Attached files
| file | filename |
|---|---|
| EX-21 - LIBERTY BANCORP INC | v169487_ex21.htm |
| EX-31.1 - LIBERTY BANCORP INC | v169487_ex31-1.htm |
| EX-31.2 - LIBERTY BANCORP INC | v169487_ex31-2.htm |
| EX-23 - LIBERTY BANCORP INC | v169487_ex23.htm |
| EX-32 - LIBERTY BANCORP INC | v169487_ex32.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
(Mark
One)
|
x
|
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the fiscal year ended September 30, 2009
OR
|
o
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from
to .
Commission
file number: 0-51992
|
LIBERTY
BANCORP, INC.
|
|
(Exact
name of registrant as specified in its
charter)
|
|
Missouri
|
20-4447023
|
|
|
(State or other jurisdiction of incorporation or organization)
|
(I.R.S. Employer Identification No.)
|
|
16 West Franklin Street, Liberty, Missouri
|
64068
|
||
|
(Address of principal executive offices)
|
(Zip Code)
|
Registrant’s
telephone number, including area code: (816)
781-4822
Securities
registered pursuant to Section 12(b) of the Act:
|
Title of each class
|
Name of each exchange on which registered
|
|
|
Common stock, par value $0.01
|
The NASDAQ Stock Market LLC
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act: YES o NO x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. YES o NO x
Indicate
by check mark whether the registrant: (l) 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 x NO o
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 o NO o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
|
Large accelerated filer
|
o
|
Accelerated filer
|
o
|
||
|
Non-accelerated filer
|
o
|
Smaller reporting company
|
x
|
||
|
(Do
not check if a smaller reporting
company)
|
|||||
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES o NO x
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates was $16,827,404, based upon the closing price ($6.78 per share)
of the registrant’s common stock as quoted on the NASDAQ Capital Market as of
the last business day of the registrant’s most recently completed second fiscal
quarter (March 31, 2009).
The number of shares outstanding of the
registrant’s common stock as of December 18, 2009 was
3,614,568.
DOCUMENTS
INCORPORATED BY REFERENCE
The
following lists the documents incorporated by reference and the Part of the Form
10-K into which the document is incorporated:
|
|
1.
|
Portions
of the registrant’s Proxy Statement for the 2010 Annual Meeting of
Stockholders. (Part
III)
|
INDEX
|
PAGE
|
||||
|
PART
I
|
||||
|
Item
1.
|
Business
|
1
|
||
|
Item
1A.
|
Risk Factors |
20
|
||
|
Item
1B.
|
Unresolved
Staff Comments
|
22
|
||
|
Item
2.
|
Properties
|
23
|
||
|
Item
3.
|
Legal
Proceedings
|
24
|
||
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
24
|
||
|
PART
II
|
||||
|
Item
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
24
|
||
|
Item
6.
|
Selected
Financial Data
|
25
|
||
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operation
|
25
|
||
|
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
50
|
||
|
Item
8.
|
Financial
Statements and Supplementary Data
|
50
|
||
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
50
|
||
|
Item
9A(T).
|
Controls
and Procedures
|
51
|
||
|
Item
9B.
|
Other
Information
|
52
|
||
|
PART
III
|
||||
|
Item
10.
|
Directors,
Executive Officers and Corporate Governance
|
52
|
||
|
Item
11.
|
Executive
Compensation
|
52
|
||
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
52
|
||
|
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
53
|
||
|
Item
14.
|
Principal
Accounting Fees and Services
|
53
|
||
|
PART
IV
|
||||
|
Item
15.
|
Exhibits
and Financial Statement Schedules
|
54
|
||
|
SIGNATURES
|
||||
This report contains
“forward-looking statements” within the meaning of the federal securities
laws. These statements are not historical facts; rather, they are
statements based on Liberty Bancorp, Inc.’s current expectations regarding its
business strategies, intended results and future
performance. Forward-looking statements are generally identified by
use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,”
“project” and similar expressions.
Management’s
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse
effect on the operations of Liberty Bancorp, Inc. and its subsidiary include,
but are not limited to, changes in interest rates, national and regional
economic conditions, legislative and regulatory changes, monetary and fiscal
policies of the U.S. Government, including policies of the U.S. Treasury and the
Federal Reserve Board, the quality and composition of the loan or investment
portfolios, demand for loan products, deposit flows, competition, demand for
financial services in BankLiberty’s market area, changes in real estate market
values in BankLiberty’s market area, changes in relevant accounting principles
and guidelines and inability or third party service providers to
perform.
These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. Except as required by applicable
law or regulations, Liberty Bancorp, Inc. does not undertake, and specifically
disclaims any obligation, to release publicly the result of any revisions that
may be made to any forward-looking statements to reflect events or circumstances
after the date of the statements or to reflect the occurrence of anticipated or
unanticipated events.
PART
I
Item
1. Business
General
Liberty
Bancorp, Inc. (the “Company” or “Liberty Bancorp”) was organized as a Missouri
corporation at the direction of BankLiberty, formerly “Liberty Savings Bank,
F.S.B.” (the “Bank” or “BankLiberty”), in February 2006 to become the holding
company for the Bank upon the completion of the “second-step” mutual-to-stock
conversion (the “Conversion”) of Liberty Savings Mutual Holding Company (the
“MHC”). The Conversion was completed on July 21, 2006. As
part of the Conversion, the MHC merged into the Bank, thereby ceasing to exist,
and Liberty Savings Bank, F.S.B. changed its name to “BankLiberty.” A
total of 2,807,383 shares of common stock were sold in the stock offering at the
price of $10.00 per share. In addition, a total of 1,952,754 shares of common stock
were issued to the minority shareholders of the former Liberty Savings Bank,
F.S.B. representing an exchange ratio of 3.5004 shares of Company common stock
for each share of Liberty Savings Bank, F.S.B. common
stock. Fractional shares in the aggregate, or 36 shares, were
redeemed for cash. Total shares outstanding after the stock offering
and the exchange totaled 4,760,137 shares. Net proceeds of $25.6
million were raised in the stock offering, excluding $1.2 million which was
loaned by the Company to a trust for the Amended and Restated Liberty Savings
Bank Employee Stock Ownership Plan (the “ESOP”), enabling it to finance the
acquisition of 153,263 shares of common stock in the offering and
exchange. Direct offering costs totaled approximately $1.3
million. In addition, as part of the Conversion and dissolution of
Liberty Savings Mutual Holding Company, the Bank received approximately $694,000
of cash previously held by the MHC.
On
November 7, 2008, the Company acquired KLT Bancshares, Inc., the parent company
of Farley State Bank, a Missouri bank headquartered in Parkville,
Missouri. Pursuant to the acquisition, the Company acquired
substantially all of the banking operations, assets and deposits, including
banking offices located in Parkville and Platte City Missouri, of Farley State
Bank for $4.5 million in cash consideration to KLT Bancshares, Inc.
shareholders.
The
Company has no significant assets, other than all of the outstanding shares of
the Bank and the portion of the net proceeds it retained from the Conversion,
and no significant liabilities. The Company neither owns nor leases
any property, but instead uses the premises, equipment and furniture of the
Bank.
BankLiberty
is a community-oriented financial institution dedicated to serving the financial
service needs of consumers and businesses within its market area. We
attract deposits from the general public and use these funds to originate loans
secured by real estate located in our market area. Our real estate
loans include construction loans, commercial real estate loans, and loans
secured by single-family or multi-family properties. To a lesser
extent, we originate consumer loans and commercial business
loans.
1
The Bank
is subject to extensive regulation, examination and supervision by the Office of
Thrift Supervision (the “OTS”), its primary federal regulator, and the Federal
Deposit Insurance Corporation (the “FDIC”), its deposit insurer. The
Bank has been a member of the Federal Home Loan Bank System since its inception
and is a member of the Federal Home Loan Bank of Des Moines.
Our
website address is www.banklibertykc.com. Information
on our website should not be considered a part of this Form 10-K.
Market
Area
The
Bank’s home office is located in the city of Liberty, Missouri, which is in Clay
County, Missouri. In addition to our main office, BankLiberty
operates nine full-service branch offices in the Kansas City, Missouri
metropolitan area. We operate primarily in the northern portion of
the Kansas City metropolitan area, which is experiencing relatively weak
population and economic growth similar to that of the overall national
economy. Our offices are located in
four different counties, including three branches each in Clay, Platte and
Jackson Counties and a single branch in Clinton County. All of the
counties are included in the Kansas City metropolitan area.
Our
market area is the Kansas City metropolitan area, which comprises 11 counties in
Missouri and Kansas. The four counties that the Bank serves have a
mix of industry groups and employment sectors, including services, manufacturing
and transportation. In Clay County, top employers include Ford Motor
Co., Cerner Corporation (health care services), a number of casinos and an
amusement park. Clinton County’s top employers are within the
services sector and include Cameron Regional Medical Center, Cameron R-1 (school
district) and the county government. Platte County relies on the
transportation sector of employment, attributable to the operations of Kansas
City International Airport. Other top employers in Platte County
include American Airlines (which operates a maintenance facility), Citicorp
Credit Services Inc. and Harley-Davidson Inc. Jackson County, the
most populous county served and the most urban, includes Kansas City and its
downtown area. Manufacturing and services are the top employment
sectors in Jackson County, including the federal government, Health Midwest,
Hallmark Cards Inc. and DST Systems Inc.
Our
primary market area for deposits includes the communities in which we maintain
our banking office locations. Our primary lending area is broader
than our primary deposit market area and includes surrounding
counties.
Competition
We face significant competition for the
attraction of deposits and origination of loans. At June 30, 2009,
the most recent date for which data is available from the FDIC, we held
approximately 4.94%, 11.88%, 0.2% and 6.37% of the deposits in Clay, Clinton,
Jackson and Platte Counties, respectively. BankLiberty was the
6th largest market share out of 32 financial institutions with offices in Clay
County, the 4th largest market share out of eight financial institutions with
offices in Clinton County, the 30th largest market share out of 49 financial
institutions with offices in Jackson County and the 6th largest market share out
of 21 financial institutions with offices in Platte County. In
addition, large national or regional bank holding companies operate in our
market area. These institutions are significantly larger than us and,
therefore, have significantly greater resources.
Our most
direct competition for loans and deposits comes primarily from financial
institutions in our market area, and, to a lesser extent, from other financial
service providers, such as brokerage firms, credit unions, mortgage companies
and mortgage brokers. Our main competitors include a number of
significant independent banks. We also face competition for
investors’ funds from money market funds and other corporate and government
securities. Competition for loans also comes from the increasing
number of non-depository financial service companies entering the lending
market, such as insurance companies, securities companies and specialty finance
companies.
2
We expect
competition to increase in the future as a result of legislative, regulatory and
technological changes and the continuing trend of consolidation in the financial
services industry. Technological advances, for example, have lowered
barriers to entry, allowed banks to expand their geographic reach by providing
services over the Internet and made it possible for non-depository institutions
to offer products and services that traditionally have been provided by
banks. Changes in federal law permit affiliation among banks,
securities firms and insurance companies, which promotes a competitive
environment in the financial services industry. Competition for
deposits and the origination of loans could limit our growth in the
future.
Lending
Activities
General. Our loan
portfolio consists primarily of real estate loans, which include real estate
construction loans, single-family residential loans, commercial real estate
loans and multi-family real estate loans. To a lesser extent, we also
originate commercial business loans and consumer loans. These
loans are originated primarily in Clay, Clinton, Platte and Jackson Counties in
Missouri, which comprise the northern and eastern portions of the Kansas City,
Missouri metropolitan area. We sell substantially all new, fixed-rate
conforming single-family loans in the secondary market due to the current low
interest rate environment.
Construction
Lending. At September 30, 2009, our loan portfolio included
$69.2 million in loans secured by properties under construction, with such loans
representing 22.1%
of our total loan portfolio at that date. Our construction
lending has traditionally involved single-family residential lending to builders
where the residences being built have not been sold prior to commencement of
construction, known as “spec” construction lending, and to custom
homebuilders. In 2009, we decreased our single-family, spec
construction loans and development loans due to current market
conditions.
Our
construction loans are secured by the following types of real
estate:
|
At September 30,
|
||||||||
|
2009
|
2008
|
|||||||
|
(In
thousands)
|
||||||||
|
Single-family,
spec
|
$ | 9,055 | $ | 13,247 | ||||
|
Single-family,
custom built
|
6,765 | 6,346 | ||||||
|
Multi-family,
5 or more units
|
2,610 | 821 | ||||||
|
Development
|
13,620 | 36,670 | ||||||
|
Commercial
|
37,123 | 33,398 | ||||||
|
Total
|
$ | 69,173 | $ | 90,482 | ||||
We
originate spec loans only to builders with experience building and selling spec
single-family residences. Our spec residential mortgage construction
loans generally provide for the payment of interest only during the construction
phase, which is usually 12 months. Spec loans generally can be made
with a maximum loan-to-value ratio of 85% of the appraised value or 100% of the
cost of the project, whichever is less. Interest rates on residential
construction loans are set at the prime rate plus a margin, and adjust with
changes in the prime rate. We also generally charge a fee for
residential construction loans. At September 30, 2009, loans for the
construction of spec sale homes totaled $9.1 million, or 2.9% of our total loan
portfolio and 13.1%
of our portfolio of construction loans. At September 30, 2009,
the largest spec loan was for $614,000. This loan was performing
according to its terms at September 30, 2009. At September 30, 2009,
our largest outstanding indebtedness to a single builder for spec loans totaled
$3.0 million. All loans to this builder were performing in accordance
with their terms at September 30, 2009.
We also
originate construction loans for customers to have their personal residences
custom-built. We do not approve loans to customers acting as their
own builder for their residences. A custom-build project loan
requires the use of an approved qualified general contractor experienced in home
building and written approval for permanent financing. Custom-build
project loans can be made with a maximum loan-to-value ratio of
85%. At September 30, 2009, the largest outstanding custom-build
project loan was $2.0 million. This loan was 15 days past due at
September 30, 2009 and current at November 30, 2009.
3
We also
make loans for the construction of non single-family residential properties,
including loans for the construction of multi-family residential properties such
as condominiums and planned multi-family communities. We generally do not make
nonresidential construction loans in amounts that exceed a loan-to-value ratio
of 85% where the value is determined by the fully improved or completed
project’s current appraised market value. These loans generally have
an interest-only phase during construction, which is usually 12 to 24 months,
and then convert to permanent financing. Disbursements of funds are
at the sole discretion of the Bank and are based on the progress of
construction. Interest rates and fees on nonresidential construction
projects are negotiated, but such loans generally carry adjustable rates of
prime, plus a margin.
As part of our nonresidential lending
program, we offer loans to selected developers to acquire land and develop
residential lots or commercial properties. At September 30, 2009,
such loans amounted to $13.6 million, or 4.4% of our total loan
portfolio. We make the loans with terms from 12 to 24 months,
depending on the size of the project, at interest rates equal to the prime rate
plus a negotiated margin of between 0.0% and 1.0% and that adjust daily with
changes in the prime rate. We generally originate these loans at a loan-to-value
ratio of the lesser of 75% of the appraised value of the security property or
100% of the cost. Loans generally are structured so that the loan
will be completely repaid after the developer has sold 75% of the lots being
developed.
We
require that development loans be reviewed by independent architects or
engineers. Disbursements during the construction phase are based on
monthly on-site inspections and approved certifications. We generally
commit to provide the permanent financing on residential projects and usually
require some minimum presale commitments. In the case of construction
loans on commercial projects where we will provide the permanent financing, we
usually require firm lease commitments on some portion of the property under
construction from qualified tenants for a period covering the duration of the
loan and usually also require rent assignments in an amount sufficient to
satisfy debt service requirements. At September 30, 2009,
our largest development loan amounted to $8.4 million loan for commercial real
estate. This loan was originated in May 2007. At September
30, 2009, this loan was performing in accordance with its terms and
conditions.
For the
fiscal year ended September 30, 2009, we originated $23.5 million in
construction loans. A substantial amount of our construction loans,
except loans to homebuilders, are structured to convert to permanent loans upon
completion of construction, and typically have an initial construction loan term
of 12 to 18 months prior to converting to a permanent loan. Loan
proceeds are disbursed during the construction phase according to a draw
schedule based on the actual work completed. Construction projects
are inspected by our officers and, if warranted by the complexity of the
project, an independent contractor. Construction loans are
underwritten on the basis of the estimated value of the property as completed
and loan-to-value ratios are based on each project’s appraised
value.
Single-Family
Residential Real Estate Lending. Historically, our
primary lending activity was the origination of conventional mortgage loans on
single-family residential dwellings. However, in recent years, we
have emphasized the origination of real estate construction and commercial real
estate loans. As of September 30, 2009, loans on single-family
one- to four-unit, residential properties accounted for $54.6 million, or 17.4%,
of our loan portfolio.
We originate fixed-rate fully
amortizing loans with maturities ranging between 10 and 30
years. Management establishes the loan interest rates based on market
conditions. We offer mortgage loans that conform to Fannie Mae and
Freddie Mac guidelines, as well as jumbo loans, which presently are loans in
amounts over $417,000. Substantially all fixed-rate, single-family
loans are sold to secondary market investors.
We also currently offer adjustable-rate
loans, with interest rates that adjust annually after a three-, five- or
seven-year initial fixed period and with terms of up to 30
years. Interest rate adjustments on such loans are generally limited
to no more than 2% during any adjustment period and 6% over the life of the
loan. Demand for adjustable-rate loans has been low during the past
two years due to the relatively low interest rates available on fixed-rate
loans.
We underwrite single-family residential
loans with loan-to-value ratios of up to 85%. We require that title,
hazard and, if appropriate, flood insurance be maintained on all properties
securing real estate loans made by us. An independent licensed
appraiser generally appraises all properties.
4
Our
single-family loan originations are generally for terms of 15, 20 or 30 years,
amortized on a monthly basis with interest and principal due each
month. Residential real estate loans often remain outstanding for
significantly shorter periods than their contractual terms as borrowers may
refinance or prepay loans at their option, without
penalty. Therefore, average loan maturity is a function of, among
other factors, the level of purchase and sale activity in the real estate
market, prevailing interest rates and the interest rates payable on outstanding
loans. Conventional residential mortgage loans we originate
customarily contain “due-on-sale” clauses, which permit the Bank to accelerate
the indebtedness of the loan upon transfer of ownership of the mortgaged
property.
We retain
some of the adjustable-rate mortgages we originate in order to reduce our
exposure to changes in interest rates. However, there are
unquantifiable credit risks resulting from potential increased costs to the
borrower as a result of repricing of adjustable-rate mortgage
loans. During periods of rising interest rates, the risk of default
on adjustable-rate mortgage loans may increase due to the upward adjustment of
interest cost to the borrower.
Multi-Family and
Commercial Real Estate Lending. We offer
fixed-rate and adjustable-rate mortgage loans secured by income-producing
multi-family and commercial real estate. Our multi-family and
commercial real estate loans generally are secured by improved property such as
office buildings, retail centers, apartment buildings and churches which are
located in our primary market area. At September 30, 2009, loans
secured by multi-family properties, i.e., more than four units,
amounted to $29.2 million, or 9.3% of our loan portfolio, and commercial
(non-residential) real estate loans amounted to $122.6 million, or 39.2% of our
loan portfolio. In the aggregate, multi-family and commercial real
estate lending totaled approximately $151.8 million, or 48.5%, of our total loan
portfolio at that date.
Multi-family
and commercial real estate loans generally amortize over a period of from 15 to
25 years but usually mature in either three or five
years. Multi-family and commercial real estate loans generally are
made in amounts not exceeding 85% of the lesser of the appraised value or the
purchase price of the property. While we offer adjustable-rate
multi-family real estate loans and commercial real estate loans, most such loans
have a fixed interest rate indexed to the three- or five-year treasury bill rate
plus a margin. At September 30, 2009, our largest commercial real
estate loan had an outstanding balance of $10.0 million, was secured by several
retail buildings and was performing in accordance with its terms. At September 30, 2009,
our largest multi-family real estate loan secured by a 210-unit apartment
complex had an outstanding balance of $5.0 million, and was performing in
accordance with its terms.
Consumer
Lending. We have a
consumer-lending program that primarily targets existing
customers. The program emphasizes our commitment to community-based
lending and is designed to meet the needs of consumers in our primary market
area. Our consumer loans consist primarily of home equity loans and
lines of credit, and, to a much lesser extent, automobile loans, loans secured
by deposit accounts and other miscellaneous consumer loans. As of
September 30, 2009, consumer loans constituted approximately $15.0 million, or
4.8%, of our total loan portfolio.
The
procedures for underwriting consumer loans include an assessment of the
applicant’s payment history and the ability to meet existing obligations and
payments on the proposed loan. Although the applicant’s
creditworthiness is a primary consideration, the underwriting process also
includes an analysis of the applicant’s employment stability, capacity to pay
debts, and a comparison of the value of the collateral, if any, to the proposed
loan amount.
We
generally offer home equity loans and home equity lines of credit with a maximum
combined loan-to-value ratio of 90%, provided that loans in excess of 85% carry
higher interest rates and are subject to stricter underwriting requirements.
Home equity lines
of credit have adjustable rates of interest that are indexed to the prime rate
as reported in The Wall Street
Journal. A home equity line of credit may be drawn down by the
borrower for an initial period of 10 years from the date of the loan
agreement. During this period, the borrower has the option of paying,
on a monthly basis, either principal and interest or only
interest. At September 30, 2009, home equity loans and lines of
credit totaled $12.8 million, or 4.1% of our loan portfolio.
The Bank
makes loans secured by deposit accounts in amounts that may not exceed the
account balance plus accrued interest at the due date. The interest
rate is usually set at 2% above the rate being paid on the collateral deposit
account with the account pledged as collateral to secure the loan. At
September 30, 2009, loans secured by deposit accounts totaled $317,000, or .1%
of our loan portfolio.
5
Our
automobile loans are generally underwritten in amounts up to 90% of the lesser
of the purchase price of the automobile or, with respect to used automobiles,
the loan value as published by the National Automobile Dealers
Association. The terms of most such loans do not exceed 60
months. We require that the vehicles be insured and that we be listed
as mortgagee on the insurance policy. At September 30, 2009,
automobile loans totaled $999,000, or .3% of our loan portfolio.
Commercial
Lending. We
originate commercial business loans to small businesses in our market
area. At September 30, 2009, commercial business loans totaled $22.5
million, or 7.2% of our total loan portfolio. We extend commercial
business loans on a secured basis that generally are secured by inventory,
business equipment, marketable securities and/or bonds and cash surrender value
life insurance. We originate both fixed- and adjustable-rate
commercial loans with terms generally up to five years based on the purpose of
the loan. Interest rates on adjustable-rate commercial loans are
usually based on the prime rate as published in The Wall Street Journal, plus
a margin, and adjust as the prime rate changes. We also originate
lines of credit to finance short-term working capital needs, with repayment from
asset conversion in the normal course of business. Closed end credit
lines are also provided for planned equipment purchases or other finite
purposes.
When
providing commercial business loans, we consider the borrower’s financial
condition, the payment history on corporate and personal debt, debt service
capabilities and actual and projected cash flows. In addition, the
borrower’s inherent industry risks and the collateral value are
analyzed. At September 30, 2009, our largest commercial business loan
was a $3.5 million loan secured by car hauling equipment. At
September 30, 2009, this loan was performing in accordance with its terms,
however it is classified as Special Mention due to adverse industry
conditions.
Loan
Underwriting Risks
Construction
Loans. Construction
financing is generally considered to involve a higher degree of risk of loss
than long-term financing on improved, occupied real estate. Risk of
loss on a construction loan depends largely upon the accuracy of the initial
estimate of the property’s value at completion of construction and the estimated
cost (including interest) of construction. During the construction
phase, a number of factors could result in delays and cost
overruns. If the estimate of construction costs proves to be
inaccurate, we may be required to advance funds beyond the amount originally
committed to permit completion of the building or project. If the
estimate of value proves to be inaccurate, we may be confronted, at or before
the maturity of the loan, with a building or project having a value that is
insufficient to assure full repayment. If we are forced to foreclose
on a building before or at completion due to a default, there can be no
assurance that we will be able to recover all of the unpaid balance of, and
accrued interest on, the loan as well as related foreclosure and holding
costs.
Adjustable-Rate
Loans. While we anticipate that adjustable-rate loans will
better offset the adverse effects of an increase in interest rates as compared
to fixed-rate mortgages, the increased mortgage payments required of
adjustable-rate loan borrowers in a rising interest rate environment could cause
an increase in delinquencies and defaults. The marketability of the
underlying property also may be adversely affected in a high interest rate
environment. In addition, although adjustable-rate mortgage loans help make our
loan portfolio more responsive to changes in interest rates, the extent of this
interest sensitivity is limited by the annual and lifetime interest rate
adjustment limits.
Multi-Family and
Commercial Real Estate Loans. Loans secured by multi-family
and commercial real estate generally have larger balances and involve a greater
degree of risk than single-family residential mortgage loans. Of
primary concern in multi-family and commercial real estate lending is the
project’s cash flow potential. Payments on loans secured by income
properties often depend on successful operation and management of the
properties. As a result, repayment of such loans may be subject to a
greater extent than residential real estate loans to adverse conditions in the
real estate market or the economy. To monitor cash flows on income
properties, we generally require borrowers and loan guarantors, if any, to
provide annual financial statements on multi-family and nonresidential real
estate loans. In reaching a decision on whether to provide a
multi-family or commercial real estate loan, we consider the net operating
income of the property, the borrower’s expertise, credit history and
profitability and the value of the underlying property. We have
generally required that the properties securing these real estate loans have
debt service coverage ratios (the ratio of net operating income before debt
service to debt service) of at least 1.20x. Environmental surveys are obtained
when circumstances suggest the possibility of the presence of hazardous
materials.
6
Consumer
Loans. Consumer loans may entail greater risk than do
residential mortgage loans, particularly in the case of consumer loans that are
unsecured or secured by assets that depreciate rapidly. In such
cases, repossessed collateral for a defaulted consumer loan may not provide an
adequate source of repayment for the outstanding loan and the remaining
deficiency often does not warrant further substantial collection efforts against
the borrower. In addition, consumer loan collections depend on the
borrower’s continuing financial stability, and therefore are more likely to be
adversely affected by job loss, divorce, illness or personal
bankruptcy. Furthermore, the application of various federal and state
laws, including bankruptcy and insolvency laws, may limit the amount that can be
recovered on such loans.
Commercial
Loans. Unlike residential mortgage loans, which generally are
made on the basis of the borrower’s ability to make repayment from his or her
employment or other income, and which are secured by real property the value of
which tends to be more easily ascertainable, commercial loans are of higher risk
and typically are made on the basis of the borrower’s ability to make repayment
from the cash flow of the borrower’s business. As a result, the
availability of funds for the repayment of commercial loans may depend
substantially on the success of the business itself. Further, any
collateral securing such loans may depreciate over time, may be difficult to
appraise and may fluctuate in value.
Loan
Originations, Purchases and Sales. Loan originations are
derived from a number of sources. Residential mortgage loan
originations primarily come from walk-in customers and referrals by realtors,
depositors and borrowers. We advertise our mortgage loan services
primarily through local builder periodicals, billboard advertisements, and to a
lesser extent, direct mailings. Commercial, commercial real estate
and construction loans are typically derived from the business development
efforts of the Bank’s commercial banking officers. Applications are
taken at all offices but are processed in the Bank’s main office and submitted
for approval.
We sell
in the secondary market substantially all fixed-rate single-family mortgage
loans we originate that conform to Fannie Mae and Freddie Mac
guidelines. These loans are sold with servicing
released. We also sell participation interests in loans to local
financial institutions, primarily on the portion of loans that exceed our
borrowing limits. We sold $8.8 million, $9.5 million and $4.6 million
of participation interests in loans during the fiscal years ended September 30,
2009, 2008 and 2007, respectively.
In fiscal
2009, we purchased participation interests, primarily in commercial real estate
loans. The aggregate outstanding balance of all such purchased loans
totaled $11.0 million at September 30, 2009. We perform our own
underwriting analysis on each of our participation interests before purchasing
such loans and therefore believe there is no greater risk of default on these
obligations. However, in a purchased participation loan, we do not
service the loan and thus are subject to the policies and practices of the lead
lender with regard to monitoring delinquencies, pursuing collections and
instituting foreclosure proceedings. We are permitted to review all
of the documentation relating to any loan in which we participate, including any
annual financial statements provided by a borrower. Additionally, we
receive periodic updates on the loan from the lead lender. We have
not historically purchased any whole loans. However, we would
entertain doing so if a loan was presented to us that met our underwriting
criteria and fit within our interest rate strategy. We consider any
servicing asset or liability associated with participation interest to be
immaterial.
Loan Approval
Procedures and Authority. Upon receipt of a loan application
from a prospective borrower, a credit report and verifications are ordered to
confirm specific information relating to the loan applicant’s employment, income
and credit history. Where applicable, an appraisal of the real estate
intended to secure the proposed loan is undertaken by an independent fee
appraiser approved by the Bank. Our Board of Directors has the
responsibility and authority for general supervision over our lending
policies. The Board has established written lending policies and has
delegated to the Officers Loan Committee (the “OLC”) the authority to approve
all loan proposals exceeding individual authorities up to a maximum relationship
amount of $1,000,000. The individual authority limits range from
$3,000 to $500,000 based on experience, lending history and
seniority. The OLC consists of the Chief Executive Officer, the Chief
Lending Officer, SVP Loan Administration (non-voting member) and
all loan officers.
7
The Board
has further established a Directors Loan Committee (the “DLC”) including all
Directors. This committee has approval authority for all loan
proposals in excess of the authority level given to the OLC and for all loans to
directors and executive officers. The DLC consists of all members of
the Board of Directors.
State
certified or licensed appraisers must perform all real estate appraisals
performed in connection with federally related
transactions. Federally related transactions include real estate
related financial transactions that the Office of Thrift Supervision regulates
and which include mortgages made by the Bank. Office of Thrift
Supervision regulations require that all federally related transactions having a
transaction value of more than $250,000, other than those involving appraisals
of one- to four-family residential properties, require an appraisal performed by
a state certified appraiser. Single-family residential property
financing may require an appraisal by a state certified appraiser if the amount
involved exceeds $1.0 million or the financing involves a “complex” one- to
four-family property appraisal. Appraisals are generally not required
for transactions when the transaction value is $250,000 or less, or when the
transaction is not secured by real estate. In some instances, an
appropriate evaluation of real estate may be required.
Loans to One
Borrower. At September 30, 2009, the maximum amount that the
Bank could have loaned to any one borrower under the 15%, 25% and 30% limits of
risk-based capital was approximately $6.3 million, $10.4 million and
$12.5
million, respectively. At that date, our largest lending
relationship totaled $17.3 million and
consisted of loans secured by commercial real estate. This
relationship meets loans to one borrower regulations due to limited guarantor
relationships and different repayment sources. The loans were
performing according to their original terms at September 30,
2009. See “Regulation and Supervision—Lending
Limits” for further discussion of loans to one borrower lending
limits.
Loan
Commitments. We issue commitments for fixed-rate and
adjustable-rate mortgage loans conditioned upon the occurrence of certain
events. Commitments to originate mortgage loans are legally binding
agreement to lend to our customers.
Interest Rates
and Loan Fees. The interest rates we charge on mortgage loans
are primarily determined by competitive loan rates offered in its market
area. Mortgage loan interest rates reflect factors such as general
market interest rate levels, the supply of money available to the financial
institutions industry and the demand for such loans. These factors
are in turn affected by general economic conditions, the monetary policies of
the Federal government, including the Board of Governors of the Federal Reserve
System (the “Federal Reserve Board”). In some cases, market interest
rates have caused the Bank to modify borrowers’ interest rates, as an
alternative to refinancing, in order to retain these loans in the Bank’s loan
portfolio.
In
addition to interest earned on loans, we receive fees in connection with loan
commitments and originations, loan modifications, late payments and for
miscellaneous services related to its loans. Income from these
activities varies from period to period with the volume and type of loans
originated, which in turn is dependent on prevailing mortgage interest rates and
their effect on the demand for loans in the markets we serve.
Investment
Activities
Mortgage-Backed
Securities. We invest in
mortgage-backed securities primarily issued or guaranteed by the United States
government or an agency thereof. Mortgage-backed securities represent
a participation interest in a pool of single-family or multi-family mortgages,
the principal and interest payments on which are passed from the mortgage
originators, through intermediaries (generally quasi-governmental agencies) that
pool and repackage the participation interests in the form of securities, to
investors such as the Bank. Such quasi-governmental agencies, which
guarantee the payment of principal and interest to investors, primarily include
Ginnie Mae, Freddie Mac and Fannie Mae. Mortgage-backed securities
typically are issued with stated principal amounts, and the securities are
backed by pools of mortgages that have loans with varying interest rates and
maturities. The underlying pool of mortgages can be composed of
either fixed-rate or adjustable-rate mortgages. As a result, the
interest rate risk characteristics of the underlying pool of mortgages, i.e., fixed-rate or
adjustable-rate, are passed on to the certificate
holder. Historically, we have invested in adjustable-rate and
short-term (five- to seven-year maturities) mortgage-backed securities to
supplement local loan originations, as well as to reduce interest rate risk
exposure, because mortgage-backed securities are more liquid than mortgage
loans. However, in recent years, we have purchased primarily five- to
seven-year balloon issues and fixed-rate 15-year issues, and, to a lesser
extent, collateralized mortgage obligations. At September 30, 2009,
our mortgage-backed securities totaled $9.0 million.
8
Investment
Securities. It is our policy to consistently maintain a liquid
portfolio. Liquidity levels may be increased or decreased depending
upon the yields on investment alternatives, our judgment as to the
attractiveness of the yields then available in relation to other opportunities,
our expectations of the level of yield that will be available in the future and
our projections as to the short-term demand for funds to be used in our loan
origination and other activities.
The
general objectives of our investment policy are to (i) maintain liquidity levels
sufficient to meet our operating needs, (ii) minimize interest rate risk by
managing the repricing characteristics of our assets and liabilities, (iii)
reduce credit risk by maintaining a balance of high quality diverse investments,
(iv) absorb excess liquidity when loan demand is low and/or deposit growth is
high, (v) maximize returns without compromising liquidity or creating undue
credit or interest rate risk, and (vi) provide collateral for pledging
requirements. Our investment activities are conducted by senior
management, specifically, the Chief Financial Officer, and supervised by the
Board of Directors. The investment policy adopted by the Board
currently provides for maintenance of an investment portfolio for the purposes
of providing earnings, ensuring a minimum liquidity reserve and facilitating our
asset/liability management objectives of limiting the weighted average terms to
maturity or repricing of our interest-earning assets. In accordance
with the policy, we have invested primarily in government and agency securities
backed by the full faith and credit of the United States and municipal
securities, and as discussed above, mortgage-backed securities and participation
certificates issued by Ginnie Mae, Freddie Mac and Fannie Mae.
For
information regarding the carrying values and market values and other
information for our mortgage-backed securities and other securities, see notes 1
and 4 of the notes to consolidated financial statements included in
this Form 10-K.
Deposit
Activities and Other Sources of Funds
General. Deposits
are a significant source of funds for lending and other investment
purposes. In addition to deposits, we derive funds from loan
principal repayments, interest payments and maturing investment
securities. Loan repayments and interest payments are a relatively
stable source of funds, while deposit inflows and outflows are significantly
influenced by general interest rates and money market
conditions. Borrowings may be used on a short-term basis to
compensate for reductions in the availability of funds from other sources, or on
a longer-term basis for general business purposes. During recent
years, we have used FHLB advances and customer deposits to fund
loans. We continuously monitor and evaluate the pricing of Federal
Home Loan Bank of Des Moines advances as an alternative to retail deposits as a
source of funds.
Deposits. We
attract principally from within our market area by offering a variety of deposit
instruments, including accounts and certificates of deposit ranging in term from
91 days to 60 months, as well as NOW, passbook and money market deposit
accounts. Deposit account terms vary, principally on the basis of the
minimum balance required the time periods the funds must remain on deposit and
the interest rate. We also offer individual retirement
accounts.
Our
policies are designed primarily to attract deposits from local
residents. We establish interest rates, maturity terms, service fees
and withdrawal penalties on a periodic basis. Determination of rates
and terms are predicated upon funds acquisition and liquidity requirements,
rates paid by competitors, growth goals and federal regulations. In
order to increase our transaction accounts, we continuously evaluate these
products and then develop new interest-bearing and noninterest-bearing checking
accounts in order to appeal to varied customer needs. Automated
teller machine services are offered as an additional incentive to attract
transaction accounts. Also, we maintained advertising and marketing
efforts in an attempt to attract such accounts. Primary marketing
costs included direct mail, radio, television, and
newspaper. Customers access our deposit services in person, through
the internet, and by phone. Typical services that are provided with
demand deposit accounts include debit cards, online banking, and online bill
pay.
9
We accept
brokered deposits and at September 30, 2009, we had 28.7 million in brokered
deposits. Brokered deposits represent an alternative and immediate
source of funds but generally bear a higher interest rate than local retail
deposits. Brokered deposits are highly susceptible to withdrawal if
the rates we pay on such deposits are not competitive.
Borrowings. Retail
deposits historically have been the primary source of funds for our lending and
investment activities and for our general business activities. We
also use advances from the Federal Home Loan Bank of Des Moines to supplement
our supply of lendable funds and to meet deposit withdrawal
requirements. The Federal Home Loan Bank of Des Moines functions as a
central reserve bank providing credit for savings institutions and certain other
member financial institutions. As a member, the Bank is required to
own capital stock in the Federal Home Loan Bank of Des Moines and is authorized
to apply for advances on the security of such stock and certain of its mortgages
and other assets (principally, securities which are obligations of, or
guaranteed by, the United States) provided certain standards related to
creditworthiness have been met. Advances from the Federal Home Loan
Bank of Des Moines are secured by our stock in the Federal Home Loan Bank of Des
Moines, a portion of mortgage loans and certain securities. Advances
from the Federal Home Loan Bank of Des Moines totaled $69.1 million at September
30, 2009, with a weighted average interest rate of 2.21%, and had maturity dates
which varied up to September 2014.
We also
borrow funds pursuant to the Federal Home Loan Bank’s Community Investment
Program, which funds are used to make loans to low and moderate income borrowers
at rates established pursuant to the program. Community Investment
Program advances amounted to $5.9 million at September 30,
2009. During the years ended September 30, 2009 and 2008, we borrowed
$0 and $9.2 million, respectively, under the Community Investment
Program.
In addition, we borrow funds pursuant
to agreements to repurchase. Securities sold under agreements to
repurchase are customer funds that are invested overnight in mortgage-related
securities. These types of accounts are often referred to as sweep
accounts and reprice daily.
Personnel
As of
September 30, 2009, the Bank had 84 full-time and 27 part-time
employees. The employees are not represented by a collective
bargaining group. We consider our relations with our employees to be
excellent.
Executive
Officers
The
executive officers of the Company are elected annually by the Board of Directors
and serve at the Board’s discretion. Unless otherwise stated, each
executive officer has held his position for at least five years. The
ages presented are as of September 30, 2009. The executive officers
are:
|
Name
|
Age
|
Position
|
||
|
Brent
M. Giles
|
42
|
President
and Chief Executive Officer of the Company and the Bank
|
||
|
Marc
J. Weishaar
|
48
|
Senior
Vice President and Chief Financial Officer of the Company and the
Bank
|
||
|
Mark
E. Hecker
|
43
|
Senior
Vice President and Chief Lending Officer of the
Bank
|
Brent M.
Giles has served as our President and Chief Executive Officer since
September 2003. He has also served as a director of our Company since
2003. Prior to joining the Bank, from August 2001 to August 2003, Mr.
Giles was President of Lawson Bank, Lawson, Missouri, a Missouri-based community
bank. From May 2000 to July 2001, Mr. Giles served as a financial
services consultant with Rightworks Corporation, San Jose, California, and from
April 1998 to May 2000, Mr. Giles served as Vice President of UMB Bank, Kansas
City, Missouri. From 1989 to April 1998, Mr. Giles was a financial
institutions examiner with the Federal Deposit Insurance
Corporation.
Marc J.
Weishaar is Senior Vice President and Chief Financial Officer of Liberty
Bancorp and the Bank. He has served as Chief Financial Officer
at the Bank since January 1995. From November 1991 to January 1995,
Mr. Weishaar was Assistant Vice President, Compliance Officer of the
Bank. From 1989 to November 1991, Mr. Weishaar was employed as a loan
officer with UMB Bank, Kansas City, Missouri. From 1985 to 1989, Mr.
Weishaar was employed in public accounting. He has a B.S. in Business
Administration from the University of Kansas, Lawrence, Kansas and an M.B.A.
from the University of Missouri, Kansas City.
10
Mark E.
Hecker has served as the Bank’s Senior Vice President and Chief Lending
Officer since June 2004. From March 1996 to June 2004, Mr. Hecker
served in various capacities, including Commercial Loan Officer and Vice
President, Commercial Manager, in Lee’s Summit, Missouri with Commercial Federal
Bank, Omaha, Nebraska. From 1990 to March 1996, Mr. Hecker was a
financial institutions examiner with the Federal Deposit Insurance
Corporation. He has a B.S. in accounting from Central Missouri State
University, Warrensburg, Missouri.
Subsidiaries
As of September 30, 2009, the Bank was
the Company’s only subsidiary. The Bank is wholly owned by the
Company.
Regulation
and Supervision
General. As
a federally chartered savings bank, the Bank is subject to extensive regulation
by the OTS. The lending activities and other investments of the Bank
must comply with various federal regulatory requirements and the FDIC and to OTS
regulations governing such matters as capital standards, mergers, establishment
of branch offices, subsidiary investments and activities and general investment
authority. The OTS periodically examines the Bank for compliance with
various regulatory requirements and the FDIC also has the authority to conduct
special examinations of insured institutions. The Bank must file
reports with the OTS describing its activities and financial
condition. The Bank is also subject to certain reserve requirements
promulgated by the Federal Reserve Board. This supervision and
regulation is intended primarily for the protection of
depositors. Certain of these regulatory requirements are referred to
below or appear elsewhere herein. This summary of regulatory
requirements does not purport to be a complete description and is qualified in
its entirety by reference to the actual statutes and regulations
involved.
Business
Activities. The activities of federal savings banks are
governed by federal law and regulations. These laws and regulations
delineate the nature and extent of the activities in which federal savings banks
may engage. In particular, certain lending authority for federal
savings banks, e.g.,
commercial, non-residential real property loans and consumer loans, is
limited to a specified percentage of the institution’s capital or
assets.
Regulatory
Capital Requirements. Under OTS capital standards, savings
institutions must maintain “tangible” capital equal to 1.5% of adjusted total
assets, “core” or “Tier 1” capital equal to 4% (or 3% if the institution is
rated CAMELS 1 under the OTS examination rating system) of adjusted total assets
and a combination of core and “supplementary” capital equal to 8% of
“risk-weighted” assets. In addition, the OTS regulations impose
certain restrictions on savings institutions that have a total risk-based
capital ratio that is less than 8%, a ratio of Tier 1 capital to risk-weighted
assets of less than 4% or a ratio of Tier 1 capital to adjusted total assets of
less than 4% (or 3% if the institution is rated CAMELS 1 under the OTS
examination rating system). See “—Prompt Corrective Regulatory
Action.” For purposes of this regulation, Tier 1 capital has
the same definition as core capital, i.e., common stockholders’
equity (including retained earnings), noncumulative perpetual preferred stock
and related surplus and minority interests in the equity accounts of fully
consolidated subsidiaries. Core capital is generally reduced by the
amount of the savings institution’s intangible assets. Limited
exceptions to the deduction requirement are provided for certain mortgage
servicing rights and credit card relationships. Tangible capital is
given the same definition as core capital and is reduced by the amount of all
the savings institution’s intangible assets with only a limited exception for
certain mortgage servicing rights.
Both core
and tangible capital are further reduced by an amount equal to a savings
institution’s debt and equity investments in subsidiaries engaged in activities
not permissible for national banks, other than subsidiaries engaged in
activities undertaken as agent for customers or in mortgage banking activities
and subsidiary depository institutions or their holding companies. At
September 30, 2009, the Bank had no such investments.
11
Adjusted
total assets include a savings institution’s total assets as determined under
generally accepted accounting principles, increased for certain goodwill amounts
and by a prorated portion of the assets of unconsolidated includable
subsidiaries in which the savings institution holds a minority
interest. Adjusted total assets are reduced by the amount of assets
that have been deducted from capital, the portion of savings institution’s
investments in subsidiaries that must be netted against capital under the
capital rules and, for purposes of the core capital requirement, qualifying
supervisory goodwill. At September 30, 2009, the Bank’s adjusted
total assets for purposes of core and tangible capital requirements were $389.0
million.
In
determining compliance with the risk-based capital requirement, a savings
institution is allowed to include both core capital and supplementary capital in
its total capital, provided the amount of supplementary capital does not exceed
the savings institution’s core capital. Supplementary capital
includes certain preferred stock issues, certain approved subordinated debt,
specified other capital instruments, a portion of the savings institution’s
general loss allowances and up to 45% of unrealized gains of equity
securities. Total core and supplementary capital are reduced by the
amount on capital instruments held by other depository institutions pursuant to
reciprocal arrangements and all equity investments. At September 30,
2009, the Bank had no equity investments for which OTS regulations require a
deduction from total capital.
The
risk-based capital requirement is measured against risk-weighted assets which
equal the sum of each asset and the credit-equivalent amount of each off-balance
sheet item after being multiplied by an assigned risk weight. Under
the OTS risk-weighting system, one- to four-family first mortgages with
specified loan-to-value ratios that are not more than 90 days past due are
assigned a risk weight of 50%. Consumer, commercial and residential
construction loans are assigned a risk weight of
100%. Mortgage-backed securities issued, or fully guaranteed as to
principal and interest by the FNMA or FHLMC are assigned a 20% risk
weight. Cash and U.S. Government securities backed by the full faith
and credit of the U.S. Government (such as mortgage-backed securities issued by
GNMA) are given a 0% risk weight. As of September 30, 2009, the
Bank’s risk-weighted assets were approximately $328.8 million.
The table
below provides information with respect to the Bank’s compliance with its
regulatory capital requirements at September 30, 2009.
|
Amount
|
Percent
of Assets (1)
|
|||||||
|
(Dollars
in thousands)
|
||||||||
|
Tangible
capital
|
$ | 38,166 | 9.8 | % | ||||
|
Tangible
capital requirement
|
5,835 |
1.5
|
||||||
|
Excess
|
$ | 32,331 | 8.3 | % | ||||
|
Tier
1/core capital
|
$ | 38,166 | 9.8 | % | ||||
|
Tier
1/core capital requirement (2)
|
15,559 | 4.0 | ||||||
|
Excess
|
$ | 22,607 | 5.8 | % | ||||
|
Tier
1/risk-based capital
|
$ | 38,166 | 11.6 | % | ||||
|
Tier
1/risk-based capital requirement
|
13,151 | 4.0 | ||||||
|
Excess
|
$ | 25,015 | 7.6 | % | ||||
|
Total
risk-based capital
|
$ | 41,685 | 12.7 | % | ||||
|
Total
risk-based capital requirement
|
26,302 | 8.0 | ||||||
|
Excess
|
$ | 15,383 | 4.7 | % | ||||
|
|
(1)
|
Based
upon adjusted total assets for purposes of the tangible capital and core
capital requirements, and risk-weighted assets for purposes of the
risk-based capital requirements.
|
|
|
(2)
|
Reflects
the capital requirement that we must satisfy to avoid regulatory
restrictions that may be imposed pursuant to prompt corrective action
regulations.
|
In
addition to requiring generally applicable capital standards for savings
institutions, the OTS is authorized to establish the minimum level of capital
for a savings institution at such amount or at such ratio of capital-to-assets
as the OTS determines to be necessary or appropriate for such institution in
light of the particular circumstances of the institution. Such
circumstances would include a high degree of exposure to interest rate risk,
prepayment risk, credit risk, concentration of credit risk and certain risks
arising from nontraditional activities. The OTS may treat the failure
of any savings institution to maintain capital at or above such level as an
unsafe or unsound practice and may issue a directive requiring any savings
institution which fails to maintain capital at or above the minimum level
required by the OTS to submit and adhere to a plan for increasing
capital.
12
At
September 30, 2009, the Bank exceeded all regulatory minimum capital
requirements.
Prompt Corrective
Regulatory Action. Under the Federal
Deposit Insurance Corporation Improvement Act (“FDICIA”), the federal banking
regulators are required to take prompt corrective action if an insured
depository institution fails to satisfy certain minimum capital requirements,
including a leverage limit, a risk-based capital requirement, and any other
measure deemed appropriate by the federal banking regulators for measuring the
capital adequacy of an insured depository institution. All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees if the institution would
thereafter fail to satisfy the minimum levels for any of its capital
requirements. An institution that fails to meet the minimum level for
any relevant capital measure (an “undercapitalized institution”) may be: (i)
subject to increased monitoring by the appropriate federal banking regulator;
(ii) required to submit an acceptable capital restoration plan within 45 days;
(iii) subject to asset growth limits; and (iv) required to obtain prior
regulatory approval for acquisitions, branching and new lines of
businesses. The capital restoration plan must include a guarantee by
the institution’s holding company that the institution will comply with the plan
until it has been adequately capitalized on average for four consecutive
quarters, under which the holding company would be liable up to the lesser of 5%
of the institution’s total assets or the amount necessary to bring the
institution into capital compliance as of the date it failed to comply with its
capital restoration plan.
A
“significantly undercapitalized” institution, as well as any undercapitalized
institution that does not submit an acceptable capital restoration plan, may be
subject to regulatory demands for recapitalization, broader application of
restrictions on transactions with affiliates, limitations on interest rates paid
on deposits, asset growth and other activities, possible replacement of
directors and officers, and restrictions on capital distributions by any bank
holding company controlling the institution. Any company controlling
the institution may also be required to divest the institution or the
institution could be required to divest subsidiaries. The senior
executive officers of a significantly undercapitalized institution may not
receive bonuses or increases in compensation without prior approval and the
institution is prohibited from making payments of principal or interest on its
subordinated debt. In their discretion, the federal banking
regulators may also impose the foregoing sanctions on an undercapitalized
institution if the regulators determine that such actions are necessary to carry
out the purposes of the prompt corrective provisions. If an
institution’s ratio of tangible capital to total assets falls below the
“critical capital level” established by the appropriate federal banking
regulator, the institution will be subject to conservatorship or receivership
within specified time periods.
Under the
implementing regulations, the federal banking regulators, including the OTS,
generally measure an institution’s capital adequacy on the basis of its total
risk-based capital ratio (the ratio of its total capital to risk-weighted
assets), Tier 1 risk-based capital ratio (the ratio of its core capital to
risk-weighted assets) and leverage ratio (the ratio of its core capital to
adjusted total assets). The following table shows the capital ratios
required for the various prompt corrective action categories.
|
Adequately
|
Significantly
|
||||||
|
Well
Capitalized
|
Capitalized
|
Undercapitalized
|
Undercapitalized
|
||||
|
Total
risk-based capital ratio
|
10.0%
or more
|
8.0%
or more
|
Less
than 8.0%
|
Less
than 6.0%
|
|||
|
Tier
1 risk-based capital ratio
|
6.0%
or more
|
4.0%
or more
|
Less
than 4.0%
|
Less
than 3.0%
|
|||
|
Leverage
ratio
|
5.0%
or more
|
4.0% or more *
|
Less
than 4.0% *
|
Less
than
3.0%
|
* 3.0%
if institution has a composite 1 CAMELS rating.
A “critically undercapitalized” savings
institution is defined as an institution that has a ratio of “tangible equity”
to total assets of less than 2.0%. Tangible equity is defined as core
capital plus cumulative perpetual preferred stock (and related surplus) less all
intangibles other than qualifying supervisory goodwill and certain purchased
mortgage servicing rights. The OTS may reclassify a well capitalized
savings institution as adequately capitalized and may require an adequately
capitalized or undercapitalized institution to comply with the supervisory
actions applicable to institutions in the next lower capital category (but may
not reclassify a significantly undercapitalized institution as critically
undercapitalized) if the OTS determines, after notice and an opportunity for a
hearing, that the savings institution is in unsafe or unsound condition or that
the institution has received and not corrected a less-than-satisfactory rating
for any CAMELS rating category.
13
Qualified Thrift
Lender Test. The Bank is subject to OTS regulations which use
the concept of a qualified thrift lender (“QTL”). A savings
institution that does not meet the Qualified Thrift Lender Test (“QTL Test”)
must either convert to a bank charter or comply with the following restrictions
on its operations: (i) the institution may not engage in any new activity or
make any new investment, directly or indirectly, unless such activity or
investment is permissible for both a national bank and savings association; (ii)
the branching powers of the institution shall be restricted to those of a
national bank located in the institution’s home state; and (iii) payment of
dividends by the institution shall be subject to the rules regarding payment of
dividends by a national bank. In addition, any company that controls
a savings institution that fails to qualify as a QTL will be required to
register as, and to be deemed, a bank holding company subject to all of the
provisions of the Bank Holding Company Act of 1956 (the “BHCA”) and other
statutes applicable to bank holding companies. Upon the expiration of
three years from the date the institution ceases to be a QTL, it must cease any
activity and dispose of any investment not permissible for a national
bank.
To comply
with the QTL test, a savings institution must either qualify as a “domestic
building and loan association” under the Internal Revenue Code or maintain at
least 65% of its “portfolio assets” in Qualified Thrift
Investments. Portfolio assets are defined as total assets less
intangibles, the value of property used by a savings institution in its business
and liquidity investments in an amount not exceeding 20% of total
assets. Qualified Thrift Investments include loans made to purchase,
refinance, construct or improve residential or manufactured housing, home equity
loans, mortgage-backed securities, education, credit card and small business
loans and other specified investments.
A savings
institution must maintain its status as a QTL on a monthly basis in nine out of
every 12 months. A savings institution that fails to maintain QTL
status will be permitted to requalify once, and if it fails the QTL test a
second time, it will become immediately subject to all penalties as if all time
limits on such penalties had expired.
At
September 30, 2009, the percentage of the Bank’s portfolio assets invested in
Qualified Thrift Investments was in excess of the percentage required to qualify
the Bank under the QTL Test.
Dividend
Restrictions. Under OTS regulations,
the Bank may not pay dividends on its capital stock if its regulatory capital
would thereby be reduced below the amount then required for the liquidation
account established for the benefit of certain depositors of the Bank at the
time of the Bank’s conversion to stock form.
OTS
regulations require that savings institutions submit notice to the OTS prior to
making a capital distribution if (a) they would not be well capitalized after
the distribution, (b) the distribution would result in the retirement of any of
the institution’s common or preferred stock or debt counted as its regulatory
capital, or (c) like the Bank, the institution is a subsidiary of a holding
company. A savings institution must apply to the OTS to pay a capital
distribution if (x) the institution would not be adequately capitalized
following the distribution, (y) the institution’s total distributions for the
calendar year exceeds the institution’s net income for the calendar year to date
plus its net income (less distributions) for the preceding two years, or (z) the
distribution would otherwise violate applicable law or regulation or an
agreement with or condition imposed by the OTS. If neither the
savings institution nor the proposed capital distribution meet any of the
foregoing criteria, then no notice or application is required to be filed with
the OTS before making a capital distribution. The OTS may disapprove
or deny a capital distribution if in the view of the OTS, the capital
distribution would constitute an unsafe or unsound practice.
During
the year ended 2009, the Bank paid a $660,000 cash dividend to Liberty Bancorp,
Inc.
Under the
OTS’ prompt corrective action regulations, the Bank is also prohibited from
making any capital distributions if, after making the distribution, the Bank
would fail to meet any of the regulatory capital requirements.
In
addition to the foregoing, earnings of the Bank appropriated to bad debt
reserves and deducted for federal income tax purposes are not available for
payment of cash dividends or other distributions to the Company without payment
of taxes at the then current tax rate by the Bank on the amount of earnings
removed from the reserves for such distributions. See “Taxation.”
14
Safety and
Soundness Standards. By statute, each federal banking agency
was required to establish safety and soundness standards for institutions under
its authority. The federal banking agencies, including the OTS, have
released Interagency Guidelines Establishing Standards for Safety and Soundness
establishing deadlines for submission and review of safety and soundness
compliance plans. The guidelines require savings institutions to
maintain internal controls and information systems and internal audit systems
that are appropriate for the size, nature and scope of the institution’s
business. The guidelines also establish certain basic standards for
loan documentation, credit underwriting, interest rate risk exposure and asset
growth. The guidelines further provide that savings institutions
should maintain safeguards to prevent the payment of compensation, fees and
benefits that are excessive or that could lead to material financial loss, and
should take into account factors such as comparable compensation practices at
comparable institutions. Additionally, the federal banking agencies
have established standards relating to the asset quality and earnings that the
agencies determine to be appropriate. Under these guidelines, a
savings institution should maintain systems, commensurate with its size and the
nature and scope of its operations, to identify problem assets and prevent
deterioration in those assets, as well as to evaluate and monitor earnings and
ensure that earnings are sufficient to maintain adequate capital and
reserves. The federal banking agencies have also issued guidelines
for information security. If the OTS determines that a savings
institution is not in compliance with the safety and soundness guidelines, it
may require the institution to submit an acceptable compliance plan to the OTS
within 30 day of receipt of a request for such a plan. Failure to
submit or implement a compliance plan may subject the institution to regulatory
sanctions.
Federal
banking regulations also require that savings institutions adopt and maintain
written policies that establish appropriate limits and standards for extensions
of credit that are secured by liens or interests in real estate or are made for
the purpose of financing permanent improvements to real estate. These
policies must establish loan portfolio diversification standards, prudent
underwriting standards, including loan-to-value limits, that are clear and
measurable, loan administration procedures and documentation, approval and
reporting requirements. A savings institution’s real estate lending
policy must reflect consideration of the Interagency Guidelines for Real Estate
Lending Policies (the “Real Estate Lending Guidelines”) that have been adopted
by the federal banking regulators. The Real Estate Lending
Guidelines, among other item, call upon savings institutions to establish
internal loan-to-value limits for real estate loans that are not in excess of
the specified loan-to-value limits for the various types of real estate
loans. The Real Estate Lending Guidelines state, however, that it may
be appropriate in individual cases to originate or purchase loans with
loan-to-value ratios in excess of the supervisory loan-to-value
limits.
Lending Limits.
With
certain limited exceptions, the maximum amount that a savings institution may
lend to any borrower outstanding at one time may not exceed 15% of the
unimpaired capital and surplus of the institution. Loans and
extensions of credit fully secured by specified readily marketable collateral
(having a market value at least equal to the funds outstanding) may comprise an
additional 10% of unimpaired capital and surplus. Savings
institutions are additionally authorized to make loans to one borrower, for any
purpose: (i) in an amount not to exceed $500,000; or (ii) by order of the
Director of OTS, in an amount not to exceed the lesser of $30.0 million or 30%
of unimpaired capital and surplus to develop residential housing, provided: (a)
the purchase price of each single-family dwelling in the development does not
exceed $500,000; (b) the savings institution is and continues to be in
compliance with regulatory capital requirements; (c) the loans comply with
applicable loan-to-value requirements; and (d) the aggregate amount of loans
made under this authority does not exceed 150% of unimpaired capital and
surplus; or (iii) loans to finance the sale of real property acquired in
satisfaction of debts previously contracted in good faith, not to exceed 50% of
unimpaired capital and surplus of the institution.
Transactions with
Related Parties. The Bank’s authority to engage in
transactions with “affiliates” (e.g., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) is limited by federal
law. The aggregate amount of covered transactions with any individual
affiliate is limited to 10% of the capital and surplus of the savings
institution. The aggregate amount of covered transactions with all
affiliates is limited to 20% of the savings institution’s capital and
surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in federal
law. The purchase of low quality assets from affiliates is generally
prohibited. The transactions with affiliates must be on terms and
under circumstances that are at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies. In addition, savings institutions are prohibited from
lending to any affiliate that is engaged in activities that are not permissible
for bank holding companies and no savings institution may purchase the
securities of any affiliate other than a subsidiary.
15
The Bank’s authority to extend credit
to executive officers, directors and 10% shareholders (“insiders”), as well as
entities such persons control, is limited. Federal law limits both
the individual and aggregate amount of loans the Bank may make to insiders
based, in part, on the Bank’s capital position and requires certain board
approval procedures to be followed. Such loans are required to be
made on terms substantially the same as those offered to unaffiliated
individuals and do not involve more than the normal risk of
repayment. There is an exception for loans made pursuant to a benefit
or compensation program that is widely available to all employees of the
institution and does not give preference to insiders over other
employees. Loans to executive officers are further restricted as to
types and amounts that are permissible.
Enforcement. The
OTS has primary enforcement responsibility over savings institutions and has the
authority to bring actions against the institution and all
institution-affiliated parties, including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured
institution. Formal enforcement action may range from the issuance of
a capital directive or cease and desist order to removal of officers and/or
directors to institution of receivership, conservatorship or termination of
deposit insurance. Civil penalties cover a wide range of violations
and can amount to $25,000 per day, or even $1.0 million per day in especially
egregious cases. The FDIC has the authority to recommend to the OTS
Director that enforcement action be taken with respect to a particular savings
institution. If action is not taken by the Director, the FDIC has
authority to take such action under certain circumstances. Federal
law also establishes criminal penalties for certain violations.
OTS
Assessments. Savings institutions are required to pay
assessments to the Office of Thrift Supervision to fund the agency’s
operations. The general assessments, paid on a semi-annual basis, are
computed based upon the savings institution’s (including consolidated
subsidiaries) total assets, financial condition and complexity of its
portfolio. The Office of Thrift Supervision assessments paid by the
Bank for the fiscal year ended September 30, 2009 totaled $98,000.
Insurance of
Deposit Accounts. The Bank’s deposits are insured up to
applicable limits by the Deposit Insurance Fund of the FDIC. The
Deposit Insurance Fund is the successor to the Bank Insurance Fund and the
Savings Association Insurance Fund, which were merged in 2006. Under
the FDIC’s risk-based assessment system, insured institutions are assigned to
one of four risk categories based on supervisory evaluations, regulatory capital
levels and certain other factors with less risky institutions paying lower
assessments. For 2008, assessments ranged from five to forty-three
basis points of assessable deposits. Due to losses incurred by the
Deposit Insurance Fund in 2008 from failed institutions, and anticipated future
losses, the FDIC, pursuant to a Restoration Plan to replenish the fund, adopted
an across the board seven basis point increase in the assessment range for the
first quarter of 2009. The FDIC adopted further refinements to its
risk-based assessment that were effective April 1, 2009 and effectively make the
range 7 to 771/2 basis
points.
In order
to replenish the Deposit Insurance Fund, the FDIC imposed on all insured
institutions a special emergency assessment of 5 basis points of total assets
less Tier 1 capital as of June 30, 2009 (capped at 10 basis points of the
institution’s deposit assessment base on the same date) in order to cover losses
to the Deposit Insurance Fund. The Bank’s special assessment amounted
to $173,000 and was charged to operations during 2009.
On
December 30, 2009 the FDIC will require that insured institutions prepay
estimated deposit insurance assessments for the fourth quarter of 2009 and 2010
through 2012 instead of imposing additional special assessments. The
FDIC may adjust the assessment scale uniformly from one quarter to the next,
except that no adjustment can deviate more than three basis points from the base
scale without notice and comment rulemaking. No institution may pay a
dividend if in default of the federal deposit insurance assessment.
Due to
the recent difficult economic conditions, deposit insurance per account owner
has been raised to $250,000 for all types of accounts until January 1,
2014. In addition, the FDIC adopted an optional Temporary Liquidity
Guarantee Program by which, for a fee, noninterest-bearing transaction accounts
would receive unlimited insurance coverage until December 31, 2009 and certain
senior unsecured debt issued by institutions and their holding companies would
be temporarily guaranteed by the FDIC. The Bank made the business
decision to participate in the unlimited noninterest-bearing transaction account
coverage and the Banks and the Company opted to not participate in the unsecured debt
guarantee program.
16
The
Reform Act also provided for the possibility that the FDIC may pay dividends to
insured institutions once the Deposit Insurance Fund reserve ratio equals or
exceeds 1.35% of estimated insured deposits.
In addition to the assessment for
deposit insurance, institutions are required to make payments on bonds issued in
the late 1980s by the Financing Corporation to recapitalize a predecessor
deposit insurance fund. This payment is established quarterly and
during the four quarters ended September 30, 2009 averaged 1.06 basis points of
assessable deposits.
The FDIC has authority to increase
insurance assessments. A significant increase in insurance premiums
would likely have an adverse effect on the operating expenses and results of
operations of the Banks. Management cannot predict what insurance
assessment rates will be in the future. However, the recent failure
of FDIC-insured institutions may increase the likelihood that insurance
assessments will increase in the future.
Insurance of deposits may be terminated
by the FDIC upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
FDIC. Management does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Federal Home Loan
Bank System. The Bank is a member of the Federal Home Loan
Bank System, which consists of 12 district Federal Home Loan Banks subject to
supervision and regulation by the Federal Housing Finance Agency
(“FHFA”). The Federal Home Loan Banks provide a central credit
facility primarily for member institutions. As a member of the
Federal Home Loan Bank of Des Moines, the Bank is required to acquire and hold
shares of capital stock in the Federal Home Loan Bank of Des
Moines. The Bank was in compliance with this requirement with
investment in Federal Home Loan Bank of Des Moines stock at September 30, 2009
of $3.9
million. The Federal Home Loan Bank of Des Moines serves as a
reserve or central bank for its member institutions within its assigned
district. It offers advances to members in accordance with policies
and procedures established by the FHFA and the Board of Directors of the Federal
Home Loan Bank of Des Moines. Long-term advances may be used for the
purpose of funding loans to residential housing finance, small businesses, small
farms and small agri-businesses. At September 30, 2009, the Bank had
$69.1 million
in advances outstanding from the Federal Home Loan Bank of Des
Moines. See “Business―Deposit
Activity and Other Sources of Funds―Borrowings.”
Federal Reserve
System. Pursuant to regulations of the Federal Reserve Board,
all FDIC-insured depository institutions must maintain average daily reserves
against their transaction accounts. In 2009, the Bank must maintain
reserves equal to 3% on transaction accounts of over $10.3 million up to
$44.4 million, plus 10% on the remainder. These requirements are
subject to adjustment annually by the Federal Reserve Board. Because
required reserves must be maintained in the form of vault cash or in a
noninterest bearing account at a Federal Reserve Bank, the effect of the reserve
requirement is to reduce the amount of the institution’s interest-earning
assets. As of September 30, 2009, the Bank met its reserve
requirements applicable at that time.
Community
Reinvestment Act. Under the Community Reinvestment Act (the
“CRA”), as implemented by OTS regulations, a bank has a continuing and
affirmative obligation, consistent with its safe and sound operation, to help
meet the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions, nor does it limit an
institution’s discretion to develop the types of products and services that it
believes are best suited to its particular community. The CRA
requires the OTS, in connection with its examination of a bank, to assess the
institution’s record of meeting the credit needs of its community and to take
the record into account in its evaluation of certain applications by the
institution. The CRA also requires all institutions to make public
disclosure of their CRA ratings. The Bank received a “satisfactory”
rating as a result of its most recent CRA assessment.
17
Regulation
of the Holding Company
General. Liberty
Bancorp is a nondiversified unitary savings and loan holding
company. Under prior law, a unitary savings and loan holding company
was not generally restricted as to the types of business activities in which it
may engage, provided that the Bank continued to be a qualified thrift
lender. See “—Qualified Thrift Lender
Test.” The Gramm-Leach-Bliley Act of 1999 provides that no
company may acquire control of a savings institution after May 4, 1999 unless it
engages only in the financial activities permitted for financial holding
companies under the law or for multiple savings and loan holding companies as
described below. Further, the Gramm-Leach-Bliley Act specifies that
existing savings and loan holding companies may only engage in such
activities. The Gramm-Leach-Bliley Act, however, grandfathered the
unrestricted authority for activities with respect to unitary savings and loan
holding companies existing prior to May 4, 1999, so long as the holding
company’s savings institution subsidiary continues to comply with the QTL
Test. Liberty Bancorp does not qualify for the
grandfathering. Liberty Bancorp is therefore limited to activities
permissible for financial holding companies under the Bank Holding Company Act
of 1956 and activities permitted for multiple holding
companies. These include activities that are financial in nature but
exclude commercial activities. Upon any non-supervisory acquisition
by Liberty Bancorp of another savings institution or savings bank that meets the
qualified thrift lender test and is deemed to be a savings institution by the
OTS, Liberty Bancorp would become a multiple savings and loan holding company
(if the acquired institution is held as a separate subsidiary) and would
generally be limited to activities permissible for bank holding companies under
Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval
of the OTS, and certain activities authorized by
OTS regulation. However, the OTS has issued an
interpretation concluding that multiple savings and loan holding companies may
also engage in activities permitted for financial holding
companies.
A savings and loan holding company is
prohibited from, directly or indirectly, acquiring more than 5% of the voting
stock of another savings institution or savings and loan holding company,
without prior written approval of the OTS and from acquiring or retaining
control of a depository institution that is not insured by the Federal Deposit
Insurance Corporation. In evaluating applications by holding
companies to acquire savings institutions, the OTS considers the financial and
managerial resources and future prospects of the company and institution
involved, the effect of the acquisition on the risk to the deposit insurance
funds, the convenience and needs of the community and competitive
factors.
The OTS may not approve any acquisition
that would result in a multiple savings and loan holding company controlling
savings institutions in more than one state, subject to two
exceptions: (i) the approval of interstate supervisory acquisitions
by savings and loan holding companies and (ii) the acquisition of a savings
institution in another state if the laws of the state of the target savings
institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.
Although savings and loan holding
companies are not currently subject to specific regulatory capital requirements
or specific restrictions on the payment of dividends or other capital
distributions, federal regulations do prescribe such restrictions on subsidiary
savings institutions. The Bank must notify the OTS 30 days before
declaring any dividend to Liberty Bancorp. In addition, the financial
impact of a holding company on its subsidiary institution is a matter that is
evaluated by the OTS and the agency has authority to order cessation of
activities or divestiture of subsidiaries deemed to pose a threat to the safety
and soundness of the institution.
Acquisition of
the Company. Under the Federal
Change in Bank Control Act, a notice must be submitted to the OTS if any person
(including a company), or group acting in concert, seeks to acquire “control” of
a savings and loan holding company or savings association. Under
certain circumstances, a change of control may occur, and prior notice is
required, upon the acquisition of 10% or more of Liberty Bancorp’s outstanding
voting stock, unless the OTS has found that the acquisition will not result in a
change of control of Liberty Bancorp. Under the Change in Bank
Control Act, the OTS has 60 days from the filing of a complete notice to act,
taking into consideration certain factors, including the financial and
managerial resources of the acquirer and the anti-trust effects of the
acquisition. Any company that acquires control would then be subject
to regulation as a savings and loan holding company.
18
Federal
and State Taxation
General. The
Bank and Company file a consolidated tax return and report their taxable income
on a fiscal year basis ending September 30, using the accrual method of
accounting. The federal income tax laws apply to us in the same
manner as other corporations with some exceptions, including particularly our
reserve for bad debts discussed below. The following discussion of
tax matters is intended only as a summary and does not purport to be a
comprehensive description of the tax rules applicable to us. Our last
federal audit by the Internal Revenue Service (the “IRS”) was for the fiscal
year ended September 30, 1993 and was audited in 1995. As a result of
this audit, the IRS disallowed certain minor deductions.
Bad Debt
Reserves. For fiscal years beginning before June 30, 1996,
thrift institutions that qualified under certain definitional test and other
conditions of the Internal Revenue Code were permitted to use certain favorable
provisions to calculate their deductions from taxable income for annual
additions to their bad debt reserve. A reserve could be established
for bad debts on qualifying real property loans, generally secured by interests
in real property improved or to be improved, under the percentage of taxable
income method or the experience method. The reserve for nonqualifying
loans was computed using the experience method. Federal legislation
enacted in 1996 repealed the reserve method of accounting for bad debts and the
percentage of taxable income method for tax years beginning after 1995 and
require savings institutions to recapture or take into income certain portions
of their accumulated bad debt reserves. Approximately $3.6 million of
our accumulated bad debt reserves would not be recaptured into taxable income
unless BankLiberty makes a “non-dividend distribution” to Liberty Bancorp as
described below.
Distributions. If
BankLiberty makes “non-dividend distributions” to Liberty Bancorp, such
distributions will be considered to have been made from BankLiberty’s
unrecaptured tax bad debt reserve as of September 30, 1988 (the “base year
reserve”), to the extent thereof and then from BankLiberty’s supplemental
reserve for losses on loans, to the extent of those reserves, and an amount
based on the amount distributed, but not more than the amount of those reserves,
will be included in BankLiberty’s taxable income. Non-dividend
distributions include distributions in excess of the Bank’s current and
accumulated earnings and profits, distributions in redemption of stock and
distributions in partial or complete liquidation. Dividends paid out
of the Bank’s current or accumulated earnings and profits will not be included
in the Bank’s income.
The amount of additional income created
from a non-dividend distribution is equal to the lesser of the base year reserve
and supplemental reserve for losses on loans or an amount that, when reduced by
the tax attributable to the income, is equal to the amount of the
distribution. Thus, in some situations, approximately one and
one-half times the non-dividend distribution would be includable in gross income
for federal income tax purposes, assuming a 34% federal corporate income tax
rate. BankLiberty does not intend to pay dividends that would result
in the recapture of any portion of the bad debt reserves.
Corporate
Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income at a rate of 20%. Only 90% of alternative
minimum taxable income can be offset by alternative minimum tax net operating
loss carryovers of which the Bank currently has none. Alternative
minimum taxable income is also adjusted by determining the tax treatment of
certain items in a manner that negates the deferral of income resulting from the
regular tax treatment of those items. Alternative minimum tax is due
when it exceeds the regular income tax. The Bank has not had a
liability for a tax on alternative minimum taxable income during the past five
years.
Dividends
Received Deduction and Other Matters. The Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Bank will not file a consolidated
tax return, except that if the Company or the Bank own more than 20% of the
stock of a corporation distributing a dividend, then 80% of any dividends
received may be deducted.
19
State
Taxation
Missouri
Taxation. The Company and Bank file Missouri income tax
returns. Missouri-based thrift institutions are subject to a special
financial institutions tax, based on net income without regard to net operating
loss carryforwards, at the rate of 7.0% of net income. This tax is in
lieu of certain other state taxes on thrift institutions, on their property,
capital or income, except taxes on tangible personal property owned by the Bank
and held for lease or rental to others and on real estate, contributions paid
pursuant to the Unemployment Compensation Law of Missouri, social security
taxes, sales taxes and use taxes. In addition, the Bank is entitled
to credit against this tax all taxes paid to the State of Missouri or any
political subdivision except taxes on tangible personal property owned by the
Bank and held for lease or rental to others and on real estate, contributions
paid pursuant to the Unemployment Compensation Law of Missouri, social security
taxes, sales and use taxes and taxes imposed by the Missouri Financial
Institutions Tax Law. Missouri thrift institutions are not subject to
the regular state corporate income tax. In January 2006, the Bank
completed a routine sales/use tax return audit for the year ended June 30, 2005,
under which we were found to owe no additional funds. The Company is
subject to the regular state corporate income tax at the rate of 6.25% of
taxable income derived from Missouri sources.
Item 1A. Risk
Factors
Our
emphasis on construction, commercial and multi-family real estate lending and
commercial business lending may expose us to increased lending
risks.
At
September 30, 2009, we had $69.2 million in real estate construction loans,
$122.6 million in commercial real estate loans, $29.2 million in multi-family
loans and $22.5 million in commercial business loans, which represented 22.1%,
39.2%, 9.3% and 7.2%, respectively, of our total loan portfolio. Moreover,
we intend to maintain our emphasis on commercial real estate, multi-family,
commercial and multi-family real estate construction and commercial business
lending. These types of loans generally expose a lender to greater
risk of non-payment and loss than single-family residential mortgage loans
because repayment of the loans often depends on the successful operation of the
property, the income stream of the borrowers and, for construction loans, the
accuracy of the estimate of the property’s value at completion of construction
and the estimated cost of construction. Such loans typically involve
larger loan balances to single borrowers or groups of related borrowers compared
to single-family residential mortgage loans. Commercial business loans
expose us to additional risks since they typically are made on the basis of the
borrower’s ability to make repayments from the cash flow of the borrower’s
business and are secured by non-real estate collateral that may depreciate over
time. Nonperforming assets totaled $5.5 million, or 1.41% of total
assets, at September 30, 2009, which was a decrease of $7.6 million, or 58.02%,
from $13.1 million, or 3.91% of total assets, at September 30,
2008. Nonperforming assets at September 30, 2009 consisted of $67,000
in nonaccrual loans, $2.6 million in impaired loans and $2.8 million in
foreclosed real estate. At September 30, 2009, nonaccrual loans
consisted of $40,000 one to four family loans and consumer loans totaling
$27,000. Impaired loans consisted of seven single-family loans.
At
September 30, 2009, we had no loans which were not currently classified as
nonaccrual, 90 days past due, restructured or impaired but where known
information about possible credit problems of borrowers caused management to
have serious concerns as to the ability of the borrowers to comply with present
loan repayment terms and would result in disclosure as non-accrual, 90 days past
due, restructured or impaired.
Our
loan portfolio has significant concentrations among a small number of borrowers;
as a result, we could be adversely affected by difficulties experienced by a
small number of borrowers.
As a
result of large loan concentrations among a relatively small number of
borrowers, we could incur significant losses if a small number of our borrowers
are unable to repay their loans to us. At September 30, 2009, we had
41 borrowers with aggregate loan balances exceeding 5% of our consolidated
stockholders’ equity at that date. Loans to these borrowers
aggregated $222.2 million, which represented 70.97% of our total loan portfolio
at that date. These loans primarily are residential real estate
development, residential real estate construction or commercial real estate
loans. Aggregate loan balances to these customers ranged from $2.2
million to $17.3 million for our largest borrower. While we seek to
control our risk and minimize losses on these large loan concentrations, if one
or more of our large borrowers were to default on their loans we could incur
significant losses.
Severe,
adverse and precipitous economic and market conditions have adversely affected
us and our industry.
The recent negative events in the
housing market, including significant and continuing home price reductions
coupled with the upward trends in delinquencies and foreclosures, have resulted
and will likely continue to result in poor performance of mortgage and
construction loans and with further deterioration, in significant asset
writedowns by many financial institutions. Reduced availability of commercial
credit and increasing unemployment further contribute to deteriorating credit
performance of commercial and consumer credit, resulting in additional
writedowns. Financial market and economic instability have caused financial
institutions to severely restrict their lending to customers and each other.
This market turmoil and credit tightening has exacerbated commercial and
consumer deficiencies, the lack of consumer confidence, market volatility and
widespread reduction in general business activity. Financial institutions also
have experienced decreased access to deposits and borrowings. The resulting
economic pressure on consumers and businesses and the lack of confidence in the
financial markets has and may continue to adversely affect our business,
financial condition, results of operations and stock price.
20
A
continued downturn in the local economy or a further decline in real estate
values could hurt our profits.
Nearly
all of our real estate loans are secured by real estate in the Kansas City
metropolitan area. In addition, through our portfolio of real estate
construction loans, which includes loans to acquire land for development of
residential property and loans to builders for the construction of residences,
we have significant exposure to the residential construction market in the
Kansas City metropolitan area. As a result, a continued downturn in
the local economy, and, particularly, a continued downturn in the residential
construction industry, could cause significant increases in non-performing
loans, which would adversely affect our profits. Additionally, a
decrease in asset quality could require additions to our allowance for loan
losses through increased provisions for loan losses, which would negatively
affect our profits. A decline in real estate values could cause some
of our mortgage loans to become inadequately collateralized, which would expose
us to a greater risk of loss. For a discussion of our market area, see
“Item 1. Business – Market
Area.”
Future
FDIC assessments will hurt our earnings.
In May 2009, the FDIC adopted a final
rule imposing a special assessment on all insured institutions due to recent
bank and savings association failures. The emergency assessment
amounts to 5 basis points of total assets minus Tier 1 Capital as of June 30,
2009, and was collected on September 30, 2009. This special
assessment of $173,000 was paid on September 30, 2009 and is included in the
FDIC premium expense of $550,000 for the year ended September
2009. The Company will be required by the FDIC to prepay their
deposit insurance for the next three years on December 30, 2009 as a result of
deterioration in the Deposit Insurance Fund reserve ratio due to institution
failures. This will be shown on the Company’s balance sheet as a
prepaid asset and amortized over the next three years. We estimate
that the prepayment fee will be approximately $1.47 million and our FDIC premium
expense will total $375,000 for the year ended 2010. Any additional
emergency special assessment imposed by the FDIC will further hurt the Company's
earnings.
Strong
competition within our market area could hurt our profits and slow
growth.
We face
intense competition both in making loans and attracting
deposits. This competition has made it more difficult for us to make
new loans and has occasionally forced us to offer higher deposit
rates. Price competition for loans and deposits might result in our
earning less on our loans and paying more on our deposits, which reduces net
interest income. Some of the institutions with which we compete have
substantially greater resources and lending limits than we have and may offer
services that we do not provide. We expect competition to increase in
the future as a result of legislative, regulatory and technological changes and
the continuing trend of consolidation in the financial services
industry. See “Item
1. Business – Competition.”
Proposed
regulatory reform may have a material impact on our operations.
On June 17, 2009, President Obama
published a comprehensive regulatory reform plan intended to modernize and
protect the integrity of the United States financial system. The
President’s plan contains several elements that would have a direct effect on
the Company and the Bank. Under the reform plan, the federal thrift
charter and the Office of Thrift Supervision would be eliminated and all
companies that control an insured depository institution must register as a bank
holding company. Although the reform plan does not specify how
existing federal thrifts, such as the Bank, would be treated, we expect that if
the federal thrift charter is eliminated the Bank, could become a national bank
or adopt a state charter. Registration as a bank holding company
would represent a significant change, as there currently exist significant
differences between savings and loan holding company and bank holding company
supervision and regulation. For example, the Federal Reserve imposes
leverage and risk-based capital requirements on bank holding companies whereas
the Office of Thrift Supervision does not impose any capital requirements on
savings and loan holding companies. Further, a change in the bank
regulatory structure could result in a change in the way that mutual holding
companies are regulated. The reform plan also proposes the creation
of a new federal agency, the Consumer Financial Protection Agency, that would be
dedicated to protecting consumers in the financial products and services
market. The creation of this agency could result in new regulatory
requirements and raise the cost of regulatory compliance. In
addition, legislation stemming from the reform plan could require changes in
regulatory capital requirements, loan loss provisioning practices, and
compensation practices. If implemented, the foregoing regulatory
reforms may have a material impact on our operations. However,
because the legislation needed to implement the President’s reform plan has not
been finalized, and because the final legislation may differ significantly from
the reform plan proposed by the President, we cannot determine the specific
impact of regulatory reform at this time.
21
Certain
interest rate movements could reduce our net interest income and
earnings.
Our net
interest income is the interest we earn on loans and investments less the
interest we pay on our deposits and borrowings. Our net interest
margin is the difference between the yield we earn on our assets and the
interest rate we pay for deposits and our other sources of
funding. Changes in interest rates—up or down—could adversely affect
our net interest margin and, as a result, our net interest
income. Although the yield we earn on our assets and our funding
costs tend to move in the same direction in response to changes in interest
rates, one can rise or fall faster than the other, causing our net interest
margin to expand or contract. Our liabilities tend to be shorter in
duration than our assets, so they may adjust faster in response to changes in
interest rates. As a result, when interest rates rise, our funding
costs may rise faster than the yield we earn on our assets, causing our net
interest margin to contract until the yield catches up. Changes in
the slope of the “yield curve”—or the spread between short-term and long-term
interest rates—could also reduce our net interest margin. Normally,
the yield curve is upward sloping, meaning short-term rates are lower than
long-term rates. Because our liabilities tend to be shorter in
duration than our assets, when the yield curve flattens or even inverts, we
could experience pressure on our net interest margin as our cost of funds
increases relative to the yield we can earn on our
assets.
The
loss of our President and Chief Executive Officer could hurt our
operations.
We rely heavily on our President and
Chief Executive Officer, Brent M. Giles. The loss of Mr. Giles could
have an adverse effect on us because, as a small community bank, Mr. Giles has
more responsibility than would be typical at a larger financial institution with
more employees. In addition, as a small community bank, we have fewer
management-level personnel who are in position to succeed and assume the
responsibilities of Mr. Giles. We have entered into a three-year
employment contract with Mr. Giles.
We
operate in a highly regulated environment and we may be adversely affected by
changes in laws and regulations.
The Bank is subject to extensive
regulation, supervision and examination by the Office of Thrift Supervision, our
primary federal regulator, and by the Federal Deposit Insurance Corporation, as
insurer of its deposits. Liberty Bancorp will also be subject to
regulation and supervision by the Office of Thrift Supervision. Such
regulation and supervision govern the activities in which an institution and its
holding company may engage, and are intended primarily for the protection of the
insurance fund and for the depositors and borrowers of the Bank. The
regulation and supervision by the Office of Thrift Supervision and the Federal
Deposit Insurance Corporation are not intended to protect the interests of
investors in Liberty Bancorp common stock. Regulatory authorities
have extensive discretion in their supervisory and enforcement activities,
including the imposition of restrictions on our operations, the classification
of our assets and determination of the level of our allowance for loan
losses. Any change in such regulation and oversight, whether in the
form of regulatory policy, regulations, legislation or supervisory action, may
have a material impact on our operations.
Item
1B. Unresolved Staff Comments
None.
22
Item
2. Properties
The
following table sets forth the location and certain additional information
regarding the Bank’s offices at September 30, 2009, all of which it
owns.
|
Year
Opened
|
Square
Footage
|
Date of Lease
Expiration
|
Owned/
Leased
|
Deposits
as of
September 30,
2009
|
Net Book Value
as of
September 30, 2009
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||||
|
Main
Office:
|
||||||||||||||||||
|
16
West Franklin
Liberty,
Missouri
|
1955
|
6,000 |
N/A
|
Owned
|
$ | 94,025 | (1) | $ | 699 | |||||||||
|
Branch
Offices:
|
||||||||||||||||||
|
Hwy.
92 & Bello Mondo Drive
Platte
City, Missouri
|
1973
|
1,500 |
N/A
|
Owned
|
24,677 | 561 | ||||||||||||
|
1206
West Clay
Plattsburg,
Missouri
|
1974
|
1,650 |
N/A
|
Owned
|
25,861 | 66 | ||||||||||||
|
9200
N.E. Barry Road
Kansas
City, Missouri
|
2001
|
6,160 |
N/A
|
Owned
|
42,484 | 2,682 | ||||||||||||
|
4315
S. Noland Road
Independence,
Missouri
|
2005
|
3,000 |
N/A
|
Owned
|
31,420 | 1,207 | ||||||||||||
|
8740
N. Ambassador Drive
Kansas
City, Missouri
|
2006
|
5,000 |
11/30/2021
|
Leased
(2)
|
18,203 | 1,118 | ||||||||||||
|
6410
N. Prospect
Gladstone,
Missouri
|
2007
|
4,000 |
N/A
|
Owned
|
12,513 | 2,224 | ||||||||||||
|
6309
NW 9 Highway
Parkville,
Missouri
|
2008
|
3,850 |
N/A
|
Owned
|
14,069 | 1,673 | ||||||||||||
|
1157
Burlington Street
North
Kansas City, Missouri
|
2009
|
2,520 |
N/A
|
Owned
|
1,401 | 1,269 | ||||||||||||
|
91
Main Street
Farley,
Missouri
|
2008
|
3,862 |
N/A
|
Owned
|
11,550 | 711 | ||||||||||||
|
420
Branch Street
Platte
City, Missouri
|
N/A
|
2,086 |
N/A
|
Owned
|
— | (3) | 493 | |||||||||||
| $ | 276,203 | $ | 12,703 | |||||||||||||||
(2) The
lease is on the land only. The branch building is owned by the
Bank.
(3) Branch
facility was acquired from KLT Bancshares, Inc. and subsequently closed due to
existing branch facility operations located in Platte City,
Missouri.
For
additional information regarding premises and equipment, see note 6 of the notes
to consolidated financial statements.
23
Item
3. Legal
Proceedings
Periodically,
there have been various claims and lawsuits against us, such as claims to
enforce liens and contracts, condemnation proceedings on properties in which we
hold security interest, claims involving the making and servicing of real
property loans and other issues incident to our business. We are not
a party to any pending legal proceedings that we believe would have a material
adverse effect on our financial condition, results of operations or cash
flows.
Item
4. Submission
of Matters to a Vote of Security Holders
None.
PART
II
Item
5. Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Market
for Common Stock and Related Stockholder Matters
The common stock of Liberty Bancorp,
Incis traded on the NASDAQ Capital Market under the symbol “LBCP.” As
of September 30, 2009, the Company had approximately 374 stockholders of record
(excluding the number of persons or entities holding stock in “street” name
accounts through various brokerage firms), and 4,761,712 shares issued and
3,621,875 shares outstanding.
The following table sets forth the high
and low sales prices for the common stock and dividends per share for the fiscal
years ended September 30, 2009 and 2008, as reported by NASDAQ. The prices do
not necessarily reflect inter-dealer prices without retail markup, markdown or
commissions and may not reflect actual transmissions.
|
High
|
Low
|
Dividend
Paid
Per Share
|
||||||||||
|
Year
Ended September 30, 2009
|
||||||||||||
|
Fourth
quarter
|
$ | 8.350 | $ | 6.750 | $0.025 | |||||||
|
Third
quarter
|
7.900 | 6.460 | 0.025 | |||||||||
|
Second
quarter
|
7.960 | 5.800 | 0.025 | |||||||||
|
First
quarter
|
9.000 | 7.440 | 0.025 | |||||||||
|
Year
Ended September 30, 2008
|
||||||||||||
|
Fourth
quarter
|
$ | 9.300 | $ | 7.500 | $0.025 | |||||||
|
Third
quarter
|
10.395 | 9.010 | 0.025 | |||||||||
|
Second
quarter
|
10.650 | 10.000 | 0.025 | |||||||||
|
First
quarter
|
10.790 | 10.100 | 0.025 | |||||||||
Liberty
Bancorp is subject to Missouri law, which generally permits Liberty Bancorp to
pay dividends on its common stock as long as no dividend is declared or paid at
a time when the net assets of the corporation are less than its stated capital
or when the payment of such dividends would reduce the net assets of the
corporation below its stated capital. Dividend payments by the
Company depend primarily on dividends received by the Company from the Bank. See
note 14 to the notes to the consolidated financial statements for information
regarding the dividend restrictions applicable to the Company and the
Bank.
24
Issuer
Purchases of Equity Securities
There were no repurchases of the
Company’s stock during the quarter ended September 30, 2009. At
September 30, 2009, 332,037 shares of common stock may still be purchased under
the current plan.
Item 6. Selected
Financial Data.
This item is not applicable as the
Company is a smaller reporting company.
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operation.
Overview
Income.
Our primary
source of pre-tax income is net interest income. Net interest income is the
difference between interest income, which is the income that we earn on our
loans and securities, and interest expense, which is the interest that we pay on
our deposits and borrowings. Other significant sources of pre-tax income are
service charges on deposit accounts, gains on sales of loans and other loan
service charges. In addition, we recognize income or losses from the sale of
investments in years that we have such sales.
Allowance for
Loan Losses. The allowance for loan losses is a valuation allowance for
probable losses inherent in the loan portfolio. Provisions for loan losses are
charged against the allowance when management believes the uncollectibility of a
loan balance is confirmed. Subsequent recoveries, if any, are credited to the
allowance. We estimate the allowance balance required using past loan loss
experience, the nature and value of the portfolio, information about specific
borrower situations, and estimated collateral values, economic conditions and
other factors. Allocation of the allowance may be made for specific loans, but
the entire allowance is available for any loan that, in our judgment, should be
charged off. The loan review process is subjective and relies on
various assumptions, therefore actual results may differ from current
estimates. The Company and Bank are subject to periodic examination
by regulatory agencies, which may require us to record increases in the
allowances based on their evaluation.
Expenses.
The noninterest
expenses we incur in operating our business consist of compensation and employee
benefit expenses, occupancy expense, equipment and data processing expenses,
advertising expenses, federal deposit insurance premiums and various other
miscellaneous expenses.
Compensation
and employee benefits consist primarily of salaries and wages paid to our
employees, director and committee fees, payroll taxes, expenses for health
insurance and other employee benefits.
Occupancy
expenses, which are the fixed and variable costs of buildings and equipment,
consist primarily of building depreciation charges, maintenance, personal
property and real estate taxes and land lease expense. Depreciation of premises
and equipment is computed using the straight-line method based on the useful
lives of the related assets, which range from three to 40 years.
Equipment
and data processing expenses primarily include fees paid to our third party data
processing service, equipment depreciation charges, repairs and service
agreement expenses.
Advertising
expenses include expenses for print, radio and television advertisements,
promotions, third-party marketing services and premium items.
Federal
deposit insurance premiums are primarily payments we make to the Federal Deposit
Insurance Corporation for insurance of our deposit accounts.
Other
expenses include correspondent banking charges, operations from foreclosed real
estate, professional and regulatory services, the amortization expense of core
deposit intangible, expenses for supplies, telephone and postage, contributions
and donations, insurance and surety bond premiums, stock administration expense
and other fees and expenses.
25
Critical
Accounting Policies
Our
accounting and reporting policies were prepared in accordance with U.S.
generally accepted accounting principles (“US GAAP”) and to general practices
within the financial services industry. The preparation of financial statements
in conformity with US GAAP requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates. Management
has identified the accounting policies described below as those that, due to the
judgments, estimates and assumptions inherent in those policies, are critical to
an understanding of our financial statements and management’s discussion and
analysis.
Income
Recognition. We recognize interest
income by methods conforming to US GAAP that include general accounting
practices within the financial services industry. Interest income on loans and
investment securities is recognized by methods that result in level rates of
return on principal amounts outstanding, including yield adjustments resulting
from the amortization of loan costs and premiums on investment securities and
accretion of loan fees and discounts on investment securities.
In the
event management believes collection of all or a portion of contractual interest
on a loan has become doubtful, which generally occurs after the loan is 90 days
past due, the accrual of interest is discontinued. In addition, previously
accrued interest deemed uncollectible that was recognized in income is reversed.
Interest received on nonaccrual loans is included in income only if principal
recovery is reasonably assured. A non-accrual loan is restored to accrual status
when it is brought current or has performed in accordance with contractual terms
for a reasonable period of time, and the collectibility of the total contractual
principal and interest is no longer doubtful.
Securities
Impairment. We periodically perform analyses to determine
whether there has been an other-than-temporary decline in the value of one or
more of our securities. Our available-for-sale securities portfolio
is carried at estimated fair value, with any unrealized gains or losses, net of
taxes, reported as accumulated other comprehensive earnings or loss in
stockholder's equity. We conduct a quarterly review and evaluation of
the securities portfolio to determine if the value of any security has declined
below its cost or amortized cost, and whether such decline is
other-than-temporary. If such decline is deemed other-than-temporary,
we would adjust the cost basis of the security by writing down the security to
estimated fair market value through a charge to current period
operations. The market values of our securities are affected by
changes in interest rates and other factors, such as market
liquidity. See Notes 1 and 4 to Consolidated Financial Statements for
further discussion regarding securities impairment.
Allowance for
Loan Losses. Valuation allowances are established for impaired loans for
the difference between the loan amount and the fair value of collateral less
estimated selling costs. We consider a loan to be impaired when, based on
current information and events, it is probable that we will be unable to collect
all amounts due according to the contractual terms of the loan agreement on a
timely basis. The types of loans for which impairment is measured include
nonaccrual income property loans (excluding those loans included in the
homogenous portfolio which are collectively reviewed for impairment), large,
non-accrual single-family loans and troubled debt restructurings. Such loans are
generally placed on non-accrual status at the point deemed uncollectible.
Impairment losses are recognized through an increase in the allowance for loan
losses. See note 5 of the notes to consolidated financial statements for
information regarding impaired loans at September 30, 2009 and
2008.
Allowances
for loan losses are available to absorb losses incurred on loans and represent
additions charged to expense, less net charge-offs. The allowances are evaluated
on a regular basis by management and are based on management’s periodic review
of the collectibility of loans, in light of historical experience, fair value of
the underlying collateral, changes in the types and mix of loans originated and
prevailing economic conditions.
26
Operating
Strategy
Our mission is to operate and further
expand a profitable and diversified community banking franchise. We plan to
achieve this by executing our strategy of:
|
|
·
|
If
acceptable economic conditions exist, expanding through de novo branching
in the Kansas City metropolitan area;
and
|
|
|
·
|
continuing
to transform our balance sheet to emphasize assets and liabilities that
allow us to increase our net interest margin while reducing our exposure
to risk from interest rate
fluctuations.
|
Expansion Through
De Novo Branching. In 2004, the Board of Directors, with the assistance
of our Chief Executive Officer hired in September 2003, determined to pursue a
strategic plan to enhance long-term shareholder value through franchise growth.
The strategic plan calls for expansion through de novo branching in the Kansas
City metropolitan area to enable us to take advantage of the opportunities
afforded by recent and forecasted economic growth in that market. We believe
that the increased asset size to be achieved through the planned expansion will
enable us to leverage better efficiencies and technology but still attract
customers based on personal service and relationships. Our first new branch was
opened in Independence, Missouri in May 2005, a second new branch was opened in
Kansas City, Missouri in January 2006, a third new branch was opened in
Gladstone, Missouri in September 2007 and a fourth new branch office was opened
in North Kansas City in January, 2009. Due to adverse economic
conditions, no additional branch offices are currently planned.
While we
anticipate that this expansion strategy will enhance long-term shareholder
value, we cannot assure you when or if our branch expansion strategy will be
accretive to our earnings. New branches generally require a significant
initial capital investment and take approximately three years or longer to
become profitable. New branches require an upfront investment of between $2.0
million and $3.0 million each for land and building expenses. Accordingly, we
anticipate that, in the short term, net income will be negatively affected as we
incur significant capital expenditures and noninterest expense in opening and
operating new branches before the new branches can produce sufficient net
interest income to offset the increased expense. In addition, the need to use
capital to fund de novo branching may limit our ability to pay or increase
dividends on our common stock. There also is implementation risk associated with
new branches. Numerous factors will determine whether our branch expansion
strategy will be successful, such as our ability to select suitable branch
locations, real estate acquisition costs, competition, interest rates,
managerial resources, our ability to hire and retain qualified personnel, the
effectiveness of our marketing strategy and our ability to attract
deposits.
Continued
Transformation of Our Balance Sheet. Our strategic plan also
calls for us to transform our balance sheet to emphasize assets and liabilities
that allow us to increase our net interest margin while reducing our exposure to
risk from interest rate fluctuations.
With
respect to our assets, our strategy has been, and continues to be, to increase
the percentage of assets invested in commercial business, commercial real estate
and multi-family loans, which tend to have higher yields than traditional
single-family residential mortgage loans and which have shorter terms to
maturity or adjustable interest rates. We will seek to maintain construction
loans approximately at current levels so as not to unduly concentrate credit
risk in the real estate construction market. At the same time, we have sought to
decrease our reliance on single-family residential mortgage loans. Currently, we
sell substantially all new, fixed-rate conforming single-family loans in the
secondary market.
Commercial
real estate, commercial business and multi-family real estate loans provide us
with the opportunity to earn more income because they tend to have higher
interest rates than residential mortgage loans. In addition, these loans are
beneficial for interest rate risk management because they typically have shorter
terms and adjustable interest rates.
27
Our
commercial real estate loans have increased from $16.2 million, or 12.18% of
total loans, at September 30, 2001 to $122.6 million, or 39.17% of total loans,
at September 30, 2009. In addition, commercial business loans have increased
from $2.7 million, or 2.04% of total loans, at September 30, 2001 to $22.5
million, or 7.18% of total loans, at September 30, 2009, and multi-family real
estate loans have increased from $3.4 million, or 2.56% of total loans, at
September 30, 2001 to $29.2 million, or 9.32% of total loans, at
September 30, 2009. The percentage of our total loan portfolio comprised of
residential mortgage loans has increased in the last year, amounting to 20.71%,
18.48%, 15.64%, 14.62% and 17.44% at September 30, 2005, 2006, 2007, 2008 and
2009, respectively.
With
respect to liabilities, our strategy is to emphasize transaction and money
market accounts, as well as shorter term certificates of deposit. We value these
types of deposits because they represent longer-term customer relationships and
a lower cost of funding compared to longer-term certificates of deposit. We
aggressively seek transaction and money market deposits through competitive
products and pricing and targeted advertising. In addition, we offer business
checking accounts for our commercial customers. We also hope to increase core
deposits through our de novo branching strategy.
Balance
Sheet Analysis
Loans.
Our primary
lending activity is the origination of loans secured by real estate. We
originate construction loans, single-family residential loans and multi-family
and commercial real estate loans. To a lesser extent, we also originate
commercial business and consumer loans.
At September 30, 2009, construction
loans totaled $69.2 million and represented 22.09% of total loans, compared to
$90.5 million, or 32.47% of total loans, at September 30, 2008. The
size of our real estate construction loan portfolio has decreased $21.3 million over this
period due primarily adverse market conditions. Commercial real
estate construction loans increased by $3.7 million, or 11.15%, from $33.4
million at September 30, 2008 to $37.1 million at September 30,
2009. Development loans decreased by $23.1 million, or 62.86%, from
$36.7 million at September 30, 2008 to $13.6 million at September 30,
2009. Single-family spec loans decreased by $4.1 million, or
31.64%, from $13.2 million at September 30, 2008 to $9.1 million at September
30, 2009. Single-family custom construction loans increased by $419,000, or
6.6%, from $6.3 million at September 30, 2008 to $6.8 million at September 30,
2009.
Single-family residential loans totaled
$54.6 million and represented 17.44% of total loans at September 30, 2009,
compared to $40.7 million, or 14.62% of total loans, at September 30, 2008.
Generally, the Bank has pursued the strategy of selling substantially all new,
fixed-rate residential loans we originate because of the relatively low yields
that have been attainable on residential loans over the last several years and
to decrease the interest rate risk resulting from the retention of longer term
fixed-rate loans.
Commercial real estate loans increased
by $20.3 million, or 19.80%, to $122.6 million and represented 39.17% of total
loans at September 30, 2009, compared to $102.3 million, or 36.73% of total
loans, at September 30, 2008. These increases were due to our
strategic decision to emphasize lending on income producing property
projects. Currently, the Bank offers a variety of commercial real
estate products to owner occupants and investors. Our primary commercial real
estate lending focus areas are retail, office and industrial uses.
Multi-family loans totaled $29.2
million and represented 9.32% of total loans at September 30, 2009, compared to
$17.4 million, or 6.23% of total loans, at September 30, 2008.
We also originate a variety of consumer
loans and home equity loans, as well as loans secured by deposit accounts,
automobile loans and other miscellaneous loans. Consumer loans totaled $15.0
million and represented 4.80% of total loans at September 30, 2009, compared to
$9.9 million, or 3.56% of total loans, at September 30, 2008. The increase in
consumer loans was due primarily to an increase in home equity
loans.
Commercial
business loans increased to $22.5 million or 7.18% of total loans at September
30, 2009 from $17.8 million, or 6.39% of total loans at September 30,
2008.
28
Set forth
below is selected data relating to the composition of our loan portfolio at the
dates indicated.
|
At
September 30,
|
||||||||||||||||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||||||||||||
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
|||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||||||
|
Type
of Loan:
|
||||||||||||||||||||||||||||||||||||||||
|
Real
estate loans:
|
||||||||||||||||||||||||||||||||||||||||
|
Single-family,
1-4 units
|
$ | 54,601 | 17.44 | % | $ | 40,727 | 14.62 | % | $ | 41,749 | 15.64 | % | $ | 42,623 | 18.48 | % | $ | 39,435 | 20.71 | % | ||||||||||||||||||||
|
Multi-family,
5 or more units
|
29,195 | 9.32 | 17,368 | 6.23 | 12,198 | 4.57 | 10,416 | 4.52 | 15,603 | 8.20 | ||||||||||||||||||||||||||||||
|
Real
estate construction loans
|
69,173 | 22.09 | 90,482 | 32.47 | 125,797 | 47.12 | 99,759 | 43.25 | 79,979 | 42.01 | ||||||||||||||||||||||||||||||
|
Commercial
real estate loans
|
122,628 | 39.17 | 102,364 | 36.73 | 57,241 | 21.44 | 53,360 | 23.13 | 37,568 | 19.74 | ||||||||||||||||||||||||||||||
|
Total
real estate loans
|
275,597 | 88.02 | 250,941 | 90.05 | 236,985 | 88.77 | 206,158 | 89.38 | 172,585 | 90.66 | ||||||||||||||||||||||||||||||
|
Consumer
loans:
|
||||||||||||||||||||||||||||||||||||||||
|
Loans
secured by deposit accounts
|
317 | .10 | 142 | 0.05 | 228 | 0.09 | 211 | 0.09 | 128 | 0.07 | ||||||||||||||||||||||||||||||
|
Automobile
loans
|
999 | .32 | 446 | 0.16 | 477 | 0.18 | 608 | 0.26 | 867 | 0.46 | ||||||||||||||||||||||||||||||
|
Home
equity loans
|
12,796 | 4.09 | 8,722 | 3.13 | 10,713 | 4.01 | 11,662 | 5.06 | 10,266 | 5.39 | ||||||||||||||||||||||||||||||
|
Other
|
911 | .29 | 610 | 0.22 | 620 | 0.23 | 738 | 0.32 | 1,129 | 0.59 | ||||||||||||||||||||||||||||||
|
Total
consumer loans
|
15,023 | 4.80 | 9,920 | 3.56 | 12,038 | 4.51 | 13,219 | 5.73 | 12,390 | 6.51 | ||||||||||||||||||||||||||||||
|
Commercial
business loans
|
22,472 | 7.18 | 17,805 | 6.39 | 17,951 | 6.72 | 11,270 | 4.89 | 5,397 | 2.83 | ||||||||||||||||||||||||||||||
|
Total
gross loans
|
313,092 | 100.00 | % | 278,666 | 100.00 | % | 266,974 | 100.00 | % | 230,647 | 100.00 | % | 190,372 | 100.00 | % | |||||||||||||||||||||||||
|
Loans
in process
|
(7,032 | ) | (19,028 | ) | (31,316 | ) | (27,962 | ) | (24,444 | ) | ||||||||||||||||||||||||||||||
|
Deferred
loan fees, net
|
(264 | ) | (279 | ) | (339 | ) | (314 | ) | (316 | ) | ||||||||||||||||||||||||||||||
|
Unearned
discounts, net
|
(13 | ) | (13 | ) | — | (5 | ) | (7 | ) | |||||||||||||||||||||||||||||||
|
Allowance
for loan losses
|
(3,537 | ) | (2,633 | ) | (3,011 | ) | (2,144 | ) | (1,762 | ) | ||||||||||||||||||||||||||||||
|
Total
|
$ | 302,246 | $ | 256,713 | $ | 232,308 | $ | 200,222 | $ | 163,843 | ||||||||||||||||||||||||||||||
29
The
following table sets forth certain information at September 30, 2009, regarding
the dollar amount of loan principal repayments coming due during the years
indicated. The table below does not include any estimate of prepayments, which
significantly shorten the average life of all loans and may cause our actual
repayment experience to differ from that shown below. Demand loans having no
stated schedule of repayments and no stated maturity are reported as due in one
year or less.
|
Due during the Year
Ended September 30,
|
Due After 3
through 5
years after
|
Due After 5
through 10
years after
|
Due After
10 through
15 years
after
|
Due After 15
years after
|
||||||||||||||||||||||||||||
|
2010
|
2011
|
2012
|
9/30/09
|
9/30/09
|
9/30/09
|
9/30/09
|
Total
|
|||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||
|
Single-family
mortgage loans
|
$ | 1,491 | $ | 1,580 | $ | 1,666 | $ | 3,654 | $ | 11,212 | $ | 14,977 | $ | 20,021 | $ | 54,601 | ||||||||||||||||
|
Multi-family
mortgage loans
|
798 | 845 | 891 | 1,953 | 5,995 | 8,009 | 10,705 | 29,196 | ||||||||||||||||||||||||
|
Real
estate construction loans
|
54,969 | 14,204 | — | — | — | — | — | 69,173 | ||||||||||||||||||||||||
|
Commercial
real estate loans
|
3,131 | 3,338 | 3,536 | 7,831 | 24,543 | 33,765 | 46,484 | 122,628 | ||||||||||||||||||||||||
|
Loans
secured by deposit accounts
|
317 | — | — | — | — | — | — | 317 | ||||||||||||||||||||||||
|
Other
consumer loans
|
3,295 | 3,537 | 3,796 | 4,077 | — | — | — | 14,705 | ||||||||||||||||||||||||
|
Commercial
business loans
|
3,914 | 4,185 | 4,473 | 9,900 | — | — | — | 22,472 | ||||||||||||||||||||||||
|
Total
gross loans
|
$ | 67,915 | $ | 27,689 | $ | 14,362 | $ | 27,415 | $ | 41,750 | $ | 56,751 | $ | 77,210 | $ | 313,092 | ||||||||||||||||
The following table sets forth the
dollar amount of all loans at September 30, 2009, that are due after September
30, 2010 which have either fixed interest rates or adjustable interest
rates.
|
Fixed Rates
|
Adjustable Rates
|
Total
|
||||||||||
|
(Dollars in thousands)
|
||||||||||||
|
Single-family
mortgage loans
|
$ | 33,870 | $ | 19,240 | $ | 53,110 | ||||||
|
Multi-family
mortgage loans
|
25,000 | 3,398 | 28,398 | |||||||||
|
Real
estate construction loans
|
3,923 | 10,281 | 14,204 | |||||||||
|
Commercial
real estate loans
|
103,615 | 15,882 | 119,497 | |||||||||
|
Loans
secured by deposit accounts
|
— | — | — | |||||||||
|
Other
consumer loans
|
2,870 | 8,540 | 11,410 | |||||||||
|
Commercial
business loans
|
9,613 | 8,945 | 18,558 | |||||||||
|
Total
gross loans
|
$ | 178,891 | $ | 66,286 | $ | 245,177 | ||||||
30
The
following table shows our loan origination, sale and other activity during the
years indicated.
|
For
the Years Ended September 30,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Total
net loans at the beginning of year
|
$ | 256,713 | $ | 232,308 | $ | 200,222 | ||||||
|
Loans
originated for portfolio:
|
||||||||||||
|
Single
and multi-family mortgage loans
|
35,385 | 22,752 | 25,703 | |||||||||
|
Real
estate construction loans
|
23,479 | 50,600 | 64,541 | |||||||||
|
Commercial
real estate loans
|
17,535 | 47,339 | 27,002 | |||||||||
|
Commercial
business loans
|
6,503 | 4,047 | 16,657 | |||||||||
|
Loans
secured by deposit accounts
|
268 | 78 | 212 | |||||||||
|
Home
equity loans
|
3,382 | 1,452 | 3,460 | |||||||||
|
Automobile
and other consumer loans
|
712 | 300 | 1,036 | |||||||||
|
Total
loans originated
|
$ | 87,264 | $ | 126,568 | $ | 138,611 | ||||||
|
Deduct:
|
||||||||||||
|
Principal
loan repayment and other, net
|
40,814 | 99,904 | 106,790 | |||||||||
|
Loan
charge-offs, net of (recoveries)
|
917 | 2,259 | (265 | ) | ||||||||
|
Total
net loans at end of year
|
$ | 302,246 | $ | 256,713 | $ | 232,308 | ||||||
|
Loans
originated for sale
|
$ | 35,483 | $ | 24,739 | $ | 20,354 | ||||||
|
Loans
sold in secondary market
|
$ | 35,901 | $ | 24,581 | $ | 20,094 | ||||||
Loans Held for
Sale. Loans held for sale decreased $418,000 to $459,000 at September 30,
2009.
Securities.
Our securities portfolio consists primarily of government agency securities,
municipal securities and mortgage-backed securities. Although municipal
securities generally have greater credit risk than government agency securities,
they generally have higher yields than government securities of similar
duration. Securities available for sale decreased from $26.1 million at
September 30, 2008 to $20.8 million at September 30, 2009 due to maturities,
sales and called securities. Mortgage-backed securities available for
sale decreased from $14.0 million at September 30, 2008 to $9.0 million at
September 30, 2009 due to principal repayments, maturities and sales, partially
offset by the purchase of one security.
The following table sets forth the
Bank’s mortgage-backed securities purchases and sales for the years
indicated.
|
Year
Ended September 30,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Purchases
|
$ 254,698 | $ — | $ — | |||||||||
|
Sold
|
1,495,215 | — | — | |||||||||
31
The
following table sets forth the carrying values and fair values of our securities
and mortgage-backed securities portfolio at the dates
indicated.
|
At September 30,
|
||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
|||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||
|
Securities
available for sale:
|
||||||||||||||||||||||||
|
Federal
agency obligations
|
$ | 9,950 | $ | 10,550 | $ | 13,422 | $ | 13,903 | $ | 34,555 | $ | 34,848 | ||||||||||||
|
State
and municipal obligations
|
9,766 | 9,915 | 11,715 | 11,679 | 12,839 | 12,741 | ||||||||||||||||||
|
Mortgage-backed
securities
|
8,823 | 8,957 | 14,007 | 13,989 | 19,621 | 19,277 | ||||||||||||||||||
|
Equity
securities
|
272 | 299 | 544 | 471 | 395 | 394 | ||||||||||||||||||
|
Total
securities available for sale
|
$ | 28,811 | $ | 29,721 | $ | 39,688 | $ | 40,042 | $ | 67,410 | $ | 67,260 | ||||||||||||
|
Weighted-average
rate on securities (1)
|
4.89 | % | 4.69 | % | 4.72 | % | ||||||||||||||||||
|
Weighted-average
rate on mortgage- backed securities
|
4.17 | % | 4.33 | % | 4.31 | % | ||||||||||||||||||
At
September 30, 2009, we had no investments in a single company or entity (other
than U.S. Government- sponsored entity securities) that had an aggregate book
value in excess of 10% of our equity.
The
following table sets forth the maturities and weighted-average yields of debt
securities at September 30, 2009. Weighted-average yields are not presented
on a tax-equivalent basis.
|
One Year or Less
|
More than One
Year to Five Years
|
More than Five
Years to Ten Years
|
More than
Ten Years
|
Total
|
||||||||||||||||||||||||||||||||||||
|
Carrying
Value
|
Weighted-
Average
Yield
|
Carrying
Value
|
Weighted-
Average
Yield
|
Carrying
Value
|
Weighted-
Average
Yield
|
Carrying
Value
|
Weighted-
Average
Yield
|
Carrying
Value
|
Weighted-
Average
Yield
|
|||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||||||
|
Securities
available for sale:
|
||||||||||||||||||||||||||||||||||||||||
|
State
and municipal obligations
|
$ | 254 | 3.75 | % | $ | 2,263 | 4.63 | % | $ | 3,052 | 4.23 | % | $ | 4,346 | 5.56 | % | $ | 9,915 | 4.91 | % | ||||||||||||||||||||
|
Federal
agency obligations
|
2,055 | 5.11 | 8,495 | 4.80 | — | — | — | — | 10,550 | 4.86 | ||||||||||||||||||||||||||||||
|
Mortgage-backed
securities
|
2,077 | 4.23 | 2,466 | 4.29 | 391 | 4.00 | 3,776 | 4.09 | 8,710 | 4.17 | ||||||||||||||||||||||||||||||
|
Collateralized
mortgage obligations
|
— | — | — | — | — | — | 247 | 3.98 | 247 | 3.98 | ||||||||||||||||||||||||||||||
|
Total
securities available
for sale
|
$ | 4,386 | 4.62 | % | $ | 13,224 | 4.67. | % | $ | 3,443 | 4.20 | % | $ | 8,369 | 4.85 | % | $ | 29,422 | 4.62 | % | ||||||||||||||||||||
Premises and
Equipment. Premises and equipment, net, increased from $9.8 million at
September 30, 2008 to $12.7 million at September 30, 2009 due primarily to
assets acquired through the acquisition of KLT Bancshares, and the renovation
and expansion of one branch, partially offset by depreciation
expense. The premises and equipment acquired consisted primarily of
three bank branch facilities.
Other
Assets. The increase in bank-owned life insurance represents
the change in cash surrender value of $437,000. Foreclosed real
estate, net decreased due to the sale of properties, partially offset by
additional properties acquired through foreclosure. Goodwill and core
deposit intangible, net is related to the acquisition. Accrued
interest receivable decreased primarily due to lower securities balances and
timing of interest receipts, partially offset by higher loan
balances. Deferred tax assets decreased primarily as a result of the
tax effect on the increase in unrealized gains on securities and purchase
accounting adjustments related to the acquisition.
32
Deposits.
Our primary source of funds is our deposit accounts, which are comprised
of noninterest-bearing NOW accounts, interest-bearing NOW accounts, money market
accounts, statement accounts and certificates of deposit. These deposits are
provided primarily by individuals within our market areas. Deposits increased
$56.4 million, or 25.7%, to $276.2 million at September 30, 2009 from $219.8
million at September 30, 2008. Approximately $33.9 million of the
$56.4 million of deposit growth was due to deposits assumed in the acquisition
of KLT Bancshares, Inc., the parent company of Farley State Bank. The
increase in deposits for the year ended September 30, 2009 was primarily due to
an increase in money market accounts, and certificate of deposits accounts
twelve months or greater and to a lesser extent, an increase in interest-bearing
and non-interest bearing checking accounts, partially offset by a decrease in
certificate of deposit accounts less than twelve months. Brokered
deposits increased $13.7 million to $28.7 million at September 30, 2009 from
$15.0 million at September 30, 2008. The amount of brokered deposits
in the future will be contingent upon current market rates as compared to retail
deposits and FHLB advances.
The
following table sets forth average balances and average rates of our deposit
products for the years indicated. For purposes of this table, average balances
have been calculated using month-end balances. Management does not believe that
the use of month-end balances instead of daily average balances has caused any
material differences in the information presented.
|
Years
Ended September 30,
|
||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
Average
Balance
|
Average
Rate
|
Average
Balance
|
Average
Rate
|
Average
Balance
|
Average
Rate
|
|||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||
|
Noninterest-bearing
NOW accounts
|
$ | 19,771 | — | % | $ | 14,873 | — | % | $ | 12,458 | — | % | ||||||||||||
|
Interest-bearing
NOW accounts
|
27,821 | 0.69 | 23,884 | 1.28 | 24,331 | 1.88 | ||||||||||||||||||
|
Money
market accounts
|
74,070 | 2.02 | 67,101 | 3.31 | 38,052 | 4.47 | ||||||||||||||||||
|
Statement
accounts
|
9,332 | 0.30 | 6,995 | 0.30 | 7,336 | 0.31 | ||||||||||||||||||
|
Certificates
of deposit
|
133,293 | 2.54 | 118,759 | 4.02 | 143,665 | 4.80 | ||||||||||||||||||
|
Total
|
$ | 264,287 | 1.93 | $ | 231,612 | 3.16 | $ | 225,842 | 4.02 | |||||||||||||||
The
following table sets forth the balances of our deposit products at the dates
indicated.
|
At
September 30,
|
||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||
|
Noninterest-bearing
NOW accounts
|
$ | 21,494 | 7.8 | % | $ | 14,869 | 6.8 | % | $ | 13,617 | 5.4 | % | ||||||||||||
|
Interest-bearing
NOW accounts
|
27,492 | 10.0 | 21,695 | 9.9 | 21,368 | 8.5 | ||||||||||||||||||
|
Money
market accounts
|
80,680 | 29.2 | 61,371 | 27.9 | 68,482 | 27.1 | ||||||||||||||||||
|
Statement
accounts
|
9,745 | 3.5 | 7,258 | 3.3 | 7,200 | 2.9 | ||||||||||||||||||
|
Certificates
of deposit
|
136,792 | 49.5 | 114,571 | 52.1 | 141,638 | 56.1 | ||||||||||||||||||
|
Total
|
$ | 276,203 | 100.0 | % | $ | 219,764 | 100.0 | % | $ | 252,305 | 100.0 | % | ||||||||||||
The
following table indicates the amount of jumbo certificates of deposit by time
remaining until maturity as of September 30, 2009. Jumbo certificates
of deposit require minimum deposits of $100,000.
|
Maturity Period
|
Certificates of
Deposits
|
|||
|
(In
thousands)
|
||||
|
Three
months or less
|
$ | 26,316 | ||
|
Over
three through six months
|
22,750 | |||
|
Over
six through 12 months
|
6,069 | |||
|
Over
12 months
|
8,425 | |||
|
Total
|
$ | 63,560 | ||
33
The
following table sets forth time deposits classified by rates at the dates
indicated.
|
At
September 30,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
0.75
- 1.49%
|
$ | 46,022 | $ | — | $ | — | ||||||
|
1.50
- 1.99
|
38,242 | — | — | |||||||||
|
2.00
- 2.99
|
17,343 | 60,858 | 300 | |||||||||
|
3.00
- 3.99
|
28,548 | 34,745 | 9,249 | |||||||||
|
4.00
- 4.99
|
5,469 | 15,733 | 60,152 | |||||||||
|
5.00
- 5.99
|
1,168 | 3,235 | 71,937 | |||||||||
| $ | 136,792 | $ | 114,571 | $ | 141,638 | |||||||
The
following table sets forth the amount and maturities of time deposits at
September 30, 2009.
|
Amount Due
|
||||||||||||||||||||||||||||
|
One Year
or Less
|
1-2 Years
|
2-3 Years
|
3-4 Years
|
4-5 Years
|
Total
|
Percent of
Total Certificate
Accounts
|
||||||||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||||||||||
|
0.75
– 1.49%
|
$ | 46,022 | $ | — | $ | — | $ | — | $ | — | $ | 46,022 | 33.6 | % | ||||||||||||||
|
1.50
– 1.99
|
35,753 | 2,489 | — | — | — | 38,242 | 27.9 | |||||||||||||||||||||
|
2.00
- 2.99
|
10,774 | 1,448 | 5,105 | 16 | — | 17,343 | 12.7 | |||||||||||||||||||||
|
3.00
- 3.99
|
12,505 | 4,523 | 2,675 | 3,800 | 5,045 | 28,548 | 20.9 | |||||||||||||||||||||
|
4.00
- 4.99
|
3,136 | 903 | 1,349 | 81 | — | 5,469 | 4.0 | |||||||||||||||||||||
|
5.00
- 5.99
|
166 | 994 | 8 | — | — | 1,168 | .9 | |||||||||||||||||||||
| $ | 108,356 | $ | 10,357 | $ | 9,137 | $ | 3,897 | $ | 5,045 | $ | 136,792 | 100.0 | % | |||||||||||||||
The
following table sets forth deposit activity for the years
indicated.
|
Years
Ended September 30,
|
||||||||
|
2009
|
2008
|
|||||||
|
(In
thousands)
|
||||||||
|
Net
deposits (withdrawals) before interest
credited 1)
|
$ | 51,917 | $ | (39,459 | ) | |||
|
Interest
credited
|
4,522 | 6,917 | ||||||
|
Net
increase (decrease) in deposits
|
$ | 56,439 | $ | (32,542 | ) | |||
|
|
1)
|
Includes
$33,964,000 of deposits assumed in connection with the
acquisition.
|
Borrowings.
We utilize borrowings from the Federal Home Loan Bank of Des Moines and
securities sold under agreement to repurchase to supplement our supply of funds
for loans and investments and to meet deposit withdrawal
requirements.
34
The
following table sets forth certain information regarding short-term borrowings
by the Bank at the end of and during the years indicated:
|
At
September 30,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
Outstanding
advances from Federal Home Loan Bank
|
$ | 34,966 | $ | 48,100 | $ | 22,056 | ||||||
|
Weighted-average
rate paid on advances from Federal Home Loan Bank
|
1.46 | % | 2.13 | % | 4.90 | % | ||||||
|
Outstanding
securities sold under agreement to repurchase
|
$ | 182 | $ | 813 | $ | 681 | ||||||
|
Weighted-average
rate paid on securities sold under agreement to repurchase
|
2.68 | % | 4.45 | % | 3.41 | % | ||||||
|
Years
Ended September 30,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
Maximum
outstanding advances from Federal Home Loan Bank at any month
end
|
$ | 54,100 | $ | 53,100 | $ | 26,083 | ||||||
|
Weighted-average
rate paid on advances from Federal Home Loan Bank (1)
|
1.73 | % | 3.08 | % | 4.84 | % | ||||||
|
Average
advances from Federal Home Loan Bank
|
$ | 38,797 | $ | 44,657 | $ | 19,904 | ||||||
|
Maximum
outstanding securities sold under agreement to repurchase at any month
end
|
$ | 848 | $ | 1,683 | $ | 5,164 | ||||||
|
Weighted-average
rate paid on securities sold under agreement to repurchase
(2)
|
3.84 | % | 3.96 | % | 3.39 | % | ||||||
|
Average
securities sold under agreement to repurchase
|
$ | 493 | $ | 1,427 | $ | 1,573 | ||||||
|
(1)
|
The
weighted-average rate paid is based on the weighted-average balances
determined on a monthly basis.
|
|
(2)
|
The
weighted-average rate paid is based on the weighted-average balances
determined on a daily basis.
|
Federal
Home Loan Bank of Des Moines borrowings decreased $100,000, or .14%, to $69.1
million at September 30, 2009 from $69.2 million at September 30, 2008. The
advances outstanding as of September 30, 2009 mature in 2009 through 2014.
Securities
sold under agreement to repurchase decreased $265,000 for the year ended
September 30, 2009 due to lower balances from existing customers, partially
offset by one new customer.
Other
Liabilities
Accrued
interest on deposits increased primarily due to a higher average balance, offset
by lower rates on money market accounts and certificates. Other liabilities
increased primarily
as a result of higher deposit insurance assessments, real estate taxes and
vacation pay, partially offset by lower accrued taxes on foreclosed real estate,
accounting and retirement plan expense and accrued payroll expense.
Stockholders’
Equity.
2009 vs.
2008. Stockholders’ equity decreased by $224,000 from $44.0
million at September 30, 2008 to $43.8 million at September 30, 2009 primarily
due to the repurchase of common stock totaling $2.5 million and the payment of
dividends of $366,000, partially offset primarily by net earnings of $1.8
million, the amortization of ESOP and stock-based compensation expenses of
$486,000 and unrealized gains on investments and mortgage backed securities, net
of taxes of $360,000.
35
Results
of Operations for the Years Ended September 30, 2009 and 2008
Overview.
|
Years
Ended September 30,
|
%
Change
|
%
Change
|
||||||||||||||||||
|
2009
|
2008
|
2007
|
2009/2008
|
2008/2007
|
||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||
|
Net
earnings
|
$ | 1,776 | $ | 1,922 | $ | 1,944 | (7.6 | )% | (1.1 | )% | ||||||||||
|
Return
on assets (1)
|
0.47 | % | 0.57 | % | 0.63 | % | (17.5 | ) | (9.5 | ) | ||||||||||
|
Return
on stockholders’ equity (2)
|
4.07 | 4.18 | 3.94 | (2.6 | ) | 6.1 | ||||||||||||||
|
Stockholders’
equity-to-assets ratio (3)
|
11.65 | 13.61 | 16.00 | (14.4 | ) | (14.9 | ) | |||||||||||||
|
Dividend
payout ratio (4)
|
20.62 | 20.97 | 23.86 | (1.7 | ) | (12.1 | ) | |||||||||||||
|
(1)
|
Net
earnings divided by average assets.
|
|
(2)
|
Net
earnings divided by average stockholders’
equity.
|
|
(3)
|
Average
stockholders’ equity divided by average total
assets.
|
|
(4)
|
Represents
dividends paid to shareholders as a percent of net
earnings.
|
2009 vs.
2008. Net earnings
decreased $146,000, or 7.59% for the year ended September 30, 2009 compared to
the year ended September 30, 2008. The decrease in net earnings was
due primarily to a $198,000, or .98%, decrease in interest income, and a $3.19
million, or 38.01%, increase in noninterest expense, partially offset by a $2.8
million, or 29.47% decrease in interest expense, a $312,000, or 16.60%, decrease
in provision for loan losses, a $127,000, or 5.98%, increase in noninterest
income and a $35,000, or 4.96%, decrease in income tax expense. Net
interest income increased primarily as a result of lower deposit costs and a
higher interest rate spread. Noninterest income increased due to an
increase in loan service charges, an increase in gains on sale of loans, gains
on sale of mortgage-backed securities and an increase in deposit account service
charges, partially offset by a decrease in gains on sales of securities and an
OTTI loss on one equity security. Noninterest expense increased
primarily due to an increase in compensation and benefits, occupancy, equipment
and data processing, operations from foreclosed real estate, net, and FDIC
premium expense and the amortization of core deposit intangible, partially
offset by a decrease in correspondent banking expense.
Net
Earnings.
2009 vs.
2008. Net earnings
decreased by $146,000 to $1.8 million at 2009 compared to $1.9 million for
2008. The decrease was due to lower interest income and higher
noninterest expense, partially offset by lower interest expense, a lower
provision for loan losses, higher noninterest income and lower income tax
expense.
Net
Interest Income.
2009 vs.
2008. Net interest income increased by $2.6 million, or
23.83%, from $10.8 million for 2008 to $13.3 million for 2009 as a result of a
higher interest rate spread, partially offset by a decrease in net
interest-earning assets. The interest rate spread increased from 3.25% for 2008 to
3.84% for 2009. The decrease in net interest-earning assets is due to
an increase of $37.7 million, or 13.03%, in average interest-bearing
liabilities, partially offset by an increase of $29.6 million, or 9.53%, in
average interest-earning assets.
Interest
on loans receivable increased as a result of a higher weighted-average balance,
partially offset by a lower average yield. The weighted average yield
on loans decreased from 7.03% for 2008 to 6.26% for 2009.
Interest on mortgage-backed securities
decreased due to a lower average balance.
Interest
on securities decreased as a result of a lower average balance and
yield. Interest on other interest-earning assets decreased as a result of a lower
average yield, partially offset by a higher average balance.
Interest on deposits decreased as a result of a lower
weighted-average rate, partially offset by a higher average
balance.
Interest on advances decreased due to a
lower average rate, partially offset by a higher average
balance.
36
Average Balances
and Yields. The following table presents information regarding average
balances of assets and liabilities, the total dollar amounts of interest income
and dividends from average interest-earnings assets, the total dollar amounts of
interest expense on average interest-bearing liabilities, and the resulting
average yields and costs. The yields and costs for the years indicated are
derived by dividing income or expense by the average balances of assets or
liabilities, respectively, for the years presented. For purposes of this table,
average balances have been calculated using month-end balances and, to a lesser
extent, daily balances, and nonaccrual loans are included in average balances
only. Management does not believe that the use of month-end balances instead of
daily average balances has caused any material differences in the information
presented. No tax equivalent adjustments were made. Nonaccruing loans have been
included in the table as loans carrying a zero yield.
|
Years Ended September 30,
|
||||||||||||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||||||||||||||
|
Average
Balance
|
Interest
|
Average
Yield/
Cost
|
Average
Balance
|
Interest
|
Average
Yield/
Cost
|
Average
Balance
|
Interest
|
Average
Yield/
Cost
|
||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||
|
Interest-earning
assets:
|
||||||||||||||||||||||||||||||||||||
|
Loans
receivable
|
$ | 291,622 | $ | 18,255 | 6.26 | % | $ | 247,024 | $ | 17,356 | 7.03 | % | $ | 217,841 | $ | 17,233 | 7.91 | % | ||||||||||||||||||
|
Mortgage-backed
securities
|
11,808 | 497 | 4.21 | 16,814 | 705 | 4.19 | 22,229 | 933 | 4.20 | |||||||||||||||||||||||||||
|
Securities
|
28,969 | 1,203 | 4.15 | 41,564 | 1,952 | 4.70 | 43,988 | 2,076 | 4.72 | |||||||||||||||||||||||||||
|
Other
interest-earning assets
|
7,945 | 4 | 0.05 | 5,343 | 144 | 2.68 | 6,484 | 321 | 4.95 | |||||||||||||||||||||||||||
|
Total
interest-earning assets
|
340,344 | 19,959 | 5.86 | 310,745 | 20,157 | 6.49 | 290,542 | 20,563 | 7.08 | |||||||||||||||||||||||||||
|
Interest-bearing
liabilities:
|
||||||||||||||||||||||||||||||||||||
|
Deposits
|
264,287 | 5,110 | 1.93 | 231,612 | 7,321 | 3.16 | 225,842 | 9,084 | 4.02 | |||||||||||||||||||||||||||
|
Federal
Home Loan Bank advances
|
62,445 | 1,484 | 2.38 | 56,607 | 2,005 | 3.54 | 27,189 | 1,333 | 4.90 | |||||||||||||||||||||||||||
|
Securities
sold under agreement
to repurchase
|
659 | 25 | 3.77 | 1,427 | 58 | 4.05 | 2,097 | 77 | 3.69 | |||||||||||||||||||||||||||
|
Total
interest-bearing liabilities
|
$ | 327,391 | 6,619 | 2.02 | $ | 289,646 | 9,384 | 3.24 | $ | 255,128 | 10,494 | 4.11 | ||||||||||||||||||||||||
|
Net
interest income before provision
for loan losses
|
$ | 13,340 | $ | 10,773 | $ | 10,069 | ||||||||||||||||||||||||||||||
|
Net
interest-earning assets
|
$ | 12,953 | $ | 21,099 | $ | 35,414 | ||||||||||||||||||||||||||||||
|
Interest
rate spread
|
3.84 | % | 3.25 | % | 2.97 | % | ||||||||||||||||||||||||||||||
|
Net
yield on average interest-earning
assets
|
3.92 | % | 3.47 | % | 3.47 | % | ||||||||||||||||||||||||||||||
|
Ratio
of average interest-earning
assets to average interest-bearing
liabilities
|
103.96 | % | 107.28 | % | 113.88 | % | ||||||||||||||||||||||||||||||
37
Rate/Volume
Analysis. The following table sets forth the effects of changing rates
and volumes on our net interest income. The rate column shows the effects
attributable to changes in rate (changes in rate multiplied by prior volume).
The volume column shows the effects attributable to changes in volume (changes
in volume multiplied by prior rate). The rate/volume column shows the effects
attributable to changes in both rate and volume (changes in rate multiplied by
changes in volume). The total column represents the sum of the prior
columns.
|
Year Ended September 30,
2009 vs. 2008
|
Year Ended September 30,
2008 vs. 2007
|
|||||||||||||||||||||||||||||||
|
Increase (Decrease) due to:
|
Increase (Decrease) due to:
|
|||||||||||||||||||||||||||||||
|
Volume
|
Rate
|
Rate/
Volume
|
Total
|
Volume
|
Rate
|
Rate/
Volume
|
Total
|
|||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||
|
Interest
income:
|
||||||||||||||||||||||||||||||||
|
Loans
receivable
|
$ | 3,133 | $ | (1,892 | ) | $ | (342 | ) | $ | 899 | $ | 2,310 | $ | (1,929 | ) | $ | (258 | ) | $ | 123 | ||||||||||||
|
Mortgage-backed
securities
|
(210 | ) | 3 | (1 | ) | (208 | ) | (226 | ) | (2 | ) | — | (228 | ) | ||||||||||||||||||
|
Securities
|
(592 | ) | (227 | ) | 69 | (750 | ) | (115 | ) | (10 | ) | 1 | (124 | ) | ||||||||||||||||||
|
Other
interest-earning assets
|
70 | (141 | ) | (68 | ) | (139 | ) | (57 | ) | (147 | ) | 26 | (178 | ) | ||||||||||||||||||
|
Total
interest-earning assets
|
$ | 2,401 | $ | (2,257 | ) | $ | (342 | ) | $ | (198 | ) | $ | 1,912 | $ | (2,088 | ) | $ | (231 | ) | $ | (407 | ) | ||||||||||
|
Interest
expense:
|
||||||||||||||||||||||||||||||||
|
Deposits
|
1,033 | (2,843 | ) | (402 | ) | (2,212 | ) | 232 | (1,947 | ) | (49 | ) | (1,764 | ) | ||||||||||||||||||
|
Federal
Home Loan Bank advances
|
207 | (660 | ) | (68 | ) | (521 | ) | 1,441 | (369 | ) | (399 | ) | 673 | |||||||||||||||||||
|
Securities
sold under agreement to repurchase
|
(41 | ) | 10 | (2 | ) | (33 | ) | (31 | ) | 26 | (14 | ) | (19 | ) | ||||||||||||||||||
|
Total
interest-bearing liabilities
|
1,199 | (3,493 | ) | (472 | ) | $ | (2,766 | ) | 1,642 | (2,290 | ) | (462 | ) | $ | (1,110 | ) | ||||||||||||||||
|
Change
in net interest income
|
$ | 1,202 | $ | 1,236 | $ | 130 | $ | 2,568 | $ | 270 | $ | 202 | $ | 231 | $ | 703 | ||||||||||||||||
Provision
for Loan Losses.
2009 vs.
2008. Provision for loan losses decreased 16.60% from $1.9
million for 2008 to $1.6 million for 2009. At September 30, 2009, the allowance
for loan losses was $3.5 million, or 1.13% of the gross loan portfolio, compared
to $2.6 million or 0.94% of the loan portfolio at September 30, 2008. At
September 30, 2009, loans secured by non-construction single-family properties
totaled 17.44% of total loans and 21.23% of the allowance for loan losses was
allocated to these loans. All other loans totaled 82.56% of the portfolio and
78.77% of the allowance for loan losses.
The
decreased provision is the result of lower net charge-offs, partially offset by
an increase in classified assets and growth of the loan portfolio.
Nonperforming
loans amounted to $2.7 million and $8.2 million at September 30, 2009 and
2008, respectively. Net loan charge-offs amounted to $917,000 during 2009
compared to net charge-offs of $2.3 million during 2008. The majority of the net
loan charge-offs in 2009 were due to losses related to non-construction single
family loans, construction single-family loans and one commercial
business loan.
38
Noninterest
Income.
The following table shows the components of noninterest income and the
percentage changes for the years ended September 30, 2009 and 2008.
|
Years Ended September 30,
|
% Change
|
|||||||||||
|
2009
|
2008
|
2009/2008
|
||||||||||
|
(Dollars in thousands)
|
||||||||||||
|
Loan
service charges
|
$ | 87 | $ | 64 | 35.9 | % | ||||||
|
Gain
on sale of securities available for sale
|
54 | 135 | (60.0 | ) | ||||||||
|
Gain
on sale of MBSs available for sale
|
52 | — |
NM
|
|||||||||
|
Gain
on sale of loans
|
437 | 319 | 37.0 | |||||||||
|
Other-than-temporary
impairment (“OTTI”) loss on equity security
|
(113 | ) | — |
NM
|
||||||||
|
Change
in cash surrender value of BOLI
|
437 | 437 | 0.0 | |||||||||
|
Deposit
account service charges
|
1,297 | 1,169 | 10.9 | |||||||||
|
Total
|
$ | 2,251 | $ | 2,124 | 6.0 | % | ||||||
2009 vs.
2008. Noninterest income increased from $2.1 million for 2008
to $2.3 million for 2009 due to gains on sales of MBSs, an increase in loan
service charges, gains on sale of loans and deposit account service charges,
partially offset by an OTTI loss and a decrease in gains on sale of
securities.
The Bank
recognized gains on sale of loans of $437,000 and $319,000 for the years ended
September 30, 2009 and 2008, respectively. During 2009 and 2008, we
sold loans to secondary market investors totaling $35.9 million and $24.6
million, respectively.
39
Noninterest
Expense. The following table shows the components of noninterest expense
and the percentage changes for the years ended September 30, 2009 and
2008.
|
Years Ended September 30
|
% Change
|
|||||||||||
|
2009
|
2008
|
2009/2008
|
||||||||||
|
(Dollars in thousands)
|
||||||||||||
|
Compensation
and benefits
|
$ | 5,102 | $ | 4,446 | 14.8 | % | ||||||
|
Occupancy
expense
|
911 | 673 | 35.4 | |||||||||
|
Equipment
and data processing expense
|
1,224 | 931 | 31.5 | |||||||||
|
Operations
from foreclosed real estate, net
|
1,540 | 362 | 325.4 | |||||||||
|
FDIC
premium expense
|
550 | 135 | 307.4 | |||||||||
|
Professional
and regulatory services
|
568 | 434 | 30.9 | |||||||||
|
Advertising
|
313 | 250 | 25.2 | |||||||||
|
Correspondent
banking charges
|
126 | 234 | (46.2 | ) | ||||||||
|
Supplies
|
183 | 136 | 34.6 | |||||||||
|
Amortization
of core deposit intangible
|
191 | — |
NM
|
|||||||||
|
Other
|
867 | 786 | 10.3 | |||||||||
|
Total
noninterest expense
|
$ | 11,575 | $ | 8,387 | 38.0 | % | ||||||
|
Efficiency
ratio (1)
|
74.2 | % | 65.0 | % | ||||||||
NM = Not Meaningful
|
(1)
|
Computed
as noninterest expense divided by the sum of net interest income and
noninterest income.
|
2009 vs.
2008. Noninterest expense increased from $8.4 million for 2008
to $11.6 million for 2009. Compensation and benefit expense increased
primarily due to higher salary levels and health insurance expense, partially
offset by an increase in deferred loan origination costs, lower ESOP expense and
stock option expense. ESOP expense is based on the fair value
of the shares committed to be released, which the fair value on average was
lower for the year ended September 30, 2009 compared to the year ended September
30, 2008. Stock option expense decreased since certain options became
fully vested.
During
2009, the Company recognized stock option expense and restricted stock award
expense of $47,000 and $250,000, respectively. During 2008, the
Company recognized stock option expense and restricted stock award expense of
$75,000 and $247,000, respectively. At September 30, 2009, total
unrecognized stock option expense was approximately $104,000 and is expected to
be recognized over the weighted-average period of 2.86 years. At
September 30, 2009, total unrecognized restricted stock award expense was
$626,000 and is expected to be recognized over the next 2.5 years.
Occupancy
expense increased due primarily to higher building depreciation expense, higher
real estate and personal property tax expense due to new branch offices and
higher utility expense. Equipment and data processing expense
increased due primarily to higher service agreement expense, repairs, internet
bill pay expense and data processing expense. FDIC premium expense
increased due to a higher assessment as a result of a risk-based assessment
system which considers the supervisory rating and certain financial ratios of
each financial institution and related expiring credits, the increase in
deposits and the special assessment of $173,000. Expenses from
operations from foreclosed real estate, net increased due primarily to higher
losses on sale of foreclosed real estate and higher maintenance expenses,
partially offset by an increase in rental income. Losses on
foreclosed real estate were $1.3 million for the year ended September 30, 2009
as compared to $311,000 for the year ended September 30, 2008 as a result of
adverse economic conditions which caused real estate values to
decrease. Professional and regulatory services increased due
primarily to higher legal and mortgage lending consulting
expenses. Legal expenses have increased due to costs associated with
nonperforming loans. Advertising expense increased due to an increase
in radio and television costs and mortgage lending marketing
costs. Correspondent banking expense decreased due to performing
certain check processing and statement rendering service operations in-house
which reduced outside vendor expense. Supplies expense increased due
to the addition of new branches and the acquisition. Amortization of
core deposit intangible expense was related to the acquisition. Other
expenses increased due primarily to an increase in telephone and data line
expense, non-origination loan expense and retail operations expense, partially
offset primarily by lower mortgage lending website expense, deferred consumer
loan origination costs and lower miscellaneous expense.
40
Income
Taxes.
2009 vs.
2008. Income tax expense for the year ended September 30, 2009
was $671,000 compared to $706,000 for the year ended September 30,
2008. Income taxes decreased due to lower pretax
earnings.
Risk
Management
Overview.
Managing risk is an essential part of successfully managing a financial
institution. Our most prominent risk exposures are credit risk, interest rate
risk and market risk. Credit risk is the risk of not collecting the interest
and/or the principal balance of a loan or investment when it is due. Interest
rate risk is the potential reduction of net interest income as a result of
changes in interest rates. Market risk arises from fluctuations in interest
rates that may result in changes in the values of financial instruments, such as
available for sale securities that are accounted for on a mark-to-market basis.
Other risks that we face are operational risks, liquidity risks and reputation
risk. Operational risks include risks related to fraud, regulatory compliance,
processing errors, technology and disaster recovery. Liquidity risk is the
possible inability to fund obligations to depositors, lenders or borrowers.
Reputation risk is the risk that negative publicity or press, whether true or
not, could cause a decline in our customer base or revenue.
Credit Risk
Management. Our strategy for credit risk management focuses on having
well-defined credit policies and uniform underwriting criteria and providing
prompt attention to potential problem loans.
When a
borrower fails to make a required loan payment, we take a number of steps to
attempt to have the borrower cure the delinquency and restore the loan to
current status. When the loan becomes 15 days past due, a 5% penalty is
assessed, and a written notification of the late payment is sent. If payment is
not received by the 30th day of delinquency, the borrower is contacted by
telephone, payment is requested and efforts are made to formulate an affirmative
plan to cure the delinquency. After a loan becomes past due 60 days, we
generally provide a final notice that we will initiate legal proceedings in 30
days, after which foreclosure procedures commence to obtain the real property
securing the loan. Generally, when a loan becomes 90 days past due, the loan is
placed on non-accrual status. We may consider loan workout arrangements with
certain borrowers under certain circumstances.
Management
reports to the Board of Directors monthly regarding the amount of loans
delinquent more than 30 days, all loans in foreclosure and all foreclosed and
repossessed property that we own.
Real
estate acquired by the Bank as a result of foreclosure is classified as
foreclosed real estate until such time as it is sold. When such property is
acquired, a new appraisal is obtained and it is recorded at the lower of its
unpaid principal or fair value, less estimated selling costs. Any required
write-down of the loan to its fair value upon foreclosure is charged against the
allowance for losses.
Analysis of
Nonperforming Assets. We consider repossessed assets and loans that are
90 days or more past due to be non-performing assets. Loans are generally placed
on nonaccrual status when they become 90 days delinquent, at which time the
accrual of interest ceases and the allowance for any uncollectible accrued
interest is established and charged against operations. Typically, payments
received on a nonaccrual loan are applied to the outstanding principal and
interest as determined at the time of collection of the loan.
Real
estate that we acquire as a result of foreclosure or deed-in-lieu of foreclosure
is classified as foreclosed assets until it is sold. When property is acquired,
it is initially recorded at the lower of its cost, or market, less estimated
selling expenses. Holding costs and declines in fair value after acquisition of
the property result in charges against income.
41
The
following table sets forth information with respect to our nonperforming assets
at the dates indicated.
|
At September 30,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
(Dollars in thousands)
|
||||||||||||||||||||
|
Loans
accounted for on a nonaccrual basis: (1)
|
||||||||||||||||||||
|
Commercial
real estate loans
|
$ | — | $ | 3,233 | $ | — | $ | — | $ | — | ||||||||||
|
Single
and multi-family loans
|
40 | — | 104 | 828 | 351 | |||||||||||||||
|
Real
estate construction spec loans
|
— | 3,193 | 1,932 | 304 | 556 | |||||||||||||||
|
Land
development loans
|
— | 1,784 | 1,386 | ― | ― | |||||||||||||||
|
Consumer
|
27 | 9 | ― | 349 | ― | |||||||||||||||
|
Total
nonaccrual loans
|
67 | 8,219 | 3,422 | 1,481 | 907 | |||||||||||||||
|
Accruing
loans which are contractually past due 90 days or more – single-family
loans (1)
|
― | ― | ― | 58 | ― | |||||||||||||||
|
Total
nonaccrual and 90 days or more past due loans
|
67 | 8,219 | 3,422 | 1,539 | 907 | |||||||||||||||
|
Impaired
loans
|
2,648 | ― | ― | 2,682 | 403 | |||||||||||||||
|
Foreclosed
real estate held for sale
|
2,822 | 4,936 | 1,676 | 1,580 | 1,530 | |||||||||||||||
|
Total
nonperforming assets
|
5,537 | 13,155 | 5,098 | 5,801 | 2,840 | |||||||||||||||
|
Allowance
for losses on nonperforming loans
|
316 | 437 | 370 | 258 | 199 | |||||||||||||||
|
Nonperforming
loans with no related allowance for loan losses
|
$ | ― | $ | ― | $ | ― | $ | 58 | $ | 116 | ||||||||||
|
Nonperforming
loans as a percentage of total loans, net
|
0.90 | % | 3.20 | % | 1.47 | % | 2.11 | % | 0.55 | % | ||||||||||
|
Nonperforming
loans as a percentage of total assets
|
0.69 | % | 2.44 | % | 1.03 | % | 1.47 | % | 0.38 | % | ||||||||||
|
Nonperforming
assets as a percentage of total assets
|
1.41 | % | 3.91 | % | 1.53 | % | 2.02 | % | 1.20 | % | ||||||||||
(1)
Interest on delinquent loans is accrued to income to the extent
considered collectible.
Nonperforming
assets totaled $5.5 million, or 1.41% of total assets, at September 30, 2009,
which was a decrease of $7.6 million, or 58.02%, from $13.1 million, or 3.91% of
total assets, at September 30, 2008. Non-performing assets at September 30, 2009
consisted of $67,000 in nonaccrual loans, $2.6 million in impaired loans and
$2.8 million in foreclosed real estate. At September 30, 2009,
nonaccrual loans consisted of $40,000 in single family loans and consumer loans
totaling $27,000. Impaired loans consisted of seven single-family
loans.
Interest
income that would have been recorded for the year ended September 30, 2009 had
nonaccrual loans been current according to their original terms amounted to
$18,861. There was interest income of $3,166 recognized on such loans during the
period the loans were classified as nonperforming in 2009.
Foreclosed
real estate owned by the Bank at September 30, 2009 totaled $2.8 million
compared to $4.9 million at September 30, 2008. Foreclosed real
estate at September 30, 2009 included six one-to-four family properties, one
one-to-four family construction property, one multi-family property, one
residential land development property, one commercial retail property, three
residential lots and two commercial lots.
Classified
Assets. Federal regulations require us to review and classify our assets
on a regular basis. In addition, the Office of Thrift Supervision has the
authority to identify problem assets and, if appropriate, require them to be
classified. There are three classifications for problem assets: substandard,
doubtful and loss. “Substandard assets” must have one or more defined weaknesses
and are characterized by the distinct possibility that we will sustain some loss
if the deficiencies are not corrected. “Doubtful assets” have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified as “loss” is considered uncollectible and of such little value
that continuance as an asset of the institution is not warranted. The
regulations also provide for a “special mention” category, described as assets
that do not currently expose us to a sufficient degree of risk to warrant
classification but do possess credit deficiencies or potential weaknesses
deserving our close attention. When we classify an asset as special mention,
substandard or doubtful we establish an allowance for loan losses. If we
classify an asset as loss, we allocate an amount equal to 100% of the portion of
the asset classified loss.
42
The
following table shows the aggregate amounts of our classified assets at the
dates indicated.
|
At September 30,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(In thousands)
|
||||||||||||
|
Special
mention assets
|
$ | 6,423 | $ | 2,919 | $ | 1,386 | ||||||
|
Substandard
assets (1)
|
14,780 | 14,212 | 5,435 | |||||||||
|
Doubtful
assets
|
― | ― | 105 | |||||||||
|
Loss
assets
|
― | ― | ― | |||||||||
|
Total
classified assets
|
$ | 21,203 | $ | 17,131 | $ | 6,926 | ||||||
|
(1)
|
Includes
foreclosed real estate of $2,822,423, $4,936,355 and $1,675,871 at
September 30, 2009, 2008 and 2007,
respectively.
|
The
increase in our substandard assets at September 30, 2009 compared to September
30, 2008 was primarily due to the classification of two land development
properties, several one-to-four family properties, two multi-family properties,
two commercial office buildings, one commercial retail property, one residential
lot and one church. Substandard assets increased from $14.2 million
at September 30, 2008 to $14.8 million at September 30, 2009. Our
substandard loans at September 30, 2009 consisted of two land development loans
to one borrower totaling $5.6 million, thirteen one-to-four family properties to
six borrowers totaling $3.9 million, one multi-family property totaling $1.0
million, two commercial office buildings totaling $1.0 million and one church
totaling $310,000.
Special
mention assets at September 30, 2009 consisted of six loans totaling $6.4
million. Three were secured by car hauling equipment totaling $3.5
million, two loans for single-family development totaling $2.9 million and one
residential lot loan.
Delinquencies.
The following table provides information about delinquencies in our loan
portfolio at the dates indicated.
|
At September 30,
|
||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
30-59
Days
Past
Due
|
60-89
Days
Past
Due
|
30-59
Days
Past
Due
|
60-89
Days
Past
Due
|
30-59
Days
Past
Due
|
60-89
Days
Past
Due
|
|||||||||||||||||||
|
(In thousands)
|
||||||||||||||||||||||||
|
Real
estate – mortgage loans
|
$ | 170 | $ | 320 | $ | — | $ | 153 | $ | 155 | $ | 31 | ||||||||||||
|
Land
loans
|
— | — | — | 59 | — | — | ||||||||||||||||||
|
Construction
loans
|
— | — | — | 2,371 | ¾ | 2,233 | ||||||||||||||||||
|
Commercial
loans
|
— | 310 | 27 | — | 906 | 95 | ||||||||||||||||||
|
Consumer
loans
|
11 | 19 | 136 | — | 97 | 10 | ||||||||||||||||||
|
Total
|
$ | 181 | $ | 649 | $ | 163 | $ | 2,583 | $ | 1,158 | $ | 2,369 | ||||||||||||
43
Analysis and
Determination of the Allowance for Loan Losses. The allowance for loan
losses is a valuation allowance for probable losses inherent in the loan
portfolio. We evaluate the need to establish allowances against losses on loans
on a monthly basis. When additional allowances are necessary, a provision for
loan losses is charged to earnings.
We
establish an allowance on certain identified problem loans based on such factors
as (1) the strength of the customer’s personal or business cash flows; (2) the
availability of other sources of repayment; (3) the amount due or past due; (4)
the type and value of collateral; (5) the strength of our collateral position;
(6) the estimated cost to sell the collateral; and (7) the borrower’s effort to
cure the delinquency.
In
addition, we establish an allowance for loans that are not delinquent to
recognize the losses associated with lending activities. This valuation
allowance is determined by segregating the loans by loan category and assigning
percentages to each category. Loan categories were specified by
collateral type. Historical loss data generally provides a reasonable starting
point for our analysis of probable losses on each loan
category. Generally, we have relied upon historical loss data for the
last ten years as a starting point. However, the increase in our
aggregate net charge-offs on loans and losses on foreclosed real estate in 2009
and 2008 have caused us to rely more heavily on the actual loss data for the
year ended September 30, 2009 as a reasonable starting point. The
increase in our net losses on foreclosed real estate in 2009 was due to
declining real estate values. The actual aggregate experience loss
ratio for loans and foreclosed real estate for 2009 was adjusted for significant
qualitative factors that, in management’s judgment, affect the collectibility of
the portfolio as of the evaluation date. These significant factors
may include changes in loan policies and procedures, changes in existing general
economic and business conditions affecting our primary lending areas and the
national economy and staff lending experience. The applied loss
factors are reevaluated quarterly to ensure their relevance in the current
economic environment. Further, we consider trends in the level of
classified assets and delinquencies in deriving the allowance for loan losses at
September 30, 2009.
We
identify loans that may need to be charged off as a loss by reviewing all
delinquent loans, classified loans and other loans that management may have
concerns about collectibility. For individually reviewed loans, the borrower’s
inability to make payments under the terms of the loan or a shortfall in
collateral value would result in our allocating a portion of the allowance to
the loan that was impaired.
The ratio
of net charge-offs to average loans outstanding was .31% and .91% for the years
ended September 30, 2009 and 2008, respectively. Had such ratios
considered net losses on foreclosed real estate, the ratio of the aggregate net
charge-offs on loans and net losses on foreclosed real estate to average loans
outstanding would have been .77% and 1.04%, respectively. The
aggregate loss ratio was higher in 2008 due to net charge-offs and losses
incurred on certain home builders. Our construction loan portfolio
has declined 23.5%, to $69.2 million at September 30, 2009, compared to $90.5
million at September 30, 2008. Foreclosed real estate is
recorded at fair value as of the date of foreclosure less estimated selling
costs. Loss on foreclosed real estate is the result of declining
real estate values.
The Bank
originates single-family loans with high loan to value ratios exceeding 90
percent. At September 30, 2009 and 2008 these loans amounted to $4.9
million and $6.3 million, respectively. These loans are reviewed
quarterly by management to determine whether any probable losses exist, if any,
as a result of declines in collateral value.
There
were no changes in our nonaccrual or charge-off policies during
2009. Loans are generally placed on nonaccrual status when they
become 90 days delinquent, at which time the accrual of interest ceases and the
allowance for any uncollectible accrued interest is established and charged
against operations. Typically, payments received on a nonaccrual loan are
applied to the outstanding principal and interest as determined at the time of
collection of the loan. Accrual of interest is resumed on previously
classified nonaccrual loans, when there is no longer any reasonable doubt as to
the timely collection of interest. We do not presently originate any
loans with terms that allow for minimum payments less than the interest accrued
on the loan.
The
Office of Thrift Supervision, as an integral part of its examination process,
periodically reviews our allowance for loan losses. The OTS may
require us to make additional provisions for loan losses based on judgments
different from ours.
At
September 30, 2009, our allowance for loan losses represented 1.13% of total
gross loans and 130.28% of nonperforming loans. Nonperforming loans
totaled $2.7 million at September 30, 2009 as compared to $8.2 million at
September 30, 2008. The allowance for loan losses increased $904,000
from September 30, 2008 to September 30, 2009 due to a provision for loan losses
of $1.6 million, an allowance acquired by acquisition of $252,000 and recoveries
totaling $18,000, partially offset by charge-offs of loans totaling
$935,000. There was no material change in our loss factors used to
calculate the allowance from September 30, 2008 to September 30,
2009.
At
September 30, 2008, our allowance for loan losses represented 0.94% of total
gross loans and 32.04% of nonperforming loans. The allowance for loan losses
decreased $378,000 from September 30, 2007 to September 30, 2008 due to a
provision for loan losses of $1.9 million and recoveries totaling $137,000,
partially offset by charge-offs of loans totaling $2.4 million. There was no
material change in our loss factors used to calculate the allowance from
September 30, 2007 to September 30, 2008.
44
The
following table sets forth the breakdown of the allowance for loan losses by
loan category at the dates indicated. Management believes that the allowance can
be allocated by category only on an approximate basis. The allocation of the
allowance to each category is not necessarily indicative of future losses and
does not restrict the use of the allowance to absorb losses in any
category.
45
|
At September 30,
|
||||||||||||||||
|
2009
|
2008
|
|||||||||||||||
|
Amount
|
Percent of
Loans in Each
Category to Total
Gross Loans
|
Amount
|
Percent of
Loans in Each
Category to Total
Gross Loans
|
|||||||||||||
|
(Dollars in thousands)
|
||||||||||||||||
|
Real
estate – mortgage:
|
||||||||||||||||
|
Single-family,
1-4 units
|
$ | 751 | 17.44 | % | $ | 143 | 14.62 | % | ||||||||
|
Multi-family,
5 or more units
|
199 | 9.32 | 84 | 6.23 | ||||||||||||
|
Real
estate construction loans
|
338 | 22.09 | 1,185 | 32.47 | ||||||||||||
|
Commercial
real estate loans
|
1,954 | 39.17 | 992 | 36.73 | ||||||||||||
|
Commercial
business loans
|
273 | 7.18 | 218 | 6.39 | ||||||||||||
|
Consumer
loans
|
22 | 4.80 | 11 | 3.56 | ||||||||||||
|
Total
allowance for loan losses
|
$ | 3,537 | 100.00 | % | $ | 2,633 | 100.00 | % | ||||||||
|
At September 30,
|
||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
Amount
|
Percent of
Loans in Each
Category to Total
Gross Loans
|
Amount
|
Percent of
Loans in Each
Category to Total
Gross Loans
|
Amount
|
Percent of
Loans in Each
Category to Total
Gross Loans
|
|||||||||||||||||||
|
(Dollars in thousands)
|
||||||||||||||||||||||||
|
Real
estate – mortgage:
|
||||||||||||||||||||||||
|
Single-family,
1-4 units
|
$ | 210 | 15.64 | % | $ | 200 | 18.48 | % | $ | 268 | 20.71 | % | ||||||||||||
|
Multi-family,
5 or more units
|
75 | 4.57 | 61 | 4.52 | 102 | 8.20 | ||||||||||||||||||
|
Real
estate construction loans
|
1,941 | 47.12 | 787 | 43.25 | 565 | 42.01 | ||||||||||||||||||
|
Commercial
real estate loans
|
562 | 21.44 | 781 | 23.13 | 672 | 19.74 | ||||||||||||||||||
|
Commercial
business loans
|
211 | 6.72 | 126 | 4.89 | 65 | 2.83 | ||||||||||||||||||
|
Consumer
loans
|
12 | 4.51 | 189 | 5.73 | 90 | 6.51 | ||||||||||||||||||
|
Total
allowance for loan losses
|
$ | 3,011 | 100.00 | % | $ | 2,144 | 100.00 | % | $ | 1,762 | 100.00 | % | ||||||||||||
46
Although
we believe that we use the best information available to establish the allowance
for loan losses, future adjustments to the allowance for loan losses may be
necessary and our results of operations could be adversely affected if
circumstances differ substantially from the assumptions used in making the
determinations. Furthermore, while we believe we have established our allowance
for loan losses in conformity with U.S. generally accepted accounting
principles, there can be no assurance that regulators, in reviewing our loan
portfolio, will not request us to increase our allowance for loan losses. In
addition, because future events affecting borrowers and collateral cannot be
predicted with certainty, there can be no assurance that increases will not be
necessary should the quality of any loans deteriorate as a result of the factors
discussed above. Any material increase in the allowance for loan losses may
adversely affect our financial condition and results of operations.
Analysis of Loan
Loss Experience. The following table sets forth an analysis of the Bank’s
allowance for loan losses for the years indicated. Where specific loan loss
allowances have been established, any difference between the loss allowance and
the amount of loss realized has been charged or credited to income.
|
Years Ended September 30,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
(Dollars in thousands)
|
||||||||||||||||||||
|
Balance
at beginning of year
|
$ | 2,633 | $ | 3,011 | $ | 2,144 | $ | 1,762 | $ | 2,024 | ||||||||||
|
Loans
charged-off:
|
||||||||||||||||||||
|
Single-family
1-4 units
|
(524 | ) | (438 | ) | (82 | ) | (261 | ) | (482 | ) | ||||||||||
|
Multi-family
5 or more units
|
― | ) | (24 | ) | ― | (113 | ) | ― | ||||||||||||
|
Real
estate construction loans
|
(333 | ) | (1,365 | ) | (140 | ) | (78 | ) | (197 | ) | ||||||||||
|
Commercial
real estate
|
― | (258 | ) | ― | ― | ― | ||||||||||||||
|
Commercial
business loans
|
(69 | ) | (307 | ) | (35 | ) | ― | ― | ||||||||||||
|
Consumer
loans
|
(9 | ) | (4 | ) | (10 | ) | (20 | ) | (16 | ) | ||||||||||
|
Total
charge-offs
|
(935 | ) | (2,396 | ) | (267 | ) | (472 | ) | (695 | ) | ||||||||||
|
Recoveries:
|
||||||||||||||||||||
|
Commercial
business loans
|
— | 12 | — | — | — | |||||||||||||||
|
Single-family
1-4 units
|
11 | 104 | 511 | ― | 1 | |||||||||||||||
|
Multi-family
5 or more units
|
1 | ― | 18 | ― | ― | |||||||||||||||
|
Real
estate construction
|
4 | 21 | ― | 1 | ― | |||||||||||||||
|
Commercial
real estate
|
1 | ― | ― | ― | ― | |||||||||||||||
|
Consumer
loans
|
1 | ― | 3 | 1 | 2 | |||||||||||||||
|
Total
recoveries
|
18 | 137 | 532 | 2 | 3 | |||||||||||||||
|
Net
loans charged-off
|
$ | (917 | ) | $ | (2,259 | ) | $ | 265 | $ | (470 | ) | $ | (692 | ) | ||||||
|
Allowance
acquired by acquisition
|
252 | — | — | — | — | |||||||||||||||
|
Provision
for loan losses
|
1,569 | 1,881 | 602 | 852 | 430 | |||||||||||||||
|
Balance
at end of year
|
$ | 3,537 | $ | 2,633 | $ | 3,011 | $ | 2,144 | $ | 1,762 | ||||||||||
|
Ratio
of allowance for losses to gross loans receivable
|
1.13 | % | 0.94 | % | 1.13 | % | 0.93 | % | 0.93 | % | ||||||||||
|
Ratio
of net loan charge-offs (recoveries) to average loans outstanding during
the year
|
0.31 | % | 0.91 | % | (0.12 | )% | 0.25 | % | 0.40 | % | ||||||||||
Interest Rate
Risk Management. We manage the interest rate sensitivity of our
interest-bearing liabilities and interest-earning assets in an effort to
minimize the adverse effects of changes in the interest rate environment.
Deposit accounts typically react more quickly to changes in market interest
rates than mortgage loans because of the shorter maturities of deposits. As a
result, sharp increases in interest rates may adversely affect our earnings
while decreases in interest rates may beneficially affect our earnings. To
reduce the potential volatility of our earnings, we have sought to provide a
better match between the interest rate sensitivity of our assets and
liabilities. In particular, the strategies utilized by the Bank are intended to
stabilize net interest income for the long term by protecting its interest rate
spread against increases in interest rates. Such strategies include the
origination for portfolio of one-year, adjustable-rate mortgage loans secured by
one- to four-family residential real estate and the origination of other loans
with greater interest rate sensitivities than long-term, fixed-rate residential
mortgage loans. Asset/liability management in the form of structuring the
maturity or repricing of cash instruments provides greater flexibility to adjust
exposure to interest rates. During periods of high interest rates, management
believes it is prudent to offer competitive rates on short-term deposits and
less competitive rates for long-term liabilities. This posture allows the Bank
to benefit quickly from declines in interest rates. Likewise, offering more
competitive rates on long-term deposits during the low interest rate periods
allows the Bank to extend the repricing and/or maturity of its liabilities thus
reducing its exposure to rising interest rates. We currently do not participate
in hedging programs, interest rate swaps or other activities involving the use
of derivative financial instruments.
47
We have
an Asset/Liability Management (“ALCO”) Committee, which includes members of
management, to communicate, coordinate and control all aspects involving
asset/liability management. The committee establishes and monitors the volume,
maturities, pricing and mix of assets and funding sources with the objective of
managing assets and funding sources to provide results that are consistent with
liquidity, growth, risk limits and profitability goals.
Net Portfolio
Value Simulation Analysis. We use an interest rate sensitivity analysis
prepared by the OTS to review our level of interest rate risk. This analysis
measures interest rate risk by computing changes in net portfolio value of our
cash flows from assets, liabilities and off-balance sheet items in the event of
a range of assumed changes in market interest rates. Net portfolio value
represents the market value of portfolio equity and is equal to the market value
of assets minus the market value of liabilities, with adjustments made for
off-balance sheet items. This analysis assesses the risk of loss in market risk
sensitive instruments in the event of a sudden and sustained 50 to 300 basis
point increase or 50 to 100 basis point decrease in market interest rates with
no effect given to any steps that we might take to counter the effect of that
interest rate movement. We measure interest rate risk by modeling the changes in
net portfolio value over a variety of interest rate scenarios. The following
table, which is based on information that we provide to the OTS, presents the
change in our net portfolio value at September 30, 2009 that would occur in the
event of an immediate change in interest rates based on OTS assumptions, with no
effect given to any steps that we might take to counteract that
change.
|
Change
in Interest Rates
|
Estimated Net Portfolio Value
|
Net Portfolio Value as a
Percentage of Portfolio
Value of Assets
|
|||||||||||||||||||||
|
(In Basis Points)
|
Amount
|
Change
|
% Change
|
NPV Ratio
|
BP Change
|
||||||||||||||||||
|
(Dollars in thousands)
|
|||||||||||||||||||||||
| +300 | $ | 52,561 | $ | (3,171 | ) |
(6
|
)%
|
13.07
|
%
|
(54
|
)%
|
||||||||||||
| +200 | 53,926 | (1,806 | ) |
(3
|
)
|
13.32
|
|
(29
|
)
|
||||||||||||||
| +100 | 54,987 | (745 | ) |
(1
|
)
|
13.50
|
(11
|
)
|
|||||||||||||||
| +50 | 55,342 | (390 | ) |
(1
|
)
|
13.55
|
(6
|
)
|
|||||||||||||||
| 0 | 55,732 | — |
—
|
13.61
|
—
|
||||||||||||||||||
| (50 | ) | 55,912 | 180 |
—
|
13.62
|
1
|
|||||||||||||||||
| (100 | ) | 55,925 | 193 |
—
|
13.60
|
(1
|
)
|
||||||||||||||||
The OTS uses certain assumptions in
assessing the interest rate risk of savings associations. These assumptions
relate to interest rates, loan prepayment rates, deposit decay rates and the
market values of certain assets under differing interest rate scenarios, among
others. As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable-rate mortgage loans, have
features which restrict changes in interest rates on a short-term basis and over
the life of the asset. Further, in the event of a change in interest rates,
expected rates of prepayments on loans and early withdrawals from certificates
could deviate significantly from those assumed in calculating the
table.
Liquidity
Management. Liquidity is the ability to meet current and future financial
obligations of a short-term nature. Our primary sources of funds consist of
deposit inflows, loan repayments, maturities and sales of securities and
borrowings from the Federal Home Loan Bank of Des Moines. While maturities and
scheduled amortization of loans and securities are predictable sources of funds,
deposit flows and loan prepayments are greatly influenced by general interest
rates, economic conditions and competition.
48
We
regularly adjust our investments in liquid assets based upon our assessment of
expected loan demand, expected deposit flows, yields available on
interest-earning deposits and securities and the objectives of our
asset/liability management policy.
Our most
liquid assets are cash and cash equivalents. The levels of these assets depend
on our operating, financing, lending and investing activities during any given
period. At September 30, 2009, cash and cash equivalents amounted to $26.5
million. Securities classified as available for sale, which provide additional
sources of liquidity, totaled $20.8 million at September 30, 2009. In addition,
at September 30, 2009, we had the ability to borrow an additional amount of
approximately $13.2 million from the Federal Home Loan Bank of Des Moines, in
the form of available overnight lines of credit. On that date, we had $8.0
million in overnight advances outstanding.
At
September 30, 2009, we had $27.3 million in loan commitments outstanding, which
included $7.0 million in undisbursed loans and $12.3 million in unused lines of
credit. Certificates of deposit due within one year of September 30, 2009
totaled $108.4 million, or 79.2% of certificates of deposit. We believe the
large percentage of certificates of deposit that mature within one year reflects
customers’ hesitancy to invest their funds for long periods in the current
interest rate environment. If these maturing deposits do not remain
with us, we will be required to seek other sources of funds, including other
certificates of deposit and borrowings. Depending on market conditions, we may
be required to pay higher rates on such deposits or other borrowings than we
currently pay on the certificates of deposit due on or before September 30,
2010. We believe, however, based on past experience that a significant portion
of our certificates of deposit will remain with us. We have the ability to
attract and retain deposits by adjusting the interest rates
offered.
Our primary investing activities are
the origination and purchase of loans and the purchase of securities. Our
primary financing activities consist of activity in deposit accounts and Federal
Home Loan Bank advances. Deposit flows are affected by the overall level of
interest rates, the interest rates and products offered by us and our local
competitors and other factors. We generally manage the pricing of our deposits
to be competitive and to increase core deposit relationships. We offer
promotional rates on certain deposit products to attract deposits.
49
The following table presents our
primary cash flows from investing and financing activities during the years
indicated.
|
Years Ended September 30,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(In thousands)
|
||||||||||||
|
Investing
activities:
|
||||||||||||
|
Net
change in loans receivable
|
$ | (30,729 | ) | $ | (32,978 | ) | $ | (35,402 | ) | |||
|
Purchases
of securities (1)
|
(255 | ) | (448 | ) | (16,946 | ) | ||||||
|
Proceeds
from calls, maturities and principal repayments of securities
(1)
|
9,555 | 10,583 | 10,579 | |||||||||
|
Proceeds
from sales of securities (1)
|
11,284 | 17,743 | — | |||||||||
|
Financing
activities:
|
||||||||||||
|
Increase
(decrease) in deposits
|
22,475 | (32,542 | ) | 53,835 | ||||||||
|
Increase
(decrease) in Federal Home Loan Bank advances
|
(100 | ) | 42,810 | (7,633 | ) | |||||||
|
Repurchase
of common stock
|
(2,468 | ) | (8,633 | ) | (1,400 | ) | ||||||
(1)
Includes mortgage-backed securities.
Capital
Management. We are subject to
various regulatory capital requirements administered by the OTS, 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, the Bank exceeded all of its regulatory
capital requirements. The Bank is considered “well capitalized” under regulatory
guidelines.
Off-Balance Sheet
Arrangements. In the normal course
of operations, we engage in a variety of financial transactions that, in
accordance with U.S. generally accepted accounting principles, are not recorded
in our consolidated financial statements. These transactions involve, to varying
degrees, elements of credit, interest rate and liquidity risk. Such transactions
are used primarily to manage customers’ requests for funding and take the form
of loan commitments and lines of credit. For information about our loan
commitments and unused lines of credit, see note 15 of the notes to consolidated
financial statements. We currently have no plans to engage in hedging activities
in the future.
For the year ended September 30, 2009,
we engaged in no off-balance sheet transactions reasonably likely to have a
material effect on our financial condition, results of operations or cash flows.
Impact
of Recent Accounting Pronouncements
The
impact of recent accounting pronouncements is discussed in note 1 of the notes
to consolidated financial statements included herewith.
Item
7A. Quantitative and Qualitative Disclosures About Market
Risk
This item is not applicable as the
Company is a smaller reporting company.
Item
8. Financial Statements and Supplementary
Data
The information required by this item
is included herein beginning on page F-1.
Item 9. Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
50
Item
9A(T). Controls and Procedures
|
|
(a)
|
Disclosure
Controls and Procedures
|
The
Company’s management, including the Company’s principal executive officer and
principal financial officer, have evaluated the effectiveness of the Company’s
“disclosure controls and procedures,” as such term is defined in Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended, (the
“Exchange Act”). Based upon their evaluation, the principal executive
officer and principal financial officer concluded that, as of the end of the
period covered by this report, the Company’s disclosure controls and procedures
were effective for the purpose of ensuring that the information required to be
disclosed in the reports that the Company files or submits under the Exchange
Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required
disclosure.
|
|
(b)
|
Internal
Control Over Financial Reporting
|
|
|
MANAGEMENT’S
ANNUAL REPORT ON INTERNAL CONTROL
OVER
FINANCIAL REPORTING
|
Management of Liberty Bancorp, Inc.
(the “Company”) is responsible for the preparation, integrity, and fair
presentation of the consolidated financial statements included in this annual
report. The Company’s consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America and, as such, include some amounts that are based on the best estimates
and judgments of management.
The Company’s management is responsible
for establishing and maintaining adequate internal control over financial
reporting. This internal control system is designed to provide
reasonable assurance to management and the Board of Directors regarding the
reliability of the Company’s financial reporting and the preparation and
presentation of financial statements for external reporting purposes in
conformity with accounting principles generally accepted in the United States of
America, as well as to safeguard assets from unauthorized use or
disposition. The system of internal control over financial reporting
is evaluated for effectiveness by management and tested for reliability through
a program of internal audit with actions taken to correct potential deficiencies
as they are identified. Because of inherent limitations in any
internal control system, no matter how well designed, misstatements due to error
or fraud may occur and not be detected, including the possibility of the
circumvention or overriding of controls. Accordingly, even an
effective internal control system can provide only reasonable assurance with
respect to financial statement preparation. Further, because of
changes in conditions, internal control effectiveness may vary over
time.
Management assessed the effectiveness
of the Company’s internal control over financial reporting as of September 30,
2009 based upon criteria set forth in Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on this assessment and on the forgoing criteria,
management has concluded that, as of September 30, 2009, the Company’s internal
control over financial reporting is effective.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.
|
/s/ Brent M. Giles
|
/s/ Marc J. Weishaar
|
|
|
Brent
M. Giles
|
Marc
J. Weishaar
|
|
|
President
and Chief Executive Officer
|
Chief
Financial Officer
|
51
|
|
(c)
|
Changes
to Internal Control Over Financial
Reporting
|
There
were no changes in the Company’s internal control over financial reporting
during the three months ended September 30, 2009 that have materially affected,
or are reasonable likely to materially affect, the Company’s internal control
over financial reporting.
Item 9B. Other
Information
None.
PART
III
Item 10. Directors,
Executive Officers and Corporate Governance
Directors
The
information relating to the directors of the Company is incorporated herein by
reference to the section captioned “Proposal I — Election of
Directors” in the Proxy Statement for the Company’s 2010 Annual Meeting
of Stockholders (the “Proxy Statement”).
Executive
Officers
The
information regarding the Company’s executive officers is incorporated herein by
reference to Part I, Item 1, “Business — Executive
Officers” of this Annual Report on Form 10-K.
Corporate
Governance
Information
regarding the Company’s Audit Committee and Audit Committee financial expert is
incorporated herein by reference to the section captioned “Corporate Governance—Committees of
the Board of Directors” in the Proxy Statement.
Compliance
with Section 16(a) of the Exchange Act
Information regarding compliance with
Section 16(a) of the Exchange Act, the cover page to this Annual Report on Form
10-K and the section captioned “Other Information Relating to
Directors and Executive Officers—Section 16(a) Beneficial Ownership Reporting
Compliance” in the Proxy Statement are incorporated herein by
reference.
Code
of Ethics
The Company has adopted a Code of
Ethics and Business Conduct that is designed to ensure that the Company’s
directors, executive officers and employees meet the highest standards of
ethical conduct. See Exhibit 14.0 to this Annual Report on Form
10-K.
Item
11. Executive Compensation
The information contained under the
sections captioned “Executive
Compensation” and “Director Compensation” in
the Proxy Statement is incorporated herein by reference.
Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
|
(a)
|
Security
Ownership of Certain Beneficial
Owners
|
The
information required by this item is incorporated herein by reference to the
section captioned “Stock
Ownership” in the Proxy Statement.
52
|
(b)
|
Security
Ownership of Management
|
The
information required by this item is incorporated herein by reference to the
section captioned “Stock
Ownership” in the Proxy Statement.
|
(c)
|
Changes
In Control
|
Management
of the Company is not aware of any arrangements, including any pledge by any
person of securities of the Company, the operation of which may at a subsequent
date result in a change in control of the Company.
|
(d)
|
Equity
Compensation Plan Information
|
The
following table sets forth information as of September 30, 2009 about Company
common stock that may be issued under the Liberty Bancorp, Inc. 2007 Equity
Incentive Plan.
|
Plan Category
|
(a)
Number of securities
to be issued upon
the exercise of
outstanding options,
warrants and rights
|
(b)
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
(c)
Number of securities
remaining available
for future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
|
||||||||||||
|
Equity
compensation plans approved by security holders
|
208,550 | $11.05 | 16,290 | ||||||||||||
|
Equity
compensation plans not approved by security holders
|
— | — | |||||||||||||
|
Total
|
208,550 | $11.05 | 16,290 | ||||||||||||
Item
13. Certain
Relationships and Related Transactions, and Director
Independence
Certain
Relationships and Related Transactions
The
information relating to certain relationships and related transactions is
incorporated herein by reference to the section captioned “Other Information Relating to
Directors and Executive Officers—Transactions with Related Persons” in
the Proxy Statement.
Corporate
Governance
The
information regarding director independence is incorporated herein by reference
to the section captioned “Proposal 1—Election of Directors”
in the Proxy Statement.
Item
14. Principal
Accountant Fees and Services
The
information required by this item is incorporated herein by reference to the
section captioned “Independent
Registered Public Accounting Firm—Fees Paid to Independent Registered Public
Accounting Firm” in the Proxy Statement.
53
PART
IV
Item
15. Exhibits
and Financial Statement Schedules
(a)(1) The
financial statements filed as a part of this report are as
follows:
Report of
Independent Registered Public Accounting Firm
Consolidated
Balance Sheets as of September 30, 2009 and 2008
Consolidated
Statements of Earnings for the Years Ended September 30, 2009 and
2008
Consolidated
Statements of Comprehensive Earnings for the Years Ended September 30, 2009 and
2008
Consolidated
Statements of Stockholders’ Equity for the Years Ended September 30, 2009 and
2008
Consolidated
Statements of Cash Flows for the Years Ended September 30, 2009 and
2008
Notes to
Consolidated Financial Statements
|
(2)
|
All
schedules are omitted as the required information either is not applicable
or is included in the financial statements or related
notes.
|
|
(3)
|
Exhibits
|
Description
|
||
|
3.1
|
Articles
of Incorporation of Liberty Bancorp, Inc. (1)
|
|||
|
3.2
|
Amended
and Restated Bylaws of Liberty Bancorp, Inc. (2)
|
|||
|
4
|
Specimen
Stock Certificate of Liberty Bancorp, Inc. (1)
|
|||
|
10.1*
|
Amended
and Restated Liberty Bancorp, Inc./BankLiberty Three-Year Employment
Agreement with Brent Giles, dated December 17, 2008 (3)
|
|||
|
10.2*
|
Amended
and Restated BankLiberty Two-Year Change in Control Agreement with Mark E.
Hecker, dated December 17, 2008 (3)
|
|||
|
10.3*
|
Amended
and Restated BankLiberty Two-Year Change in Control Agreement with Marc J.
Weishaar, dated December 17, 2008 (3)
|
|||
|
10.4*
|
BankLiberty
Directors’ Retirement Plan (1)
|
|||
|
10.5*
|
Liberty
Bancorp, Inc. 2003 Incentive Equity and Deferred Compensation Plan, as
Amended and Restated (4)
|
|||
|
10.6*
|
Liberty
Bancorp, Inc. 2007 Equity Incentive Plan (5)
|
|||
|
14
|
Code
of Ethics (6)
|
|||
|
21
|
Subsidiaries
|
|||
|
23
|
Consent
of Michael Trokey & Company, P.C.
|
|||
|
31.1
|
Rule
13a-14 Certification of Chief Executive Officer
|
|||
|
31.2
|
Rule
13a-14 Certification of Chief Financial Officer
|
|||
|
32
|
Section
1350
Certifications
|
|||
|
*
|
Management
contract or compensatory plan, contract or
arrangement.
|
|
(1)
|
Incorporated
by reference to Company’s Registration Statement on Form S-1, as amended
(File No. 333-133849), initially filed on May 5,
2006.
|
|
(2)
|
Incorporated
by reference to the Company’s Form 8-K filed on November 28,
2007.
|
|
(3)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended December 31, 2008, filed on February 17,
2009.
|
|
(4)
|
Incorporated
by reference to the Company’s Form S-8 filed on August 14,
2006.
|
|
(5)
|
Incorporated
by reference to the Company’s Form S-8 filed on February 8,
2007.
|
|
(6)
|
Incorporated
by reference to the Company’s 2006 Annual Report on Form 10-K, as amended,
initially filed on December 26,
2006.
|
54
MICHAEL
TROKEY & COMPANY, P.C.
CERTIFIED
PUBLIC ACCOUNTANTS
10411
CLAYTON ROAD
ST.
LOUIS, MISSOURI 63131
Report
of Independent Registered Public Accounting Firm
Audit
Committee, Board of Directors and Stockholders
Liberty
Bancorp, Inc.
Liberty,
Missouri
We have
audited the accompanying consolidated balance sheets of Liberty Bancorp, Inc.
and subsidiary (“the Company”) as of September 30, 2009 and 2008 and the related
consolidated statements of earnings, comprehensive earnings, stockholders'
equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Liberty Bancorp, Inc. and
subsidiary as of September 30, 2009 and 2008, and the results of their
operations and their cash flows for the years then ended, in conformity with
U.S. generally accepted accounting principles.
We were
not engaged to examine management’s assertion about the effectiveness of the
Company’s internal control over financial reporting as of September 30, 2009,
included in the accompanying management’s annual report on internal control over
financial reporting and, accordingly, we do not express an opinion
thereon.
/s/
Michael Trokey & Company, P.C.
St.
Louis, Missouri
December
21, 2009
F-1
LIBERTY
BANCORP, INC.
Consolidated
Balance Sheets
September
30, 2009 and 2008
|
|
2009
|
2008
|
||||||
|
Assets
|
||||||||
|
Cash
and due from banks
|
$ | 26,512,327 | $ | 5,274,603 | ||||
|
Federal
funds sold
|
— | 2,810,000 | ||||||
|
Total
cash and cash equivalents
|
26,512,327 | 8,084,603 | ||||||
|
Securities
available for sale - at market value (amortized cost of $19,988,207 and
$25,681,057, respectively)
|
20,764,176 | 26,053,420 | ||||||
|
Mortgage-backed
securities – available for sale, at market value (amortized cost of
$8,822,806 and $14,007,011, respectively)
|
8,956,810 | 13,989,151 | ||||||
|
Stock
in Federal Home Loan Bank (“FHLB”) of Des Moines
|
3,910,100 | 3,576,300 | ||||||
|
Loans
receivable, net of allowance for loan losses of $3,536,837 and $2,633,298,
respectively
|
302,246,097 | 256,713,257 | ||||||
|
Loans
held for sale
|
459,270 | 877,246 | ||||||
|
Premises
and equipment, net
|
12,702,627 | 9,790,337 | ||||||
|
Bank-owned
life insurance (“BOLI”)
|
8,975,562 | 8,538,528 | ||||||
|
Foreclosed
real estate, net
|
2,822,423 | 4,936,355 | ||||||
|
Accrued
interest receivable
|
1,557,970 | 1,640,478 | ||||||
|
Goodwill
|
1,191,603 | — | ||||||
|
Core
deposit intangible, net
|
865,333 | — | ||||||
|
Deferred
tax asset
|
738,360 | 1,279,570 | ||||||
|
Other
assets
|
695,180 | 705,649 | ||||||
|
Total
assets
|
$ | 392,397,838 | $ | 336,184,894 | ||||
|
Liabilities
and Stockholders' Equity
|
||||||||
|
Deposits
|
$ | 276,203,274 | $ | 219,763,837 | ||||
|
Accrued
interest payable on deposits
|
307,911 | 297,656 | ||||||
|
Advances
from FHLB of Des Moines
|
69,140,862 | 69,240,870 | ||||||
|
Securities
sold under agreement to repurchase
|
547,019 | 812,500 | ||||||
|
Advances
from borrowers for taxes and insurance
|
1,079,264 | 864,268 | ||||||
|
Other
liabilities
|
1,334,817 | 1,196,659 | ||||||
|
Total
liabilities
|
348,613,147 | 292,175,790 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Stockholders'
equity:
|
||||||||
|
Preferred
stock, $0.01 par value; 1,000,000 shares authorized; shares
issued and outstanding - none
|
— | — | ||||||
|
Common
stock, $0.01 par value; 20,000,000 shares authorized;4,761,712 shares
issued
|
47,617 | 47,617 | ||||||
|
Treasury
stock, at cost, 1,139,837 and 825,002 shares at September 30,
2009 and 2008, respectively
|
(11,100,506 | ) | (8,632,753 | ) | ||||
|
Additional
paid-in capital
|
32,600,040 | 32,320,258 | ||||||
|
Common
stock acquired by ESOP
|
(268,805 | ) | (474,634 | ) | ||||
|
Accumulated
other comprehensive earnings, net
|
640,636 | 292,484 | ||||||
|
Retained
earnings - substantially restricted
|
21,865,709 | 20,456,132 | ||||||
|
Total
stockholders' equity
|
43,784,691 | 44,009,104 | ||||||
|
Total
liabilities and stockholders' equity
|
$ | 392,397,838 | $ | 336,184,894 | ||||
See
accompanying notes to consolidated financial statements.
F-2
LIBERTY
BANCORP, INC.
Consolidated
Statements of Earnings
Years
Ended September 30, 2009 and 2008
|
2009
|
2008
|
|||||||
|
Interest
income:
|
||||||||
|
Loans
receivable
|
$ | 18,255,137 | $ | 17,355,934 | ||||
|
Mortgage-backed
securities
|
497,239 | 705,131 | ||||||
|
Securities
- taxable
|
687,244 | 1,416,150 | ||||||
|
Securities
- non-taxable
|
515,185 | 536,110 | ||||||
|
Other
interest - earning assets
|
3,871 | 143,261 | ||||||
|
Total
interest income
|
19,958,676 | 20,156,586 | ||||||
|
Interest
expense:
|
||||||||
|
Deposits
|
5,109,490 | 7,321,062 | ||||||
|
Securities
sold under agreement to repurchase
|
24,868 | 57,834 | ||||||
|
Advances
from FHLB of Des Moines
|
1,484,145 | 2,005,534 | ||||||
|
Total
interest expense
|
6,618,503 | 9,384,430 | ||||||
|
Net
interest income
|
13,340,173 | 10,772,156 | ||||||
|
Provision
for loan losses
|
1,568,912 | 1,881,175 | ||||||
|
Net
interest income after provision for loan losses
|
11,771,261 | 8,890,981 | ||||||
|
Noninterest
income:
|
||||||||
|
Loan
service charges
|
87,358 | 63,632 | ||||||
|
Gain
on sale of loans
|
437,059 | 318,634 | ||||||
|
Gain
on sale of securities available for sale
|
54,293 | 135,303 | ||||||
|
Gain
on sale of MBSs available for sale
|
51,620 | — | ||||||
|
Other-than-temporary
impairment (“OTTI”) loss on equity security
|
(113,126 | ) | — | |||||
|
Change
in cash surrender value of BOLI
|
437,034 | 437,336 | ||||||
|
Deposit
account service charges
|
1,296,688 | 1,168,913 | ||||||
|
Total
noninterest income
|
2,250,926 | 2,123,818 | ||||||
|
Noninterest
expense:
|
||||||||
|
Compensation
and benefits
|
5,101,735 | 4,445,981 | ||||||
|
Occupancy
expense
|
910,844 | 673,323 | ||||||
|
Equipment
and data processing expense
|
1,223,851 | 930,917 | ||||||
|
Operations
from foreclosed real estate, net
|
1,540,466 | 361,994 | ||||||
|
FDIC
premium expense
|
550,000 | 134,795 | ||||||
|
Professional
and regulatory services
|
568,112 | 434,083 | ||||||
|
Advertising
|
313,555 | 250,486 | ||||||
|
Correspondent
banking charges
|
125,640 | 233,664 | ||||||
|
Supplies
|
183,323 | 136,320 | ||||||
|
Amortization
of core deposit intangible
|
190,667 | — | ||||||
|
Other
|
867,297 | 785,708 | ||||||
|
Total
noninterest expense
|
11,575,490 | 8,387,271 | ||||||
|
Earnings
before income taxes
|
2,446,697 | 2,627,528 | ||||||
|
Income
taxes:
|
||||||||
|
Current
|
741,000 | 639,000 | ||||||
|
Deferred
|
(70,000 | ) | 67,000 | |||||
|
Total
income taxes
|
671,000 | 706,000 | ||||||
|
Net
earnings
|
$ | 1,775,697 | $ | 1,921,528 | ||||
|
Basic
earnings per share
|
$ | 0.50 | $ | 0.48 | ||||
|
Diluted
earnings per share
|
$ | 0.49 | $ | 0.47 | ||||
See
accompanying notes to consolidated financial statements.
F-3
LIBERTY
BANCORP, INC.
Consolidated
Statements of Comprehensive Earnings
Years
Ended September 30, 2009 and 2008
|
2009
|
2008
|
|||||||
|
Net
earnings
|
$ | 1,775,697 | $ | 1,921,528 | ||||
|
Other
comprehensive earnings:
|
||||||||
|
Unrealized
gains on securities and mortgage-backed securities available for sale,
net:
|
||||||||
|
Reclassification
adjustment for gains included in earnings, net of tax of $(62,423) and
$(47,356), respectively
|
(43,490 | ) | (87,947 | ) | ||||
|
Reclassification
adjustment of OTTI loss, net of tax of $0
|
113,126 | — | ||||||
|
Unrealized
gains arising during the year, net of tax of $160,902 and $218,673,
respectively
|
290,374 | 406,107 | ||||||
|
Decrease
in unrealized gain on benefit plans, net of tax of $6,385 and $7,031,
respectively
|
(11,858 | ) | (13,057 | ) | ||||
|
Comprehensive
earnings
|
$ | 2,123,849 | $ | 2,226,631 | ||||
See
accompanying notes to consolidated financial statements.
F-4
LIBERTY
BANCORP, INC.
Consolidated
Statements of Stockholders’ Equity
Years
Ended September 30, 2009 and 2008
|
Common
|
Accumulated
|
|||||||||||||||||||||||||||
|
Additional
|
Stock
|
Other
|
Total
|
|||||||||||||||||||||||||
|
Common
|
Treasury
|
Paid-In
|
Acquired
|
Retained
|
Comprehensive
|
Stockholders'
|
||||||||||||||||||||||
|
Stock
|
Stock
|
Capital
|
by ESOP
|
Earnings
|
Earnings, Net
|
Equity
|
||||||||||||||||||||||
|
Balance
at September 30, 2007
|
$ | 47,612 | $ | - | $ | 31,923,289 | $ | (701,309 | ) | $ | 18,937,560 | $ | (12,619 | ) | $ | 50,194,533 | ||||||||||||
|
Shares
issued under stock-based incentive plan, 525 shares
|
5 | - | 4,342 | - | - | - | 4,347 | |||||||||||||||||||||
|
Treasury
stock, 825,002 shares
|
- | (8,632,753 | ) | - | - | - | - | (8,632,753 | ) | |||||||||||||||||||
|
Amortization
of ESOP award
|
- | - | 69,703 | 226,675 | - | - | 296,378 | |||||||||||||||||||||
|
Amortization
of stock awards
|
- | - | 246,588 | - | - | - | 246,588 | |||||||||||||||||||||
|
Amortization
of stock option grants
|
- | - | 75,347 | - | - | - | 75,347 | |||||||||||||||||||||
|
Unrealized
gain on securities available for sale, net
|
- | - | - | - | - | 318,160 | 318,160 | |||||||||||||||||||||
|
Decrease
in unrealized gain on benefit plans, net
|
- | - | - | - | - | (13,057 | ) | (13,057 | ) | |||||||||||||||||||
|
Other
contributed capital
|
- | - | 989 | - | - | - | 989 | |||||||||||||||||||||
|
Cash
dividends of $.10 per share
|
- | - | - | - | (402,956 | ) | - | (402,956 | ) | |||||||||||||||||||
|
Net
earnings
|
- | - | - | - | 1,921,528 | - | 1,921,528 | |||||||||||||||||||||
|
Balance
at September 30, 2008
|
$ | 47,617 | (8,632,753 | ) | 32,320,258 | (474,634 | ) | 20,456,132 | 292,484 | 44,009,104 | ||||||||||||||||||
|
Treasury
stock, 314,835 shares
|
- | (2,467,753 | ) | - | - | - | - | (2,467,753 | ) | |||||||||||||||||||
|
Amortization
of ESOP award
|
- | - | (16,790 | ) | 205,829 | - | - | 189,039 | ||||||||||||||||||||
|
Amortization
of stock awards
|
- | - | 249,977 | - | - | - | 249,977 | |||||||||||||||||||||
|
Amortization
of stock option grants
|
- | - | 46,595 | - | - | - | 46,595 | |||||||||||||||||||||
|
Unrealized
gain on securities available for sale, net
|
- | - | - | - | - | 360,010 | 360,010 | |||||||||||||||||||||
|
Decrease
in unrealized gain on benefit plans, net
|
- | - | - | - | - | (11,858 | ) | (11,858 | ) | |||||||||||||||||||
|
Cash
dividends of $.10 per share
|
- | - | - | - | (366,120 | ) | - | (366,120 | ) | |||||||||||||||||||
|
Net
earnings
|
- | - | - | - | 1,775,697 | - | 1,775,697 | |||||||||||||||||||||
|
Balance
at September 30, 2009
|
$ | 47,617 | $ | (11,100,506 | ) | $ | 32,600,040 | $ | (268,805 | ) | $ | 21,865,709 | $ | 640,636 | $ | 43,784,691 | ||||||||||||
See
accompanying notes to consolidated financial statements.
F-5
LIBERTY
BANCORP, INC.
Consolidated
Statements of Cash Flows
Years
Ended September 30, 2009 and 2008
|
2009
|
2008
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
earnings
|
$ | 1,775,697 | $ | 1,921,528 | ||||
|
Adjustments
to reconcile net earnings to net cash provided by (used for) operating
activities:
|
||||||||
|
Depreciation
expense
|
684,417 | 570,422 | ||||||
|
Amortization
of core deposit intangible
|
190,667 | — | ||||||
|
ESOP
expense
|
189,039 | 296,378 | ||||||
|
Incentive
Plan expense
|
296,572 | 321,935 | ||||||
|
Amortization
of premiums (discounts) on investments, net
|
(55,810 | ) | (21,141 | ) | ||||
|
Amortization
of premiums on loans
|
65,333 | — | ||||||
|
Amortization
of deferred loan fees, net
|
(91,555 | ) | (279,263 | ) | ||||
|
Provision
for loan losses
|
1,568,912 | 1,881,175 | ||||||
|
Loans
held for sale – originated
|
(35,482,786 | ) | (24,739,010 | ) | ||||
|
Loans
held for sale - proceeds from sale
|
36,337,821 | 24,899,484 | ||||||
|
Loss
on foreclosed real estate, net
|
1,341,181 | 310,572 | ||||||
|
Gain
on sale of securities available for sale
|
(54,293 | ) | (135,303 | ) | ||||
|
Gain
on sale of mortgage-backed securities available for sale
|
(51,620 | ) | — | |||||
|
Other-than-temporary
impairment loss on equity security
|
113,126 | — | ||||||
|
Gain
on sale of loans
|
(437,059 | ) | (318,634 | ) | ||||
|
Change
in cash surrender value of BOLI
|
(437,034 | ) | (437,336 | ) | ||||
|
Decrease
(increase) in:
|
||||||||
|
Accrued
interest receivable
|
293,371 | 415,336 | ||||||
|
Other
assets
|
400,415 | (490,826 | ) | |||||
|
Deferred
tax assets
|
(292,718 | ) | 67,000 | |||||
|
Decrease
in:
|
||||||||
|
Accrued
interest on deposits and other liabilities
|
(120,139 | ) | (559,222 | ) | ||||
|
Accrued
income taxes
|
— | (88,308 | ) | |||||
|
Net
cash provided by (used for) operating activities
|
6,233,537 | 3,614,787 | ||||||
|
Cash
flows from investing activities:
|
||||||||
|
Net
change in loans receivable
|
(30,729,060 | ) | (32,977,909 | ) | ||||
|
Securities
available for sale:
|
||||||||
|
Purchased
|
(254,698 | ) | (448,061 | ) | ||||
|
Proceeds
from sales
|
11,283,720 | 17,743,207 | ||||||
|
Proceeds
from maturity or call
|
4,105,000 | 4,935,000 | ||||||
|
Principal
collections
|
5,449,916 | 5,648,258 | ||||||
|
Purchase
of stock in FHLB of Des Moines
|
(678,000 | ) | (2,513,071 | ) | ||||
|
Redemption
of stock in FHLB of Des Moines
|
412,500 | 467,971 | ||||||
|
Proceeds
from the sale of foreclosed real estate, net
|
5,169,454 | 3,399,609 | ||||||
|
Purchase
of premises and equipment
|
(821,580 | ) | (1,615,913 | ) | ||||
|
Cash
paid in acquisition of KLT Bancshares, Inc., net
|
(1,164,119 | ) | — | |||||
|
Net
cash provided by (used for) investing activities
|
$ | (7,226,867 | ) | $ | (5,360,909 | ) | ||
(continued)
F-6
LIBERTY
BANCORP, INC.
Consolidated
Statements of Cash Flows
Years
Ended September 30, 2009 and 2008
(Continued)
|
2009
|
2008
|
|||||||
|
Cash
flows from financing activities:
|
||||||||
|
Net
increase (decrease) in deposits
|
$ | 22,475,316 | $ | (32,541,645 | ) | |||
|
Increase
(decrease) in advances from borrowers for taxes and
insurance
|
145,100 | (41,338 | ) | |||||
|
Proceeds
from advances from the FHLB
|
597,766,000 | 1,156,350,000 | ||||||
|
Repayment
of advances from the FHLB
|
(597,866,008 | ) | (1,113,539,524 | ) | ||||
|
Securities
sold under agreement to repurchase:
|
||||||||
|
Proceeds
|
10,145,371 | 10,662,300 | ||||||
|
Repayments
|
(10,410,852 | ) | (11,070,984 | ) | ||||
|
Proceeds
from exercise of stock options
|
— | 4,347 | ||||||
|
Repurchase
of common stock
|
(2,467,753 | ) | (8,632,753 | ) | ||||
|
Other
contributed capital
|
— | 989 | ||||||
|
Cash
dividends
|
(366,120 | ) | (402,956 | ) | ||||
|
Net
cash provided by (used for) financing activities
|
19,421,054 | 788,436 | ||||||
|
Net
increase (decrease) in cash and cash equivalents
|
18,427,724 | (957,686 | ) | |||||
|
Cash
and cash equivalents at beginning of year
|
8,084,603 | 9,042,289 | ||||||
|
Cash
and cash equivalents at end of year
|
$ | 26,512,327 | $ | 8,084,603 | ||||
|
Supplemental
disclosures of cash flow information:
|
||||||||
|
Cash
paid (received) during the year for:
|
||||||||
|
Interest
on deposits
|
$ | 5,315,069 | $ | 7,624,587 | ||||
|
Interest
on advances from FHLB of Des Moines
|
1,489,088 | 2,016,978 | ||||||
|
Interest
on securities sold under agreement to repurchase
|
24,868 | 57,939 | ||||||
|
Income
taxes
|
864,615 | 920,655 | ||||||
|
Real
estate acquired in settlement of loans
|
5,964,750 | 6,970,665 | ||||||
|
Loans
originated to finance the sale of foreclosed real estate
|
1,568,047 | — | ||||||
|
Net
cash paid in acquisition of KLT Bancshares, Inc.:
|
||||||||
|
Cash
paid to Farley State Bank shareholders
|
$ | (4,500,000 | ) | $ | — | |||
|
Acquisition
costs paid
|
(251,256 | ) | — | |||||
|
Total
cash payments
|
(4,751,256 | ) | — | |||||
|
Cash
and cash equivalents acquired
|
3,587,137 | — | ||||||
|
Net
cash paid in acquisition
|
$ | (1,164,119 | ) | $ | — | |||
See
accompanying notes to consolidated financial statements.
F-7
LIBERTY
BANCORP, INC.
Notes
to Consolidated Financial Statements
As
of September 30, 2009 and 2008 and
Years
Ended September 30, 2009 and 2008
|
(1)
|
Summary
of Significant Accounting Policies
|
Liberty
Bancorp, Inc. (the “Company” or “Liberty Bancorp”) was organized as a Missouri
corporation at the direction of BankLiberty, formerly “Liberty Savings Bank,
F.S.B.” (the “Bank” or “BankLiberty”), in February 2006 to become the holding
company for the Bank upon the completion of the “second-step” mutual-to-stock
conversion (the “Conversion”) of Liberty Savings Mutual Holding Company (the
“MHC”). The Conversion was completed on July 21, 2006. As
part of the Conversion, the MHC merged into the Bank, thereby ceasing to exist,
and Liberty Savings Bank, F.S.B. changed its name to “BankLiberty.” A
total of 2,807,383 shares of common stock were sold in the stock offering at the
price of $10.00 per share. In addition, a total of 1,952,754 shares
of common stock were issued to the minority shareholders of the former Liberty
Savings Bank, F.S.B. representing an exchange ratio of 3.5004 shares of Company
common stock for each share of Liberty Savings Bank, F.S.B. common
stock. Fractional shares in the aggregate, or 36 shares, were
redeemed for cash. Total shares outstanding after the stock offering
and the exchange totaled 4,760,137 shares. Net proceeds of $25.6
million were raised in the stock offering, excluding $1.2 million which was
loaned by the Company to a trust for the Employee Stock Ownership Plan (the
“ESOP”), enabling it to finance 153,263 shares of common stock in the offering
and exchange. Direct offering costs totaled approximately $1.3
million. In addition, as part of the Conversion and dissolution of
Liberty Savings Mutual Holding Company, the Bank received approximately $694,000
of cash previously held by the MHC.
Effective
for all interim and annual periods ending after September 15, 2009, the
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) became the source of authoritative U.S. generally accepted accounting
principles (“GAAP”) recognized by FASB to be applied to nongovernmental
entities. Rules and interpretive releases of the Securities and
Exchange Commission (“SEC”) under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants.
Subsequent
events have been evaluated through December 21, 2009, which is the date we filed
this Form 10-K with the Securities and Exchange Commission.
The
following comprise the significant accounting policies, which the Company and
Bank follow in preparing and presenting their consolidated financial
statements:
|
a.
|
The
consolidated financial statements include the accounts of the Company and
its wholly- owned subsidiary, BankLiberty. The Company’s principal
business is thebusiness of the Bank. All significant
intercompany accounts and transactions have been
eliminated.
|
|
b.
|
For
purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks and interest-bearing funds in other banks with original
maturities of three months or less. The Company maintains cash
in bank accounts which may exceed federally insured limits. The
Company does not believe it is exposed to any significant credit
risk. Interest-bearing funds in other banks were $16,820,427
and $1,129,990 at September 30, 2009 and 2008, respectively. A
restricted cash account of $560,510 related to clearing of checks was held
in a correspondent bank at September 30, 2009 and
2008.
|
F-8
LIBERTY
BANCORP, INC.
Notes
to Consolidated Financial Statements
|
c.
|
Securities
that the Company has the positive intent and ability to hold to maturity
are classified as held to maturity securities and reported at cost,
adjusted for amortization of premiums and accretion of discounts over the
life of the security using the interest method. Securities not
classified as held to maturity securities are classified as available for
sale securities and are reported at fair value, with unrealized gains and
losses excluded from net earnings and reported as a separate component of
stockholders’ equity. Unrealized gains on securities net of tax
of $326,626 amounted to $583,347 at September 30,
2009. Unrealized gains on securities, net of tax of $131,166,
amounted to $223,337 at September 30, 2008. The Company does not purchase
securities for trading purposes.
|
|
|
The
cost of securities sold is determined by specific
identification. Declines in fair value of securities available
for sale that are deemed to be other-than-temporary are charged to
earnings as a realized loss. In estimating other-than-temporary
impairment losses, management of the Company considers the length of time
and the extent to which the fair value has been less than cost, the
financial condition and near-term prospects of the issuer, and the
Company’s intent to sell the security or whether it is more likely than
not that it will be required to sell the security before the anticipated
recovery of its remaining amortized cost basis and adverse changes to
expected cash flows. Stock in the Federal Home Loan Bank of Des
Moines (“FHLBDM”) is recorded at cost, which represents redemption
value. Dividends received on such stock are reported as
income. The Bank is a member of the Federal Home Loan Bank
system. The required investment in the common stock is based
upon a certain percentage of the Bank’s assets and FHLB
advances.
|
|
|
FHLBDM
stock is evaluated for impairment in accordance with FASB ASC 942-325-35,
“Financial Services - Depository and Lending – Investments -
Other.” Determination of whether the FHLBDM stock is impaired
is based on the assessment of the ultimate recoverability of cost rather
than by recognizing declines in value. The determination of
whether a decline affects the ultimate recoverability of costs is
influenced by the significance of the decline in net assets compared to
the capital of the FHLBDM and the length of time this situation has
persisted; the ability of the FHLBDM to make payments required by law or
regulation and operating performance; the impact of legislative and
regulatory changes on member institutions and customer base and the
liquidity position of the FHLBDM.
|
|
|
Management
believes that no impairment charge on FHLBDM stock is necessary at
September 30, 2009.
|
Collateralized
mortgage obligations (“CMOs”) included in mortgage-backed securities are
mortgage derivatives and the type owned by the Bank is classified as “low risk”
under regulatory guidelines. CMOs are subject to the effects of
interest rate risk. The Bank does not purchase CMOs at any
significant premium over par value to limit certain prepayment
risks.
F-9
LIBERTY
BANCORP, INC.
Notes
to Consolidated Financial Statements
|
d.
|
Loans
receivable, net are carried at unpaid principal balances, less loans in
process, net deferred
loan fees, unearned discount and allowance for
losses.
|
|
|
Loans
originated and held for sale in the secondary market are carried at the
lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized through a valuation allowance by charges
to income. Gain on sale of loans is recognized once title has
passed to the purchaser, substantially all risks and rewards of ownership
have irrevocably passed to the purchaser and recourse obligations, if any,
are minor and can be reasonably
estimated.
|
Loan
origination and commitment fees and certain direct loan origination costs are
deferred and amortized to interest income over the contractual life of the loan
using the interest method.
|
e.
|
Valuation
allowances are established for impaired loans for the difference between
the loan amount and the fair value of collateral less estimated selling
costs. The Bank considers a loan to be impaired when, based on
current information and events, it is probable that the Bank will be
unable to collect all amounts due according to the contractual terms of
the loan agreement on a timely basis. The types of loans for
which impairment is measured include nonaccrual income property loans
(excluding those loans included in the homogenous portfolio which are
collectively reviewed for impairment), large, nonaccrual single-family
loans and troubled debt restructurings. Such loans are
generally placed on nonaccrual status at the point deemed
uncollectible. Impairment losses are recognized through an
increase in the allowance for loan losses. A loan is considered
delinquent when a payment has not been made by the contractual due
date.
|
|
f.
|
Allowances
for losses are available to absorb losses incurred on loans and foreclosed
real estate held for sale and represent additions charged to expense, less
net charge-offs. Loans are charged-off in the period deemed
uncollectible. Recoveries of loans previously charged-off are
recorded when received. The allowances are evaluated on a
regular basis by management and are based on management's periodic review
of the collectibility of loans, in light of historical experience, fair
value of the underlying collateral, changes in the types and mix of loans
originated and prevailing economic
conditions.
|
|
g.
|
Premises
and equipment are carried at cost, less accumulated
depreciation. Depreciation of premises and equipment is
computed using the straight-line method based on the estimated useful
lives of the related assets. Estimated lives are five to forty
years for buildings and improvements, and three to ten years for furniture
and equipment.
|
|
h.
|
Foreclosed
real estate is carried at the lower of cost or fair value less estimated
selling costs
based upon an appraisal or internal valuation of the
property. Costs related to improvement
of real estate are capitalized. Foreclosed assets also include
properties for which the Bank has taken physical possession, even though
formal foreclosure proceedings have not taken
place.
|
|
i.
|
Interest
on securities and loans receivable is accrued as earned. Interest on loans
receivable contractually delinquent is excluded from income when deemed
uncollectible. When a loan is classified as nonaccrual, accrued
interest is reversed against current income. Subsequent
collection of interest on nonaccrual loans is recorded as income when
received or applied to reduce the loan balance. Accrual of
interest is resumed on previously classified nonaccrual loans, when there
is no longer any reasonable doubt as to the timely collection of
interest.
|
F-10
LIBERTY
BANCORP, INC.
Notes
to Consolidated Financial Statements
Accrued
interest receivable as of September 30, 2009 and 2008 is summarized as
follows:
|
2009
|
2008
|
|||||||
|
Securities
|
$ | 290,893 | $ | 426,150 | ||||
|
Loans
receivable
|
1,267,077 | 1,214,328 | ||||||
| $ | 1,557,970 | $ | 1,640,478 | |||||
|
j.
|
Bank
owned life insurance is carried at the cash surrender
value. Changes in the cash surrender value, including interest
income, increases and decreases in value and policy expenses, are
recognized as a component of noninterest
income.
|
|
k.
|
Deferred
income tax assets and liabilities are computed for differences between the
financial statement and tax basis of assets and liabilities which will
result in taxable or deductible amounts in the future based on enacted tax
laws and rates applicable to the periods in which the differences are
expected to affect income. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount that will more
likely than not be realized. Income tax expense is the tax
payable or refundable for the period plus or minus the net change in the
deferred tax assets and
liabilities.
|
|
|
We
adopted the provisions of FASB ASC 740-10-25, “Income Taxes,” effective
October 1, 2007. A tax position is recognized as a benefit only
if it is “more likely than not“ that the tax position would be sustained
in a tax examination, with a tax examination being presumed to
occur. The amount recognized is the largest amount of tax
benefit that is greater than 50% likely of being realized on
examination. For tax positions not meeting the “more likely
than not” test, no tax benefit is recorded. No adjustments were
recognized for uncertain tax positions at September 30, 2009 or
2008. The Company is subject to U.S. Federal income taxes as
well Missouri income taxes and special financial institution
taxes. Tax years ending September 30, 2007 through 2009 remain
open to examination by these jurisdictions. The Company
recognizes interest and penalties related to tax positions in income tax
expense. At September 30, 2009, there was no accrual for
uncertain tax positions or related
interest.
|
|
l.
|
Under
the measurement provisions of FASB ASC 718-10-30 and FASB ASC 718-10-35,
“Compensation – Stock Compensation,” compensation expense is recognized
based on the fair value of unvested stock awards at the implementation
date and new awards granted thereafter, which includes restricted stock
and stock options, at the grant date and is recognized on a straight–line
basis over the requisite service period. The fair value of
stock options is estimated at the date of grant using the Black–Scholes
pricing model and related assumptions. The risk–free rate is
based on the U.S. Treasury zero–coupon issue with a remaining term equal
to the expected term used as an assumption in the model. The
expected term is based upon the average of the original contractual term
and the vesting term. The expected volatility is based on
historical volatility of the Company’s
stock.
|
F-11
LIBERTY
BANCORP, INC.
Notes
to Consolidated Financial Statements
|
m.
|
For
ESOP shares committed to be released, the Bank recognizes compensation
expense equal to the average fair value of the shares committed to be
released during the period in accordance with the provisions of FASB ASC
718-40-30, “Compensation – Stock Compensation – Employee Stock Ownership
Plans.”
|
|
n.
|
Earnings
per share are based upon the weighted-average shares
outstanding. ESOP shares, which have been committed to be
released, are considered outstanding and stock options to the extent
dilutive.
|
|
|
Under
the treasury stock method, stock options are dilutive when the average
market price of the Company’s common stock and effect of any unamortized
compensation expense exceeds the option price during the
year. In addition, proceeds from the assumed exercise of
dilutive stock options and related tax benefit are assumed to be used to
repurchase common stock at the average market price during the
year.
|
Following
is a summary of basic and diluted earnings per common share for the years ended
September 30, 2009 and 2008:
|
2009
|
2008
|
|||||||
|
Net
earnings
|
$ | 1,775,697 | $ | 1,921,528 | ||||
|
Weighted-average
shares - Basic EPS
|
3,563,876 | 4,007,591 | ||||||
|
Stock
options - treasury stock method
|
40,562 | 39,468 | ||||||
|
Weighted-average
shares - Diluted EPS
|
3,604,438 | 4,047,059 | ||||||
|
Basic
earnings per common share
|
$ | 0.50 | $ | 0.48 | ||||
|
Diluted
earnings per common share
|
$ | 0.49 | $ | 0.47 | ||||
|
Anti-dilutive
shares
|
37,184 | 94,185 | ||||||
|
o.
|
The
following paragraphs summarize recent accounting guidance and references
to the FASB ASC :
|
FASB ASC
810-10-65, “Consolidation,” improves the relevance, comparability,
and transparency of the financial information that an entity provides in its
consolidated financial statements by establishing accounting and reporting
standards for a noncontrolling interest or minority interest, the portion of
equity in a subsidiary not attributable, directly or indirectly, to a
parent.
FASB ASC
805-10-10, “Business Combinations,” improves the relevance, representational
faithfulness, and comparability of the financial information that an entity
provides in its financial reports regarding business combinations and its
effects.
The
recent accounting guidance in FASB ASC 805 and FASB ASC 810 was adopted October
1, 2009 and did not have a material impact on the Company’s financial position
or results of operation. At September 30, 2009, the Company did not
have a noncontrolling interest.
F-12
LIBERTY
BANCORP, INC.
Notes
to Consolidated Financial Statements
FASB ASC
815-10-65, “Derivatives and Hedging,” requires enhanced disclosures about an
entity’s derivative and hedging activities and improves the transparency of
financial reporting. The recent disclosure guidance in FASB ASC 815
was adopted January 1, 2009 and did not have a material impact on the Company’s
financial position or results of operation.
The
Company adopted recent accounting guidance in FASB ASC 820-10, “Fair Value
Measurements and Disclosures,” for non-financial assets and liabilities that are
not recognized or disclosed at fair value in the financial statements, effective
October 1, 2009. The guidance did not have a material impact on the
Company’s financial condition or results of operation.
Recent
accounting guidance in FASB ASC 820-10 provides factors to determine whether
there has been a significant decrease in the volume and level of activity for
the asset or liability and circumstances that may indicate that a transaction is
not orderly. In those instances, adjustments to the transactions or
quoted prices may be necessary to estimate fair value with FASB ASC
820-10. This ASC does not apply to Level 1 inputs. The
guidance also requires additional disclosures, including inputs and valuation
techniques used, and changes thereof, to measure the fair value. The
recent guidance included in FASB ASC 820-10 was adopted, effective June 30,
2009, and did not have a material impact on the Company’s financial position or
results of operation.
Recent
accounting guidance in FASB ASC 320-10, “Investments-Debt and Equity
Securities,” 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 ASC requires that impairment losses related
to credit losses will be included in earnings. Impairments related to other
factors will be included in other comprehensive earnings, 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. The recent accounting guidance in FASB ASC 320-10 was
adopted, effective June 30, 2009 and did not have a material impact on the
Company’s financial position or results of operation.
FASB ASC
805-20, “Identifiable Assets and Liabilities, and Any Noncontrolling Interest,”
amends and clarifies application issues regarding the initial recognition,
measurement, accounting and disclosure of assets and liabilities arising from
contingencies in a business combination. FASB ASC 805-20 is effective
for business combinations that occur during the first annual reporting period
beginning after December 15, 2008. The recent accounting guidance in
this ASC was adopted October 1, 2009 and did not have a material impact on the
Company’s financial position or results of operation.
FASB ASC
855-10, Subsequent Events,” establishes principles for accounting for and
disclosures for events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. The
recent accounting guidance in this ASC was adopted June 30, 2009 and did not
have a material impact on the Company’s financial position or results of
operation.
F-13
LIBERTY
BANCORP, INC.
Notes
to Consolidated Financial Statements
The
Company adopted recent guidance in FASB ASC 260-10, “Earnings Per Share,” which
requires that unvested restricted stock awards that contain non-forfeitable
rights to dividends are participating securities and are to be included in the
EPS computation using the two-class method, effective October 1,
2009. Prior period EPS data is adjusted
retrospectively. The recent guidance is not expected to have a
material impact on the Company’s basic or diluted earnings per
share.
|
|
In
June 2009, the FASB issued accounting guidance not yet incorporated in the
FASB ASC which improves the relevance, representational faithfulness, and
comparability of the financial information that an entity provides in its
financial reports regarding a transfer of financial assets and its
effects. In addition, guidance was issued which improves
financial reporting for companies involved with variable interest
entities. The Company is currently reviewing the related
accounting guidance, which is effective as of the beginning of an entity’s
first fiscal year that begins after November 15,
2009.
|
|
|
In
June 2009, the FASB issued exposure draft of Proposed ASU No. 1700-100,
“Credit Quality of Financing Receivables and Allowance for Credit
Losses.” This proposed ASU would require enhanced disclosures
about the allowance for credit losses and the credit quality of financing
receivables, disaggregated by portfolio segment or class. The
Company is currently reviewing these disclosures, which would be effective
beginning with the first interim or annual reporting period ending after
December 15, 2009.
|
|
|
In
August 2009, the FASB issued Accounting Standards Update (“ASU”) No.
2009-05, “Fair Value Measurements and Disclosures (Topic 820) – Measuring
Liabilities at Fair Value.” When a quoted price in an active
market for the identical liability is not available, fair value should be
measured using the quoted price of an identical liability when traded as
an asset; quoted prices for similar liabilities or similar liabilities
when traded as assets; or another valuation technique such as the income
or market approach. If a restriction exists that presents the
transfer of a liability, a separate adjustment related to the restriction
is not required when estimating fair value. ASU No. 2009-05 is
effective for the first reporting period (including interim periods)
beginning after issuance or fourth quarter 2009. The ASC was
adopted, effective October 1, 2009, and did not have any material impact
on the Company’s financial position or results of
operation.
|
|
|
In
August 2009, the FASB issued exposure draft of Proposed ASU No. 1710-100,
“Fair Value Measurements and Disclosures (Topic 820) – Improving
Disclosures about Fair Value Measurements.” This proposed ASU
provides amendments that would require disclosure of the effect of
reasonable possible alternative Level 3 inputs on fair value measurements;
transfers in or out of level 1 and 2 inputs; and activity in Level 3 fair
value measurements on a gross basis rather than net. In
addition, the proposed ASU would clarify existing disclosures related to
the level of disaggregation and inputs and valuation
techniques. The Company is currently reviewing these
disclosures. The level 3 sensitivity disclosures would be
effective for interim and annual reporting periods ending after March 15,
2010. All other disclosures would be effective for interim and
annual periods ending after December 15,
2009.
|
F-14
LIBERTY
BANCORP, INC.
Notes
to Consolidated Financial Statements
|
(2)
|
Risks
and Uncertainties
|
The Bank
is a community oriented financial institution, which provides traditional
financial services within the areas it serves. The Bank is engaged
primarily in the business of attracting deposits from the general public and
using these funds to originate residential real estate loans, commercial
business, commercial real estate and consumer loans primarily to customers
located in Clay, Clinton, Jackson and Platte Counties of
Missouri. Senior management of the Bank monitors the level of net
interest income and noninterest income from various products and
services. Further, operations of the Bank are managed and financial
performance is evaluated on an institution-wide basis. As a result,
all of the Bank's operations are considered by management to be aggregated in
one reportable operating segment.
The
financial statements have been prepared in conformity with U.S. generally
accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions, which
affect the reported amounts of assets and liabilities as of the balance sheet
dates and income and expenses for the years covered. Actual results
could differ significantly from these estimates and
assumptions. Material estimates that are particularly susceptible to
significant change in the near term relate to determination of the allowance for
loan losses, impairment of securities and the fair value of financial
instruments.
The
Bank's operations are affected by interest rate risk, credit risk, market risk
and regulations by the Office of Thrift Supervision (“OTS”). The Bank
is subject to interest rate risk to the degree that its interest-bearing
liabilities mature or reprice more rapidly, or on a different basis, than its
interest-earning assets. To better control the impact of changes in
interest rates, the Bank has sought to improve the match between asset and
liability maturities or repricing periods and rates by emphasizing the
origination of adjustable-rate mortgage loans, other loans with greater interest
rate sensitivities than long-term, fixed rate loans and maintaining securities
and advances from FHLB portfolio primarily with maturities of less than ten
years. The Bank is also emphasizing transaction accounts, which are
core deposits and are treated favorably in measurement of interest rate
risk.
The
Bank uses a net market value methodology provided by the OTS to measure its
interest rate risk exposure. This exposure is a measure of the
potential decline in the net portfolio value of the Bank based upon the effect
of an assumed increase or decrease in interest rates in primarily 100 basis
point increments. Net portfolio value is the expected net cash flows
from the institution's assets, liabilities and off-balance sheet
contracts. Credit risk is the risk of default on the Bank's loan
portfolio that results from the borrowers' inability or unwillingness to make
contractually required payments. Market risk reflects changes in the
value of collateral underlying loans receivable and the valuation of real estate
held by the Bank. The Bank is subject to periodic examination by
regulatory agencies, which may require the Bank to record increases in the
allowance based on their evaluation of available information. There
can be no assurance that the Bank’s regulators will not require further
increases to the allowances.
F-15
LIBERTY
BANCORP, INC.
Notes
to Consolidated Financial Statements
|
(3)
|
Business
Combination
|
On
November 7, 2008, the Company acquired KLT Bancshares, Inc., the parent company
of Farley State Bank. Shareholders of Farley State Bank received
total merger consideration of $4.5 million, consisting of entirely
cash. The Company incurred acquisition costs of approximately
$251,000. Fair value adjustments on the assets acquired and
liabilities assumed are depreciated or amortized as applicable, over the
estimated useful lives of the related assets and liabilities. The
core deposit intangible of $1.1 million are amortized over 10.2 years using
the double declining balance method. The Company recorded fair value
accounting adjustments of $422,000, net of income taxes of $247,000 and core
deposit intangibles of $665,000, net of income taxes of
$391,000. Based upon Farley State Bank’s stockholders’ equity of $2.5
million, goodwill amounted to approximately $1.2 million at November 7,
2008. The excess purchase price has been allocated to goodwill and
identifiable intangible assets in accordance with current accounting
literature. As a result of the acquisition, the Bank will
operate two additional full-service offices and expand its market
area.
The
following table summarizes the assets acquired and liabilities assumed at
November 7, 2008, the date of acquisition:
|
Cash
and due from banks
|
$ | 1,353,137 | ||
|
Federal
funds sold
|
2,234,000 | |||
|
Securities
available for sale
|
9,658,286 | |||
|
Federal
Home Loan Bank stock
|
68,300 | |||
|
Loans,
net
|
20,743,173 | |||
|
Premises
and equipment, net
|
2,775,127 | |||
|
Accrued
interest receivable
|
210,863 | |||
|
Goodwill
|
1,191,603 | |||
|
Core
deposit intangible
|
1,056,000 | |||
|
Other
assets
|
389,946 | |||
|
Total
assets acquired
|
39,680,435 | |||
|
Deposits
|
33,964,121 | |||
|
Accrued
interest payable
|
215,834 | |||
|
Advances
from borrowers for taxes and insurance
|
69,896 | |||
|
Other
liabilities
|
40,860 | |||
|
Deferred
tax liability
|
638,468 | |||
|
Total
liabilities assumed
|
34,929,179 | |||
|
Purchase
price, including acquisition costs
|
$ | 4,751,256 | ||
The consolidated statements of earnings
for the year ended September 30, 2009 include the results of KLT Bancshares,
Inc. from November 8, 2008 through September 30, 2009.
F-16
LIBERTY
BANCORP, INC.
Notes
to Consolidated Financial Statements
The
following pro forma information, including the effects of the purchase
accounting adjustments, summarizes the results of operations for the years ended
September 30, 2009 and 2008 as though the acquisition had been completed as of
the beginning of each year.
|
Years Ended September 30,
|
||||||||
|
2009
|
2008
|
|||||||
|
Total
interest income
|
$ | 20,165,648 | $ | 22,374,586 | ||||
|
Total
interest expense
|
(6,682,118 | ) | (10,226,430 | ) | ||||
|
Net
interest income
|
13,483,530 | 12,148,156 | ||||||
|
Provision
for loan losses
|
(1,992,840 | ) | (2,723,175 | ) | ||||
|
Total
noninterest income
|
2,265,315 | 2,426,818 | ||||||
|
Total
noninterest expense
|
(11,800,603 | ) | (9,823,271 | ) | ||||
|
Earnings
before income taxes
|
1,955,402 | 2,028,528 | ||||||
|
Income
taxes
|
(584,158 | ) | (451,000 | ) | ||||
|
Net
earnings
|
$ | 1,371,244 | $ | 1,577,528 | ||||
|
Pro
forma basic and diluted earnings per share
|
$ | 0.38 | $ | 0.39 | ||||
The pro
forma results of operations do not purport to be indicative of the results that
would actually have been obtained had the acquisition occurred on the date
indicated or which my be obtained in the future.
|
(4)
|
Securities
|
Securities
are summarized as follows:
|
2009
|
||||||||||||||||
|
Gross
|
Gross
|
|||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Market
|
|||||||||||||
|
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
|
Available
for sale - debt securities:
|
||||||||||||||||
|
Federal
agency obligations
|
$ | 9,950,308 | $ | 600,055 | $ | — | $ | 10,550,363 | ||||||||
|
State
and municipal obligations
|
9,765,909 | 348,672 | (199,957 | ) | 9,914,624 | |||||||||||
|
Agency
mortgage-backed securities
|
8,822,806 | 134,812 | (808 | ) | 8,956,810 | |||||||||||
| 28,539,023 | 1,083,539 | (200,765 | ) | 29,421,797 | ||||||||||||
|
Available
for sale - equity securities
|
271,990 | 27,199 | — | 299,189 | ||||||||||||
| $ | 28,811,013 | $ | 1,110,738 | $ | (200,765 | ) | $ | 29,720,986 | ||||||||
|
Weighted-average
rate
|
4.62 |
%
|
||||||||||||||
F-17
LIBERTY
BANCORP, INC.
Notes
to Consolidated Financial Statements
|
2008
|
||||||||||||||||
|
Gross
|
Gross
|
|||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Market
|
|||||||||||||
|
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
|
Available
for sale - debt securities:
|
||||||||||||||||
|
Federal
agency obligations
|
$ | 13,422,143 | $ | 480,901 | $ | — | 13,903,044 | |||||||||
|
State
and municipal obligations
|
11,714,464 | 46,438 | (82,041 | ) | 11,678,861 | |||||||||||
|
Agency
mortgage-backed securities
|
14,007,011 | 35,110 | (52,970 | ) | 13,989,151 | |||||||||||
| 39,143,618 | 562,449 | (135,011 | ) | 39,571,056 | ||||||||||||
|
Available
for sale - equity securities
|
544,450 | — | (72,935 | ) | 471,515 | |||||||||||
| $ | 39,688,068 | $ | 562,449 | $ | (207,946 | ) | $ | 40,042,571 | ||||||||
|
Weighted-average
rate
|
4.56 |
%
|
||||||||||||||
During 2009, the Company sold a portion
of one equity security, recognizing a loss of $72,440, which is included in gain
on sale of securities available for sale. In addition, the Company
determined that an other-than–temporary impairment loss was required on the
remaining investment in accordance with FASB ASC 320-10, “Investments – Debt and
Equity Securities.” The Company’s assessment considered the duration
and severity of the unrealized losses, the financial condition and near term
prospects of the issuer, the ability to recover its initial cost basis within a
reasonable period of time and adverse changes to expected cash
flows.
Based on these factors, the Company
recorded an other-than-temporary impairment loss on the equity security of
$113,126. At September 30, 2009, the carrying value of the equity
security was $299,189.
Weighted-average rates are based on the
coupon rate at the balance sheet dates. Actual yields are expected to
be lower and is affected by prepayments and related premium
amortization. At September 30, 2009 and 2008, mortgage-backed
securities included adjustable-rate mortgage loans of $3,775,929 and $4,815,649,
respectively. Mortgage-backed securities pledged to secure certain
deposits were $4,264,967 at September 30, 2009.
F-18
LIBERTY
BANCORP, INC.
Notes
to Consolidated Financial Statements
Securities
having a continuous unrealized loss position for less than twelve months or
twelve months or longer are as follows:
|
Less than 12 Months
|
12 Months or Longer
|
Total
|
||||||||||||||||||||||
|
Market
|
Unrealized
|
Market
|
Unrealized
|
Market
|
Unrealized
|
|||||||||||||||||||
|
|
Value
|
Loss
|
Value
|
Loss
|
Value
|
Loss
|
||||||||||||||||||
|
September 30, 2009
|
||||||||||||||||||||||||
|
Available
for sale - debt securities:
|
||||||||||||||||||||||||
|
State
and municipal obligations
|
$ | — | $ | — | $ | 3,117,032 | $ | (199,957 | ) | $ | 3,117,032 | $ | (199,957 | ) | ||||||||||
|
Agency
mortgage-backed securities
|
— | — | 874,259 | (808 | ) | 874,259 | (808 | ) | ||||||||||||||||
| $ | — | $ | — | $ | 3,991,291 | $ | (200,765 | ) | $ | 3,991,291 | $ | (200,765 | ) | |||||||||||
|
September
30, 2008
|
||||||||||||||||||||||||
|
Available
for sale- debt securities:
|
||||||||||||||||||||||||
|
State
and municipal obligations
|
$ | — | $ | — | $ | 4,773,162 | $ | (82,041 | ) | $ | 4,773,162 | $ | (82,041 | ) | ||||||||||
|
Agency
mortgage-backed securities
|
— | — | 9,125,713 | (52,970 | ) | 9,125,713 | (52,970 | ) | ||||||||||||||||
|
Available
for sale- equity securities
|
130,279 | (19,548 | ) | 341,236 | (53,387 | ) | 471,515 | (72,935 | ) | |||||||||||||||
| $ | 130,279 | $ | (19,548 | ) | $ | 14,240,111 | $ | (188,398 | ) | $ | 14,370,390 | $ | (207,946 | ) | ||||||||||
The
Company believes unrealized losses are related to changes in market interest
rates and not the credit quality of the issuers.
State and
Municipal Obligations (5 issues). The unrealized losses on the
Company’s state and municipal obligations were caused primarily by changes in
interest rates and not credit quality. One state and municipal
obligation had an unrealized loss of $193,000 and represented approximately 97%
of the total unrealized loss on such securities. Management of the
Company does not intend to sell the securities and it is not more likely than
not that the Company will be required to sell the securities before recovery of
their amortized cost basis, which may be upon maturity. Accordingly,
the Company did not consider the unrealized losses on those securities to be
other-than-temporary impaired credit related losses at September 30,
2009.
Four
state and municipal obligations amounting to $560,000 had a credit rating of A
or better. One state and municipal obligation of $2.6 million was not
rated.
Mortgage-backed
Securities (3 issues). The unrealized losses on the Company’s
mortgage-backed securities and agency collateralized mortgage obligation were
caused primarily by changes in interest rates and not credit
quality. Management of the Company does not intend to sell the
securities and it is not more likely than not that the Company will be required
to sell the securities before recovery of their amortized cost basis, which may
be upon maturity. Accordingly, the Company did not consider the
unrealized losses on those securities to be other-than-temporary impaired credit
related losses at September 30, 2009.
F-19
LIBERTY
BANCORP, INC.
Notes
to Consolidated Financial Statements
Maturities of debt securities at
September 30, 2009 are summarized as follows:
|
Available for Sale
|
||||||||
|
Amortized
|
Market
|
|||||||
|
Cost
|
Value
|
|||||||
|
Due
within one year
|
$ | 2,250,669 | $ | 2,309,230 | ||||
|
Due
after one through five years
|
10,084,748 | 10,757,411 | ||||||
|
Due
after five through ten years
|
2,903,310 | 3,052,066 | ||||||
|
Due
after ten years
|
4,477,490 | 4,346,280 | ||||||
| 19,716,217 | 20,464,987 | |||||||
|
Agency
mortgage-backed securities
|
8,822,806 | 8,956,810 | ||||||
| $ | 28,539,023 | $ | 29,421,797 | |||||
At September 30, 2009, securities with
a carrying value of approximately $5,137,802 are callable at the discretion of
the issuer prior to the maturity date. Securities in the amount of
$15,228,408 were pledged to secure certain deposits at September 30,
2009.
Gross proceeds, gross realized gains
and gross realized losses from sales of available for sale securities were
$11,283,720, $255,163 and $149,250, respectively for the year ended September
30, 2009. Gross proceeds, gross realized gains and gross realized
losses from sales of available for sale securities were $17,743,207, $135,303
and $0, respectively, for the year ended September 30, 2008.
|
(5)
|
Loans
Receivable, Net
|
Loans receivable, net are summarized as
follows:
|
2009
|
2008
|
||||||||
|
Real
estate loans:
|
|||||||||
|
Single-family,
1-4 units
|
$ | 54,600,743 | $ | 40,727,011 | |||||
|
Multi-family,
5 or more units
|
29,195,176 | 17,368,034 | |||||||
|
Construction
|
69,173,527 | 90,482,099 | |||||||
|
Commercial
|
122,627,930 | 102,363,966 | |||||||
|
Commercial
business loans
|
22,471,956 | 17,805,117 | |||||||
|
Consumer
loans
|
15,022,844 | 9,919,979 | |||||||
| 313,092,176 | 278,666,206 | ||||||||
|
Allowance
for losses
|
(3,536,837 | ) | (2,633,298 | ) | |||||
|
Loans
in process
|
(7,032,403 | ) | (19,027,587 | ) | |||||
|
Unearned
discounts
|
(13,068 | ) | (13,068 | ) | |||||
|
Deferred
loan fees, net
|
(263,771 | ) | (278,996 | ) | |||||
| $ | 302,246,097 | $ | 256,713,257 | ||||||
|
Weighted-average
rate
|
6.33 | % |
|
6.46 | % | ||||
F-20
LIBERTY
BANCORP, INC.
Notes
to Consolidated Financial Statements
Adjustable-rate loans included in the
loan portfolio amounted to $106,670,009 and $96,031,839 at September 30, 2009
and 2008, respectively. Loans serviced for the benefits of others
amounted to $14,050,318 and $10,742,912 at September 30, 2009 and 2008,
respectively.
Real estate construction loans are
secured by the following:
|
2009
|
2008
|
|||||||
|
Single-family,
spec
|
$ | 9,055,528 | $ | 13,247,325 | ||||
|
Single-family,
custom built
|
6,764,889 | 6,346,275 | ||||||
|
Multi-family,
5 or more units
|
2,610,000 | 821,090 | ||||||
|
Development
|
13,620,379 | 36,669,828 | ||||||
|
Commercial
|
37,122,731 | 33,397,581 | ||||||
| $ | 69,173,527 | $ | 90,482,099 | |||||
Following is a summary of activity in
allowance for loan losses:
|
2009
|
2008
|
|||||||
|
Balance,
beginning of year
|
$ | 2,633,298 | $ | 3,010,904 | ||||
|
Loan
charge-offs
|
(935,777 | ) | (2,395,909 | ) | ||||
|
Loan
recoveries
|
18,275 | 137,128 | ||||||
|
Allowance
acquired by acquisition
|
252,129 | — | ||||||
|
Provision
charged to expense
|
1,568,912 | 1,881,175 | ||||||
|
Balance,
end of year
|
$ | 3,536,837 | $ | 2,633,298 | ||||
A summary of nonperforming loans
follows:
|
2009
|
2008
|
|||||||
|
Nonaccrual
loans
|
$ | 67,123 | $ | 8,218,713 | ||||
|
Accruing
loans past due 90 days or more
|
— | — | ||||||
|
Impaired loans
|
2,648,065 | — | ||||||
|
Total
nonperforming loans
|
$ | 2,715,188 | $ | 8,218,713 | ||||
|
Allowance
for losses on nonperforming loans
|
$ | 315,858 | $ | 437,523 | ||||
|
Nonperforming
loans with no allowance for loan losses
|
$ | — | $ | — | ||||
|
Average
balance of nonperforming loans
|
$ | 2,859,948 | $ | 4,598,203 | ||||
|
Interest
income that would have been recognized
|
$ | 18,861 | $ | 150,281 | ||||
|
Interest
income recognized
|
$ | 3,166 | $ | 8,831 | ||||
F-21
LIBERTY
BANCORP, INC.
Notes
to Consolidated Financial Statements
The Bank originates single-family loans
with high loan to value ratios exceeding 90 percent. At September 30,
2009 and 2008 these loans amounted to $4,914,038 and $6,263,049,
respectively.
Following is a summary of loans to
directors, executive officers and associates of such persons in excess of
$60,000 in the aggregate for the year ended September 30, 2009:
|
Balance,
beginning of year
|
$ | 575,409 | ||
|
Additions
|
- | |||
|
Repayments
|
(490,378 | ) | ||
|
Balance,
end of year
|
$ | 85,031 |
These loans were made on substantially
the same terms as those prevailing at the time for comparable transactions with
unaffiliated persons.
|
(6)
|
Premises
and Equipment, Net
|
Premises and equipment, net are
summarized as follows:
|
2009
|
2008
|
|||||||
|
Land
|
$ | 3,717,466 | $ | 2,430,041 | ||||
|
Land
for future branch location
|
— | 600,000 | ||||||
|
Office
buildings
|
8,964,933 | 6,665,992 | ||||||
|
Furniture
and equipment
|
4,754,255 | 3,563,844 | ||||||
|
Building-in-progress
|
— | 580,070 | ||||||
| 17,436,654 | 13,839,947 | |||||||
|
Less
accumulated depreciation
|
4,734,027 | 4,049,610 | ||||||
| $ | 12,702,627 | $ | 9,790,337 | |||||
Depreciation expense for 2009 and 2008
was $684,417 and $570,422, respectively.
F-22
LIBERTY
BANCORP, INC.
Notes
to Consolidated Financial Statements
The Bank leases the land for one branch
office located in Kansas City. The lease expires in November
2021. The Bank has four successive options to extend the lease term
for five years each and a fifth option for a three year period. Rent
expense for both 2009 and 2008 amounted to $91,622. Future minimum
lease payments are summarized as follows:
|
October
1, 2009 to September 30, 2010
|
$ | 91,622 | ||
|
October
1, 2010 to September 30, 2011
|
92,386 | |||
|
October
1, 2011 to September 30, 2012
|
100,784 | |||
|
October
1, 2012 to September 30, 2013
|
100,784 | |||
|
October
1, 2013 to September 30, 2014
|
100,784 | |||
|
After
September 30, 2014
|
722,287 | |||
| $ | 1,208,647 |
|
(7)
|
Foreclosed
Real Estate, Net
|
Foreclosed real estate, net is
summarized as follows:
|
2009
|
2008
|
|||||||
|
Foreclosed
real estate
|
$ | 2,822,423 | $ | 4,936,355 | ||||
|
Allowance
for losses
|
— | — | ||||||
| $ | 2,822,423 | $ | 4,936,355 | |||||
Foreclosed real estate at September 30,
2009 included six one-to-four family properties, one one-to-four family
construction property, one multi-family property, one residential
land development property, one commercial retail property, three
residential lots and two commercial lots.
Following is a summary of activity in
allowance for losses:
|
2009
|
2008
|
|||||||
|
Balance,
beginning of year
|
$ | — | $ | — | ||||
|
Gain
on sale
|
23,932 | 53,183 | ||||||
|
Charge-offs
|
(1,365,113 | ) | (363,755 | ) | ||||
|
Provision
charged to expense
|
1,341,181 | 310,572 | ||||||
|
Balance,
end of year
|
$ | — | $ | — | ||||
|
(8)
|
Goodwill
and Core Deposit Intangible, Net
|
Goodwill was recognized in connection
with the acquisition of KLT Bancshares, Inc., the parent company of Farley State
Bank, in November 2008. Under FASB ASC 350, “Intangibles - Goodwill
and Other,” goodwill is tested for impairment annually or more frequently, if
necessary, utilizing a two-step methodology.
F-23
LIBERTY
BANCORP, INC.
Notes
to Consolidated Financial Statements
The first step requires that the
Company compare the fair value of a reporting unit with its carrying
amount. If the fair value of the reporting unit exceeds the carrying
value, goodwill is not impaired. If the carrying value exceeds the
fair value of the reporting unit, the second step is performed to determine the
amount of impairment, if any. The second step compares the implied
value of the reporting unit’s goodwill with the carrying amount of such
goodwill. The implied value of goodwill is the excess of the fair
value of the reporting unit over the aggregate fair values of the individual
assets, liabilities and identifiable assets as if the reporting unit had been
acquired in a business combination and the fair value of the reporting unit was
the price paid to acquire the reporting unit.
Management determined that the Bank is
the reporting unit for purposes of evaluating goodwill. Under the
first step, the fair value of the reporting unit was determined using recent
deal metrics obtained from comparable banks from an independent third party,
including deal value to total assets, deal value to tangible book value, deal
value to last twelve months net earnings and a control premium.
After weighting each valuation
approach, the fair value of the Bank was determined to exceed the carrying
amount. As a result, goodwill was not impaired at September 30,
2009.
The gross carrying value and
accumulated amortization of the core deposit intangible is presented
below:
|
September 30,
2009
|
||||
|
Core
deposit intangible
|
$ | 1,056,000 | ||
|
Accumulated
amortization
|
(190,667 | ) | ||
| $ | 865,333 | |||
The core deposit intangible is tested
for impairment whenever events or changes in circumstances indicate the carrying
amount may not be recoverable.
Amortization expense on core deposit
intangible for the years ended September 30, 2009 and 2008 was $190,667 and $0,
respectively.
Estimated amortization expense on core
deposit intangible for the next five years is as follows:
|
Year
ended September 30, 2010
|
$ | 170,000 | ||
|
Year
ended September 30, 2011
|
137,000 | |||
|
Year
ended September 30, 2012
|
110,000 | |||
|
Year
ended September 30, 2013
|
89,000 | |||
|
Year
ended September 30, 2014
|
71,000 |
F-24
LIBERTY
BANCORP, INC.
Notes
to Consolidated Financial Statements
|
(9)
|
Deposits
|
Deposits are summarized as
follows:
|
Description and interest rate
|
2009
|
2008
|
||||||
|
Non-interest
bearing NOW accounts
|
$ | 21,494,001 | $ | 14,869,181 | ||||
|
NOW
accounts, .50% and .85%, respectively
|
27,491,640 | 21,694,726 | ||||||
|
Statement
accounts, .30% and .30%, respectively
|
9,745,346 | 7,257,784 | ||||||
|
Money
market accounts, 1.48% and 2.72%, respectively
|
80,679,977 | 61,370,844 | ||||||
|
Total
transaction accounts
|
139,410,964 | 105,192,535 | ||||||
|
Certificates:
|
||||||||
|
0.75
- 1.49%
|
46,021,988 | — | ||||||
|
1.50
- 1.99%
|
38,241,719 | — | ||||||
|
2.00
- 2.99%
|
17,342,663 | 60,858,183 | ||||||
|
3.00
- 3.99%
|
28,548,107 | 34,745,328 | ||||||
|
4.00
- 4.99%
|
5,469,010 | 15,732,752 | ||||||
|
5.00
- 5.99%
|
1,168,823 | 3,235,039 | ||||||
|
Total
certificates, 2.00% and 3.08%, respectively
|
136,792,310 | 114,571,302 | ||||||
|
Total
deposits, 1.49% and 2.47%, respectively
|
$ | 276,203,274 | $ | 219,763,837 | ||||
At September 30, 2009 and 2008,
deposits included brokered certificates of $28,710,000 and $15,000,000,
respectively. Approximately $26.0 million of brokered deposits matures within
one year, $710,000 in 2012 and $2.0 million in 2014.
Certificate maturities are summarized
as follows:
|
|
2009
|
2008
|
||||||
|
First
year
|
$ | 108,355,733 | $ | 89,574,562 | ||||
|
Second
year
|
10,356,733 | 14,843,151 | ||||||
|
Third
year
|
9,137,490 | 6,192,967 | ||||||
|
Fourth
year
|
3,897,198 | 1,735,327 | ||||||
|
Fifth
year
|
5,045,156 | 2,225,295 | ||||||
| $ | 136,792,310 | $ | 114,571,302 | |||||
Transaction accounts and certificates
in denominations of $100,000 or more amounted to $61,335,542 and $63,560,324 at
September 30, 2009, respectively, and $40,069,184 and $44,204,202 at September
30, 2008, respectively. Generally, deposits in excess of $250,000 are
not Federally insured. Substantially all certificates of $100,000 or more mature
within one year.
F-25
LIBERTY
BANCORP, INC.
Notes
to Consolidated Financial Statements
Interest
on deposits is summarized as follows:
|
|
2009
|
2008
|
||||||
|
NOW
accounts
|
$ | 190,936 | $ | 305,856 | ||||
|
Passbook
accounts
|
28,365 | 21,198 | ||||||
|
Money
market accounts
|
1,498,587 | 2,223,297 | ||||||
|
Certificates
|
3,391,602 | 4,770,711 | ||||||
| $ | 5,109,490 | $ | 7,321,062 | |||||
Deposits from directors, executive
officers and other affiliates were not material to total deposits at September
30, 2009 and 2008.
|
(10)
|
Advances
from Federal Home Loan Bank of Des Moines and MIB Line of
Credit
|
Fixed-rate advances from FHLB of Des
Moines are summarized as follows:
|
Final
|
Average Interest Rate
|
|||||||||||
|
Maturity Date
|
at September 30, 2009
|
2009
|
2008
|
|||||||||
|
Within
one year
|
1.45 | % | $ | 34,866,000 | $ | 48,000,000 | ||||||
|
After
one through three years
|
3.04 | 26,274,862 | 19,866,000 | |||||||||
|
After
three through five years
|
2.83 | 8,000,000 | 1,374,870 | |||||||||
| $ | 69,140,862 | $ | 69,240,870 | |||||||||
|
Weighted-average
rate
|
2.21 |
%
|
2.58 | % | ||||||||
Principal maturities at September 30,
2009 are summarized as follows:
|
October
1, 2009 to September 30, 2010
|
$ | 34,966,008 | ||
|
October
1, 2010 to September 30, 2011
|
11,100,008 | |||
|
October
1, 2011 to September 30, 2012
|
15,074,846 | |||
|
October
1, 2012 to September 30, 2013
|
3,000,000 | |||
|
October
1, 2013 to September 30, 2014
|
5,000,000 | |||
| $ | 69,140,862 |
At September 30, 2009, advances from
FHLB of Des Moines are secured by FHLB stock and one-to-four family, home
equity, multi-family, commercial real estate and non-real estate loans amounting
to $82,308,345. The Bank had remaining credit available under the
FHLB advance program of $13.2 million at September 30, 2009. The Bank
currently has $5.0 million in available credit at MIB with no amount borrowed as
of September 30, 2009.
F-26
LIBERTY
BANCORP, INC.
Notes
to Consolidated Financial Statements
|
(11)
|
Securities
Sold Under Agreement to Repurchase
|
Securities sold under agreement to
repurchase, which are classified as borrowings, are reflected at the amount of
cash received in connection with transaction, plus interest
credited. The Bank may be required to provide additional collateral
based on the fair value of the underlying securities. The securities
sold under agreement to repurchase are under the Bank’s
control. These agreements to repurchase are summarized as
follows:
|
Rate at
|
|||||||||||
|
September 30,
|
|||||||||||
|
Maturity Date
|
2009
|
2009
|
2008
|
||||||||
|
June
26, 2012
|
3.34%
|
$ | 365,052 | $ | 569,102 | ||||||
|
|
|||||||||||
|
Open
line
|
2.68%
|
181,967 | 243,398 | ||||||||
|
Total,
3.12% and 4.45%
|
$ | 547,019 | $ | 812,500 | |||||||
|
Market
value of securities
|
$ | 1,524,646 | $ | 3,991,155 | |||||||
|
Average
balance of borrowings
|
$ | 658,994 | $ | 1,426,793 | |||||||
|
Maximum
balance at any month end
|
$ | 855,407 | $ | 2,197,390 | |||||||
F-27
LIBERTY
BANCORP, INC.
Notes
to Consolidated Financial Statements
|
(12)
|
Income
Taxes
|
The Company and Bank file consolidated
income tax returns. The Bank is permitted to make additions to the
tax bad debt reserve using the experience method.
The components of the net deferred tax
asset are summarized as follows:
|
2009
|
2008
|
|||||||
|
Deferred
tax liabilities:
|
||||||||
|
FHLB
stock dividends
|
$ | (140,625 | ) | $ | (140,625 | ) | ||
|
Unrealized
gain on securities available for sale
|
(326,626 | ) | (131,166 | ) | ||||
|
Purchase
accounting adjustments
|
(548,205 | ) | — | |||||
|
Other
|
(9,426 | ) | — | |||||
| (1,024,882 | ) | (271,791 | ) | |||||
|
Deferred
tax assets:
|
||||||||
|
Accrued
income and expense and deferred loan fees
|
216,819 | 270,493 | ||||||
|
Allowance
for losses on loans
|
1,229,002 | 987,486 | ||||||
|
Book
over tax depreciation
|
141,412 | 118,874 | ||||||
|
Book
over tax benefit plan expense
|
176,009 | 164,749 | ||||||
|
Other
|
— | 9,759 | ||||||
|
Total
deferred tax assets
|
1,763,242 | 1,551,361 | ||||||
|
Net
deferred tax asset
|
$ | 738,360 | $ | 1,279,570 | ||||
The provisions of FASB ASC 942-740-35,
“Financial Services – Depository and Lending – Income Taxes,” require the Bank
to establish a deferred tax liability for the effect of the tax bad debt
reserves over the amounts at September 30, 1988. The Bank’s tax bad
debt reserves were $3,588,000 at September 30, 1988. The estimated
deferred tax liability on such amount is approximately $1,220,000, which has not
been recorded in the accompanying financial statements. If these tax
bad debt reserves are used for other than loan losses, the amount used will be
subject to Federal income taxes at the then prevailing corporate
rate.
Income taxes are summarized as
follows:
|
2009
|
2008
|
|||||||
|
Current:
|
||||||||
|
Federal
|
$ | 625,000 | $ | 575,000 | ||||
|
State
|
116,000 | 64,000 | ||||||
| 741,000 | 639,000 | |||||||
|
Deferred:
|
||||||||
|
Federal
|
(25,000 | ) | 59,000 | |||||
|
State
|
(45,000 | ) | 8,000 | |||||
| (70,000 | ) | 67,000 | ||||||
| $ | 671,000 | $ | 706,000 | |||||
F-28
LIBERTY
BANCORP, INC.
Notes
to Consolidated Financial Statements
The provision for income taxes differs
from the Federal statutory corporate tax rate as follows:
|
Percentage of Earnings
|
||||||||||
|
Before Income Taxes
|
||||||||||
|
2009
|
2008
|
|||||||||
|
Federal
statutory income tax rate
|
34.0 | % | 34.0 | % | ||||||
|
Increases
(decreases) in tax rate:
|
||||||||||
|
Tax
exempt income
|
(6.6 | ) | (6.0 | ) | ||||||
|
Change
in cash surrender value of BOLI
|
(6.1 | ) | (5.7 | ) | ||||||
|
Nondeductible
capital loss
|
2.6 | — | ||||||||
|
Nondeductible
stock option expense
|
0.5 | 0.8 | ||||||||
|
State
taxes, net of Federal tax benefit
|
1.9 | 1.8 | ||||||||
|
Average
fair value versus cost of ESOP shares
|
0.1 | 0.9 | ||||||||
|
Other,
net
|
1.0 | 1.3 | ||||||||
|
Tax
rate
|
27.4 | % | 27.1 | % | ||||||
|
(13)
|
Employee
Benefits
|
Defined Contribution Pension Plan
(401(k) Plan)
The Bank maintains a defined
contribution pension plan, which covers substantially all
employees. Participants can contribute from 2% to 15% of their salary
of which the Bank will match 50% of the employee contribution, up to a maximum
of 5% of the employee’s salary. Participants are fully vested after
five years of service. Pension plan expense was $71,944 and $62,717
for 2009 and 2008, respectively.
Directors’ Benefit Plans
The Bank
has adopted a retirement plan for directors elected before 1994. The
plan provides that each non-employee director (participant) shall receive upon
retirement a benefit in equal annual installments over a ten-year
period. The annual benefit will be based upon the product of the
participant's vesting percentage and $8,000 for currently retired directors and
surviving spouses. For three directors covered under the plan, the
annual benefit was amended and will be based upon the product of the
participant’s vesting percentage and $15,000.
The
vesting percentage shall be determined based upon the participant's years of
service on the Board, whether before or after the reorganization date, according
to the following schedule:
|
Non-Employee Director's
|
||
|
on the Board
|
Vested Percentage
|
|
|
Less
than 10
|
0%
|
|
|
10
to 14
|
25%
|
|
|
15
to 19
|
50%
|
|
|
75%
|
||
|
25
or more
|
100%
|
F-29
LIBERTY
BANCORP, INC.
Notes
to Consolidated Financial Statements
If an
active director covered under the plan terminates service of the Board due to
disability, the director's annual benefit for ten years will be
$15,000. In the event that the participant dies before collecting any
or all of the benefits, the Bank shall pay the participant's surviving
spouse. No benefits shall be payable to anyone other than the
surviving spouse, and shall terminate on the death of the surviving
spouse.
The Bank
also provides postretirement medical benefits to directors, elected before 1994,
and their spouses. The liability for such benefits is
unfunded. The accumulated postretirement benefit obligation, which
represents the present value of the estimated future benefits payable to plan
participants attributed to service rendered to date, will be recognized on a
delayed basis as a component of net periodic cost for postretirement medical
benefits.
Postretirement
medical benefits for three directors and their spouses have been amended from
the current plan of lifetime health insurance coverage to benefits of $500 per
month for each of the directors and spouses, not to exceed twenty
years.
The
following table sets forth each plan’s funded status and amounts recognized in
other liabilities in the financial statements:
|
Retirement Plan
|
Postretirement
Medical Benefits
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Accumulated
benefit obligation
|
$ | (194,317 | ) | $ | (205,310 | ) | $ | (221,623 | ) | $ | (240,160 | ) | ||||
|
Under
(over) accrual
|
(7,580 | ) | (7,580 | ) | 10,732 | 10,732 | ||||||||||
|
Accrued
benefit cost
|
$ | (201,897 | ) | $ | (212,890 | ) | $ | (210,891 | ) | $ | (229,428 | ) | ||||
A
reconciliation of the accumulated retirement and postretirement benefit
obligations are summarized as follows:
|
Retirement Plan
|
Postretirement
Medical Benefits
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Balance,
beginning of year
|
$ | (205,310 | ) | $ | (222,934 | ) | $ | (240,160 | ) | $ | (257,426 | ) | ||||
|
Service
cost
|
(2,597 | ) | (2,597 | ) | (6,685 | ) | (6,685 | ) | ||||||||
|
Interest
cost
|
(11,292 | ) | (13,376 | ) | (11,967 | ) | (14,712 | ) | ||||||||
|
Benefits
paid
|
31,000 | 31,000 | 45,149 | 38,163 | ||||||||||||
|
Actuarial
(loss) gain
|
(6,118 | ) | 2,597 | (7,960 | ) | 500 | ||||||||||
|
Balance,
end of year
|
$ | (194,317 | ) | $ | (205,310 | ) | $ | (221,623 | ) | $ | (240,160 | ) | ||||
The
weighted-average annual assumed rate of increase in the per capita cost of
covered benefits for the medical plan is 14% for 2009 and
thereafter. The effect of increasing the assumed health care trend
rates by one percentage point on the accumulated postretirement benefit
obligation and the components of the net periodic cost for postretirement
medical benefits at or for the years ended September 30, 2009 and 2008 was
considered immaterial.
F-30
LIBERTY
BANCORP, INC.
Notes
to Consolidated Financial Statements
The
weighted-average discount rates used in determining the accumulated benefit
obligations were 5.50% at September 30, 2009 and 6.00% at September 30, 2008 and
for the years ended September 30, 2009 and 2008, respectively.
The
components of the net periodic cost for the retirement and postretirement
medical benefits are summarized as follows:
|
Retirement Plan
|
Postretirement
Medical Benefits
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Service
cost
|
$ | 2,597 | $ | 2,597 | $ | 6,685 | $ | 6,685 | ||||||||
|
Interest
cost
|
11,292 | 13,376 | 11,967 | 14,712 | ||||||||||||
|
Amortization
of transition obligation
|
— | — | 12,538 | 12,538 | ||||||||||||
|
Amortization
of prior service cost
|
7,526 | 7,526 | (9,665 | ) | (9,665 | ) | ||||||||||
|
Amortization
of actuarial gain
|
(2,976 | ) | (2,101 | ) | (21,813 | ) | (21,368 | ) | ||||||||
|
Net
periodic cost
|
$ | 18,439 | $ | 21,398 | $ | (288 | ) | $ | 2,902 | |||||||
Benefits
expected to be paid in each of the next five years and in the aggregate for the
five years thereafter are summarized as follows:
|
Retirement
Plan
|
Postretirement
Medical
Benefits
|
|||||||
|
October
1, 2009 to September 30, 2010
|
$ | 23,000 | $ | 41,955 | ||||
|
October
1, 2010 to September 30, 2011
|
15,000 | 46,149 | ||||||
|
October
1, 2011 to September 30, 2012
|
15,000 | 50,930 | ||||||
|
October
1, 2012 to September 30, 2013
|
15,000 | 12,000 | ||||||
|
October
1, 2013 to September 30, 2014
|
15,000 | 12,000 | ||||||
|
October
1, 2014 to September 30, 2019
|
75,000 | 60,000 | ||||||
| $ | 158,000 | $ | 223,034 | |||||
Amounts
recognized in accumulated other comprehensive earnings, net are summarized as
follows:
|
Retirement Plan
|
Postretirement
Medical Benefits
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Unrecognized
transition obligation
|
$ | — | $ | — | $ | 50,138 | $ | 62,676 | ||||||||
|
Unrecognized
prior service cost
|
30,103 | 37,629 | (38,658 | ) | (48,323 | ) | ||||||||||
|
Unrecognized
actuarial gain
|
(26,316 | ) | (35,741 | ) | (103,307 | ) | (122,621 | ) | ||||||||
| 3,787 | 1,888 | (91,827 | ) | (108,268 | ) | |||||||||||
|
Tax
effect
|
(1,325 | ) | (661 | ) | 32,076 | 37,894 | ||||||||||
|
Unrecognized loss
(gain), net of taxes
|
$ | 2,462 | $ | 1,227 | $ | (59,751 | ) | $ | (70,374 | ) | ||||||
F-31
LIBERTY
BANCORP, INC.
Notes
to Consolidated Financial Statements
The
estimated amounts that will be amortized from accumulated other comprehensive
earnings into net periodic cost for 2010 are as follows:
|
Retirement
Plan
|
Postretirement
Medical
Benefits
|
|||||||
|
Unrecognized
transition obligation
|
$ | — | $ | 12,538 | ||||
|
Unrecognized
prior service cost
|
7,526 | (9,665 | ) | |||||
|
Unrecognized
actuarial gain
|
(1,721 | ) | (20,286 | ) | ||||
| $ | 5,805 | $ | (17,413 | ) | ||||
Employee
Stock Ownership Plan (ESOP)
The Bank
has established an ESOP for the benefit of participating
employees. Participating employees are employees who are normally
scheduled to work at least twenty hours a week. After participants
complete plan eligibility requirements they become 20% vested after one year of
service, and 20% for each additional year of service until benefits are 100%
vested after 5 years. The Bank makes annual contributions to the ESOP
equal to the ESOP's debt service less dividends on unallocated ESOP shares used
to repay the ESOP loan. Dividends on allocated ESOP shares are paid
to participants of the ESOP and charged to retained earnings. The
ESOP shares are pledged as collateral on the ESOP loan. As the loan
is repaid, shares are released from collateral and allocated to participating
employees, based on the proportion of loan repaid and compensation of the
participants. The Plan permits offsetting forfeitures against
employer contributions. Benefits become payable upon a participant's
retirement, death, disability or separation from service.
Additional
ESOP disclosures are summarized as follows:
|
2009
|
2008
|
|||||||
|
Shares
allocated at year end
|
173,524 | 153,614 | ||||||
|
Shares
released for allocation at year end
|
25,350 | 29,369 | ||||||
|
Unreleased
shares at year end
|
36,134 | 61,484 | ||||||
|
ESOP
expense for the year
|
$ | 189,039 | $ | 296,378 | ||||
|
Fair
value of unreleased ESOP shares at year end
|
271,366 | 553,356 | ||||||
ESOP
shares prior to the July 11, 2006 conversion date have been adjusted by the
exchange ratio of 3.5004. The ESOP loan from the Company is secured
solely by the common stock at an interest rate of 8.25%.
F-32
LIBERTY
BANCORP, INC.
Notes
to Consolidated Financial Statements
Stock
Options
As
authorized by the 2003 Incentive Equity and Deferred Compensation Plan (the
“2003 Plan”), the Board of Directors granted 78,760 options to non-employee
directors and 96,260 to certain officers and employees during fiscal year
2004. The Plan authorizes the award of up to 258,063 shares of common
stock, subject to restrictions, to be issued to directors, officers and
employees of the Bank. The Plan provides for the grant of stock
options, stock appreciation rights, restricted stock and unrestricted
stock. Options expire ten years from the date of the
grant. Stock options to directors are fully vested on the grant date
of June 16, 2004. Options granted to the Bank’s CEO are vested over
three years and three months and options granted to certain other officers and
employees are vested over a five-year period. On January 27, 2005 the
Board of Directors granted an additional 38,504 options to certain officers and
employees. Options granted to the CEO are vested over a period of
three years and eight months and options granted to certain officers and
employees are vested over a five-year period. On November 23, 2005
the Board of Directors granted an additional 42,440 options to directors and
officers. Options granted to the board, CEO, and certain officers,
were vested over a ten-month period.
In
connection with the completion of the Conversion in July 2006, the Company
assumed the Plan and all outstanding options and shares were adjusted based on
the 3.5004 exchange ratio. The exercise prices were adjusted to
reflect the proportional change in values that resulted from the
exchange.
As
authorized by the Liberty Bancorp, Inc. 2007 Equity Incentive Plan (the “2007
Plan”), the Board of Directors granted 25,150 options to non-employee directors
and 65,500 options to certain officers and employees on February 27,
2007. The 2007 Plan authorizes the award of up to 100,691
options to purchase shares of common stock, subject to restrictions, to be
issued to directors, officers and employees of the Bank. The
Plan provides for the grant of stock options, stock appreciation rights,
restricted stock and unrestricted stock. Options expire ten
years from the date of the grant. All 90,650 options granted
are vested over a five-year period.
The
Company has estimated the fair value of awards granted for the year ended
September 30, 2009 under its stock option plan utilizing the Black-Scholes
pricing model to be $1.82. The assumptions used in the Black-Scholes
model were as follows:
|
2009
|
2008
|
|||||||
|
Expected
dividend yield
|
1.30 | % | — | |||||
|
Risk-free
interest rate
|
2.77 | % | — | |||||
|
Expected
life of options
|
7.50
years
|
— | ||||||
|
Expected
volatility
|
23.00 | % | — | |||||
The expected dividend yield is based
on the current quarterly dividend in effect at the time of the
grant. The risk-free interest rate is based on the 7-year U.S.
Treasury Constant. The expected life of options is based on the
average of the option life of ten years and vesting period of five
years. The expected volatility is based on historical volatility of
the Company’s
stock.
Stock
option compensation expense is as follows:
|
2009
|
2008
|
|||||||
|
Pretax
|
$ | 46,595 | $ | 75,347 | ||||
|
After
tax
|
43,550 | 71,639 | ||||||
|
Basic
and diluted earnings per share
|
$ | 0.01 | $ | 0.02 | ||||
F-33
LIBERTY
BANCORP, INC.
Notes
to Consolidated Financial Statements
At September 30, 2009, the total
unrecognized compensation expense related to nonvested stock options was
$103,991 and is expected to be recognized over the weighted-average period of
2.86 years.
Stock options, granted, exercised or
forfeited are as follows:
|
|
Weighted-
|
|||||||||||||||
|
Weighted-
|
Average
|
|||||||||||||||
|
Number
|
Average
|
Contractual
|
Aggregate
|
|||||||||||||
|
of
|
Exercise
|
Term
in
|
Intrinsic
|
|||||||||||||
|
Shares
|
Price
|
Years
|
Value
|
|||||||||||||
|
Outstanding
at September 30, 2007
|
323,063 | $ | 8.42 | 7.75 | $ | 797,568 | ||||||||||
|
Granted
|
- | - | - | - | ||||||||||||
|
Exercised
|
(525 | ) | 8.28 | - | - | |||||||||||
|
Expired
|
- | - | - | - | ||||||||||||
|
Forfeited
|
(1,050 | ) | 8.28 | - | - | |||||||||||
|
Outstanding
at September 30, 2008
|
321,488 | $ | 8.40 | 6.72 | 396,443 | |||||||||||
|
Granted
|
5,000 | 6.78 | - | - | ||||||||||||
|
Exercised
|
- | - | - | - | ||||||||||||
|
Expired
|
- | - | - | - | ||||||||||||
|
Forfeited
|
- | - | - | - | ||||||||||||
|
Outstanding
at September 30, 2009
|
326,488 | $ | 8.37 | 5.78 | $ | 105,303 | ||||||||||
|
Exercisable
at September 30, 2009
|
264,321 | $ | 7.82 | 5.38 | $ | 101,653 | ||||||||||
|
Vested
and expected to vest at September 30, 2009
|
264,321 | $ | 7.82 | 5.38 | $ | 101,653 | ||||||||||
A summary
of the total value of options exercised, the amount of cash received from the
exercise of stock options and the fair value of shares vested is as follows for
the years indicated:
|
2009
|
2008
|
|||||||
|
Intrinsic
value of options exercised
|
$ | — | $ | 1,076 | ||||
|
Cash
received from the exercise of options
|
— | 4,347 | ||||||
|
Fair
value of shares vested
|
189,033 | 415,793 | ||||||
Shares exercisable and weighted-average
exercise prices were 264,321 and $7.82 at September 30, 2009, respectively and
236,162 and $7.58 at September 30, 2008, respectively.
F-34
LIBERTY
BANCORP, INC.
Notes
to Consolidated Financial Statements
Restricted Stock Awards
During fiscal year 2004, as authorized
by the 2003 Plan, two directors each received a restricted stock award of 6,125
shares as adjusted by the exchange ratio of 3.5004, which vests over three
years. On February 27, 2007, as authorized by the 2007 Plan, the
Board of Directors granted 31,400 restricted stock awards to non-employee
directors and 78,000 awards to certain officers and employees. The
2007 Plan authorizes the award of up to 125,649 shares of common stock, subject
to restrictions, to be issued to directors, officers and employees of the
Bank. Subsequently, 125,649 shares were repurchased by a trust to
fund the restricted stock awards. All awards are vested over a
five-year period. A summary of the Company’s restricted stock
compensation expense is as follows:
|
2009
|
2008
|
|||||||
|
Pretax
|
$ | 249,977 | $ | 246,588 | ||||
|
After
tax
|
$ | 162,485 | $ | 160,282 | ||||
At September 30, 2009, the total
unrecognized expense was $626,430 and is expected to be recognized over the next
2.5 years.
A summary of the Company’s nonvested
stock award activity for 2009 is as follows:
|
Weighted-
|
||||||||
|
|
Average
|
|||||||
|
Number
of
Nonvested
|
Grant
Date
|
|||||||
|
Shares
|
Fair
Value
|
|||||||
|
Nonvested
at October 1, 2008
|
87,520 | $ | 11.27 | |||||
|
Granted
|
5,000 | 6.78 | ||||||
|
Vested
|
(21,880 | ) | 11.27 | |||||
|
Forfeited
|
— | — | ||||||
|
Nonvested
at September 30, 2009
|
70,640 | $ | 11.03 | |||||
|
(14)
|
Stockholders’
Equity and Minimum Regulatory Capital
Requirements
|
On August
23, 1993 the Bank completed its reorganization from a state-chartered mutual
savings bank into a Federal mutual holding company. The
reorganization was accomplished through a purchase and assumption of assets and
liabilities whereby the Bank (i) incorporated a Missouri-chartered stock savings
bank; (ii) converted the Bank's charter to a Federally-chartered mutual holding
company; (iii) transferred substantially all of the Bank's assets and
liabilities to the newly formed stock savings bank in exchange for 800,000
shares of common stock; and (iv) adopted a new charter issued by the Office of
Thrift Supervision (“OTS”) changing its form to that of a federally chartered
mutual holding company known as Liberty Savings Mutual Holding Company
(“MHC”).
Concurrent
with the reorganization, 500,000 shares of the Bank's common stock were issued
in an offering to the Bank's ESOP and MRPs established for the benefit of
officers and employees of the Bank, certain members of the Bank and members of
the general public. Each share of common stock was sold at a price of
$10.00 per share. The MHC owned 800,000 of the Bank's outstanding
common stock. Subsequent to the offering an additional 14,276 shares
of the Bank's common stock were issued to the MRPs.
F-35
LIBERTY
BANCORP, INC.
Notes
to Consolidated Financial Statements
On July
21, 2006 our organization converted from the partially public mutual holding
company form to the fully public stock holding company structure. In the stock
holding company structure, all of the Bank’s stock is owned by Liberty Bancorp,
Inc., and all of Liberty Bancorp’s stock is owned by the public and our employee
stock ownership plan. Liberty Savings Mutual Holding Company no
longer exists and the name of the bank, Liberty Savings Bank, F.S.B., was
changed to BankLiberty. Depositors and borrowers do not have voting
rights in the Bank. Voting rights were vested exclusively with
stockholders of the Company. A liquidation account was established at
the time of Conversion in an amount equal to $21.1 million, the capital of the
Bank as of the date of the latest balance sheet contained in the final
prospectus. Each eligible account holder or supplemental account
holder is entitled to a proportionate share of this account in the event of a
complete liquidation of the Bank, and only in such event. This share
will be reduced if the account holder’s or supplemental account holder’s deposit
balance falls below the amount on the date of record and will cease to exist if
the account is closed. The liquidation account will never be
increased despite any increase in the related deposit balance.
As part
of the conversion, Liberty Bancorp sold 2,807,383 shares of common stock at a
price of $10.00 per share representing the majority ownership of Liberty Savings
Bank that was held by Liberty Savings Mutual Holding Company. At the
conclusion of the conversion, existing public stockholders of Liberty Savings
Bank were issued 3.5004 shares of Liberty Bancorp, Inc. in exchange for each
share of Liberty Savings Bank common stock, or 1,952,754 shares. Fractional
shares in the aggregate, or 36 shares, were redeemed for cash. Total
shares outstanding after the offering and the exchange totaled 4,760,137
shares. Net proceeds from the sale of common stock in the
offering were $25,647,944, after deduction of conversion costs of $1,257,890,
and unearned compensation related to shares issued to the ESOP of
$1,167,996. In addition, as part of the Conversion and dissolution of
Liberty Savings Mutual Holding Company, the Bank received $694,397 of cash
previously held by the MHC. The Company retained 50% of the net
conversion proceeds less funds to originate a loan to a trust for the ESOP, and
used the balance of the net proceeds to purchase all of the stock in the Bank in
the Conversion.
On May 21, 2009 a fourth stock
repurchase program was approved to acquire up to 365,537, or 10%, of the
Company’s common stock. Repurchases will be conducted through open
market purchases or privately negotiated transactions, from time to time
depending on market conditions and other factors. There is no
guarantee as to the exact number of shares to be repurchased by the Company. The
Company repurchased 40,808 shares under this program.
The Bank
is subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital
requirements can result in certain mandatory and possibly additional
discretionary actions by regulators, which, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital
adequacy guidelines, the Bank must meet specific guidelines, which involve
quantitative measures of assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The Bank's
capital amounts and classifications are also subject to judgments by the
regulators about components, risk-weightings and other factors. At
September 30, 2009, the Bank met all capital adequacy requirements.
The Bank
is also subject to the regulatory framework for prompt corrective action. At
September 30, 2009 and 2008, the most recent notification from the regulatory
agencies categorized the Bank as well capitalized. To be categorized
as well capitalized, the Bank must maintain minimum total risk-based, Tier 1
risk-based and Tier 1 leverage ratios as set forth in the following
table. There are no conditions or events since the dates of the
aforementioned notifications which management believes have changed the Bank's
category.
F-36
LIBERTY
BANCORP, INC.
Notes
to Consolidated Financial Statements
The Bank’s actual and required capital
amounts and ratios at September 30, 2009 are as follows:
|
Minimum
|
Required
|
|||||||||||||||||||||||
|
for
Capital
|
to
be "Well
|
|||||||||||||||||||||||
|
Actual
|
Adequacy
|
Capitalized"
|
||||||||||||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||||
|
(Dollars
in Thousands)
|
||||||||||||||||||||||||
|
Stockholders'
equity
|
$ | 41,027 | ||||||||||||||||||||||
|
Computer
software costs
|
(191 | ) | ||||||||||||||||||||||
|
Goodwill
and core deposit intangible
|
(2,057 | ) | ||||||||||||||||||||||
|
Unrealized
gain, net – benefit plans
|
(57 | ) | ||||||||||||||||||||||
|
Unrealized
gain on securities AFS, net
|
(556 | ) | ||||||||||||||||||||||
|
Tangible
capital
|
$ | 38,166 | 9.8 | % | $ | 5,835 | 1.5 | % | ||||||||||||||||
|
General
valuation allowance
|
3,519 | |||||||||||||||||||||||
|
Total
capital to risk-weighted assets
|
$ | 41,685 | 12.7 | % | $ | 26,302 | 8.0 | % | $ | 32,877 | 10.0 | % | ||||||||||||
|
Tier
1 capital to risk-weighted assets
|
$ | 38,166 | 11.6 | % | $ | 13,151 | 4.0 | % | $ | 19,726 | 6.0 | % | ||||||||||||
|
Tier
1 capital to total assets
|
$ | 38,166 | 9.8 | % | $ | 15,559 | 4.0 | % | $ | 19,449 | 5.0 | % | ||||||||||||
F-37
LIBERTY
BANCORP, INC.
Notes
to Consolidated Financial Statements
The Bank’s actual and required capital
amounts and ratios at September 30, 2008 are as follows:
|
Minimum
|
Required
|
|||||||||||||||||||||||
|
for
Capital
|
to
be "Well
|
|||||||||||||||||||||||
|
Actual
|
Adequacy
|
Capitalized"
|
||||||||||||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||||
|
(Dollars
in Thousands)
|
||||||||||||||||||||||||
|
Stockholders'
equity
|
$ | 38,863 | ||||||||||||||||||||||
|
Computer
software costs
|
(192 | ) | ||||||||||||||||||||||
|
Unrealized
gain, net – benefit plans
|
(69 | ) | ||||||||||||||||||||||
|
Unrealized
gain on securities AFS, net
|
(269 | ) | ||||||||||||||||||||||
|
Tangible
capital
|
$ | 38,333 | 11.5 | % | $ | 4,983 | 1.5 | % | ||||||||||||||||
|
General
valuation allowance
|
2,633 | |||||||||||||||||||||||
|
Total
capital to risk-weighted assets
|
$ | 40,966 | 14.4 | % | $ | 22,741 | 8.0 | % | $ | 28,426 | 10.0 | % | ||||||||||||
|
Tier
1 capital to risk-weighted assets
|
$ | 38,333 | 13.5 | % | $ | 11,371 | 4.0 | % | $ | 17,056 | 6.0 | % | ||||||||||||
|
Tier
1 capital to total assets
|
$ | 38,333 | 11.5 | % | $ | 13,288 | 4.0 | % | $ | 16,610 | 5.0 | % | ||||||||||||
An OTS regulation restricts the Bank’s
ability to make capital distributions, including paying
dividends. The regulations do not permit cash dividend payments if
the Bank’s capital would be reduced below the amount of the minimum capital
requirements or the liquidation account. The OTS may impose other
restrictions. During the year ended 2009, the Bank paid a $660,000
dividend to Liberty Bancorp, Inc.
During the years ended September 30,
2009 and 2008, the Company paid cash dividends of $366,120 and $402,956,
respectively.
|
(15)
|
Off-Balance
Sheet Risk, Commitments and
Contingencies
|
The
Company is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to
originate loans and unused lines of credit. Those instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the balance sheet. The Company’s maximum
exposure to credit loss in the event of nonperformance by the borrower is
represented by the contractual amount and related accrued interest receivable of
those instruments. The Company minimizes this risk by evaluating each
borrower's creditworthiness on a case-by-case basis. Collateral held by the
Company generally consists of a first or second mortgage on the borrower's
property. The amount of collateral obtained is based upon an
appraisal of the property.
F-38
LIBERTY
BANCORP, INC.
Notes
to Consolidated Financial Statements
Commitments
to originate loans are legally binding agreements to lend to the Company's
customers. Letters of credit are unconditional commitments issued by
the Company to guarantee the performance of the borrower to a third
party.
The following table sets forth
information regarding off-balance sheet financial instruments as of September
30, 2009:
|
Fixed-Rate
|
Adjustable-
Rate
|
|||||||
|
Off-balance
sheet financial instruments:
|
||||||||
|
Commitments
to originate loans
|
$ | 3,562,841 | 4,209,636 | |||||
|
Commitments
for unused lines of credit
|
$ | 302,016 | 11,970,663 | |||||
|
Commitments
for undisbursed loans
|
$ | 2,286,855 | 4,745,548 | |||||
|
Commitments
for letters of credit
|
$ | 219,253 | — | |||||
Interest rates on these fixed-rate
loans generally ranged from 4.91% to 8.50%.
At September 30, 2009, there was no
known pending litigation or other claims that management believes will be
material to the Company’s financial position.
|
(16)
|
Fair
Value Measurements and Financial
Instruments
|
Fair
Value Measurements
Effective October 1, 2008, the Company
adopted the provisions included in FASB ASC 820-10, “Fair Value Measurements,”
for financial assets and liabilities. In accordance with FASB
820-10-65, the Company will delay application of the transition content in FASB
ASC 820 for non-financial assets and liabilities that are not recognized or
disclosed at fair value in the financial statements, until October 1,
2009.
FASB ASC 820-10 defines fair value as
the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date. The fair value hierarchy prioritizes the
assumptions that market participants would use in pricing the assets or
liabilities (the “inputs”) into three broad levels.
The fair value hierarchy gives the
highest priority (Level 1) to quoted prices in active markets for identical
assets and liabilities and the lowest priority (Level 3) to unobservable inputs
in which little, if any, market activity exists, requiring entities to develop
their own assumptions and data.
Level 2 inputs are inputs other than
quoted prices included within Level 1 that are observable for the asset or
liability, either directly or indirectly. These inputs include quoted
prices for similar assets or liabilities in active markets, quoted prices for
identical or similar assets or liabilities in market areas that are not active,
inputs other than quoted prices that are observable for the asset or liability
(such as interest rates, volatilities, prepayment speeds, credit risks and
default rates) or inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
F-39
LIBERTY
BANCORP, INC.
Notes
to Consolidated Financial Statements
Valuation
Techniques
Available for sale securities are
carried at fair value utilizing Level 1, Level 2 and Level 3
inputs. For equity securities, the Company obtains market
quotes for its investment in common stock.
For Level 2 debt securities, the
Company obtains fair value measurements from an independent pricing
service. Level 2 debt securities include Federal agency obligations,
state and municipal obligations, mortgage-backed securities and collateralized
mortgage obligations. The fair value measurements consider observable
data that may include dealer quotes, live trading levels, trade execution data,
cash flows, market consensus prepayment speeds, market spreads, credit
information and the U.S. Treasury yield curve.
The fair value of Level 3 debt
securities are determined by the appraisal of the underlying
collateral, discounted cash flow analysis, or other internally
developed estimates that incorporate market-based assumptions.
Impaired loans are carried at fair
value utilizing Level 3 inputs, consisting of appraisals of underlying
collateral or discounted cash flow analysis. The Company
considers a loan to be impaired under FASB ASC 310-10-15 when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan agreement
on a timely basis. Impairment losses are recognized through an
increase in the allowance for loan losses and provision for loan losses,
included in earnings for the period. The types of loans for which impairment
under FASB ASC 310-10-15 is measured include nonaccrual income property loans
(excluding those loans included in the homogenous portfolio which are
collectively reviewed for impairment), large, nonaccrual single-family loans and
troubled debt restructurings. Valuation allowances are established
for impaired loans under FASB ASC 310-10-15 for the difference between the loan
amount and the fair value of collateral and estimated selling
costs.
Mortgage loans originated and intended
for sale in the secondary market are carried at the lower of cost or estimated
market value in the aggregate, utilizing Level 2 inputs as determined based on
expected proceeds from outstanding commitments from investors.
F-40
LIBERTY
BANCORP, INC.
Notes
to Consolidated Financial Statements
Assets
Measured at Fair Value on a Recurring Basis
The following table summarizes
financial assets measured at fair value on a recurring basis at September 30,
2009, segregated by the level of the inputs within the hierarchy used to measure
fair value:
|
Fair Value Measurements at
Reporting Date Using
|
||||||||||||||||
|
Quoted
Prices
in
Active
Markets
for
Identical
Assets
|
Significant
Other
Observable
Inputs
|
Significant
Unobservable
Inputs
|
Total
Fair
|
|||||||||||||
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
Value
|
|||||||||||||
|
Available
for sale securities:
|
||||||||||||||||
|
Debt
securities:
|
||||||||||||||||
|
Federal
agency obligations
|
$ | - | $ | 10,550,363 | $ | - | $ | 10,550,363 | ||||||||
|
State
and municipal obligations
|
- | 6,933,639 | 2,980,985 | 9,914,624 | ||||||||||||
|
Mortgage-backed
securities
|
- | 8,709,731 | - | 8,709,731 | ||||||||||||
|
Collateralized
mortgage obligations
|
- | 247,079 | - | 247,079 | ||||||||||||
|
Equity
securities
|
299,189 | - | - | 299,189 | ||||||||||||
| $ | 299,189 | $ | 26,440,812 | $ | 2,980,985 | $ | 29,720,986 | |||||||||
Level 3
Assets Measured at Fair Value on a Recurring Basis Using Significant
Unobservable Inputs:
|
State
and
Municipal
Obligations
|
||||
|
Balance
at October 1, 2008
|
$ | 3,205,908 | ||
|
Total
unrealized losses included in other comprehensive earnings
|
(203,462 | ) | ||
|
Purchases
|
4,512 | |||
|
Principal
collections
|
(25,973 | ) | ||
|
Balance
at September 30, 2009
|
$ | 2,980,985 | ||
Assets
Measured at Fair Value on a Non-Recurring Basis
Assets measured at fair value on a
non-recurring basis at September 30, 2009 include nonperforming loans of
$2,715,188, which are collateral dependent utilizing Level 3 inputs and loans
held for sale of $459,270, utilizing Level 2
inputs.
F-41
LIBERTY
BANCORP, INC.
Notes
to Consolidated Financial Statements
Following is a summary of activity in
the allowance for losses on nonperforming loans:
|
2009
|
||||
|
Balance
at beginning of year
|
$ | 437,523 | ||
|
Charge-offs
|
(646,957 | ) | ||
|
Recoveries
|
— | |||
|
Provision
charged to expense
|
525,292 | |||
|
Balance
at end of year
|
$ | 315,858 | ||
Financial
Instruments
The carrying amounts and estimated fair
values of the Company’s financial instruments under FASB ASC 825-10 “Financial
Instruments,” are summarized as follows:
|
2009
|
2008
|
|||||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
|
Amount
|
Value
|
Amount
|
Value
|
|||||||||||||
|
Non-trading
instruments and nonderivatives:
|
||||||||||||||||
|
Cash
and cash equivalents
|
$ | 26,512,327 | $ | 26,512,327 | $ | 8,084,603 | $ | 8,084,603 | ||||||||
|
Securities
available for sale
|
20,764,176 | 20,764,176 | 26,053,420 | 26,053,420 | ||||||||||||
|
Stock
in FHLB of Des Moines
|
3,910,100 | 3,910,100 | 3,576,300 | 3,576,300 | ||||||||||||
|
Mortgage-backed
securities - available for sale
|
8,956,810 | 8,956,810 | 13,989,151 | 13,989,151 | ||||||||||||
|
Loans
receivable, net
|
302,246,097 | 314,679,761 | 256,713,257 | 262,427,542 | ||||||||||||
|
Loans
held for sale
|
459,270 | 459,270 | 877,246 | 877,246 | ||||||||||||
|
Accrued
interest receivable
|
1,557,970 | 1,557,970 | 1,640,478 | 1,640,478 | ||||||||||||
|
Deposits
|
276,203,274 | 278,379,493 | 219,763,837 | 220,125,700 | ||||||||||||
|
Accrued
interest on deposits
|
307,911 | 307,911 | 297,656 | 297,656 | ||||||||||||
|
Advances
from FHLB of Des
|
||||||||||||||||
|
Moines
|
69,140,862 | 69,784,806 | 69,240,870 | 68,890,734 | ||||||||||||
|
Securities
sold under agreement to repurchase
|
$ | 547,019 | $ | 542,643 | $ | 812,500 | $ | 806,000 | ||||||||
The following methods and assumptions
were used in estimating the fair values of financial instruments, exclusive of
securities which are discussed under “Valuation Techniques.”
Cash and cash equivalents are valued at
their carrying amounts due to the relatively short period to maturity of the
instruments.
The carrying amounts of accrued
interest receivable and payable approximate fair value. Stock in FHLB
of Des Moines is valued at cost, which represents redemption value and
approximates fair value.
Fair values are computed for each loan
category using market spreads to treasury securities for similar existing loans
in the portfolio and management's estimates of prepayments.
F-42
LIBERTY
BANCORP, INC.
Notes
to Consolidated Financial Statements
Deposits with no defined maturities,
such as NOW accounts, passbook accounts and money market deposit accounts, are
valued at the amount payable on demand at the reporting date. The fair value of
certificates of deposit, advances from FHLB of Des Moines and securities sold
under agreement to repurchase is computed at fixed spreads to treasury
securities with similar maturities.
Off-balance sheet assets include
commitments to extend credit and unused lines of credit for which fair values
were estimated based on interest rates and fees currently charged to enter into
similar transactions and commitments to sell loans for which fair values were
estimated based on current secondary market prices for commitments with similar
terms. As a result of the short-term nature of the outstanding
commitments, the fair values of fees on such commitments are considered
immaterial to the Company’s financial condition.
|
(17)
|
Parent
Company Only Financial Statements
|
The following balance sheets and
statements of earnings and cash flows for Liberty Bancorp, Inc. should be read
in conjunction with the consolidated financial statements and the notes
thereto.
Balance
Sheets
September
30, 2009 and 2008
|
|
2009
|
2008
|
||||||
|
Assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 1,659,607 | $ | 1,084,524 | ||||
|
Investment
in subsidiary
|
41,027,794 | 38,863,988 | ||||||
|
Securities
available for sale (“AFS”)
|
299,189 | 471,515 | ||||||
|
ESOP
note receivable
|
283,147 | 490,439 | ||||||
|
Loans
receivable, net of allowance for loan losses of $0
|
470,510 | 3,085,454 | ||||||
|
Accrued
interest receivable – loans
|
1,663 | 7,420 | ||||||
|
Other
assets
|
61,603 | 41,710 | ||||||
|
Total
assets
|
$ | 43,803,513 | $ | 44,045,050 | ||||
|
Liabilities
and Stockholders' Equity
|
||||||||
|
Other
liabilities
|
$ | 18,822 | 28,307 | |||||
|
Accrued
income taxes
|
— | 7,639 | ||||||
|
Total
liabilities
|
18,822 | 35,946 | ||||||
|
Stockholders'
equity:
|
||||||||
|
Common
stock
|
47,617 | 47,617 | ||||||
|
Treasury
stock, at cost
|
(11,100,506 | ) | (8,632,753 | ) | ||||
|
Additional
paid-in capital
|
32,600,040 | 32,320,258 | ||||||
|
Common
stock acquired by ESOP
|
(268,805 | ) | (474,634 | ) | ||||
|
Accumulated
other comprehensive earnings, net
|
640,636 | 292,484 | ||||||
|
Retained
earnings - substantially restricted
|
21,865,709 | 20,456,132 | ||||||
|
Total
stockholders' equity
|
43,784,691 | $ | 44,009,104 | |||||
|
Total
liabilities and stockholders' equity
|
$ | 43,803,513 | 44,045,050 | |||||
F-43
LIBERTY
BANCORP, INC.
Notes
to Consolidated Financial Statements
Statements
of Earnings
Years
Ended September 30, 2009 and 2008
|
|
2009
|
2008
|
||||||
|
Interest
and dividend income:
|
||||||||
|
Loans
receivable
|
$ | 90,689 | $ | 103,301 | ||||
|
ESOP
note receivable
|
40,461 | 58,322 | ||||||
|
Other
interest-earning assets
|
15,501 | 135,327 | ||||||
|
Total
interest income
|
146,651 | 296,950 | ||||||
|
Dividend
income - BankLiberty
|
660,000 | — | ||||||
|
Total
interest and dividend income
|
806,651 | 296,950 | ||||||
|
Loss
on sale of equity securities – AFS
|
(72,440 | ) | — | |||||
|
OTTI
loss on equity security
|
(113,126 | ) | — | |||||
|
Noninterest
expense
|
(308,579 | ) | (305,080 | ) | ||||
|
Earnings (loss) before income taxes and equity in
|
||||||||
|
undistributed
earnings of the Bank
|
312,506 | (8,130 | ) | |||||
|
Income
tax benefit
|
60,000 | 3,000 | ||||||
|
Net
earnings (loss) before equity in earnings of Bank
|
372,506 | (5,130 | ) | |||||
|
Earnings
of subsidiary in excess of dividends received
|
1,403,191 | 1,926,658 | ||||||
|
Net
earnings
|
$ | 1,775,697 | $ | 1,921,528 | ||||
F-44
LIBERTY
BANCORP, INC.
Notes
to Consolidated Financial Statements
Statements
of Cash Flows
Years
Ended September 30, 2009 and 2008
|
2009
|
2008
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
earnings
|
$ | 1,775,697 | $ | 1,921,528 | ||||
|
Adjustments
to reconcile net earnings to net
|
||||||||
|
cash
provided by (used for) operating activities:
|
||||||||
|
Equity
in undistributed net earnings of BankLiberty
|
(2,063,191 | ) | (1,926,658 | ) | ||||
|
OTTI
loss on equity security
|
113,126 | — | ||||||
|
Decrease
(increase) in:
|
||||||||
|
Accrued
interest receivable
|
5,757 | 2,520 | ||||||
|
Other
assets
|
(46,878 | ) | (2,959 | ) | ||||
|
Increase
(decrease) in;
|
||||||||
|
Other
liabilities
|
(9,485 | ) | 14,807 | |||||
|
Accrued
income taxes
|
(7,639 | ) | (32,519 | ) | ||||
|
Net
cash provided by (used for) operating activities
|
(232,613 | ) | (23,281 | ) | ||||
|
Cash
flows from investing activities:
|
||||||||
|
Net
change in loans receivable
|
2,614,944 | (1,485,454 | ) | |||||
|
Proceeds
from sale of equity securities
|
159,333 | — | ||||||
|
Dividend
from subsidiary
|
660,000 | — | ||||||
|
Purchase
of securities available for sale
|
— | (149,826 | ) | |||||
|
Repayment
of ESOP loan
|
207,292 | 216,496 | ||||||
|
Net
cash provided by (used for) investing activities
|
3,641,569 | (1,418,784 | ) | |||||
|
Cash
flows from financing activities:
|
||||||||
|
Proceeds
from exercise of stock options
|
— | 4,347 | ||||||
|
Cash
dividends
|
(366,120 | ) | (402,956 | ) | ||||
|
Repurchase
of common stock
|
(2,467,753 | ) | (8,632,753 | ) | ||||
|
Other
|
— | 989 | ||||||
|
Net
cash provided by (used for) financing activities
|
(2,833,873 | ) | (9,030,373 | ) | ||||
|
Net
increase (decrease) in cash and cash equivalents
|
575,083 | (10,472,438 | ) | |||||
|
Cash
and cash equivalents at beginning of year
|
1,084,524 | 11,556,962 | ||||||
|
Cash
and cash equivalents at end of year
|
$ | 1,659,607 | $ | 1,084,524 | ||||
F-45
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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.
|
LIBERTY
BANCORP, INC.
|
||
|
Date:
December 21, 2009
|
By:
|
/s/ Brent M. Giles
|
|
Brent
M. Giles
|
||
|
Chief
Executive Officer
|
||
|
(Duly
Authorized Representative)
|
||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
By:
|
/s/ Brent M. Giles
|
Date: December
21, 2009
|
|
|
Brent
M. Giles
|
|||
|
Chief
Executive Officer and Director
|
|||
|
(Principal
Executive Officer)
|
|||
|
By:
|
/s/ Marc J. Weishaar
|
Date: December
21, 2009
|
|
|
Marc
J. Weishaar
|
|||
|
Chief
Financial Officer
|
|||
|
(Principal
Financial and Accounting Officer)
|
|||
|
By:
|
/s/ Daniel G. O’Dell
|
Date: December
21, 2009
|
|
|
Daniel
G. O’Dell
|
|||
|
Chairman
of the Board
|
|||
|
By:
|
/s/ Ralph W. Brant, Jr.
|
Date: December
21, 2009
|
|
|
Ralph
W. Brant, Jr.
|
|||
|
Director
|
|||
|
By:
|
/s/ Robert T. Sevier
|
Date: December
21, 2009
|
|
|
Robert
T. Sevier
|
|||
|
Director
|
|||
|
By:
|
/s/ Steven K. Havens
|
Date: December
21, 2009
|
|
|
Steven
K. Havens
|
|||
|
Director
|