interest-bearing liabilities:
Interest-bearing deposits:
Passbook accounts
$
4,782
34
0.71
%
$
5,172
42
0.81
%
Statement savings
11,057
167
1.51
12,210
268
2.19
Money market accounts
39,672
942
2.37
40,578
1,423
3.51
NOW accounts
8,424
37
0.44
8,079
47
0.58
Certificates of deposit
62,345
2,552
4.09
60,140
2,894
4.81
Total interest-bearing deposits
126,280
3,732
2.95
126,179
4,674
3.70
FHLB advances
9,062
634
7.00
9,605
467
4.86
Total interest-bearing liabilities
135,342
4,366
3.23
135,784
5,141
3.79
Non-interest-bearing deposits
6,766
5,518
Other non-interest-bearing liabilities
4,491
11,383
Total liabilities
146,599
152,685
Total stockholders equity
13,527
13,543
Total liabilities and stockholders equity
$
160,126
$
166,228
Net interest income
$
4,122
$
3,702
Interest rate spread (2)
2.54
%
2.13
%
Net interest margin (3)
2.80
2.48
Interest-earning assets as a percentage of interest-bearing liabilities
108.68
%
110.05
%
(1)
Amount is net of deferred loan origination costs, undisbursed proceeds of loans in process, allowance for loan losses and includes non-accrual loans.
(2)
Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(3)
Net interest margin represents net interest income as a percentage of average interest-earning assets.
35
Table of Contents
Rate/Volume Analysis . The following table sets forth the effects of changing rates
and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume
multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionately based on the changes
due to rate and the changes due to volume.
2009 Compared to 2008
Increase (Decrease)
Due to
Volume
Rate
Net
(In thousands)
Interest income:
Loans receivable
$
342
$
(56
)
$
286
Securities
135
(99
)
36
Interest-earning deposits
1
(20
)
(19
)
Federal Funds
(273
)
(385
)
(658
)
Total interest income
205
(560
)
(355
)
Interest expense:
Deposit:
Passbook accounts
(3
)
(5
)
(8
)
Savings accounts
(23
)
(78
)
(101
)
Money market accounts
(31
)
(450
)
(481
)
NOW accounts
2
(12
)
(10
)
Certificates of deposit
103
(445
)
(342
)
Total deposits
48
(990
)
(942
)
Borrowings
(28
)
195
167
Total interest expense
20
(795
)
(775
)
Net interest income
$
185
$
235
$
420
Provision for Loan Losses.
The provision for loan losses increased $401,000, from $328,000 for fiscal 2008 to $729,000 for fiscal 2009. This was a result of increased charge-offs
and classified loans.
An analysis of the changes in the allowance for loan losses, non-performing loans and classified loans is presented
under Risk ManagementAnalysis of Non-Performing and Classified Assets and Risk ManagementAnalysis and Determination of the Allowance for Loan Losses.
Non-Interest Income . The following table shows the components of other income and the percentage changes from year to year.
2009
2008
% Change
(Dollars in thousands)
Service fees on deposits
$
121
$
119
1.7
%
Service fees on loans
35
31
12.9
Income from investment in life insurance
76
76
Loss on securities trading
(471
)
N/A
Loss on sale of securities available for sale
(19
)
100.0
Termination of split-dollar life insurance policy
240
N/A
Other income
93
81
14.8
Total
$
94
$
288
(67.4
)
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Table of Contents
Total non-interest income decreased $194,000 from $288,000 to $94,000 or 67.4% primarily due to a
$471,000 loss on securities trading associated with a decline in the AMF Short Mortgage Mutual Fund offset by $240,000 in income from the termination of a split-dollar life insurance policy.
Non-Interest Expenses. The following table shows the components of non-interest expenses and the percentage changes from year to year.
2009
2008
% Change
(Dollars in thousands)
Compensation and related expenses
$
2,225
$
2,250
(1.1
)%
Occupancy
267
257
3.9
Data processing
373
375
(0.5
)
Telephone and postage
67
65
3.1
Advertising
110
115
(4.4
)
Professional fees
277
213
30.0
Equipment
148
175
(15.4
)
Impairment write-down of investment securities
274
(100.0
)
Net amortization of intangible assets
110
112
(1.8
)
Goodwill impairment
3,940
N/A
Repossessed assets expense
64
(12
)
633.3
FDIC Insurance Premiums
235
19
1,136.8
Other
366
403
(9.2
)
Total
$
8,182
$
4,246
92.7
Efficiency ratio (1)
194.1
%
106.4
%
(1)
Computed as non-interest expenses divided by the sum of net interest income and other income. If goodwill impairment for 2009 and impairment write-down of investment securities for
2008 were excluded, the efficiency ratio would be 100.6% and 99.6% for 2009 and 2008, respectively.
Total non-interest
expenses increased $3.9 million from $4.3 million to $8.2 million or 92.7% primarily due to a $3.9 million goodwill impairment charge off recorded in connection with the acquisition of the Pasadena, Maryland branch office in August 2007. The
increased non-interest expense also reflected increased FDIC insurance premiums due to the one-time special assessment and an increase in the overall assessment rate. Other expenses decreased due to management controlling costs and reductions in
office supplies, check printing, bank charges and insurance expenses.
Income Taxes. The benefit for income taxes increased
$1.7 million, or 678.7%, from a benefit of $254,000 for fiscal year 2008 to $2.0 million for fiscal year 2009 due primarily to the decrease in pre-tax income. The Companys effective tax rate was (42.1)% for fiscal year 2009 compared to
(43.5%) for fiscal year 2008.
Risk Management
Overview . Managing risk is an essential part of successfully managing a financial institution. Our most prominent risk exposures are credit risk, interest rate risk and market risk. Credit risk is
the risk of not collecting the interest and/or the principal balance of a loan or investment when it is due. Interest rate risk is the potential reduction of interest income as a result of changes in interest rates. Market risk arises from
fluctuations in interest rates that may result in changes in the values of financial instruments, such as available-for-sale securities that are accounted for on a mark-to-market basis. Other risks that we encounter are operational risks, liquidity
risks and reputation risk. Operational risks include risks related to fraud, regulatory compliance, processing errors, technology and disaster recovery. Liquidity risk is the possible inability to fund obligations to depositors, lenders or
borrowers. Reputation risk is the risk that negative publicity or press, whether true or not, could cause a decline in our customer base or revenue.
37
Table of Contents
Credit Risk Management . Our strategy for credit risk management focuses on having
well-defined credit policies and uniform underwriting criteria and providing prompt attention to potential problem loans. Our strategy also emphasizes the origination of one- to four-family residential real estate loans, which typically have lower
default rates than other types of loans and are secured by collateral that generally tends to appreciate in value.
When a borrower fails to make a required loan payment, we take a number of steps to have the borrower cure the delinquency and restore the loan to current status. We make initial contact with the borrower when the loan becomes 15 days past
due. If payment is not received by the 35 th day of delinquency, a letter from our
President and Chief Executive Officer is sent. Typically, when the loan becomes 60 days past due, a letter is sent from our attorney notifying the borrower that we will commence foreclosure proceedings if the loan is not paid in full within 30 days.
Generally, loan workout arrangements are made with the borrower at this time; however, if an arrangement cannot be structured before the loan becomes 90 days past due, we will commence foreclosure proceedings against any real property that secures
the loan or attempt to repossess any personal property that secures a consumer loan. If a foreclosure action is instituted and the loan is not brought current, paid in full or refinanced before the foreclosure sale, the real property securing the
loan generally is sold at foreclosure.
Management informs the board of directors monthly of the amount of loans delinquent more than 30
days.
Analysis of Non-Performing and Classified Assets. We consider repossessed assets and loans that are 90 days or more
past due to be non-performing assets. When a loan becomes 90 days delinquent, the loan is placed on non-accrual status at which time the accrual of interest ceases and an allowance for any uncollectible accrued interest is established and charged
against operations. 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.
Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until it is sold. When
property is acquired, it is recorded at fair value, net of estimated selling costs, at the date of foreclosure. Holding costs and declines in fair value after acquisition of the property result in charges against income.
Non-performing assets totaled $1.6 million, or 1.02% of total assets, at June 30, 2009, which was a decrease of $1.2 million, or 42.9%, from
June 30, 2008. The decrease in non-performing assets was due primarily to a $2.6 million decrease in non-accruing construction loans offset by a $651,000 increase in non-accruing one- to four-family loans and a $500,000 increase in foreclosed
real estate. The decrease in non-accruing construction loans was due to $2.2 million in pay-offs, $426,000 in charge-offs and a $405,000 loan becoming current.
In August 2008, the Bank refinanced one of the non-accruing construction loans present at June 30, 2008 by splitting the original loan amount between the two primary borrowers and making two loans. One
borrowers new loan was secured by two properties that were only 85% complete. This borrower provided additional properties for collateral so that there would be enough equity to finish the remaining 15% of the project. This project has been
completed and the two properties are being rented providing cash flows for repayment of this loan. The other borrowers new loan was secured by two completed properties that are being rented providing cash flows for repayment of this loan. This
borrower is adding personal cash to help make the loan payments. Both of the refinanced loans were granted at the current market rates available and the same risk and compliance standards as other such loans available. At June 30, 2009, these
loans were current and paying in accordance with the revised terms.
Non-accrual loans accounted for 41.2% of total non-performing assets
at June 30, 2009.
38
Table of Contents
The following table provides information with respect to our non-performing assets at the dates
indicated.
At June 30,
2009
2008
(Dollars in thousands)
Non-accruing loans:
Construction
$
$
2,623
One- to four-family
651
Other consumer
62
Total
651
2,685
Accruing loans past due 90 days or more
270
Troubled debt restructuring (1)
46
Foreclosed real estate
500
Other repossessed assets
161
41
Total non-performing assets
$
1,582
$
2,772
Total non-performing loans to total loans
0.55
%
2.10
%
Total non-performing loans to total assets
0.42
1.64
Total non-performing assets to total assets
1.02
1.69
(1)
As defined in Statement of Financial Accounting Standards No. 15.
Other than disclosed in the above table, there are no other loans at June 30, 2009 that management has serious doubts about the ability of the borrowers to comply with the present repayment terms.
Interest income that would have been recorded for the year ended June 30, 2009 had nonaccruing loans been current according to their original terms
amounted to $45,000. The amount of interest related to these loans included in interest income was $23,000 for the year ended June 30, 2009.
Federal regulations require us to review and classify our assets on a regular basis. In addition, the Office of Thrift Supervision has the authority to identify problem assets and, if appropriate, require them to be classified. There are
three classifications for problem assets: substandard, doubtful and loss. Substandard assets must have one or more defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies
are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values
questionable and there is a high possibility of loss. An asset classified loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. The regulations also provide for a
special mention category, described as assets that do not currently expose us to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving our close attention. When we
classify an asset as substandard or doubtful, we establish a specific allowance for loan losses. If we classify an asset as loss, we charge off an amount equal to 100% of the portion of the asset classified as loss.
The following table shows the aggregate amounts of our classified assets at the dates indicated.
At June 30,
2009
2008
(In thousands)
Special mention assets
$
2,853
$
Substandard assets
1,776
2,603
Doubtful assets
Loss assets
Total classified assets
$
4,629
$
2,603
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Table of Contents
Total classified assets increased $2.0 million from $2.6 million to $4.6 million, or 76.9%,
primarily due to negative changes in customer payment histories and deterioration of customers personal credit histories.
There were ten loans at June 30, 2009 with an aggregate balance of $1.8 million that are classified as substandard and are considered non-performing. There were four loans at June 30, 2008 with an aggregate balance of $2.6 million
that were classified as substandard and were considered non-performing.
Delinquencies. The following table
provides information about delinquencies in our loan portfolio at the dates indicated.
At June 30,
2009
2008
60-89 Days
90 Days or More
60-89 Days
90 Days or More
Number
of
Loans
Principal
Balance
of
Loans
Number
of
Loans
Principal
Balance
of
Loans
Number
of
Loans
Principal
Balance
of
Loans
Number
of
Loans
Principal
Balance
of
Loans
(Dollars in thousands)
Construction
$
$
2
$
411
6
$
2,623
One- to four-family residential
5
1,347
4
588
Mobile home
3
71
4
163
2
62
Other consumer
1
24
Total
8
$
1,418
5
$
612
6
$
574
8
$
2,685
Analysis and Determination of the Allowance for Loan Losses . The allowance
for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the need to establish provisions against losses on loans on a quarterly basis. When additions to the allowance are necessary, a provision for
loan losses is charged to earnings.
Our methodology for assessing the appropriateness of the allowance for loan losses consists of three
key elements: (1) specific allowances for identified problem loans; (2) a general valuation allowance on certain identified problem loans; and (3) a general valuation allowance on the remainder of the loan portfolio. Although we
determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio.
Specific Allowance Required for Identified Problem Loans. We establish an allowance on certain identified problem loans based on such factors as: (1) the strength of the customers personal or business cash flows;
(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 borrowers effort to cure the delinquency.
General Valuation Allowance on Certain Identified Problem Loans. We
also establish a general allowance for classified loans that do not have an individual allowance. We segregate these loans by loan category and assign allowances 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 classified 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 allowances based on our historical loss experience, delinquency trends and managements evaluation of the collectibility of the loan portfolio. The allowance may be adjusted for significant factors that, in managements
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
market area, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience in
40
Table of Contents
particular segments of the portfolio, duration of the current business cycle and bank regulatory examination results. The applied loss factors are
re-evaluated quarterly to ensure their relevance in the current real estate environment.
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 make additional provisions for loan losses based on judgments different from ours.
At June 30, 2009, our allowance for loan losses represented 0.71% of total loans and 92.8% of non-performing loans. The allowance for loan losses
increased to $855,000 at June 30, 2009 from $709,000 at June 30, 2008, due to a provision for loan losses of $729,000 and charge-offs of $583,000. The higher allowance reflects higher general loss factors being established in all loan
categories except construction. A lower allowance for construction loans was required at June 30, 2009 due to $1.8 million in pay-offs of non-accruing construction loans and $426,000 in construction loan charge-offs during fiscal year 2009.
The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated.
At June 30,
2009
2008
Amount
% of
Allowance
to Total
Allowance
% of
Loans in
Each Category
to Total Loans
Amount
% of
Allowance
to Total
Allowance
% of
Loans in
Each Category
to Total Loans
(Dollars in thousands)
One- to four-family
$
283
33.1
%
70.3
%
$
178
25.1
%
70.7
%
Multi-family and commercial
290
33.9
13.5
73
10.3
10.6
Construction
112
13.1
5.5
329
46.4
8.7
Mobile home
152
17.8
9.3
118
16.6
9.2
Other consumer
13
1.5
0.7
8
1.1
0.6
Commercial
5
0.6
0.7
3
0.5
0.2
Total allowance for loan losses
$
855
100.0
%
100.0
%
$
709
100.0
%
100.0
%
Although we believe that we use the best information available to establish the allowance for loan
losses, future adjustments to the allowance for loan losses may be necessary and our results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while
we believe we have established our allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that regulators, in reviewing our loan portfolio, will not request us to increase our allowance for
loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should
the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.
41
Table of Contents
Analysis of Loan Loss Experience. The following table sets forth an analysis of the
allowance for loan losses for the periods indicated. Where specific loan loss allowances have been established, any difference between the loss allowance and the amount of loss realized has been charged or credited to current income.
Year Ended June 30,
2009
2008
(Dollars in thousands)
Allowance for loan losses, at beginning of year
$
709
$
402
Provision for loan losses
729
328
Charge-offs:
Construction
426
Non-residential
60
Mobile home
76
7
Other consumer
21
14
Total charge-offs
583
21
Recoveries:
Total recoveries
Net charge-offs
583
21
Allowance for loan losses, end of period
$
855
$
709
Allowance to non-performing loans
92.83
%
26.40
%
Allowance to total loans outstanding at end of period
0.71
0.57
Net charge-offs to average loans outstanding during the period
0.46
0.02
Interest Rate Risk Management. We manage the interest rate sensitivity of our
interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment. Deposit accounts typically react more quickly to changes in market interest rates than mortgage loans
because of the shorter maturities of deposits. As a result, sharp increases in interest rates may adversely affect our earnings while decreases in interest rates may beneficially affect our earnings. To reduce the potential volatility of our
earnings, we have sought to improve the match between asset and liability maturities and rates, while maintaining an acceptable interest rate spread. Also, we attempt to manage our interest rate risk through: the origination of adjustable-rate one-
to four-family residential real estate loans; an investment in a mutual fund that invests in adjustable-rate mortgage loans; an increased focus on multi-family and commercial real estate lending, which emphasizes the origination of shorter-term
adjustable-rate loans; and efforts to originate fixed-rate mortgage loans with maturities of fifteen years or less. We currently do not participate in hedging programs, interest rate swaps or other activities involving the use of off-balance sheet
derivative financial instruments.
Our board of directors serves as our Asset/Liability Committee to communicate, coordinate and control
all aspects involving asset/liability management. The committee monitors the volume and mix of assets and funding sources with the objective of managing assets and funding sources.
Net Portfolio Value Simulation Analysis. We use an interest rate sensitivity analysis prepared by the Office of Thrift Supervision to
review our level of interest rate risk. This analysis measures interest rate risk by computing changes in net portfolio value of our cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market
interest rates. Net portfolio value represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk
of loss in market risk sensitive instruments in the event of a sudden and sustained 100 to 300 basis point increase or 50 basis point decrease in market interest rates. We measure interest rate risk by modeling the changes in net portfolio value
over a variety of interest rate scenarios. The following table, which is based on information that we provide to the Office of Thrift Supervision, presents the change in our net portfolio value at June 30, 2009 that would occur in the event of
an immediate change in interest rates based on Office of Thrift Supervision assumptions, with no effect given to any steps that we might take to counteract that change.
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Table of Contents
Net Portfolio Value
(Dollars in thousands)
Net Portfolio Value as % of
Portfolio
Value of Assets
Basis Point (bp) Change in Rates
$ Amount
$ Change
% Change
NPV Ratio
Change
300
$
10,687
$
(3,203
)
(23
)%
6.79
%
(171
)bp
200
12,466
(1,424
)
(10
)
7.79
(71
)
100
13,623
(267
)
(2
)
8.40
(10
)
50
13,857
(33
)
8.51
1
Static
13,890
8.50
(50)
13,856
(33
)
8.46
(5
)
(100)
13,739
(151
)
(1
)
8.37
(13
)
The Office of Thrift Supervision uses certain assumptions in assessing the interest rate risk of
savings associations. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates, and the market values of certain assets under differing interest rate scenarios, among others. As with any method of measuring interest
rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to
changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Further,
in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating the table.
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, loan repayments and maturities and sales of investment securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic conditions and competition.
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 program.
Excess liquid assets are invested generally in interest-earning deposits, federal funds sold and short- and intermediate-term U.S. Treasury and federal agency securities.
Our most liquid assets are cash and cash equivalents and interest-bearing deposits. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At
June 30, 2009, cash and cash equivalents totaled $11.2 million. Additionally, at June 30, 2009, the Company had interest-bearing deposits of $124,000. Securities classified as available-for-sale, which provide additional sources of
liquidity, totaled $1.2 million at June 30, 2009. In addition, at June 30, 2009, we had the ability to borrow an additional $40.0 million from the Federal Home Loan Bank of Atlanta. On that date, we had no outstanding borrowings.
At June 30, 2009, we had $471,000 in loan commitments outstanding. In addition to commitments to originate loans, we had $2.2 million
in unused lines of credit and $1.0 million in undisbursed construction loans in process. Certificates of deposit due within one year of June 30, 2009 totaled $38.7 million, or 28.2% of total deposits. If these deposits do not remain with us, we
will be required to seek other sources of funds, including other certificates of deposit and lines of credit. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the
certificates of deposit due on or before June 30, 2010. We believe, however, based on past experience, that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by
adjusting the interest rates offered.
Our primary investing activities are the origination of loans and the purchase of securities. Our
primary financing activities consist of activity in deposit accounts. 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 and to increase core deposits. Occasionally, we offer promotional rates to attract certain deposit products.
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Table of Contents
The following table presents our primary investing and financing activities during the periods indicated.
Year Ended June 30,
2009
2008
(In thousands)
Investing activities:
Loan originations
$
17,692
$
17,635
Loan and participation purchases
1,621
5,250
New securities (sales) purchases
(3,000
)
17,360
Loan participation sales
(3,290
)
(890
)
Financing activities:
Increase (decrease) in deposits
584
(8,402
)
FHLB borrowings net
(7,500
)
(6,000
)
Capital Management. We have managed our capital to maintain strong protection for
depositors and creditors. We are subject to various regulatory capital requirements administered by the Office of Thrift Supervision, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and
a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At June 30, 2009, we exceeded all of our regulatory capital requirements. We are considered well
capitalized under regulatory guidelines. See Regulation and SupervisionFederal Savings Institution RegulationCapital Requirements and note 12 of the notes to the consolidated financial statements.
We also will manage our capital for maximum shareholder benefit. We may use capital management tools such as cash dividends and share
repurchases.
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. A presentation of our outstanding loan commitments and unused lines of credit at June 30, 2009 and their effect on our
liquidity is presented at note 3 of the notes to the consolidated financial statements included in this Form 10-K and under Risk ManagementLiquidity Management.
For the year ended June 30, 2009, we did not engage in any off-balance-sheet transactions reasonably likely to have a material effect on our
financial condition, results of operations or cash flows.
Recent Accounting Pronouncements
See Note 1 to the notes to consolidated financial statements included in this Form 10-K for a discussion of recent accounting pronouncements.
Effect of Inflation and Changing Prices
The
financial statements and related financial data presented in this annual report on Form 10-K have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in
terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial
companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institutions performance than do general levels of
inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
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ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated by reference to Part II, Item 7, Managements Discussion and Analysis of Financial Condition and Results of OperationRisk ManagementInterest Rate
Risk Management and Net Portfolio Value Simulation Analysis.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.