SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(mark
one)
x
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For
the quarterly period ended September 30, 2008
or
o
TRANSITION REPORT
UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the
transition period from _______to_______
Commission
File Number 000-51876
MUTUAL
FEDERAL BANCORP, INC.
(Exact
name of registrant specified in its charter)
Federal
(State
or other jurisdiction of incorporation or organization)
|
33-1135091
(I.R.S.
Employer Identification Number)
|
2212
West Cermak Road
Chicago,
Illinois 60608
(Address
of principal executive offices)
|
(773)
847-7747
(Registrant’s
telephone number, including area code)
Not
Applicable
(Former
name, former address and former fiscal year,
if
changed since last report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the 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. Yes
x
No
o
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 the definitions 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
(Do
not check if a smaller reporting company)
|
Smaller
reporting company
x
|
Indicate
by a check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
o
No
x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
equity, as of the latest practicable date:
Class
|
Outstanding
as of November 1, 2008
|
Common
Stock, $0.01 par value
|
3,470,317
|
MUTUAL
FEDERAL BANCORP, INC.
FORM
10-Q
For
the quarterly period ended September 30, 2008
TABLE OF CONTENTS
|
Page
|
|
|
|
|
|
1
|
|
2
|
|
3
|
|
5
|
|
15
|
|
30
|
|
30
|
|
|
|
|
|
31
|
|
31
|
|
31
|
|
31
|
|
31
|
|
31
|
|
|
|
32
|
|
|
|
|
PART I.
– FINANCIAL INFORMATION
MUTUAL
FEDERAL BANCORP, INC.
CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION (unaudited)
(Dollar
amounts in thousands except share data)
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
4,024
|
|
|
$
|
2,264
|
|
Trading
securities
|
|
|
2,174
|
|
|
|
—
|
|
Securities
available-for-sale
|
|
|
11,015
|
|
|
|
16,345
|
|
Loans,
net of allowance for loan losses of $700 at
September
30, 2008; $290 at December 31, 2007
|
|
|
53,406
|
|
|
|
53,047
|
|
Federal
Home Loan Bank stock, at cost
|
|
|
610
|
|
|
|
610
|
|
Premises
and equipment, net
|
|
|
882
|
|
|
|
250
|
|
Accrued
interest receivable
|
|
|
343
|
|
|
|
360
|
|
Other
assets
|
|
|
772
|
|
|
|
135
|
|
Total
assets
|
|
$
|
73,226
|
|
|
$
|
73,011
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Non-interest-bearing
deposits
|
|
$
|
345
|
|
|
$
|
331
|
|
Interest-bearing
deposits
|
|
|
39,035
|
|
|
|
39,388
|
|
Total
deposits
|
|
|
39,380
|
|
|
|
39,719
|
|
Advance
payments by borrowers for taxes
and
insurance
|
|
|
722
|
|
|
|
236
|
|
Advances
from the Federal Home Loan Bank
|
|
|
6,000
|
|
|
|
5,000
|
|
Accrued
interest payable and other liabilities
|
|
|
1,307
|
|
|
|
1,037
|
|
Common
stock in ESOP subject to contingent repurchase
obligation
|
|
|
137
|
|
|
|
108
|
|
Total
liabilities
|
|
|
47,546
|
|
|
|
46,100
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value, 1,000,000 shares
authorized
at September 30, 2008 and December 31, 2007
|
|
|
—
|
|
|
|
—
|
|
Common
stock, $0.01 par value, 12,000,000 shares
authorized,
3,636,875 shares issued at September 30, 2008
and
December 31, 2007
|
|
|
36
|
|
|
|
36
|
|
Additional
paid-in capital
|
|
|
9,914
|
|
|
|
9,738
|
|
Treasury
stock, at cost, 166,558 shares at September 30, 2008
and
108,696 at December 31, 2007
|
|
|
(1,925
|
)
|
|
|
(1,286
|
)
|
Retained
earnings
|
|
|
18,469
|
|
|
|
19,077
|
|
Reclassification
of ESOP shares
|
|
|
(137
|
)
|
|
|
(108
|
)
|
Unearned
ESOP shares
|
|
|
(725
|
)
|
|
|
(768
|
)
|
Accumulated
other comprehensive income
|
|
|
48
|
|
|
|
222
|
|
Total
stockholders’ equity
|
|
|
25,680
|
|
|
|
26,911
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
73,226
|
|
|
$
|
73,011
|
|
See
accompanying notes to unaudited consolidated financial
statements.
MUTUAL
FEDERAL BANCORP, INC.
CONSOLIDATED
STATEMENTS OF INCOME (LOSS) (unaudited)
(Dollar
amounts in thousands except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and dividend income
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans,
including fees
|
|
$
|
829
|
|
|
$
|
899
|
|
|
$
|
2,462
|
|
|
$
|
2,611
|
|
Securities
|
|
|
156
|
|
|
|
208
|
|
|
|
518
|
|
|
|
643
|
|
Interest
earning deposits
|
|
|
11
|
|
|
|
10
|
|
|
|
42
|
|
|
|
27
|
|
Federal
Home Loan Bank stock dividends
|
|
|
—
|
|
|
|
5
|
|
|
|
—
|
|
|
|
12
|
|
Total
interest and dividend income
|
|
|
996
|
|
|
|
1,122
|
|
|
|
3,022
|
|
|
|
3,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
229
|
|
|
|
289
|
|
|
|
751
|
|
|
|
874
|
|
Advances
from Federal Home Loan Bank
|
|
|
59
|
|
|
|
38
|
|
|
|
176
|
|
|
|
98
|
|
Total
interest expense
|
|
|
288
|
|
|
|
327
|
|
|
|
927
|
|
|
|
972
|
|
Net
interest income
|
|
|
708
|
|
|
|
795
|
|
|
|
2,095
|
|
|
|
2,321
|
|
Provision
for loan losses
|
|
|
285
|
|
|
|
—
|
|
|
|
553
|
|
|
|
10
|
|
Net
interest income after provision for
loan
losses
|
|
|
423
|
|
|
|
795
|
|
|
|
1,542
|
|
|
|
2,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on sale of securities
|
|
|
—
|
|
|
|
—
|
|
|
|
152
|
|
|
|
—
|
|
Impairment
charge on securities available-for-sale
|
|
|
(351
|
)
|
|
|
—
|
|
|
|
(382
|
)
|
|
|
—
|
|
Changes
in fair value of trading securities
|
|
|
(147
|
)
|
|
|
—
|
|
|
|
(294
|
)
|
|
|
—
|
|
Other
income
|
|
|
17
|
|
|
|
13
|
|
|
|
39
|
|
|
|
35
|
|
Total
non-interest income
|
|
|
(481
|
)
|
|
|
13
|
|
|
|
(485
|
)
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
|
375
|
|
|
|
336
|
|
|
|
1,122
|
|
|
|
1,006
|
|
Occupancy
and equipment
|
|
|
36
|
|
|
|
38
|
|
|
|
122
|
|
|
|
120
|
|
Data
processing
|
|
|
34
|
|
|
|
26
|
|
|
|
85
|
|
|
|
81
|
|
Professional
fees
|
|
|
74
|
|
|
|
125
|
|
|
|
285
|
|
|
|
386
|
|
Other
expense
|
|
|
88
|
|
|
|
74
|
|
|
|
234
|
|
|
|
219
|
|
Total
non-interest expense
|
|
|
607
|
|
|
|
599
|
|
|
|
1,848
|
|
|
|
1,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
(665
|
)
|
|
|
209
|
|
|
|
(791
|
)
|
|
|
534
|
|
Income
tax (benefit) expense
|
|
|
(244
|
)
|
|
|
86
|
|
|
|
(282
|
)
|
|
|
216
|
|
Net
income (loss)
|
|
$
|
(421
|
)
|
|
$
|
123
|
|
|
$
|
(509
|
)
|
|
$
|
318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share (basic and diluted)
|
|
$
|
(0.12
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.15
|
)
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income (loss)
|
|
$
|
(423
|
)
|
|
$
|
238
|
|
|
$
|
(683
|
)
|
|
$
|
367
|
|
See
accompanying notes to unaudited consolidated financial statements.
MUTUAL
FEDERAL BANCORP, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)
(Dollar
amounts in thousands)
|
|
|
|
|
Additional
Paid-in Capital
|
|
|
|
|
|
|
|
|
Amount
Reclassified on ESOP Shares
|
|
|
|
|
|
Accumulated
Other Comprehensive Income/(Loss)
|
|
|
|
|
Balance
at January 1, 2007
|
|
$
|
36
|
|
|
$
|
10,175
|
|
|
$
|
—
|
|
|
$
|
18,782
|
|
|
$
|
(66
|
)
|
|
$
|
(827
|
)
|
|
$
|
133
|
|
|
$
|
28,233
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
318
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
318
|
|
Change
in net unrealized gain on securities available-for-sale, net of taxes and
reclassification adjustments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
49
|
|
|
|
49
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
367
|
|
Treasury
stock purchases, 83,444 shares at cost
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,106
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,106
|
)
|
MRP
share grants, 52,748 shares at cost
|
|
|
—
|
|
|
|
(699
|
)
|
|
|
699
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
MRP
shares earned
|
|
|
—
|
|
|
|
108
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
108
|
|
Stock
option shares earned
|
|
|
—
|
|
|
|
74
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
74
|
|
Adjustment
to fair value of common stock in ESOP subject to contingent repurchase
obligation of ESOP shares
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(36
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(36
|
)
|
ESOP
shares committed to be released
|
|
|
—
|
|
|
|
14
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
44
|
|
|
|
—
|
|
|
|
58
|
|
Balance
at September 30, 2007
|
|
$
|
36
|
|
|
$
|
9,672
|
|
|
$
|
(407
|
)
|
|
$
|
19,100
|
|
|
$
|
(102
|
)
|
|
$
|
(783
|
)
|
|
$
|
182
|
|
|
$
|
27,698
|
|
See
accompanying notes to unaudited consolidated financial
statements.
|
|
|
|
|
Additional
Paid-in Capital
|
|
|
|
|
|
|
|
|
Amount
Reclassified on ESOP Shares
|
|
|
|
|
|
Accumulated
Other
Comprehensive
Income/(Loss)
|
|
|
|
|
Balance
at January 1, 2008
|
|
$
|
36
|
|
|
$
|
9,738
|
|
|
$
|
(1,286
|
)
|
|
$
|
19,077
|
|
|
$
|
(108
|
)
|
|
$
|
(768
|
)
|
|
$
|
222
|
|
|
$
|
26,911
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(509
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(509
|
)
|
Change
in net unrealized gain (loss) on securities available-for-sale, net of
taxes and reclassification adjustments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(174
|
)
|
|
|
(174
|
)
|
Total
comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(683
|
)
|
Dividends
paid
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(114
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(114
|
)
|
Treasury
stock purchases, 60,000 shares at cost
|
|
|
—
|
|
|
|
—
|
|
|
|
(664
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(664
|
)
|
MRP
share grants, 2,138 shares at cost
|
|
|
—
|
|
|
|
(25
|
)
|
|
|
25
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
MRP
shares earned
|
|
|
—
|
|
|
|
117
|
|
|
|
—
|
|
|
|
5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
122
|
|
Stock
option shares earned
|
|
|
—
|
|
|
|
80
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
80
|
|
Adjustment
to fair value of common stock in ESOP subject to contingent repurchase
obligation of ESOP shares
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(29
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(29
|
)
|
ESOP
shares committed to be released
|
|
|
—
|
|
|
|
4
|
|
|
|
—
|
|
|
|
10
|
|
|
|
—
|
|
|
|
43
|
|
|
|
—
|
|
|
|
57
|
|
Balance
at September 30, 2008
|
|
$
|
36
|
|
|
$
|
9,914
|
|
|
$
|
(1,925
|
)
|
|
$
|
18,469
|
|
|
$
|
(137
|
)
|
|
$
|
(725
|
)
|
|
$
|
48
|
|
|
$
|
25,680
|
|
See
accompanying notes to unaudited consolidated financial
statements.
MUTUAL
FEDERAL BANCORP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (unaudited)
(Dollar
amounts in thousands)
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(509
|
)
|
|
$
|
318
|
|
Adjustments
to reconcile net income to net cash
from
operating activities
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
553
|
|
|
|
10
|
|
Depreciation
|
|
|
38
|
|
|
|
44
|
|
Net
amortization of securities
|
|
|
10
|
|
|
|
20
|
|
Dividends
reinvested on securities
|
|
|
(46
|
)
|
|
|
(89
|
)
|
Gain
on sale of securities
|
|
|
(152
|
)
|
|
|
—
|
|
Impairment
charge on securities available-for-sale
|
|
|
382
|
|
|
|
—
|
|
Changes
in fair value of trading securities
|
|
|
294
|
|
|
|
—
|
|
ESOP
expense
|
|
|
57
|
|
|
|
58
|
|
MRP
expense
|
|
|
122
|
|
|
|
108
|
|
Option
expense
|
|
|
80
|
|
|
|
74
|
|
Increase
in accrued interest receivable and other assets
|
|
|
(620
|
)
|
|
|
(175
|
)
|
Increase
in accrued interest payable and other liabilities
|
|
|
336
|
|
|
|
726
|
|
Net
cash provided by operating activities
|
|
|
545
|
|
|
|
1,094
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
Activity
in securities available-for-sale:
|
|
|
|
|
|
|
|
|
Proceeds
from maturities, calls, and principal repayments
|
|
|
2,909
|
|
|
|
2,832
|
|
Proceeds
from sales
|
|
|
160
|
|
|
|
—
|
|
Purchases
|
|
|
(641
|
)
|
|
|
—
|
|
Purchase
of FHLB stock
|
|
|
—
|
|
|
|
(110
|
)
|
Loan
originations and payments, net
|
|
|
(912
|
)
|
|
|
(1,528
|
)
|
Proceeds
from sale of real estate owned, acquired through
foreclosure
|
|
|
—
|
|
|
|
222
|
|
Additions
to premises and equipment
|
|
|
(670
|
)
|
|
|
(16
|
)
|
Net
cash provided by investing activities
|
|
|
846
|
|
|
|
1,400
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in deposits
|
|
|
(339
|
)
|
|
|
(2,471
|
)
|
Net
increase in advance payments by borrowers for taxes and
insurance
|
|
|
486
|
|
|
|
306
|
|
Advances
from the Federal Home Loan Bank
|
|
|
4,000
|
|
|
|
4,500
|
|
Repayment
of advances from the Federal Home Loan Bank
|
|
|
(3,000
|
)
|
|
|
(3,500
|
)
|
Dividends
paid
|
|
|
(114
|
)
|
|
|
—
|
|
Purchases
of treasury stock
|
|
|
(664
|
)
|
|
|
(1,106
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
369
|
|
|
|
(2,271
|
)
|
Net
increase in cash and cash equivalents
|
|
|
1,760
|
|
|
|
223
|
|
Cash
and cash equivalents at beginning of period
|
|
|
2,264
|
|
|
|
2,268
|
|
Cash
and cash equivalents at end of
period
|
|
$
|
4,024
|
|
|
$
|
2,491
|
|
See
accompanying notes to unaudited consolidated financial
statements.
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information
|
|
|
|
|
|
|
Adoption
of fair value option
|
|
|
|
|
|
|
Securities
transferred from available-for-sale to trading
|
|
$
|
2,423
|
|
|
|
—
|
|
Loans
transferred to real estate owned…………………………………….
|
|
|
—
|
|
|
$
|
222
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
950
|
|
|
$
|
926
|
|
Income
taxes
|
|
|
263
|
|
|
|
81
|
|
See
accompanying notes to unaudited consolidated financial
statements.
Note
1 – Basis of Presentation
The accompanying unaudited consolidated
financial statements have been prepared in accordance with U.S. generally
accepted accounting principles (GAAP) for interim financial information and with
instructions to Form 10-Q (as applicable to smaller reporting companies) and
Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and notes required by GAAP for complete financial
statements. In the opinion of management, all adjustments consisting
of normal recurring accruals necessary for a fair presentation have been
included. The results of operations and other data for the three
months and the nine months ended September 30, 2008, are not necessarily
indicative of results that may be expected for the entire fiscal year ended
December 31, 2008.
The
consolidated financial statements include Mutual Federal Bancorp, Inc. (the
“Company”), and its wholly owned subsidiary Mutual Federal Savings and Loan
Association of Chicago and its wholly owned subsidiary, EMEFES Service
Corporation, together referred to as “the Bank.” Intercompany
transactions and balances are eliminated in consolidation. As of
September 30, 2008, Mutual Federal Bancorp, MHC (the “MHC”) was the majority
(73%) stockholder of the Company. The MHC is owned by the depositors
of the Bank. The financial statements included in this Form 10-Q
do not include the transactions and balances of the MHC. EMEFES
Service Corporation is an insurance agency that sells insurance products to the
Bank’s customers. The insurance products are underwritten and
provided by a third party.
The Bank
provides financial services through its office in Chicago. Its
primary deposit products are checking, savings, and term certificate accounts,
and its primary lending products are residential mortgage loans and loans on
deposit accounts. Substantially all loans are secured by specific
items of collateral, including one- to four-family and multifamily residential
real estate, and deposit accounts. The Company does not originate or
purchase nontraditional loans such as interest-only, negative amortization, or
payment option ARMS. The Company does not originate or purchase
sub-prime or Alt-A loans. There are no significant concentrations of loans to
any one customer. However, the customers’ ability to repay their
loans is dependent on the real estate and general economic conditions in the
Chicago area.
Note
2 – Capital Resources
The Bank
is subject to regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary actions by
regulators that, if undertaken, could have a material impact on the Bank’s
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank’s assets,
liabilities, and certain off-balance sheet items as calculated for regulatory
accounting purposes. The Bank’s capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative
measures established by regulation to ensure capital adequacy require the Bank
to maintain minimum amounts and ratios of total and Tier 1 capital to
risk-weighted assets, and of Tier 1 capital to average assets and of tangible
capital to average assets. As of September 30, 2008, the Bank met the
capital adequacy requirements to which it is subject. The Bank’s
tangible capital ratio at September 30, 2008 was 31.09%. The Tier 1
capital ratio was 31.09%, the Tier 1 risk-based capital ratio was 51.92%, and
the total risk-based capital ratio was 52.73%.
The most
recent notification from the federal banking agencies categorized the Bank as
well-capitalized under the regulatory framework for prompt corrective
action. To be well-capitalized, the Bank must maintain minimum total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios. There are
no conditions or events since that notification that have changed the Bank’s
category.
Note
2 – Capital Resources (continued)
On October 3, 2008,
Congress passed the Emergency Economic Stabilization Act of 2008 (EESA), which
provides the U. S. Secretary of the Treasury with broad authority to implement
certain actions to help restore stability and liquidity to U.S.
markets. One of the provisions resulting from the Act is the Treasury
Capital Purchase Program (CPP), which provides direct equity investment of
perpetual preferred stock by the Treasury in qualified financial
institutions. The program is voluntary and requires an institution to
comply with a number of restrictions and provisions, including limits on
executive compensation, stock redemptions and declaration of
dividends. Applications must be submitted by November 14, 2008 and
are subject to approval by the Treasury. The CPP provides for a
minimum investment of 1% of Risk-Weighted Assets, with a maximum
investment equal to the lesser of 3 percent of Total Risk-Weighted Assets or $25
billion. The perpetual preferred stock investment will have a
dividend rate of 5% per year, until the fifth anniversary of the Treasury
investment, and a dividend of 9%, thereafter. The CPP also requires
the Treasury to receive warrants for common stock equal to 15% of the capital
invested by the Treasury. Participation in the program is not
automatic and subject to approval by the Treasury. After giving
consideration to, among other things, the Company’s continued sound capital
position, with tangible and Tier 1 core capital ratios of 31.09%, the Company
has determined not to apply for participation in the Capital Purchase Program
presently being implemented by the U. S. Treasury.
Note
3 – Commitments
At
September 30, 2008, the Bank had no outstanding commitments to make
loans. At December 31, 2007, the Bank had outstanding
commitments to make loans of $205,000.
Note
4 – Fair Value Option and Fair Value Measurements
In
September 2006, the FASB issued Statement No. 157,
Fair Value
Measurements
. This Statement defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. This Statement establishes a fair value hierarchy about
the assumptions used to measure fair value and clarifies assumptions about risk
and the effect of a restriction on the sale or use of an asset. The
standard was effective for fiscal years beginning after November 15,
2007. The impact of adoption was not material. In
February 2008, the FASB issued Staff Position (FSP) 157-2,
Effective Date of FASB Statement No.
157
. This FSP delays the effective date of FAS 157 for all
non-financial assets and non-financial liabilities, except those that are
recognized or disclosed at fair value on a recurring basis (at least annually)
to fiscal years beginning after November 15, 2008, and interim periods within
those fiscal years. The impact of adoption was not
material.
In February 2007, the FASB issued
Statement No. 159,
The Fair
Value Option for Financial Assets and Financial
Liabilities.
The standard provides companies with an option to
report selected financial assets and liabilities at fair value and establishes
presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar types
of assets and liabilities. The new standard was effective for the
Company on January 1, 2008. The Company elected the fair value option
for various mutual funds included in trading securities as of January 1,
2008. The impact of adoption was not material, as the Company
recognized an impairment charge at December 31, 2007, resulting in the mutual
funds being carried at fair value.
Fair Value
Option
The Company has elected the fair value
option for various mutual funds in order to make them more readily available for
liquidity management. The mutual funds are the only assets being
designated as trading assets. The Company’s investments in Federal
Home Loan Mortgage Corporation preferred stock, and all debt securities, will
continue to be held as available-for-sale, carried at fair value with unrealized
gains and losses recorded through accumulated other comprehensive
income. Unrealized losses on securities held as available-for-sale
that management considers other-than-temporary are recognized through income as
write downs of the cost basis of the securities.
Fair
Value Measurement.
Statement
157 defines fair value as the exchange price that would be received for an asset
or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. Statement 157 also establishes a
fair value hierarchy which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value.
The standard describes three levels of inputs that may be used to measure fair
value:
Level 1:
Quoted prices (unadjusted) of identical assets or liabilities in active markets
that the entity has the ability to access as of the measurement
date.
Level 2:
Significant other observable inputs other than Level 1 prices such as quoted
prices for similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by observable
market data.
Level 3:
Significant unobservable inputs that reflect a company’s own assumptions about
the assumptions that market participants would use in pricing an asset or
liability.
The
Company determines the fair values of trading securities and securities
available-for-sale by obtaining quoted prices on nationally recognized
securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical
technique widely used in the industry to value debt securities without relying
exclusively on quoted prices for the specific securities, but rather by relying
on the securities’ relationship to other benchmark quoted securities (Level 2
inputs). The Company determines the fair values of impaired loans by
obtaining current appraisals of the collateral real estate properties (Level 2
or 3 inputs).
|
|
|
|
|
Fair
Value Measurements at September 30, 2008 Using
|
|
|
|
|
|
|
Quoted
Prices in Active Markets for Identical Assets
|
|
|
Significant
Other Observable Inputs
|
|
|
Significant
Unobservable Inputs
|
|
|
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Trading
securities
|
|
$
|
2,174
|
|
|
$
|
2,174
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Securities
available-for-sale
|
|
|
11,015
|
|
|
|
20
|
|
|
|
10,995
|
|
|
|
—
|
|
|
|
$
|
13,189
|
|
|
$
|
2,194
|
|
|
$
|
10,995
|
|
|
$
|
—
|
|
Note
5 – Fair Value (continued)
Dividend income earned on
trading securities was reinvested and used to purchase additional shares through
May 31, 2008. The Company discontinued reinvesting dividends in these
securities as
of June 1, 2008. Changes in share price are
recorded through the income statement as changes in fair value of trading
securities. During the nine months ended September 30, 2008, the
Company recognized an unrealized loss of $294,000 on changes in fair value of
trading securities. Restrictions on redemption of these securities
have
been
imposed by the manager of these funds, limiting cash redemptions to
$250,000 per fund (there are three funds) per quarter. The Company
has not requested any redemptions, and
although it
currently
does not anticipate
a
need to
request
redemptions, it
may
do so in the future.
For the
nine months ended September 30, 2008, the Company also recognized a $382,000
loss for other-than-temporary impairment of FHLMC preferred stock held as
available-for-sale, because the fair value of the preferred stock has declined
substantially
due to the announcement on September 7, 2008, that
its regulatory agency, the Federal Housing Finance Agency (“FHFA”), was
appointed as conservator, and because dividends on previously issued preferred
shares have been suspended. We are uncertain as to what impact these
actions will have on the future value of this security. At September
30, 2008, we held 10,000 preferred shares valued at $2.00 per
share.
|
|
|
|
|
Fair
Value Measurements at September 30, 2008 Using
|
|
|
|
|
|
|
Quoted
Prices in Active Markets for Identical Assets
|
|
|
Significant
Other Observable Inputs
|
|
|
Significant
Unobservable Inputs
|
|
|
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Impaired
loans
|
|
$
|
1,813
|
|
|
$
|
—
|
|
|
$
|
1,813
|
|
|
$
|
—
|
|
Impaired
loans, which are measured for impairment using the fair value of the collateral
for collateral dependent loans, had a carrying amount of $2.2 million, with
specific valuation allowances of $345,000.
Note
6 – Stock Based Compensation
On
January 16, 2007, the Company awarded 52,748 shares of common stock, with a fair
value of $14.41 per share, to the Company’s officers and directors under its
2006 Management Recognition and Retention Plan. The Company also
awarded 131,871 options to purchase the Company’s common stock at a strike price
of $14.41 per share, to the Company’s officers and directors under its 2006
Stock Option Plan.
On March
18, 2008, the Company awarded 2,138 shares of common stock, with a fair value of
$11.35 per share, to a director of the Company under its 2006 Management
Recognition and Retention Plan. The Company also awarded to this
director options to purchase 5,346 shares of the Company’s common stock at a
strike price of $11.35 per share under its 2006 Stock Option Plan.
The
awards vest over a five year period. Total compensation cost that has
been charged against income for those plans for the nine months ended September
30, 2008 and 2007, was $202,000 and $182,000, respectively. The total
income tax benefits were estimated at $47,000 and $53,000,
respectively.
Stock Option
Plan
The
Company’s 2006 Stock Option Plan, which is shareholder-approved, permits the
grant of stock options to its officers, directors and employees for up to an
aggregate 178,206 shares of common stock. The Company believes that
such awards better align the interests of its employees with those of its
shareholders. Option awards are granted with an exercise price that
is no less than the market price of the Company’s common stock at the date of
grant, have vesting periods of five years, and have ten year contractual
terms. The Company anticipates purchasing shares to satisfy share
option exercises.
The fair
value of each option award is estimated on the date of grant using a closed form
option valuation (Black-Scholes) model that uses the assumptions noted in the
table below. Since the Company stock has only been trading since
April 6, 2006, the Company has used the price volatility of similar entities to
estimate volatility. The Company has no historical data on which to
base forfeiture estimates, and has assumed no forfeitures. The
expected term of options granted is based on the calculation for “plain vanilla
options” permitted by Staff Accounting Bulletin No. 107, and represents the
period of time that options granted are expected to be outstanding, which takes
into account that the options are not transferable. The risk-free interest rate
for the expected term of the option is based on the U.S. Treasury yield curve in
effect at the time of the grant.
The fair
value of options granted during 2008 and 2007 were determined using the
following weighted-average assumptions as of grant date:
|
|
2008
|
|
|
2007
|
|
Risk-free
interest rate
|
|
|
3.47
|
%
|
|
|
4.50
|
%
|
Expected
term
|
|
6.50
years
|
|
6.50
years
|
Expected
stock price volatility
|
|
|
13.51
|
%
|
|
|
9.40
|
%
|
Dividend
yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Note
6 – Stock Based Compensation (continued)
A summary
of the activity in the stock option plan for 2008 and 2007 follows:
|
|
|
|
|
Weighed
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Term
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 1, 2008
|
|
|
131,871
|
|
|
$
|
14.41
|
|
|
|
9.0
|
|
|
$
|
—
|
|
Granted
|
|
|
5,346
|
|
|
|
11.35
|
|
|
|
10.0
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited
or expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding
at September 30, 2008
|
|
|
137,217
|
|
|
$
|
14.29
|
|
|
|
8.3
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at September 30, 2008
|
|
|
26,374
|
|
|
$
|
14.41
|
|
|
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 1, 2007
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
|
131,871
|
|
|
|
14.41
|
|
|
|
10.0
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited
or expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding
at September 30, 2007
|
|
|
131,871
|
|
|
$
|
14.41
|
|
|
|
9.3
|
|
|
$
|
—
|
|
There
were no option exercises or forfeitures for the nine months ended September 30,
2008 and 2007. The weighted average fair value of options granted in
2008 and 2007 were $2.83 and $3.96, respectively. As of September 30,
2008, there was $357,000 of total unrecognized compensation cost related to
non-vested stock options granted under the Plan. The cost is expected
to be recognized over a weighted-average remaining period of 3.3
years. Options outstanding at September 30, 2008 and 2007 had an
intrinsic value of zero as these options have a strike price that exceeds the
stock price at those dates.
Stock Award
Plan
The
Company’s 2006 Management Recognition and Retention Plan (“MRP”), which is
shareholder approved, permits awards of up to an aggregate 71,282 shares of the
Company’s common stock to officers, directors and
employees. Compensation expense is recognized over the vesting period
of the shares based on the market value of the shares at issue
date.
A summary
of changes in the Company’s non-vested shares for the nine months ended
September 30, 2008 and 2007, follows:
Note
6 – Stock Based Compensation (continued)
|
|
|
|
|
Weighted
Average Grant Price
|
|
|
Weighed
Average Grant-Date Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested
at January 1, 2008
|
|
|
52,748
|
|
|
$
|
14.41
|
|
|
$
|
760,000
|
|
Granted
|
|
|
2,138
|
|
|
|
11.35
|
|
|
|
24,000
|
|
Vested
|
|
|
(10,553
|
)
|
|
|
14.41
|
|
|
|
(152,000
|
)
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Non-vested
at September 30, 2008
|
|
|
44,333
|
|
|
$
|
14.26
|
|
|
$
|
632,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested
at January 1, 2007
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Granted
|
|
|
52,748
|
|
|
|
14.41
|
|
|
|
760,000
|
|
Vested
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Non-vested
at September 30, 2007
|
|
|
52,748
|
|
|
$
|
14.41
|
|
|
$
|
760,000
|
|
As of
September 30, 2008, there was $522,000 of total unrecognized compensation cost
related to non-vested shares granted under the Plan. The cost is
expected to be recognized over a weighted-average remaining period of 3.3
years.
Note
7 – Earnings Per Share
Basic
earnings per share are computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the Company. Both basic and
fully diluted weighted average shares outstanding for the three months and the
nine months ended September 30, 2008, are 3,397,097 and 3,428,679,
respectively. Both basic and fully diluted weighted average shares
outstanding for the three months and the nine months ended September 30, 2007,
are 3,527,271 and 3,544,315, respectively. During the nine months
ended September 30, 2008 and 2007, the average fair value of the Company’s
common stock was less than the exercise price, and the stock option awards had
no dilutive effect on earnings per share.
The
factors used in the earnings per share computation for the three months and the
nine months ended September 30, 2008 and 2007, follow:
Note
7 – Earnings Per Share (continued)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(421
|
)
|
|
$
|
123
|
|
|
$
|
(509
|
)
|
|
$
|
318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
3,470,317
|
|
|
|
3,606,314
|
|
|
|
3,503,334
|
|
|
|
3,624,829
|
|
Less:
average unallocated ESOP shares
|
|
|
(73,220
|
)
|
|
|
(79,043
|
)
|
|
|
(74,655
|
)
|
|
|
(80,514
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares
|
|
|
3,397,097
|
|
|
|
3,527,271
|
|
|
|
3,428,679
|
|
|
|
3,544,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per common share
|
|
$
|
(0.12
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.15
|
)
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(421
|
)
|
|
$
|
123
|
|
|
$
|
(509
|
)
|
|
$
|
318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding for basic earnings per common
share
|
|
|
3,397,097
|
|
|
|
3,527,271
|
|
|
|
3,428,679
|
|
|
|
3,544,315
|
|
Add:
dilutive effects of assumed exercises of stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares and dilutive potential common shares
|
|
|
3,397,097
|
|
|
|
3,527,271
|
|
|
|
3,428,679
|
|
|
|
3,544,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per common share
|
|
$
|
(0.12
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.15
|
)
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 2.
Management’s Discussion and
Analysis of Financial Condition and Results of Operations
.
General
This
discussion and analysis reflects our consolidated financial statements and other
relevant statistical data and is intended to enhance your understanding of our
financial condition and results of operations. You should read the
information in this section in conjunction with our audited consolidated
financial statements for the years ended December 31, 2007 and 2006, which
are included in Form 10-KSB filed with the Securities and Exchange Commission on
March 21, 2008.
Forward-Looking
Information
This
report contains forward-looking statements, which can be identified by the use
of such words as estimate, project, believe, intend, anticipate, plan, seek,
expect and similar expressions. These forward-looking statements
include statements of our goals, intentions and expectations; statements
regarding our business plans and prospects and growth and operating strategies;
statements regarding the asset quality of our loan and investment portfolios;
and estimates of our risks and future costs and benefits. These
forward-looking statements are subject to significant risks, assumptions and
uncertainties, including, among other things, the following important factors
that could affect the actual outcome of future events:
·
|
general
economic conditions, either nationally or in our market area, continue to
deteriorate or become worse than
expected;
|
·
|
adverse
changes or continued volatility and disruption in the securities and
credit markets;
|
·
|
deterioration
in asset quality due to adverse changes in the residential real estate
market;
|
·
|
inflation
and changes in the interest rate environment that reduce our margins or
reduce the fair value of financial
instruments;
|
·
|
significantly
increased competition among depository and other financial
institutions;
|
·
|
our
ability to enter new markets successfully and take advantage of growth
opportunities;
|
·
|
our
ability to successfully implement our business
plan;
|
·
|
legislative
or regulatory changes that adversely affect our
business;
|
·
|
changes
in consumer spending, borrowing and savings
habits;
|
·
|
changes
in accounting policies and practices, as may be adopted by the bank
regulatory agencies, the Financial Accounting Standards Board and the
PCAOB; and
|
·
|
changes
in our organization, compensation and benefit
plans.
|
These
risks and uncertainties should be considered in evaluating forward-looking
statements, and undue reliance should not be placed on such
statements. Because of these and other uncertainties, our actual
future results may be materially different from the results indicated by these
forward-looking statements.
Overview
Our
results of operations depend primarily on our net interest
income. Net interest income is the difference between the interest
income we earn on our interest-earning assets, consisting primarily of loans,
U.S. government and agency securities, mortgage-backed securities and other
interest earning assets (primarily cash and cash equivalents), and the interest
we pay on our interest-bearing liabilities, consisting of savings accounts, time
deposits, and advances from the Federal Home Loan Bank. Our results
of operations are also affected by our provisions for loan losses, non-interest
income and non-interest expense. Non-interest income consists
primarily of miscellaneous fees and charges on loan and deposit accounts, gains
and losses on securities and related impairment charges, and changes in the fair
value of trading securities. Non-interest expense currently consists
primarily of salaries and employee benefits, occupancy, data processing,
professional fees, and other operating expenses. Our results of
operations also may be affected significantly by general and local economic and
competitive conditions, changes in market interest rates, governmental policies
and actions of regulatory authorities.
Critical
Accounting Policies
We
consider accounting policies involving significant judgments and assumptions by
management that have, or could have, a material impact on the carrying value of
certain assets or on income to be critical accounting policies. We
consider our critical accounting policies to be those related to our allowance
for loan losses.
The
allowance for loan losses is the estimated amount considered necessary to cover
probable incurred losses in the loan portfolio at the balance sheet
date. The allowance is established through a provision for loan
losses that is charged against income. In determining the allowance
for loan losses, management makes significant estimates and has identified this
policy as one of our most critical.
Management
performs a quarterly evaluation of the adequacy of the allowance for loan
losses. We consider a variety of factors in establishing this
estimate including, but not limited to, current economic conditions, delinquency
statistics, geographic and industry concentrations, the adequacy of the
underlying collateral, the financial strength of the borrower, results of
internal loan reviews and other relevant factors. This evaluation is
inherently subjective as it requires material estimates that may be subject to
significant change.
The
analysis has two components: specific and general
allocations. Specific allocations are made for loans that are
determined to be impaired. Impairment is measured by determining the
present value of expected future cash flows or, for collateral-dependent, the
fair value of the collateral adjusted for market conditions and selling
expenses. The general allocation is determined by segregating the
remaining loans by type of loan, risk weighting (if applicable) and payment
history. We also analyze historical loss experience, delinquency
trends, general economic conditions and geographic and industry
concentrations. This analysis establishes factors that are applied to
the loan groups to determine the amount of the general allowance for loan
losses. Actual loan losses may be significantly more than the
allowances we have established which could have a material negative effect on
our financial results.
Recent
Events
During
the past year, the banking industry has been under significant stress due to
declining real estate values, asset impairment, eroding capital ratios and
tightening liquidity. The impact of these trends are briefly
discussed below and more fully discussed in the quarterly and nine-month
operating results comparisons that follow.
Loan
Quality
: As discussed in greater detail in the Management Discussion and
Analysis, the Company has seen an increase in non-performing loans. During the
nine months ended September 30, 2008, the Company recorded charge-offs totaling
$143,000. The combination of increased charge-offs and non-performing
loans in conjunction with downturns in the economy and real estate environment
has resulted in an increase in our allowance for loan losses. At
September 30, 2008, the allowance to loan losses was 1.29% of loans receivable
as compared to 0.54% at December 31, 2007. The increase in
non-performing loans has been a result of economic and real estate softening and
not a result of changes in underwriting standards. As previously
mentioned, the Company does not originate or purchase nontraditional loans, such
as interest-only, negative amortization, or payment option ARM loans, and the
Company does not originate or purchase sub-prime or Alt-A
loans. Management continues to enforce strict underwriting standards
which generally require loan to value ratios not to exceed
80%.
Securities
Portfolio:
Our securities portfolio primarily consists of FHLB bonds and
FNMA, FHLMC, and GNMA guaranteed mortgage backed securities. At
September 30, 2008, total unrealized gain on our security portfolio was
approximately $48,000. As further discussed in this document, during
the nine months ended September 30, 2008, the Company recorded a gain of
$152,000 on the sale of FHLMC common stock, an impairment charge of $382,000 due
to other than temporary declines in fair value of FHLMC preferred stock, and a
change in fair value of mutual funds (trading securities) resulting in an
unrealized loss of $294,000. Restrictions on redemption of these
mutual funds
have
been imposed
by the manager of these funds, limiting cash redemptions to $250,000 per
fun
d (there are
three funds) per quarter. The Company has not requested any
redemptions, and although it currently does not anticipate a need to request
redemptions, it may do so in the future. As of September 30, 2008, management
has not identified any additional securities that we believe would be classified
as other than temporarily impaired.
Capital
Levels
: As previously detailed in Note 2 - Capital Resources,
the Bank's capital levels exceed regulatory capital requirements. As
of September 30, 2008, the Bank is categorized as well capitalized under the
regulatory framework for prompt corrective action. After giving consideration
to, among other things, the Company’s continued sound capital position, with
tangible and Tier 1 core capital ratios of 31.09%, the Company has determined
not to apply for participation in the Capital Purchase Program presently being
implemented by the U. S. Treasury.
Liquidity:
In
recent months, certain banking institutions have encountered liquidity
constraints. As
of the
date of this filing, the Company has not encountered similar liquidity
constraints. However, we actively monitor our liquidity and, if necessary, we
presently have additional borrowing capacity with the Federal Home Loan Bank of
Chicago that we could use to satisfy liquidity demands. Please see
the Liquidity section of Management’s Discussion and Analysis for additional
details.
The
Federal Depository Insurance Corporation (FDIC) has issued a proposed rule to
raise current deposit insurance assessment rates uniformly for all financial
institutions for the first quarter of 2009. The proposed rule also
provides for a new means of calculating deposit insurance beginning during the
second quarter of 2009, and includes an assessment of the financial
institution’s risk profile as determined by the FDIC. Although final
rules have not been published, the Company anticipates that its cost of insuring
deposits will increase in 2009, when and if the final rules are
adopted.
Comparison
of Financial Condition at September 30, 2008 and December 31,
2007
Our total
assets increased $215,000, or 0.3%, to $73.2 million at September 30, 2008,
compared to $73.0 million at December 31, 2007. Loans receivable
increased $359,000, or 0.7%, to $53.4 million at September 30, 2008, from $53.0
million at December 31, 2007, reflecting an decrease of $872,000, or 2.6%,
in one-to-four family residential mortgage loans and an increase of $1.6
million, or 8.2%, in multi-family residential mortgage loans during the period,
offset by a net increase of $410,000 in the allowance for loan
losses.
Premises
and equipment increased $632,000, to $882,000 at September 30, 2008, from
$250,000 at December 31, 2007, primarily due to the acquisition of property
adjacent to the current bank building for $660,000, for the purpose of adding a
drive-up facility for added customer convenience. Other assets
increased $637,000, to $772,000 at September 30, 2008, from $135,000 at December
31, 2007, primarily due to increases in deferred income tax assets resulting
from temporary differences in the recording of loan and security losses for book
and income tax purposes.
Total
deposits decreased $339,000, or 0.9%, to $39.4 million at September 30, 2008,
from $39.7 million at December 31, 2007. Mortgage escrow
accounts increased by $486,000, or 205.9% during this period. The
Company borrowed an additional $4.0 million from the Federal Home Loan Bank in
order to refinance $3.0 million in maturing advances, lock in lower interest
rates, and fund loans.
Stockholders’
equity decreased $1.2 million, to $25.7 million at September 30,
2008, from $26.9 million at December 31, 2007. The
decrease reflects a net loss of $509,000 for the nine months ended September 30,
2008, a $174,000 decrease in accumulated other comprehensive income from net
unrealized gains on securities available-for-sale (a $152,000 in gain from the
sale of FHLMC common stock before a conservator was appointed for FHLMC, was
realized through earnings during the period), and $664,000 in repurchases of the
Company’s common stock. The Company paid dividends of $114,000 to
minority shareholders. Mutual Federal Bancorp, MHC, the majority
shareholder, waived receipt of its dividends. Stockholders’ equity
also reflects a $259,000 increase from recognition of stock benefits earned
under the Company’s Employee Stock Ownership Plan, Management Recognition and
Retention Plan, and Stock Option Plan, offset by a $29,000 reclassification due
to the commitment for release and change in fair value of common stock in the
ESOP subject to the contingent repurchase obligation of ESOP
shares.
Comparison
of Operating Results for the Three Months Ended September 30, 2008 and
2007
General
. The
Company had a net loss of $421,000 for the three months ended September 30,
2008, compared to net income of $123,000 for the three months ended September
30, 2007. The primary reasons for the decrease were a $351,000 charge
for other-than-temporary impairment of FHLMC preferred stock and a $147,000
write down in the fair value of trading securities. Also contributing to the
decrease was an $87,000, or 10.9% decrease in net interest income, to $708,000
for the three months ended September 30, 2008, from $795,000 for the three
months ended September 30, 2007, and the increased provision for loan losses of
$285,000 for the three months ended September 30, 2008, from none in the third
quarter of 2007.
Compensation
and benefits expense increased $39,000, or 11.6%, to $375,000 for the three
months ended September 30, 2008, from $336,000 for the three months ended
September 30, 2007, primarily due to new employees, ordinary
-
course
salary increases, a $16,000 increase in health insurance costs, and a
$2,000 increase in the amortization of stock awards and stock option
expense. The increase in compensation and benefits expense was offset
by a $51,000, or 40.8% decrease in professional fees, to $74,000 for the current
period, from $125,000 for the same period last year. The decrease in
professional fees was due primarily to legal, accounting and consulting fees in
2007 which were not repeated in 2008.
The
annualized return on average assets was (2.27)% for the three months ended
September 30, 2008, compared to 0.67% for the same period last year, and the
annualized return on equity was (6.48)% and 1.77%, respectively, for
these two periods.
Interest
Income
. Interest and dividend income decreased $126,000, or
11.2%, to $996,000 for the three months ended September 30, 2008, compared to
$1.1 million for the three months ended September 30, 2007. The decrease
resulted primarily from decrease of 68 basis points in the average yield on
interest earning assets, to 5.61% in 2008, from 6.29% in 2007. In
addition, it is the Company’s policy to reserve all accrued interest on loans 90
days or more delinquent, which resulted in a $38,000 reduction in interest
income on loans during the third quarter of 2008, compared to a $38,000 increase
during the third quarter of 2007.
Interest
income and fees from loans receivable decreased $70,000, or 7.8%, to $829,000
for the three months ended September 30, 2008, from $899,000 for the three
months ended September 30, 2007. The primary reason was the increase
in the reserve for uncollected interest. The decrease was partially
offset by a $1.4 million, or 2.7%, increase in the average balance of loans
receivable, to $54.2 million in the third quarter of 2008, compared to $52.8
million in the third quarter of 2007. There was a net decrease of 69
basis points in the average yield on loans receivable, to 6.12% in 2008, from
6.81% in 2007.
Interest
and dividend income from securities, FHLB stock, and interest-earning deposits
decreased $56,000, or 25.1%, to $167,000 for the three months ended September
30, 2008, from $223,000 for the three months ended September 30,
2007. The primary reasons for the decrease were a $1.6 million, or
9.1%, decrease in the average balances of securities, FHLB stock, and
interest-earning deposits, to $16.9 million in 2008, from $18.5 million in 2007,
as well as an 85 basis point decrease in average yield to 3.96% in 2008, from
4.81% in 2007. In addition, the FHLB of Chicago has suspended its
dividend, which amounted to $5,000 of income during the third quarter of 2007,
and the Federal Home Loan Mortgage Corporation suspended the dividend on its
common and preferred stocks, resulting in a reduction of $11,000 in dividend
income from this source during the third quarter of 2008, as compared to the
third quarter of 2007.
Interest
Expense
. Interest expense on deposits decreased $60,000, or
20.8%, to $229,000 for the three months ended September 30, 2008, from $289,000
for the three months ended September 30, 2007. The decrease in
interest expense was due primarily to a $1.5 million decrease in the average
balance of interest bearing deposits. The average rate paid on
deposits decreased 51 basis points, to 2.32% for the quarter ended September 30,
2008, from 2.83% for the quarter ended September 30, 2007. Interest
expense on certificates of deposit decreased $58,000, or 25.6%, to $169,000 in
2008, from $227,000 in 2007, because of a $827,000 decrease in the average
balance of certificates of deposit, and a decrease in the average rate paid on
certificates of deposit of 97 basis points, to 3.32% in 2008, from 4.29% in
2007.
Interest
expense on FHLB advances increased $21,000, to $59,000 for the three months
ended September 30, 2008, compared to $38,000 for the three months ended
September 30, 2007. The average balance of FHLB advances increased
$3.4 million, to $6.3 million for the third quarter of 2008, from $2.9 million
for the third quarter of 2007. The average rate paid on advances decreased 157
basis points, to 3.75% in 2008, from 5.32% in 2007. The overall
average cost of funds decreased 47 basis points, to 2.52% in 2008, from 2.99% in
2007.
Net Interest
Income
. Net interest income decreased $87,000, or 10.9%, to
$708,000 for the three months ended September 30, 2008, from $795,000 for the
same quarter last year. Our net interest margin decreased 47 basis
points, to 3.99% in 2008, from 4.46% in 2007. A 68 basis point
decrease in the average yield on interest-earning assets, to 5.61% in 2008, from
6.29% in 2007, and a decrease of $283,000 in the average balance of
interest-earning assets, both contributed to interest income decreasing
by
$126,000. The average rate paid on interest-bearing liabilities
decreased 47 basis points, to 2.52% in 2008, from 2.99% in 2007, and the average
balance of interest-bearing liabilities increased $2.0 million, with interest
expense decreasing by $39,000. The interest rate spread between
interest earning assets and interest bearing liabilities decreased 21 basis
points, to 3.09% in 2008, from 3.30% in 2007.
Provision for Loan
Losses
. During the three months ended September 30, 2008,
management made a $285,000 provision for losses on loans, based on its
quarterly evaluation of the level of the allowance necessary to absorb probable
incurred loan losses at September 30, 2008. Management established
$267,000 in specific allowances against $1.5 million of impaired loans, charged
off $143,000 in realized losses against previously established specific
reserves, and increased the general allowance for loan losses by
$18,000.
Management
considers changes in delinquencies, changes in the composition and volume of
loans, historical loan loss experience, general economic and real estate market
conditions, as well as peer group data, when determining the level on the
allowance for loan losses. The increase in the general allowance
resulted from increases in the factors used for delinquency trends, both in our
portfolio and in the current economic environment, and declines in the value of
real estate reflected in the current market.
During
the three months ended September 30, 2008, non-performing (non-accrual) loans
decreased $49,000, to $3.19 million, from $3.24 million at June 30,
2008. Loans delinquent 60-89 days decreased $743,000, to
$1.4 million at September 30, 2008, compared to $2.1 million at June 30,
2008. During this period, one- to four-family residential mortgage
loans decreased $872,000, or 2.6%, and multi-family residential mortgage loans
increased $1.6 million, or 8.2%.
Impaired
loans, which are measured for impairment using the fair value of the collateral
for collateral dependent loans, had a carrying amount of $2.2 million at
September 30, 2008, with specific valuation allowances of $345,000, or 16.0% of
the carrying amount. All of the impaired loans were one- to
four-family mortgage loans.
At
September 30, 2008, the allowance for loan losses, including specific
allowances, was $700,000, or 1.29% of loans receivable, compared to $558,000, or
1.03% of loans receivable at June 30, 2008. In a similar evaluation
of the allowance for loan losses at September 30, 2007, management determined
that there was no need for an additional loan loss provision for the three
months then ended.
Non-interest
Income
. Non-interest income decreased $494,000, to a loss
of $481,000 for the three month period ended September 30, 2008, compared
to $13,000 income for the three months ended September 30, 2007. The
Company recognized a $351,000 charge for other-than-temporary impairment of
FHLMC preferred stock held as available-for-sale, because the fair value of the
preferred stock has declined significantly since FHFA was appointed conservator
for FHLMC, and we are unable to forecast a recovery. The Company
holds 10,000 shares of FHLMC preferred stock valued at $2.00 per share at
September 30, 2008.
The
Company also recognized a $147,000 fair value loss adjustment on various mutual
funds carried as trading securities and accounted for under FASB Statement No.
159,
The Fair Value Option for
Financial Assets and Financial Liabilities,
which was adopted for these
mutual funds on January 1, 2008.
Non-interest
Expense
. Non-interest expense increased $8,000, or 1.3%, to
$607,000 for the three months ended September 30, 2008, from $599,000 for the
same quarter last year, primarily as a result of increased compensation and
employee benefits expense, partially offset by decreases in professional
fees. Compensation and employee benefits expense increased $39,000,
or 11.6%, to $375,000 in 2008, from $336,000 in 2007, primarily due to new
employees,
ordinary
-
course
salary increases, a $16,000 increase in health insurance costs, and a $2,000
increase in the amortization of stock awards and stock option
expense.
Occupancy
costs decreased $2,000, or 5.3%, to $36,000 in 2008, from $38,000 in
2007. Data processing fees increased $8,000, or 30.8%, to $34,000,
from $26,000 in 2007. Professional fees, including legal, accounting
and consulting fees, decreased $51,000, or 40.8%, to $74,000 in 2008, from
$125,000 in 2007. (Legal, accounting, and consulting expenses
decreased $27,000, $19,000, and $5,000,
respectively.) Miscellaneous expenses increased $14,000, or
18.9%, to $88,000 for the third quarter of 2008, from $74,000 for the third
quarter of 2007.
The
Company’s ratio of non-interest expense to average assets increased to 3.28% in
the third quarter of 2008, from 3.25% in 2007, and its efficiency ratio was
83.7% in 2008, compared to 74.1% in 2007.
Income Tax
Expense
. The provision for income taxes decreased $330,000, to
a benefit of $244,000 in 2008, from an expense of $86,000 in 2007, largely due
to the $874,000 decrease in pre-tax income. The effective tax rate
for the quarter ended September 30, 2008, decreased to 36.7%, compared to 41.2%
for this quarter last year.
Average
Balance Sheet
The
following table sets forth average balance sheets, average annualized yields and
costs, and certain other information for the three months ended September 30,
2008 and 2007. No tax-equivalent yield adjustments were made, as
their effects were not material. All average balances are based on an
average of daily balances. Non-accrual loans are included in the
computation of average balances, but have been reflected in the table as loans
carrying a zero yield. The yields set forth below include the effect
of deferred fees, discounts and premiums that are amortized or accreted to
interest income or expense.
|
|
For
the Three Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
Average
Outstanding Balance
|
|
|
|
|
|
|
|
|
Average
Outstanding Balance
|
|
|
|
|
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
54,192
|
|
|
$
|
829
|
|
|
|
6.12
|
%
|
|
$
|
52,786
|
|
|
$
|
899
|
|
|
|
6.81
|
%
|
Securities
|
|
|
13,738
|
|
|
|
156
|
|
|
|
4.54
|
|
|
|
17,022
|
|
|
|
207
|
|
|
|
4.86
|
|
Interest-earning
deposits
|
|
|
2,503
|
|
|
|
11
|
|
|
|
1.76
|
|
|
|
908
|
|
|
|
11
|
|
|
|
4.85
|
|
Federal
Home Loan Bank
Stock
|
|
|
610
|
|
|
|
-
|
|
|
|
0.00
|
|
|
|
610
|
|
|
|
5
|
|
|
|
3.28
|
|
Total
interest-earning
assets
|
|
|
71,043
|
|
|
$
|
996
|
|
|
|
5.61
|
%
|
|
|
71,326
|
|
|
$
|
1,122
|
|
|
|
6.29
|
%
|
Non-interest-earning
assets
|
|
|
2,999
|
|
|
|
|
|
|
|
|
|
|
|
2,413
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
74,042
|
|
|
|
|
|
|
|
|
|
|
$
|
73,739
|
|
|
|
|
|
|
|
|
|
Interest-Bearing
Liabilities:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
|
$
|
19,064
|
|
|
$
|
60
|
|
|
|
1.26
|
%
|
|
$
|
19,699
|
|
|
$
|
62
|
|
|
|
1.26
|
%
|
Certificates
of deposit
|
|
|
20,342
|
|
|
|
169
|
|
|
|
3.32
|
|
|
|
21,169
|
|
|
|
227
|
|
|
|
4.29
|
|
Total
interest-bearing
deposits
|
|
|
39,406
|
|
|
|
229
|
|
|
|
2.32
|
|
|
|
40,868
|
|
|
|
289
|
|
|
|
2.83
|
|
Federal
Home Loan Bank
advances
|
|
|
6,293
|
|
|
|
59
|
|
|
|
3.75
|
|
|
|
2,859
|
|
|
|
38
|
|
|
|
5.32
|
|
Total
interest-bearing
liabilities
|
|
|
45,699
|
|
|
|
288
|
|
|
|
2.52
|
%
|
|
|
43,727
|
|
|
|
327
|
|
|
|
2.99
|
%
|
Non-interest-bearing
liabilities
|
|
|
2,346
|
|
|
|
|
|
|
|
|
|
|
|
2,260
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
48,045
|
|
|
|
|
|
|
|
|
|
|
|
45,987
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
25,997
|
|
|
|
|
|
|
|
|
|
|
|
27,752
|
|
|
|
|
|
|
|
|
|
Total
liabilities and
stockholders’
equity
|
|
$
|
74,042
|
|
|
|
|
|
|
|
|
|
|
$
|
73,739
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$
|
708
|
|
|
|
|
|
|
|
|
|
|
$
|
795
|
|
|
|
|
|
Net
interest rate spread
(2)
|
|
|
|
|
|
|
|
|
|
|
3.09
|
%
|
|
|
|
|
|
|
|
|
|
|
3.30
|
%
|
Net
interest-earning
assets
(3)
|
|
$
|
25,344
|
|
|
|
|
|
|
|
|
|
|
$
|
27,599
|
|
|
|
|
|
|
|
|
|
Net
interest margin
(4)
|
|
|
|
|
|
|
|
|
|
|
3.99
|
%
|
|
|
|
|
|
|
|
|
|
|
4.46
|
%
|
Ratio
of interest-earning
assets
to interest-
bearing
liabilities
|
|
|
|
|
|
|
|
|
|
|
155.46
|
%
|
|
|
|
|
|
|
|
|
|
|
163.12
|
%
|
(1)
|
Non-interest-bearing
checking deposits are included in non-interest-bearing
liabilities.
|
(2)
|
Net
interest rate spread represents the difference between the yield on
average interest-earning assets and the cost of average interest-bearing
liabilities.
|
(3)
|
Net
interest-earning assets represents total interest-earning assets less
total interest-bearing liabilities.
|
(4)
|
Net
interest margin represents net interest income divided by average total
interest-earning assets.
|
Comparison
of Operating Results for the Nine Months Ended September 30, 2008 and
2007
General
. The
Company had a net loss of $509,000 for the nine months ended September 30, 2008,
compared to net income of $318,000 for the nine months ended September 30,
2007. The primary reasons for the decrease were a $382,000 charge for
other-than-temporary impairment of FHLMC preferred stock, a $294,000 write down
in the fair value of trading securities, partially offset by a $152,000 gain on
the sale of FHLMC common stock prior to the appointment of a conservator for
FHLMC, and the increased provision for loan losses, to $553,000 for the nine
months ended September 30, 2008, from $10,000 in 2007. The decrease
also resulted from a $226,000, or 9.7% decrease in net
interest
income, to $2.1 million for the nine months ended September 30, 2008, from $2.3
million for the nine months ended September 30, 2007.
Compensation
and benefits expense increased $116,000, or 11.5%, to $1.1 million for the nine
months ended September 30, 2008, from $1.0 million for the nine months ended
September 30, 2007, primarily due to new employees, ordinary-
course
salary increases, a $54,000 increase in health insurance premiums, and a $14,000
increase in the amortization of stock awards and stock option
expense. The increase in compensation and benefits expense was
partially offset by a $101,000, or 26.2% decrease in professional fees, to
$285,000 for the current period, from $386,000 for the same period last
year. The decrease in professional fees was due primarily to legal,
accounting and consulting fees in 2007 which were not repeated in
2008.
The
annualized return on average assets was (0.92)% for the nine months ended
September 30, 2008, compared to 0.57% for the same period last year, and the
annualized return on equity was (2.55)% and 1.51%, respectively, for
these two periods.
Interest
Income
. Interest and dividend income decreased $271,000, or
8.2%, to $3.0 million for the nine months ended September 30, 2008, compared to
$3.3 million for the nine months ended September 30, 2007. The decrease resulted
primarily from a decrease of 41 basis points in the average yield on interest
earning assets, to 5.67% in 2008, from 6.08% in 2007. In addition, it
is the Company’s policy to reserve all accrued interest on loans 90 days or more
delinquent, which resulted in a $135,000 reduction in interest income on loans
during the first nine months of 2008, compared to a $23,000 increase during the
first nine months of 2007.
Interest
income and fees from loans receivable decreased $149,000, or 5.7%, to $2.5
million for the nine months ended September 30, 2008, from $2.6 million for the
nine months ended September 30, 2007. The primary reason was the
increase in the reserve for uncollected interest. There was a
decrease of 39 basis points in the average yield on loans receivable, to 6.18%
in 2008, from 6.57% in 2007.
Interest
and dividend income from securities, FHLB stock, and interest-earning deposits
decreased $122,000, or 17.9%, to $560,000 for the nine months ended September
30, 2008, from $682,000 for the nine months ended September 30,
2007. The primary reasons for the decrease were a $210,000, or
1.1%, decrease in average balances of securities, FHLB stock, and
interest-earning deposits, to $19.0 million in 2008, from $19.2 million in 2007,
as well as an 56 basis point decrease in average yield to 4.17% in 2008, from
4.73% in 2007. In addition, the FHLB of Chicago has suspended its
dividend, which amounted to $12,000 of income during the first nine months of
2007, and the Federal Home Loan Mortgage Corporation suspended the dividends on
its common and preferred stock, resulting in a reduction of $15,000 in dividend
income from this source during the first nine months of 2008.
Interest
Expense
. Interest expense on deposits decreased $123,000, or
14.1%, to $751,000 for the nine months ended September 30, 2008, from $874,000
for the nine months ended September 30, 2007. The decrease in
interest expense was due primarily to a $2.5 million decrease in the average
balance of interest bearing deposits and to a decrease in the average rate paid
on deposits of 24 basis points, to 2.54% for the nine months ended September 30,
2008, from 2.78% for the nine months ended September 30,
2007. Interest expense on certificates of deposit decreased $112,000,
or 16.3%, to $576,000 in 2008, from $688,000 in 2007, because of a $1.3 million
decrease in the average balance of certificates of deposit, and a decrease in
the average rate paid on certificates of deposit of 45 basis points, to 3.75% in
2008, from 4.20% in 2007.
Interest
expense on FHLB advances increased $78,000, to $176,000 for the nine months
ended September 30, 2008, compared to $98,000 for the nine months ended
September 30, 2007. The average balance of FHLB advances increased
$3.4 million, to $5.8 million for the first nine months of 2008, from
$2.4
million for the first nine months of 2007. The average rate paid on advances
decreased 132 basis points, to 4.02% in 2008, from 5.34% in 2007. The
overall average cost of funds decreased 19 basis points, to 2.73% in 2008, from
2.92% in 2007.
Net Interest
Income
. Net interest income decreased $226,000, or 9.7%, to
$2.1 million for the nine months ended September 30, 2008, from $2.3 million for
the same period last year. Our net interest margin decreased 35 basis
points, to 3.93% in 2008, from 4.28% in 2007. A 41 basis point
decrease in the average yield on interest-earning assets, to 5.67% in 2008, from
6.08% in 2007, and the increase in non-accrual loans, both contributed to
interest income decreasing by $271,000. The average rate paid on
interest-bearing liabilities decreased 19 basis points, to 2.73% in 2008, from
2.92% in 2007, with interest expense decreasing by $45,000. The
interest rate spread between interest earning assets and interest bearing
liabilities decreased 22 basis points, to 2.94% in 2008, from 3.16% in
2007.
Provision for Loan
Losses
. During the nine months ended September 30, 2008,
management made an additional $553,000 provision for losses on loans, based on
its quarterly evaluation of the level of the allowance necessary to absorb
probable incurred loan losses at September 30, 2008. Management
established $488,000 in specific allowances, charged off $143,000 in realized
losses against previously established specific reserves, and increased the
general allowance for loan losses by $65,000.
Management
considers changes in delinquencies, changes in the composition and volume of
loans, historical loan loss experience, general economic and real estate market
conditions, as well as peer group data, when determining the level on the
allowance for loan losses. The increase in the general allowance
resulted from increases in the factors used for delinquency trends, both in our
portfolio and in the current economic environment, and declines in the value of
real estate reflected in the current market.
During
the nine months ended September 30, 2008, non-performing (non-accrual) loans
increased to $3.2 million, from $259,000 at December 31,
2007. Loans delinquent 60-89 days were $1.4 million at September 30,
2008, decreasing $1.2 million, from $2.6 million at December 31,
2007. The loan portfolio increased $359,000, or 0.7%, to $53.4
million at September 30, 2008, from $53.0 million at December 31,
2007. During this period, one- to four-family residential mortgage
loans decreased $872,000, or 2.6%, and multi-family residential mortgage loans
increased $1.6 million, or 8.2%.
Impaired
loans, which are measured for impairment using the fair value of the collateral
for collateral dependent loans, had a carrying amount of $2.2 million at
September 30, 2008, with specific valuation allowances of $345,000, or 16.0% of
the carrying amount. All of the impaired loans were one- to
four-family mortgage loans.
At
September 30, 2008, the allowance for loan losses, including specific
allowances, was $700,000, or 1.29% of loans receivable, compared to $290,000, or
0.54% of loans receivable at December 31, 2007. In a similar
evaluation of the allowance for loan losses at September 30, 2007, management
determined that there was a need for a provision of $10,000 for the nine months
then ended.
Non-interest
Income
. Non-interest income decreased $520,000, to a loss
of $485,000 for the nine months ended September 30, 2008, compared to
$35,000 income for the nine months ended September 30, 2007. The
Company recognized a $382,000 loss for other-than-temporary impairment of FHLMC
preferred stock held as available-for-sale, because the fair value of the
preferred stock has continued to decline since FHFA was appointed conservator
for FHLMC, and we are unable to forecast a recovery. Partially
offsetting this loss, and prior to the conservator appointment, the Company sold
its remaining shares of FHLMC common stock and realized a gain of
$152,000. The Company holds 10,000 shares of FHLMC preferred stock
valued at $2.00 per share at September 30, 2008.
The
Company also recognized a $294,000 fair value loss adjustment on various mutual
funds carried as trading securities and accounted for under FASB Statement No.
159,
The Fair Value Option for
Financial Assets and Financial Liabilities,
which was adopted for these
mutual funds on January 1, 2008.
Non-interest
Expense
. Non-interest expense increased $36,000, or 2.0%, to
$1.8 million for the nine months ended September 30, 2008, approximately the
same as last year. Compensation and employee benefits increased
$116,000, or 11.5%, to $1.1 million in 2008, from $1.0 million in 2007,
primarily due to new employees, ordinary-
course
salary increases, a $54,000 increase in health insurance premiums, and to a
$15,000 increase in the amortization of stock grant and stock option
expense.
Occupancy
costs increased $2,000, or 1.7%, to $122,000 in 2008, from $120,000 in
2007. Data processing fees increased $4,000, or 4.9%, to $85,000,
from $81,000 in 2007. Professional fees, including legal, accounting
and consulting fees, decreased $101,000, or 26.2%, to $285,000 in 2008, from
$386,000 in 2007. (Legal, accounting, and consulting expenses
decreased $43,000, $38,000, and $20,000, respectively.) Miscellaneous
expenses increased $15,000, or 6.9%, to $234,000 in 2008, from $219,000 in
2007.
The
Company’s ratio of non-interest expense to average assets increased to 3.33% in
the first nine months of 2008, from 3.24% for the first nine months of 2007, and
the efficiency ratio increased to 86.6% in 2008, from 76.9% in
2007.
Income Tax
Expense
. The provision for income taxes decreased $498,000, to
a tax benefit of $282,000 in 2008, from a tax expense of $216,000 in 2007,
largely due to the $1.3 million decrease in pre-tax income to a loss of $791,000
in 2008, from income of $534,000 in 2007. The effective tax rate for
the nine months ended September 30, 2008, decreased to 35.7%, compared to 40.5%
for this period last year.
Average
Balance Sheet
The
following table sets forth average balance sheets, average annualized yields and
costs, and certain other information for the nine months ended September 30,
2008 and 2007. No tax-equivalent yield adjustments were made, as
their effects were not material. All average balances are based on an
average of daily balances. Non-accrual loans are included in the
computation of average balances, but have been reflected in the table as loans
carrying a zero yield. The yields set forth below include the effect
of deferred fees, discounts and premiums that are amortized or accreted to
interest income or expense.
|
|
For
the Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
Average
Outstanding Balance
|
|
|
|
|
|
|
|
|
Average
Outstanding Balance
|
|
|
|
|
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
53,106
|
|
|
$
|
2,462
|
|
|
|
6.18
|
%
|
|
$
|
53,024
|
|
|
$
|
2,611
|
|
|
|
6.57
|
%
|
Securities
|
|
|
14,718
|
|
|
|
518
|
|
|
|
4.69
|
|
|
|
17,947
|
|
|
|
643
|
|
|
|
4.78
|
|
Interest-earning
deposits
|
|
|
2,578
|
|
|
|
42
|
|
|
|
2.17
|
|
|
|
728
|
|
|
|
27
|
|
|
|
4.95
|
|
Federal
Home Loan Bank
Stock
|
|
|
610
|
|
|
|
-
|
|
|
|
0.00
|
|
|
|
570
|
|
|
|
12
|
|
|
|
2.81
|
|
Total
interest-earning
assets
|
|
|
71,012
|
|
|
$
|
3,022
|
|
|
|
5.67
|
%
|
|
|
72,269
|
|
|
$
|
3,293
|
|
|
|
6.08
|
%
|
Non-interest-earning
assets
|
|
|
2,986
|
|
|
|
|
|
|
|
|
|
|
|
2,269
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
73,998
|
|
|
|
|
|
|
|
|
|
|
$
|
74,538
|
|
|
|
|
|
|
|
|
|
Interest-Bearing
Liabilities:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
|
$
|
18,918
|
|
|
$
|
175
|
|
|
|
1.23
|
%
|
|
$
|
20,126
|
|
|
$
|
186
|
|
|
|
1.23
|
%
|
Certificates
of deposit
|
|
|
20,502
|
|
|
|
576
|
|
|
|
3.75
|
|
|
|
21,818
|
|
|
|
688
|
|
|
|
4.20
|
|
Total
interest-bearing
deposits
|
|
|
39,420
|
|
|
|
751
|
|
|
|
2.54
|
|
|
|
41,944
|
|
|
|
874
|
|
|
|
2.78
|
|
Federal
Home Loan Bank
advances
|
|
|
5,832
|
|
|
|
176
|
|
|
|
4.02
|
|
|
|
2,448
|
|
|
|
98
|
|
|
|
5.34
|
|
Total
interest-bearing
liabilities
|
|
|
45,252
|
|
|
|
927
|
|
|
|
2.73
|
%
|
|
|
44,392
|
|
|
|
972
|
|
|
|
2.92
|
%
|
Non-interest-bearing
liabilities
|
|
|
2,151
|
|
|
|
|
|
|
|
|
|
|
|
2,096
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
47,403
|
|
|
|
|
|
|
|
|
|
|
|
46,488
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
26,595
|
|
|
|
|
|
|
|
|
|
|
|
28,050
|
|
|
|
|
|
|
|
|
|
Total
liabilities and
stockholders’
equity
|
|
$
|
73,998
|
|
|
|
|
|
|
|
|
|
|
$
|
74,538
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$
|
2,095
|
|
|
|
|
|
|
|
|
|
|
$
|
2,321
|
|
|
|
|
|
Net
interest rate spread
(2)
|
|
|
|
|
|
|
|
|
|
|
2.94
|
%
|
|
|
|
|
|
|
|
|
|
|
3.16
|
%
|
Net
interest-earning
assets
(3)
|
|
$
|
25,760
|
|
|
|
|
|
|
|
|
|
|
$
|
27,877
|
|
|
|
|
|
|
|
|
|
Net
interest margin
(4)
|
|
|
|
|
|
|
|
|
|
|
3.93
|
%
|
|
|
|
|
|
|
|
|
|
|
4.28
|
%
|
Ratio
of interest-earning
assets
to interest-
bearing
liabilities
|
|
|
|
|
|
|
|
|
|
|
156.93
|
%
|
|
|
|
|
|
|
|
|
|
|
162.80
|
%
|
(1)
|
Non-interest-bearing
checking deposits are included in non-interest-bearing
liabilities.
|
(2)
|
Net
interest rate spread represents the difference between the yield on
average interest-earning assets and the cost of average interest-bearing
liabilities.
|
(3)
|
Net
interest-earning assets represents total interest-earning assets less
total interest-bearing liabilities.
|
(4)
|
Net
interest margin represents net interest income divided by average total
interest-earning assets.
|
Liquidity
We
maintain liquid assets at levels we consider adequate to meet our liquidity
needs. We adjust our liquidity levels to fund deposit outflows, pay
real estate taxes on mortgage loans, repay our borrowings and to fund loan
commitments. We also adjust liquidity as appropriate to meet asset
and liability management objectives.
Our
primary sources of liquidity are deposits, amortization and prepayment of loans,
maturities of investment securities and other short-term investments, and
earnings and funds provided from operations.
While
scheduled principal repayments on loans are a relatively predictable source of
funds, deposit flows and loan prepayments are greatly influenced by market
interest rates, economic conditions, and rates offered by our
competition. We set the interest rates on our deposits to maintain a
desired level of total deposits. In addition, we invest excess funds
in short-term interest-earning assets, which provide liquidity to meet lending
requirements.
A portion
of our liquidity consists of cash and cash equivalents, which are a product of
our operating, investing and financing activities. At September 30,
2008, $4.0 million of our assets were invested in cash and cash
equivalents. Our primary sources of cash are principal repayments on
loans, proceeds from the calls and maturities of investment securities,
increases in deposit accounts, and FHLB advances. Our cash flows are
derived from operating activities, investing activities and financing activities
as reported in our consolidated statements of cash flows.
Our
primary investing activities are the origination of loans and the purchase of
investment securities. During the nine months ended September 30,
2008, net loan originations totaled $913,000. During the nine months
ended September 30, 2007, net loan originations totaled $1.5
million. We do not sell loans. Cash received from
principal repayments, calls and maturities of securities totaled $2.9 million
and $2.8 million for the nine months ended September 30, 2008 and 2007,
respectively. We purchased $641,000 in securities during the nine
months ended September 30, 2008, and sold $160,000 in securities during this
period. We purchased $110,000 in Federal Home Loan Bank common stock
during the first nine months of 2007 to meet our minimum required for membership
in the FHLB of Chicago.
Deposit
flows are generally affected by the level of interest rates, the interest rates
and products offered by us and by local competitors, and other
factors. There was a net decrease in total deposits of $338,000 for
the nine months ended September 30, 2008, and a net decrease of $2.5 million for
the same period in 2007.
Liquidity
management is both a daily and long-term function of business
management. If we require funds beyond our ability to generate them
internally, borrowing agreements exist with the Federal Home Loan Bank of
Chicago, which provide an additional source of funds. During the nine
months ended September 30, 2008, the Company borrowed $4.0 million in advances
from the Federal Home Loan Bank, and repaid $3.0 million. Our
available borrowing limit was $12.2 million, an additional $6.2 million over the
$6.0 million borrowed at September 30, 2008.
During
the nine months ended September 30, 2008, we repurchased 60,000 shares of our
common stock for $664,000, under a share repurchase program. During
the same period last year, we repurchased 83,300 shares for $1.1
million.
At
September 30, 2008, the Company had no outstanding commitments to originate
loans, primarily due to a lack of recent applications and the current economic
environment. At September 30, 2008, certificates of deposit scheduled
to mature in less than one year totaled $18.1 million. Based on prior
experience, management believes that a significant portion of such deposits will
remain with us, although there can be no assurance that this will be the
case. In the event we do not retain a significant portion of our
maturing certificates of deposit, we will have to utilize other funding sources,
such as Federal Home Loan Bank of Chicago advances, in order to maintain our
level of assets. Alternatively, we would reduce our level of liquid
assets, such as our cash and cash equivalents, or securities. In
addition, the cost of such deposits may be significantly higher if market
interest rates are higher at the time of renewal.
Off-Balance-Sheet
Arrangements
In the
ordinary course of business, the Company is a party to credit-related financial
instruments with off-balance-sheet risk to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit. The Company follows the same credit policies in making
commitments as it does for on-balance-sheet instruments.
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Therefore, the total commitment amounts do
not necessarily represent future cash requirements.
The
Company had no outstanding commitments to make loans at September 30,
2008. At December 31, 2007, the Company had outstanding
commitments to make loans of $205,000.
Impact
of Inflation and Changing Prices
Our
financial statements and related notes have been prepared in accordance with
U.S. generally accepted accounting principles (“GAAP”). GAAP
generally requires the measurement of financial position and operating results
in terms of historical dollars without consideration for changes in the relative
purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of our
operations. Unlike industrial companies, our assets and liabilities
are primarily monetary in nature. As a result, changes in market
interest rates have a greater impact on performance than the effects of
inflation.
Management
of Market Risk
General
. The
majority of our assets and liabilities are monetary in
nature. Consequently, our most significant form of market risk is
interest rate risk. Our assets, consisting primarily of mortgage
loans, have longer maturities than our liabilities, which consist primarily of
deposits. As a result, a principal part of our business strategy is
to manage interest rate risk and reduce the exposure of our net interest income
to changes in market interest rates. Our board of directors has
approved a series of policies for evaluating interest rate risk inherent in our
assets and liabilities; for determining the level of risk that is appropriate
given our business strategy, operating environment, capital, liquidity and
performance objectives; and for managing this risk consistent with these
policies. Senior management regularly monitors the level of interest
rate risk and reports to the board of directors on our compliance with our
asset/liability policies and on our interest rate risk position.
We have
sought to manage our interest rate risk in order to control the exposure of our
earnings and capital to changes in interest rates. During the low
interest rate environment that has existed in recent years, we have managed our
interest rate risk by maintaining a high equity-to-assets ratio and building and
maintaining portfolios of shorter-term fixed rate residential loans and second
mortgage loans. By maintaining a high equity-to-assets ratio, we
believe that we are better positioned to absorb more interest rate risk in order
to improve our net interest margin. However, maintaining high equity
balances reduces our return on equity ratio, and investments in shorter-term
assets generally bear lower yields than longer-term investments.
Net Portfolio
Value
. In past years, many savings institutions have measured
interest rate sensitivity by computing the “gap” between the assets and
liabilities that are expected to mature or reprice within certain time periods,
based on assumptions regarding loan prepayment and deposit decay rates formerly
provided by the OTS. However, the OTS now requires the computation of
amounts by which the net present value of an institution’s cash flow from
assets, liabilities and off balance sheet items (the
institution’s
net portfolio value or “NPV”) would change in the event of a range of assumed
changes in market interest rates. The OTS provides all institutions
that file a Consolidated Maturity/Rate Schedule as a part of their
quarterly Thrift Financial Report with an interest rate sensitivity report of
net portfolio value. The OTS simulation model uses a discounted cash
flow analysis and an option-based pricing approach to measuring the interest
rate sensitivity of net portfolio value. Historically, the OTS model
estimated the economic value of each type of asset, liability and off-balance
sheet contract under the assumption that the United States Treasury yield curve
increases or decreases instantaneously by 100 to 300 basis points in 100 basis
point increments. A basis point equals one-hundredth of one percent,
and 100 basis points equals one percent. An increase in interest
rates from 3% to 4% would mean, for example, a 100 basis point increase in the
“Change in Interest Rates” column below. The OTS provides us the
results of the interest rate sensitivity model, which is based on information we
provide to the OTS to estimate the sensitivity of our net portfolio
value.
The table
below sets forth, as of June 30, 2008, the latest date available, the estimated
changes in our NPV and our net interest income that would result from the
designated instantaneous changes in the U.S. Treasury yield
curve. Computations of prospective effects of hypothetical interest
rate changes are based on numerous assumptions including relative levels of
market interest rates, loan prepayments and deposit decay, and should not be
relied upon as indicative of actual results.
Change
In
|
|
|
|
|
|
Net
Portfolio Value as a
Percentage
of Present Value of
Assets
|
|
Interest
Rates
(Basis
Points)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars
in thousands)
|
|
|
+300
|
|
|
$
|
19,699
|
|
|
$
|
(6,380
|
)
|
|
|
-24
|
%
|
|
|
27.82
|
%
|
|
|
-571
|
bp
|
|
+200
|
|
|
|
21,819
|
|
|
|
(4,259
|
)
|
|
|
-16
|
|
|
|
29.84
|
|
|
|
-368
|
|
|
+100
|
|
|
|
23,993
|
|
|
|
(2,086
|
)
|
|
|
-8
|
|
|
|
31.79
|
|
|
|
-174
|
|
|
+50
|
|
|
|
25,075
|
|
|
|
(1,004
|
)
|
|
|
-4
|
|
|
|
32.70
|
|
|
|
-82
|
|
Unchanged
|
|
|
|
26,079
|
|
|
|
—
|
|
|
|
—
|
|
|
|
33.52
|
|
|
|
—
|
|
|
-50
|
|
|
|
27,010
|
|
|
|
931
|
|
|
|
+4
|
|
|
|
34.26
|
|
|
|
+73
|
|
|
-100
|
|
|
|
27,905
|
|
|
|
1,826
|
|
|
|
+7
|
|
|
|
34.94
|
|
|
|
+141
|
|
The table
above indicates that at June 30, 2008, in the event of a 100 basis point
decrease in interest rates, we would experience a 7% increase in net portfolio
value. (The OTS model did not report a calculation for a 200 basis
point decrease in interest rates at June 30, 2008.) In the event of a
200 basis point increase in interest rates, we would experience a 16% decrease
in net portfolio value.
Certain
shortcomings are inherent in the methodology used in the above interest rate
risk measurement. Modeling changes in net portfolio value requires
making certain assumptions that may or may not reflect the manner in which
actual yields and costs respond to changes in market interest
rates. In this regard, the net portfolio value table presented
assumes that the composition of our interest-sensitive assets and liabilities
existing at the beginning of a period remains constant over the period being
measured and assumes that a particular change in interest rates is reflected
uniformly across the yield curve regardless of the duration or repricing of
specific assets and liabilities. Accordingly, although the net
portfolio value table provides an indication of our interest rate risk exposure
at a particular point in time, such measurements do not provide a precise
forecast of the effect of changes in market interest rates on net interest
income and will differ from actual results.
Item 3
.
Quantitative and Qualitative
Disclosures About Market Risk
Disclosure
for this item is currently not required for smaller reporting companies on an
interim basis.
Item 4
.
Controls and
Procedures
As of the
end of the period covered by this report, we carried out an evaluation, under
the supervision, and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures as contemplated
by Exchange Act Rule 13a-15. Based upon, and as of the date of
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that, as of the end of the period covered by this report, the
Company’s disclosure controls and procedures are effective, in all material
respects, in timely alerting them to material information relating to the
Company (and its consolidated subsidiaries) required to be included in the
periodic reports the Company is required to file and submit to the Securities
and Exchange Commission under the Exchange Act.
There
have been no changes in the Company’s internal controls during the period
covered by this report that have materially affected, or are reasonably likely
to materially affect, the Company’s internal controls over financial
reporting.
PART II
. –
OTHER INFORMATION
Item 1A
is currently not required for smaller reporting companies and has been
omitted.
The
Company and the Bank are not involved in any pending proceedings other than the
legal proceedings occurring in the ordinary course of business. Such
legal proceedings in the aggregate are believed by management to be immaterial
to the Company’s business, financial condition, results of operations and cash
flows.
Item 2
.
Unregistered Sales of Equity
Securities and Use of Proceeds
.
|
|
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
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/1/08–7/31/08
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
136,044
|
|
8/1/08–8/31/08
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
136,044
|
|
9/1/08–9/30/08
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
136,044
|
|
(1)
|
On
May 29, 2008 the Company announced that its Board of Directors had
approved a stock repurchase program that authorized the purchase of up to
5%, or 175,500 shares, of the Company’s then outstanding shares of common
stock, from time to time in open market or privately negotiated
transactions. Unless terminated or amended earlier by the Board of
Directors, the stock repurchase program will end when the Company has
repurchased all 175,500 shares authorized for
repurchase.
|
Item 3
.
Defaults Upon Senior
Securities
.
None
Item 4
.
Submission of Matters to a
Vote of Security Holders
.
None
None
The
exhibits filed as part of this Form 10-Q are listed in the Exhibit Index,
which is incorporated herein by reference.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
MUTUAL FEDERAL BANCORP,
INC.
|
|
|
|
|
|
|
By:
|
/s/Stephen
M. Oksas
|
|
|
|
Stephen
M. Oksas
|
|
|
|
President
and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/John
L. Garlanger
|
|
|
|
John
L. Garlanger
|
|
|
|
Chief
Financial Officer
|
|
|
|
|
|
EXHIBIT INDEX
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
32.1
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|