Item
2.
Management’s Discussion and
Analysis of Financial Condition and Results of
Operations
.
General
This
discussion and analysis reflects the Company’s consolidated financial statements
and other relevant statistical data and is intended to enhance your
understanding of our financial condition and results of
operations. You should read the information in this section in
conjunction with our audited consolidated financial statements for the years
ended December 31, 2006 and 2005, which are included in Form 10-KSB filed
with the Securities and Exchange Commission on March 29, 2007.
Forward-Looking
Information
This
report contains forward-looking statements, which can be identified by the
use
of such words as estimate, project, believe, intend, anticipate, plan, seek,
expect and similar expressions. These forward-looking statements
include statements of our goals, intentions and expectations; statements
regarding our business plans and prospects and growth and operating strategies;
statements regarding the asset quality of our loan and investment portfolios;
and estimates of our risks and future costs and benefits. These
forward-looking statements are subject to significant risks, assumptions and
uncertainties, including, among other things, the following important factors
that could affect the actual outcome of future events:
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·
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significantly
increased competition among depository and other financial
institutions;
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·
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our
ability to enter new markets successfully and take advantage of growth
opportunities;
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·
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our
ability to successfully implement our business
plan;
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·
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inflation
and changes in the interest rate environment that reduce our margins
or
reduce the fair value of financial
instruments;
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·
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general
economic conditions, either nationally or in our market area, that
are
worse than expected;
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·
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adverse
changes in the securities markets;
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·
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any
unexpected deterioration in asset quality due to adverse changes
in the
residential real estate market;
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·
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legislative
or regulatory changes that adversely affect our
business;
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·
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changes
in consumer spending, borrowing and savings
habits;
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·
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changes
in accounting policies and practices, as may be adopted by the bank
regulatory agencies, the Financial Accounting Standards Board and
the
PCAOB; and
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·
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changes
in our organization, compensation and benefit
plans.
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These
risks and uncertainties should be considered in evaluating forward-looking
statements, and undue reliance should not be placed on such
statements. Because of these and other uncertainties, our actual
future results may be materially different from the results indicated by these
forward-looking statements.
Overview
Our
results of operations depend primarily on our net interest
income. Net interest income is the difference between the interest
income we earn on our interest-earning assets, consisting primarily of loans,
U.S. government and agency securities, mortgage-backed securities and other
interest earning assets (primarily cash and cash equivalents), and the interest
we pay on our interest-bearing liabilities, consisting of savings accounts,
time
deposits, and advances from the Federal Home Loan Bank. Our results
of operations are also affected by our provisions for loan losses, non-interest
income and non-interest expense. Non-interest income consists
primarily of gains and losses on sales of securities and miscellaneous other
income. Non-interest expense currently consists primarily of salaries
and employee benefits, occupancy, data processing, professional fees, and other
operating expenses. Our results of operations also may be affected
significantly by general and local economic and competitive conditions, changes
in market interest rates, governmental policies and actions of regulatory
authorities.
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 our critical accounting policies to be those related to our allowance
for loan losses.
The
allowance for loan losses is the estimated amount considered necessary to cover
probable incurred losses in the loan portfolio at the balance sheet
date. The allowance is established through a provision for loan
losses that is charged against income. In determining the allowance
for loan losses, management makes significant estimates and has identified
this
policy as one of our most critical.
Management
performs a quarterly evaluation of the adequacy of the allowance for loan
losses. We consider a variety of factors in establishing this
estimate including, but not limited to, current economic conditions, delinquency
statistics, geographic and industry concentrations, the adequacy of the
underlying collateral, the financial strength of the borrower, results of
internal loan reviews and other relevant factors. This evaluation is
inherently subjective as it requires material estimates that may be subject
to
significant change.
The
analysis has two components: specific and general
allocations. Specific allocations are made for loans that are
determined to be impaired. Impairment is measured by determining the
present value of expected future cash flows or, for collateral-dependent loans,
the fair value of the collateral adjusted for market conditions and selling
expenses. The general allocation is determined by segregating the
remaining loans by type of loan, risk weighting (if applicable) and payment
history. We also analyze historical loss experience, delinquency
trends, general economic conditions and geographic and industry
concentrations. This analysis establishes factors that are applied to
the loan groups to determine the amount of the general allowance for loan
losses. Actual loan losses may be significantly more than the
allowances we have established which could have a material negative effect
on
our financial results.
Comparison
of Financial Condition at September 30, 2007 and December 31,
2006
Our
total
assets decreased by $907,000, or 1.2%, to $74.2 million at September 30,
2007, from $75.1 million at December 31, 2006. Loans receivable
increased $1.3 million, or 2.5%, to $53.2 million at September 30, 2007,
from $51.9 million at December 31, 2006, reflecting an increase of
$897,000, or 2.7%, in one-to-four family residential mortgage loans and an
increase of $380,000, or 2.0%, in multi-family residential mortgage loans during
the period.
Total
deposits decreased $2.5 million, or 5.7%, to $40.8 million at September 30,
2007, from $43.3 million at December 31, 2006. Stockholders’
Equity decreased $535,000, to $27.7 million at September 30, 2007, from
$28.2 million at December 31, 2006. The decrease reflects $1.1
million in repurchases of the Company’s common stock, partially offset by net
income of $318,000 for the nine months ended September 30, 2007, a $49,000
increase in accumulated other comprehensive income from unrealized gains and
losses on securities available-for-sale, and a $204,000 increase from
recognition of stock benefits earned under the Company’s Employee Stock
Ownership Plan, Management Recognition and Retention Plan, and Stock Option
Plan. Treasury stock in the amount of $699,000 was transferred to
additional paid-in capital to fund stock awards granted under the Management
Recognition and Retention Plan.
Comparison
of Operating Results for the Three Months Ended September 30, 2007 and
2006
General
. Net
income decreased $35,000, or 22.2%, to $123,000 for the three months ended
September 30, 2007, from $158,000 for the three months ended
September 30, 2006. The primary reasons for the decrease were a
$53,000 increase in compensation and benefits and a $63,000 increase in
professional fees, partially offset by an increase in net interest income of
$45,000 and a $15,000 decrease in the provision for loan
losses. Return on average assets was 0.67% for the three months ended
September 30, 2007, compared to 0.87% for the same period last year, and
return on equity was 1.77% and 2.27%, respectively, for
these two periods.
Interest
Income
. Interest and dividend income increased $96,000, or 9.4%,
to $1.1 million for the three months ended September 30, 2007, compared to
$1.0 million for the three months ended September 30, 2006. The
increase resulted from an increase of 51 basis points in the average yield
on
interest earning assets, to 6.29% in 2007, from 5.78% in 2006.
Interest
income and fees from loans receivable increased $129,000, or 16.8%, to $899,000
for the three months ended September 30, 2007, from $770,000 for the three
months ended September 30, 2006. The increase resulted from a
$5.1 million, or 10.6%, increase in the average balance of loans receivable,
to
$52.8 million in the third quarter of 2007, compared to $47.7 million in the
third quarter of 2006, and by a 36 basis point increase in the
average yield on loans receivable, to 6.81% in 2007, compared to 6.45% in
2006.
Interest
and dividend income from securities, interest-earning deposits, and FHLB stock
decreased $33,000, or 12.9%, to $223,000 for the three months ended
September 30, 2007, from $256,000 for the three months ended
September 30, 2006. The primary reason for the decrease was the
decrease in average balances of these assets of $4.7 million, or 20.2%, to
$18.5
million in 2007, from $23.2 million in 2006, partially offset by a 40 basis
point increase in average yield to 4.81% in 2007, compared to 4.41% in
2006.
Interest
Expense
. Interest expense increased $51,000, or 18.5%, to
$327,000 for the three months ended September 30, 2007, from $276,000 for
the three months ended September 30, 2006. The increase in
interest expense was due primarily to an increase in rates paid on deposits,
offset in part by a $1.9 million decrease in the average balance of
deposits. The average rate paid on deposits increased 29 basis
points, to 2.83% for the quarter ended September 30, 2007, from 2.54% for
the quarter ended September 30, 2006. Interest expense on
certificates of deposit increased $24,000, or 11.8%, to $227,000 in 2007, from
$203,000 in 2006, and the average rate paid on certificates increased 48 basis
points, to 4.29% in 2007, from 3.81% in 2006.
Interest
expense on FHLB advances was $38,000 for the three months ended September 30,
2007, compared to $4,000 for the three months ended September 30,
2006. The average balance of advances
increased
$2.6 million, to $2.9 million for the three months ended September 30, 2007,
from $283,000 for the three months ended September 30, 2006. The
average rate paid on FHLB advances decreased 33 basis points, to 5.32% for
the
three months ended September 30, 2007, from 5.65% for the three months ended
September 30, 2006.
Net
Interest Income
. Net interest income increased $45,000, or 6.0%,
to $795,000 for the three months ended September 30, 2007, from $750,000
for the same quarter last year. Our net interest margin increased 23
basis points, to 4.46% in 2007, from 4.23% in 2006. The average yield
on interest-earning assets increased 51 basis points, to 6.29% in 2007, from
5.78% in 2006, with interest income increasing by $96,000. The
average rate paid on interest-bearing liabilities increased 43 basis points,
to
2.99% in 2007, from 2.56% in 2006, with interest expense increasing by
$51,000. The interest rate spread between interest earning assets and
interest bearing liabilities increased 8 basis points, to 3.30% in 2007, from
3.22% in 2006.
Provision
for Loan Losses
. Based on its quarterly evaluation of the level
of the allowance for loan losses necessary to absorb probable incurred losses
at
September 30, 2007, management has not changed the allowance for the three
months ended September 30, 2007. Management considers changes in
delinquencies, changes in the composition and volume of loans, historical loan
loss experience, general economic and real estate market conditions, as well
as
peer group data, when determining the level of the allowance for loan
losses.
During
the three months ended September 30, 2007, non-performing (non-accrual)
loans decreased to $259,000, from $591,000 at June 30, 2007. Loans
delinquent 60-89 days increased to $1.2 million, from $450,000 at June 30,
2007. The loan portfolio increased $276,000, or 0.5%, to $53.2
million at September 30, 2007, from $52.9 million at June 30,
2007. During this period one- to four-family residential mortgage
loans increased $243,000, or 0.7%, and multi-family residential mortgage loans
increased $23,000, or 0.1%.
At
September 30, 2007, the Company has identified a $450,000 single-family
mortgage loan, current in its payments, which the Company has classified as
special mention due to a prior lien. In addition, a $468,000
multi-family residential mortgage loan in the 60-89 day delinquency category
was
classified as special mention. All loans included in the non-accrual
and 60-89 day delinquency categories were reviewed individually by management,
and currently, the Company does not believe there will be any loss associated
with these loans, but management continues to monitor these loans
closely.
Real
estate owned, acquired through foreclosure, $222,000 at June 30, 2007, was
sold
during the third quarter. There was no gain or loss associated with
this sale.
After
reviewing these and other factors, management determined that it was not
necessary to increase the allowance for loan losses at September 30,
2007. At September 30, 2007, the allowance for loan losses was
$250,000, or 0.47% of loans receivable, the same as it was at June 30,
2007.
Non-interest
Income
. Non-interest income increased $5,000, to $13,000 for the
three months ended September 30, 2007, compared to $8,000 for the three
months ended September 30, 2006, primarily due to increases in late charges
on delinquent loans.
Non-interest
Expense
. Non-interest expense increased $107,000, or 21.8%, to
$599,000 for the three months ended September 30, 2007, from $492,000 for
the same quarter last year. Compensation and employee benefits
increased $53,000, or 18.7%, to $336,000 in 2007, from $283,000 in
2006. The cost of newly instituted stock benefit plans increased
benefits expense by approximately $64,000. Occupancy costs decreased
$4,000, or 9.5%, to $38,000 for the three months ended September 30,
2007,
from
$42,000 for the same period in 2006. Data processing fees decreased
$6,000, or 18.8%, to $26,000, in 2007, from $32,000 in
2006. Professional fees, including legal, accounting and consulting
fees, increased $63,000, or 101.6%, to $125,000 in 2007, from $62,000 in
2006. The increase was due primarily to increased costs associated
with administration of stock benefit plans, SEC reporting compliance, and other
changes resulting from being a public company. The Bank’s ratio of
non-interest expense to average assets increased to 3.25% for the three months
ended September 30, 2007, from 2.70% for the same period in 2006, and its
efficiency ratio was 74.1% in 2007, compared to 64.9% in 2006.
Income
Tax Expense
. The provision for income taxes decreased $7,000, to
$86,000 for the three months ended September 30, 2007, from $93,000 for the
same period in 2006, reflecting primarily the reduction in pre-tax net
income. The effective tax rate for the quarter ended
September 30, 2007, was 41.2%, compared to 37.1% for this quarter last
year. The increase in the effective tax rate was due primarily to
non-deductible costs associated with newly implemented stock benefit
plans.
Average
Balance Sheet
The
following table sets forth average balance sheets, average yields and costs,
and
certain other information for the three months ended September 30, 2007 and
2006. No tax-equivalent yield adjustments were made, as their effects
were not material. All average balances are based on an average of
daily balances. Non-accrual loans are included in the computation of
average balances, but have been reflected in the table as loans carrying a
zero
yield. The yields set forth below include the effect of deferred
fees, discounts and premiums that are amortized or accreted to interest income
or expense.
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For
the Three Months Ended September 30,
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Average
Outstanding Balance
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Average
Outstanding Balance
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Interest-earning
assets:
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Loans
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$
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52,786
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$
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899
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6.81
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%
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$
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47,721
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$
|
770
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6.45
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%
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Securities
available for sale
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17,022
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|
207
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4.86
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22,012
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|
|
242
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|
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|
4.40
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Interest-earning
deposits
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|
908
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|
11
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4.85
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734
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|
10
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5.45
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Federal
Home Loan Bank Stock
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610
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5
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3.28
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500
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|
4
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|
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3.20
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Total
interest-earning assets
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71,326
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$
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1,122
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6.29
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%
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70,967
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$
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1,026
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5.78
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%
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Non-interest-earning
assets
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2,413
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1,810
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Total
assets
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$
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73,739
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$
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72,777
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Interest-Bearing
Liabilities:
(1)
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Savings
deposits
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$
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19,699
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$
|
62
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1.26
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%
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$
|
21,476
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$
|
69
|
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1.29
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%
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Certificates
of deposit
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21,169
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|
227
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4.29
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21,293
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|
|
|
203
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|
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3.81
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Total
interest-bearing deposits
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40,868
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|
|
289
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|
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2.83
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42,769
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|
|
|
272
|
|
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|
2.54
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Federal
Home Loan Bank advances
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2,859
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|
38
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5.32
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|
|
283
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|
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|
4
|
|
|
|
5.65
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Total
interest-bearing liabilities
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43,727
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|
|
|
327
|
|
|
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2.99
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%
|
|
|
43,052
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|
|
|
276
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|
|
|
2.56
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%
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|
Non-interest-bearing
liabilities
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|
|
2,260
|
|
|
|
|
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1,839
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|
|
|
|
|
|
|
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Total
liabilities
|
|
|
45,987
|
|
|
|
|
|
|
|
|
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44,891
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|
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Stockholders’
equity
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27,752
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|
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27,886
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|
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|
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Total
liabilities and stockholders’ equity
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$
|
73,739
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|
|
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$
|
72,777
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|
|
|
|
|
|
|
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Net
interest income
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|
|
|
|
|
$
|
795
|
|
|
|
|
|
|
|
|
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|
$
|
750
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|
|
|
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|
Net
interest rate spread
(2)
|
|
|
|
|
|
|
|
|
|
|
3.30
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%
|
|
|
|
|
|
|
|
|
|
|
3.22
|
%
|
|
Net
interest-earning assets
(3)
|
|
$
|
27,599
|
|
|
|
|
|
|
|
|
|
|
$
|
27,915
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin
(4)
|
|
|
|
|
|
|
|
|
|
|
4.46
|
%
|
|
|
|
|
|
|
|
|
|
|
4.23
|
%
|
|
Ratio
of interest-earning assets to interest-bearing
liabilities
|
|
|
|
|
|
|
|
|
|
|
163.12
|
%
|
|
|
|
|
|
|
|
|
|
|
164.84
|
%
|
|
(1)
|
Non-interest-bearing
checking deposits are included in non-interest-bearing
liabilities.
|
|
(2)
|
Net
interest rate spread represents the difference between the yield
on
average interest-earning assets and the cost of average interest-bearing
liabilities.
|
|
(3)
|
Net
interest-earning assets represents total interest-earning assets
less
total interest-bearing liabilities.
|
|
(4)
|
Net
interest margin represents net interest income divided by average
total
interest-earning assets.
|
Comparison
of Operating Results for the Nine Months Ended September 30, 2007 and
2006
General
. Net
income decreased $84,000, or 20.9%, to $318,000 for the nine months ended
September 30, 2007, from $402,000 for the nine months ended
September 30, 2006. The primary reasons for the decrease were a
$191,000 increase in compensation and employee benefits, and a $168,000 increase
in professional fees, partially offset by an increase in net interest income
of
$199,000, and a decrease in the provision for loan losses of
$45,000. Return on average assets was 0.57% for the nine months ended
September 30, 2007, compared to 0.75% for the same period last year, and
return on equity was 1.51% and 2.18%, respectively, for
these two periods.
Interest
Income
. Interest and dividend income increased $372,000, or
12.7%, to $3.3 million for the nine months ended September 30, 2007,
compared to $2.9 million for the nine months ended September 30,
2006. The increase resulted from a $3.0 million, or 4.4%, increase in
the average balance of interest-earning assets, to $72.3 million in the first
three quarters of 2007, compared to $69.3 million in the first three quarters
of
2006, and an increase of 46 basis points in the average yield on interest
earning assets, to 6.08% in 2007, from 5.62% in 2006.
Interest
income and fees from loans receivable increased $470,000, or 22.0%, to $2.6
million for the nine months ended September 30, 2007, from $2.1 million for
the nine months ended September 30, 2006. The increase resulted
from a $8.7 million, or 19.6%, increase in the average balance of loans
receivable, to $53.0 million in the first three quarters of 2007, compared
to
$44.3 million in the first three quarters of 2006. The average yield on loans
receivable increased 13 basis points, to 6.57% in 2007, from 6.44% in
2006.
Interest
and dividend income from securities, interest-earning deposits, and FHLB stock
decreased $98,000, or 12.6%, to $682,000 for the nine months ended
September 30, 2007, from $780,000 for the nine months ended
September 30, 2006. The primary reason for the decrease was the
decrease in average balances of securities and interest-earning
deposits of $5.7 million, or 22.7%, to $19.2 million in 2007, from $24.9 million
in 2006, partially offset by a 56 basis point increase in the average yield,
to
4.73% in 2007, from 4.17% in 2006.
Interest
Expense
. Interest expense increased $173,000, or 21.7%, to
$972,000 for the nine months ended September 30, 2007, from $799,000 for
the nine months ended September 30, 2006. The increase in
interest expense was primarily due to an increase in rates paid on deposits
and
borrowings. The average rate paid on deposits increased 46 basis
points, to 2.78% for the first three quarters of 2007, from 2.32% for the first
three quarters of 2006. Interest expense on certificates of deposit
increased $126,000, or 22.4%, to $688,000 in 2007, from $562,000 in 2006, and
the average rate paid on certificates increased 67 basis points, to 4.20% in
2007, from 3.53% in 2006. The increase in rates was partially offset
by a decrease in the average balance of deposits of $2.3 million, or 5.1%,
to
$41.9 million in 2007, from $44.2 million in 2006.
Interest
expense on advances from the FHLB increased $67,000, or 216.1%, to $98,000
in
2007, from $31,000 in 2006. The increase was due to both an increase
in the average balance of advances, to $2.4 million in 2007, from $855,000
in
2006, and to a 51 basis point increase in the average rate paid on advances,
to
5.34% in 2007, from 4.83% in 2006. The overall average cost of funds
increased 56 basis points, to 2.92% in 2007, from 2.36% in 2006.
Net
Interest Income
. Net interest income increased $199,000, or
9.4%, to $2.3 million for the nine months ended September 30, 2007, from
$2.1 million for the same period last year. Our net interest margin
increased 19 basis points, to 4.28% in 2007, from 4.09% in 2006. The
average yield on interest-earning assets increased 46 basis points, to 6.08%
in
2007, from 5.62% in 2006, and was augmented by an increase of $3.0 million,
or
4.4%, in the average balance of interest-earning assets, with interest income
increasing by $372,000. The average rate paid on interest-bearing
liabilities also increased, to 2.92% in 2007, from 2.36% in 2006, with interest
expense increasing by $173,000. The interest rate spread between
interest earning assets and interest bearing liabilities decreased 10 basis
points, to 3.16% in 2007, from 3.26% in 2006.
Provision
for Loan Losses
. During the nine months ended September 30,
2007, management increased the general loan loss allowance by $10,000, with
a
charge to operations, based on its quarterly evaluation of the level of the
allowance necessary to absorb probable incurred loan losses at
September 30, 2007. Management considers changes in
delinquencies, changes in the composition and volume of loans, historical loan
loss experience, general economic and real estate market conditions, as well
as
peer group data, when determining the level on the allowance for loan
losses.
During
the nine months ended September 30, 2007, non-performing (non-accrual)
loans decreased to $259,000, from $443,000 at December 31,
2006. Loans delinquent 60-89 days increased to $1.2 million, from
$385,000 at December 31, 2006. The loan portfolio increased $1.3
million, or 2.5%, to $53.2 million at September 30, 2007, from $51.9
million at December 31, 2006. During this period one- to
four-family residential mortgage loans increased $897,000, or 2.7%, and
multi-family residential mortgage loans increased $380,000, or
2.0%.
At
September 30, 2007, the Company has identified a $450,000 single-family
mortgage loan, current in its payments, which the Company classified as special
mention due to a prior lien. In addition, a $468,000 multi-family
residential mortgage loan in the 60-89 day delinquency category was classified
as special mention. All loans included in the non-accrual
and 60-89 day delinquency categories were reviewed individually by
management, and currently, the Company does not believe there will be any loss
associated with these loans, but management continues to monitor these loans
closely.
After
reviewing these and other factors, management determined that it was necessary
to increase the allowance for loan losses by $10,000. At
September 30, 2007, the allowance for loan losses was $250,000, or 0.47% of
loans receivable, compared to $240,000, or 0.46% of loans receivable at
December 31, 2006.
Non-interest
Income
. Non-interest income increased $11,000, to $35,000 for
the nine month period ended September 30, 2007, compared to $24,000 for the
nine months ended September 30, 2006, primarily due to increases in late
charges on delinquent loans.
Non-interest
Expense
. Non-interest expense increased $356,000, or 24.5%, to
$1.8 million for the nine months ended September 30, 2007, from $1.5
million for the same period last year. Compensation and employee
benefits increased $191,000, or 23.4%, to $1.0 million in 2007, from $815,000
in
2006. The cost of newly instituted stock benefit plans increased
benefits expense by approximately $182,000. Occupancy costs decreased
$9,000, or 7.0%, to $120,000 for the nine months ended September 30, 2007,
from $129,000 for the same period last year. Data processing fees
increased $2,000, or 2.5%, to $81,000 in 2007, from $79,000 in
2006. Professional fees, including legal, accounting and consulting
fees, increased $168,000, or 77.1%, to $386,000 in 2007, from $218,000 in
2006. The increase was due primarily to increased costs associated
with administration of stock benefit plans, SEC reporting compliance, and other
changes resulting from being a new public company. Miscellaneous
expenses increased $4,000, or 1.9%, to $219,000 in 2007, from $215,000 in
2006.
The
Bank’s ratio of non-interest expense to average assets increased to 3.24% for
the nine months ended September 30, 2007, from 2.71% for the same period
last year, and its efficiency ratio was 76.9% in 2007, compared to 67.9% in
2006.
Income
Tax Expense
. The provision for income taxes decreased $17,000,
to $216,000 for the nine months ended September 30, 2007, from $233,000 for
the same period last year, reflecting primarily the reduction in pre-tax net
income. The effective tax rate for the nine months ended
September 30, 2007, was 40.5%, compared to 36.7% for this period last
year. The increase in the effective tax rate was due primarily to
non-deductible costs associated with newly implemented stock benefit
plans.
Average
Balance Sheet
The
following table sets forth average balance sheets, average yields and costs,
and
certain other information for the nine months ended September 30, 2007 and
2006. No tax-equivalent yield adjustments were made, as their effects
were not material. All average balances are based on an average of
daily balances. Non-accrual loans are included in the computation of
average balances, but have been reflected in the table as loans carrying a
zero
yield. The yields set forth below include the effect of deferred
fees, discounts and premiums that are amortized or accreted to interest income
or expense.
|
|
|
For
the Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Outstanding Balance
|
|
|
|
|
|
|
|
|
Average
Outstanding Balance
|
|
|
|
|
|
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
53,024
|
|
|
$
|
2,611
|
|
|
|
6.57
|
%
|
|
$
|
44,340
|
|
|
$
|
2,141
|
|
|
|
6.44
|
%
|
|
Securities
available for sale
|
|
|
17,947
|
|
|
|
643
|
|
|
|
4.78
|
|
|
|
22,967
|
|
|
|
718
|
|
|
|
4.17
|
|
|
Interest-earning
deposits
|
|
|
728
|
|
|
|
27
|
|
|
|
4.95
|
|
|
|
1,444
|
|
|
|
51
|
|
|
|
4.71
|
|
|
Federal
Home Loan Bank Stock
|
|
|
570
|
|
|
|
12
|
|
|
|
2.81
|
|
|
|
500
|
|
|
|
11
|
|
|
|
2.93
|
|
|
Total
interest-earning assets
|
|
|
72,269
|
|
|
$
|
3,293
|
|
|
|
6.08
|
%
|
|
|
69,251
|
|
|
$
|
2,921
|
|
|
|
5.62
|
%
|
|
Non-interest-earning
assets
|
|
|
2,269
|
|
|
|
|
|
|
|
|
|
|
|
2,504
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
74,538
|
|
|
|
|
|
|
|
|
|
|
$
|
71,755
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing
Liabilities:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
|
$
|
20,126
|
|
|
$
|
186
|
|
|
|
1.23
|
%
|
|
$
|
23,002
|
|
|
$
|
206
|
|
|
|
1.19
|
%
|
|
Certificates
of deposit
|
|
|
21,818
|
|
|
|
688
|
|
|
|
4.20
|
|
|
|
21,198
|
|
|
|
562
|
|
|
|
3.53
|
|
|
Total
interest-bearing deposits
|
|
|
41,944
|
|
|
|
874
|
|
|
|
2.78
|
|
|
|
44,200
|
|
|
|
768
|
|
|
|
2.32
|
|
|
Federal
Home Loan Bank advances
|
|
|
2,448
|
|
|
|
98
|
|
|
|
5.34
|
|
|
|
855
|
|
|
|
31
|
|
|
|
4.83
|
|
|
Total
interest-bearing liabilities
|
|
|
44,392
|
|
|
|
972
|
|
|
|
2.92
|
%
|
|
|
45,055
|
|
|
|
799
|
|
|
|
2.36
|
%
|
|
Non-interest-bearing
liabilities
|
|
|
2,096
|
|
|
|
|
|
|
|
|
|
|
|
2,099
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
46,488
|
|
|
|
|
|
|
|
|
|
|
|
47,154
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
28,050
|
|
|
|
|
|
|
|
|
|
|
|
24,601
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
74,538
|
|
|
|
|
|
|
|
|
|
|
$
|
71,755
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$
|
2,321
|
|
|
|
|
|
|
|
|
|
|
$
|
2,122
|
|
|
|
|
|
|
Net
interest rate spread
(2)
|
|
|
|
|
|
|
|
|
|
|
3.16
|
%
|
|
|
|
|
|
|
|
|
|
|
3.26
|
%
|
|
Net
interest-earning
assets
(3)
|
|
$
|
27,877
|
|
|
|
|
|
|
|
|
|
|
$
|
24,196
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin
(4)
|
|
|
|
|
|
|
|
|
|
|
4.28
|
%
|
|
|
|
|
|
|
|
|
|
|
4.09
|
%
|
|
Ratio
of interest-earning assets to interest-bearing
liabilities
|
|
|
|
|
|
|
|
|
|
|
162.80
|
%
|
|
|
|
|
|
|
|
|
|
|
153.70
|
%
|
|
(1)
|
Non-interest-bearing
checking deposits are included in non-interest-bearing
liabilities.
|
|
(2)
|
Net
interest rate spread represents the difference between the yield
on
average interest-earning assets and the cost of average interest-bearing
liabilities.
|
|
(3)
|
Net
interest-earning assets represents total interest-earning assets
less
total interest-bearing liabilities.
|
|
(4)
|
Net
interest margin represents net interest income divided by average
total
interest-earning assets.
|
Liquidity
and Capital Resources
We
maintain liquid assets at levels we consider adequate to meet our liquidity
needs. We adjust our liquidity levels to fund deposit outflows, pay
real estate taxes on mortgage loans, repay our borrowings and to fund loan
commitments. We also adjust liquidity as appropriate to meet asset
and liability management objectives.
Our
primary sources of liquidity are deposits, amortization and prepayment of loans,
maturities of investment securities and other short-term investments, and
earnings and funds provided from operations. While scheduled
principal repayments on loans are a relatively predictable source of funds,
deposit flows and loan prepayments are greatly influenced by market interest
rates, economic conditions, and rates
offered
by our competition. We set the interest rates on our deposits to
maintain a desired level of total deposits. In addition, we invest
excess funds in short-term interest-earning assets, which provide liquidity
to
meet lending requirements.
A
portion
of our liquidity consists of cash and cash equivalents, which are a product
of
our operating, investing and financing activities. At
September 30, 2007, $2.5 million of our assets were invested in cash and
cash equivalents. Our primary sources of cash are principal
repayments on loans, proceeds from the calls and maturities of investment
securities and increases in deposit accounts. Our cash flows are
derived from operating activities, investing activities and financing activities
as reported in our consolidated statements of cash flows.
Our
primary investing activities are the origination of loans and the purchase
of
investment securities. During the nine months ended
September 30, 2007, our loan originations, net of collected principal,
totaled $1.5 million. During the nine months ended September 30,
2006, net loan originations totaled $11.0 million. The decrease in
net originations was due to both reduced demand for one-to-four family loans,
because of higher mortgage interest rates, and to our decision to reduce the
amount of new multi-family loans in our portfolio. We did not sell any loans
during 2007 or 2006. Cash received from calls and maturities of
securities totaled $2.8 million and $4.5 million for the nine months ended
September 30, 2007 and 2006,
respectively. We purchased $2.0 million in securities
during the nine months ended September 30, 2006, but none during the nine
months ended September 30, 2007.
Deposit
flows are generally affected by the level of interest rates, the interest rates
and products offered by us and by local competitors, and other
factors. There was a net decrease in total deposits of $2.5 million
for the nine months ended September 30, 2007, and a net decrease of
$423,000 in 2006. The decrease in deposits during 2007 was due to
increased rate-based competition in our market area. We also faced
competition from a much improved stock market.
Liquidity
management is both a daily and long-term function of business
management. If we require funds beyond our ability to generate them
internally, borrowing agreements exist with the Federal Home Loan Bank of
Chicago, which provide an additional source of funds. During the nine
months ended September 30, 2007, the Bank borrowed $4.5 million in advances
from the Federal Home Loan Bank and repaid $3.5 million of the
advances. During the nine months ended September 30, 2006, the Bank
borrowed $5.0 million and repaid $4.0 million in FHLB advances. Our
remaining available borrowing limit at September 30, 2007, was $7.0
million.
At
September 30, 2007, we had outstanding commitments to originate loans of
$55,000. At September 30, 2007, certificates of deposit
scheduled to mature in less than one year totaled $19.1
million. Based on prior experience, management believes that a
significant portion of such deposits will remain with us, although there can
be
no assurance that this will be the case. In the event we do not
retain a significant portion of our maturing certificates of deposit, we will
have to utilize other funding sources, such as Federal Home Loan Bank of Chicago
advances, in order to maintain our level of assets. Alternatively, we
would reduce our level of liquid assets, such as our cash and cash
equivalents. In addition, the cost of such deposits may be
significantly higher if market interest rates are higher at the time of
renewal.
Off-Balance
Sheet Arrangements
In
the
ordinary course of business, the Bank is a party to credit-related financial
instruments with off-balance-sheet risk to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit. The Bank follows the same credit policies in making
commitments as it does for on-balance-sheet instruments.
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Therefore, the total commitment amounts do
not necessarily represent future cash requirements.
At
September 30, 2007 and December 31, 2006, the Bank had $55,000 and
$576,000, respectively, of commitments to grant mortgage loans.
Impact
of Inflation and Changing Prices
Our
financial statements and related notes have been prepared in accordance with
U.S. generally accepted accounting principles (“GAAP”). GAAP
generally requires the measurement of financial position and operating results
in terms of historical dollars without consideration for changes in the relative
purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of our
operations. Unlike industrial companies, our assets and liabilities
are primarily monetary in nature. As a result, changes in market
interest rates have a greater impact on performance than the effects of
inflation.
Management
of Market Risk
General
. The
majority of our assets and liabilities are monetary in
nature. Consequently, our most significant form of market risk is
interest rate risk. Our assets, consisting primarily of mortgage
loans, have longer maturities than our liabilities, which consist primarily
of
deposits. As a result, a principal part of our business strategy is
to manage interest rate risk and reduce the exposure of our net interest income
to changes in market interest rates. Our board of directors has
approved a series of policies for evaluating interest rate risk inherent in
our
assets and liabilities; for determining the level of risk that is appropriate
given our business strategy, operating environment, capital, liquidity and
performance objectives; and for managing this risk consistent with these
policies. Senior management regularly monitors the level of interest
rate risk and reports to the board of directors on our compliance with our
asset/liability policies and on our interest rate risk position.
We
have
sought to manage our interest rate risk in order to control the exposure of
our
earnings and capital to changes in interest rates. During the low
interest rate environment that has existed in recent years, we have managed
our
interest rate risk by maintaining a high equity-to-assets ratio and building
and
maintaining portfolios of shorter-term fixed rate residential loans and second
mortgage loans. By maintaining a high equity-to-assets ratio, we
believe that we are better positioned to absorb more interest rate risk in
order
to improve our net interest margin. However, maintaining high equity
balances reduces our return on equity ratio, and investments in shorter-term
assets generally bear lower yields than longer-term investments.
Net
Portfolio Value
. In past years, many savings institutions have
measured interest rate sensitivity by computing the “gap” between the assets and
liabilities that are expected to mature or reprice within certain time periods,
based on assumptions regarding loan prepayment and deposit decay rates formerly
provided by the OTS. However, the OTS now requires the computation of
amounts by which the net present value of an institution’s cash flow from
assets, liabilities and off balance sheet items (the institution’s net portfolio
value or “NPV”) would change in the event of a range of assumed changes in
market interest rates. The OTS provides all institutions that file a
Consolidated Maturity/Rate Schedule as a part of their quarterly Thrift
Financial Report with an interest rate sensitivity report of net portfolio
value. The OTS simulation model uses a discounted cash flow analysis
and an option-based pricing approach to measuring the interest rate sensitivity
of net portfolio value. Historically, the OTS model estimated the
economic value of each type of asset, liability and off-balance sheet contract
under
the
assumption that the United States Treasury yield curve increases or decreases
instantaneously by 100 to 300 basis points in 100 basis point
increments. A basis point equals one-hundredth of one percent, and
100 basis points equals one percent. An increase in interest rates
from 3% to 4% would mean, for example, a 100 basis point increase in the “Change
in Interest Rates” column below. The OTS provides us the results of
the interest rate sensitivity model, which is based on information we provide
to
the OTS to estimate the sensitivity of our net portfolio value.
The
table
below sets forth, as of June 30, 2007, the latest date available, the estimated
changes in our NPV and our net interest income that would result from the
designated instantaneous changes in the U.S. Treasury yield
curve. Computations of prospective effects of hypothetical interest
rate changes are based on numerous assumptions including relative levels of
market interest rates, loan prepayments and deposit decay, and should not be
relied upon as indicative of actual results.
|
|
|
|
|
|
|
Net
Portfolio Value as a Percentage of Present Value of
Assets
|
|
Change
In Interest Rates (Basis Points)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars
in thousands)
|
|
|
|
+300
|
|
|
$
|
19,511
|
|
|
$
|
(7,017
|
)
|
|
|
-26
|
%
|
|
|
28.16
|
%
|
|
-638bp
|
|
|
|
+200
|
|
|
|
21,801
|
|
|
|
(4,727
|
)
|
|
|
-18
|
|
|
|
30.39
|
|
|
|
-414
|
|
|
|
+100
|
|
|
|
24,180
|
|
|
|
(2,348
|
)
|
|
|
-9
|
|
|
|
32.55
|
|
|
|
-198
|
|
|
Unchanged
|
|
|
|
26,528
|
|
|
|
—
|
|
|
|
—
|
|
|
|
34.53
|
|
|
|
—
|
|
|
|
-100
|
|
|
|
28,682
|
|
|
|
2,153
|
|
|
|
+8
|
|
|
|
36.23
|
|
|
|
+169
|
|
|
|
-200
|
|
|
|
30,447
|
|
|
|
3,918
|
|
|
|
+15
|
|
|
|
37.51
|
|
|
|
+298
|
|
The
table
above indicates that at June 30, 2007, in the event of a 200 basis point
decrease in interest rates, we would experience a 15% increase in net portfolio
value. In the event of a 200 basis point increase in interest rates,
we would experience an 18% decrease in net portfolio value.
Certain
shortcomings are inherent in the methodology used in the above interest rate
risk measurement. Modeling changes in net portfolio value requires
making certain assumptions that may or may not reflect the manner in which
actual yields and costs respond to changes in market interest
rates. In this regard, the net portfolio value table presented
assumes that the composition of our interest-sensitive assets and liabilities
existing at the beginning of a period remains constant over the period being
measured and assumes that a particular change in interest rates is reflected
uniformly across the yield curve regardless of the duration or repricing of
specific assets and liabilities. Accordingly, although the net
portfolio value table provides an indication of our interest rate risk exposure
at a particular point in time, such measurements do not provide a precise
forecast of the effect of changes in market interest rates on net interest
income and will differ from actual results.