NOTES
TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 -
BASIS OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements of First
Bancorp of Indiana, Inc. (the "Company") have been prepared in accordance with
the instructions to Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. However,
such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary to fairly
present the financial position, results of operations, and cash flow of the
Company. The condensed consolidated balance sheet of the Company as of June
30,
2007, has been derived from the audited consolidated balance sheet of the
Company as of that date. The results of operations for the three and six months
ended December 31, 2007, are not necessarily indicative of the results to be
expected for the year ending June 30, 2008. The condensed consolidated financial
statements and notes thereto should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended June
30,
2007, contained in the Company's Annual Report on Form 10-KSB filed with the
Securities and Exchange Commission on September 27, 2007.
NOTE
2 -
BORROWINGS
The
following summarizes the Company's borrowings at December 31, 2007, and June
30,
2007. Each putable advance is convertible from a fixed-rate to a variable-rate
instrument at the discretion of the Federal Home Loan Bank of Indianapolis
contingent upon meeting prescribed strike rates and/or initial lockout periods.
Similarly, the counterparties to reverse repurchase agreements may terminate
the
agreements upon the expiration of the initial lockout periods.
|
|
|
December
31, 2007
|
|
June
30, 2007
|
|
|
|
|
(unaudited)
|
|
|
|
|
Federal
Home Loan Bank putable advances
|
|
|
|
|
|
|
Fixed
rate of 5.360%, due in March 2008
|
|
|
|
|
$
|
2,500,000
|
|
|
Fixed
rate of 4.980%, due in December 2010
|
|
$
|
2,000,000
|
|
|
2,000,000
|
|
|
Fixed
rate of 5.370%, due in February 2011
|
|
|
10,000,000
|
|
|
10,000,000
|
|
|
Fixed
rate of 4.830%, due in July 2011
|
|
|
10,000,000
|
|
|
10,000,000
|
|
|
Fixed
rate of 4.350%, due in September 2015
|
|
|
10,000,000
|
|
|
10,000,000
|
|
|
Fixed
rate of 3.700%, due in September 2015
|
|
|
10,000,000
|
|
|
10,000,000
|
|
|
Fixed
rate of 4.610%, due in June 2017
|
|
|
15,000,000
|
|
|
15,000,000
|
|
|
Fixed
rate of 4.140%, due in August 2017
|
|
|
5,000,000
|
|
|
|
|
|
Fixed
rate of 3.910%, due in September 2017
|
|
|
5,000,000
|
|
|
|
|
|
Fixed
rate of 3.320%, due in December 2017
|
|
|
5,000,000
|
|
|
|
|
|
Fixed
rate of 3.490%, due in December 2017
|
|
|
5,000,000
|
|
|
|
|
|
Fixed
rate of 3.430%, due in December 2017
|
|
|
5,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
Home Loan Bank bullet advances
|
|
|
|
|
|
|
|
|
Fixed
rate of 3.290%, due in August 2007
|
|
|
|
|
|
500,000
|
|
|
Fixed
rate of 5.310%, due in June 2008
|
|
|
4,000,000
|
|
|
4,000,000
|
|
|
Fixed
rate of 4.300%, due in June 2010
|
|
|
500,000
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
Total
Federal Home Loan Bank advances
|
|
|
86,500,000
|
|
|
64,500,000
|
|
|
|
|
|
|
|
|
|
|
|
Reverse
repurchase agreements
|
|
|
|
|
|
|
|
|
Fixed
rate of 4.2850%, due in January 2017
|
|
|
|
|
|
8,000,000
|
|
|
Fixed
rate of 4.410%, due in July 2017
|
|
|
8,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior
subordinated debentures, 6.905% rate, due September 2037
|
|
|
5,155,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
on purchased borrowings
|
|
|
(2,091
|
)
|
|
(4,126
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
borrowings
|
|
$
|
99,652,909
|
|
$
|
72,495,874
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average rate
|
|
|
4.352
|
%
|
|
4.611
|
%
|
The
junior subordinated debentures represent obligations of the Company to First
Bancorp of Indiana Statutory Trust I (Trust), a wholly-owned subsidiary, in
connection with the issuance of $5,000,000 of trust preferred securities by
the
Trust on August 1, 2007. The debentures mature in September 2037 and bear a
fixed interest rate of 6.905% for the first five years and 141 basis points
over
the three month LIBOR rate for the remaining term. The Company has fully and
unconditionally guaranteed all of the Trust’s obligations under the trust
preferred securities.
NOTE
3 -
EARNINGS PER SHARE
Earnings
per share for the quarters ended December 31, 2007, and December 31, 2006,
were
computed as follows:
|
|
|
Quarter
Ended December 31, 2007
|
|
|
|
|
Income
|
|
Weighted-Average
Shares
|
|
Per
Share Amount
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
247,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
Income
available to common stockholders
|
|
$
|
247,813
|
|
|
1,781,976
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
—
|
|
|
12,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
Income
available to common stockholders and assumed conversions
|
|
$
|
247,813
|
|
|
1,794,493
|
|
$
|
0.14
|
|
|
|
|
Quarter
Ended December 31, 2006
|
|
|
|
|
Income
|
|
Weighted-Average
Shares
|
|
Per
Share Amount
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
227,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
Income
available to common stockholders
|
|
$
|
227,553
|
|
|
1,779,459
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
—
|
|
|
35,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
Income
available to common stockholders and assumed conversions
|
|
$
|
227,553
|
|
|
1,814,901
|
|
$
|
0.13
|
|
Year-to-date
earnings per share were computed as follows:
|
|
|
Six
Months Ended December 31, 2007
|
|
|
|
|
Income
|
|
Weighted-Average
Shares
|
|
Per
Share Amount
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
436,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
Income
available to common stockholders
|
|
$
|
436,422
|
|
|
1,783,534
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
—
|
|
|
14,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
Income
available to common stockholders and assumed conversions
|
|
$
|
436,422
|
|
|
1,798,195
|
|
$
|
0.24
|
|
|
|
|
Six
Months Ended December 31, 2006
|
|
|
|
|
Income
|
|
Weighted-Average
Shares
|
|
Per
Share Amount
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
401,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
Income
available to common stockholders
|
|
$
|
401,224
|
|
|
1,632,512
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
—
|
|
|
35,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
Income
available to common stockholders and assumed conversions
|
|
$
|
401,224
|
|
|
1,667,597
|
|
$
|
0.24
|
|
Options
to purchase 22,724 shares of common stock at $19.33 per share were outstanding
at December 31, 2007 and 2006, but were not included in the calculation of
diluted EPS because the options’ exercise price was greater than the average
market price of the common shares. Similarly, an additional 11,362 options
exercisable at $14.58 per share were greater than the average market price
of
common shares for the quarter ended December 31, 2007.
NOTE
4 -
RECLASSIFICATIONS
Certain
reclassifications have been made to the condensed consolidated income statement
for the three- and six-month periods ended December 31, 2006, to conform to
the
presentation of the condensed consolidated income statement for the three-
and
six-month periods ended December 31, 2007. These reclassifications had no effect
on earnings.
NOTE
5 -
CHANGE IN ACCOUNTING PRINCIPLES
On
July
1, 2007, the Company adopted Financial Accounting Standards Board (FASB)
Interpretation No. 48 (FIN 48),
Accounting
for Uncertainty in Income Taxes
.
FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in an
enterprise’s financial statements in accordance with Statement No. 109. FIN 48
presents a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to
be
taken in a tax return. As a result of the implementation of FIN 48, the
Company did not identify any material uncertain tax positions that it believes
should be recognized in the financial statements.
Effective
July 1, 2007, the Company adopted Statement of Financial Accounting Standards
No. 156 (SFAS 156),
Accounting
for Servicing of Financial Assets, an amendment of FASB Statement No. 140.
SFAS
156
requires all separately recognized servicing assets and servicing liabilities
be
initially measured at fair value, if practicable, and permits for subsequent
measurement using either fair value measurement with changes in fair value
reflected in earnings or the amortization and impairment requirements of
Statement No. 140. The subsequent measurement of separately recognized servicing
assets and servicing liabilities at fair value eliminates the necessity for
entities that manage the risks inherent in servicing assets and servicing
liabilities with derivatives to qualify for hedge accounting treatment and
eliminates the characterization of declines in fair value as impairments or
direct write-downs. The adoption of SFAS 156 did not impact the results of
operations or financial condition.
ITEM
2.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING
STATEMENTS
This
report contains forward-looking statements within the meaning of the federal
securities laws. These statements are not historical facts, rather they are
statements based on the Company's current expectations regarding its business
strategies and their intended results and its future performance.
Forward-looking statements are preceded by terms such as "expects," "believes,"
"anticipates," "intends," and similar expressions. Forward-looking statements
are not guarantees of future performance. Numerous risks and uncertainties
could
cause the Company's actual results, performance, and achievements to be
materially different from those expressed or implied by the forward-looking
statements. Factors that may cause or contribute to these differences include,
without limitation, general economic conditions, including changes in market
interest rates and changes in monetary and fiscal policies of the federal
government; legislative and regulatory changes; and other factors disclosed
periodically in the Company's filings with the Securities and Exchange
Commission. Because of the risks and uncertainties inherent in forward-looking
statements, readers are cautioned not to place undue reliance on them, whether
included in this report or made elsewhere from time to time by the Company
or on
its behalf. The Company assumes no obligation to update any forward-looking
statements.
GENERAL
Management's
discussion and analysis of financial condition and results of operations is
intended to assist in understanding the financial condition and results of
operations of the Company. The information contained in this section should
be
read in conjunction with the unaudited condensed consolidated financial
statements and accompanying notes thereto.
COMPARISON
OF FINANCIAL CONDITION AT DECEMBER 31, 2007, AND JUNE 30, 2007
Total
consolidated assets of the Company increased $5.3 million, or 1.5%, to $368.3
million at December 31, 2007, from $363.0 million at June 30, 2007. Investment
activity was responsible for the growth.
Cash
and
cash equivalents, which consist mainly of funds on deposit at the Federal Home
Loan Bank of Indianapolis (FHLB) or the Federal Reserve Bank, decreased $1.9
million to $12.9 million during the six months ended December 31, 2007.
Certificates of deposit (CDs) with other financial institutions, which are
all
fully insured by the FDIC, totaled $722,000 at December 31, 2007, compared
to
$1.6 million at June 30, 2007.
Investment
securities increased 11.7% during the first six months of fiscal 2008 to $89.5
million. Highly-rated mortgage-backed securities represented most of the
increase. The portfolio is composed entirely of mortgage-related securities,
federal agency notes, municipal bonds, and investment grade asset-backed paper.
Recent economic conditions have not adversely affected the ratings of any
securities in the portfolio.
Net
loans
totaled $232.0 million at December 31, 2007, a 0.5% decrease from the $233.2
million balance at June 30, 2007. Permanent mortgage loans secured by one-
to
four-family residences decreased 4.0% during the first half of fiscal 2008
with
non-owner-occupied loans accounting for the majority of this reduction.
Conversely, commercial business loans increased 7.8% and permanent loans secured
by nonresidential or multi-family real estate grew 3.0% during the same period.
The consumer loan portfolio, including loans secured by savings accounts,
decreased 0.5% as indirect automobile loan production slowed to $17.4 million
through the first six months of fiscal 2008. Also, $4.0 million of newly
originated permanent single family residential mortgage loans, or 53.6% of
total
production, have been sold this fiscal year. For the foreseeable future,
management intends to continue building the mortgage loan servicing portfolio
through the origination and sale of loans. Consumer loan retention is subject
to
First Federal's liquidity needs, as well as internal and regulatory asset
diversification limitations to which First Federal is in full
compliance.
The
allowance for loan losses totaled $1.0 million at December 31, 2007, a $62,000
decrease from six months earlier. The change was composed of $195,000 in
provisions for losses and $257,000 in net charge-offs. Net charge-offs consisted
of $63,000 of mortgage loans, $17,000 of commercial loans, and $177,000 of
consumer loans. The Company’s allowance for loan losses represented 0.43% of
total loans at December 31, 2007, compared to 0.45% at June 30, 2007. Despite
the small reduction, the allowance for loan losses increased to 783.6% of
nonperforming loans at December 31, 2007, from 326.7% at June 30,
2007.
The
table
below highlights changes in the Company’s nonperforming assets since the most
recent fiscal year end.
|
|
|
December
31, 2007
|
|
June
30, 2007
|
|
|
|
|
|
|
|
|
|
Loans
accounted for on a nonaccrual basis
|
|
$
|
127,000
|
|
$
|
311,000
|
|
|
Accruing
loans past due 90 days or more
|
|
|
-
|
|
|
14,000
|
|
|
Nonperforming
loans
|
|
|
127,000
|
|
|
325,000
|
|
|
Real
estate owned (net)
|
|
|
92,000
|
|
|
10,000
|
|
|
Other
repossessed assets
|
|
|
24,000
|
|
|
33,000
|
|
|
Total
nonperforming assets
|
|
$
|
243,000
|
|
$
|
368,000
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans delinquent 90 days or more to total loans
|
|
|
0.05
|
%
|
|
0.14
|
%
|
|
Total
loans delinquent 90 days or more to total assets
|
|
|
0.03
|
%
|
|
0.09
|
%
|
|
Total
nonperforming assets to total assets
|
|
|
0.07
|
%
|
|
0.10
|
%
|
Total
deposits decreased $22.8 million to $228.4 million at December 31, 2007, from
$251.2 million at June 30, 2007. The decrease was attributed primarily to a
$24.7 million reduction in brokered funds. Borrowings, which consisted mainly
of
FHLB products, totaled $99.7 million at December 31, 2007, a $27.2 million
increase that included $5.2 million of junior subordinated debt associated
with
trust preferred securities issued through a statutory trust on August 1, 2007.
Advances from the Federal Home Loan Bank of Indianapolis accounted for the
balance of the increase. First Federal believes that it has substantial
resources to increase its borrowing capacity with the FHLB.
At
$608,000, escrow balances at December 31, 2007, were 12.5% below the levels
six
months earlier due mainly to seasonal variances. During the first six months
of
fiscal 2008, other liabilities, which include accrued expenses and miscellaneous
short-term payables, increased $924,000, or 21.2%. The change was attributed
primarily to accrued interest on time deposits and accrued income
taxes.
Total
stockholders’ equity increased $190,000 to $34.4 million at December 31, 2007,
from $34.2 million at June 30, 2007. In addition to the $436,000 of net income,
the most significant components of the change included 21,438 shares of First
Bancorp common stock repurchased at a total cost of $323,000 and semiannual
cash
dividends totaling $553,000. Also affecting stockholders’ equity were $112,000
in allocations of ESOP shares, and $63,000 from the exercise of stock options.
Finally, an unrealized gain, adjusted for deferred taxes, of $455,000 was
recognized on the portfolio of available-for-sale securities.
COMPARISON
OF OPERATING RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, 2007, AND
2006
GENERAL.
Net income for the quarter ended December 31, 2007, improved 8.8% to $248,000
from $228,000 for the quarter ended December 31, 2006, despite higher funding
costs that further compressed the net interest margin. The annualized return
on
average assets rose slightly to 0.27% for the quarter ended December 31, 2007,
from 0.26% for the same quarter last year. The return on average equity also
increased to 2.90% from 2.67% for the comparative quarters. Greater noninterest
revenues were primarily responsible for the improved earnings.
NET
INTEREST INCOME. At $1.9 million, net interest income for the quarter ended
December 31, 2007, was 2.8% less than in the same quarter a year ago. Total
interest income increased 4.2% between the comparative quarters as a result
of
an $8.3 million increase in average interest-earning assets and a ten basis
point improvement in the average yield on these assets. Total interest expenses
increased 8.7% between the same periods due primarily to a $15.6 million
increase in average interest-bearing liabilities and a 14 basis point rise
in
average cost. Consequently, the net interest margin declined to 2.34% for the
second quarter of fiscal 2008 from 2.47% for the same period the preceding
year.
PROVISION
FOR LOAN LOSSES. The provision for loan losses is intended to establish an
allowance adequate to cover losses inherent in the loan portfolio as of the
balance sheet date based upon management's periodic analysis of information
available at that time. At $115,000, the provision for loan losses for the
quarter ended December 31, 2007, was $15,000 greater than the same quarter
last
fiscal year. While management believes the allowance for loan losses to be
sufficient given current information, future events, conditions, or regulatory
directives could necessitate additions to the allowance for loan losses that
may
adversely affect net income.
NONINTEREST
INCOME. Noninterest income totaled $606,000 for the quarter ended December
31,
2007, compared to $459,000 for the same quarter last year. The introduction
of a
new overdraft protection program accounted for the 108.4% increase in service
charges on deposit accounts. Net gains on loan sales were nearly double the
same
quarter last year due to improved pricing and a 65.3% increase in
sales.
NONINTEREST
EXPENSE. At $2.1 million for the quarter ended December 31, 2007, total
noninterest expense was 3.4% above the same quarter in fiscal 2007. The increase
was distributed among numerous expense categories with professional fees
accounting for the largest change. At 2.31% of average assets, noninterest
expenses were slightly below the year-ago quarter.
INCOME
TAXES. Effective tax rates for the quarters ended December 31, 2007 and 2006
approximated 20.0% and 25.1%, respectively. The effective tax rates are below
the statutory rates due in large part to the tax benefits generated by
bank-qualified municipal securities relative to the levels of income before
taxes.
COMPARISON
OF OPERATING RESULTS FOR THE SIX MONTHS ENDED DECEMBER 31, 2007, AND
2006
GENERAL.
Net income for the six months ended December 31, 2007, improved 8.7% to $436,000
from $401,000 for the six months ended December 31, 2006, despite further
compression to the net interest margin. At 0.24%, the annualized return on
average assets was only slightly below the 0.25% for the same period in fiscal
2007. Similarly, the 2.56% return on average equity for the most recent six
months was in line with the same period last year. The significant increase
in
noninterest expenses between the comparative six-month periods was largely
due
to the Company’s October 1, 2006, acquisition of Home Building Bancorp, Inc.
Improved noninterest revenues partially offset the higher overhead
expenses.
NET
INTEREST INCOME. At $3.8 million, net interest income for the six months ended
December 31, 2007, was 4.5% higher than in the same period a year ago. Total
interest income increased 15.3% between the comparative six-month periods as
a
result of a $33.8 million increase in average interest-earning assets attributed
mainly to the merger and a 22 basis point improvement in the average yield
on
these assets. The merger was also the primary contributor to the 22.4% increase
in total interest expenses between the same periods. Consequently, the net
interest margin declined to 2.29% for the first half of fiscal 2008 from 2.44%
for the same time frame in fiscal 2007.
PROVISION
FOR LOAN LOSSES. At $195,000, the provision for loan losses for the six months
ended December 31, 2007, was unchanged from the same six-month period in fiscal
2007. Net charge-offs, which typically are related to the automobile loan
portfolio, totaled $257,000 for the most recent six months versus $64,000 for
the first half of last fiscal year. Approximately $90,000 of the current fiscal
year charge-offs are attributed to loans delinquent 180 days or more to
borrowers who have filed for Chapter 13 bankruptcy protection. Payments received
from the bankruptcy trustees are treated as recoveries in subsequent
periods.
NONINTEREST
INCOME. Noninterest income totaled $1.1 million for the six months ended
December 31, 2007, compared to $960,000 for the same period last year. Last
year’s total included a $42,000 gain from the sale of approximately $5.0 million
of consumer loans. The introduction of a new overdraft protection program
accounted for the 88.9% increase in service charges on deposit accounts. Reduced
income from the servicing of sold consumer loans was responsible for the
decrease in other noninterest income.
NONINTEREST
EXPENSE. At $4.1 million for the six months ended December 31, 2007, total
noninterest expense increased 7.3% from the same period in fiscal 2007 due
in
large part to the personnel and facilities gained in the merger along with
other
merger-related items. The increased amortization of intangible assets is
attributed to the amortization of the core deposit intangible that resulted
from
the merger. Similarly, the 22.8% increase in data processing expenses was due
mainly to accounts added in the merger. Despite these items, noninterest
expenses relative to average assets declined 11 basis points to an annualized
2.27% for the first half of fiscal 2008.
INCOME
TAXES. Effective tax rates for the six-month periods ended December 31, 2007
and
2006 approximated 19.2% and 23.1%, respectively. The effective tax rates are
below the statutory rates due in large part to the tax benefits generated by
bank-qualified municipal securities relative to the levels of income before
taxes.
LIQUIDITY
AND CAPITAL RESOURCES
Federal
regulations require First Federal to maintain liquidity commensurate with safe
and sound operations. Such liquidity may include both existing assets and access
to reliable funding sources. To this end, First Federal maintains an adequate
level of liquidity to ensure the availability of sufficient funds to fund loan
originations and deposit withdrawals, to satisfy other financial commitments,
and to take advantage of investment opportunities. First Federal invests excess
funds in overnight deposits and other short-term interest-bearing assets to
provide liquidity to meet these needs. At December 31, 2007, bank-only cash
and
cash equivalents totaled $9.6 million, or 2.6% of total assets. First Federal
also had marketable securities, excluding a small inventory of negotiable CDs,
totaling $89.5 million, of which, 84.0% were classified “available for sale.” At
the same time, First Federal had net commitments to fund loans, including loans
in process, of $2.5 million.
Retail
certificates of deposit scheduled to mature in one year or less totaled $71.2
million at December 31, 2007. Based upon historical experience, management
believes the majority of maturing certificates of deposit will remain with
First
Federal. Management of First Federal believes it can adjust the offering rates
of certificates of deposit to retain deposits in changing interest rate
environments. If a significant portion of these deposits are not retained by
First Federal, First Federal would be able to utilize FHLB advances and other
wholesale sources to fund deposit withdrawals. This could result in an increase
in interest expense to the extent that the average rate paid on wholesale funds
generally exceeds the average rate paid on retail deposits of similar
duration.
Management
believes its ability to generate funds internally will satisfy its liquidity
needs. However, should First Federal require funds beyond its ability to
generate them internally, it has the ability to borrow funds from the Federal
Home Loan Bank. Based on currently pledged collateral, First Federal had
approximately $4.2 million remaining available to borrow under its credit
arrangement with the FHLB as of December 31, 2007. In addition, First Federal
had unpledged collateral sufficient to add another $26.9 million of borrowing
capacity with the FHLB.
Office
of
Thrift Supervision regulations require First Federal to maintain specific
amounts of capital. As of December 31, 2007, First Federal exceeded its minimum
capital requirements as the following table illustrates.
|
|
|
|
|
Regulatory
Minimum
|
|
Well
Capitalized per
|
|
|
|
|
Actual
|
|
Required
Capital
|
|
12
CFR Part 565
|
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
|
(Dollars
in Thousands)
|
|
As
of December 31, 2007 (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital (to risk weighted assets)
|
|
$
|
27,422
|
|
|
11.58
|
%
|
$
|
18,938
|
|
|
8.00
|
%
|
$
|
23,672
|
|
|
10.00
|
%
|
|
Tier
I capital (to risk weighted assets)
|
|
|
27,399
|
|
|
11.22
|
|
|
9,469
|
|
|
4.00
|
|
|
14,203
|
|
|
6.00
|
|
|
Tier
I capital (to adjusted total assets)
|
|
|
27,399
|
|
|
7.68
|
|
|
14,088
|
|
|
4.00
|
|
|
17,835
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital (to risk weighted assets)
|
|
$
|
25,680
|
|
|
10.81
|
%
|
$
|
19,010
|
|
|
8.00
|
%
|
$
|
23,763
|
|
|
10.00
|
%
|
|
Tier
I capital (to risk weighted assets)
|
|
|
25,675
|
|
|
10.40
|
|
|
9,505
|
|
|
4.00
|
|
|
14,258
|
|
|
6.00
|
|
|
Tier
I capital (to adjusted total assets)
|
|
|
25,675
|
|
|
7.23
|
|
|
14,200
|
|
|
4.00
|
|
|
17,750
|
|
|
5.00
|
|
The
Company’s fourth stock repurchase program was announced on August 24, 2006, to
acquire up to 77,000 shares, or 5%, of the outstanding shares. This repurchase
program, as with the previous programs, has been undertaken to enhance
shareholder value and to provide liquidity for the otherwise thinly traded
shares. The repurchase programs generally have been conducted through open
market purchases, although unsolicited negotiated transactions or other types
of
repurchases have also taken place. As of December 31, 2007, 39,079 shares had
been repurchased under the fourth stock repurchase program leaving 37,921 shares
to be purchased.
The
following chart summarizes stock repurchase activity during the most recent
quarter.
|
Period
|
|
Total
Number of Shares Purchased
|
|
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
|
|
|
October
1, 2007 through October 31, 2007
|
|
|
1,000
|
|
$
|
15.05
|
|
|
1,000
|
|
|
45,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November
1, 2007 through November 30, 2007
|
|
|
2,700
|
|
$
|
14.39
|
|
|
2,700
|
|
|
42,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
1, 2007 through December 31, 2007
|
|
|
5,000
|
|
$
|
13.88
|
|
|
5,000
|
|
|
37,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,700
|
|
$
|
14.17
|
|
|
8,700
|
|
|
|
|
CRITICAL
ACCOUNTING POLICIES
ALLOWANCE
FOR LOAN LOSSES. The allowance for loan losses is established through a
provision for loan losses charged to earnings at the time losses are estimated
to have occurred. Loan losses are charged against the allowance when management
believes the uncollectibility of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance.
The
allowance for loan losses is evaluated on a regular basis by management and
is
based upon management’s periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower’s ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes
available.
A
loan is
considered impaired when, based on current information and events, it is
probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as
impaired.
Management
determines the significance of payment delays and payment shortfalls on a
case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower’s prior payment record and the amount of the
shortfall in relation to the principal and interest owed. Impairment is measured
on a loan-by-loan basis for commercial and construction loans by either the
present value of expected future cash flows discounted at the loan’s effective
interest rate, the loan’s obtainable market price or the fair value of the
collateral if the loan is collateral dependent.
Large
groups of smaller balance homogenous loans are collectively evaluated for
impairment. Accordingly, the Bank does not separately identify individual
consumer and residential loans for impairment disclosures.
MORTGAGE
SERVICING RIGHTS. Mortgage servicing rights on originated loans that have been
sold are initially recorded at fair value. Capitalized servicing rights are
amortized in proportion to and over the period of estimated servicing revenues.
Impairment of mortgage-servicing rights is assessed based on the fair value
of
those rights. Fair values are estimated using discounted cash flows based on
a
current market interest rate. For purposes of measuring impairment, the rights
are stratified based on the predominant risk characteristics of the underlying
loans. The predominant characteristic currently used for stratification is
type
of loan. The amount of impairment recognized is the amount by which the
capitalized mortgage servicing rights for a stratum exceed their fair
value.
GOODWILL.
Goodwill is tested annually for impairment. If the implied fair value of
goodwill is lower than its carrying amount, goodwill impairment is indicated
and
goodwill is written down to its implied fair value. Subsequent increases in
goodwill value are not recognized in the financial statements.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
September 2006, FASB issued Statement No. 157 (SFAS 157),
Fair
Value Measurements
.
This
Statement defines fair value, establishes a framework for measuring fair value
and expands disclosures about fair value measurements. Although this statement
does not require any new fair value measurements, the application of this
Statement may change current practices. The new standard will be effective
for
the Company beginning July 1, 2008. The Company has not completed its evaluation
of the impact of the adoption of SFAS 157.
In
February 2007, FASB issued Statement No. 159 (SFAS 159),
The
Fair Value Option for Financial Assets and Financial Liabilities - Including
an
amendment of FASB Statement No. 115.
This
Statement permits entities to choose to measure many financial instruments
and
certain other items at fair value.
The
new
standard will be effective for the Company beginning July 1, 2008, although
early adoption is allowed. The Company is currently evaluating the impact of
the
impact of the adoption of SFAS 159 and did not elect to early
adopt.
