Attached files
file | filename |
---|---|
10-K - 10-K - Skagit State Bancorp, Inc. | a09-36035_110k.htm |
EX-23 - EX-23 - Skagit State Bancorp, Inc. | a09-36035_1ex23.htm |
EX-32 - EX-32 - Skagit State Bancorp, Inc. | a09-36035_1ex32.htm |
EX-31.1 - EX-31.1 - Skagit State Bancorp, Inc. | a09-36035_1ex31d1.htm |
EX-31.2 - EX-31.2 - Skagit State Bancorp, Inc. | a09-36035_1ex31d2.htm |
Exhibit 13
SKAGIT STATE BANCORP, INC. AND SUBSIDIARY
TABLE OF CONTENTS
December 31, 2009, 2008 and 2007
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PAGE |
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SELECTED FINANCIAL DATA |
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1 |
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TO OUR STOCKHOLDERS AND FRIENDS |
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2 |
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MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING |
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3 |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |
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4 |
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FINANCIAL STATEMENTS |
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Consolidated Balance Sheet |
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5 |
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Consolidated Statement of Income |
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6 |
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Consolidated Statement of Changes in Stockholders Equity and Comprehensive Income |
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7 |
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Consolidated Statement of Cash Flows |
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8 |
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Notes to Consolidated Financial Statements |
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9-31 |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS; QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK |
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32-51 |
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CORPORATE DIRECTORY |
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52 |
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LOCATION DIRECTORY |
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53 |
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STOCK INFORMATION |
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54 |
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ANNUAL MEETING |
The annual meeting of stockholders will be held at 6:30 p.m. on Tuesday, April 20, 2010, at McIntyre Hall, 2501 East College Way, Mount Vernon, Washington. |
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SELECTED FINANCIAL DATA
(dollars in thousands except per share data)
As of and for the year ended December 31, |
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2009 |
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2008 |
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2007 |
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2006 |
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2005 |
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STATEMENT OF INCOME |
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Interest income |
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$ |
28,646 |
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$ |
32,187 |
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$ |
36,822 |
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$ |
33,219 |
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$ |
29,014 |
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Interest expense |
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7,180 |
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10,132 |
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13,137 |
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10,000 |
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6,413 |
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|||||
Net interest income |
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21,466 |
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22,055 |
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23,685 |
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23,219 |
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22,601 |
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Provision (benefit) for loan losses |
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3,595 |
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2,080 |
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(150 |
) |
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(50 |
) |
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Net interest income after provision (benefit) for loan losses |
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17,871 |
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19,975 |
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23,835 |
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23,219 |
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22,651 |
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Non-interest income |
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3,979 |
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4,365 |
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3,776 |
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3,214 |
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3,175 |
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Non-interest expense |
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18,498 |
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18,104 |
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16,420 |
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14,568 |
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14,186 |
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Income before income taxes |
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3,352 |
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6,236 |
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11,191 |
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11,865 |
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11,640 |
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Income tax expense |
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45 |
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998 |
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2,615 |
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3,177 |
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3,110 |
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Net income |
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$ |
3,307 |
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$ |
5,238 |
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$ |
8,576 |
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$ |
8,688 |
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$ |
8,530 |
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Basic earnings per share |
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$ |
5.64 |
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$ |
8.64 |
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$ |
12.76 |
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$ |
12.69 |
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$ |
12.06 |
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Diluted earnings per share |
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$ |
5.60 |
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$ |
8.57 |
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$ |
12.72 |
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$ |
12.68 |
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$ |
12.06 |
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Cash dividends declared per share |
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$ |
3.50 |
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$ |
4.50 |
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$ |
4.50 |
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$ |
3.00 |
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$ |
2.20 |
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BALANCE SHEET |
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Total assets |
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$ |
647,888 |
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$ |
566,876 |
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$ |
592,663 |
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$ |
532,788 |
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$ |
521,879 |
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Net loans |
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386,649 |
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393,775 |
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350,663 |
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320,568 |
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295,436 |
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Deposits |
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545,436 |
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469,538 |
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500,420 |
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449,343 |
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443,065 |
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Other borrowings |
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38,128 |
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32,665 |
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15,851 |
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14,102 |
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11,298 |
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Stockholders equity |
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62,857 |
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61,801 |
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72,683 |
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66,544 |
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65,373 |
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KEY OPERATING RATIOS |
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Return on average stockholders equity |
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5.22 |
% |
8.27 |
% |
12.33 |
% |
13.35 |
% |
13.71 |
% |
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Return on average assets |
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0.56 |
% |
0.91 |
% |
1.54 |
% |
1.68 |
% |
1.71 |
% |
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Net interest margin |
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3.85 |
% |
4.10 |
% |
4.52 |
% |
4.83 |
% |
4.87 |
% |
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Average stockholders equity to average assets |
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10.75 |
% |
11.05 |
% |
12.45 |
% |
12.55 |
% |
12.45 |
% |
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Dividend pay-out ratio |
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62.06 |
% |
52.08 |
% |
35.27 |
% |
23.64 |
% |
18.24 |
% |
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Book value per share |
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$ |
107.10 |
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$ |
105.41 |
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$ |
108.32 |
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$ |
98.80 |
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$ |
92.43 |
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March 22, 2010
To Our Stockholders and Friends,
These are truly challenging times for banks. The worst economic downturn since the 1930s coupled with extraordinary dislocations in the financial markets, created enormous challenges for community bankers during the past two years. While the current recession has thrown many banks into a survival mode, these difficult times have also created growth opportunities for Skagit State Bank as individuals and businesses look for stability and safety in their Banking relationship.
Net income for 2009 was $3,307,000, yielding basic earnings per share of $5.64, down $3.00 per share from $8.64 for 2008. During 2009, to address loan downgrades and decreases in real estate collateral values, the provision for loan losses increased to $3,595,000. Net loans decreased 1.81% and were $386,649,000 at year end. The deposit challenges of 2008 disappeared and our deposits grew 16.16% to $545,436,000 and total assets grew to $647,888,000.
Although it was another tough year, Skagit State Bank continues to fare better than many of our peers. It seems undeniable that we are entering an era of heightened oversight from Washington D.C. The regulatory reform drama in Congress is still unfolding and it is far from clear what the new regulatory architecture for financial services will look like, although a profound change of some kind seems inevitable.
We value our long-term customers, many who have been with us since the bank was founded. We also highly value the new relationships we build each and every day. Because of your commitment to banking at Skagit State Bank, we have built a bank that has continued to grow. We look forward to serving you in the days, months, and years to come!
Sincerely,
Cheryl R. Bishop
President and Chief Executive Officer
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Bancorps management, including its Chief Executive Officer and its Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Bancorps internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and disposal of assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United State of America, and that receipts and expenditures are made only in accordance with authorizations of management and directors of Bancorp; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposal of assets that could have a material impact on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and can only provide reasonable assurance with respect to financial statement preparation and fair presentation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
Management assessed the effectiveness of Bancorps internal control over financial reporting as of December 31, 2009, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control Integrated Framework. Based on this assessment, management concluded that as of December 31, 2009, Bancorps internal control over financial reporting was effective based on those criteria.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Additionally, managements report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permits us to provide only managements report in this annual report.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Skagit State Bancorp, Inc.
We have audited the accompanying consolidated balance sheet of Skagit State Bancorp, Inc., and Subsidiary as of December 31, 2009 and 2008, and the related consolidated statements of income, changes in stockholders equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2009. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated 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 audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, and audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial position of Skagit State Bancorp, Inc. and Subsidiary as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.
Bellingham, Washington
March 22, 2010
SKAGIT STATE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(dollars in thousands)
December 31, |
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2009 |
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2008 |
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ASSETS |
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ASSETS |
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Cash and due from banks |
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$ |
14,441 |
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$ |
11,954 |
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Federal funds sold |
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62,531 |
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Investment securities |
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Available-for-sale, at fair value |
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118,561 |
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102,647 |
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Held-to-maturity, at amortized cost |
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40,298 |
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36,518 |
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Loans held for sale |
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574 |
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350 |
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Loans |
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393,532 |
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399,225 |
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Allowance for loan losses |
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(6,883 |
) |
(5,450 |
) |
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Net loans |
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386,649 |
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393,775 |
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Bank premises and equipment, net |
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10,944 |
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11,480 |
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Other real estate owned |
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6,284 |
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5,667 |
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Accrued interest receivable |
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2,531 |
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2,430 |
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Other assets |
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5,075 |
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2,055 |
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TOTAL ASSETS |
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$ |
647,888 |
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$ |
566,876 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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LIABILITIES |
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Deposits |
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Interest-bearing |
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$ |
471,597 |
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$ |
394,422 |
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Non-interest-bearing |
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73,839 |
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75,116 |
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Total deposits |
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545,436 |
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469,538 |
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Other borrowings |
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38,128 |
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32,665 |
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Other liabilities |
|
1,467 |
|
2,872 |
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Total liabilities |
|
585,031 |
|
505,075 |
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COMMITMENTS AND CONTINGENCIES (Notes 10 and 15) |
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STOCKHOLDERS EQUITY |
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Common stock no par value, 5,000,000 shares authorized, 586,905 and 586,285 shares issued and outstanding at December 31, 2009 and 2008 respectively |
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12,303 |
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12,042 |
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Accumulated other comprehensive income, net of tax |
|
1,872 |
|
2,325 |
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Retained earnings |
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48,682 |
|
47,434 |
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Total stockholders equity |
|
62,857 |
|
61,801 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
647,888 |
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$ |
566,876 |
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See accompanying notes to these financial statements.
SKAGIT STATE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(dollars in thousands, except per share amounts)
Years Ended December 31, |
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2009 |
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2008 |
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2007 |
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INTEREST INCOME |
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|
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Interest and fees on loans |
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$ |
23,243 |
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$ |
25,486 |
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$ |
28,353 |
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Investment securities |
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|
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|
|
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Taxable |
|
4,192 |
|
5,208 |
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5,621 |
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Exempt from federal income tax |
|
1,133 |
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1,208 |
|
1,070 |
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Federal funds sold |
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78 |
|
285 |
|
1,778 |
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Total interest income |
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28,646 |
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32,187 |
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36,822 |
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INTEREST EXPENSE |
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|
|
|
|
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|
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Deposits |
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6,877 |
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9,579 |
|
12,556 |
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Other borrowings |
|
303 |
|
553 |
|
581 |
|
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Total interest expense |
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7,180 |
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10,132 |
|
13,137 |
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NET INTEREST INCOME |
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21,466 |
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22,055 |
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23,685 |
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Provision (benefit) for loan losses |
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3,595 |
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2,080 |
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(150 |
) |
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NET INTEREST INCOME AFTER |
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PROVISION (BENEFIT) FOR LOAN LOSSES |
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17,871 |
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19,975 |
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23,835 |
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NON-INTEREST INCOME |
|
|
|
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|
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|
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Service charges on deposits |
|
3,005 |
|
3,060 |
|
2,761 |
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Other |
|
736 |
|
827 |
|
972 |
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Gain on sale of assets |
|
238 |
|
478 |
|
43 |
|
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Total non-interest income |
|
3,979 |
|
4,365 |
|
3,776 |
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NON-INTEREST EXPENSES |
|
|
|
|
|
|
|
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Salaries |
|
7,330 |
|
7,900 |
|
7,587 |
|
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Payroll taxes and employee benefits |
|
1,867 |
|
1,828 |
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1,769 |
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Provision for other real estate owned losses |
|
1,167 |
|
1,479 |
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Bank premises and equipment |
|
948 |
|
1,027 |
|
1,211 |
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Occupancy |
|
779 |
|
780 |
|
693 |
|
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State business taxes |
|
379 |
|
432 |
|
495 |
|
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Advertising |
|
643 |
|
747 |
|
897 |
|
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Deposit Insurance |
|
1,218 |
|
69 |
|
53 |
|
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Other |
|
4,167 |
|
3,842 |
|
3,715 |
|
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Total non-interest expenses |
|
18,498 |
|
18,104 |
|
16,420 |
|
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INCOME BEFORE PROVISION FOR INCOME TAX |
|
3,352 |
|
6,236 |
|
11,191 |
|
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PROVISION (BENEFIT) FOR INCOME TAX |
|
|
|
|
|
|
|
|||
Current |
|
1,221 |
|
1,398 |
|
2,663 |
|
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Deferred |
|
(1,176 |
) |
(400 |
) |
(48 |
) |
|||
Total provision for income tax |
|
45 |
|
998 |
|
2,615 |
|
|||
NET INCOME |
|
$ |
3,307 |
|
$ |
5,238 |
|
$ |
8,576 |
|
BASIC EARNINGS PER SHARE |
|
$ |
5.64 |
|
$ |
8.64 |
|
$ |
12.76 |
|
DILUTED EARNINGS PER SHARE |
|
$ |
5.60 |
|
$ |
8.57 |
|
$ |
12.72 |
|
DIVIDENDS DECLARED PER SHARE |
|
$ |
3.50 |
|
$ |
4.50 |
|
$ |
4.50 |
|
See accompanying notes to these financial statements.
SKAGIT STATE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
Years Ended December 31, 2009, 2008 and 2007
|
|
|
|
|
|
Accum. Other |
|
|
|
Total |
|
|
|
|||||
|
|
Common Stock |
|
Comprehensive |
|
Retained |
|
Stockholders |
|
Comprehensive |
|
|||||||
(dollars in thousands except share and per share amounts) |
|
Shares |
|
Amount |
|
Income (Loss) |
|
Earnings |
|
Equity |
|
Income |
|
|||||
BALANCE, December 31, 2006 |
|
673,532 |
|
$ |
13,935 |
|
$ |
(269 |
) |
$ |
52,878 |
|
$ |
66,544 |
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net income |
|
|
|
|
|
|
|
8,576 |
|
8,576 |
|
$ |
8,576 |
|
||||
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Unrealized gains on available-for-sale securities, net of taxes of $496 |
|
|
|
|
|
963 |
|
|
|
963 |
|
963 |
|
|||||
Total other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
963 |
|
|||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
$ |
9,539 |
|
||||
Cash dividend declared, $4.50 per share |
|
|
|
|
|
|
|
(3,029 |
) |
(3,029 |
) |
|
|
|||||
Common stock redemption |
|
(2,870 |
) |
(510 |
) |
|
|
|
|
(510 |
) |
|
|
|||||
Stock options exercised |
|
25 |
|
4 |
|
|
|
|
|
4 |
|
|
|
|||||
Stock compensation expense and restricted stock awards |
|
310 |
|
135 |
|
|
|
|
|
135 |
|
|
|
|||||
BALANCE, December 31, 2007 |
|
670,997 |
|
13,564 |
|
694 |
|
58,425 |
|
72,683 |
|
|
|
|||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net income |
|
|
|
|
|
|
|
5,238 |
|
5,238 |
|
$ |
5,238 |
|
||||
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Unrealized gains on available-for-sale securities, net of taxes of $840 |
|
|
|
|
|
1,631 |
|
|
|
1,631 |
|
1,631 |
|
|||||
Total other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
1,631 |
|
|||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
$ |
6,869 |
|
||||
Cash dividend declared, $4.50 per share |
|
|
|
|
|
|
|
(2,646 |
) |
(2,646 |
) |
|
|
|||||
Common stock redemption |
|
(85,022 |
) |
(1,721 |
) |
|
|
(13,583 |
) |
(15,304 |
) |
|
|
|||||
Stock compensation expense and restricted stock awards |
|
310 |
|
199 |
|
|
|
|
|
199 |
|
|
|
|||||
BALANCE, December 31, 2008 |
|
586,285 |
|
12,042 |
|
2,325 |
|
47,434 |
|
61,801 |
|
|
|
|||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net income |
|
|
|
|
|
|
|
3,307 |
|
3,307 |
|
$ |
3,307 |
|
||||
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Unrealized loss on available-for-sale securities, net of benefit of $233 |
|
|
|
|
|
(453 |
) |
|
|
(453 |
) |
(453 |
) |
|||||
Total other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
(453 |
) |
|||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
$ |
2,854 |
|
||||
Cash dividend declared, $3.50 per share |
|
|
|
|
|
|
|
(2,059 |
) |
(2,059 |
) |
|
|
|||||
Stock options exercised |
|
25 |
|
4 |
|
|
|
|
|
4 |
|
|
|
|||||
Stock compensation expense and restricted stock awards |
|
595 |
|
257 |
|
|
|
|
|
257 |
|
|
|
|||||
BALANCE, December 31, 2009 |
|
586,905 |
|
$ |
12,303 |
|
$ |
1,872 |
|
$ |
48,682 |
|
$ |
62,857 |
|
|
|
See accompanying notes to these financial statements
SKAGIT STATE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in thousands)
Years Ended December 31, |
|
2009 |
|
2008 |
|
2007 |
|
|||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|||
Net income |
|
$ |
3,307 |
|
$ |
5,238 |
|
$ |
8,576 |
|
Adjustments to reconcile net income to net cash flows from operating activities |
|
|
|
|
|
|
|
|||
Provision (benefit) for loan losses |
|
3,595 |
|
2,080 |
|
(150 |
) |
|||
Provision for other real estate owned losses |
|
1,167 |
|
1,479 |
|
|
|
|||
Depreciation |
|
831 |
|
884 |
|
838 |
|
|||
Loss (gain) on sale of assets |
|
8 |
|
(232 |
) |
92 |
|
|||
Gain on sale of other real estate owned |
|
|
|
|
|
(19 |
) |
|||
Gain on sale of loans |
|
(238 |
) |
(246 |
) |
(24 |
) |
|||
Amortization of investment security premiums and discounts, net |
|
(167 |
) |
(218 |
) |
(231 |
) |
|||
Provision for deferred income taxes |
|
(1,176 |
) |
(400 |
) |
(48 |
) |
|||
Stock compensation for employee services |
|
257 |
|
199 |
|
135 |
|
|||
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|||
Originations of loans held for sale |
|
(16,854 |
) |
(18,212 |
) |
(1,476 |
) |
|||
Proceeds from sales of loans held for sale |
|
16,868 |
|
18,108 |
|
1,500 |
|
|||
(Increase) decrease in interest receivable |
|
(101 |
) |
1,034 |
|
(50 |
) |
|||
Decrease in other assets |
|
(1,611 |
) |
(770 |
) |
(867 |
) |
|||
(Decrease) increase in other liabilities |
|
(1,405 |
) |
(837 |
) |
910 |
|
|||
Net cash flows from operating activities |
|
4,481 |
|
8,107 |
|
9,186 |
|
|||
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|||
Proceeds from maturities, calls, and principal payments of investment securities available-for-sale |
|
41,122 |
|
47,441 |
|
67,507 |
|
|||
Purchases of investment securities available-for-sale |
|
(57,557 |
) |
(20,445 |
) |
(78,829 |
) |
|||
Proceeds from maturities, calls, and principal payments of investment securities held-to-maturity |
|
7,302 |
|
8,309 |
|
5,962 |
|
|||
Purchases of investment securities held-to-maturity |
|
(11,080 |
) |
(4,901 |
) |
(10,854 |
) |
|||
Net (increase) decrease in federal funds sold |
|
(62,531 |
) |
41,195 |
|
(15,495 |
) |
|||
Net (increase) decrease in loans |
|
2,222 |
|
(52,138 |
) |
(29,945 |
) |
|||
Purchase of premises and equipment |
|
(642 |
) |
(338 |
) |
(1,736 |
) |
|||
Capitalized expenditures for improvements to other real estate owned |
|
(136 |
) |
(200 |
) |
|
|
|||
Proceeds from sale of assets |
|
|
|
301 |
|
|
|
|||
Proceeds from sale of other real estate owned |
|
|
|
|
|
19 |
|
|||
Net cash flows from investing activities |
|
(81,300 |
) |
19,224 |
|
(63,371 |
) |
|||
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|||
Net increase (decrease) in demand deposits, money market, NOW and savings accounts |
|
30,600 |
|
(707 |
) |
3,967 |
|
|||
Net increase (decrease) in time deposits |
|
45,298 |
|
(30,175 |
) |
47,110 |
|
|||
Amount paid for redemption of common stock |
|
|
|
(15,304 |
) |
(510 |
) |
|||
Net increase in other borrowings |
|
5,463 |
|
16,814 |
|
1,749 |
|
|||
Cash dividends |
|
(2,059 |
) |
(2,646 |
) |
(3,029 |
) |
|||
Proceeds from exercise of stock options |
|
4 |
|
|
|
4 |
|
|||
Net cash flows from financing activities |
|
79,306 |
|
(32,018 |
) |
49,291 |
|
|||
NET CHANGE IN CASH AND DUE FROM BANKS |
|
2,487 |
|
(4,687 |
) |
(4,894 |
) |
|||
CASH AND DUE FROM BANKS, beginning of year |
|
11,954 |
|
16,641 |
|
21,535 |
|
|||
CASH AND DUE FROM BANKS, end of year |
|
$ |
14,441 |
|
$ |
11,954 |
|
$ |
16,641 |
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|||
Cash paid during the year for income taxes |
|
$ |
266 |
|
$ |
1,902 |
|
$ |
2,387 |
|
Cash paid during the year for interest |
|
$ |
7,155 |
|
$ |
10,408 |
|
$ |
12,977 |
|
SUPPLEMENTAL INFORMATION ABOUT NONCASH FINANCING AND INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|||
Property taken in settlement of loans |
|
$ |
1,309 |
|
$ |
6,946 |
|
|
|
See accompanying notes to these financial statements
Skagit State Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Subsequent Events Subsequent events are events or transactions that occur after the balance sheet date, but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet. Non-recognized subsequent events are events that provided evidence about conditions that did not exist at the date of the balance sheet, but arose after that date. Bancorp has evaluated subsequent events for potential recognition or disclosure through the date the financial statements were issued.
Financial Statement Presentation The accompanying consolidated financial statements include the accounts of Skagit State Bancorp, Inc. and its subsidiary Skagit State Bank, (collectively, Company or Bancorp). The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and reporting practices applicable to the banking industry. All significant inter-company accounts and transactions have been eliminated. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
Nature of Operations Skagit State Bank (the Bank) provides a full range of banking services to individual and corporate customers through its 12 branches in Skagit, Snohomish and Whatcom counties. The Bank is subject to significant competition from other financial institutions. The Bank is also subject to the regulations of certain federal and state of Washington agencies and undergoes periodic examinations by those regulatory authorities. The Bank began operations in 1958 and is a state-chartered commercial bank with its headquarters in Burlington (Skagit County), Washington.
Use of Estimates In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of revenues and expenses for the periods presented, and assets and liabilities as of the date of the balance sheet. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, deferred income taxes, the valuation of real estate owned, and investment securities. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of Bancorps financial statements; accordingly, it is possible that actual results could differ from these estimates or assumptions, which could have a material effect on the reported amounts of the consolidated financial position and results of operation.
Cash and Cash Equivalents For purposes of the statement of cash flows, cash and cash equivalents include cash on hand and due from banks, all of which have original maturities of three months or less. Bancorp maintains cash balances at several banks. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $250,000.
Federal Funds Sold Federal funds sold include funds the bank has sold overnight to various financial institutions. In addition, since the Federal Reserve Bank is currently paying interest on reserves held overnight with them, Bancorp considers reserve funds held at the Federal Reserve Bank as federal funds sold. Bancorp is required to maintain an average balance with the Federal Reserve Bank or maintain such reserve balances in the form of cash. The Banks reserve requirement as of December 31, 2009 and 2008 was $2.3 million and $998,000, respectively.
Investment Securities Bancorps investment portfolio is classified into two groups. 1) Securities Available for Sale (AFS); and 2) Securities Held to Maturity (HTM). Investment securities classified as available-for-sale are recorded at fair value, with the net unrealized gain or loss included in comprehensive income within the statement of stockholders equity, net of tax. Securities available for sale may be sold. Realized gains or losses on dispositions are based on the net proceeds and the adjusted carrying amount of securities sold, using the specific identification method. Investment securities Bancorp has the intent and ability to hold to maturity are classified as held-to-maturity and recorded at amortized cost.
Skagit State Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investments with fair values that are less than amortized cost are considered impaired. Impairment may result from either a decline in the financial condition of the issuing entity or, in the case of fixed rate investments, from rising interest rates. At each financial statement date, management assesses each investment to determine if impaired investments are temporarily impaired or if the impairment is other-than-temporarily impaired. If the investment is deemed to be other-than-temporarily impaired, the security is written down in the period in which such determination is made. Such write-downs would be included in earnings as realized losses.
Loans Held-for-Sale Loans originated and intended for sale are carried at the lower of aggregate cost or fair value. Gains and losses on sales of mortgage loans are recognized on the difference between the selling price and the carrying value of the related mortgage loans sold. Gains on sale of loans were $238,000, $246,000 and $24,000 during 2009, 2008 and 2007. The servicing rights on such loans are not retained. As of December 31, 2009 and 2008, Bancorp held $574,000 and $350,000 as loans held-for-sale on its balance sheet.
Loans Loans are reported at their outstanding principal balance adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees including commitment fees and direct loan origination costs are capitalized and the net amount is amortized into interest income as an adjustment to the loan yield.
A loan is considered impaired when management determines that it is probable that Bancorp will be unable to collect all contractual amounts of principal and interest as scheduled in the loan agreement. These loans include loans in nonaccrual status and other loans that management considers to be impaired. At a minimum, all non-accrual loans and troubled debt restructuring are considered impaired loans. Factors considered by management in determining impairment include payment status, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. The recorded net investment in impaired loans, including accrued interest, is limited to the present value of the expected cash flows of the impaired loan, the observable fair market value of the loan or the estimated fair value of the loans collateral.
Loans are defined as delinquent when any payment of principal and/or interest is past due. Loans are placed on nonaccrual status when, in the opinion of management, the collection of additional interest is doubtful or when the loan becomes 90 or more days past due. When a loan is placed on nonaccrual status, all interest previously accrued, but not collected, is reversed and charged against interest income. Payments received on nonaccrual loans are generally applied to principal. However, based on managements assessment of the ultimate collectability of a nonaccrual loan, interest income may be recognized on a cash basis. Nonaccrual loans are returned to accrual when the loan is brought current, and when in the opinion of management, the borrower has demonstrated the ability to resume payments of principal and interest. Interest income on restructured loans is recognized pursuant to the terms of a new loan agreement.
Allowance for Loan Losses The allowance for loan losses represents managements best estimate of losses inherent in the portfolio and is evaluated on a regular basis and reviewed by the Board of Directors. Bancorps evaluation of the allowance for loan losses is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance is based upon Bancorps evaluation of the pertinent factors underlying the quality and composition of the loan portfolio, levels and trends in losses and delinquencies, current economic conditions, specific industry conditions and estimated value of any underlying collateral.
The allowance consists of specific, general and unallocated components; (i) a specific valuation allowance based on a review of classified or non-performing loans for specific weaknesses and evaluation of those loans for impairment and loss exposure; (ii) a general allowance which is based on historical loan loss experience for different loan types
Skagit State Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and different risk gradings with adjustments for current events and conditions. Bancorps process is designed to account for credit deterioration as it occurs. The adjustments are a result of managements judgment about risks inherent in the portfolio and include such factors as loan quality trends, levels of and trends of non-accrual loans, past due loans, potential problem loans, criticized loan balances, net charge-offs and current economic and business conditions, among other factors and; (iii) unallocated general allowances determined based on general economic conditions and other qualitative risk factors. The unallocated allowance provides for other credit losses inherent in the loan portfolio that may not have been contemplated in the general and specific components of the allowance. The unallocated amount is reviewed periodically based on trends in credit losses, the results of credit reviews and overall economic trends.
While Bancorp believes that it uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in adjustments to the allowance for loan losses, and net income could be significantly affected if circumstances differ substantially from the assumptions used in making the final determination. The growth of the loan portfolio and a further decline in the performance of the economy, in general, or a further decline in real estate values in our market areas, in particular, could have an adverse impact on collectability, increase the level of non-performing loans or have other adverse effects which alone or in aggregate could have a material adverse effect on our business, financial condition, results of operation and cash flows which may require additional provisions to our allowance for loan losses. The ultimate recovery of loans is susceptible to future market factors beyond Bancorps control. Additionally, loans are subject to examinations by regulators, who, based upon their judgment, may require Bancorp to make additional provisions or adjustments to its allowance for loan losses.
Additions to the allowance, in the form of provisions, are reflected in current operating results, while charge-offs to the allowance are made when a loss is determined to have occurred.
Bank Premises and Equipment Bank premises and equipment are shown at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The estimated useful life ranges up to 30 years for buildings and improvements and ranges from 3 to 7 years for all furniture, fixtures and equipment. Upon sale or retirement, the cost and related accumulated depreciation are removed from the respective property or equipment accounts, and the resulting gains or losses are reflected in operations. Expenditures for maintenance and repairs are charged to expense as incurred.
Other Real Estate Owned Other real estate owned includes properties acquired through foreclosure. These properties are recorded at the lower of cost or estimated fair value less estimated costs to sell based on periodic evaluations. Valuation of the property occurs when it is foreclosed upon and annually thereafter. Losses arising from the acquisition of property, in full or partial satisfaction of loans, are charged to the allowance for loan losses. Legal and professional fees associated with foreclosures are expensed as incurred. Costs incurred to improve property are capitalized to the extent they are deemed to be recoverable; however, in no event are recorded costs allowed to exceed fair value. Subsequent gains, losses, or expenses recognized on the sale of these properties are included in non-interest income or expense.
Borrowings Bancorp pledges certain financial instruments it owns to collateralize the sales of securities that are subject to an obligation to repurchase the same or similar securities (repurchase agreements). Under these arrangements, Bancorp transfers the assets but still retains effective control through an agreement that both entitles and obligates Bancorp to repurchase the assets. As a result, repurchase agreements are accounted for as collateralized financing arrangements and not as a sale and subsequent repurchase of securities. The obligation to repurchase the securities is reflected as a liability in the Consolidated Balance Sheets while the securities underlying the agreements remain in the respective asset accounts.
Skagit State Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Bancorp has the capacity to borrow funds from the Federal Reserve Bank. This credit line has pledge requirements whereby Bancorp must pledge collateral sufficient to cover any borrowed funds taken. Bancorp also has federal funds credit lines at other financial institutions which are subject to the financial institutions availability of funds and Bancorps financial position.
Income Tax Bancorp files a consolidated federal income tax return. Bancorp accounts for income taxes using the liability method and deferred taxes are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. Deferred taxes result from temporary differences in the recognition of certain income and expense amounts between Bancorps financial statements and its tax returns. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
FASB ASC 740, Accounting for Uncertainty in Income Taxes seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. ASC 740 provides guidance on de-recognition, classification, interest and penalties and accounting in interim periods and requires expanded disclosure with respect to uncertainty in income taxes. As a result of the implementation of ASC 740, Bancorp recognized no adjustments for unrecognized income tax benefits, all of which would affect Bancorps effective income tax rate if recognized. Our accounting policy with respect to interest and penalties arising from income tax settlements is to recognize them as non-interest expense.
Financial Instruments In the ordinary course of business, Bancorp has entered into off-balance-sheet financial instruments consisting of commitments to extend credit, commitments under credit-card arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received.
Advertising Costs Bancorp expenses advertising costs as they are incurred.
Earnings Per Share Basic earnings per share amounts are computed based on the weighted average number of shares outstanding. Diluted earnings per share is calculated by dividing net income by diluted weighted average shares outstanding, which includes common stock equivalents outstanding using the treasury stock method.
Stock-Based Compensation Bancorp has a stock-based equity compensation plan which is described more fully in Note 9. Under this plan, Bancorp is authorized to grant options or restricted stock up to 100,000 shares. Bancorp accounts for stock-based compensation and any awards that are granted under FASB ASC Topic 718 Compensation-Stock Compensation.
Reclassifications Certain amounts in prior years financial statements have been reclassified to conform to the current years presentation. These reclassifications had no effect on retained earnings or net income as previously reported.
Skagit State Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
NOTE 2 INVESTMENT SECURITIES AND FEDERAL FUNDS SOLD
The following tables summarize the aggregate amortized cost and estimated fair value of investment securities as of December 31:
|
|
2009 |
|
||||||||||
|
|
Amortized |
|
Gross Unrealized |
|
Estimated |
|
||||||
(dollars in thousands) |
|
Cost |
|
Gains |
|
Losses |
|
Fair Value |
|
||||
Available-For-Sale Securities |
|
|
|
|
|
|
|
|
|
||||
U.S. government agencies |
|
$ |
39,698 |
|
$ |
274 |
|
$ |
132 |
|
$ |
39,840 |
|
Mortgage-backed securities |
|
66,640 |
|
2,556 |
|
200 |
|
68,996 |
|
||||
State and political subdivisions |
|
9,387 |
|
366 |
|
28 |
|
9,725 |
|
||||
Total available-for-sale |
|
115,725 |
|
3,196 |
|
360 |
|
118,561 |
|
||||
Held-To-Maturity Securities |
|
|
|
|
|
|
|
|
|
||||
State and political subdivisions |
|
40,298 |
|
889 |
|
626 |
|
40,561 |
|
||||
Total held-to-maturity |
|
40,298 |
|
889 |
|
626 |
|
40,561 |
|
||||
Total investment securities |
|
$ |
156,023 |
|
$ |
4,085 |
|
$ |
986 |
|
$ |
159,122 |
|
|
|
2008 |
|
||||||||||
|
|
Amortized |
|
Gross Unrealized |
|
Estimated |
|
||||||
(dollars in thousands) |
|
Cost |
|
Gains |
|
Losses |
|
Fair Value |
|
||||
Available-For-Sale Securities |
|
|
|
|
|
|
|
|
|
||||
U.S. government agencies |
|
$ |
28,669 |
|
$ |
857 |
|
$ |
|
|
$ |
29,526 |
|
Mortgage-backed securities |
|
59,316 |
|
2,525 |
|
|
|
61,841 |
|
||||
State and political subdivisions |
|
11,140 |
|
218 |
|
78 |
|
11,280 |
|
||||
Total available-for-sale |
|
99,125 |
|
3,600 |
|
78 |
|
102,647 |
|
||||
Held-To-Maturity Securities |
|
|
|
|
|
|
|
|
|
||||
State and political subdivisions |
|
36,518 |
|
167 |
|
87 |
|
36,598 |
|
||||
Total held-to-maturity |
|
36,518 |
|
167 |
|
87 |
|
36,598 |
|
||||
Total investment securities |
|
$ |
135,643 |
|
$ |
3,767 |
|
$ |
165 |
|
$ |
139,245 |
|
Skagit State Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
NOTE 2 INVESTMENT SECURITIES AND FEDERAL FUNDS SOLD (CONTINUED)
The following tables show the gross unrealized losses and fair value of investments with unrealized losses that are not deemed to be other-than-temporarily impaired as of December 31;
|
|
2009 |
|
||||||||||||||||
|
|
Less Than 12 Months |
|
12 Months or Greater |
|
Total |
|
||||||||||||
(dollars in thousands) |
|
Fair Value |
|
Unrealized |
|
Fair Value |
|
Unrealized |
|
Fair Value |
|
Unrealized |
|
||||||
Available-For-Sale Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
U.S. government agencies |
|
$ |
18,933 |
|
$ |
132 |
|
$ |
|
|
$ |
|
|
$ |
18,933 |
|
$ |
132 |
|
Mortgage-backed securities |
|
10,916 |
|
200 |
|
|
|
|
|
10,916 |
|
200 |
|
||||||
State and political subdivisions |
|
221 |
|
1 |
|
470 |
|
27 |
|
691 |
|
28 |
|
||||||
Total available-for-sale |
|
30,070 |
|
333 |
|
470 |
|
27 |
|
30,540 |
|
360 |
|
||||||
Held-To-Maturity Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
State and political subdivisions |
|
15,725 |
|
626 |
|
|
|
|
|
15,725 |
|
626 |
|
||||||
Total held-to-maturity |
|
15,725 |
|
626 |
|
|
|
|
|
15,725 |
|
626 |
|
||||||
Total investment securities |
|
$ |
45,795 |
|
$ |
959 |
|
$ |
470 |
|
$ |
27 |
|
$ |
46,265 |
|
$ |
986 |
|
|
|
2008 |
|
||||||||||||||||
|
|
Less Than 12 Months |
|
12 Months or Greater |
|
Total |
|
||||||||||||
(dollars in thousands) |
|
Fair Value |
|
Unrealized |
|
Fair Value |
|
Unrealized |
|
Fair Value |
|
Unrealized |
|
||||||
Available-For-Sale Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
U.S. government agencies |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
State and political subdivisions |
|
904 |
|
78 |
|
|
|
|
|
904 |
|
78 |
|
||||||
Total available-for-sale |
|
904 |
|
78 |
|
|
|
|
|
904 |
|
78 |
|
||||||
Held-To-Maturity Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
State and political subdivisions |
|
6,547 |
|
74 |
|
4,544 |
|
13 |
|
11,091 |
|
87 |
|
||||||
Total held-to-maturity |
|
6,547 |
|
74 |
|
4,544 |
|
13 |
|
11,091 |
|
87 |
|
||||||
Total investment securities |
|
$ |
7,451 |
|
$ |
152 |
|
$ |
4,544 |
|
$ |
13 |
|
$ |
11,995 |
|
$ |
165 |
|
In estimating other-than-temporary impairment losses, management considers, among other things, the length of time and the extent to which the fair values has been less than cost, the financial condition and near-terms prospects of the issuer, and the intent and ability of Bancorp to retain its investment in the issue for a period of time sufficient to allow for any anticipated recovery in costs. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time. If Bancorp intends to sell the security or it is more likely than not that it will be required to sell the security, the other-than-temporary impairment will be recognized in earnings equal to the entire difference between the cost basis and fair value. If Bancorp does not intend to sell the security and it is not more likely than not that Bancorp will sell the security before recovery of its cost basis, the difference between the cost basis and fair value is reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. The previous cost basis less the other-than-temporary impairment recognized in earnings becomes the new cost basis of the security.
Management has the ability and intent to hold securities classified as held-to-maturity until they mature, at which time Bancorp will receive full value for the securities. In addition, management does not have the intent to sell any of the securities classified as available for sale and believes that it is more likely than not that Bancorp will not have
Skagit State Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
NOTE 2 INVESTMENT SECURITIES AND FEDERAL FUNDS SOLD (CONTINUED)
to sell any such securities before a recovery of the cost basis. At December 31, 2009, the unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline. Bancorp believes that the decline in fair value is temporary, with no permanent sector or issuer credit concerns or impairments. Accordingly, management believes any impairments as of December 31, 2009 are temporary and thus, did not recognize any other-than-temporary impairment losses.
At December 31, 2009, Bancorp held one security in the available-for-sale portfolio and no security in the held-to-maturity portfolio that had an unrealized loss for more than one year.
Available for sale investment securities with a carrying value of $101.3 million and $87.1 million, as of December 31, 2009 and 2008, respectively, were pledged as collateral for public fund deposits, securities sold under agreements to repurchase, Treasury Tax and Loan payments, and Federal Reserve Bank discount window borrowings. There were no sales of securities during 2009 and 2008.
The amortized cost and estimated fair value of investment securities at December 31, 2009, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
2009 |
|
||||||||||
|
|
Available-For-Sale |
|
Held-To-Maturity |
|
||||||||
|
|
Amortized |
|
Estimated |
|
Amortized |
|
Estimated |
|
||||
(dollars in thousands) |
|
Cost |
|
Fair Value |
|
Cost |
|
Fair Value |
|
||||
U.S. government agencies |
|
|
|
|
|
|
|
|
|
||||
1 year |
|
$ |
2,000 |
|
$ |
2,053 |
|
$ |
|
|
$ |
|
|
2-5 years |
|
31,203 |
|
31,233 |
|
|
|
|
|
||||
6-10 years |
|
6,495 |
|
6,554 |
|
|
|
|
|
||||
Over 10 years |
|
|
|
|
|
|
|
|
|
||||
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
||||
1 year |
|
|
|
|
|
|
|
|
|
||||
2-5 years |
|
|
|
|
|
|
|
|
|
||||
6-10 years |
|
23,643 |
|
24,698 |
|
|
|
|
|
||||
Over 10 years |
|
42,997 |
|
44,298 |
|
|
|
|
|
||||
State and political subdivisions |
|
|
|
|
|
|
|
|
|
||||
1 year |
|
1,511 |
|
1,548 |
|
5,085 |
|
5,100 |
|
||||
2-5 years |
|
4,777 |
|
5,037 |
|
14,123 |
|
14,341 |
|
||||
6-10 years |
|
1,599 |
|
1,653 |
|
8,988 |
|
9,153 |
|
||||
Over 10 years |
|
1,500 |
|
1,487 |
|
12,102 |
|
11,967 |
|
||||
Total investment securities |
|
$ |
115,725 |
|
$ |
118,561 |
|
$ |
40,298 |
|
$ |
40,561 |
|
Investments in federal funds sold are made with various banks. To reduce risk, Bancorp will generally invest no more than $10,000,000 in federal funds sold with any one bank with the exception of the Federal Reserve Bank which there is no limit. Federal funds sold as of December 31, 2009 were $62.5 million and no federal funds sold as of December 31, 2008.
Skagit State Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
NOTE 3 LOANS
Most of Bancorps business activity is with customers located within Skagit, Snohomish and Whatcom Counties. Generally, loans are secured by accounts receivable, inventory, deposit accounts, personal property or real estate. Rights to collateral vary and are legally documented to the extent practicable. Bancorp originates commercial, real estate and consumer loans. Bancorp concentrates on five areas of lending: loans to individuals for business purposes, loans for small and medium-sized businesses, agricultural loans, loans to commercial enterprises for real estate transactions and consumer purpose loans.
Real estate loans comprise the largest category of loans. While Bancorp has significant balances within this lending category, these real estate secured loans are diversified between the defined segments of this portfolio. The real estate secured portfolio consists of both commercial purpose loans and consumer purpose loans. These loans are collateralized by, but not limited to, property types such as office buildings, retail buildings, owner occupied business properties, multi-family properties, farm land, timber land, residential land development and residential properties. Bancorp has developed processes and policies to monitor and manage concentrations of credit within defined segments of the loan portfolio. Bancorp believes that its loan policies and concentration policies minimize risk in its loan portfolio. Although Bancorp has a diversified loan portfolio, economic conditions may affect borrowers ability to meet the stated repayment terms.
The major components of loans at December 31 are as follows:
(dollars in thousands) |
|
2009 |
|
2008 |
|
||
Real Estate |
|
|
|
|
|
||
Residential and commercial |
|
$ |
248,658 |
|
$ |
258,958 |
|
Construction |
|
13,261 |
|
17,470 |
|
||
Commercial, industrial and agricultural |
|
76,716 |
|
79,819 |
|
||
Consumer |
|
55,910 |
|
44,224 |
|
||
|
|
394,545 |
|
400,471 |
|
||
Less deferred loan fees |
|
(1,013 |
) |
(1,246 |
) |
||
Total loans |
|
$ |
393,532 |
|
$ |
399,225 |
|
Contractual maturities of loans as of December 31, 2009 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay loans with or without prepayment penalties.
(dollars in thousands) |
|
Within
one |
|
One
to five |
|
After
five |
|
Total |
|
||||
Real Estate |
|
|
|
|
|
|
|
|
|
||||
Residential and commercial |
|
$ |
57,237 |
|
$ |
145,699 |
|
$ |
45,722 |
|
$ |
248,658 |
|
Construction |
|
12,473 |
|
788 |
|
|
|
13,261 |
|
||||
Commercial, industrial and agricultural |
|
49,121 |
|
16,674 |
|
10,921 |
|
76,716 |
|
||||
Consumer |
|
8,152 |
|
18,179 |
|
29,579 |
|
55,910 |
|
||||
Total |
|
$ |
126,983 |
|
$ |
181,340 |
|
$ |
86,222 |
|
$ |
394,545 |
|
Bancorp originates both variable and fixed-rate loans. At December 31, 2009 and 2008, $160.5 million and $170.9 million of loans outstanding were variable rate loans. Loans participations sold to others totaled $3.9 million and $5.2 million as of December 31, 2009 and 2008.
Skagit State Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
NOTE 4 ALLOWANCE FOR LOAN LOSSES
The following is an analysis of the changes in the allowance for loan losses:
(dollars in thousands) |
|
2009 |
|
2008 |
|
2007 |
|
|||
Balance, beginning of year |
|
$ |
5,450 |
|
$ |
4,535 |
|
$ |
5,176 |
|
Provision (benefit) for loan losses |
|
3,595 |
|
2,080 |
|
(150 |
) |
|||
Loans charged off |
|
(2,597 |
) |
(1,612 |
) |
(1,336 |
) |
|||
Recoveries on loans previously charged off |
|
435 |
|
447 |
|
845 |
|
|||
Balance, end of year |
|
$ |
6,883 |
|
$ |
5,450 |
|
$ |
4,535 |
|
The following is a summary of non-accrual and impaired loans:
(dollars in thousands) |
|
2009 |
|
2008 |
|
||
Non accruing loans |
|
$ |
10,742 |
|
$ |
5,456 |
|
Other impaired loans |
|
13,625 |
|
50 |
|
||
Loans 90 days past due and still accruing |
|
|
|
|
|
||
Total impaired loans |
|
$ |
24,367 |
|
$ |
5,506 |
|
|
|
|
|
|
|
||
Impaired loans with a valuation allowance |
|
$ |
24,157 |
|
$ |
732 |
|
Impaired loans without a valuation allowance |
|
$ |
210 |
|
$ |
4,774 |
|
Allowance for loan losses related to impaired loans |
|
$ |
1,179 |
|
$ |
89 |
|
Interest income collected on impaired loans was $1.1 million, $300,000, and $411,000 for the years ended December 31, 2009, 2008 and 2007, respectively. Average balances of impaired loans were $13.1 million, $3.5 million and $7.2 million for the years ended December 31, 2009, 2008 and 2007, respectively. Additional interest income of $514,000, $173,000 and $522,000 would have been recorded for the year ended December 31, 2009, 2008 and 2007, respectively, had non-accrual loans been current in accordance with their original terms. At December 31, 2009, there were no significant commitments to lend to borrowers representing impaired and nonaccruing loans. At December 31, 2009, four relationships represented fifty percent of total impaired loans. Periodically, Bancorp restructures loans by renewing or extending due dates as an accommodation to borrowers. Principal and interest on these loans are recorded in accordance with their restructured terms.
NOTE 5 BANK PREMISES AND EQUIPMENT
The major classifications of bank premises and equipment are as follows:
(dollars in thousands) |
|
2009 |
|
2008 |
|
||
Land |
|
$ |
3,820 |
|
$ |
3,942 |
|
Buildings and leasehold improvements |
|
10,311 |
|
10,450 |
|
||
Furniture, fixtures and equipment |
|
5,039 |
|
5,696 |
|
||
|
|
19,170 |
|
20,088 |
|
||
Less accumulated depreciation |
|
(8,226 |
) |
(8,608 |
) |
||
Total bank premises and equipment |
|
$ |
10,944 |
|
$ |
11,480 |
|
Depreciation expense on premises and equipment was $831,000 in 2009, $884,000 in 2008 and $838,000 in 2007.
SKAGIT STATE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
NOTE 6 DEPOSITS
The major classifications of deposits and the total remaining maturities for time deposits at December 31, are as follows:
(dollars in thousands) |
|
2009 |
|
2008 |
|
||
Non-interest-bearing demand |
|
$ |
73,839 |
|
$ |
75,116 |
|
Interest-bearing demand |
|
101,504 |
|
87,091 |
|
||
Money market deposit accounts |
|
77,288 |
|
69,548 |
|
||
Savings |
|
86,370 |
|
76,646 |
|
||
Subtotal |
|
339,001 |
|
308,401 |
|
||
|
|
|
|
|
|
||
Time Deposits |
|
|
|
|
|
||
Due within one year |
|
158,885 |
|
135,587 |
|
||
After one year but within two years |
|
39,680 |
|
19,632 |
|
||
After two years but within three years |
|
7,065 |
|
3,449 |
|
||
After three years but within four years |
|
287 |
|
1,670 |
|
||
After four years but within five years |
|
307 |
|
298 |
|
||
After five years |
|
211 |
|
501 |
|
||
Total time deposits |
|
206,435 |
|
161,137 |
|
||
Total deposits |
|
$ |
545,436 |
|
$ |
469,538 |
|
Certificates of deposit, greater than or equal to $100,000 included in the above amounts, totaled $114.9 million and $79.9 million at December 31, 2009 and 2008, respectively. At December 31, 2009 and 2008, $152,000 and $479,000 in deposit overdrafts were reclassified as loans outstanding. At December 31, 2009 and 2008, brokered time deposits totaled $24.0 million and $4.0 million, respectively.
NOTE 7 OTHER BORROWINGS
The Bancorps primary source of other borrowings include securities sold under agreement to repurchase, federal funds purchased from correspondent banks, and discount window borrowings from the Federal Reserve Bank of San Francisco. The following tables detail Bancorps other borrowings as of December 31:
(dollars in thousands) |
|
2009 |
|
2008 |
|
||
Balance outstanding at end of year |
|
$ |
38,128 |
|
$ |
32,665 |
|
Weighted average interest rate at year end |
|
0.94 |
% |
1.65 |
% |
||
Maximum month-end balance during the year |
|
$ |
38,128 |
|
$ |
45,990 |
|
Average monthly balance during the year |
|
18,065 |
|
24,242 |
|
||
Weighted average interest rate during the year |
|
1.68 |
% |
2.28 |
% |
||
Carrying value of collateral for repurchase agreements |
|
41,103 |
|
23,201 |
|
Bancorp offers repurchase agreements to its customers. The agreements are fully collateralized by certain securities of the U.S. Government and its agencies and other approved investments including FHLB, FNMA, FFCB and FHLMC securities under agreements to repurchase. The securities underlying the agreements are held by a safekeeping agent. As of December 31, 2009, securities sold under agreements to repurchase were $38.1 million and all scheduled to mature during 2009 with variable interest rates between 0.40% to 2.00%.
SKAGIT STATE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
NOTE 7 OTHER BORROWINGS (CONTINUED)
As of December 31, 2009, Bancorp held investment securities at the Federal Reserve with a market value of $48.5 million as collateral for discount window borrowings. The Federal Reserve applies a margin to the market price of this collateral to determine lendable value, and as of December 31, 2009, this lendable value was $46.7 million.
NOTE 8 INCOME TAXES
A reconciliation of the effective income tax rate with the federal statutory tax rate is as follows:
|
|
2009 |
|
2008 |
|
2007 |
|
|||||||||
(dollars in thousands) |
|
Amount |
|
Rate |
|
Amount |
|
Rate |
|
Amount |
|
Rate |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Income tax provision at statutory rate |
|
$ |
1,140 |
|
34.0 |
% |
$ |
2,120 |
|
34.0 |
% |
$ |
3,805 |
|
34.0 |
% |
Effect of non-taxable interest income |
|
(385 |
) |
(11.5 |
) |
(411 |
) |
(6.6 |
) |
(369 |
) |
(3.2 |
) |
|||
Non-deductible expenses |
|
440 |
|
13.1 |
|
452 |
|
7.3 |
|
483 |
|
4.3 |
|
|||
Tax credits |
|
(1,219 |
) |
(36.4 |
) |
(1,224 |
) |
(19.6 |
) |
(1,190 |
) |
(10.6 |
) |
|||
Other |
|
69 |
|
2.1 |
|
61 |
|
0.9 |
|
(114 |
) |
(1.1 |
) |
|||
Total income taxes |
|
$ |
45 |
|
1.3 |
% |
$ |
998 |
|
16.0 |
% |
$ |
2,615 |
|
23.4 |
% |
The tax credits are from Bancorps investment in Qualified Zone Academy Bonds. In lieu of receiving periodic interest payments, Bancorp receives an annual income tax credit until maturity of the bond. The tax credits become available one year after the bond is issued and each successive one year period thereafter until maturity. At December 31, 2009 and 2008, Bancorp had $20.7 million and $21.1 million in Qualified Zone Academy Bonds with maturity dates ranging from approximately 2 years to 13 years. The tax credits earned were $1.2 million for each of the last three years ended 2009, 2008 and 2007, respectively.
The following table shows the nature and components of Bancorps net deferred tax asset as of December 31:
(dollars in thousands) |
|
2009 |
|
2008 |
|
||
Deferred Tax Assets |
|
|
|
|
|
||
Allowance for loan losses |
|
$ |
2,340 |
|
$ |
1,853 |
|
Unrealized loss on securities available-for-sale |
|
|
|
|
|
||
Other deferred tax assets |
|
241 |
|
74 |
|
||
Other accrued expenses |
|
109 |
|
71 |
|
||
Other real estate owned |
|
386 |
|
13 |
|
||
Total deferred assets |
|
3,076 |
|
2,011 |
|
||
|
|
|
|
|
|
||
Deferred Tax Liabilities |
|
|
|
|
|
||
Deferred loan fees for tax purposes in excess of amounts deferred for financial reporting |
|
(50 |
) |
(65 |
) |
||
Investment securities |
|
(33 |
) |
(28 |
) |
||
Premises and equipment |
|
(225 |
) |
(328 |
) |
||
Unrealized gain on securities available-for-sale |
|
(965 |
) |
(1,198 |
) |
||
Other |
|
(49 |
) |
(48 |
) |
||
Total deferred liabilities |
|
(1,322 |
) |
(1,667 |
) |
||
Net deferred tax asset |
|
$ |
1,754 |
|
$ |
344 |
|
SKAGIT STATE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
NOTE 8 INCOME TAXES (CONTINUED)
A valuation allowance against deferred tax assets has not been established as it is more likely than not, based on Bancorps historical performance, that these deferred tax assets will be realized.
FASB ASC 740, Accounting for Uncertainty in Income Taxes seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. ASC 740 provides guidance on de-recognition, classification, interest and penalties and accounting in interim periods and requires expanded disclosure with respect to uncertainty in income taxes. As a result of the implementation of ASC 740, Bancorp recognized no adjustments for unrecognized income tax benefits, all of which would affect Bancorps effective income tax rate if recognized.
Our accounting policy with respect to interest and penalties arising from income tax settlements is to recognize them as non-interest expense. Bancorp had no unrecognized tax benefits at December 31, 2009 and 2008 and recognized no interest or penalties expense during 2009 and 2008. Bancorp and its subsidiary files income tax returns in the United States federal jurisdiction. Bancorp is no longer subject to U.S. federal income tax examinations by tax authorities for tax years before 2006. During 2007, the State of Washington examined the Bancorps business and occupation tax returns for 2003, 2004, 2005, and 2006 and no significant adjustments were identified.
NOTE 9 EMPLOYEE BENEFIT PLANS
401K Plan: Bancorp has a 401(k) plan covering substantially all of its employees. Eligible employees may contribute amounts through payroll deductions. Bancorp matches 100% of each eligible employees elected contributions, up to a maximum of 4% of the employees annual eligible compensation. At the discretion of the Board of Directors, Bancorp also makes an annual discretionary profit sharing contribution of 2%, which is allocated to eligible employees based upon annual eligible compensation. All employee contributions vest immediately and employer contributions vest over a 6 year period. Employees have the option of investing contributions among selected mutual funds. During years ended December 31, 2009, 2008 and 2007, Bancorp contributed approximately $384,000, $355,000 and $336,000, respectively, to the 401(k) plan.
Incentive Stock Plan: Bancorp has one share-based payment plan, which is shareholder approved, and permits the grant of share-based awards to its employees and directors up to 100,000 shares. The plan addresses stock options, restricted stock awards and other stock based compensation awards. This plan is primarily designed to recognize, motivate, reward and retain eligible employees and to better align the interest of Bancorps employees with those of its shareholders.
During 2009, Bancorp granted options and in 2008 granted both options and restricted stocks awards. No options or awards were granted in 2007. It is the Bancorps policy to issue new shares of common stock for options and restricted stock awards. Total equity compensation expense was $256,000 in 2009, $199,000 in 2008 and $135,000 in 2007. In 2007 and 2009, cash received from the exercise of options and restricted stock awards totaled $4,000 and in 2008, no options were exercised. There was no tax benefit realized on stock options and restricted stock awards in 2009, 2008 and 2007.
SKAGIT STATE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
NOTE 9 EMPLOYEE BENEFIT PLANS (CONTINUED)
Stock Options: All options granted during 2009 and 2008 were Incentive Stock Options and were granted at a price equal to the market value of the stock on the grant date, have a term of 10 years and vest over a five year period. Bancorp measures the fair value of each stock option at the date of the grant, using the Black Scholes option valuation model. The application of this valuation model involves assumptions that are judgmental and sensitive in the determination of compensation expense. The fair value of all options is amortized on a straight-line basis over the vesting periods. Estimated forfeitures will be evaluated in subsequent periods and may change based on new facts and circumstances. Assumptions used in arriving at the fair value of options granted are presented in the following table. No stock options were awarded in 2007.
|
|
2009 |
|
2008 |
|
Expected price volatility |
|
18.41 |
% |
16.14 |
% |
Risk-free interest rate |
|
2.05 |
% |
3.37 |
% |
Dividend yield on underlying stock |
|
2.30 |
% |
2.38 |
% |
Weighted-average expected life in years |
|
7.00 |
|
7.00 |
|
Weighted-average grant date fair value |
|
30.78 |
|
31.84 |
|
The volatility factor is based on historical stock prices over the most recent period commensurate with the estimated expected life of the award. The risk-free interest rate is based on the U.S. Treasury curve in effect at the time of the award. As Bancorp does not have a long history of stock options, an average or mid-point based on the vesting term and the expiration term was used in determining the weighted average expected life on options granted to employees. The expected dividend yield is based on dividend trends and the market value of the Bancorps stock price at the time of the award.
The following table summarizes the activity related to options outstanding at December 31, 2009. The aggregate intrinsic value represents the total pretax intrinsic value (amount by which the fair value of the underlying stock exceeds the exercise price of an option or award, times the number of shares).
(dollars in thousands except share and per share amounts)
|
|
Shares |
|
Weighted
|
|
Weighted
|
|
Aggregate |
|
||
Outstanding at January 1, 2009 |
|
18,331 |
|
$ |
170.48 |
|
7.69 |
|
$ |
541 |
|
Granted |
|
10,455 |
|
195.00 |
|
10.00 |
|
|
|
||
Exercised |
|
25 |
|
|
|
|
|
$ |
1 |
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
||
Outstanding at December 31, 2009 |
|
28,761 |
|
$ |
179.40 |
|
7.58 |
|
$ |
|
|
Exercisable at December 31, 2009 |
|
8,941 |
|
$ |
166.33 |
|
6.36 |
|
$ |
|
|
The unrecognized share-based compensation cost relating to stock option expense at December 31, 2009 was $505,000 which will be recognized over the remaining vesting schedule of the options. The total intrinsic value of options exercised during the twelve months ended December 31, 2009, 2008 and 2007 was $1,000, $0 and $1,000. The total fair value of shares vested during the year ended December 31, 2009, 2008, and 2007 was $676,000, $532,000 and $490,000.
SKAGIT STATE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
NOTE 9 EMPLOYEE BENEFIT PLANS (CONTINUED)
A summary of the status of Bancorps non-vested stock options as of December 31, 2009, and activity during the year ended December 31, 2009, is presented below:
|
|
Shares |
|
Weighted
|
|
|
|
|
|
|
|
|
|
Nonvested at January 1, 2009 |
|
13,036 |
|
$ |
32.73 |
|
Awarded |
|
10,455 |
|
30.78 |
|
|
Vested |
|
3,671 |
|
32.90 |
|
|
Forfeited |
|
|
|
|
|
|
Nonvested at December 31, 2009 |
|
19,820 |
|
$ |
31.67 |
|
Stock Awards: Recipients of restricted stock awards do not pay any cash consideration to Bancorp for the shares and receive all dividends with respect to all such shares, whether or not shares have vested. The awards vest over a five year period. Bancorp measures the fair value of each stock award at the date of the grant and recognizes compensation based on the market price of Bancorps common stock. The unrecognized share-based compensation cost relating to restricted stock awards expense at December 31, 2009 was $208,000, which will be recognized over the remaining years of the original five year vesting period of the awards. The weighted average grant date fair value of restricted stock awards granted during 2008 was $189.00. No awards were granted during 2009 or 2007. The total intrinsic value of stock awards exercised and the total fair value of shares vested during the year ended December 31, 2009, 2008 and 2007 was $112,000, $62,000 and $57,000.
The following table summarizes the activity relating to restricted stock awards outstanding at December 31, 2009. The aggregate intrinsic value represents the total pretax intrinsic value (amount by which the fair value of the underlying stock exceeds the exercise price of an option or award, times the number of shares).
(dollars in thousands except share and per share amounts)
|
|
Shares |
|
Weighted
Average |
|
Aggregate
|
|
|
Outstanding at January 1, 2009 |
|
2,159 |
|
3.61 |
|
$ |
432 |
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
595 |
|
|
|
104 |
|
|
Forfeited |
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009 |
|
1,564 |
|
2.80 |
|
$ |
235 |
|
Exercisable at December 31, 2009 |
|
|
|
|
|
|
|
SKAGIT STATE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
NOTE 10 COMMITMENTS
Bancorp 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, provide funds under existing lines of credit, standby letters of credit and municipal warrants. Those instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the balance sheet. The contract amounts of those instruments reflect the extent of Bancorps involvement in particular classes of financial instruments. Bancorp uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
Commitments to originate loans or provide funds under existing lines of credit or to fund municipal warrants are agreements to lend to a customer as long as there is no violation of any condition established in the terms and conditions of the loan documents. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee and may be either fixed or variable interest rates. Total commitment amounts may not necessarily represent future cash-flow requirements. Bancorp generally expects commitments to be drawn upon, however, some of these commitments may not be drawn upon prior to expiration.
The amount of collateral obtained, if it is deemed necessary by Bancorp upon extension of credit, is based on managements credit evaluation of the borrower. Collateral held varies but may include accounts receivable, inventory, property, plant, and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by Bancorp to guarantee the performance of a customer to a third party. Commercial and standby letters of credit are granted primarily to commercial borrowers. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Except for certain long-term guarantees, the majority of guarantees expire in one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Bancorp has not incurred any losses on its letter of credit commitments in 2009, 2008 or 2007.
The following table represents the off-balance sheet commitments with their remaining terms as of December 31, 2009: (dollars in thousands)
|
|
Total |
|
Less
Than |
|
One
Year |
|
Three
Years |
|
Thereafter |
|
|||||
Unfunded commitments to extend credit |
|
$ |
59,091 |
|
$ |
28,190 |
|
$ |
7,270 |
|
$ |
4,584 |
|
$ |
19,047 |
|
Credit card arrangements |
|
11,746 |
|
11,746 |
|
|
|
|
|
|
|
|||||
Commitments to fund municipal warrants |
|
2,863 |
|
1,915 |
|
500 |
|
|
|
448 |
|
|||||
Standby letters of credit |
|
2,261 |
|
2,067 |
|
33 |
|
|
|
161 |
|
|||||
SKAGIT STATE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
NOTE 11 FAIR VALUE OF FINANCIAL INSTRUMENTS
Disclosures regarding the fair value of financial asset and liabilities, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis are required disclosures. The estimated fair values have been determined by Bancorp using available market information and appropriate valuation methodologies and considerable judgment is necessary to interpret market data in the development of the estimates of fair value. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. In that regard, the fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement on the instrument. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of Bancorp.
Cash, Due From Banks, Federal Funds Sold, Other Borrowings and Accrued Interest Receivable and Payable The carrying amount of these financial assets and liabilities approximates fair value.
Investment Securities The securities classified as available for sale are reported at fair value utilizing Level 2 inputs. The fair values for held-to-maturity securities including fixed rate warrants and qualified zone academy bonds, included in state and political subdivisions investment securities, are estimated using discounted cash flow analysis using interest rates currently being offered for warrants of similar terms or the current qualified zone academy bond interest rates.
Loans The fair value of loans is estimated by discounting anticipated future cash flows using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality as of the balance sheet date. An overall liquidity discount was also used for 2009 to reflect the decline of loan sales in the marketplace. Impaired loans were not subjected to discounted cash flow analysis as they are already considered to be held at fair value.
Deposits The fair values disclosed for demand, savings, and money market accounts are equal to their carrying amounts. The fair values for fixed-rate time deposits are estimated using a discounted cash flow analysis that applies interest rates currently being offered on certificates to a schedule of aggregated expected maturities on time deposits.
Off-Balance-Sheet Instruments Commitments to extend credit and standby letters of credit represent the principal categories of off-balance financial instruments (See Note 10). The fair value of these instruments is not considered material since they are for relatively short periods of time and are subject to customary credit terms, which would not include terms that would expose Bancorp to significant gains or losses.
SKAGIT STATE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
NOTE 11 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amounts and estimated fair values of Bancorps financial instruments at December 31, 2009 and 2008 are as follows:
|
|
2009 |
|
2008 |
|
||||||||
|
|
Carrying |
|
|
|
Carrying |
|
|
|
||||
(dollars in thousands) |
|
Amount |
|
Fair Value |
|
Amount |
|
Fair Value |
|
||||
Financial Assets |
|
|
|
|
|
|
|
|
|
||||
Cash and due from banks |
|
$ |
14,441 |
|
$ |
14,441 |
|
$ |
11,954 |
|
$ |
11,954 |
|
Federal funds sold |
|
62,531 |
|
62,531 |
|
|
|
|
|
||||
Investment securities |
|
158,859 |
|
159,122 |
|
139,165 |
|
139,245 |
|
||||
Net loans |
|
386,649 |
|
361,780 |
|
393,775 |
|
393,964 |
|
||||
Accrued interest receivable |
|
2,531 |
|
2,531 |
|
2,430 |
|
2,430 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Financial Liabilities |
|
|
|
|
|
|
|
|
|
||||
Demand and savings deposits |
|
339,001 |
|
339,001 |
|
308,401 |
|
308,401 |
|
||||
Time deposits |
|
206,435 |
|
208,142 |
|
161,137 |
|
162,448 |
|
||||
Federal funds purchased and securities sold under agreements to repurchase |
|
38,128 |
|
38,128 |
|
32,665 |
|
32,665 |
|
||||
Accrued interest payable |
|
366 |
|
366 |
|
341 |
|
341 |
|
||||
NOTE 12 FAIR VALUE MEASUREMENTS
The methodologies for estimating the fair value of financial assets and liabilities that are measured at fair value on a recurring or non-recurring basis are discussed below. The methodologies for other financial assets and liabilities are discussed above. FASB ASC 820 establishes a hierarchy that prioritizes the use of fair value inputs used in the valuation methodologies into the following three levels:
Level 1 Quoted prices for identical instruments in active markets that Bancorp has the ability to access at the measurement date.
Level 2 Significant other observable inputs other than Level 1 prices such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, or other inputs that are observable or can be derived from or corroborated by observable market data by correlation or other means.
Level 3 Significant unobservable inputs that reflect the Bancorps own assumption about the assumptions that market participants would use in pricing an asset or liability.
In general, Bancorp determines fair value based upon quoted prices when available or through the use of alternative approaches, such as matrix or model pricing, when market quotes are not readily accessible or available. The valuation techniques used are based on observable and unobservable inputs. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. While management believes Bancorps valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions used to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
SKAGIT STATE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
NOTE 12 FAIR VALUE MEASUREMENTS (CONTINUED)
The table below shows assets measured at fair value on a recurring basis as of the dates indicated.
(dollars in thousands)
|
|
|
|
Quoted Prices in |
|
Significant Other |
|
Significant |
|
||||
|
|
Total |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
||||
December 31, 2009 |
|
|
|
|
|
|
|
|
|
||||
Available-for-sale securities |
|
$ |
118,561 |
|
$ |
|
|
$ |
118,561 |
|
$ |
|
|
Total |
|
$ |
118,561 |
|
$ |
|
|
$ |
118,561 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
||||
December 31, 2008 |
|
|
|
|
|
|
|
|
|
||||
Available-for-sale securities |
|
$ |
102,647 |
|
$ |
|
|
$ |
102,647 |
|
$ |
|
|
Total |
|
$ |
102,647 |
|
$ |
|
|
$ |
102,647 |
|
$ |
|
|
Investment Securities Available for Sale Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, Bancorp obtains fair value measurements from an independent pricing service. The fair value measurements includes considerable observable data that may include dealer quotes, market spreads, cash flows, the treasury yield curve, yield/spread relationships, consensus prepayment rates, and the bonds terms and conditions, among other things.
The table below shows assets measured at fair value on a non-recurring basis as of the dates indicated.
(dollars in thousands)
|
|
|
|
Quoted Prices in |
|
Significant Other |
|
Significant |
|
||||
|
|
Total |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
||||
December 31, 2009 |
|
|
|
|
|
|
|
|
|
||||
Impaired loans |
|
$ |
23,188 |
|
$ |
|
|
$ |
|
|
$ |
23,188 |
|
Other real estate owned |
|
$ |
6,284 |
|
$ |
|
|
$ |
|
|
$ |
6,284 |
|
Total |
|
$ |
29,472 |
|
$ |
|
|
$ |
|
|
$ |
29,472 |
|
|
|
|
|
|
|
|
|
|
|
||||
December 31, 2008 |
|
|
|
|
|
|
|
|
|
||||
Impaired loans |
|
$ |
5,417 |
|
$ |
|
|
$ |
|
|
$ |
5,417 |
|
Total |
|
$ |
5,417 |
|
$ |
|
|
$ |
|
|
$ |
5,417 |
|
Impaired Loans Impaired loans are reported at the lower of the recorded amount of the loan or fair value of the underlying collateral, if the loan is collateral dependent. Impaired loans with a carrying amount of $26.1 million were written down to their fair value to $23.2 million, resulting in a $2.9 million charge or reserve allocation to the allowance for loan losses for the twelve months ended December 31, 2009. During 2008, impaired loans were reduced via partial charge-offs and loan impairment reserves of $267,000 to a fair value of $5.4 million.
Other Real Estate Owned Other real estate owned includes properties acquired through foreclosure. These properties are recorded at the lower of the recorded amount of the loan, or estimated fair value less estimated costs to sell based on periodic evaluations using Level 3 inputs. Valuation of the property occurs when it is foreclosed upon and at least annually thereafter. Write-downs arising from the acquisition of property, in full or partial satisfaction of loans, are charged to the allowance for loan losses.
SKAGIT STATE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
NOTE 12 FAIR VALUE MEASUREMENTS (CONTINUED)
Subsequent write-downs after acquisition, identified through managements periodic valuations, are written down through non-interest expenses. Other real estate owned with a carrying amount of $7.5 million, were written down to their fair value of $6.3 million, resulting in write-downs of $1.2 million, which was charged against earnings for the twelve months ended December 31, 2009.
NOTE 13 RELATED PARTY TRANSACTIONS
Loans to directors, executive officers, principal stockholders of Bancorp and their affiliates are subject to regulatory limitations. In the opinion of management, related party loans and deposits are transacted as part of Bancorps normal course of business, and are not subject to preferential terms or conditions. At December 31, 2009 and 2008, loans outstanding to directors and executive officers were $16.9 million and $17.5 million, respectively. During 2009, advances or new loans totaled $13.5 million and repayments totaled $14.1 million. During 2009 and 2008, there were no loans to related parties that were considered to be classified or impaired. Deposits from related parties totaled $16.2 million and $11.3 million at December 31, 2009 and 2008, respectively.
NOTE 14 STOCKHOLDERS EQUITY AND REGULATORY MATTERS
Skagit State Bancorp and Skagit State Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Bancorps financial statements. Under capital adequacy guidelines on the regulatory framework for prompt corrective action, specific capital adequacy guidelines, that involve quantitative measures of Bancorps assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices, must be met. The capital classifications are subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures, established by regulation to ensure capital adequacy, require maintenance of minimum amounts and ratios (set forth in the table on the following page) of total and Tier I capital to risk weighted assets (as defined in the regulations), and of Tier I capital to average assets. As of the most recent notification from the Banks primary regulator, the Bank was categorized as well-capitalized under the regulatory framework for prompt corrective action. At December 31, 2009, Skagit State Bancorp and the Bank both exceeded regulatory capital requirements and were well-capitalized pursuant to such regulations. There are no conditions or events since that notification that management believes have changed the Banks category. Payments of dividends are subject to federal regulatory requirements and cash dividends paid by Skagit State Bank to Skagit State Bancorp, Inc. are subject to both federal and state regulatory requirements.
SKAGIT STATE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
NOTE 14 STOCKHOLDERS EQUITY AND REGULATORY MATTERS (CONTINUED)
The following table sets forth the amounts and ratios regarding actual and minimum regulatory capital requirements, together with the amounts and ratios required to meet the definition of a well-capitalized institution.
|
|
|
|
|
|
|
|
|
|
To Be Well |
|
|||||||
|
|
|
|
|
|
|
|
|
|
Capitalized Under |
|
|||||||
|
|
|
|
|
|
For Capital |
|
Prompt Corrective |
|
|||||||||
|
|
Actual |
|
Adequacy Purposes |
|
Action Provisions |
|
|||||||||||
(dollars in thousands) |
|
Amount |
|
Ratio |
|
Amount |
|
Minimum |
|
Amount |
|
Ratio |
|
|||||
As of December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total
Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Skagit State Bank |
|
$ |
66,563 |
|
14.39 |
% |
$ |
37,002 |
|
> |
8.00 |
% |
$ |
46,252 |
|
> |
10.00 |
% |
Skagit State Bancorp, Inc. |
|
$ |
66,783 |
|
14.43 |
% |
$ |
37,021 |
|
> |
8.00 |
% |
$ |
46,276 |
|
> |
10.00 |
% |
Tier
I Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Skagit State Bank |
|
$ |
60,768 |
|
13.14 |
% |
$ |
18,501 |
|
> |
4.00 |
% |
$ |
27,751 |
|
> |
6.00 |
% |
Skagit State Bancorp, Inc. |
|
$ |
60,985 |
|
13.18 |
% |
$ |
18,510 |
|
> |
4.00 |
% |
$ |
27,765 |
|
> |
6.00 |
% |
Tier
I Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Skagit State Bank |
|
$ |
60,768 |
|
9.74 |
% |
$ |
24,959 |
|
> |
4.00 |
% |
$ |
31,199 |
|
> |
5.00 |
% |
Skagit State Bancorp, Inc. |
|
$ |
60,985 |
|
9.77 |
% |
$ |
24,959 |
|
> |
4.00 |
% |
$ |
31,199 |
|
> |
5.00 |
% |
As of December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Total
Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Skagit State Bank |
|
$ |
64,776 |
|
14.04 |
% |
$ |
36,901 |
|
> |
8.00 |
% |
$ |
46,127 |
|
> |
10.00 |
% |
Skagit State Bancorp, Inc. |
|
$ |
64,926 |
|
14.07 |
% |
$ |
36,913 |
|
> |
8.00 |
% |
$ |
46,141 |
|
> |
10.00 |
% |
Tier
I Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Skagit State Bank |
|
$ |
59,326 |
|
12.86 |
% |
$ |
18,451 |
|
> |
4.00 |
% |
$ |
27,676 |
|
> |
6.00 |
% |
Skagit State Bancorp, Inc. |
|
$ |
59,476 |
|
12.89 |
% |
$ |
18,456 |
|
> |
4.00 |
% |
$ |
27,684 |
|
> |
6.00 |
% |
Tier
I Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Skagit State Bank |
|
$ |
59,326 |
|
10.50 |
% |
$ |
22,596 |
|
> |
4.00 |
% |
$ |
28,245 |
|
> |
5.00 |
% |
Skagit State Bancorp, Inc. |
|
$ |
59,476 |
|
10.53 |
% |
$ |
22,596 |
|
> |
4.00 |
% |
$ |
28,242 |
|
> |
5.00 |
% |
NOTE 15 CONTINGENCIES
From time to time, Bancorp may become a plaintiff and/or defendant in certain claims and legal actions arising in the ordinary course of commercial banking involving real estate lending transactions and other ordinary routine litigation incidental to the business of Bancorp. Bancorp is not currently a party to any pending legal proceedings that Bancorp believes would have a material adverse effect on the financial condition or results of operations of Bancorp.
SKAGIT STATE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
NOTE 16 EARNINGS PER SHARE
The following table presents the computation of basic and diluted earnings per share for the years ended:
(dollars in thousands except share and per share amounts) |
|
2009 |
|
2008 |
|
2007 |
|
|||
Numerator: |
|
|
|
|
|
|
|
|||
Net income |
|
$ |
3,307 |
|
$ |
5,238 |
|
$ |
8,576 |
|
Denominator: |
|
|
|
|
|
|
|
|||
Denominator for basic earnings per share - Weighted average shares outstanding |
|
586,623 |
|
606,018 |
|
671,937 |
|
|||
Effect of dilutive securities: |
|
|
|
|
|
|
|
|||
Stock options and restricted stock grants |
|
3,690 |
|
4,856 |
|
2,509 |
|
|||
Denominator for diluted earnings per share - Weighted average shares outstanding |
|
590,313 |
|
610,874 |
|
674,446 |
|
|||
Basic earnings per share |
|
$ |
5.64 |
|
$ |
8.64 |
|
$ |
12.76 |
|
Diluted earnings per share |
|
$ |
5.60 |
|
$ |
8.57 |
|
$ |
12.72 |
|
NOTE 17 PARENT COMPANY (ONLY) FINANCIAL INFORMATION
The following table presents the condensed financial statements for Skagit State Bancorp, Inc. (parent company only) at December 31, 2009 and 2008:
Condensed Balance Sheet
December 31, |
|
2009 |
|
2008 |
|
||
Assets |
|
|
|
|
|
||
Cash and due from banks |
|
$ |
19 |
|
$ |
8 |
|
Other assets |
|
233 |
|
142 |
|
||
Investment in subsidiaries |
|
62,640 |
|
61,651 |
|
||
Total Assets |
|
$ |
62,892 |
|
$ |
61,801 |
|
|
|
|
|
|
|
||
Liabilities |
|
|
|
|
|
||
Other liabilities |
|
$ |
35 |
|
$ |
|
|
Stockholders equity |
|
|
|
|
|
||
Common stock |
|
12,303 |
|
12,042 |
|
||
Accumulated other comprehensive income, net of tax |
|
1,872 |
|
2,325 |
|
||
Retained earnings |
|
48,682 |
|
47,434 |
|
||
Total stockholders equity |
|
62,857 |
|
61,801 |
|
||
Total Liabilities and Stockholders Equity |
|
$ |
62,892 |
|
$ |
61,801 |
|
SKAGIT STATE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
NOTE 17 PARENT COMPANY (ONLY) FINANCIAL INFORMATION (CONTINUED)
Condensed Statement of Income
Year Ended December 31, |
|
2009 |
|
2008 |
|
||
Non-interest expense |
|
$ |
328 |
|
$ |
304 |
|
Loss before income tax benefit and equity in undistributed income of subsidiaries |
|
(328 |
) |
(304 |
) |
||
Income tax benefit |
|
91 |
|
84 |
|
||
Loss before equity in undistributed income of subsidiaries |
|
(237 |
) |
(220 |
) |
||
Undistributed income of subsidiaries |
|
1,185 |
|
(12,693 |
) |
||
Dividend income from Bank |
|
2,359 |
|
18,151 |
|
||
Net Income |
|
$ |
3,307 |
|
$ |
5,238 |
|
Condensed Statement of Cash Flows
Year Ended December 31, |
|
2009 |
|
2008 |
|
||
Cash Flows from Operating Activities: |
|
|
|
|
|
||
Net Income |
|
$ |
3,307 |
|
$ |
5,238 |
|
Adjustments to reconcile net income to net cash flows from operating activities: |
|
|
|
|
|
||
Equity in undistributed (earnings) losses of subsidiaries |
|
(1,185 |
) |
12,693 |
|
||
Other assets |
|
(91 |
) |
(85 |
) |
||
Other liabilities |
|
35 |
|
|
|
||
Net cash flows from operating activities |
|
2,066 |
|
17,846 |
|
||
|
|
|
|
|
|
||
Cash Flows from Financing Activities: |
|
|
|
|
|
||
Amount paid for redemption of common stock |
|
|
|
(15,304 |
) |
||
Cash dividends paid to stockholders |
|
(2,059 |
) |
(2,646 |
) |
||
Proceeds for exercise of stock options |
|
4 |
|
|
|
||
Net cash flows from financing activities |
|
(2,055 |
) |
(17,950 |
) |
||
|
|
|
|
|
|
||
Cash and due from banks, beginning of year |
|
8 |
|
112 |
|
||
Cash and due from banks, end of year |
|
$ |
19 |
|
$ |
8 |
|
NOTE 18 NEW ACCOUNTING PRONOUNCEMENTS
On July 1, 2009, the FASB launched the Accounting Standards Codification (ASC), a structural overhaul to U.S. GAAP that changes from a standards-based model to a topically based model. The topics are organized by ASC number and are updated with an Accounting Standards Update (ASU). The Codification is the single source of nongovernmental authoritative U.S. GAAP for interim and annual periods ending after September 15, 2009. It supersedes all authoritative literature in Levels A-D of the U.S. GAAP hierarchy.
FASB ASC Topic 820-10-50, Interim Disclosures about Fair Value of Financial Instruments. The guidance requires publically traded companies to disclose the fair value of financial instruments in interim periods previously required in annual financial statements. The guidance was effective for interim and annual periods ending after June 15, 2009. The implementation of this guidance did not have a material impact on the consolidated financial statements.
SKAGIT STATE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
NOTE 18 NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
FASB ASC Topic 855, Subsequent Events. New authoritative accounting guidance under ASC Topic 855, Subsequent Events, establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. ASC Topic 855 defines (i) the period after the balance sheet date during which a reporting entitys management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and (iii) the disclosures an entity should make about events or transactions that occurred after the balance sheet date. The guidance was effective for financial statements for periods ending after June 15, 2009. The implementation of this guidance did not have a material impact on the consolidated financial statements.
FASB ASC Topic 320, Recognition and Presentation of Other-Than-Temporary Impairments. This guidance amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. The guidance was effective for interim and annual periods ending after June 15, 2009. The implementation of this guidance did not have a material impact on the consolidated financial statements.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion is intended to assist in understanding the financial condition and results of operations of Bancorp. The purpose of this discussion is to focus on significant factors concerning Skagit State Bancorps financial condition and results of operation. This discussion should be read in conjunction with the financial statements and the accompanying notes thereto.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Bancorps financial statements are based upon the selection and application of significant accounting policies which by their nature are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. Bancorp considers accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on Bancorps financial statements. Management has identified specific accounting policies that due to judgments, estimates and assumptions and economic assumptions which may prove inaccurate or are subject to variation that may significantly affect our reported results of operations and financial positions for the periods presented or in future periods. These policies relate to the determination of the allowance for loan losses, deferred income taxes and the valuation of real estate owned and investment securities. This discussion should be read in conjunction with Note 1 to the Consolidated Financial Statements.
Allowance for Loan Losses The allowance for loan losses (ALLL) represents managements best estimate of losses inherent in the portfolio and is evaluated on a regular basis. These evaluations are inherently subjective and it requires management to make numerous assumptions, estimates and judgments that are susceptible to significant revision as more information becomes available. In analyzing the adequacy of the allowance for loan losses, we utilize a comprehensive loan grading system to determine the risk potential in the portfolio and also consider the results of independent third party credit reviews. The allowance is based upon Bancorps evaluation of the pertinent factors underlying the quality and composition of the loan portfolio, levels and trends in losses and delinquencies, current economic conditions, specific industry conditions and the estimated value of any underlying collateral. The allowance consists of specific, general and unallocated components.
Specific Valuation Allowance: A specific valuation allowance is established based on a review of impaired loans including troubled debt restructures for specific weaknesses, impairment and loss exposure. Impaired loans including troubled debt restructures with balances greater than $250,000 are reviewed for impairment and specific loss exposure. In addition, other loans not meeting the threshold may also be analyzed. Smaller balance loan pools, such as consumer and credit card loans, are grouped with other loans in its product type and risk grade category for reserve purposes. In general, the specific allocation for a loan is equal to the impairment measured by ASC 310. If the loan is collateral dependent, a specific reserve is established when the value of the loan collateral is less than Bancorps recorded investment in the loan. If the loan is not collateral dependent, a specific allocation is established when the discounted cash flow is less than Bancorps recorded investment in the loan.
General Allowance: The general allowance is based on historical loan loss experience for different loan types and different risk gradings with adjustments for current events and conditions. Bancorps loan portfolio is broken into different loan types and different risk ratings. For real estate and commercial loans, Bancorp uses historical loss experience factors by loan category, adjusted for changes in trends and conditions, to help determine an indicated allowance for each category based on individual risk ratings. In addition, other factors are considered in the analysis including volumes and trends of delinquencies, levels of nonaccrual loans, repossessions and bankruptcies, trends in criticized and classified loans, and expected losses on loans secured by real estate, new policies, economic conditions, concentrations of credit risk, and the experience and abilities of lending personnel are also taken into consideration. Historical loss rates for commercial and real estate types loans are established by examining historical charge-off data for each pool of loans, typically over the last 5 years (although the period may be shortened based on current and expected trends and conditions). Bancorps process is designed to account for credit deterioration as it occurs. Thus, as the loans are risk-rated downward, additional adjustments are made to the historical loss factors. The adjustments are a result of managements judgment about risks inherent in these risk categories. Loss factor rates for consumer loans are based on West Coast consumer loan loss statistics from Equifax and the loss factors for Credit Cards are based on Federal Reserve Statistical loss rates.
Unallocated General Allowance: An unallocated general allowances is established based on an additional review of the adequacy of the allowance on the loan portfolio in its entirety, as well as our judgmental consideration of any adjustments necessary for subjective factors such as economic uncertainties and concentration risks. The unallocated allowance provides for other credit losses inherent in the loan portfolio that may not have been contemplated in the general and specific components of the allowance.
There are numerous components that enter into the evaluation of the allowance for loan losses. Some are quantitative while others require Bancorp to make qualitative judgments. While Bancorp believes that it uses the best information available to determine the allowance for loan losses and that our processes adequately address the various components that could potentially result in credit losses, the processes and the various components include features that may be susceptible to significant change. Any unfavorable differences between the actual outcome of credit-related events and our estimates and projections could require an additional provision for credit losses, which would negatively impact Bancorps results of operations in future periods. Bancorp believes that given the procedures we follow in determining the potential losses in the loan portfolio, the various components used in the current estimation processes are appropriate. Regardless of the methodology employed, we expect current economic conditions may result in increases to the allowance for loan losses for 2010. In addition, growth of the loan portfolio and a further decline in the performance of the economy, in general, or a further decline in real estate values in our market areas, in particular, could have an adverse impact on collectability, increase the level of non-performing loans or have other adverse effects which alone or in aggregate could have a material adverse effect on our business, financial condition, results of operation and cash flows which may require additional provisions to our allowance for loan losses. The ultimate recovery of loans is susceptible to future market factors beyond Bancorps control. Additionally, loans are subject to examinations by regulators, who, based upon their judgment, may require Bancorp to make additional provisions or adjustments to its allowance for loan losses.
See the section captioned Allowance for Loan Losses elsewhere in this discussion for further details of the risk factors considered by management in estimating the necessary level of the allowance for possible loan losses.
Other Real Estate Owned Other real estate owned includes properties acquired through foreclosure and other properties owned but no longer used for banking purposes. These properties are recorded at the lower of cost or estimated fair value less estimated costs to sell based on periodic evaluations. The adjustment at the time of foreclosure is recorded through the allowance for loan losses. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate.
Valuation of the property occurs when it is foreclosed upon and annually thereafter. If it is determined that fair value declines subsequent to foreclosure, a valuation allowance is recorded through noninterest expense. Legal and professional fees associated with foreclosures are expensed as incurred. Costs incurred to improve property are capitalized to the extent they are deemed to be recoverable; however, in no event are recorded costs allowed to exceed fair value. Subsequent gains, losses, or expenses recognized on the sale of these properties are included in non-interest income or expense.
Investment Securities Bancorps investment portfolio is classified into two groups; Securities Available for Sale (AFS) and Securities Held to Maturity (HTM).
Investment securities classified as available-for-sale are recorded at fair value, with the net unrealized gain or loss included in comprehensive income within the statement of stockholders equity, net of tax. Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, Bancorp obtains fair value measurements from an independent pricing service. The fair value measurements includes considerable observable data that may include dealer quotes, market spreads, cash flows, the treasury yield curve, yield/spread relationships, consensus prepayment rates, and the bonds terms and conditions, among other things. The fair values of fixed rate warrants and qualified zone academy bonds, included in state and political subdivisions investment securities, are estimated using discounted cash flow analysis using interest rates currently being offered for warrants of similar terms or the current qualified zone academy bond interest rates.
Due to the subjective nature of the valuation process, it is possible that the actual fair values of these investments could differ from the estimated amounts, thereby affecting Bancorps financial position, results of operations and cash flows. If the estimated value of investments is less than the cost or amortized cost, Bancorp evaluates whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment.
In estimating other-than-temporary impairment losses, management considers, among other things, the length of time and the extent to which the fair values has been less than cost, the financial condition and near-terms prospects of the issuer, and the intent and ability of Bancorp to retain its investment in the issue for a period of time sufficient to allow for any anticipated recovery in costs. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time. If Bancorp intends to sell the security or it is more likely than not that it will be required to sell the security, the other-than-temporary impairment will be recognized in earnings equal to the entire difference between the cost basis and fair value. If Bancorp does not intend to sell the security and it is not more likely than not that Bancorp will sell the security before recovery of its cost basis, the difference between the cost basis and fair value is reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. The previous cost basis less the other-than-temporary impairment recognized in earnings becomes the new cost basis of the security.
Deferred Income Taxes - Bancorps net deferred income tax asset arises from differences in the dates that items of income and expense enter into reported income and taxable income. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. For purposes of a valuation allowance, Bancorp evaluates all evidence currently available, both positive and negative, including existence of taxes paid in available carry-back years, forecasts of future income, cumulative losses, applicable tax planning strategies and assessments of the current and future economic and business conditions.
Additionally, Bancorp reviews its uncertain tax positions annually. An uncertain 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 actually recognized is the largest amount of tax benefit that is greater than 50% likely to be recognized on examination. For tax positions not meeting the more likely than not test, no tax benefit is recorded. A significant amount of judgment is applied to determine both whether the tax position meets the more likely than not test as well as to determine the largest amount of tax benefit that is greater than 50% likely to be recognized. Differences between the position taken by management and that of taxing authorities could result in a reduction of a tax benefit or increase to tax liability, which could adversely affect future income tax expense.
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about managements plans, objectives, expectations and intentions that are not historical facts, and other statements identified by words such as expects, anticipates, intends, plans, believes, should, projects, seeks, estimates or words of similar meaning. These forward-looking statements are based on current beliefs and expectations of management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond Bancorps control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations in the forward-looking statements, including those set forth in this Annual Report and Form 10-K, or the documents incorporated by reference:
· the risks associated with lending and potential adverse changes in the credit quality of loans in our portfolio, including as a result of declines in the housing and real estate markets in our market areas;
· increased loan delinquency rates;
· the risks presented by a continued economic downturn, which could adversely affect credit quality, loan collateral values, investment values, liquidity levels, and loan originations;
· changes in market interest rates, which could adversely affect our net interest income and profitability;
· legislative or regulatory changes that adversely affect our business or our ability to complete pending or prospective future acquisitions;
· reduced demand for banking products and services;
· competition from other financial services companies in our markets; and
· Bancorps success in managing risks involved in the foregoing.
Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in Risk Factors in Item 1A. Please take into account that forward-looking statements speak only as of the date of this Annual Report on Form 10-K or documents incorporated by reference. Bancorp does not undertake any obligation to publicly correct or update any forward-looking statement if we later become aware that actual results are likely to differ materially from these expressed in such forward looking statement.
BUSINESS
Skagit State Bancorp, Inc. is a bank holding company with one wholly owned subsidiary - Skagit State Bank (collectively, Company or Bancorp). Skagit State Bank began operations in 1958 and is headquartered in Burlington (Skagit County), Washington. The Bank provides a full range of banking services and products to both businesses and individuals through 12 full service banking offices located in Skagit, Snohomish and Whatcom counties.
OVERVIEW
For the year ended December 31, 2009, net income decreased to $3.3 million or $5.60 per diluted earnings per share compared to $5.2 million or $8.57 per diluted earnings per share in 2008 and $8.6 million or $12.72 per diluted share in 2007. Return on average assets was 0.56 percent in 2009 compared to 0.91 percent and 1.54 percent in 2008 and in 2007. Return on average equity was 5.22 percent in 2009 compared to 8.27 percent and 12.33 percent in 2008 and 2007.
The decrease in net income during 2009 was primarily attributable to decreased net interest income, increased FDIC insurance premiums and increased provisions for loan losses partially offset by decreases in write-downs on other real estate owned and salary expenses. The decrease in 2008 net income compared to 2007 was primarily a result of increased provisions for loan losses, increased provisions for other real estate owned and a decrease in net interest income which was partially offset by increases in non-interest income. For purposes of comparability, results from 2007 were favorably impacted by $935,000 in interest income recognized on a cash basis on two loan relationships and a $150,000 benefit for loan losses.
Highlights for 2009 include:
At December 31, 2009, Bancorp continued to exceed regulatory capital requirements for well-capitalized banks. Bancorps Total Risk-Based Capital ratio was 14.43% which exceeded the regulatory well-capitalized requirement of 10%. Stockholders equity increased to $62.9 million at December 31, 2009 from $61.8 million at December 31, 2008.
Total assets increased to $647.9 million at December 31, 2009 compared to $566.9 million at December 31, 2008.
Net loans decreased by $7.1 million or 1.8 percent to $386.6 million at December 31, 2009, compared to $393.8 million at December 31, 2008. This decrease in loan balances reflects the current market conditions and the lower demand and lower availability of quality loans and a decrease in line of credit usage by borrowers.
Total deposits increased $76.0 million or 16.2% to $545.4 million at December 31, 2009 from $469.5 million at December 31, 2008. Time certificates of deposits increased $45.3 million and other deposit accounts increased $30.7 million.
Provision for loan losses increased to $3.6 million in 2009 from $2.1 million in 2008. 2009 provisions exceeded net-charge-offs by $1.4 million and as a result the allowance for loan losses to net loans ratio increased to 1.78% at December 31, 2009 from 1.38% at December 31, 2008. As a result of the continued deterioration in the local economy, non-performing assets increased to $17.0 million or 2.63% of total assets at December 31, 2009 compared to $11.1 million or 1.96% at December 31, 2008.
Bancorps continued to pay cash dividends to shareholders during 2009. However, dividends decreased to $3.50 per share in 2009 from $4.50 per share in 2008, reflecting the current economic environment and decreased net income for 2009.
RESULTS OF OPERATIONS
Bancorps results of operations are dependent to a large degree on net interest income, operating efficiency and the level of the provision for loan losses. Bancorps operations are sensitive to interest rate changes and the resulting impact on net interest income. In addition, changes in net interest income are influenced by the volume of assets and liabilities and the rates earned and paid respectively. Bancorp generates non-interest income primarily through fees and service charges on deposit accounts and gains on the sale of mortgage loans. Bancorps non-interest expenses consist primarily of salaries and employee benefits expense, bank premises and equipment expenses and other operating expenses.
NET INTEREST INCOME Net interest income is Bancorps principal source of revenue and is comprised of interest income on earnings assets (loans and investment securities) less interest expense on interest-bearing liabilities (deposits and borrowings). Interest income and expense are affected significantly by general economic conditions, particularly changes in market interest rates, and by government policies and the actions of regulatory authorities.
Bancorps net interest income decreased $589,000 in 2009 to $21.5 million from $22.1 million in 2008 and from $23.7 million in 2007. The net interest margin is net interest income expressed as a percent of average interest-earning assets. Net interest margin is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities as well as levels of non-interest bearing liabilities. The net interest margin decreased to 3.85 percent in 2009 from 4.10 percent in 2008 and 4.52 percent in 2007.
The decreases in 2009 were primarily due to the negative impact of the change in the interest-earning asset composition with lower yield federal funds sold comprising a higher percentage of total interest-earning assets. In addition, interest income not recognized on non accruing loans negatively impacted the net interest margin by 10 basis points. Prime rate declined rapidly in 2008 from 7.25% to 3.25% where it remained for all of 2009. The decreases in 2008 were primarily due to interest-earning assets re-pricing more rapidly at lower interest rates than interest-bearing liabilities and $935,000 in interest income recognized on a cash basis on two loan relationships during 2007.
Interest-earning assets
The largest component of interest income is interest earned on loans. Total loan interest income decreased by $2.2 million in 2009 to $23.2 million. This compares to loan interest income in 2008 and 2007 of $25.5 million and $28.4 million. For 2009, the decrease was primarily the result of the current interest rate environment which decreased the loan yield to 6.06 percent for 2009 from 6.84 percent in 2008. Additionally, higher levels of non-performing loans held during 2009 were a factor of the reduced interest income. This decrease was partially offset by an $11.0 million increase in average loan balances. For 2008, the decrease was primarily a result of lower yields which were offset by a $37.8 million increase in average loan balances.
Interest earned on investments and federal funds sold decreased $1.3 million to $5.4 million for the year ended December 31, 2009 from $6.7 million in 2008 and $8.5 million in 2007. For 2009, the decreases were attributable to decreases in yield which were partially offset by an increase in the average balances. The decrease in the yield resulted as Bancorp had a larger proportion of securities invested in lower-yielding federal funds sold. For 2008, the decrease was the result of both decreases in yield and in average balances.
Interest- bearing liabilities
Interest expense decreased $3.0 million to $7.2 million for the year ended December 31, 2009 from $10.1 million for the year ended December 31, 2008. For 2009, the decrease was a result of a 74 basis point decrease in the cost of funds including a 128 basis point decrease on time deposits. For 2008, the decrease was primarily attributable to an 85 basis point reduction in the cost of funds including a 99 basis point reduction on time deposits. The majority of Bancorps deposits are short term and re-price within a twelve month period.
The following table presents information regarding average balances of assets and liabilities as well as the total amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resulting yield and cost ratios, interest rate spread and net interest margin. Tax exempt securities, included in investment securities below are stated at their contractual interest rate. Loan fees of $814,000 in 2009 and $1.0 million in 2008 and 2007 are included in interest earned on loans. Non-accruing loans have been included in the computation of average loans. (dollars in thousands)
Condensed Average Balance Sheets
|
|
2009 |
|
2008 |
|
2007 |
|
||||||||||||||||||
December 31, |
|
Average |
|
Interest |
|
Yield |
|
Average |
|
Interest |
|
Yield |
|
Average |
|
Interest |
|
Yield |
|
||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Federal funds sold |
|
$ |
30,817 |
|
$ |
78 |
|
0.25 |
% |
$ |
10,366 |
|
$ |
285 |
|
2.75 |
% |
$ |
36,243 |
|
$ |
1,778 |
|
4.91 |
% |
Taxable investment securities |
|
93,733 |
|
4,192 |
|
4.47 |
|
105,776 |
|
5,208 |
|
4.92 |
|
109,200 |
|
5,621 |
|
5.15 |
|
||||||
Tax exempt securities |
|
48,987 |
|
1,133 |
|
2.31 |
|
49,352 |
|
1,208 |
|
2.45 |
|
44,308 |
|
1,070 |
|
2.41 |
|
||||||
Loans |
|
383,411 |
|
23,243 |
|
6.06 |
|
372,387 |
|
25,486 |
|
6.84 |
|
334,543 |
|
28,353 |
|
8.48 |
|
||||||
Total interest-earning assets |
|
556,948 |
|
28,646 |
|
5.14 |
% |
537,881 |
|
32,187 |
|
5.98 |
% |
524,294 |
|
36,822 |
|
7.02 |
% |
||||||
Non-interest earning assets |
|
32,516 |
|
|
|
|
|
35,486 |
|
|
|
|
|
34,162 |
|
|
|
|
|
||||||
Total assets |
|
$ |
589,464 |
|
|
|
|
|
$ |
573,367 |
|
|
|
|
|
$ |
558,456 |
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Interest-bearing demand |
|
$ |
89,375 |
|
$ |
316 |
|
0.35 |
% |
$ |
88,532 |
|
$ |
498 |
|
0.56 |
% |
$ |
85,726 |
|
$ |
1,030 |
|
1.20 |
% |
Savings and money market |
|
162,238 |
|
1,568 |
|
0.97 |
|
147,026 |
|
2,074 |
|
1.41 |
|
140,655 |
|
2,944 |
|
2.09 |
|
||||||
Certificates of deposit |
|
182,801 |
|
4,993 |
|
2.73 |
|
174,870 |
|
7,007 |
|
4.01 |
|
171,794 |
|
8,582 |
|
5.00 |
|
||||||
Total interest-bearing deposits |
|
434,414 |
|
6,877 |
|
1.58 |
|
410,428 |
|
9,579 |
|
2.34 |
|
398,175 |
|
12,556 |
|
3.15 |
|
||||||
Other borrowings |
|
18,065 |
|
303 |
|
1.68 |
|
24,242 |
|
553 |
|
2.28 |
|
15,115 |
|
581 |
|
3.84 |
|
||||||
Total interest-bearing deposits & liabilities |
|
452,479 |
|
7,180 |
|
1.59 |
% |
434,670 |
|
10,132 |
|
2.33 |
% |
413,290 |
|
13,137 |
|
3.18 |
% |
||||||
Non interest-bearing demand deposits |
|
71,505 |
|
|
|
|
|
72,623 |
|
|
|
|
|
72,016 |
|
|
|
|
|
||||||
Other non-interest-bearing liabilities |
|
2,112 |
|
|
|
|
|
2,738 |
|
|
|
|
|
3,595 |
|
|
|
|
|
||||||
Total liabilities |
|
526,096 |
|
|
|
|
|
510,031 |
|
|
|
|
|
488,901 |
|
|
|
|
|
||||||
Stockholders equity |
|
63,368 |
|
|
|
|
|
63,336 |
|
|
|
|
|
69,555 |
|
|
|
|
|
||||||
Total liabilities and stockholders equity |
|
$ |
589,464 |
|
|
|
|
|
$ |
573,367 |
|
|
|
|
|
$ |
558,456 |
|
|
|
|
|
|||
Net interest income |
|
|
|
$ |
21,466 |
|
|
|
|
|
$ |
22,055 |
|
|
|
|
|
$ |
23,685 |
|
|
|
|||
Interest rate spread |
|
|
|
|
|
3.56 |
% |
|
|
|
|
3.65 |
% |
|
|
|
|
3.84 |
% |
||||||
Net interest margin |
|
|
|
|
|
3.85 |
% |
|
|
|
|
4.10 |
% |
|
|
|
|
4.52 |
% |
The following table sets forth information about changes in net interest income, which are attributable to changes in interest rates and changes in volume for the periods indicated. Changes attributable to the combined effect of volume and interest rates have been allocated proportionately. (dollars in thousands)
Analysis of Changes in Interest Income and Expense Due to Changes in Volume and Rate
|
|
2009 vs. 2008 |
|
2008 vs. 2007 |
|
||||||||||||||
|
|
Increase (Decrease) Due to |
|
Increase (Decrease) Due to |
|
||||||||||||||
|
|
Volume |
|
Rate |
|
Total |
|
Volume |
|
Rate |
|
Total |
|
||||||
Interest-Earning Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Federal funds sold |
|
$ |
213 |
|
$ |
(420 |
) |
$ |
(207 |
) |
$ |
(924 |
) |
$ |
(569 |
) |
$ |
(1,493 |
) |
Investment securities |
|
(572 |
) |
(519 |
) |
(1,091 |
) |
(50 |
) |
(225 |
) |
(275 |
) |
||||||
Loans |
|
737 |
|
(2,980 |
) |
(2,243 |
) |
2,979 |
|
(5,846 |
) |
(2,867 |
) |
||||||
Total net change in income on interest-earning assets |
|
378 |
|
(3,919 |
) |
(3,541 |
) |
2,005 |
|
(6,640 |
) |
(4,635 |
) |
||||||
Interest-Bearing Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Deposits |
|
338 |
|
(3,040 |
) |
(2,702 |
) |
388 |
|
(3,365 |
) |
(2,977 |
) |
||||||
Federal funds purchased and securities sold under agreements to repurchase |
|
(123 |
) |
(127 |
) |
(250 |
) |
266 |
|
(294 |
) |
(28 |
) |
||||||
Total net change in expense on interest-bearing liabilities |
|
215 |
|
(3,167 |
) |
(2,952 |
) |
654 |
|
(3,659 |
) |
(3,005 |
) |
||||||
Net change in net interest income |
|
$ |
163 |
|
$ |
(752 |
) |
$ |
(589 |
) |
$ |
1,351 |
|
$ |
(2,981 |
) |
$ |
(1,630 |
) |
PROVISION FOR LOAN LOSSES The provision for loan losses was $3.6 million in 2009 compared to $2.1 million for loan losses in 2008 and $150,000 benefit in 2007. The increase in provision is primarily attributable to the continued deterioration in the Pacific Northwest economy, internal downgrades of credit within the loan portfolio and increased charge-offs. For the years ended December 31, 2009, 2008 and 2007, net charge-offs were $2.2 million, $1.2 million and $491,000, respectively. In 2009, 2008 and 2007 gross charge-offs included charge-offs of $1.6 million on three credit relationships, $1.2 million on four credit relationships, and $931,000 on four credit relationships, respectively.
The provision for loan losses is highly dependent upon Bancorps ability to manage asset quality and control the level of net-charge-offs through prudent underwriting standards. In the future, continued growth of the loan portfolio may or further declines in economic conditions could increase future provisions for loan losses and impact Bancorps net income. Additional discussion on loan quality and the allowance for loan losses is provided under Allowance for Loan Losses and Asset Quality.
NON-INTEREST INCOME Non-interest income, which consists primarily of fees and service charges on deposits and other income, was $4.0 million in 2009, $4.4 million for 2008 and $3.8 million for 2007. The decrease in 2009 was primarily attributable to the non-recurring gain on the sale of bank owned property recognized in 2008.
NON-INTEREST EXPENSE Non-interest expenses increased to $18.5 million in 2009 compared to $18.1 million and $16.4 million in 2008 and 2007. The increase from 2008 to 2009 was primarily attributable to increased FDIC insurance premiums and increased carrying costs for other real estate owned which were partially offset by a decrease in the provision for other real estate owned and salary expense. The increase from 2007 to 2008 was primarily a result of a $1.5 million provision for other real estate losses and a $313,000 increase in salary expense.
The provision for other real estate was $1.2 million for 2009 compared to $1.5 million and zero for 2008 and 2007, respectively. These provisions were a result of updated appraisals received during 2009 and 2008 and the decrease in fair market values of these real estate properties. Valuation of the other real estate owned property occurs when it is foreclosed upon and annually thereafter.
FDIC insurance premium assessments increased to $1.2 million including a $260,000 special assessment during 2009 from $69,000 and $53,000 in 2008 and 2007. Increased FDIC insurance premium assessments are the result of losses incurred by the Deposit Insurance Fund and not directly correlated to Bancorps performance.
Salary expense decreased 7.2% to $7.3 million in 2009 compared to $7.9 million and $7.6 million in 2008 and 2007. This decrease for 2009 was a result of minimal bonuses being paid during 2009 and in minimal base salary increases to employees. The increase in salary expense for 2008 was primarily related to increased salaries and incentives and equity compensation expenses.
The efficiency ratio is computed by dividing total operating expenses by non-interest income and net interest income before any provision for loan losses. Bancorps efficiency ratio was 72.7 percent, 68.5 percent and 59.8 percent for 2009, 2008 and 2007, respectively.
INCOME TAX EXPENSE Income tax expense was $45,000 in 2009, $1.0 million in 2008 and $2.6 million in 2007. The effective tax rate in 2009 was 1.3% compared to 16.0% in 2008 and 23.4% in 2007.
The effective tax rate is lower than the statutory rate due to tax credits from the tax-exempt bonds and to nontaxable income generated from tax-exempt municipal bonds and warrants. As of December 31, 2009, Bancorp had $1.1 million in tax-exempt income from $29.3 million of tax-exempt bonds and warrants compared to $1.2 million and $1.1 million in tax-exempt income from $26.7 million and $29.9 million of tax-exempt bonds and warrants during 2008 and 2007, respectively. In addition, Bancorp had $20.7 million and $21.1 million in Qualified Zone Academy Bonds for 2009 and 2008, respectively. In lieu of receiving periodic interest payments on Qualified Zone Academy Bonds, Bancorp receives an annual income tax credit until maturity of the bond. The tax credits are available one year after the bond is issued and each successive one year period thereafter until maturity. The tax credits earned were $1.2 million for each of the last three years ended 2009, 2008 and 2007, respectively.
Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. For purposes of a valuation allowance, Bancorp evaluates all evidence currently available, both positive and negative, including existence of taxes paid in available carry-back years, forecasts of future income, cumulative losses, applicable tax planning strategies and assessments of the current and future economic and business conditions. Based on this evaluation Bancorp has determined that a valuation allowance for deferred tax assets is not required. However, as Bancorp continues to have a deferred tax asset, Bancorp will continue to evaluate the need for a valuation allowance and whether the allowance should be adjusted based on then available evidence.
REVIEW OF FINANCIAL CONDITION
Total assets increased to $647.9 million at December 31, 2009 compared to $566.9 million at December 31, 2008. This increase was primarily due to a $75.9 million increase in deposits. Net loans decreased $7.1 million or 1.8 percent to $386.6 million and investment securities and federal funds sold increased $82.2 million to $221.4 million.
INVESTMENT SECURITIES AND FEDERAL FUNDS SOLD Total investment securities, including federal funds sold increased $82.2 million to $221.4 million at December 31, 2009 from $139.2 million at December 31, 2008. Federal funds sold increased to $62.5 million at December 31, 2009. This increase resulted primarily from the growth in deposits.
The available-for-sale investment portfolio is comprised of 58.2 percent Government Sponsored Agencies and Government Agencies mortgage-backed pass-through securities, 8.2 percent of state and municipals and 33.6 percent of Government Sponsored Agencies and Government Agencies securities. The held-to-maturity portfolio is concentrated in municipal securities and Qualified Zone Academy Bonds. Security purchases totaled $68.6 million in 2009, while maturities, security calls and principal pay downs totaled $48.4 million.
Securities classified as available for sale are reported at estimated fair value, with unrealized gains and losses (net of income taxes) reported as accumulated other comprehensive income, a separate component of stockholders equity. Included in tax exempt securities were $20.7 million and $21.1 million in Qualified Zone Academy Bonds for 2009 and 2008, respectively. In lieu of receiving periodic interest payments, Bancorp receives an annual income tax credit until maturity of the bond. The tax credits are available one year after the bond is issued and each successive one year period thereafter until maturity. At December 31, 2009, Bancorp had no investment securities, other than U.S. government or U.S. government agencies, with aggregate carrying values exceeding 10% of stockholders equity.
The following table presents the carrying value of the portfolio of investment securities as of the dates indicated. (dollars in thousands)
Investment Securities Composition
December 31, |
|
2009 |
|
2008 |
|
||
Held-To-Maturity |
|
|
|
|
|
||
U.S. government agencies |
|
$ |
|
|
$ |
|
|
State and political subdivisions |
|
40,298 |
|
36,518 |
|
||
Total |
|
$ |
40,298 |
|
$ |
36,518 |
|
Available-For-Sale |
|
|
|
|
|
||
U.S. government agencies |
|
$ |
39,840 |
|
$ |
29,526 |
|
Mortgage-backed securities |
|
68,996 |
|
61,841 |
|
||
State and political subdivisions |
|
9,725 |
|
11,280 |
|
||
Total |
|
$ |
118,561 |
|
$ |
102,647 |
|
The following table presents the contractual maturities and tax equivalent weighted average yields as of December 31, 2009. Yields on non-taxable investments are presented on a taxable-equivalent basis using the federal statutory rate of 34%. However, primarily as a result of investment tax credits, the Banks effective tax rate can differ from statutory rates. (dollars in thousands)
Investment Securities Maturity Table
|
|
Within One Year |
|
After One But |
|
After Five But |
|
After Ten Years |
|
||||||||||||
|
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
||||
Held-To-Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
State and political subdivisions(1) |
|
$ |
5,085 |
|
4.17 |
% |
$ |
14,123 |
|
5.76 |
% |
$ |
8,988 |
|
6.01 |
% |
$ |
12,102 |
|
6.37 |
% |
Total |
|
$ |
5,085 |
|
4.17 |
% |
$ |
14,123 |
|
5.76 |
% |
$ |
8,988 |
|
6.01 |
% |
$ |
12,102 |
|
6.37 |
% |
Available-For-Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. government agencies |
|
$ |
2,053 |
|
4.99 |
% |
$ |
31,233 |
|
2.75 |
% |
$ |
6,554 |
|
4.33 |
% |
$ |
|
|
|
|
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
24,698 |
|
4.71 |
% |
44,298 |
|
4.57 |
% |
||||
State and political subdivisions(1) |
|
1,548 |
|
4.72 |
% |
5,037 |
|
4.94 |
% |
1,653 |
|
5.48 |
% |
1,487 |
|
6.08 |
% |
||||
Total |
|
$ |
3,601 |
|
4.88 |
% |
$ |
36,270 |
|
3.04 |
% |
$ |
32,905 |
|
4.67 |
% |
$ |
45,785 |
|
4.62 |
% |
(1) Yield on non-taxable investments and loans is presented on a taxable-equivalent basis using the federal statutory rate of 34%.
LOANS Net loans decreased 1.8 percent in 2009, from $393.8 million at December 31, 2008 to $386.6 million at December 31, 2009. Net loans represented 59.7 percent of total assets at December 31, 2009. During 2009, Bancorp continued to originate and fund loans to credit-worthy customers within our markets. However, decreased loan balances reflect the current market conditions and the lower demand and lower availability of quality loans and a decrease in line of credit usage by borrowers.
Bancorp concentrates on five areas of lending: loans to individuals for business purposes, loans for small and medium-sized businesses, agricultural loans, loans to commercial enterprises for real estate transactions and consumer purpose loans. Bancorps primary lending activities include commercial real estate loans, commercial
loans which include agriculture production loans and consumer purpose loans. Most of Bancorps business activity is with customers located within Skagit, Snohomish and Whatcom Counties. Bancorp originates commercial, real estate and consumer loans.
Real Estate Loans: Real estate loans comprise the largest category of loans and our real estate portfolio consists of commercial and residential loans which are secured by property such as office buildings, retail buildings, owner occupied commercial business properties, farm land, timber land, residential land development properties and residential properties. Real estate loans compromised 66.4% of total loans at December 31, 2009. The primary repayment source of these specific loan types are from the cash flows generated by the occupant business, occupant farm operation, or the sale of properties. While Bancorp has significant balances secured by real estate, Bancorp believes that its lending policies and concentration policies are sufficient to minimize risks. However, economic conditions may affect a borrowers ability to meet the stated repayment terms.
Commercial Loans: Commercial loans, secured and unsecured, are made primarily to small and medium-sized businesses including farms operating within Skagit, Snohomish and Whatcom Counties. These loans are available for general operating purposes, acquisition of fixed assets, purchases of equipment and machinery, financing of inventory and accounts receivable, and other business purposes. Bancorp originates Small Business Administration (SBA) loans, including 504 and 7A loans.
Consumer Loans: Bancorp makes secured and unsecured consumer loans including loans to individuals, primarily customers of Bancorp, for various purposes, including home equity loans, purchases of automobiles, mobile homes, boats and other recreational vehicles, home improvement loans and loans for education and personal investments.
The following table presents the composition of as of the dates indicated. (dollars in thousands)
Loan Composition
|
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
|||||||||||||||
December 31, |
|
Amount |
|
% |
|
Amount |
|
% |
|
Amount |
|
% |
|
Amount |
|
% |
|
Amount |
|
% |
|
|||||
Real estate residential & commercial |
|
$ |
248,658 |
|
63.0 |
% |
$ |
258,958 |
|
64.7 |
% |
$ |
229,680 |
|
64.4 |
% |
$ |
194,989 |
|
59.5 |
% |
$ |
194,273 |
|
64.2 |
% |
Real estate construction |
|
13,261 |
|
3.4 |
% |
17,470 |
|
4.4 |
% |
21,468 |
|
6.0 |
% |
32,031 |
|
9.8 |
% |
23,597 |
|
7.8 |
% |
|||||
Commercial, industrial & agricultural |
|
76,716 |
|
19.4 |
% |
79,819 |
|
19.9 |
% |
70,040 |
|
19.6 |
% |
72,033 |
|
22.0 |
% |
70,923 |
|
23.4 |
% |
|||||
Consumer |
|
55,910 |
|
14.2 |
% |
44,224 |
|
11.0 |
% |
35,411 |
|
10.0 |
% |
28,385 |
|
8.7 |
% |
13,724 |
|
4.6 |
% |
|||||
Total loans |
|
394,545 |
|
100 |
% |
400,471 |
|
100 |
% |
356,599 |
|
100 |
% |
327,438 |
|
100 |
% |
302,517 |
|
100 |
% |
|||||
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Allowance for loan losses |
|
6,883 |
|
|
|
5,450 |
|
|
|
4,535 |
|
|
|
5,176 |
|
|
|
5,178 |
|
|
|
|||||
Deferred loan fees |
|
1,013 |
|
|
|
1,246 |
|
|
|
1,401 |
|
|
|
1,694 |
|
|
|
1,903 |
|
|
|
|||||
Net loans |
|
$ |
386,649 |
|
|
|
$ |
393,775 |
|
|
|
$ |
350,663 |
|
|
|
$ |
320,568 |
|
|
|
$ |
295,436 |
|
|
|
Concentrations
As shown in the table above, a concentration of loans in commercial and residential real estate existed as of December 31, 2009. At December 31, 2009, Bancorps real estate portfolio included $158.4 million in non-farm non-residential real estate loans of which $97.5 million is owner occupied. Total loans also included $12.0 million in raw land, $25.6 million in land development, $14.6 million in construction loans and $60.0 million in one-to-four family residential loans.
During 2006, the FDIC issued guidance entitled Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices. The guidance set forth two thresholds to identify institutions with Commercial Real Estate (CRE) loan concentrations. Financial institutions are deemed to have a CRE concentration if loans for construction, land development, and other land represent 100 percent or more of total capital or if loans for construction, land development, and other land and loans secured by multifamily and nonfarm nonresidential property(excluding loans secured by owner-occupied properties) represent 300 percent or more of total capital.
Bancorps construction, land development, raw land, multifamily and nonfarm nonresidential non-owner occupied real estate loans (total commercial real estate) were 176% and 211% of total risk based capital for December 31, 2009 and 2008, respectively. Total reported loans for construction, land development, and raw land were 78% and 96% of total risk based capital for December 31, 2009 and 2008, respectively. Bancorp considers both ratios noted above to be within acceptable levels of concentration risk.
Management employs risk management practices, including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through stress testing. In addition, Bancorp monitors concentrations of commercial real estate for which the cash flow from the real estate is the primary source of repayment rather than loans to a borrower for which real estate collateral is taken as a secondary source of repayment. These types of commercial real estate loans have risk profiles which are more sensitive to changes in market demand, vacancy rates, rents or changes in capitalization rates. Included in these commercial real estate concentrations are loans for construction, land development, raw land, multifamily, and nonfarm nonresidential non-owner occupied properties. Excluded from these commercial real estate concentrations are nonfarm nonresidential owner occupied properties where the primary source of repayment is the cash flow from the ongoing operations and activities conducted by the party, or affiliate of the party, who owns the property.
Further declines in the performance of the economy, in general, or further declines in real estate values in our market areas, in particular, could have an adverse impact on collectability, increase the level of real estate non-performing loans or have other adverse effects which alone or in aggregate could have a material adverse effect on our business, financial condition, results of operation and cash flows. In addition, most of Bancorps business activity is with customers located within Skagit, Snohomish and Whatcom Counties.
The following table presents the contractual maturity of loans as of December 31, 2009. Loan balances do not include deferred loan fees or the allowance for loan losses. The table does not reflect any estimate of prepayments, which may significantly shorten the average life of all loans and may cause Bancorps actual repayment experience to differ significantly from that indicated below. (dollars in thousands)
Loan Maturity Table
|
|
Within One |
|
One Year |
|
After |
|
|
|
||||
|
|
Year |
|
to Five Years |
|
Five Years |
|
Total |
|
||||
Real estate residential and commercial |
|
$ |
57,237 |
|
$ |
145,699 |
|
$ |
45,722 |
|
$ |
248,658 |
|
Real estate construction |
|
12,473 |
|
788 |
|
|
|
13,261 |
|
||||
Commercial, industrial and agricultural |
|
49,121 |
|
16,674 |
|
10,921 |
|
76,716 |
|
||||
Consumer |
|
8,152 |
|
18,179 |
|
29,579 |
|
55,910 |
|
||||
Total loans |
|
$ |
126,983 |
|
$ |
181,340 |
|
$ |
86,222 |
|
$ |
394,545 |
|
The following table presents all loans due one year or more after December 31, 2009 that have fixed or floating interest rates. (dollars in thousands)
|
|
Floating Rate |
|
Fixed Rate |
|
||
Loans maturing in more than one year |
|
$ |
76,935 |
|
$ |
190,627 |
|
ALLOWANCE FOR LOAN LOSSES The allowance for loan losses was $6.9 million or 1.78 percent of net loans as of December 31, 2009 compared to $5.5 million or 1.38 percent of net loans as of December 31, 2008. The increase in the allowance for loan losses is primarily due to the continued deterioration of the economy, internal downgrades of credit within the loan portfolio and increased charge-offs. Additions to the allowance, in the form of provision, are reflected in current operating results, while charge-offs to the allowance are made when a loss is determined to have occurred. The provision for loan losses was $3.6 million in 2009 compared to $2.1 million for loan losses in 2008 and $150,000 benefit in 2007. For the years ended December 31, 2009, 2008 and 2007, net charge-offs were $2.2 million, $1.2 million and $491,000. In 2009, 2008 and 2007 gross charge-offs included charge-offs of $1.6 million on three credit relationships, $1.2 million on four credit relationships, and $931,000 on four credit relationships, respectively. Net charge-offs have an impact on the historical loss factors used in Bancorps allowance for loan losses computation.
At December 31, 2009, the general allocated reserve was $5.0 million compared to $4.6 million at December 31, 2008. This increase was primarily due to increases in the general reserve for other real estate loans and credit card loans as a result of increased charge-offs, historical loss allocation factors and managements expectation of overall
economic conditions in the areas in which Bancorp operates. During 2009, the general reserve allocated to raw land, land development and construction loans decreased slightly compared to 2008, primarily due to decreases in loan balances in these categories, offset by an increase in the historical loss allocation factors applied to non-impaired loans. However, the specific reserve allocated for impaired loans in these types of loans (raw land, land development and construction loans) increased from $89,000 at December 31, 2008 to $1.1 million as of December 31, 2009. Combined, the general and specific reserves on raw land, land development and construction loans increased $1.1 million to $2.4 million at December 31, 2009 from $1.3 million at December 31, 2008.
At December 31, 2009, $1.2 million or 17.1% of the $6.9 million allowance for loan losses related to loans for which there was a specific reserve. This compares to a specific reserve of $89,000, or 1.63%, of the total allowance for loan losses at December 31, 2008. This increase in specific reserves is attributable to an increase in impaired loans, primarily land development and construction loans, which are evaluated for a specific reserve or impairment. The increase in the unallocated portion of the allowance for possible loan losses during 2009 compared to 2008 is reflective of continued recessionary economic conditions.
During 2008, the general allowance for loan losses allocated to all categories of loans except consumer loans increased compared to 2007 primarily due to internal downgrades of credit within the loan portfolio, increased charge-offs, a deterioration in the economy and a growth in total loans. The specific valuation allowance for impaired loans decreased which was primarily the result of an impaired loan with allocated reserves at December 31, 2007 being transferred to other real estate owned during 2008. The decrease in the unallocated portion of the allowance for possible loan losses during 2008 compared to 2007 was primarily due to the transfer of reserve dollars from the unallocated reserve to the general allocated reserve based on factors previously quantified within the unallocated reserve.
The allowance consists of specific, general and unallocated components; (i) a specific valuation allowance based on a review of classified or non-performing loans for specific weaknesses and evaluation of those loans for impairment and loss exposure; (ii) a general allowance which is based on historical loan loss experience for different loan types and different risk gradings with adjustments for current events and conditions. Bancorps process is designed to account for credit deterioration as it occurs. The adjustments are a result of managements judgment about risks inherent in the portfolio and include such factors as loan quality trends, levels of and trends of non-accrual loans, past due loans, potential problem loans, criticized loan balances, net charge-offs and current economic and business conditions, among other factors and (iii) unallocated general allowances determined based on general economic conditions and other qualitative risk factors. The unallocated allowance provides for other credit losses inherent in the loan portfolio that may not have been contemplated in the general and specific components of the allowance. The unallocated amount is reviewed periodically based on trends in credit losses, the results of credit reviews and overall economic trends.
While Bancorp believes that it uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in adjustments to the allowance for loan losses, and net income could be significantly affected if circumstances differ substantially from the assumptions used in making the final determination. The growth of the loan portfolio and a further decline in the performance of the economy, in general, or a further decline in real estate values in our market areas, in particular, could have an adverse impact on collectability, increase the level of non-performing loans or have other adverse effects which alone or in aggregate could have a material adverse effect on our business, financial condition, results of operation and cash flows which may require additional provisions to our allowance for loan losses. The ultimate recovery of loans is susceptible to future market factors beyond Bancorps control. Additionally, loans are subject to examinations by regulators, who, based upon their judgment, may require Bancorp to make additional provisions or adjustments to its allowance for loan losses.
The following table presents the activity in the allowance for loan losses for the dates indicated. (dollars in thousands)
Allowance for Loan Loss Activity
Year ended December 31, |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
|||||
Allowance as of beginning of year |
|
$ |
5,450 |
|
$ |
4,535 |
|
$ |
5,176 |
|
$ |
5,178 |
|
$ |
5,830 |
|
Provision (benefit) for loan losses |
|
3,595 |
|
2,080 |
|
(150 |
) |
|
|
(50 |
) |
|||||
Charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Real estate residential and commercial & construction |
|
1,764 |
|
831 |
|
931 |
|
855 |
|
384 |
|
|||||
Commercial, industrial and agricultural |
|
348 |
|
456 |
|
236 |
|
256 |
|
392 |
|
|||||
Consumer |
|
485 |
|
325 |
|
169 |
|
152 |
|
125 |
|
|||||
Total charge-offs |
|
2,597 |
|
1,612 |
|
1,336 |
|
1,263 |
|
901 |
|
|||||
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Real estate residential and commercial & construction |
|
207 |
|
235 |
|
643 |
|
927 |
|
85 |
|
|||||
Commercial, industrial and agricultural |
|
90 |
|
103 |
|
126 |
|
272 |
|
175 |
|
|||||
Consumer |
|
138 |
|
109 |
|
76 |
|
62 |
|
39 |
|
|||||
Total recoveries |
|
435 |
|
447 |
|
845 |
|
1,261 |
|
299 |
|
|||||
Net charge-offs |
|
2,162 |
|
1,165 |
|
491 |
|
2 |
|
602 |
|
|||||
Balance at end of year |
|
$ |
6,883 |
|
$ |
5,450 |
|
$ |
4,535 |
|
$ |
5,176 |
|
$ |
5,178 |
|
Ratio of net charge-offs to average loans during the year |
|
0.56 |
% |
0.31 |
% |
0.15 |
% |
0.00 |
% |
0.19 |
% |
|||||
Ratio of allowance to net loans as of the end of the year |
|
1.78 |
% |
1.38 |
% |
1.29 |
% |
1.61 |
% |
1.75 |
% |
|||||
Allowance for loan losses to non-performing loans as of end of the year |
|
64.08 |
% |
99.89 |
% |
58.97 |
% |
90.27 |
% |
125.80 |
% |
The following table presents Bancorps allocation of the allowance for loan losses by loan category as of the dates indicated. (dollars in thousands)
Allocation of the Allowance for Loan Losses
Year ended December 31, |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
|||||
Commercial, industrial & agricultural |
|
$ |
1,456 |
|
$ |
1,682 |
|
$ |
778 |
|
$ |
1,448 |
|
$ |
930 |
|
Real estate-residential & commercial |
|
4,013 |
|
2,656 |
|
1,861 |
|
2,328 |
|
2,304 |
|
|||||
Consumer |
|
683 |
|
395 |
|
588 |
|
477 |
|
231 |
|
|||||
Unallocated |
|
731 |
|
717 |
|
1,308 |
|
923 |
|
1,713 |
|
|||||
Total |
|
$ |
6,883 |
|
$ |
5,450 |
|
$ |
4,535 |
|
$ |
5,176 |
|
$ |
5,178 |
|
Credit Risk Management
The extension of credit to individuals and businesses is a significant portion of Bancorps principal business activity and requires ongoing portfolio and credit management. Bancorp has established lending policies and procedures to manage and monitor risk. These lending policies and procedures include guidelines for concentrations of credit, loan terms, loan-to-value ratios, collateral appraisals and loan approval limits. In addition, Bancorp monitors its loan portfolio for potential risk of loss according to an internal risk-grading system and monitors its credit quality to identify potential problem credits and any loss exposure in a timely manner. Bancorp has assessed and will continue to assess on an on-going basis, the impact of the economy on the credit risk in the loan portfolio.
ASSET QUALITY Non-performing assets consist of nonaccrual loans, accruing loans past due 90 days or more, and other real estate owned. At December 31, 2009, non-performing assets increased to $17.0 million or 2.63 percent of total assets compared to $11.1 million or 1.96 percent as of December 31, 2008.
Non-accrual loans - It is Bancorps policy to discontinue the accrual of interest on all loans that are 90 days or more past due or when there are otherwise serious doubts about the collectability of principal or interest within the existing terms of the loan and place them on non-accrual. When a loan is placed on non-accrual status, any accrued but unpaid interest on that date is removed from interest income. Non-accruing loans were $10.7 million as of December 31, 2009 compared to $5.5 million as of December 31, 2008 with $1.4 million of the December 2008 balance transferring into other real estate owned during 2009.
Restructured loans Loans are considered restructured on loans for which concessions, including the reduction of interest rates below a rate otherwise available to that borrower or the deferral or forgiveness, of interest or principal, have been granted due to the borrowers weakened financial condition. Restructured loans included in impaired loans were $945,000 as of December 31, 2009, of which, $555,000 was included in non-accrual loans. Bancorp had no restructured loans as of December 31, 2008.
Other real estate owned During 2009, Bancorp foreclosed on two non-accrual credit relationships of $1.3 million, which were transferred into other real estate owned. In addition, Bancorp transferred the former Boulevard branch to other real estate owned. As a result at December 31, 2009, Bancorp held seven properties which represent four separate land development projects consisting of finished lots with a carrying balance of $4.7 million, two commercial real estate properties with a carrying balance of $1.5 million, and a $136,000 residential lot, compared to four properties owned with a carrying balance of $5.7 million at December 31, 2008.
Valuation of the property occurs when it is foreclosed upon and annually thereafter. Based on current appraisals received during 2009 and 2008 and the decrease in fair market values of these real estate properties, Bancorp recorded a write-down on other real estate owned of $1.2 million during 2009 and $1.5 million during 2008. It is Bancorps plan to continue its collection efforts and liquidation of collateral, as necessary, to recover as large a portion of other real estate owned as possible.
The following table presents non-performing asset information for the dates indicated. (dollars in thousands)
Non-Performing Assets
December 31, |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
|||||
Non-accrual loans |
|
|
|
|
|
|
|
|
|
|
|
|||||
Real estate residential and commercial & construction |
|
$ |
9,425 |
|
$ |
4,915 |
|
$ |
7,604 |
|
$ |
3,636 |
|
$ |
3,476 |
|
Commercial, industrial and agricultural |
|
999 |
|
315 |
|
86 |
|
2,013 |
|
574 |
|
|||||
Consumer |
|
318 |
|
226 |
|
|
|
85 |
|
66 |
|
|||||
Total |
|
10,742 |
|
5,456 |
|
7,690 |
|
5,734 |
|
4,116 |
|
|||||
Loans past due 90 days or more |
|
|
|
|
|
|
|
|
|
|
|
|||||
Total non-performing loans |
|
10,742 |
|
5,456 |
|
7,690 |
|
5,734 |
|
4,116 |
|
|||||
Other real estate owned |
|
6,284 |
|
5,667 |
|
|
|
|
|
|
|
|||||
Total non-performing assets |
|
$ |
17,026 |
|
$ |
11,123 |
|
$ |
7,690 |
|
$ |
5,734 |
|
$ |
4,116 |
|
Total non-performing loans to net loans |
|
2.78 |
% |
1.39 |
% |
2.19 |
% |
1.79 |
% |
1.39 |
% |
|||||
Total non-performing loans to total assets |
|
1.66 |
% |
0.96 |
% |
1.30 |
% |
1.08 |
% |
0.79 |
% |
|||||
Total non-performing assets to total assets |
|
2.63 |
% |
1.96 |
% |
1.30 |
% |
1.08 |
% |
0.79 |
% |
Impaired loans - At December 31, 2009, impaired loans increased to $24.4 million compared to $5.5 million at December 31, 2008. Six credit relationships of $15.5 million, accounted for 63.8 percent of impaired loans as of December 31, 2009. All material loan restructurings have been included in impaired loans.
A loan is considered impaired when management determines that it is probable that Bancorp will be unable to collect all amounts of principal and interest according to contractual terms. Factors considered by management in determining impairment include payment status, and the probability of collecting scheduled principal and interest payments when due. Impaired loans include loans in nonaccrual status, troubled debt restructures and other loans that management considers to be impaired. Other loans include loans that management has reviewed for impairment and has determined to be impaired even though the loan may be current and performing in accordance with the contractual loan terms. As a result, these other impaired loans continue to remain on accrual status and are not considered non-performing assets. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.
Other potential problem loans Potential problem loans consist of loans that are currently performing, are not on nonaccrual status, restructured or impaired, but for which management have identified as having a well defined weakness or weaknesses and which there are sufficient doubts as to the borrowers future ability to comply with repayment terms. These loans are identified through our internal risk grading processes and management monitors these loans closely and reviews their performance on a regular basis. As of December 31, 2009 and 2008, Bancorp had classified $8.8 million and $13.1 million, respectively, as potential problem loans.
DEPOSITS Bancorp offers a full range of deposit services including checking accounts, savings accounts, money market accounts and various types of certificates of deposit. The transaction accounts and certificates of deposit are tailored to Bancorps primary market area at rates competitive with those offered in the area. Bancorp offers both interest and non-interest bearing checking accounts. In December 2008, Bancorp initiated service through the Certificate of Deposit Account Registry Service (CDARS), which allows Bancorp to assist customers in maximizing their FDIC insurance.
Total deposits increased $75.9 million to $545.4 million at December 31, 2009 compared to $469.5 million at December 31, 2008. Within the total, time deposits increased $45.3 million while core deposits increased $30.6 million. Core deposits, which consist of non-interest and interest bearing demand accounts, money market accounts, and saving accounts, represented 62.1% and 65.6% of total deposits at December 31, 2009 and 2008, respectively.
Time deposits increased to 37.9 percent of deposits at December 31, 2009 compared to 34.4 percent of deposits at December 31, 2008.
The following table presents the balance and percent of total deposits in the various categories of deposits as of the dates indicated. (dollars in thousands)
Deposit Composition
|
|
2009 |
|
2008 |
|
2007 |
|
|||||||||
December 31, |
|
Amount |
|
% of Total |
|
Amount |
|
% of Total |
|
Amount |
|
% of Total |
|
|||
Non-interest bearing demand |
|
$ |
73,839 |
|
13.5 |
% |
$ |
75,116 |
|
16.0 |
% |
$ |
77,957 |
|
15.5 |
% |
Interest bearing demand |
|
101,504 |
|
18.6 |
% |
87,091 |
|
18.5 |
% |
89,830 |
|
18.0 |
% |
|||
Money market |
|
77,288 |
|
14.2 |
% |
69,548 |
|
14.8 |
% |
67,857 |
|
13.6 |
% |
|||
Savings |
|
86,370 |
|
15.8 |
% |
76,646 |
|
16.3 |
% |
73,464 |
|
14.7 |
% |
|||
Time |
|
182,441 |
|
33.4 |
% |
157,127 |
|
33.5 |
% |
191,312 |
|
38.2 |
% |
|||
Brokered time deposits |
|
23,994 |
|
4.5 |
% |
4,010 |
|
0.9 |
% |
|
|
0.0 |
% |
|||
Total deposits |
|
$ |
545,436 |
|
|
|
$ |
469,538 |
|
|
|
$ |
500,420 |
|
|
|
The following table presents time deposits with balances equal to or greater than $100,000 classified by remaining maturity. (dollars in thousands)
Time Deposit Maturity Table
As of December 31, |
|
2009 |
|
2008 |
|
2007 |
|
|||
3 months or less |
|
$ |
37,128 |
|
$ |
22,024 |
|
$ |
39,468 |
|
Over 3 months through 6 months |
|
17,876 |
|
16,161 |
|
23,056 |
|
|||
Over 6 months through 12 months |
|
34,863 |
|
27,807 |
|
26,673 |
|
|||
Over 12 months |
|
25,071 |
|
13,904 |
|
13,547 |
|
|||
|
|
$ |
114,938 |
|
$ |
79,896 |
|
$ |
102,744 |
|
At December 31, 2009 and 2008, public fund time deposits totaled $6.8 million and $4.4 million, respectively.
OTHER BORROWINGS Borrowings consist of federal funds purchased, discount window borrowings from the Federal Reserve Bank of San Francisco and securities sold under agreements to repurchase. At December 31, 2009 and 2008, securities sold under agreements to repurchase were $38.1 million and $19.3 million, respectively. These borrowings decrease or increase primarily based on the availability of funds and the current competitive interest rate offered. These borrowings are collateralized by securities with an estimated fair value exceeding the face value of the borrowings. Periodically, Bancorp uses federal funds purchased and Federal Reserve borrowings as a funding source. Bancorp had no Federal Reserve borrowings at December 31, 2009 and $13.4 million at December 31, 2008.
The following table represents the detail of other borrowings: (dollars in thousands)
As of and for the year ended December 31, |
|
2009 |
|
2008 |
|
2007 |
|
|||
Balance at year-end |
|
$ |
38,128 |
|
$ |
32,665 |
|
$ |
15,851 |
|
Average balance during the year |
|
18,065 |
|
24,242 |
|
15,115 |
|
|||
Maximum month-end balance during the year |
|
38,128 |
|
45,990 |
|
17,914 |
|
|||
Weighted average rate during the year |
|
1.68 |
% |
2.28 |
% |
3.84 |
% |
|||
Weighted average rate at year-end |
|
0.94 |
% |
1.65 |
% |
3.38 |
% |
|||
CAPITAL RESOURCES Stockholders equity increased to $62.9 million at December 31, 2009 from $61.8 million at December 31, 2008. Book value per share at December 31, 2009 was $107.10 compared to a book value of $105.41 at December 31, 2008. Bancorp continued to pay cash dividends to shareholders during 2009. However, dividends decreased to $3.50 per share in 2009 compared to $4.50 per share in 2008, reflecting the current economic environment and decreased net income for 2009.
Bancorp has only one class of stock, which is common stock and at December 31, 2009, there were 776 shareholders of record. Bancorps stock is not actively traded or quoted and no broker currently makes a market in the stock. However, sales and transfers of the stock do occur. Skagit State Bank acts as transfer agent for Bancorp stock. To facilitate trading, the Bank maintains a list of persons interested (known to the Bank) in either purchasing or selling Bancorp stock. Purchasers and sellers then negotiate their own transactions with the Bank acting as transfer agent for those transactions.
From time to time, Bancorp repurchases shares of its common stock. The number of shares of stock that will be repurchased and the price that will be paid is the result of many factors including market and economic conditions, the number of shares available, Bancorps liquidity and capital needs and regulatory requirements. Bancorp did not repurchase any shares in 2009. During 2008, Bancorp repurchased 85,022 shares of stock for $15.3 million at a price of $180 per share.
Skagit State Bancorp and Skagit State Bank are both subject to various regulatory capital requirements administered by the federal banking agencies. At December 31, 2009, Skagit State Bancorp and the Bank both exceeded regulatory capital requirements and were well-capitalized pursuant to such regulations.
On October 3, 2008, Congress approved and the President signed the Emergency Economic Stabilization Act of 2008 (the Act). The Troubled Assets Relief Program (TARP) is the heart of the Act and provides the Secretary of the Treasury the authority to purchase troubled assets from eligible financial institutions in an aggregate amount of up to $700 billion. Under the Act, the Treasury created the Capital Purchase Program (CPP) that enables the federal government to purchase equity in participating financial institutions to help restore credit markets. In November 2008, Bancorp applied to participate under this program. In January 2009, Bancorp received preliminary approval from the U.S. Department of Treasury for approximately $14 million under the program. This preliminary approval was a validation of our conservative business model and we were honored to be held in such high regard. After careful consideration by Executive Management and our Board of Directors, we determined not to accept any of the TARP proceeds. In reaching this decision, the Board also considered the uncertainties and constraints (including dividend and stock repurchase restrictions) associated with the TARP.
OFF-BALANCE SHEET COMMITMENTS In the normal course of business, Bancorp makes off-balance sheet arrangements, including credit commitments to its customers to meet their financial needs. These commitments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the balance sheet. These arrangements include commitments to extend credit and standby letters of credit.
Commitments to extend credit are subject to Bancorps normal credit policies and are essentially the same as extending loans to customers. See Note 10 of the Notes to Consolidated Financial Statements included in this Annual Report for additional information.
LIQUIDITY
The objective of liquidity risk management is to ensure that Bancorp has the continuing ability to maintain cash flows that are adequate to fund operations including day to day cash flow requirements of either its depositors wanting to withdraw funds or to provide for customers credit needs. Bancorp has a formal liquidity policy that establishes liquidity guidelines and the maintenance of contingency liquidity plans that provide for actions and timely responses to liquidity stress situations.
Liquidity is generated from both internal and external sources. The majority of funding comes from customer deposits within the Bancorps market area. In addition, funding needs are met through loan repayments, investment securities repayments, earnings and other borrowings through pre-approved credit lines. Liquidity may also be obtained by maintaining assets that can be converted to cash with little or no risk of loss. However, in the current market environment, assets may be more difficult to convert to cash with or without a loss.
As part of Bancorps liquidity management, Bancorp utilizes federal funds purchased to supplement the primary source of funds, which are deposits. As a result, there could be fluctuations in these borrowing balances depending on short-term liquidity and longer-term financing needs of Bancorp. As of December 31, 2009, Bancorp had approximately $47.0 million in approved unsecured credit lines from various financial institutions and had securities with a market value of $48.5 million pledged as collateral for borrowing at the Federal Reserve Discount Window.
The recent turmoil in the credit markets did not have a direct impact on Bancorps liquidity management practices. Access to our correspondent banks and the Federal Reserve remained open. Management believes that Bancorps liquidity position at December 31, 2009 was adequate to fund ongoing operations.
Because Bancorps primary sources and uses of funds are deposits and loans, the relationship between net loans and total deposits provides one measure of Bancorps liquidity. Bancorps loan to deposit ratio decreased to 70.9 percent at December 31, 2009 compared to 83.9 percent at December 31, 2008, as a result of the increase in deposits and the decrease in loans.
The analysis of liquidity also includes a review of the statement of cash flows. The cash flows detail Bancorps operating, investing and financing activities during the year. Cash flows from operations contribute to liquidity as well as proceeds from the maturities of securities, loan repayments and increasing customer deposits. As indicated in the statement of cash flows, net cash from operating activities contributed $4.5 million to liquidity during 2009 and $8.1 million during 2008.
Skagit State Bancorp, Inc. is a separate legal entity from the Bank and must provide for its own liquidity. Substantially all of Bancorps revenues are obtained from dividends declared and paid by the Bank. Skagit State Banks ability to pay dividends is limited by its earnings, financial condition and capital requirements, as well as regulatory restrictions.
MARKET RISK
The results of operations for financial institutions are largely dependent upon the financial institutions ability to manage market risks which includes interest rate risk. Interest rate risk refers to the exposure of earnings and capital arising from changes in interest rates.
Bancorp maintains an asset/liability management program which is the responsibility of the Asset/Liability Committee. The objective of asset/liability management is to maximize long-term stockholder returns and to manage, protect and stabilize Bancorps net interest income from undue interest rate risk through various interest rate cycles within the constraints of credit quality, interest rate risk policies, levels of capital and adequate levels of liquidity. The committee meets to monitor the composition of the balance sheet, to review projected earnings trends, and to formulate strategies consistent with these objectives for liquidity, interest rate risk, and capital adequacy.
Bancorp uses an interest rate simulation modeling system to measure Bancorps interest sensitivity position. This model analyzes Bancorps major balance sheet components and attempts to estimate the changes to Bancorps income statement and economic value of equity under various interest rate change scenarios. The model combines the significant factors that affect interest rate sensitivity into a comprehensive earnings simulation. While numerous assumptions go into this modeling and undue reliance should not be placed on the specific results, Bancorp believes that this modeling enhances its interest rate risk management efforts. Actual results may differ from simulated
results due to timing, magnitude, and frequency of interest rate changes and changes in market conditions and management strategies, among other factors.
In addition, Bancorp analyzes its interest rate sensitivity using GAP analysis. The GAP analysis may differ from model simulations because a traditional GAP analysis does not reflect the multiple effects of interest rate movement on the entire range of interest sensitive assets and liabilities and does not factor in the future impact of new business strategies. The interest rate GAP is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the interest-bearing liabilities maturing or repricing within that same time period. A GAP is considered asset sensitive when the amount of interest-earning assets exceeds the amount of interest-bearing liabilities during the same period. The volume or origination of fixed or variable rate loans, the interest rate sensitivity of deposits, the overall level of interest rates and general economic conditions can have a significant effect on Bancorps performance in a changing interest rate environment.
As shown in the following table, Bancorp has calculated its one-year cumulative gap to be a negative $187.0 million, or liability sensitive, at December 31, 2009. It is generally assumed that during a period of rising interest rates, the net earnings of an institution with a negative gap may be adversely affected due to its interest-bearing liabilities repricing to a greater extent than its interest-earning assets. Conversely, during a period of falling interest rates, net earnings may increase. That assumption, however, is based on the premise that assets and liabilities will generally move in the same direction at approximately the same rate. Bancorps variable rate loans are tied to prime rate which is subject to the movement of the national federal funds rate. On the other hand, deposit rates are subject to Bancorps internal pricing strategy which is impacted to some degree by competition from other financial institutions and is dependent on Bancorps customers preferences. As such, a majority of Bancorps variable rate loans immediately re-price with the change in the federal funds rates while the rate on Bancorps deposits may not immediately change or at the same level.
In the future, changes in market conditions, Bancorps liquidity position, competition, deposit mix and other factors may cause interest sensitive liabilities to reprice faster or slower than Bancorps interest sensitive assets. For example, if it becomes necessary for Bancorp to continue to increase the rate it pays to attract deposits, an absence of a corresponding increase in the prime rate may negatively affect performance. However, the exact impact of the gap on future income is uncertain both in timing and amount because interest rates for Bancorps assets and liabilities can change rapidly as a result of market conditions and customer patterns.
The following table sets forth the estimated contractual maturity or repricing and the resulting interest rate gap of interest-earning assets and interest-bearing liabilities at December 31, 2009. The amounts shown could be significantly impacted by prepayments, withdrawal or transfer of deposits or competition. (dollars in thousands)
Estimated Maturity and Repricing at December 31, 2009
|
|
|
|
After One |
|
|
|
|
|
||||
|
|
Within |
|
But Within |
|
After Five |
|
|
|
||||
|
|
One Year |
|
Five Years |
|
Years |
|
Total |
|
||||
Assets |
|
|
|
|
|
|
|
|
|
||||
Federal funds sold |
|
$ |
62,531 |
|
$ |
|
|
$ |
|
|
62,531 |
|
|
Loans |
|
|
|
|
|
|
|
|
|
||||
Fixed rate |
|
43,439 |
|
149,975 |
|
40,652 |
|
234,066 |
|
||||
Variable rate |
|
160,479 |
|
|
|
|
|
160,479 |
|
||||
Investment securities |
|
8,687 |
|
52,613 |
|
97,559 |
|
158,859 |
|
||||
Total interest-bearing assets |
|
$ |
275,136 |
|
$ |
202,588 |
|
$ |
138,211 |
|
$ |
615,935 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
||||
Interest-bearing demand |
|
101,504 |
|
|
|
|
|
101,504 |
|
||||
Money market |
|
77,288 |
|
|
|
|
|
77,288 |
|
||||
Savings |
|
86,370 |
|
|
|
|
|
86,370 |
|
||||
Time deposits |
|
158,885 |
|
47,339 |
|
211 |
|
206,435 |
|
||||
Other borrowings |
|
38,128 |
|
|
|
|
|
38,128 |
|
||||
Total interest-bearing liabilities |
|
$ |
462,175 |
|
$ |
47,339 |
|
$ |
211 |
|
$ |
509,725 |
|
Gap |
|
(187,039 |
) |
155,249 |
|
138,000 |
|
106,210 |
|
||||
Cumulative gap |
|
(187,039 |
) |
(31,790 |
) |
106,210 |
|
|
|
||||
Cumulative gap to total assets |
|
-29 |
% |
-5 |
% |
16 |
% |
|
|
Bancorp is continuing to pursue strategies to manage the level of interest rate risk while increasing its net interest income. There can be no assurance that Bancorp will be successful in implementing any of these strategies or that if these strategies are implemented, they will have the intended effect of reducing interest rate risk or increasing net interest income. Bancorp does not currently use interest rate risk management products such as interest rate swaps, hedges or derivatives nor did it have a trading portfolio of investment securities.
The table represents the principal cash flows by contractual maturity dates of Bancorps interest-earning asset and interest-bearing liabilities as of December 31, 2009. (dollars in thousands)
Expected Maturity Dates of Interest-Sensitive Assets and Liabilities at December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
There- |
|
|
|
Fair |
|
||||||||
|
|
2010 |
|
2011 |
|
2012 |
|
2013 |
|
2014 |
|
after |
|
Total |
|
Value |
|
||||||||
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Federal funds sold |
|
$ |
62,531 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
62,531 |
|
$ |
62,531 |
|
Average interest rate |
|
0.25 |
% |
|
|
|
|
|
|
|
|
|
|
0.25 |
% |
|
|
||||||||
Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Fixed rate |
|
43,439 |
|
39,298 |
|
27,932 |
|
47,154 |
|
35,592 |
|
40,651 |
|
234,066 |
|
218,632 |
|
||||||||
Average interest rate |
|
7.00 |
% |
7.15 |
% |
7.42 |
% |
6.91 |
% |
6.81 |
% |
6.95 |
% |
7.02 |
% |
|
|
||||||||
Variable rate |
|
83,543 |
|
9,552 |
|
16,622 |
|
5,086 |
|
105 |
|
45,571 |
|
160,479 |
|
149,865 |
|
||||||||
Average interest rate |
|
4.56 |
% |
3.53 |
% |
3.85 |
% |
3.72 |
% |
4.73 |
% |
3.85 |
% |
4.20 |
% |
|
|
||||||||
Available-for-sale securities |
|
3,602 |
|
3,244 |
|
10,359 |
|
11,234 |
|
11,433 |
|
78,689 |
|
118,561 |
|
118,561 |
|
||||||||
Average interest rate (1) |
|
4.88 |
% |
2.58 |
% |
2.38 |
% |
3.48 |
% |
3.35 |
% |
4.64 |
% |
4.16 |
% |
|
|
||||||||
Held-to-maturity securities |
|
5,085 |
|
5,574 |
|
917 |
|
5,993 |
|
1,639 |
|
21,090 |
|
40,298 |
|
40,561 |
|
||||||||
Average interest rate (1) |
|
4.17 |
% |
4.57 |
% |
6.42 |
% |
6.44 |
% |
6.99 |
% |
6.22 |
% |
5.80 |
% |
|
|
||||||||
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Non-interest demand |
|
$ |
73,839 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
73,839 |
|
$ |
73,839 |
|
Interest-bearing demand |
|
101,504 |
|
|
|
|
|
|
|
|
|
|
|
101,504 |
|
101,504 |
|
||||||||
Average interest rate |
|
0.36 |
% |
|
|
|
|
|
|
|
|
|
|
0.36 |
% |
|
|
||||||||
Money market |
|
77,288 |
|
|
|
|
|
|
|
|
|
|
|
77,288 |
|
77,288 |
|
||||||||
Average interest rate |
|
0.89 |
% |
|
|
|
|
|
|
|
|
|
|
0.89 |
% |
|
|
||||||||
Savings |
|
86,370 |
|
|
|
|
|
|
|
|
|
|
|
86,370 |
|
86,370 |
|
||||||||
Average interest rate |
|
0.82 |
% |
|
|
|
|
|
|
|
|
|
|
0.82 |
% |
|
|
||||||||
Time deposits |
|
158,885 |
|
39,680 |
|
7,065 |
|
287 |
|
307 |
|
211 |
|
206,435 |
|
208,142 |
|
||||||||
Average interest rate |
|
2.08 |
% |
2.44 |
% |
2.96 |
% |
4.29 |
% |
4.41 |
% |
4.60 |
% |
2.19 |
% |
|
|
||||||||
Other borrowings |
|
38,128 |
|
|
|
|
|
|
|
|
|
|
|
38,128 |
|
38,128 |
|
||||||||
Average interest rate |
|
0.94 |
% |
|
|
|
|
|
|
|
|
|
|
0.94 |
% |
|
|
(1) Tax equivelent rate using the federal statutory rate of 34%
As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the preceding table. For example, although certain assets and liabilities may have similar maturities, they may react in different degrees to changes in market interest rates. In addition, in the event of changes in interest rates, actual maturities on loans may differ from scheduled maturities and withdrawals from deposit accounts might deviate significantly from those assumed in presenting the table. Therefore, the data presented in the table should not be relied upon as necessarily indicative of actual future results.
SKAGIT STATE BANCORP, INC.
CORPORATE DIRECTORY
Skagit State Bancorp, Inc. and Skagit State Bank Board of Directors
B. Marvin Omdal, Chairman
Michael F. Janicki, Vice Chairman of the Board
Cheryl R. Bishop
Gerald W. Christensen, C.P.A. Investments
Richard N. Nelson Owner, Dakota Creek Industries, Inc.
Michael E. Pegram
Daniel R. Peth
Corporate Counsel Graham & Dunn PC
Senior Management Team Cheryl R. Bishop, President and Chief Executive Officer Richard C. Humphrey, Executive Vice President and Chief Credit Officer Michele Johnson, Senior Vice President and Director of Human Resources Eric Landon, Senior Vice President and Chief Information Officer Mary Kay Richter, Senior Vice President and Chief Retail Banking Officer Carla Tucker, Executive Vice President and Chief Financial Officer Donna Weaver, Assistant Vice President and Secretary to the Board of Directors
|
|
Skagit State Bank Officers
Jennie Barnhart, Vice President and Manager Laney Bernick, Assistant Vice President Josh Bluhm, Vice President Lisa Cassidy, Vice President Val Closson, Vice President and Manager Jeff Connor, Assistant Vice President Jaye Cory, Assistant Vice President and Manager Tim FitzGerald, Senior Vice President Paul Forster, Assistant Vice President Jackie Frazier, Vice President and Manager Mike Fredlund, Assistant Vice President Bonnie George, Vice President and Manager Kara Gonzalez, Vice President Steve Henery, Senior Vice President Kirk Hereford, Vice President Ryan Johnson, Vice President Aldi Kllogjeri, Vice President Rollin Mackintosh, Vice President Marna McLatchy, Assistant Vice President Gary Medcalf, Vice President Lori Miller, Assistant Vice President Pam Miller, Assistant Vice President Sally Mills, Vice President Douglas E. Noblet, Vice President Mike Oldow, Vice President Jerimy Pennock, Vice President Sandy Perkins, Vice President Virginia Pitman, Assistant Vice President and Manager Marcy Poortinga, Assistant Vice President and Manager Kristia Poppe, Vice President and Manager Delilah Quanz, Vice President and Manager Cindy Randall, Assistant Vice President Karin Shough, Assistant Vice President and Manager Nadine Springer, Vice President Becky Taft, Assistant Vice President and Manager Erik Vanerstrom, Vice President Geoff Wachter, Senior Vice President Carrie Wallace, Vice President Kim Walley, Vice President and Manager Steve Wilkinson, Vice President LeAnne Wiseman, Vice President Ed Zavala, Vice President |
SKAGIT STATE BANK
LOCATION DIRECTORY
Branch Location
Main Office Burlington*
West Mount Vernon Office
Downtown Office
College Way Office
Carter Street Office
Anacortes Office*
Ferry Street Office
Stanwood Office
Bellingham Office
Sunset Square Office*
Arlington Office P.O. Box 100
Lynden Office* 138 Birch Bay Lynden Road P.O. Box 980 |
|
Branch Managers
Burlington Main Office
West Mount Vernon Office
Downtown Office Mount Vernon
College Way Office Mount Vernon
Carter Street Office Sedro-Woolley
Anacortes Office
Ferry Street Office Sedro-Woolley
Stanwood Office
Bellingham Office
Sunset Square Office Bellingham
Arlington Office
Lynden Office
|
* Includes Business Banking locations
Business Profile
Skagit State Bank is a state-chartered commercial bank founded in 1958 by James P. Bishop and other investors. The Bank conducts its banking business through its main office in Burlington, Washington and eleven other offices located within the Skagit, Snohomish and Whatcom Counties. Skagit State Bank provides a wide range of banking services for businesses and individuals within its market area, including commercial real estate transactions and residential mortgage loans, deposit services and other general banking services.
SKAGIT STATE BANCORP, INC.
STOCK INFORMATION
The table below indicates the high and low market price of Bancorp stock and the cash dividends paid over the last two years. The stock transfer records maintained by the Bank, as transfer agent, indicate that there have been limited transactions involving Bancorps stock. The price information shown in the following table is to the best knowledge of management based upon information provided informally by the parties to the transactions. No assurance can be given that such prices are representative of the actual market value of the Common Stock.
Year Ended 12/31/2009
|
|
|
|
|
|
Cash |
|
|||
|
|
Market Price |
|
Dividend |
|
|||||
|
|
High |
|
Low |
|
Declared |
|
|||
1st Qtr |
|
$ |
205.00 |
|
$ |
161.00 |
|
$ |
|
|
2nd Qtr |
|
200.00 |
|
166.67 |
|
2.25 |
|
|||
3rd Qtr |
|
193.00 |
|
175.00 |
|
|
|
|||
4th Qtr |
|
185.00 |
|
150.00 |
|
1.25 |
|
|||
Year Ended 12/31/2008
|
|
|
|
|
|
Cash |
|
|||
|
|
Market Price |
|
Dividend |
|
|||||
|
|
High |
|
Low |
|
Declared |
|
|||
1st Qtr |
|
$ |
200.50 |
|
$ |
180.00 |
|
$ |
|
|
2nd Qtr |
|
200.00 |
|
190.00 |
|
2.25 |
|
|||
3rd Qtr |
|
200.00 |
|
190.00 |
|
|
|
|||
4th Qtr |
|
200.00 |
|
167.00 |
|
2.25 |
|
|||
Stockholder Inquiries:
Skagit State Bank acts as transfer agent for Bancorp stock. Bancorps stock is not actively traded or quoted and no broker currently makes a market in the stock. To facilitate trading, the Bank maintains a list of persons (known to Bancorp) interested in either purchasing or selling stock. In addition, from time to time Bancorp may repurchase shares of its stock.
Shareholder Services
Skagit State Bank
301 East Fairhaven Avenue
P.O. Box 285
Burlington, WA 98233
360-755-0411
1-800-246-4402
If you need assistance with address changes, corrections to tax identification numbers, re-issuance of stock certificates or selling your stock, please contact Bancorp at the address or phone number listed above.
ANNUAL REPORT TO SHAREHOLDERS
Any shareholder may obtain without charge a copy of our Annual Report or Form 10-K filed with the SEC for the year ended December 31, 2009, including financial statements at the SEC website www.sec.gov or at Skagit State Banks website www.skagitbank.com Additionally, Bancorp has adopted and posted on its website a code of ethics that applies to its principal executive officer and principal financial and accounting officer. The website also includes Bancorps audit committee and nominating committee charters. Written requests for the Form 10-K and other aforementioned documents may be sent to Donna L. Weaver, Secretary to the Board, Skagit State Bancorp, Inc., 301 East Fairhaven Avenue, P. O. Box 285, Burlington, Washington 98233.