UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
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x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
For
the quarterly period ended March 31, 2008
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|
|
|
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o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
For
the transition period from ______to ___________
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Commission
file number: 000-51037
SFSB,
INC.
(Exact
name of registrant as specified in its charter)
United
States
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|
20-2077715
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(State
or other jurisdiction of
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(I.R.S.
Employer
|
incorporation
or organization)
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|
Identification
No.)
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|
1614
Churchville Road, Bel Air, Maryland 21015
(Address
of principal executive offices)
(Zip
Code)
(443)
265-5570
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
See
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
o
Accelerated
filer
o
Non-accelerated
filer
o
Smaller
reporting company
þ
(Do
not check if a smaller reporting
company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
o
Yes
x
No
State
the
number of shares outstanding of each of the registrant’s classes of common
equity, as of the latest practicable date:
As
of May
10, 2008, there were 2,817,644 shares of the issuer’s Common Stock, par value
$0.01 per share, outstanding.
PART
I - FINANCIAL INFORMATION
Item
1. Financial Statements
SFSB,
Inc.
CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
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|
|
|
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|
|
March
31, 2008
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|
December
31, 2007
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|
(Dollars
in thousands, except per share data)
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|
ASSETS
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|
|
|
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|
Cash
and due from banks
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$
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769
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|
$
|
612
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|
Federal
funds sold
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|
1,044
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|
|
665
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|
Cash
and cash equivalents
|
|
|
1,813
|
|
|
1,277
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|
|
|
|
|
|
|
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Investment
securities - available for sale
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|
8,952
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8,942
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|
Investment
securities - held to maturity
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2,000
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3,000
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|
Mortgage
backed securities - held to maturity
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2,061
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|
2,247
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|
Loans
receivable - net of allowance for loan losses of
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|
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|
|
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|
2008
$1,007; 2007 $972
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|
151,304
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|
|
147,744
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Foreclosed
real estate
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|
1,096
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|
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1,083
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Federal
Home Loan Bank of Atlanta stock, at cost
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|
1,863
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|
1,844
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Premises
and equipment, net
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5,070
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5,107
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Accrued
interest receivable
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|
574
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564
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Other
assets
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465
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|
|
436
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Total
assets
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$
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175,198
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$
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172,244
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
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Liabilities
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Deposits
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$
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117,703
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$
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114,098
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Checks
outstanding in excess of bank balance
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—
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1,077
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Borrowings
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34,000
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34,000
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Advance
payments by borrowers for taxes and insurance
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1,056
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339
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Other
liabilities
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|
644
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961
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|
|
|
|
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Total
liabilities
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153,403
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150,475
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Stockholders’
Equity
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Preferred
stock, no par value, 1,000,000 shares authorized, none issued and
outstanding
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—
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—
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|
Common
stock, par value $.01, 9,000,000 shares authorized, 2,975,625 shares
issued at March 31, 2008 and December 31, 2007 and 2,817,644 shares
outstanding at March 31, 2008 and December 31, 2007,
respectively
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|
30
|
|
|
30
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Additional
paid-in capital
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12,854
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12,828
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Retained
earnings (substantially restricted)
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11,538
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11,496
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Unearned
Employee Stock Ownership Plan shares
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|
|
(978
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)
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|
(992
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)
|
Treasury
Stock at cost, March 31, 2008 and December 31, 2007, 157,981 shares
|
|
|
(1,434
|
)
|
|
(1,434
|
)
|
Accumulated
other comprehensive loss
|
|
|
(215
|
)
|
|
(159
|
)
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Total
stockholders’ equity
|
|
|
21,795
|
|
|
21,769
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|
Total
liabilities and stockholders’ equity
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|
$
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175,198
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|
$
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172,244
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|
|
|
|
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|
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|
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|
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See
notes
to consolidated financial statements.
SFSB,
Inc.
CONSOLIDATED
STATEMENTS OF OPERATIONS
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Three
Months Ended
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March
31,
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|
2008
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2007
|
|
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|
(Dollars
in thousands, except for per share data)
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|
Interest
and fees on loans
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|
$
|
2,225
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|
$
|
2,042
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|
Interest
and dividends on investment securities
|
|
|
127
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|
|
146
|
|
Interest
on mortgage backed securities
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|
24
|
|
|
34
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|
Other
interest income
|
|
|
36
|
|
|
80
|
|
Total
interest income
|
|
|
2,412
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|
|
2,302
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|
|
|
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|
|
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Interest
on deposits
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1,176
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|
|
1,114
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|
Interest
on short-term borrowings
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|
67
|
|
|
149
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|
Interest
on long-term borrowings
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|
268
|
|
|
261
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|
Total
interest expense
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|
|
1,511
|
|
|
1,524
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|
|
|
|
|
|
|
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Net
interest income
|
|
|
901
|
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|
778
|
|
Provision
for loan losses
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|
|
36
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|
|
33
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|
Net
interest income after provision for loan
|
|
|
|
|
|
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|
losses
|
|
|
865
|
|
|
745
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|
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|
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|
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Other
Income
|
|
|
|
|
|
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|
Rental
income
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|
42
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|
39
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|
Other
income
|
|
|
41
|
|
|
20
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|
Gain
on sale of loans
|
|
|
—
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|
8
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|
Total
other income
|
|
|
83
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|
|
67
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|
|
|
|
|
|
|
|
|
Non-Interest
Expenses
|
|
|
|
|
|
|
|
Compensation
and other related expenses
|
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|
484
|
|
|
434
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|
Occupancy
expense
|
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|
97
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|
95
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|
Advertising
expense
|
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|
54
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|
44
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|
Service
bureau expense
|
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|
47
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|
|
43
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|
Furniture,
fixtures and equipment
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|
31
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|
34
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|
Telephone,
postage and delivery
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|
21
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|
|
19
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|
Other
expenses
|
|
|
148
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|
149
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Total
non-interest expenses
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|
882
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|
818
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|
|
|
|
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Income
(Loss) before income tax provision
|
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|
66
|
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|
(6
|
)
|
Income
tax provision
|
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|
24
|
|
|
4
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
42
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|
$
|
(10
|
)
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|
|
|
|
|
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|
Basic
Earnings per Share
|
|
$
|
0.02
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|
$
|
0.00
|
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|
|
|
|
|
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|
Diluted
Earnings Per Share
|
|
$
|
0.02
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
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|
See
notes
to consolidated financial statements.
SFSB,
Inc.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
42
|
|
$
|
(10
|
)
|
|
|
|
|
|
|
|
|
Net
unrealized gain (loss) on securities available for sale during the
period
(net of taxes of $(37) and $3)
|
|
|
(56
|
)
|
|
5
|
|
|
|
|
|
|
|
|
|
Total
Comprehensive Loss
|
|
$
|
(14
|
)
|
$
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
See
notes
to consolidated financial statements.
SFSB,
Inc.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Dollars
in thousands)
|
|
Cash
Flows From Operating Activities
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
42
|
|
$
|
(10
|
)
|
Adjustments
to Reconcile Net Income (Loss) to Net Cash from Operating
Activities:
|
|
|
|
|
|
|
|
Non-cash
compensation under stock based compensation plans and Employee Stock
Ownership Plan
|
|
|
41
|
|
|
44
|
|
Net
amortization of premiums and discounts of investment
securities
|
|
|
2
|
|
|
4
|
|
Amortization
of deferred loan fees
|
|
|
(34
|
)
|
|
(11
|
)
|
Provision
for loan losses
|
|
|
36
|
|
|
33
|
|
Gain
on sale of loans
|
|
|
—
|
|
|
(8
|
)
|
Loans
originated for sale
|
|
|
(430
|
)
|
|
(3,313
|
)
|
Proceeds
from loans sold
|
|
|
430
|
|
|
3,321
|
|
Provision
for depreciation
|
|
|
58
|
|
|
59
|
|
(Increase)
decrease in accrued interest receivable and other assets
|
|
|
(39
|
)
|
|
44
|
|
(Decrease)
increase in other liabilities
|
|
|
(317
|
)
|
|
31
|
|
Net
Cash (Used in) Provided by Operating Activities
|
|
|
(211
|
)
|
|
194
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
Purchase
of available for sale securities
|
|
|
(104
|
)
|
|
(109
|
)
|
Proceeds
from redemption of held to maturity securities
|
|
|
1,000
|
|
|
—
|
|
Net
(increase) decrease
in
loans
|
|
|
(3,403
|
)
|
|
1,250
|
|
Purchase
of loans
|
|
|
(134
|
)
|
|
—
|
|
Principal
collected on mortgage backed securities
|
|
|
184
|
|
|
211
|
|
Purchase
of Federal Home Loan Bank of Atlanta stock
|
|
|
(23
|
)
|
|
—
|
|
Redemption
of Federal Home Loan Bank of Atlanta stock
|
|
|
3
|
|
|
142
|
|
Purchases
of premises and equipment
|
|
|
(22
|
)
|
|
(62
|
)
|
Net
Cash (Used in) Provided by
Investing
Activities
|
|
|
(2,499
|
)
|
|
1,432
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
Net
increase in deposits
|
|
|
3,605
|
|
|
1,973
|
|
(Decrease)
increase in checks outstanding in excess of bank balance
|
|
|
(1,077
|
)
|
|
292
|
|
Proceeds
from long term borrowings
|
|
|
—
|
|
|
5,000
|
|
Repayment
of long term borrowings
|
|
|
—
|
|
|
(5,000
|
)
|
Net
change in short term borrowings
|
|
|
—
|
|
|
(3,500
|
)
|
Increase
in advance payments by borrowers for taxes and insurance
|
|
|
718
|
|
|
722
|
|
Net
Cash
Provided
by (Used in) Financing Activities
|
|
|
3,246
|
|
|
(513
|
)
|
Increase
in cash and cash equivalents
|
|
|
536
|
|
|
1,113
|
|
Cash
and cash equivalents at beginning of period
|
|
|
1,277
|
|
|
2,851
|
|
Cash
and cash equivalents at end of period
|
|
$
|
1,813
|
|
$
|
3,964
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flows Information
:
|
|
|
|
|
|
|
|
Income
taxes
|
|
$
|
133
|
|
$
|
—
|
|
Interest
expense
|
|
$
|
1,519
|
|
$
|
1,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes
to consolidated financial statements.
SFSB,
Inc.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 - Principles of Consolidation
The
consolidated financial statements include the accounts of SFSB, Inc. (“the
Company”), its wholly-owned subsidiaries, Slavie Federal Savings Bank (“the
Bank”) and the Bank’s wholly-owned subsidiary, Slavie Holdings, LLC
(“Holdings”). The accompanying consolidated financial statements include the
accounts and transactions of these companies on a consolidated basis since
inception. All intercompany accounts and transactions have been eliminated
in
the consolidated financial statements.
Slavie
Bancorp, MHC, a mutual holding company whose activity is not included in the
accompanying consolidated financial statements, owns 58.8% of the outstanding
common stock of the Company as of March 31, 2008.
Note
2 - Business
The
Company's primary business is the ownership and operation of the Bank. The
Bank’s primary business activity is the acceptance of deposits from the general
public and the use of the proceeds for investments and loan originations. The
Bank is subject to competition from other financial institutions. The Bank
is
subject to the regulations of certain federal agencies and undergoes periodic
examinations by those regulatory authorities.
Holdings,
formed on August 18, 1999 as a Maryland limited liability company, was created
to acquire and manage certain real property located at 1614 Churchville Road,
Bel Air, Maryland. This property includes the main office and corporate
headquarters of the Bank. In addition, the property houses mixed use office
space which is available for lease.
Note
3 - Basis of
Presentation
The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America
(GAAP) for interim financial information and with the instructions to SEC Form
10-Q. Accordingly, they do not include all the information and footnotes
required by GAAP for complete financial statements.
The
foregoing consolidated financial statements in the opinion of management include
all adjustments (consisting only of normal recurring adjustments) necessary
for
a fair presentation thereof. These consolidated financial statements should
be
read in conjunction with the consolidated financial statements and notes thereto
included in the Company’s Annual Report on Form 10-K for the year ended December
31, 2007. The results of operations for the three months ended March 31, 2008
are not necessarily indicative of the results that may be expected for the
full
year.
Note
4 - Earnings Per Share
Basic
earnings per share is computed by dividing net income (loss) by the weighted
average number of common shares outstanding for the appropriate period. Unearned
Employee Stock Ownership Plan (“ESOP”) shares are not included in outstanding
shares. Diluted earnings per share is computed by dividing net income (loss)
by
the weighted average shares outstanding as adjusted for the dilutive effect
of
outstanding stock options and unvested stock awards. Potential common shares
related to stock options and unvested stock awards are determined based on
the
“treasury stock” method. Information related to the calculation of earnings per
share is summarized for the three months ended March 31, 2008 and 2007 as
follows:
(In
thousands, except per share data)
|
|
|
|
|
|
March
31, 2008
|
|
|
|
Basic
|
|
Diluted
|
|
Net
income
|
|
$
|
42
|
|
$
|
42
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
2,716
|
|
|
2,716
|
|
|
|
|
|
|
|
|
|
Dilutive
securities:
|
|
|
|
|
|
|
|
Stock
options
|
|
|
—
|
|
|
—
|
|
Unvested
Stock Awards
|
|
|
—
|
|
|
—
|
|
Adjusted
weighted average shares
|
|
|
2,716
|
|
|
2,716
|
|
Per
share amount
|
|
$
|
0.02
|
|
$
|
0.02
|
|
(In
thousands, except per share data)
|
|
|
|
|
|
March
31, 2007
|
|
|
|
Basic
|
|
Diluted
|
|
Net
loss
|
|
$
|
(10
|
)
|
$
|
(10
|
)
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
2,793
|
|
|
2,793
|
|
|
|
|
|
|
|
|
|
Dilutive
securities:
|
|
|
|
|
|
|
|
Stock
options
|
|
|
—
|
|
|
—
|
|
Unvested
Stock Awards
|
|
|
—
|
|
|
—
|
|
Adjusted
weighted average shares
|
|
|
2,793
|
|
|
2,793
|
|
Per
share amount
|
|
$
|
0.00
|
|
$
|
0.00
|
|
Note
5 - Regulatory Capital Requirements
At
March
31, 2008, the Bank met each of the three minimum regulatory capital
requirements. The following table summarizes the Bank’s regulatory capital
position at March 31, 2008 and December 31, 2007.
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
|
|
|
|
|
|
|
|
|
|
To
Be Well
|
|
|
|
|
|
|
|
Minimum
|
|
Capitalized
Under
|
|
|
|
|
|
|
|
For
Capital
|
|
Prompt
Corrective
|
|
|
|
Actual
|
|
Adequacy
Purposes
|
|
Action
Provision
|
|
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
March
31, 2008
|
|
(Dollars
in thousands)
|
|
Tangible
(1)
|
|
$
|
17,020
|
|
|
9.68
|
%
|
$
|
2,637
|
|
|
1.50
|
%
|
|
N/A
|
|
|
N/A
|
|
Tier
I risk-based (2)
|
|
|
17,020
|
|
|
16.44
|
%
|
|
N/A
|
|
|
N/A
|
|
$
|
6,213
|
|
|
6.00
|
%
|
Core
(leverage) (1)
|
|
|
17,020
|
|
|
9.68
|
%
|
|
7,033
|
|
|
4.00
|
%
|
|
8,792
|
|
|
5.00
|
%
|
Total
risk-based (2)
|
|
|
17,927
|
|
|
17.31
|
%
|
|
8,284
|
|
|
8.00
|
%
|
|
10,355
|
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible
(1)
|
|
$
|
16,948
|
|
|
9.81
|
%
|
$
|
2,591
|
|
|
1.50
|
%
|
|
N/A
|
|
|
N/A
|
|
Tier
I risk-based (2)
|
|
|
16,948
|
|
|
16.42
|
%
|
|
N/A
|
|
|
N/A
|
|
$
|
6,194
|
|
|
6.00
|
%
|
Core
(leverage) (1)
|
|
|
16,948
|
|
|
9.81
|
%
|
|
6,909
|
|
|
4.00
|
%
|
|
8,637
|
|
|
5.00
|
%
|
Total
risk-based (2)
|
|
|
17,920
|
|
|
17.36
|
%
|
|
8,259
|
|
|
8.00
|
%
|
|
10,324
|
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
To
adjusted total assets.
|
(2)
|
To
risk-weighted assets.
|
Note
6 - Stock-Based Compensation
The
compensation cost charged against income for stock-based compensation plans,
excluding ESOP, was $30,000 for each of the three months ended March 31, 2008
and 2007. The total income tax benefit recognized was $8,000 for each of the
three months ended March 31, 2008 and 2007.
Note
7 - Fair Values for Financial Instruments
In
September 2006, the Financial Accounting Standards Board issued FASB Statement
No. 157, “Fair Value Measurements,” (SFAS 157) which defines fair value,
establishes a framework for measuring fair value under Generally Accepted
Accounting Principles, and expands disclosures about fair value measurements.
SFAS 157 applies to other accounting pronouncements that require or permit
fair
value measurements. The new guidance is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and for interim
periods within those fiscal years. Effective January 1, 2008, the Company
adopted SFAS 157. The primary effect of SFAS 157 on the Company was to expand
the required disclosures pertaining to the methods used to determine fair
values.
SFAS
157
establishes a fair value hierarchy that prioritizes the inputs to valuation
methods used to measure fair value. The hierarchy gives the highest priority
to
unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1 measurement) and the lowest priority to unobservable inputs (Level
3
measurements).
The
three
levels of the fair value hierarchy under SFAS 157 are as follows:
Level
1:
Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or liabilities.
Level
2:
Quoted prices in markets that are not active, or inputs that are observable
either directly or indirectly, for substantially the full term of the asset
or
liability.
Level
3:
Prices or valuation techniques that require inputs that are both significant
to
the fair value measurement and unobservable (i.e. supported with little or
no
market activity).
An
asset
or liability’s level within the fair value hierarchy is based on the lowest
level of input that is significant to the fair value measurement.
For
assets measured at fair value on a recurring basis, the fair value measurements
by level within the fair value hierarchy used at March 31, 2008 are as
follows:
|
|
March
31, 2008
|
|
(Level
1) Quoted Prices in Active Markets for Identical
Assets
|
|
(Level
2) Significant Other Observable Inputs
|
|
(Level
3) Significant Other Unobservable Inputs
|
|
|
|
(Dollars
in thousands)
|
|
Securities
available for sale
|
|
$
|
8,952
|
|
$
|
8,952
|
|
$
|
—
|
|
$
|
—
|
|
Foreclosed
Real Estate
|
|
|
1,096
|
|
|
—
|
|
|
—
|
|
|
1,096
|
|
Total
|
|
$
|
10,048
|
|
$
|
8,952
|
|
$
|
—
|
|
$
|
1,096
|
|
The
valuation techniques were used to measure fair value of assets in the table
above on a recurring basis as of March 31, 2008.
Available
for sale securities
- As of
March 31, 2008, the fair value on available for sale securities was based on
actual market pricing for the securities.
Foreclosed
Real Estate
- Fair
value of foreclosed real estate was based on an independent third party
appraisal of the property. This value was determined based on the sale price
of
similar development properties in the proximate vicinity. There has been no
significant activity during the first quarter of 2008.
Item
2.
Management's
Discussion and Analysis of Financial Condition and Results of Operations
Introduction
Some
of
the matters discussed below include forward-looking statements within the
meaning of the federal securities laws. Forward-looking statements often use
words such as “believe,” “expect,” “plan,” “may,” “will,” “should,” “project,”
“contemplate,” “anticipate,” “forecast,” “intend” or other words of similar
meaning. You can also identify them by the fact that they do not relate strictly
to historical or current facts. Our actual results and the actual outcome of
our
expectations and strategies could be materially different from those anticipated
or estimated for the reasons discussed below and the reasons under the heading
“Information Regarding Forward Looking Statements.”
Overview
Earnings
increased to $42,000 for the three months ended March 31, 2008 as compared
to a
net loss of $10,000 for the same period in 2007. This increase was primarily
due
to an increase in interest income as a result of an increase in higher yielding
commercial loan originations and an increase in fee income from commissions
earned through a financial services operation established in mid 2007. The
increase also resulted from a decrease in interest expense because the interest
rates we pay on deposit accounts have dropped as a result of recent decreases
in
the prime rate instituted by the Federal Reserve Board in response to the
unfavorable economy. These increases were partially offset by an increase in
non-interest expenses primarily due to an increase in compensation expenses
related to the hiring of two experienced commercial loan originators and a
certified financial planner.
Interest
income increased $110,000, or 4.78%, non-interest income increased $16,000,
or
23.88%, and interest expense decreased $13,000, or 0.85%. These improvements
were offset by a $64,000, or 7.82%, increase in non- interest expenses.
Assets
increased during the first three months of 2008 primarily because we increased
our loan portfolio by $3,560,000, or 2.41%, to $151,304,000 at March 31, 2008
from $147,744,000 at December 31, 2007. The increase is also the result of
increases in cash and cash equivalents of $536,000, or 41.97%, to $1,813,000
at
March 31, 2008 from $1,277,000 at December 31, 2007, investment securities
available for sale of $10,000, or 0.11%, to $8,952,000 at March 31, 2008 from
$8,942,000 at December 31, 2007, Federal Home Loan Bank of Atlanta stock of
$19,000, or 1.03%, to $1,863,000 at March 31, 2008 from $1,844,000 at December
31, 2007 and other assets of $29,000, or 6.65%, to $465,000 at March 31, 2008
from $436,000 at December 31, 2007. These increases were partially offset by
decreases in investment securities held to maturity of $1,000,000, or 33.33%,
to
$2,000,000 at March 31, 2008 from $3,000,000 at December 31, 2007 and mortgage
backed securities held to maturity of $186,000, or 8.27%, to $2,061,000 at
March
31, 2008 from $2,247,000 at December 31, 2007.
As
further discussed in the Asset Quality section of this report, we hold a 19%
participation (approximately $1,096,000 in unpaid principal balance) in an
acquisition and development loan. This loan is a foreclosed real estate
participation loan. The foreclosed property has been contracted subject to
a feasibility study period currently scheduled to expire on June 15, 2008.
With
a pending settlement expected before the end of the third quarter of 2008,
we
anticipate that we will recover the carrying amount of the real estate, although
there can be no assurance that this will be the case. Additionally, a $100,000
business line of credit loan, restructured in the third quarter of 2007, is
classified as impaired, because we believe that there is a substantial
likelihood that we will not collect the total amount of the outstanding
principal balance on this loan. A specific reserve of $100,000, or 100%, of
the
remaining loan balance continues to remain in our allowance for loan losses.
To
remain
competitive and offer even more choices to our customers, we have implemented
a
health
savings account to assist customers in making medical expenses more affordable
and a Coverdell Education Savings Account to assist our customers with planning
for educational expenses. We also offer an eight month certificate of deposit
and a carefree premium checking account with what we believe are attractive
interest rates. In addition, we offer a merchant bank card service through
a
third party vendor, which offers our commercial checking account customers
the
convenience of processing their debit and credit transactions with ease. We
also
offer a comprehensive and full service approach to managing finances and
investing in the future. The creation of Slavie Financial Services and the
addition of a certified financial planner in mid-year 2007 enabled us to bring
investment guidance and financial planning expertise to our customers, while
expanding our ability to provide personalized services that focus on the
successful financial well being of our customers.
During
2008, our product development and review committee expects to develop and
implement remote deposit for commercial accountholders, a Slavie credit card,
foreign currency services for our customers traveling abroad and check imaging
services for our checking accountholders to provide an even wider variety of
products and services to our customers.
We
continue to implement strategies formed during strategic planning meetings
of
the Board of Directors and the Company’s officers during 2006. In our continued
efforts to boost the yield of our interest earning assets during a period of
net
interest margin compression, management, along with our two experienced
commercial loan originators, continues to increase and diversify the Bank’s mix
of commercial loans to residential loans in its portfolio. In addition, we
intensified our marketing strategy by offering incentives to attract new
checking accounts in an effort to attain our goal of decreasing the cost of
our
interest bearing liabilities. Our directors, officers, management and staff
remain committed in a unified effort to improve the Bank’s profitability.
Key
measurements and events for the three-month period ended March 31, 2008 include
the following:
|
·
|
Total
assets at March 31, 2008 increased by 1.72% to $175,198,000 as compared
to
$172,244,000 as of December 31, 2007.
|
|
·
|
Net
loans outstanding increased by 2.41% from $147,744,000 as of December
31,
2007 to $151,304,000 as of March 31,
2008.
|
|
·
|
Nonperforming
loans and foreclosed real estate totaled $1,935,000 at March 31,
2008 as
compared with a total of $1,551,000 at December 31, 2007. We believe
an
appropriate allowance for loan losses continues to be
maintained.
|
|
·
|
Deposits
at March 31, 2008 were $117,703,000, an increase of $3,605,000 or
3.16%
from $114,098,000 at December 31, 2007.
|
|
·
|
We
realized net income of $42,000 for the three-month period ended March
31,
2008. This compares to a net loss of $10,000 for the three-month
period
ended March 31, 2007.
|
|
·
|
Net
interest income, our main source of income, was $865,000 during the
three-month period ended March 31, 2008 compared to $745,000 for
the same
period in 2007. This represents an increase of 16.11% for the three
months
ended March 31, 2008 as compared to the same period in 2007.
|
|
·
|
We
had three overdraft protection loan charge-offs totaling $1,000 during
the
three-month period ended March 31, 2008. We had a commercial non-real
estate loan charge-off of $120,000 during the same period in 2007.
|
|
·
|
Non-interest
income increased by $16,000, or 23.88%, for the three-month period
ended
March 31, 2008, as compared to the three-month period ended March
31,
2007, from $67,000 to $83,000.
|
|
·
|
Non-interest
expense increased by $64,000 or 7.82% for the three-month period
ended
March 31, 2008, as compared to the same period in 2007, from $818,000
to
$882,000.
|
A
detailed discussion of the factors leading to these changes can be found in
the
discussion below.
Critical
Accounting Policies
The
Company’s consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America or
GAAP, and follow general practices within the industry in which we operate.
Application of these principles requires management to make estimates,
assumptions, and judgments that affect the amounts reported in the financial
statements and accompanying notes. These estimates, assumptions, and judgments
are based on information available as
of
the
date of the financial statements; accordingly, as this information changes,
the
financial statements could reflect different estimates, assumptions, and
judgments. Certain policies inherently have a greater reliance on the use of
estimates, assumptions, and judgments and as such have a greater possibility
of
producing results that could be materially different than originally reported.
Estimates, assumptions, and judgments are necessary when assets and liabilities
are required to be recorded at fair value, when a decline in the value of an
asset not carried on the financial statements at fair value warrants an
impairment write-down or valuation allowance to be established, or when an
asset
or liability needs to be recorded contingent upon a future event. Carrying
assets and liabilities at fair value inherently results in more financial
statement volatility. The fair values and the information used to record
valuation adjustments for certain assets and liabilities are based either on
quoted market prices or are provided by other third-party sources, when
available.
Based
on
the valuation techniques used and the sensitivity of financial statement amounts
to the methods, assumptions, and estimates underlying those amounts, management
has identified the determination of the allowance for loan losses as the
accounting area that requires the most subjective or complex judgments, and
as
such could be most subject to revision as new information becomes available.
Management’s
judgment is inherent in the determination of the provision and allowance for
loan losses, including in connection with the valuation of collateral and the
financial condition of the borrower. The establishment of allowance factors
is a
continuing exercise and allowance factors may change over time, resulting in
an
increase or decrease in the amount of the provision or allowance based upon
the
same volume and classification of loans. Changes in allowance factors or in
management’s interpretation of those factors will have a direct impact on the
amount of the provision, and a corresponding effect on income and assets. Also,
errors in management’s perception and assessment of the allowance factors could
result in the allowance not being adequate to cover losses in the portfolio,
and
may result in additional provisions or charge-offs, which would adversely affect
income and capital. For additional information regarding the allowance for
loan
losses, see “Results of Operations for the Three Months Ended March 31, 2008 and
2007 - Provision for Loan Losses and Analysis of Allowance for Loan
Losses.”
Results
of Operations for the Three Months Ended March 31, 2008 and
2007
General
.
Net
income increased $52,000 to a net income of $42,000 for the three months ended
March 31, 2008 compared to a net loss of $10,000 for the same period in the
prior year. The increase was due primarily to a $110,000 increase in interest
income, offset by a $64,000 increase in non-interest expenses.
Average
Balances, Net Interest Income, Yields Earned and Rates Paid.
The
following table presents for the periods indicated the total dollar amount
of
interest income from average interest-earning assets and the resultant yields,
as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made
because no income was exempt from federal income taxes. All average balances
are
monthly average balances. We do not believe that the monthly averages differ
materially from what the daily averages would have been. Non-accruing loans
have
been included in the table as loans carrying a zero yield. The amortization
of
loan fees is included in computing interest income, however, such fees are
not
material.
|
|
Three
Months Ended
March
31, 2008
|
|
Three
Months Ended
March
31, 2007
|
|
|
|
Average
Outstanding
Balance
|
|
Interest
Earned/
Paid
|
|
Yield/
Rate
|
|
Average
Outstanding
Balance
|
|
Interest
Earned/
Paid
|
|
Yield/
Rate
|
|
|
|
(Dollars
in thousands)
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
receivable(1)
|
|
$
|
149,821
|
|
$
|
2,225
|
|
|
5.94
|
%
|
$
|
146,033
|
|
$
|
2,042
|
|
|
5.59
|
%
|
Mortgage-backed
securities
|
|
|
2,131
|
|
|
24
|
|
|
4.50
|
|
|
3,050
|
|
|
34
|
|
|
4.46
|
|
Investment
securities (available for sale)
|
|
|
8,969
|
|
|
104
|
|
|
4.64
|
|
|
8,607
|
|
|
109
|
|
|
5.07
|
|
Investment
securities (held to maturity)
|
|
|
2,333
|
|
|
23
|
|
|
3.94
|
|
|
4,000
|
|
|
37
|
|
|
3.70
|
|
Other
interest-earning assets
|
|
|
2,784
|
|
|
36
|
|
|
5.17
|
|
|
5,290
|
|
|
80
|
|
|
6.05
|
|
Total
interest-earning assets
|
|
|
166,038
|
|
|
2,412
|
|
|
5.81
|
%
|
|
166,980
|
|
|
2,302
|
|
|
5.51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
earning assets
|
|
|
7,845
|
|
|
|
|
|
|
|
|
7,082
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
173,883
|
|
|
|
|
|
|
|
$
|
174,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
|
$
|
14,291
|
|
|
36
|
|
|
1.01
|
%
|
$
|
17,350
|
|
|
47
|
|
|
1.08
|
%
|
Demand
and NOW accounts
|
|
|
8,730
|
|
|
58
|
|
|
2.66
|
|
|
7,213
|
|
|
42
|
|
|
2.33
|
|
Certificates
of deposit
|
|
|
91,520
|
|
|
1,082
|
|
|
4.73
|
|
|
86,783
|
|
|
1,025
|
|
|
4.72
|
|
Escrows
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
—
|
|
|
—
|
|
Borrowings
|
|
|
34,167
|
|
|
335
|
|
|
3.92
|
|
|
36,666
|
|
|
410
|
|
|
4.47
|
|
Total
interest-bearing liabilities
|
|
|
148,709
|
|
|
1,511
|
|
|
4.06
|
%
|
|
148,017
|
|
|
1,524
|
|
|
4.12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
bearing liabilities
|
|
|
3,377
|
|
|
|
|
|
|
|
|
3,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
152,086
|
|
|
|
|
|
|
|
|
151,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
equity(2)
|
|
|
21,797
|
|
|
|
|
|
|
|
|
22,409
|
|
|
|
|
|
|
|
Total
liabilities and equity
|
|
$
|
173,883
|
|
|
|
|
|
|
|
$
|
174,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
$
|
901
|
|
|
|
|
|
|
|
$
|
778
|
|
|
|
|
Interest
rate spread(3)
|
|
|
|
|
|
|
|
|
1.75
|
%
|
|
|
|
|
|
|
|
1.39
|
%
|
Net
interest-earning assets
|
|
$
|
17,329
|
|
|
|
|
|
|
|
$
|
18,963
|
|
|
|
|
|
|
|
Net
interest margin(4)
|
|
|
|
|
|
|
|
|
2.17
|
%
|
|
|
|
|
|
|
|
1.86
|
%
|
Ratio
of interest earning assets to interest bearing liabilities
|
|
|
|
|
|
1.11x
|
|
|
|
|
|
|
|
|
1.12x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Loans
receivable are net of the allowance for loan
losses.
|
(2)
|
Total
equity includes retained earnings and accumulated other comprehensive
income (loss).
|
(3)
|
Net
interest rate spread represents the difference between the average
yield
on interest earning assets and the average cost of interest bearing
liabilities.
|
(4)
|
Net
interest margin represents net interest income as a percentage of
average
interest earning assets.
|
Net
Interest Income
.
Net
interest income increased $123,000, or 15.81%, to $901,000 for the three months
ended March 31, 2008 from $778,000 for the three months ended March 31, 2007.
The increase was a result of a 30 basis point increase in the yield on average
interest earning assets, from 5.51% to 5.81% and a slight decrease of 6 basis
points in the cost of average interest bearing liabilities, from 4.12% to 4.06%.
These were offset by a $942,000, or 0.56%, decrease in average interest earning
assets to $166,038,000 from $166,980,000 and a $692,000, or 0.47%, increase
in
average interest bearing liabilities to $148,709,000 from $148,017,000.
Our
interest rate spread increased to 1.75% for the quarter ended March 31, 2008
from 1.39% for the quarter ended March 31, 2007, reflecting a more rapid
increase in the yield of our interest earning assets as compared to the decrease
in the cost of our average interest bearing liabilities. Our net interest margin
increased to 2.17% from 1.86%, because of a higher yield on average interest
earning assets and a decrease in the cost of the average interest bearing
liabilities. The ratio of interest earning assets to
interest
bearing liabilities remained relatively steady at 1.11 times for the three
months ended March 31, 2008 and 1.12 times for the same period in
2007.
Interest
Income
.
Interest
income increased by $110,000, or 4.78%, to $2,412,000 for the three months
ended
March 31, 2008, from $2,302,000 for the three months ended March 31, 2007.
The
increase in interest income resulted from an increase of $183,000, or 8.96%,
in
interest and fee income from loans, partially offset by decreases of $19,000,
or
13.01%, in interest income from investment securities, $44,000, or 55.00%,
in
interest income from other interest-earning assets (primarily consisting of
interest earned on federal funds sold and Federal Home Loan Bank stock) and
$10,000, or 29.41%, in interest income from mortgage backed
securities.
The
increase in interest income reflected a 30 basis point increase in the yield
on
average interest earning assets to 5.81% for the three months ended March 31,
2008 from 5.51% for the three months ended March 31, 2007. This is due to a
focus on increasing our commercial loan origination volume and the higher
interest rates those loans yield.
The
increase in interest income and fees on loans was due to a $3,788,000, or 2.59%
increase in average net loans receivable, from $146,033,000 to $149,821,000,
and
a 35 basis point increase in the average yield on net loans receivable. The
decrease in interest income from investment securities was primarily reflective
of a 14 basis point decrease in the average yield and a $1,305,000 or 10.35%
decrease in the average balance of the investment securities. The decrease
in
interest income from other interest-earning assets (primarily federal funds
sold) was due to an $2,506,000, or 47.37%, decrease in average other
interest-earning assets, from $5,290,000 during the quarter ended March 31,
2007
to $2,784,000 during the quarter ended March 31, 2008 (as a result of using
federal funds to fund commercial loan settlements) and an 88 basis point
decrease in the average yield on these assets (as a result of decreases in
short
term market interest rates).
The
decrease in interest income from mortgage-backed securities was primarily the
result of a $919,000 or 30.13% decline in the average balance of mortgage-backed
securities, which was only slightly offset by a 4 basis point increase in the
yield on these securities.
Interest
Expense
.
Interest
expense, which consists of interest paid on deposits and borrowings, decreased
by $13,000, or 0.85%, to $1,511,000 for the three months ended March 31, 2008
from $1,524,000 for the three months ended March 31, 2007. The decrease in
interest expense resulted from a decrease in interest paid on short-term
borrowings of $82,000, or 55.03%, partially offset by increases of $62,000,
or
5.57%, in interest paid on deposits and $7,000, or 2,68%, in interest paid
on
long-term borrowings. The decrease in interest expense reflects a 6 basis point
decrease in the average cost of interest-bearing liabilities, to 4.06% for
the
three months ended March 31, 2008 from 4.12% for the three months ended March
31, 2007. The increase in interest paid on deposits is due to an increase in
the
average balance of interest bearing deposits to $114,541,000 from $111,346,000
and an increase in the average cost of deposits by 11 basis points as a result
of a volatile interest rate market in which customers are moving their funds
into short term investments with a higher rate of return. The decrease in
interest paid on borrowings is a result of a decrease in the average balance
of
borrowings to $34,167,000 from $36,666,000 and the average cost of borrowings
by
55 basis points as a result of borrowing at lower interest rates in connection
with short-term borrowings which are renewed at current interest rates, which
were lower during the 2008 period.
Provision
for Loan Losses and Analysis of Allowance for Loan Losses.
We
establish provisions for loan losses, which are charged to operations, at a
level estimated as necessary to absorb known and inherent losses that are both
probable and reasonably estimable at the date of the financial statements.
In
evaluating the level of the allowance for loan losses, management considers,
among other things, historical loss experience, the types of loans and the
amount of loans in the loan portfolio, adverse
situations
that may affect the borrower’s ability to repay, estimated value of any
underlying collateral, and prevailing economic conditions (particularly as
such
conditions relate to our market area). We charge losses on loans against the
allowance when we believe that collection of loan principal is unlikely.
Recoveries on loans previously charged off are added back to the allowance.
Based
on
our evaluation of these factors, and as discussed further below, management
made
a provision of $36,000 and $33,000 for the three months ended March 31, 2008
and
March 31, 2007, respectively. There were three overdraft protection loan
charge-offs of $1,000 during the three-month period ended March 31, 2008. There
was one commercial non-real estate loan charge-off of $120,000 during the
three-month period ended March 31, 2007
which
is
discussed below under “General Valuation Allowance on the Remainder of the Loan
Portfolio.” We used the same methodology and generally similar assumptions in
computing the allowance for these periods.
We
have
developed a methodology for assessing the adequacy of the allowance for loan
losses. Our methodology consists of three key elements: (1) specific allowances
for identified problem loans, primarily collateral-dependent; (2) a general
valuation allowance on certain identified problem loans; and (3) a general
valuation allowance on the remainder of the loan portfolio.
Specific
Allowance on Identified Problem Loans.
The loan
portfolio is segregated first between loans that are on our “watch list” and
loans that are not. Our watch list includes:
|
·
|
loans
90 or more days delinquent;
|
|
·
|
loans
with anticipated losses;
|
|
·
|
loans
referred to attorneys for collection or in the process of
foreclosure;
|
|
·
|
loans
classified as substandard, doubtful or loss by either our internal
classification system or by regulators during the course of their
examination of us; and
|
|
·
|
troubled
debt restructurings and other non-performing
loans.
|
Two
of
our officers review each loan on the watch list and establish an individual
allowance allocation on certain loans based on such factors as: (1) the strength
of the customer’s personal or business cash flow; (2) the availability of other
sources of repayment; (3) the amount due or past due; (4) the type and value
of
collateral; (5) the strength of our collateral position; (6) the estimated
cost
to sell the collateral; and (7) the borrowers’ efforts to cure the
delinquency.
We
review
and establish, if necessary, an allowance for impaired loans for the amounts
by
which the discounted cash flows (or collateral value or observable market price)
are lower than the carrying value of the loan. Under current accounting
guidelines, a loan is defined as impaired when, based on current information
and
events, it is probable that a creditor will be unable to collect all amounts
when due under the contractual terms of the loan agreement.
General
Valuation Allowance on Certain Identified Problem Loans.
We
also
establish a general allowance for watch list loans that do not meet the
definition of impaired and do not have an individual allowance. We segregate
these loans by loan category and assign allowance percentages to each category
based on inherent losses associated with each type of lending and consideration
that these loans, in the aggregate, represent an above-average credit risk
and
that more of these loans will prove to be uncollectible compared to loans in
the
general portfolio.
General
Valuation Allowance on the Remainder of the Loan Portfolio.
We
establish another general allowance for loans that are not on the watch list
to
recognize the inherent losses associated with lending activities, but which,
unlike specific allowances and the general valuation allowance on certain
identified problem loans, has not been allocated to particular problem assets.
This general valuation allowance is determined by segregating the loans by
loan
category and assigning allowance percentages based on our historical loss
experience and delinquency trends. The allowance may be adjusted for significant
factors that, in management’s judgment, affect the collectibility of the
portfolio as of the evaluation date. These significant factors may include
changes in lending policies and procedures, changes in existing general economic
and business conditions affecting our primary lending areas, credit quality
trends, collateral value, loan volumes and concentrations, seasoning of the
loan
portfolio, specific industry conditions within portfolio segments, recent loss
experience in a particular segment of the portfolio, duration of the current
business cycle and bank regulatory examination results. The applied loss factors
are reevaluated annually to ensure their relevance in the current
environment.
Although
we believe that we use the best information available to establish the allowance
for loan losses, the evaluation is inherently subjective as it requires
estimates that are susceptible to significant revisions as more information
becomes available or as future events change. If circumstances differ
substantially from the assumptions used in making our determinations, future
adjustments to the allowance for loan losses may be necessary and our results
of
operations could be adversely affected. In addition, the Office of Thrift
Supervision, as an integral part of its examination process, periodically
reviews our allowance for loan losses. The Office of Thrift Supervision may
require us to increase the allowance for loan losses based on its judgments
about information available to it at the time of its examination, which would
adversely affect our results of operations.
The
allowance for loan losses totaled $1,007,000, or 0.66%, of gross loans
outstanding of $152,754,000 at March 31, 2008, compared to an allowance for
loan
losses of $972,000, or 0.65%, of gross loans outstanding of $150,501,000 at
December 31, 2007. The increase to the loan loss reserve is due to the increased
commercial loan balances, which historically create a mix of riskier loan
products since commercial loans are considered to be a higher risk than
residential mortgage loans. As of March 31, 2008, we have specific reserves
of
$100,000 within the allowance for loan losses because we believe there is a
substantial likelihood that we will not collect the total amount of the
outstanding principal balance on a commercial non-real estate loan that is
classified as impaired. The corporate commercial loan borrower filed Chapter
7
corporate bankruptcy in the third quarter of 2006 and filed Chapter 7 personal
bankruptcy in the second quarter of 2007. We restructured the remaining debt
to
facilitate repayment of the loan in the third quarter of 2007 and the borrower
has been making payments in accordance with the terms of the restructured loan.
The
following table summarizes the activity in the provision for loan losses for
the
three months ended March 31, 2008 and 2007:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
972
|
|
$
|
850
|
|
|
|
|
|
|
|
|
|
Charge-offs
(1)
|
|
|
(1
|
)
|
|
(120
|
)
|
Recoveries
|
|
|
—
|
|
|
—
|
|
Net
charge-offs
|
|
|
(1
|
)
|
|
(120
|
)
|
Provision
for loan losses
|
|
|
36
|
|
|
33
|
|
Ending
balance
|
|
$
|
1,007
|
|
$
|
763
|
|
|
|
|
|
|
|
|
|
Ratio
of net charge-offs during the period to average loans outstanding,
net,
during the period
|
|
|
0.00
|
%
|
|
0.08
|
%
|
Ratio
of allowance for loan losses to total loans outstanding
|
|
|
0.66
|
%
|
|
0.52
|
%
|
Allowance
for loan losses as a percent of total non-performing loans
|
|
|
120.02
|
%
|
|
59.73
|
%
|
|
|
|
|
|
|
|
|
(1)
|
Charge
offs consisted of the principal loss of three overdraft protection
lines
of credit totaling $1,000 in 2008 and a commercial non-real estate
loan of
$120,000 in 2007.
|
Other
Income
.
Historically,
our non-interest income has been relatively modest and one of our strategic
initiatives is to increase our non-interest income. Non-interest income
increased $16,000, or 23.88%, to $83,000 for the three months ended March 31,
2008, as compared to $67,000 for the three months ended March 31, 2007. The
primary reason for the increase in non-interest income is a $21,000, or 105.00%,
increase in other income (primarily consisting of fees earned from the sale
of
non-insured investment products, processing fees and late charges on loan
products and income from checking accounts and ATM usage) to $41,000 for the
three months ended March 31, 2008, as compared to $20,000 for the three months
ended March 31, 2007. Rental income from our headquarters building increased
$3,000, or 7.69%, to $42,000 for the three months ended March 31, 2008, as
compared to $39,000 for the three months ended March 31, 2007 as the result
of
an increase in leasing rates to certain non-affiliated tenants since March
2007.
While one tenant has vacated a portion of our leaseable space and another tenant
is expected to vacate in the second quarter of 2008, the tenants continue to
pay
the rent due pursuant to the agreed upon rent schedule while we seek to lease
their respective spaces. As of March 31, 2008, we leased 100% of the total
leaseable space in our headquarters building. We expect this figure to remain
constant for the second quarter of 2008 as we do not anticipate any vacant
leaseable space in our headquarters building, other than due to the tenants
mentioned above.
Non-interest
Expense
.
Non-interest
expense increased $64,000, or 7.82%, to $882,000 for the three months ended
March 31, 2008 as compared to $818,000 for the three months ended March 31,
2007. The increase was due primarily to an increase of $50,000, or 11.52%,
in
compensation and related expenses, $10,000, or 22.73%, in advertising expenses
and $4,000, or 9.30%, in service bureau expenses, partially offset by a decrease
of $3,000, or 8.82%, in furniture, fixtures and equipment expenses. The increase
in compensation and related expenses is the result of hiring two experienced
commercial loan originators, one in February of 2007 and one in November 2007
and a certified financial planner in June 2007.
Income
Tax Expense
.
The
provision for income taxes increased to $24,000 for the three months ended
March
31, 2008 from $4,000 for the three months ended March 31, 2007, representing
a
$20,000, or 500.00%, increase. The increase in the provision for income taxes
was primarily due to our income before taxes of $66,000 for the three months
ended March 31, 2008, as compared to our loss of $6,000 for the three months
ended March 31, 2007. The effective tax rate was 36.36% for the three months
ended March 31, 2008. Although the Company recorded a pre-tax loss for the
three
months ended March 31, 2007, a tax expense of $4,000 was recorded due to
non-deductible stock based compensation.
Analysis
of Financial Condition
Assets.
General
.
Our
total
assets increased by $2,954,000 or 1.72%, to $175,198,000 at March 31, 2008,
from
$172,244,000 at December 31, 2007. The increase in total assets resulted
primarily from a $3,560,000, or 2.41% increase in net loans receivable, from
$147,744,000 at December 31, 2007 to $151,304,000 at March 31, 2008 and a
$536,000, or 41.97%, increase in cash and cash equivalents, from $1,277,000
at
December 31, 2007 to $1,813,000 at March 31, 2008. These increases were offset
by a $1,000,000 decrease in investment securities - held to maturity, from
$3,000,000 at December 31, 2007 to $2,000,000 at March 31, 2008 and a $186,000,
or 8.28%, decrease in mortgage backed securities-held to maturity, from
$2,247,000 at December 31, 2007 to $2,061,000 at March 31, 2008.
Investment
Securities
.
The
investment portfolio at March 31, 2008 amounted to $13,013,000, a decrease
of
$1,176,000, or 8.29%, from $14,189,000 at December 31, 2007. Investment
securities - available for sale, increased $10,000, or 0.11%, to $8,952,000
at
March 31, 2008 from $8,942,000 at December 31, 2007, as a result of dividends
credited to the account. Investment securities - held to maturity, decreased
$1,000,000, or 33.33%, to $2,000,000 at March 31, 2008 from $3,000,000 at
December 31, 2007, as a result of a principal repayment on a matured investment.
Mortgage backed securities - held to maturity, decreased $186,000, or 8.28%,
to
$2,061,000 at March 31, 2008 from $2,247,000 at December 31, 2007, as a result
of principal repayments. As we are not continuing to purchase mortgage-backed
securities, we expect continued decreases in this asset both in amount and
as a
percentage of our assets
.
The
carrying value of available for sale securities includes a net unrealized loss
of $351,000 at March 31, 2008 (reflected as accumulated other comprehensive
loss
of $215,000 in equity after deferred taxes) as compared to a net unrealized
loss
of $258,000 ($158,000 net of taxes) as of December 31, 2007. In general, the
increase in unrealized loss was a result of instability in the mortgage backed
securities market.
Loan
Portfolio
.
Loans
receivable, net, increased $3,560,000, or 2.41%, to $151,304,000 at March 31,
2008 from $147,744,000 at December 31, 2007. The commercial loan portfolio
increased $1,742,000, or 10.98%, to
$17,608,000
at
March
31, 2008 from $15,866,000 at December 31, 2007. One-to-four family residential
loans decreased $133,000, or 0.12% to $112,105,000 at March 31, 2008 from
$112,238,000 at December 31, 2007. Our loan customers are generally located
in
the Baltimore Metropolitan area and its surrounding counties in Maryland.
Asset
Quality
.
Loans
are
reviewed on a regular basis and are generally placed on non-accrual status
when
they become more than 90 days delinquent. When we classify a loan as
non-accrual, we no longer accrue interest on such loan and reverse any interest
previously accrued but not collected. Typically, payments received on a
non-accrual loan are applied to the outstanding principal and interest as
determined at the time of collection of the loan. We return a non-accrual loan
to accrual status when factors indicating doubtful collection no longer exist
and the loan has been brought current. We consider repossessed assets and loans
that are 90 days or more past due to be non-performing assets.
Real
estate and other assets that we acquire as a result of foreclosure or by
deed-in-lieu of foreclosure or repossession on collateral-dependent loans are
classified as foreclosed real estate or other repossessed assets until sold.
Such assets are recorded at fair value less estimated selling costs at
foreclosure or other repossession and updated quarterly at the lower of cost
or
estimated fair value less estimated selling costs. Any portion of the
outstanding loan balance in excess of fair value at the time of foreclosure
is
charged off against the allowance for loan losses. If, upon ultimate disposition
of the property, net sales proceeds exceed the net carrying value of the
property, a gain on sale of foreclosed real estate or other assets is recorded.
We have one foreclosed real estate participation loan totaling $1,096,000 at
March 31, 2008. This asset is an acquisition and development real estate
participation that became delinquent in the fourth quarter of 2004 and was
placed on non-accrual status in the third quarter of 2005. Both the principal
of
the borrower and the entity that owns the collateral property filed for
bankruptcy in the fourth quarter of 2006. An automatic stay that was imposed
in
connection with the bankruptcy filings and had prevented the sale of the
property was lifted in the second quarter of 2007 and the property was sold
at
auction to the lead participating bank, requiring us to reclassify the
participation as foreclosed real estate in the same quarter. Subsequently,
a
real estate developer made an offer to purchase the foreclosed property and
the
lead participating bank accepted a letter of intent and executed a contract
with
a feasibility study period, currently scheduled to expire on June 15, 2008.
With
a pending settlement expected before the end of the third quarter of 2008,
we
expect to recover the carrying amount of the real estate, although there can
be
no assurance that this will be the case.
We
had
foreclosed real estate of $1,096,000 at March 31, 2008 and $1,083,000 at
December 31, 2007.
Non-accrual
loans totaled $839,000, or 0.55%, $468,000, or 0.32% and $1,279,000, or 0.88%
of
net loans receivable at March 31, 2008, December 31, 2007 and March 31, 2007,
respectively. Of the non-accrual loans at March 31, 2008, $100,000 consisted
of
a commercial non-real estate loan and $739,000 consisted of five one-
to-four-family residential mortgage loans. The decrease in the amount of
non-accrual loans between the first quarter of 2008 and 2007 is due to the
reclassification of the participation loan as foreclosed real estate during
the
second quarter of 2007, as discussed above.
Under
current accounting guidelines, a loan is defined as impaired when, based on
current information and events, it is probable that a creditor will be unable
to
collect all amounts when due under the contractual terms of the loan
agreement. We consider one- to four-family mortgage loans and consumer
installment loans to be homogeneous and, therefore, do not separately evaluate
them for impairment. All other loans are evaluated for impairment on an
individual basis. We generally classify non-accrual loans as
impaired.
As
of
March 31, 2008, we have classified a commercial non-real estate loan as impaired
as was discussed in the “Provision for Loan Losses and Analysis of Allowance for
Loan Losses” section of this report. In anticipation of a minimal recovery of
principal on this loan, we charged a portion of the loan balance against our
allowance for loan losses and we have reserved $100,000, or 100%, of the
remaining balance of the loan to our allowance for loan losses in 2007. The
remaining debt was restructured at that time.
Other
than as disclosed in the paragraphs above, there are no other loans at March
31,
2008 about which management has serious doubts concerning the ability of the
borrowers to comply with the present loan repayment terms.
Liabilities.
General
.
Total
liabilities increased by $2,928,000, or 1.95%, to $153,403,000 at March 31,
2008, from $150,475,000 at December 31, 2007. The increase in total liabilities
resulted from increases of $3,605,000, or 3.16% in deposits and $717,000, or
211.50%, in advance payments by borrowers for taxes and insurance, partially
offset by decreases of $317,000, or 32.99%, in other liabilities and $1,077,000,
or 100.00%, in checks outstanding in excess of bank balance. Advance payments
by
borrowers for taxes and insurance increased because of the increased property
taxes of the loan portfolio. The balance in checks outstanding in excess of
bank
balance at the end of a period is dependent on the number and amounts of checks
issued on the account at our correspondent’s bank and when such checks are
presented for payment. Any excess funds are automatically transferred into
an
interest-earning federal funds account. Therefore, changes in checks outstanding
in excess of bank balance as reflected on the balance sheet, generally, do
not
reflect any underlying changes in the Company’s financial condition. The other
liabilities consist primarily of accrued federal and state income taxes and
accrued interest on Federal Home Loan Bank borrowings.
Deposits
.
Deposits
increased $3,605,000, or 3.16%, to $117,703,000 at March 31, 2008 from
$114,098,000 at December 31, 2007. Certificates of deposits increased $2,773,000
to $92,448,000 at March 31, 2008 from $89,675,000 at December 31, 2007, and
NOW
and money market demand deposit accounts increased by $1,170,000 to $17,875,000
at March 31, 2008 from $16,705,000 at December 31, 2007. Savings deposits
decreased by $338,000 to $7,380,000 at March 31, 2008 from $7,718,000 at
December 31, 2007. We believe that, as deposit rates fall and the stock market
remains volatile, our customers are moving funds into shorter term investments
with higher yields or keeping their funds liquid in anticipation of an economic
recovery, thus accounting for the increase in certificate of deposit and core
deposit accounts and the decline in lower rate paying savings deposit accounts.
Borrowings
.
At
March
31, 2008, we were permitted to borrow up to $52,559,000 from the Federal Home
Loan Bank of Atlanta. We had $34,000,000 and $34,000,000 of Federal Home Loan
Bank advances outstanding as of March 31, 2008 and December 31, 2007,
respectively, and we averaged $34,167,000 and $33,917,000 of Federal Home Loan
Bank advances during the three months ended March 31, 2008 and the year ended
December 31, 2007, respectively. The borrowings remained steady reflecting
$22,500,000 in the rollover of Federal Home Loan Bank short term advances,
offset by maturing short term advances of $22,500,000 in the first quarter
of
2008.
Liquidity
Management
Liquidity
is the ability to meet current and future financial obligations of a short-term
nature. Our primary sources of funds consist of deposit inflows, borrowings
from
the Federal Home Loan Bank of Atlanta, scheduled amortization and prepayment
of
loans and mortgage-backed securities, maturities and calls of held to maturity
investment securities and earnings and funds provided from operations. While
scheduled principal repayments on loans and mortgage-backed securities are
a
relatively predictable source of funds, deposit flows, calls of securities
and
loan prepayments are greatly influenced by market interest rates, economic
conditions, and rates offered by our competitors.
We
regularly adjust our investments in liquid assets based upon our assessment
of
(1) expected loan demand, (2) expected deposit flows, (3) yields available
on
interest-earning deposits and securities and (4) the objectives of our
asset/liability management policy.
Our
most
liquid assets are cash and cash equivalents. The levels of these assets depend
on our operating, financing, lending and investing activities during any given
period. At March 31, 2008, cash and cash equivalents totaled $1,813,000.
Securities classified as available-for-sale, which can provide additional
sources of liquidity, totaled $8,952,000 at March 31, 2008. However, because
all
of these securities were in an unrealized loss position at March 31, 2008,
and
because management has the intent and ability to hold these securities until
recovery or maturity, management does not consider these securities as a source
of liquidity at March 31, 2008.
Also,
at
March 31, 2008, we had advances outstanding of $34,000,000 from the Federal
Home
Loan Bank of Atlanta. On that date, we had the ability to borrow an additional
$18,559,000.
At
March
31, 2008, we had outstanding commitments to originate loans of $787,000
(excluding the undisbursed portions of loans). These commitments do not
necessarily represent future cash requirements since certain of these
instruments may expire without being funded, although this would be unusual.
We
also extend lines of credit to customers, primarily home equity lines of credit.
The borrower is able to draw on these lines as needed, thus the funding is
generally unpredictable. Unused home equity lines of credit amounted to
$4,902,000 and unused commercial lines of credit amounted to
$6,976,000
at
March
31, 2008. Since the majority of unused lines of credit expire without being
funded, it is anticipated that our obligation to fund the above commitment
amounts will be substantially less than the amounts reported.
Certificate
of deposit accounts scheduled to mature within one year totaled $59,861,000
or
50.86% of total deposits at March 31, 2008. Management believes that the large
percentage of deposits in shorter-term certificates of deposit reflects
customers’ hesitancy to invest their funds in long-term certificates of deposit
in the current volatile interest rate environment. If these deposits do not
remain with us, we will be required to seek other sources of funds, including
other certificates of deposit and/or additional borrowings. Depending on market
conditions, we may be required to pay higher rates on such deposits or other
borrowings than we currently pay on the certificates of deposit due on or before
March 31, 2009. We believe, however, based on past experience, a significant
portion of our certificates of deposit will remain with us. We also believe
we
have the ability to attract and retain deposits by adjusting the interest rates
offered.
Our
borrowings are with the Federal Home Loan Bank of Atlanta and are secured by
Federal Home Loan Bank of Atlanta stock that we own and a blanket lien on
mortgages. Borrowings at March 31, 2008 consisted of $7,500,000 short term
fixed
rate FHLB advances bearing interest at rates ranging from 2.18% to 3.00% and
$26,500,000 long term convertible rate FHLB advances with fixed interest rates
ranging from 3.63% to 4.90%. If not repaid or converted to a different product,
the convertible rate advances will convert from a fixed to a floating rate
after
the initial borrowing periods ranging from three months to sixty months.
Our
primary investing activity is the origination of loans, primarily one- to
four-family residential mortgage loans and commercial real estate loans, and
the
purchase of securities. Our primary financing activity consists of activity
in
deposit accounts and Federal Home Loan Bank of Atlanta advances. Deposit growth
has continued to outpace asset growth over the past twelve months and the
increased liquidity has been placed in a federal funds account with our
correspondent bank and used to fund commercial and acquisition and renovation
loans. Deposit flows are affected by the overall level of interest rates, the
interest rates and products offered by us and our local competitors and other
factors. We generally manage the pricing of our deposits to be competitive.
Occasionally, we offer promotional rates on certain deposit products to attract
deposits.
We
are
not aware of any known trends, events or uncertainties that will have or are
reasonably likely to have a material effect on our liquidity, capital or
operations, nor are we aware of any current recommendation by regulatory
authorities, which if implemented, would have a material effect on liquidity,
capital or operations.
Stockholders’
Equity
Total
stockholders’ equity increased $26,000, or 0.12%, to $21,795,000 at March 31,
2008 from $21,769,000 at December 31, 2007 as a result of stock based
compensation of $40,000, net income of $42,000, and an increase of $56,000
in
accumulated other comprehensive loss (resulting from the unrealized losses
on
investments available for sale, net of tax). We are considered “well
capitalized” under the risk-based capital guidelines applicable to
us.
Off-Balance
Sheet Arrangements
In
the
normal course of operations, we engage in a variety of financial transactions
that, in accordance with generally accepted accounting principles, are not
recorded in our financial statements. These transactions involve, to varying
degrees, elements of credit, interest rate, and liquidity risk. Such
transactions are used primarily to manage customers’ requests for funding and
take the form of loan commitments and lines of credit. Our exposure to credit
loss from non-performance by the other party to the above-mentioned financial
instruments is represented by the contractual amount of those instruments.
We
use the same credit policies in making commitments and conditional obligations
as we do for on-balance sheet instruments.
Financial
Instruments Whose
|
|
|
|
|
|
Contract
Amount Represents
|
|
Contract
Amount At
|
|
Credit
Risk
|
|
March
31, 2008
|
|
December
31, 2007
|
|
|
|
(Dollars
in thousands)
|
|
Lines
of credit - commercial real estate
|
|
$
|
6,976
|
|
$
|
887
|
|
Lines
of credit - home equity
|
|
|
4,902
|
|
|
4,
964
|
|
Lines
of credit - overdraft protection
|
|
|
132
|
|
|
129
|
|
Mortgage
loan commitments
|
|
|
787
|
|
|
1,541
|
|
Commercial
real estate lines of credit, including equipment lines of credit discussed
below, are generally secured by a blanket lien on assets of the borrower.
Revolving Lines of Credit (RLOC) are typically used for short term working
capital needs and are based most heavily on the accounts receivable and
inventory components of the borrower’s balance sheet. RLOC have terms of one
year, are subject to annual reaffirmation and carry variable rates of interest.
We generally receive a one percent fee, based on the commitment
amount.
Equipment
lines of credit are secured by equipment being purchased and sometimes by a
blanket lien on assets of the borrower as well. Each advance is repaid over
a
three to five year period and carries a variable or prevailing fixed rate of
interest. We will generally advance up to 80% of the cost of the new or used
equipment. These credit facilities are revolving in nature and the commitment
is
subject to annual reaffirmation.
For
both
types of credit facilities listed above, we evaluate each customer’s credit
worthiness on a case-by-case basis.
Home
equity lines of credit are secured by second deeds of trust on residential
real
estate. They have fixed expiration dates as long as there is no violation of
any
condition established in the contract. We evaluate each customer’s credit
worthiness on a case-by-case basis.
Overdraft
lines of credit on checking accounts are unsecured. Linked to any Slavie Federal
personal checking account, the line will automatically make a deposit to the
customer’s checking account if the balance falls below the amount needed to pay
an item presented for payment.
Our
outstanding commitments to make mortgages are at fixed rates ranging from
5.875%
to
7.500%
and 6.250% to 8.250% at March 31, 2008 and December 31, 2007, respectively.
Loan
commitments expire 60 days from the date of the commitment.
For
the
three months ended March 31, 2008, we engaged in no off-balance sheet
transactions reasonably likely to have a material effect on our financial
condition, results of operations or cash flows.
Information
Regarding Forward-Looking Statements
In
addition to the historical information contained in Part I of this Quarterly
Report on Form 10-Q, the discussion in Part I of this Quarterly Report on Form
10-Q contains certain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements often use words
such as “believe,” “expect,” “plan,” “may,” “will,” “should,” “project,”
“contemplate,” “anticipate,” “forecast,” “intend” or other words of similar
meaning. You can also identify them by the fact that they do not relate strictly
to historical or current facts.
Our
goals, objectives, expectations and intentions, including statements regarding
the development and introduction of new products and services, the allowance
for
loan losses, leaseable space in our headquarters building, repayment of
non-accrual loans, retention of maturing certificates of deposit, liquidity
management, funding of unused lines of credit, our holding of mortgage-backed
securities and financial and other goals are forward looking. These statements
are based on our beliefs, assumptions and on information available to us as
of
the date of this filing, and involve risks and uncertainties. These risks and
uncertainties include, among others, those discussed in this Quarterly Report
on
Form 10-Q and in our Annual Report on Form 10-K for the year ended December
31,
2007; the effect of falling interest rates on our profits and asset values;
risks related to our intended increased focus on commercial real estate and
commercial business loans; adverse economic conditions in our market area;
our
dependence on key personnel; competitive factors within our market area; the
effect of developments in technology on our business; adverse changes in the
overall national economy as well as adverse economic conditions in our specific
market area; adequacy of the allowance for loan losses; expenses as a result
of
our stock benefit plans; and changes in regulatory requirements and/or
restrictive banking legislation.
Our
actual results and the actual outcome of our expectations and strategies could
differ materially from those discussed herein and you should not put undue
reliance on any forward-looking statements. All forward-looking statements
speak
only as of the date of this filing, and we undertake no obligation to make
any
revisions to the forward-looking statements to reflect events or circumstances
after the date of this filing or to reflect the occurrence of unanticipated
events.
Item
3.
Quantitative
and Qualitative Disclosures About Market Risk.
Not
Applicable
Item
4.
Controls
and Procedures.
As
of the
end of the period covered by this quarterly report on Form 10-Q, SFSB, Inc.’s
Chief Executive Officer and Chief Financial Officer evaluated the effectiveness
of SFSB, Inc.’s disclosure controls and procedures. Based upon that evaluation,
SFSB, Inc.’s Chief Executive Officer and Chief Financial Officer concluded that
SFSB, Inc.’s disclosure controls and procedures are effective as of
March
31,
2008. Disclosure controls and procedures are controls and other procedures
that
are designed to ensure that information required to be disclosed by SFSB, Inc.
in the reports that it files or submits under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission’s rules and
forms.
In
addition, there were no changes in SFSB, Inc.’s internal control over financial
reporting (as defined in Rule 13a-15 or Rule 15d-15 under the Securities Act
of
1934, as amended) during the quarter ended March 31, 2008, that have materially
affected, or are reasonably likely to materially affect, SFSB, Inc.’s internal
control over financial reporting.
PART
II - OTHER INFORMATION
Item
1.
Legal
Proceedings.
None.
Item
2.
Unregistered
Sales of Equity Securities and Use of Proceeds.
None.
Item
3.
Defaults
Upon Senior Securities.
Not
applicable.
Item
4.
Submission
of Matters to a Vote of Securities Holders.
None.
Item
5.
Other
Information.
None.
Item
6.
Exhibits.
|
31.1
|
Rule
13a-14(a) Certification of Chief Executive
Officer
|
|
31.2
|
Rule
13a-14(a) Certification of Chief Financial Officer
|
|
|
Section
1350 Certification of Chief Executive Officer and Chief Financial
Officer
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
SFSB,
Inc.
|
|
|
|
|
|
|
|
Date:
May 14, 2008
|
|
By:
|
/s/
Philip E. Logan
|
|
|
|
Philip
E. Logan, President
|
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
Date:
May 14, 2008
|
|
By:
|
/s/
Sophie T. Wittelsberger
|
|
|
|
Sophie
T. Wittelsberger, Chief Financial Officer
|
|
|
|
(Principal
Accounting and Financial Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
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