Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period ended September 30, 2009
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For transition period from ____________to_____________
Commission File Number 000-53790
FIRST SENTRY BANCSHARES, INC.
---------------------------------
(Exact Name of Registrant as Specified in Charter)
West Virginia 03-0398338
---------------------------------- -----------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization )
823 Eighth Street, Huntington, West Virginia 25701
-------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(304) 522-6400
--------------------------------------------------
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 Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X].
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). Yes [ ] No [ ]
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. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
Indicate the number of shares outstanding of each of the Issuer's classes of
common stock as of the latest practicable date.
1,437,651 shares of Common Stock, par value $1.00 per share, were issued and
outstanding as of November 13, 2009.
FIRST SENTRY BANCSHARES, INC.
Form 10-Q Quarterly Report
Table of Contents
PART I FINANCIAL INFORMATION...................................................1
ITEM 1. FINANCIAL STATEMENTS...................................................1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................................20
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2009 AND
DECEMBER 31, 2008...........................................................21
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009
AND 2008....................................................................24
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
AND 2008....................................................................27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....30
ITEM 4T. CONTROLS AND PROCEDURES.........................................30
PART II OTHER INFORMATION.....................................................30
ITEM 1. LEGAL PROCEEDINGS...............................................30
ITEM 1A. RISK FACTORS....................................................30
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.....30
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............30
ITEM 5. OTHER INFORMATION...............................................31
ITEM 6. EXHIBITS........................................................31
SIGNATURES ................................................................32
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST SENTRY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 2009 (Unaudited) and December 31, 2008
(Dollars in Thousands)
September 30, December 31,
2009 2008
(Unaudited)
ASSETS
Cash and due from banks $ 8,124 $ 7,534
Federal funds sold 30 -
-------- --------
Cash and cash equivalents 8,154 7,534
Interest-earning deposits 13,628 18,677
Investments available-for-sale 83,069 70,659
Investments held-to-maturity 16,215 9,286
Federal Home Loan Bank stock, at cost 3,038 2,177
Loans, net of allowance of $3,740 (unaudited)
and $3,227, respectively 352,661 220,945
Interest receivable 2,315 1,652
Bank premises and equipment, net 6,934 4,858
Other real estate owned 2,979 1,491
Goodwill and core deposit intangible 1,904 -
Other assets 2,168 1,218
-------- --------
$493,065 $338,497
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing $ 54,123 $ 39,724
Interest-bearing 336,299 225,476
-------- --------
Total deposits 390,422 265,200
Securities sold under agreements to repurchase 19,540 12,498
Federal Home Loan Bank advances 43,080 35,560
Federal funds purchased - 518
Interest payable 1,163 707
Income taxes payable - 11
Other liabilities 374 319
-------- --------
454,579 314,813
-------- --------
TRUST PREFERRED SECURITIES 9,000 5,000
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $1 par value, 5,280,000 shares authorized
1,437,651 issued and outstanding at September 30, 2009
(unaudited) and 1,056,000 issued and outstanding at
December 31, 2008 1,438 1,056
Additional paid-in capital 15,277 6,144
Retained earnings 11,906 11,451
Accumulated other comprehensive income 865 33
-------- --------
29,486 18,684
-------- --------
$493,065 $338,497
======== ========
See Notes to Consolidated Financial Statements
1
FIRST SENTRY BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements Of Income (Unaudited)
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
------- ------- ------- -------
INTEREST INCOME
Loans, including fees $ 3,723 $ 3,574 $10,565 $10,870
Investment securities 771 720 2,459 1,951
Interest-earning deposits and cash equivalents 125 172 424 414
------- ------- ------- -------
4,619 4,466 13,448 13,235
------- ------- ------- -------
INTEREST EXPENSE
Deposits 1,503 1,812 4,553 5,430
Securities sold under agreements to repurchase 96 127 311 368
Trust preferred securities 28 56 106 189
Advances 303 292 858 793
------- ------- ------- -------
1,930 2,287 5,828 6,780
------- ------- ------- -------
NET INTEREST INCOME 2,689 2,179 7,620 6,455
PROVISION FOR LOAN LOSSES 861 264 1,403 763
------- ------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,828 1,915 6,217 5,692
------- ------- ------- -------
OTHER INCOME
Service fees 18 13 46 42
Securities gains 2 36 60 112
Gains from trading activities - - - 4
Impairment losses on held-to-maturity securities - - (500) -
Other charges, commissions and fees 322 283 829 784
------- ------- ------- -------
342 332 435 942
------- ------- ------- -------
OTHER EXPENSES
Salaries and employee benefits 724 651 2,121 1,942
Equipment and occupancy expenses 143 166 455 499
Data processing 136 112 397 307
Professional fees 59 16 153 119
Taxes, other than payroll, property and income 51 49 147 155
Insurance 158 50 497 153
Other expenses 455 388 1,336 979
------- ------- ------- -------
1,726 1,432 5,106 4,154
------- ------- ------- -------
INCOME BEFORE INCOME TAX 444 815 1,546 2,480
INCOME TAX EXPENSE 125 294 457 877
------- ------- ------- -------
NET INCOME $ 319 $ 521 $ 1,089 $ 1,603
======= ======= ======= =======
WEIGHTED AVERAGE EARNINGS PER SHARE $ 0.30 $ 0.49 $ 1.02 $ 1.52
======= ======= ======= =======
See Notes to Consolidated Financial Statements
2
FIRST SENTRY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three and Nine Months Ended September 30, 2009 and 2008 (Unaudited)
(Dollars in Thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
Net income $ 319 $ 521 $1,089 $1,603
------ ------ ------ ------
Other comprehensive income:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during the period 1,552 371 1,277 (294)
Less: reclassification adjustment for gains
included in net income (2) (37) (60) (112)
------ ------ ------ ------
1,550 334 1,217 (406)
Cumulative-effect adjustment to apply SFAS
Statement No. 115 for transfer of securities
from available-for-sale to held-to-maturity 24 - 38 -
Adjustment for income tax (expense) benefit (559) (130) (422) 158
------ ------ ------ ------
Other comprehensive income (loss), net of tax 1,015 204 833 (248)
------ ------ ------ ------
Comprehensive income $1,334 $ 725 $1,922 $1,355
====== ====== ====== ======
See Notes to Consolidated Financial Statements
3
FIRST SENTRY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2009 and 2008 (Unaudited)
(Dollars in Thousands)
September 30, September 30,
2009 2008
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,089 $ 1,603
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,403 763
Depreciation and amortization 259 294
Investment securities amortization (accretion), net 324 70
Securities and trading asset losses (gains) (60) (116)
Impairment loss on held-to-maturity securities 500 -
Write down of foreclosed properties 42 -
Changes in:
Trading assets - 3,996
Interest receivable (633) (203)
Other assets (5,139) (835)
Interest payable 456 33
Income taxes payable (11) 12
Other liabilities 54 (189)
------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (1,716) 5,428
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest-earning deposits 5,049 (14,920)
Maturities of investments available-for-sale 1,000 1,000
Redemptions of investments available-for-sale 43,921 23,167
Purchase of investments for available-for-sale (54,398) (44,838)
Maturities of investments held-to-maturity 1,160 -
Purchase of investments held-to-maturity (11,137) -
Sale of Federal Home Loan Bank Stock (861) (391)
Net increase in loans (132,229) (9,722)
Proceeds from sale of foreclosed properties 9 245
Purchases of premises and equipment (2,326) (357)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (149,812) (45,816)
------- -------
CASH FLOWS FROM FINANCING ACTIVITES
Net increase in deposits 125,222 40,517
Net change in agreements to repurchase securities 7,042 1,587
Net change in FHLB loans 7,521 10,000
Net decrease in federal funds purchased (518) (158)
Increase in trust preferred securities 4,000 -
Fair market value of stock issued in business combination 9,515 -
Cash dividends paid (634) (634)
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 152,148 51,312
------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS 620 10,924
CASH AND DUE FROM BANKS, BEGINNING 7,534 7,129
------- -------
CASH AND DUE FROM BANKS, ENDING $ 8,154 $18,053
======= =======
See Notes to Consolidated Financial Statements
4
FIRST SENTRY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2009 and 2008 (Unaudited)
(Dollars in Thousands)
September 30, September 30,
2009 2008
SUPPLEMENTAL DISCLOSURES
Cash paid for interest on deposits and borrowings $ 5,372 $ 6,748
======= =======
Cash paid for income taxes $ 647 $ 883
======= =======
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES
Loans transferred to foreclosed real estate $ 1,530 $ 129
======= =======
Net change in unrealized holding gain (loss)
on investments available-for-sale $ 1,217 $ (406)
======= =======
See Notes to Consolidated Financial Statements
5
NOTE 1. BASIS OF PRESENTATION
Principles of consolidation: The accompanying unaudited consolidated financial
statements of First Sentry Bancshares, Inc. (the "Company") and its wholly-owned
subsidiary, First Sentry Bank (the "Bank") have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information and the instructions for Form 10-Q. Accordingly,
they do not include all of the information and footnotes necessary for a
complete presentation of consolidated financial position, results of operations,
and cash flows in conformity with accounting principles generally accepted in
the United States of America. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for (i) a fair
presentation and (ii) to make the financial statements not misleading, have been
included. Operating results for the three and nine months ended September 30,
2009 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2009. All significant inter-company balances have been
eliminated in consolidation.
Current accounting developments: In March 2008, the Financial Accounting
Standards Board issued Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities - an amendment of FASB Statement No. 133,
which is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. This Statement has the same scope as
Statement 133 and, accordingly, applies to all entities. The Statement changes
the disclosure requirements for derivative instruments and hedging activities.
Entities are required to provide enhanced disclosures about (a) how and why an
entity uses derivative instruments, (b) how derivative instruments and related
hedging items are accounted for under Statement 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity's financial position, financial performance, and cash flows.
The Company does not expect the Statement to have a material impact on its
consolidated financial statements.
In December 2007, the Financial Accounting Standards Board issued Statement No.
160, Noncontrolling Interests in Consolidated Financial Statements - an
Amendment of ARB No. 51, which is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008. This
Statement amends Accounting Research Bulletin No. 51, Consolidated Financial
Statements to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. The Company does not expect the
Statement to have a material impact on its consolidated financial statements.
In December 2007, the Financial Accounting Standards Board issued Statement No.
141 (R), Business Combinations, which applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 31, 2008. An entity
may not apply it before that date. This statement retains the fundamental
requirements in Statement No. 141 that the acquisition method of accounting
(formerly called purchase method) be used for all business combinations and for
an acquirer to be identified for each business combination. The Statement
defines the acquirer as the entity that obtains control of one or more
businesses in the business combination and establishes the acquisition date as
the date the acquirer achieves control. The Statement retains guidance for
identifying and recognizing intangible assets separately from goodwill. The
revisions apply to the acquisition of Guaranty Financial Services, Inc. and may
have an impact on the Company for the manner of recording any future
acquisitions.
6
NOTE 1. BASIS OF PRESENTATION (continued)
In February 2007, the Financial Accounting Standards Board issued Statement No.
159, The Fair Value Option for Financial Assets and Financial Liabilities -
Including an Amendment of FASB Statement No. 115, which is effective for an
entity as of the beginning of an entity's first fiscal year that begins after
November 15, 2007. The Statement permits entities to choose to measure many
financial instruments and certain other assets at fair value. The objective is
to improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This Statement is expected to expand the use of fair value
measurement, which is consistent with the Board's long-term measurement
objectives for accounting for financial instruments. The Company elected early
adoption effective January 1, 2007, and it is not anticipated to have a material
effect on the Company's financial position, results of operations or cash flows.
In September 2006, the Financial Accounting Standards Board issued Statement No.
157, Fair Value Measurements, which is effective for financial statements issued
for fiscal years beginning after November 15, 2007. This Statement defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles (GAAP), and expands disclosures about fair value
measurements. This Statement applies under other accounting pronouncements that
require or permit fair value measurements, the Board having previously concluded
in those accounting pronouncements that fair value is the relevant measurement
attribute. Accordingly, this Statement does not require any new fair value
measurements. However, for some entities, the application of this Statement will
change current practice. The Company elected early adoption effective January 1,
2007, and it is not anticipated to have a material effect on the Company's
financial position, results of operations or cash flows. Statement No. 157
establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy gives the highest priority
to adjusted quoted prices in active markets for identical assets or liabilities
(level 1 measurements) and the lowest priority to unobservable inputs (level 3
measurements). The three levels of the fair value hierarchy under Statement No.
157 are as described below: Level 1 - Unadjusted quoted prices in active markets
that are accessible at the measurement date for identical, unrestricted assets
or liabilities; Level 2 - Quoted prices in markets that are not active, or
inputs that are observable, either directly or indirectly, for substantially the
full term of the asset or liability; Level 3 - Prices or valuation techniques
that require inputs that are both significant to the fair value measurement and
unobservable. A financial instrument's level within the fair value hierarchy is
based on the lowest level of input that is significant to the fair value
measurement. U.S. government and agency securities are valued based on quoted
market prices in active markets and are generally classified within level 1 or
level 2. As required by Statement No.157, the quoted prices for such instruments
are not adjusted. Corporate bonds, less liquid listed equities, state and
municipal obligations, are types of instruments valued based on quoted prices in
markets that are not active and generally are classified within level 2 of the
fair value hierarchy. Level 3 is for positions that are not traded in active
markets or subject to transfer restrictions and adjustments are made based on
market available evidence.
7
NOTE 1. BASIS OF PRESENTATION (continued)
In April 2009, the FASB issued FSP SFAS No. 157-4, "Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly." FSP SFAS No. 157-4
emphasizes that even if there has been a significant decrease in the volume and
level of activity, the objective of a fair value measurement remains the same.
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction (that is, not a forced
liquidation or distressed sale) between market participants. The FSP provides a
number of factors to consider when evaluating whether there has been a
significant decrease in the volume and level of activity for an asset or
liability in relation to normal market activity. In addition, when transactions
or quoted prices are not considered orderly, adjustments to those prices based
on the weight of available information may be needed to determine the
appropriate fair value. The FSP also requires increased disclosures. This FSP is
effective for interim and annual reporting periods ending after June 15, 2009,
and shall be applied prospectively. Early adoption is permitted for periods
ending after March 15, 2009. The adoption of this FSP at June 30, 2009 did not
have a material impact on the Company's results of operations or financial
position.
In April 2009, the FASB issued FSP SFAS No. 115-2 and SFAS No. 124-2,
"Recognition and Presentation of Other-Than-Temporary Impairments." FSP SFAS No.
115-2 and SFAS No. 124-2 applies to debt securities classified as
available-for-sale and held-to-maturity and makes other-than-temporary
impairment guidance more operational and improves related presentation and
disclosure requirements. This FSP requires that impairment losses related to
credit losses will be included in earnings. Impairments related to other factors
will be included in other comprehensive income, when management asserts it does
not have the intent to sell the security and it is not more likely than not that
it will have to sell the security before its recovery. For debt securities held
at the beginning of the interim period of adoption for which an
other-than-temporary impairment was previously recognized, if the entity does
not intend to sell and it is not more likely than not that it will be required
to sell the security before recovery of its amortized cost basis, the entity
will recognize the cumulative-effect adjustment, including related tax effects,
to the beginning balance of retained earnings and corresponding adjustment to
accumulated other comprehensive income. FSP SFAS No. 115-2 and SFAS No. 124-2 is
effective for interim and annual periods ending after June 15, 2009. This FSP
amends SFAS No. 115 and other related guidance. Early adoption is permitted for
periods ending after March 15, 2009. This FSP amends SFAS No. 157 and supersedes
FSP SFAS No. 157-3. The adoption of these FSP's on April 1, 2009 did not have a
material impact on the Company's results of operations or financial position.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("FAS 165"). FAS
165 establishes general standards of accounting for and disclosures of events
that occur after the balance sheet date but before financial statements are
issued or are available to be issued. It requires entities to disclose the date
through which it has evaluated subsequent events and the basis for that date.
SFAS 165 is effective for interim and annual periods ending after June 15, 2009.
SFAS 165 was effective for the Company as of June 30, 2009. The adoption of SFAS
165 did not have a material impact on the Company's financial condition, results
of operations or disclosures.
8
NOTE 1. BASIS OF PRESENTATION (continued)
In April 2009, the FASB issued FSP No. 107-1 and APB 28-1, Interim Disclosures
about Fair Value of Financial Instruments. This FSP amends FASB Statement No.
107, Disclosures about Fair Value of Financial Instruments, to require
disclosures about fair value of financial instruments for interim reporting
periods of publicly traded companies that were previously only required in
annual financial statements. This FSP is effective for interim reporting periods
ending after June 15, 2009. The adoption of this FSP at June 30, 2009 did not
have a material impact on the Company's results of operations or financial
position.
NOTE 2. INVESTMENT SECURITIES
The amortized cost of investment securities and their fair values at September
30, 2009 (unaudited) and December 31, 2008 are as follows:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
September 30, 2009 (unaudited):
Held-to-maturity:
State and political $ 14,867 $ 29 $ 457 $ 15,295
Corporate securities 1,348 - 134 1,482
--------------- ------------- ---------------- ---------------
16,215 29 591 16,777
--------------- ------------- ---------------- ---------------
Available-for-sale:
Mortgage-backed securities 16,143 - 580 16,723
U.S. agency 52,427 73 636 52,990
State and political 12,108 31 284 12,361
Corporate securities 726 - 269 995
--------------- ------------- ---------------- ---------------
$ 97,619 $ 133 $ 2,360 $ 99,846
=============== ============= ================ ===============
December 31, 2008:
Held-to-maturity:
State and political $ 7,459 $ - $ - $ 7,459
Corporate securities 1,827 - - 1,827
--------------- ------------- ---------------- ---------------
9,286 - - 9,286
--------------- ------------- ---------------- ---------------
Available-for-sale:
Mortgage-backed securities 11,394 442 - 11,836
U.S. agency 50,241 735 7 50,969
State and political 8,495 15 656 7,854
--------------- ------------- ---------------- ---------------
70,130 1,192 663 70,659
--------------- ------------- ---------------- ---------------
$ 79,416 $ 1,192 $ 663 $ 79,945
=============== ============= ================ ===============
9
NOTE 2. INVESTMENT SECURITIES (continued)
The amortized cost and estimated fair value of securities at September 30, 2009
(unaudited) and December 31, 2008, by contractual maturity, are as follows:
Held-to-Maturity Available-for-Sale
Amortized Fair Amortized Fair
Cost Value Cost Value
--------------- ---------------- ----------------- ---------------
September 30, 2009 (unaudited):
One year or less $ 409 $ 409 $ 948 $ 949
After one year through five years 3,684 3,702 19,852 20,045
After five years through ten years 3,204 3,300 21,314 21,958
After ten years 8,921 9,366 39,290 40,117
--------------- ---------------- ----------------- ---------------
$ 16,218 $ 16,777 $ 81,404 $ 83,069
=============== ================ ================= ===============
December 31, 2008:
One year or less $ - $ - $ 4,266 $ 4,284
After one year through five years 480 480 16,329 16,539
After five years through ten years 1,759 1,759 15,743 15,958
After ten years 7,047 7,047 33,792 33,878
--------------- ---------------- ----------------- ---------------
$ 9,286 $ 9,286 $ 70,130 $ 70,659
=============== ================ ================= ===============
During the Company's annual evaluation of security investment classifications on
December 31, 2008, management transferred certain securities from the
classification of "available-for-sale" to "held-to-maturity." The securities
transferred included fifteen municipal securities acquired during 2008 with a
book value of $7,546 and fair market value of $7,459. In addition, three
corporate securities acquired during 2008 were transferred from
"available-for-sale" to "held-to-maturity" with a book value of $2,031 and
market value of $1,827. The securities have been transferred under SFAS No. 115
as of December 31, 2008, and the cumulative-effect adjustment of the
reclassification was a decrease to other comprehensive income in the amount of
$290 and a reduction to the cost basis of the transferred securities by the same
amount. The adjustment of $290 recorded in other comprehensive income will be
amortized over the life of the securities transferred.
Securities with a carrying value of $59,690 and $31,845 were pledged at
September 30, 2009 (unaudited) and December 31, 2008, respectively, to secure
public deposits, securities sold under agreements to repurchase and for other
purposes as required or permitted by law.
Management evaluates securities for other-than-temporary impairment at least on
a quarterly basis, and more frequently when economic or market concerns warrant
such evaluation. Consideration is given to (1) the length of time and the extent
to which fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, and (3) the intent and ability of the Company
to retain its investment in the issuer for a period of time sufficient to allow
for any anticipated recovery in fair value.
10
NOTE 2. INVESTMENT SECURITIES (continued)
Information pertaining to securities held-to-maturity and securities
available-for-sale with gross unrealized losses at September 30, 2009
(unaudited) and December 31, 2008, aggregated by investment category and length
of time that individual securities have been in a continuous loss position
follows:
Less Than Twelve Months Over Twelve Months
----------------------------------- -----------------------------------
Gross Gross
Unrealized Fair Unrealized Fair
Losses Value Losses Value
--------------- --------------- ---------------- ---------------
September 30, 2009 (unaudited):
Held-to-maturity
State and political $ - $ - $ - $ -
Corporate securities - - - -
Available-for-sale
Mortgage-backed securities - - - -
U.S. agencies 72 6,997 - -
State and political - - 31 503
Corporate securities - - - -
--------------- --------------- ---------------- ---------------
$ 603 $ 28,171 $ 125 $ 1,027
=============== =============== ================ ===============
December 31, 2008:
Available-for-sale
U.S. Agencies 7 990 - -
State and political 534 5,920 123 381
--------------- --------------- ---------------- ---------------
$ 541 $ 6,910 $ 123 $ 381
=============== =============== ================ ===============
These unrealized losses relate principally to current interest rates for similar
types of securities. In analyzing an issuer's financial condition, management
considers whether the federal government or its agencies issue the securities,
whether the downgrades by bond-rating agencies have occurred, and the results of
reviews of the issuer's financial condition. Management has the ability to hold
debt securities until maturity, or for the foreseeable future if classified as
available-for-sale, therefore no unrealized losses are deemed to be
other-than-temporary.
During the first quarter of 2009, the Company recognized an other-than-temporary
impairment charge of $500 on Silverton Bank (formerly "The Bankers Bank")
corporate bonds that were previously classified as held-to-maturity securities.
In May 2009, the Company had received information that Silverton Bank had been
closed by the Office of the Comptroller of Currency and that the Federal Deposit
Insurance Corporation (FDIC) had been appointed as receiver. A bridge bank was
formed to facilitate liquidation of Silverton Bank. The other-than-temporary
impairment charge was recorded based on this information and management's belief
that the market prices of these bonds are unrecoverable. At September 30, 2009
(unaudited), the Company did not have any remaining investments in Silverton
Bank corporate bonds.
11
NOTE 2. INVESTMENT SECURITIES (continued)
In the fourth quarter of 2008, the Company recognized an other-than-temporary
impairment charge of $463 on 170 shares of Silverton Bank equity stock, which
was previously reported in other assets. The Company received information from
bank regulators that dividends on the equity securities would cease, and
therefore no further earnings would be generated from the securities. The
other-than-temporary impairment charge was recorded based on this information,
along with management's belief that the market prices of these securities would
not recover in the foreseeable future due to current market conditions, industry
information, regulatory matters and other factors. At December 31, 2008, the
Company did not have any remaining investments in Silverton Bank equity stocks.
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES
Major classifications of loans are as follows: September 30,
2009 December 31,
(unaudited) 2008
------------------ ------------------
Loans
Commercial $ 115,364 $ 68,116
Commercial real estate 160,473 107,458
Residential real estate 55,033 35,543
Consumer 25,605 13,091
-------------- --------------
356,475 224,208
Less deferred loan fees (74) (36)
-------------- --------------
356,401 224,172
-------------- --------------
Allowance for loan losses
Balances, beginning of year 3,227 2,852
Provision for losses 1,403 1,189
Recoveries on loans 18 11
Loans charged off (908) (825)
-------------- --------------
3,740 3,227
-------------- --------------
$ 352,661 $ 220,945
============== ==============
The scheduled maturities of loans are as follows:
September 30,
2009 December 31,
(unaudited) 2008
-------------- --------------
Three months or less $ 86,583 $ 67,030
Over three months through twelve months 48,509 32,578
Over one year through three years 66,211 48,272
Over three years through five years 105,580 64,772
Over five years through fifteen years 36,006 10,188
Over fifteen years 13,586 1,368
-------------- --------------
$ 356,475 $ 224,208
============== ==============
12
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)
Loans classified as nonaccrual totaled $1,341 and $1,089 as of September 30,
2009 (unaudited) and December 31, 2008, respectively. At September 30, 2009
(unaudited) there were no commitments to lend additional funds to customers
whose loans are classified as nonaccrual. Total loans past-due ninety days or
more and still accruing at September 30, 2009 (unaudited) and December 31, 2008
totaled $527 and $22, respectively.
The average recorded investment in impaired loans at September 30, 2009
(unaudited) and December 31, 2008 was $1,187 and $815, respectively. The Company
considers nonaccrual loans and loans past-due ninety days or more to be
impaired. The following is a summary of loans considered impaired:
September 30,
2009 December 31,
(unaudited) 2008
--------------- ---------------
Gross impaired loans $ 1,868 $ 1,111
Less valuation allowance for impaired loans 490 635
--------------- ---------------
Recorded investment in impaired loans $ 1,378 $ 476
=============== ===============
NOTE 4. OTHER REAL ESTATE OWNED
Activity for other real estate owned included in other assets for September 30,
2009 (unaudited) and December 31, 2008 is as follows:
September 30,
2009 December 31,
(unaudited) 2008
-------------- -------------
Balance at beginning of year $ 1,491 $ 1,699
Properties acquired 1,539 57
Subsequent write-downs (42) -
Gross proceeds from sales (9) (245)
Gains (losses) recorded - (20)
-------------- -------------
$ 2,979 $ 1,491
============== =============
13
NOTE 5. FEDERAL HOME LOAN BANK ADVANCES
The Bank owns stock of the Federal Home Loan Bank of Pittsburgh (FHLB), which
allows the Bank to borrow funds from the FHLB. The Bank's maximum borrowing
capacity from the FHLB was $131,128 at September 30, 2009 (unaudited) and
$102,722 at December 31, 2008.
The Bank has advances from the FHLB totaling $43,080 at September 30, 2009
(unaudited) and $35,560 at December 31, 2008. The advances are secured by
residential and commercial real estate loans and pledged securities. They have
various scheduled maturity dates beginning with October 1, 2009 through May 19,
2022. The interest rate is determined at the time the advances are made and
currently range from .70% to 4.77%. The FHLB advances are scheduled for
repayment as follows:
Year Amount
------- ----------
2009 $ 13,859
2010 8,000
2011 5,000
2012 5,000
2013 -
Thereafter 11,221
---------------
$ 43,080
===============
NOTE 6. TRUST PREFERRED SECURITIES
On April 10, 2002, First Sentry Bancshares Capital Trust I issued $4 million of
Floating Rate Trust Preferred Securities. The trust preferred securities were
non-voting, paying semi-annual distributions at a variable rate, and carrying a
liquidation value of $1,000 per share. The variable rate was equal to LIBOR plus
3.7%. The Company executed a guarantee with regard to the trust preferred
securities. The trust preferred securities were redeemed at the option of the
Company on April 22, 2007, for a redemption price of $1,000 per security.
On April 23, 2007, First Sentry Bancshares Capital Trust II (the "trust") issued
$5 million of Floating Rate Trust Preferred Securities. First Sentry Bancshares
Capital Trust II, a Delaware statutory business trust, is a wholly-owned
consolidated subsidiary of the Company, with its sole asset being $5 million
aggregate principal amount of Floating Rate Junior Subordinated Debt Securities
due June 15, 2037, of First Sentry Bancshares, Inc. (the trust debenture).
The trust-preferred securities are non-voting, pay quarterly distributions at a
variable rate, and carry a liquidation value of $1,000 per share. The variable
interest rate is equal to a 3-month LIBOR plus 1.58% (1.88% at September 30,
2009, unaudited, and 3.58% at December 31, 2008) and distributions were $106 for
the nine months ended September 30, 2009 (unaudited) and $244 for the year ended
December 31, 2008. The Company has executed a guarantee with regard to the trust
preferred securities. The guarantee, when taken together with the Company's
obligations under the trust debenture, the indenture pursuant to which the trust
debenture was issued and the applicable trust document, provides a full and
unconditional guarantee of the trust's obligations under the trust preferred
securities.
14
NOTE 6. TRUST PREFERRED SECURITIES (continued)
After June 15, 2012, the trust preferred securities are redeemable in part or
whole, at the option of the Company, for a redemption price of $1,000 per trust
preferred security. The trust preferred securities are subject to mandatory
redemption on June 15, 2037, at a redemption price of $1,000 per trust preferred
security. First Sentry Bancshares, Inc. may cause the trust to delay payment of
distributions on the trust preferred securities for up to twenty consecutive
quarterly periods. During such deferral periods, distributions to which holders
of the trust preferred securities are entitled will compound quarterly at the
applicable rate for each quarterly period.
At the close of business on September 25, 2009, First Sentry Bancshares, Inc.
acquired Guaranty Financial Statutory Trust I (the "Trust") as part of the
acquisition of Guaranty Financial Services, Inc. In June 2003, the trust issued
$4 million of Floating Rate Trust Preferred Securities. The trust preferred
securities are non-voting, pay quarterly distributions at a variable rate, and
carry a liquidation value of $1,000 per share. The variable interest rate is
equal to a 3-month LIBOR plus 3.10% with a current rate of 3.38% at September
30, 2009 (unaudited). First Sentry Bancshares, Inc. now guarantees the trust
preferred securities and this guarantee, when taken together with the Company's
obligations under the trust debenture, provides a full and unconditional
guarantee of the trust's obligations under the trust preferred securities. The
trust preferred securities have a 30-year term but are redeemable, in whole or
in part, by the Company on or after June 26, 2008. First Sentry Bancshares, Inc.
may cause the trust to delay payment of distributions on the trust preferred
securities for up to twenty consecutive quarterly periods. During such deferral
periods, distributions to which holders of the trust preferred securities are
entitled will compound quarterly at the applicable rate for each quarterly
period.
NOTE 7. STOCKHOLDERS' EQUITY
Banking regulations limit the amount of dividends that may be paid without prior
approval of regulatory agencies. Under these regulations, the amount of
dividends that may be paid in any calendar year is limited to the current year's
net income, as defined, combined with the retained earnings of the preceding two
years, subject to the capital requirements as defined below.
The Bank is subject to various regulatory capital requirements administered by
the state and federal banking agencies. Failure to meet the minimum regulatory
capital requirements can initiate certain mandatory, and possible additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under the regulatory capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Bank must meet specific capital guidelines involving quantitative measures
of the Bank's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Bank's capital amounts and
classification under the prompt corrective action guidelines 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 (set forth in the
following table) of total and Tier 1 capital to risk-weighted assets (as defined
in the regulations), and of Tier 1 capital to average assets (as defined).
Management believes, as of September 30, 2009 (unaudited) and December 31, 2008,
that the Bank meets all the capital adequacy requirements to which it is
subject.
15
NOTE 7. STOCKHOLDERS' EQUITY (continued)
As of December 31, 2007, the date of the most recent notification from the West
Virginia Division of Banking, the Bank was categorized as well capitalized under
the regulatory framework for prompt corrective action. As of September 30, 2009
(unaudited) and December 31, 2008, the Bank is categorized as well capitalized
as disclosed in the following table. The Bank's actual and required capital
amounts and ratios as of September 30, 2009 (unaudited) and December 31, 2008
are as follows:
To Be Well
Capitalized
Under The Prompt
For Capital Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
September 30, 2009 (unaudited):
Total Risk-Based Capital
(to Risk-Weighted Assets) $ 39,132 11.3% $ 27,713 8% $ 34,642 10%
Tier l Capital
(to Risk-Weighted Assets) 35,422 10.2% 13,857 4% 20,785 6%
Tier l Capital
(to Adjusted Total Assets) 35,422 7.2% 19,660 4% 24,575 5%
December 31, 2008:
Total Risk-Based Capital
(to Risk-Weighted Assets) $ 26,690 12.0% $ 17,285 8% $ 22,184 10%
Tier l Capital
(to Risk-Weighted Assets) 23,911 10.8% 8,643 4% 13,310 6%
Tier l Capital
(to Adjusted Total Assets) 23,911 7.3% 12,332 4% 16,377 5%
16
NOTE 8. FAIR VALUES OF FINANCIAL INSTRUMENTS
Effective January 1, 2007, the Company elected early adoption of SFAS No. 159
and 157. SFAS 159 generally permits the measurement of selected eligible
financial instruments at fair value at specified election dates. The following
table presents the assets that are measured at fair value on a recurring basis
by level within the fair value hierarchy (see Note 1 for further information on
the fair value hierarchy) as reported on September 30, 2009 (unaudited) and
December 31, 2008. As required by SFAS No. 157, financial assets are classified
in their entirety based on the lowest level of input that is significant to the
fair value measurement.
Fair Value Measurements at Reporting Date Using:
--------------------------------------------------------------
Quoted Prices Significant
Active Markets Other Significant
for Identical Observable Unobservable
Assets Inputs Inputs
Balance (Level 1) (Level 2) (Level 3)
------------------- ------------------ ------------------- ------------------
September 30, 2009 (unaudited):
Assets:
Investment securities:
Available-for-sale $ 83,069 $ - $ 83,069 $ -
=================== ================== =================== ==================
December 31, 2008:
Assets:
Investment securities:
Available-for-sale $ 70,659 $ - $ 70,659 $ -
=================== ================== =================== ==================
Available-for-sale and trading securities: Prices for these securities are
obtained through third party data service providers or dealer market
participants with whom the Company has historically transacted both purchases
and sales of investment securities. Benchmarks and other comparable securities
are also used in estimating the values of these investment securities.
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the statement of
financial condition. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instruments. SFAS 107 excluded certain financial instruments
and all nonfinancial instruments from its disclosure requirements. Accordingly,
aggregate fair value estimates do not represent the underlying value of the
Bank.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments carried on the consolidated financial
statements at cost and are not measured or recorded at fair value on a recurring
basis, unless otherwise noted:
Cash and cash equivalents: For these short-term instruments, the carrying amount
is a reasonable estimate of fair value.
17
NOTE 8. FAIR VALUES OF FINANCIAL INSTRUMENTS (continued)
Federal funds sold: For these short-term instruments, the carrying amount is a
reasonable estimate of fair value.
Interest-earning deposits: For these short-term instruments, the carrying amount
is a reasonable estimate of fair value.
Held-to-maturity securities: Fair values are based on quoted market prices.
Loans: For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying amounts. The fair
values for other loans (for example, fixed rate commercial real estate and
rental property mortgage loans and commercial and industrial loans) are
estimated using discounted cash flow analysis, based on interest rates currently
being offered for loans with similar terms to borrowers of similar credit
quality.
Deposits: The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated by discounting
future cash flows using the rates currently offered for deposits of similar
remaining maturities.
Securities sold under agreements to repurchase: For these short-term
instruments, the carrying amount is a reasonable estimate of fair value.
Advances: Rates currently available to the Bank for advances with similar terms
and remaining maturities are used to estimate fair value of existing debt.
Commitments to extend credit and standby letters of credit: Commitments to
extend credit and standby letters of credit represent agreements to lend to a
customer at the market rate when the loan is extended, thus the commitments and
letters of credit are not considered to have a fair value.
The estimated fair values of the Bank's financial instruments at September 30,
2009 (unaudited) and December 31, 2008 do not significantly differ from their
carrying amounts as reported in the balance sheet.
NOTE 9. MERGER
On September 25, 2009, First Sentry Bancshares, Inc. completed its merger with
Guaranty Financial Services, Inc. ("Guaranty") as contemplated by the Agreement
and Plan of Merger by and between the Company and Guaranty, dated August 22,
2008, and as amended as of June 4, 2009 (the "Agreement"). Under terms of the
Agreement, each share of Guaranty common stock was converted into the right to
receive one share of Company common stock. The aggregate merger consideration
was approximately 381,651 shares of Company common stock. The transaction was
valued at approximately $9.5 million. Guaranty was a one-bank holding company,
with its principal asset consisting of 100% common stock ownership of Guaranty
Bank & Trust Company ("Guaranty Bank"). Guaranty Bank was merged into First
Sentry Bank, Inc. at the close of business on September 25, 2009. At the time of
the merger Guaranty Bank had approximately $149.0 million in total assets.
18
NOTE 10. RECENT DEVELOPMENTS
On November 12, 2009, the Federal Deposit Insurance Corporation issued a final
rule pursuant to which all insured depository institutions, subject to limited
exceptions, are required to prepay their estimated assessments for the fourth
quarter of 2009, and for all of 2010, 2011 and 2012. This pre-payment will be
due on December 30, 2009. Under the rule, the assessment rate for the fourth
quarter of 2009 and for 2010 is based on each institution's total base
assessment rate for the third quarter of 2009, modified to assume that the
assessment rate in effect on September 30, 2009 had been in effect for the
entire third quarter, and the assessment rate for 2011 and 2012 will be equal to
the modified third quarter assessment rate plus an additional 3 basis points. In
addition, each institution's base assessment rate for each period is calculated
using its third quarter assessment base, adjusted quarterly for an estimated 5%
annual growth rate in the assessment base through the end of 2012.
NOTE 11. SUBSEQUENT EVENTS
Management has evaluated subsequent events through November 16, 2009, which is
the date that the Company's financial statements were issued. No material
subsequent events have occurred since September 30, 2009 that required
recognition or disclosure in these financial statements.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Information
This Quarterly Report contains forward-looking statements, which can be
identified by the use of words such as "estimate," "project," "believe,"
"intend," "anticipate," "plan," "seek," "expect," "will," "may" and words of
similar meaning. These forward-looking statements include, but are not limited
to:
o statements of our goals, intentions and expectations;
o statements regarding our business plans, prospects, growth and
operating strategies;
o statements regarding the asset quality of our loan and investment
portfolios; and
o estimates of our risks and future costs and benefits.
These forward-looking statements are based on our current beliefs and
expectations and are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond our
control. In addition, these forward-looking statements are subject to
assumptions with respect to future business strategies and decisions that are
subject to change. We are under no duty to and do not take any obligation to
update any forward-looking statements after the date of this Quarterly Report.
The following factors, among others, could cause actual results to differ
materially from the anticipated results or other expectations expressed in the
forward-looking statements:
o general economic conditions, either nationally or in our market areas,
that are worse than expected;
o competition among depository and other financial institutions;
o inflation and changes in the interest rate environment that reduce our
margins or reduce the fair value of financial instruments;
o adverse changes in the securities markets;
o changes in laws or government regulations or policies affecting
financial institutions, including changes in regulatory fees and
capital requirements;
o our ability to enter new markets successfully and capitalize on growth
opportunities;
o our ability to successfully integrate acquired entities, if any;
o changes in consumer spending, borrowing and savings habits;
o changes in accounting policies and practices, as may be adopted by the
bank regulatory agencies, the Financial Accounting Standards Board,
the Securities and Exchange Commission and the Public Company
Accounting Oversight Board;
20
o changes in our organization, compensation and benefit plans;
o changes in our financial condition or results of operations that
reduce capital available to pay dividends; and
o changes in the financial condition or future prospects of issuers of
securities that we own.
Because of these and a wide variety of other uncertainties, our actual
future results may be materially different from the results indicated by these
forward-looking statements.
Critical Accounting Policies
There are no material changes to the critical accounting policies disclosed
in First Sentry Bancshares, Inc.'s Proxy Statement/Prospectus dated August 6,
2009, as filed with the Securities and Exchange Commission pursuant to
Securities Act Rule 424(b)(3) on August 18, 2009.
Comparison of Financial Condition at September 30, 2009 and December 31, 2008
Total assets increased $154.6 million, or 45.6%, to $493.1 million at
September 30, 2009 from $338.5 million at December 31, 2008. Approximately
$149.0 million of the increase was the result of the merger of Guaranty Bank
into First Sentry Bank, Inc.
Investments classified as available for sale increased $12.4 million, or
17.6%, to $83.1 million at September 30, 2009 from $70.7 million at December 31,
2008. Investments classified as held to maturity increased $6.9 million or
74.6%, to $16.2 million at September 30, 2009, as compared to $9.3 million at
December 31, 2008. We received $23.8 million of available for sale and held to
maturity investments from Guaranty Bank as a result of the merger. Excluding the
investments received from Guaranty Bank, total investments decreased $4.5
million. We purchased $41.6 million of securities during the first nine months
of 2009 (excluding investments received from the merger with Guaranty Bank)
while $46.1 million of securities were called or matured during this period. We
used the net $4.5 million difference in cash received from bond calls and
securities maturing that was not reinvested into securities to fund additional
loan growth. Purchases of investment securities were primarily shorter-term U.S.
agency securities with maturities up to five years or longer-term maturity step
bonds, and to a lesser extent, shorter-term municipal bonds with maturities of
three years or less. The investments acquired from Guaranty Bank were U.S.
agency securities, municipal bonds, agency mortgage-backed securities and
corporate bonds.
Loans, net of allowance, increased $131.7 million, or 59.6%, to $352.7
million at September 30, 2009, from $220.9 million at December 31, 2008. We
acquired $110.2 million of loans from Guaranty Bank, including $41.5 million of
commercial loans and $39.4 million of commercial real estate loans. During the
first nine months of 2009, we continued to focus on loan growth in response to
customer demand, which was primarily in our commercial business and commercial
real estate portfolios. Excluding loans received from the merger with Guaranty
Bank, commercial business loans increased $5.7 million and commercial real
estate loans increased $13.6 million from December 31, 2008.
Interest earning deposits and cash and cash equivalents decreased $4.4
million, or 16.9%, to $21.8 million at September 30, 2009, from $26.2 million at
December 31, 2008. The decrease in interest earning deposits and cash and cash
equivalents was due to increased loan demand.
Deposits increased $125.5 million, or 47.2%, to $390.4 million at September
21
30, 2009, from $265.2 million at December 31, 2008. We acquired deposits
totaling $113.4 million from Guaranty Bank, including $43.0 million of core
deposits (consisting of checking accounts, NOW accounts, money market accounts
and savings accounts) and $70.4 million of certificates of deposit. Excluding
deposits acquired from Guaranty Bank, core deposits increased $4.0 million and
certificates of deposit increased $30.6 million from December 31, 2008. The
growth in our certificates of deposit can be attributed to increased
participation in our CDARS program coupled with an increase in deposits within
our general market area. The increase in our core deposits was the result of
organic growth during the first nine months of 2009 within our general market
area.
Securities sold under agreements to repurchase increased $7.0 million, or
56.3%, to $19.5 million at September 30, 2009, from $12.5 million at December
31, 2008. The acquisition of Guaranty Bank accounted for an increase of $11.0
million of securities sold under agreements to repurchase that was partially
offset by the maturing of term repurchase agreements during the first nine
months of 2009.
Federal Home Loan Bank borrowings increased $7.5 million, or 21.1%, to
$43.1 million at September 30, 2009, from $35.6 million at December 31, 2008. We
acquired $12.5 million of FHLB borrowings from Guaranty Bank that was partially
offset by the maturing of a $5.0 million FHLB advance.
Stockholders' equity increased $10.8 million, or 57.8%, to $29.5 million at
September 30, 2009, from $18.7 million at December 31, 2008. The majority of the
increase, $9.5 million, was the result of issuing 381,651 shares of common
stock, with a fair market value of $25.00, to the common shareholders of
Guaranty Financial Services, Inc. in a one-for-one exchange of common stock. The
remaining increase, $1.3 million, was the result of an increase in retained
earnings of $455,000, due to net income of $1.1 million for the nine months
ended September 30, 2009, partially offset by the payment of $634,000 in cash
dividends to stockholders during the first three quarters of 2009, and an
increase in accumulated other comprehensive income of $832,000, reflecting
market value fluctuations in available for sale investments, net of tax, for the
first nine months of 2009.
22
Average Balances and Yields. The following tables set forth average balance
sheets, average yields and costs, and certain other information for the periods
indicated. All average balances are daily average balances. Non-accrual loans
were 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,
------------------------------------------------------------------------
2009 2008
------------------------------------------------------------------------
Average Average
Outstanding Yield/ Outstanding Yield/
Balance Interest Rate(1) Balance Interest Rate(1)
(Dollars in thousands)
Interest-earning assets:
Loans....................... $ 248,669 $ 3,723 5.99% $ 214,541 $ 3,574 6.66%
Investment securities....... 75,170 771 4.10 59,785 720 4.82
Interest-bearing deposits and
cash equivalents........... 15,638 125 3.20 20,413 172 3.37
Federal Home Loan Bank stock 2,273 - - 1,777 15 3.38
------------ -------- ------ ------------ -------- ----
Total interest-earning
assets................... 341,750 4,619 5.41 296,516 4,481 6.04
-------- ---- -------- ----
Non-interest-earning assets. 13,169 11,443
------------ ------------
Total assets............. $ 354,919 $ 307,959
============ ============
Interest-bearing liabilities:
Savings accounts............ $ 14,929 7 0.20 $ 9,797 8 0.33
Certificates of deposit..... 161,099 1,427 3.54 132,495 1,538 4.64
Money market................ 28,459 37 0.52 31,733 153 1.93
NOW......................... 39,558 32 0.32 31,477 113 1.44
------------ -------- ---- ------------ -------- ----
Total interest-bearing
deposits.... 244,045 1,503 2.46% 205,502 1,812 3.53
Federal Home Loan Bank
advances................... 36,961 303 3.28 32,639 292 3.58
Securities sold under
agreements to repurchase.... 11,017 96 3.49 12,175 127 4.17
Trust preferred securities.. 5,261 28 2.13 5,000 56 4.48
------------ -------- ---- ------------ -------- ----
Total interest-bearing
liabilities.............. 297,284 1,930 2.60 255,316 2,287 3.58
-------- ---- -------- ----
Non-interest-bearing checking 36,755 33,666
Other non-interest-bearing
liabilities.............. 1,478 313
------------ ------------
Total liabilities........ 335,517 289,295
Stockholders' equity........ 19,402 18,664
------------ ------------
Total liabilities and
stockholders' equity... $ 354,919 $ 307,959
============ ============
Net interest income......... $ 2,689 $ 2,194
======== ========
Net interest rate spread (3) 2.81% 2.46%
Net interest-earning assets (4) $ 44,466 $ 41,200
============ ============
Net interest margin (5)..... 3.15% 2.96%
Average interest-earning
assets to interest-bearing
liabilities.............. 114.96% 116.14%
(1) Average yields and rates for the three months ended September 30, 2009 and
2008 are annualized.
(2) The tax equivalent yield of the investment securities portfolio was 5.13%
and 5.67% for the three months ended September 30, 2009 and 2008,
respectively.
(3) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(4) Net interest-earning assets represents total interest-earning assets less
total interest-bearing liabilities. (5) Net interest margin represents net
interest income divided by average total interest-earning assets.
23
For the Nine Months Ended September 30,
--------------------------------------------------------------------
2009 2008
--------------------------------------------------------------------
Average Average
Outstanding Yield/ Outstanding Yield/
Balance Interest Rate(1) Balance Interest Rate(1)
(Dollars in thousands)
Interest-earning assets:
Loans....................... $ 236,059 $ 10,565 5.97% $ 210,260 $ 10,870 6.89%
Investment securities....... 79,055 2,459 4.15 53,467 1,912 4.77
Interest-bearing depsoits and
cash equivalents........... 16,307 424 3.47 14,944 414 3.69
Federal Home Loan Bank stock 2,216 - - 1,549 37 3.18
Trading assets.............. - - - 102 2 2.61
------------ -------- ------ ------------ -------- ----
Total interest-earning
assets................... 333,637 13,448 5.37 280,322 13,235 6.30
-------- ---- -------- ----
Non-interest-earning assets. 11,671 11,089
------------ ------------
Total assets............. $ 345,308 $ 291,411
============ ============
Interest-bearing liabilities:
Savings accounts............ $ 12,692 19 0.20 $ 9,673 33 0.45
Certificates of deposit..... 154,475 4,326 3.73 125,860 4,534 4.80
Money market................ 31,305 123 0.52 28,838 469 2.17
NOW......................... 37,370 85 0.30 30,168 394 1.74
------------ -------- ---- ------------ -------- ----
Total interest-bearing
deposits.... 235,842 4,553 2.57 194,539 5,430 3.72
Federal Home Loan Bank
advances................... 35,463 858 3.23 28,696 793 3.68
Securities sold under
agreements to repurchase.... 12,282 311 3.38 11,307 368 4.34
Trust preferred securities.. 5,088 106 2.78 5,000 189 5.04
------------ -------- ---- ------------ -------- ----
Total interest-bearing
liabilities.............. 288,675 5,828 2.69 239,542 6,780 3.77
-------- ---- -------- ----
Non-interest-bearing checking 36,223 32,739
Other non-interest-bearing
liabilities.............. 1,074 726
------------ ------------
Total liabilities........ 325,972 273,007
Stockholders' equity........ 19,336 18,404
------------ ------------
Total liabilities and
stockholders' equity... $ 345,308 $ 291,411
============ ============
Net interest income......... $ 7,620 $ 6,455
======== ========
Net interest rate spread (3) 2.68% 2.53%
Net interest-earning assets (4) $ 44,962 $ 40,780
============ ============
Net interest margin (5)..... 3.05% 3.07%
Average interest-earning
assets to interest-bearing
liabilities.............. 115.58% 117.02%
(1) Average yields and rates for the nine months ended September 30, 2009 and
2008 are annualized.
(2) The tax equivalent yield of the investment securities portfolio was 5.09%
and 5.66% for the nine months ended September 30, 2009 and 2008,
respectively.
(3) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(4) Net interest-earning assets represents total interest-earning assets less
total interest-bearing liabilities. (5) Net interest margin represents net
interest income divided by average total interest-earning assets.
Comparison of Operating Results for the Three Months Ended September 30, 2009
and 2008
General. Net income decreased $217,000, or 40.5%, to $319,000 for the three
months ended September 30, 2009, from $536,000 for the three months ended
September 30, 2008. The decrease reflected increases in provision for loan
losses, Federal Deposit Insurance Corporation assessments and merger expenses,
which was partially offset by an increase in our net interest income.
24
Interest Income. Interest income increased $138,000, or 3.1%, to $4.6
million for the three months ended September 30, 2009, from $4.5 million for the
three months ended September 30, 2008. The increase resulted from an increase in
the average balance of interest-earning assets of $45.2 million, or 15.3%, to
$341.8 million for the three months ended September 30, 2009, from $296.5
million for the three months ended September 30, 2008, offset in part by a
decline in the average yield on interest-earning assets of 63 basis points to
5.41% for the three months ended September 30, 2009, from 6.04% for the three
months ended September 30, 2008. The increase in the average balance of our
interest-earning assets was due to our emphasis on increasing the average
balance of our loans and investment securities. The decline in our average yield
on interest-earning assets during the three months ended September 30, 2009, as
compared to the prior year period was due to the general decline in market
interest rates as a result of the Federal Reserve Board's action to lower the
federal funds rate by 500 basis points since September, 2007.
Interest income on loans increased $149,000, or 4.2%, to $3.7 million for
the three months ended September 30, 2009, from $3.6 million for the three
months ended September 30, 2008. The increase resulted primarily form the
increase in the average balance of loans, which increased $34.1 million, or
15.9%, to $248.7 million for the three months ended September 30, 2009, from
$214.5 million for the three months ended September 30, 2008, reflecting our
continued efforts to grow our loan portfolio. The average yield on our loan
portfolio decreased 67 basis points, to 5.99% for the three months ended
September 30, 2009, from 6.66% for the three months ended September 30, 2008,
primarily as a result of the decline in interest rates on our prime based
adjustable-rate loans.
Interest income on investment securities increased $51,000, or 7.1%, to
$771,000 for the three months ended September 30, 2009, from $720,000 for the
three months ended September 30, 2008. The increase resulted primarily from an
increase in the average balance of our securities portfolio, which increased
$15.4 million, or 25.7%, to $75.2 million for the three months ended September
30, 2009, from $60.0 million for the three months ended September 30, 2008, due
to increased investment in mortgage-backed securities and U.S. agency
securities. The average yield on our securities portfolio decreased by 72 basis
points, to 4.10% for the three months ended September 30, 2009, from 4.82% for
the three months ended September 30, 2008.
Interest income on interest-earning deposits and cash equivalents decreased
$47,000, or 27.3%, to $125,000 for the three months ended September 30, 2009,
from $172,000 for the three months ended September 30, 2008. The decrease
resulted primarily form the decrease in the average balance of interest-earning
deposits and cash equivalents, which decreased $4.8 million, or 23.4%, to $16.6
million for the three months ended September 30, 2009, from $20.4 million for
the three months ended September 30, 2008. The average yield on our
interest-earning deposits and cash equivalents decreased 17 basis points, to
3.20% for the three months ended September 30, 2009, from 3.37% for the three
months ended September 30, 2008, primarily as a result of the decline in market
rates.
Interest Expense. Interest expense decreased by $357,000 or 18.5%, to $1.9
million for the three months ended September 30, 2009, from $2.3 million for the
prior year period. The decrease resulted primarily from a decrease in interest
expense on deposits of $309,000 between the three months ended September 30,
2009 and 2008. The average rate we paid on deposits decreased 107 basis points
to 2.46% for the three months ended September 30, 2009, from 3.53% for the three
months ended September 30, 2008. The average balance of interest bearing
deposits increased $38.5 million, or 18.8%, to $244.0 million for the three
months ended September 30, 2009, from $205.5 million for the three months ended
September 30, 2008. The growth in our deposits was primarily due to increased
participation in our CDARS program coupled with an increase in deposits within
our general market area.
Interest expense on certificates of deposit decreased by $111,000 between
the three months ended September 30, 2009 and 2008. The decrease reflected a
25
decline in the average rate paid on certificates of deposit, which decreased 110
basis points to 3.54% for the three months ended September 30, 2009, from 4.64%
for the three months ended September 30, 2008, reflecting lower market rates.
Partially offsetting the decline in the average rate paid was an increase in the
average balance of certificates of deposit, which increased $28.6 million, or
21.6%, to $161.1 million for the three months ended September 30, 2009, from
$132.5 million for the three months ended September 30, 2008, primarily as a
result of the growth in our CDARS certificates of deposit and increased deposits
within our general market area. Interest expense on our core deposits
(consisting of checking accounts, NOW accounts, money market accounts and
savings accounts) decreased $198,000 to $76,000 for the three months ended
September 30, 2009, from $274,000 for the prior year period.
Interest expense on FHLB advances increased by $11,000 to $303,000 for the
three months ended September 30, 2009, from $292,000 for the prior year period
as we used the lower cost borrowings to invest in higher yielding investment
securities. Interest expense on trust preferred securities decreased by $28,000
during the three months ended September 30, 2009, as compared to the prior year
period.
Net Interest Income. Net interest income increased by $495,000, or 22.6%,
to $2.7 million for the three months ended September 30, 2009, from $2.2 million
for the three months ended September 30, 2008. Our net interest rate spread
increased 35 basis points to 2.81% for the three months ended September 30,
2009, from 2.46% for the three months ended September 30, 2008, as the cost of
our interest-bearing liabilities repriced downward faster than the yield on our
interest earning assets. Our net interest margin increased 19 basis points to
3.15% for the three months ended September 30, 2009, from 2.96% for the three
months ended September 30, 2008.
Provision for Loan Losses. We recorded a provision for loan losses of
$861,000 for the three months ended September 30, 2009, and a provision for loan
losses of $264,000 for the three months ended September 30, 2008. The increase
in the provision for loan losses for the three months ended September 30, 2009,
as compared to the prior year period, was based on the increase in net
charge-offs for the period. Net charge-offs increased to $876,000 for the three
months ended September 30, 2009, from $288,000 for the three months ended
September 30, 2008. The allowance for loan losses was $3.7 million, or 1.05% of
total loans receivable at September 30, 2009, compared to $3.0 million, or 1.39%
of total loans receivable at September 30, 2008. The decline in the ratio of the
allowance for loan losses to total loans receivable at September 30, 2009, was
the result of recording loans acquired from Guaranty Bank at fair market value
without carrying over the allowance for loan losses from Guaranty Bank, as
required by FASB Statement No. 141(R), Business Combinations, which became
effective for acquisitions on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The allowance for loan
losses, as a percentage of non-performing loans, was 49.9% at September 30,
2009, as compared to 45.6% at September 30, 2008. To the best of our knowledge,
we have provided for all losses that are both probable and reasonable to
estimate at September 30, 2009 and 2008.
Other Income. Other income increased $10,000 to $342,000 for the three
months ended September 30, 2009, from $332,000 for the three months ended
September 30, 2008. The increase was attributable to a $44,000 increase in
service fees and other fee income offset by a $34,000 decrease in investment
securities gains.
Other Expenses. Other expenses increased $294,000, or 20.5%, to $1.7
million for the three months ended September 30, 2009, from $1.4 million for the
three months ended September 30, 2008. The increase was attributable to merger
related expenses of $145,000 during the third quarter of 2009, as compared to
$36,000 in the prior year period. The increase was also attributable to an
increase of $73,000 in salaries and employee benefits expense to $724,000 for
the three months ended September 30, 2009, from $651,000 for the three months
ended September 30, 2008. This increase was as a result of increased benefit
26
costs, primarily health insurance, and the addition to our staff of one full
time equivalent employee prior to the merger with Guaranty Bank. Insurance
increased $108,000 for the three months ended September 30, 2009, compared to
the prior year period, due to increased Federal Deposit Insurance Corporation
assessments. During 2009, we anticipate paying significantly higher deposit
insurance premiums than in prior years, reflecting the Federal Deposit Insurance
Corporation's efforts to recapitalize the Deposit Insurance Fund through
increased assessments and special assessments.
Income Tax Expense. The provision for income taxes was $125,000 for the
three months ended September 30, 2009, compared with $294,000 for the prior year
period, reflecting a decrease in income before tax expense along with a decrease
in the state corporate income tax rate between the comparative periods and an
increase in tax-exempt municipal interest income for 2009 as compared to 2008.
Our effective tax rate was 28.2% for the three months ended September 30, 2009,
compared to 35.4% for the three months ended September 30, 2008.
Comparison of Operating Results for the Nine Months Ended September 30, 2009 and
2008
General. Net income decreased $514,000, or 32.1%, to $1.1 million for the
nine months ended September 30, 2009, from $1.6 million for the nine months
ended September 30, 2008. The decrease reflected a decline in our other income
due primarily to impairment losses on held-to-maturity securities, an increase
in our provision for loan losses, an increase in merger related expenses and
increased Federal Deposit Insurance Corporation assessments in 2009 partially
offset by an increase in net interest income.
Interest Income. Interest income increased $213,000, or 1.6%, to $13.4
million for the nine months ended September 30, 2009, from $13.2 million for the
nine months ended September 30, 2008. The increase resulted from an increase in
the average balance of interest-earning assets of $53.3 million, or 19.0%, to
$333.6 million for the nine months ended September 30, 2009, from $280.3 million
for the nine months ended September 30, 2008, offset in part by a decline in the
average yield on interest-earning assets of 93 basis points to 5.37% for the
nine months ended September 30, 2009, from 6.30% for the nine months ended
September 30, 2008. The increase in the average balance of our interest-earning
assets was due to our emphasis on increasing the average balance of our loans
and investment securities. The decline in our average yield on interest-earning
assets during the nine months ended September 30, 2009, as compared to the prior
year period was due to the general decline in market interest rates as a result
of the Federal Reserve Board's action to lower the federal funds rate by 500
basis points since September, 2007.
Interest income on loans decreased $305,000, or 2.8%, to $10.6 million for
the nine months ended September 30, 2009, from $10.9 million for the nine months
ended September 30, 2008. The average yield on our loan portfolio decreased 92
basis points, to 5.97% for the nine months ended September 30, 2009, from 6.89%
for the nine months ended September 30, 2008, primarily as a result of the
decline in interest rates on our prime based adjustable-rate loans. The average
balance of loans increased $25.8 million, or 12.3%, to $236.1 million for the
nine months ended September 30, 2009, from $210.3 million for the nine months
ended September 30, 2008, reflecting our continued efforts to grow our loan
portfolio.
Interest income on investment securities increased $637,000, or 33.3%, to
$2.5 million for the nine months ended September 30, 2009, from $1.9 million for
the nine months ended September 30, 2008. The increase resulted primarily from
an increase in the average balance of our securities portfolio, which increased
$25.6 million, or 47.9%, to $79.1 million for the nine months ended September
30, 2009, from $53.5 million for the nine months ended September 30, 2008, due
27
to increased investment in mortgage-backed securities and U.S. agency
securities. The average yield on our securities portfolio decreased by 62 basis
points, to 4.15% for the nine months ended September 30, 2009, from 4.77% for
the nine months ended September 30, 2008, reflecting a general decline in market
rates from 2008 to 2009.
Interest income on interest-earning deposits and cash equivalents increased
$10,000, or 0.2%, to $424,000 for the nine months ended September 30, 2009, from
$414,000 for the nine months ended September 30, 2008. The increase resulted
primarily form the increase in the average balance of interest-earning deposits
and cash equivalents, which increased $1.4 million, or 9.1%, to $16.3 million
for the nine months ended September 30, 2009, from $14.9 million for the nine
months ended September 30, 2008. The average yield on our interest-earning
deposits and cash equivalents decreased 22 basis points, to 3.47% for the nine
months ended September 30, 2009, from 3.69% for the nie months ended September
30, 2008, primarily as a result of the decline in market rates.
Interest Expense. Interest expense decreased by $952,000 or 14.0%, to $5.8
million for the nine months ended September 30, 2009, from $6.8 million for the
prior year period. The decrease resulted primarily from a decrease in interest
expense on deposits of $877,000 between the nine months ended September 30, 2009
and 2008. The average rate we paid on deposits decreased 115 basis points to
2.57% for the nine months ended September 30, 2009, from 3.72% for the nine
months ended September 30, 2008. The average balance of interest bearing
deposits increased $41.3 million, or 21.2%, to $235.8 million for the nine
months ended September 30, 2009, from $194.5 million for the nine months ended
September 30, 2008. The growth in our deposits was primarily due to increased
participation in our CDARS program coupled with an increase in our core deposits
for the nine months ended September 30, 2009 when compared to the nine months
ended September 30, 2008.
Interest expense on our certificates of deposit decreased by $208,000
between the nine months ended September 30, 2009 and 2008. The decrease
reflected a decline in the average rate paid on certificates of deposit, which
decreased 107 basis points to 3.73% for the nine months ended September 30,
2009, from 4.80% for the nine months ended September 30, 2008, reflecting lower
market rates. Partially offsetting the decline in the average rate paid was an
increase in the average balance of certificates of deposit, which increased
$28.6 million, or 22.7%, to $154.5 million for the nine months ended September
30, 2009, from $125.9 million for the nine months ended September 30, 2008,
primarily as a result of the growth in our CDARS certificates of deposit coupled
with deposit growth in our general market area. Interest expense on our core
deposits (consisting of checking accounts, NOW accounts, money market accounts
and savings accounts) decreased $669,000 to $227,000 for the nine months ended
September 30, 2009, from $896,000 for the prior year period.
Interest expense on FHLB advances increased by $65,000 to $858,000 for the
nine months ended September 30, 2009, from $793,000 for the prior year period as
we used the lower cost borrowings to invest in higher yielding investment
securities. Interest expense on trust preferred securities decreased by $83,000
during the nine months ended September 30, 2009, as compared to the prior year
period.
Net Interest Income. Net interest income increased by $1.2 million, or
18.0%, to $7.6 million for the nine months ended September 30, 2009, from $6.5
million for the nine months ended September 30, 2008. Our net interest rate
spread increased 15 basis points to 2.68% for the nine months ended September
30, 2009, from 2.53% for the nine months ended September 30, 2008, as the cost
of our interest bearing liabilities repriced downward faster than the yield on
our interest earning assets. Our net interest margin decreased 2 basis points to
3.05% for the nine months ended September 30, 2009, from 3.07% for the nine
months ended September 30, 2008.
Provision for Loan Losses. We recorded a provision for loan losses of $1.4
million for the nine months ended September 30, 2009, and a provision for loan
28
losses of $763,000 for the nine months ended September 30, 2008. The increase in
the provision for loan losses for the nine months ended September 30, 2009, as
compared to the prior year period, was based on increased charge-offs from 2008
to 2009 and the continuing uncertainty in the broader economy. Net charge-offs
totaled $890,000 for the nine months ended September 30, 2009, compared to
$590,000 for the nine months ended September 30, 2008. The allowance for loans
losses was $3.7 million, or 1.05% of total loans receivable at September 30,
2009, compared to $3.0 million, or 1.39% of total loans receivable at September
30, 2008. The allowance for loan losses, as a percentage of non-performing
loans, was 49.9% at September 30, 2009, as compared to 45.6% at September 30,
2008. To the best of our knowledge, we have provided for all losses that are
both probable and reasonable to estimate at September 30, 2009 and 2008.
Other Income. Other income decreased $507,000 to $435,000 for the nine
months ended September 30, 2009, from $942,000 for the nine months ended
September 30, 2008. The decrease was primarily attributable to a loss of
$500,000 in held-to-maturity investment securities for the nine months ended
September 30, 2009. The loss related to an other-than-temporary impairment
charge on our entire investment in Silverton Bank corporate bonds. Based on
regulatory concerns culminating with the failure of Silverton Bank on May 1,
2009, management concluded that the value of the bonds would not recover for the
foreseeable future.
Other Expenses. Other expenses increased $952,000, or 22.9%, to $5.1
million for the nine months ended September 30, 2009, from $4.2 million for the
nine months ended September 30, 2008. The increase was attributable to merger
related expenses of $405,000 during the first nine months of 2009, as compared
to $57,000 in the prior year period. The increase was also attributable to an
increase of $179,000 in salaries and employee benefits expense to $2.1 million
for the nine months ended September 30, 2009, from $1.9 million for the nine
months ended September 30, 2008. This increase was as a result of increased
benefit costs, primarily health insurance, and the addition to our staff of one
full time equivalent employee prior to the Guaranty Bank merger. Insurance
increased $344,000 for the nine months ended September 30, 2009, compared to the
prior year period, due to increased Federal Deposit Insurance Corporation
assessments in the first nine months of 2009, including the FDIC special
assessment of $160,000 paid September 30, 2009. During 2009, we anticipate
paying significantly higher deposit insurance premiums then in prior years,
reflecting the Federal Deposit Insurance Corporation's efforts to recapitalize
the Deposit Insurance Fund through increased assessments and special
assessments.
Income Tax Expense. The provision for income taxes was $457,000 for the
nine months ended September 30, 2009, compared with $877,000 for the prior year
period, reflecting the decrease in income before income tax between the
comparative periods. Our effective tax rate was 29.6% for the nine months ended
September 30, 2009, compared to 35.4% for the nine months ended September 30,
2008.
29
Liquidity and Capital Resources
Liquidity is the ability to fund assets and meet obligations as they come
due. Our primary sources of funds consist of deposit inflows, loan repayments,
repurchase agreements with and advances from the Federal Home Loan Bank of
Pittsburgh, lines of credit with other financial institutions and maturities and
sales of securities. In addition, we have the ability to collateralize
borrowings in the wholesale markets. While maturities and scheduled amortization
of loans and securities are predictable sources of funds, deposit flows and
mortgage prepayments are greatly influenced by general interest rates, economic
conditions and competition. The Board of Directors is responsible for
establishing and monitoring our liquidity targets and strategies in order to
ensure that sufficient liquidity exists for meeting the borrowing needs and
deposit withdrawals of our customers as well as unanticipated contingencies. We
seek to maintain a ratio of liquid assets (not subject to pledge) as a
percentage of deposits and borrowings (not subject to pledge) of 20% or greater.
At September 30, 2009, this ratio was 21.65%. We believe that we have enough
sources of liquidity to satisfy our short- and long-term liquidity needs as of
September 30, 2009.
We regularly adjust our investments in liquid assets based upon our
assessment of:
(i) expected loan demand and repayment;
(ii) expected deposit flows;
(iii) yields available on interest-earning deposits and securities; and
(iv) the objectives of our asset/liability management program.
Excess cash is invested generally in interest-earning deposits and short- and
intermediate-term securities.
Our most liquid assets are cash and cash equivalents. The levels of these
assets depend on our operating, financing and investing activities during any
given period. At September 30, 2009, cash and cash equivalents totaled $8.2
million. At September 30, 2009, we had no loans classified as held for sale.
Securities classified as available-for-sale, which provide additional sources of
liquidity, totaled $83.1 million at September 30, 2009, and we had $43.1 million
in outstanding borrowings at September 30, 2009. We had $71.5 million of
remaining borrowing capacity available at the Federal Home Loan Bank of
Pittsburgh as of September 30, 2009.
At September 30, 2009, we had $6.0 million in outstanding loan commitments.
In addition to outstanding loan commitments, we had $55.1 million in unused
lines of credit to borrowers. Certificates of deposit due within one year of
September 30, 2009 totaled $147.5 million, or 37.8% of total deposits. If these
deposits do not remain with us, we will be required to seek other sources of
funds, including loan sales, other deposit products, including replacement
certificates of deposit, securities sold under agreements to repurchase
(repurchase agreements) and advances from the Federal Home Loan Bank of
Pittsburgh and other borrowing sources. Depending on market conditions, we may
be required to pay higher rates on such deposits or other borrowings than we
currently pay on the certificates of deposit due on or before September 30,
2009. We believe, however, based on past experience that a significant portion
of such deposits will remain with us. We have the ability to attract and retain
deposits by adjusting the interest rates offered.
30
First Sentry Bank is subject to various regulatory capital requirements,
including a risk-based capital measure. The risk-based capital guidelines
include both a definition of capital and a framework for calculating
risk-weighted assets by assigning balance sheet assets and off-balance sheet
items to broad risk categories. At September 30, 2009, First Sentry Bank
exceeded all regulatory capital requirements. First Sentry Bank is considered
"well capitalized" under regulatory guidelines.
Off-Balance Sheet Arrangements and Contractual Obligations
Commitments. As a financial services provider, we routinely are a party to
various financial instruments with off-balance-sheet risks, such as commitments
to extend credit and unused lines of credit. While these contractual obligations
represent our potential future cash requirements, a significant portion of
commitments to extend credit may expire without being drawn upon. Such
commitments are subject to the same credit policies and approval process
accorded to loans we originate.
Contractual Obligations. In the ordinary course of our operations, we enter
into certain contractual obligations. Such obligations include operating leases
for premises and equipment, agreements with respect to borrowed funds and
deposit liabilities and agreements with respect to investments.
31
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for smaller reporting companies.
ITEM 4T. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of the Company's management, including the President and Chief
Executive Officer and the Senior Vice President and Chief Financial Officer, of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures (as defined in Rule 13a-15(e) promulgated under the
Securities and Exchange Act of 1934, as amended) as of September 30, 2009. Based
on that evaluation, the Company's management, including the President and Chief
Executive Officer and the Senior Vice President and Chief Financial Officer,
concluded that the Company's disclosure controls and procedures were effective.
During the quarter ended September 30, 2009, there have been no changes in
the Company's internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are subject to various legal actions that
are considered ordinary routine litigation incidental to the business of the
Company, and no claim for money damages exceeds ten percent of the Company's
consolidated assets. In the opinion of management, based on currently available
information, the resolution of these legal actions is not expected to have a
material adverse effect on the Company's results of operations.
ITEM 1A. RISK FACTORS
Not required for smaller reporting companies.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 14, 2009, the Company held a Special Meeting of Stockholders
to obtain approval for its merger with Guaranty Financial Services, Inc.
Stockholders of record as of August 15, 2009, were eligible to vote. The
following is a summary of the proposal and the result of the vote.
1. To consider and vote upon a proposal to approve and adopt the Agreement
and Plan of Merger, dated as of August 22, 2008, and as amended on June 4,
2009, by and between First Sentry Bancshares, Inc. and Guaranty Financial
Services, Inc.
32
For Against Abstain
------- ------- -------
811,558 10,476 3,280
There were no broker non-votes.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
The exhibits required by Item 601 of Regulation S-K are included with this
Form 10-Q and are listed on the "Index to Exhibits" immediately following the
Signatures.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST SENTRY BANCSHARES, INC.
(Registrant)
Date: November 13, 2009 /S/ Geoffrey S. Sheils
-------------------------------------
Geoffrey S. Sheils
President and Chief Executive Officer
Date: November 13, 2009 /S/ Richard D. Hardy
------------------------------------
Richard D. Hardy
Senior Vice President and
Chief Financial Officer
34
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
31.1 Certification of Geoffrey S. Sheils, President and Chief Executive Officer,
Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
31.2 Certification of Richard D. Hardy, Senior Vice President and Chief
Financial Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
32 Certification of Geoffrey S. Sheils, President and Chief Executive Officer,
and Richard D. Hardy, Senior Vice President 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.
35
