Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2011
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-51208
BROOKLYN FEDERAL BANCORP, INC.
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(Exact name of registrant as specified in its charter)
Federal
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20-2659598
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification Number)
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81 Court Street, Brooklyn, New York
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11201
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code (718) 855-8500.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES x NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES o NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
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o
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Accelerated Filer
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o
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Non-accelerated Filer
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o
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Smaller Reporting Company
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x
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Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).
YES o NO x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date.
Common Stock, $.01 Par Value
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12,882,607
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Class
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Outstanding at June 24, 2010
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BROOKLYN FEDERAL BANCORP, INC.
Form 10-Q Quarterly Report
Table of Contents
Page Number
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PART I. | ||
Item 1.
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Financial Statements
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1
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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22
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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36
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Item 4.
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Controls and Procedures
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36
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PART II.
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Item 1.
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Legal Proceedings
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37
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Item 1A.
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Risk Factors
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37
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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38
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Item 3.
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Defaults Upon Senior Securities
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38
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Item 4.
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(Reserved)
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38
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Item 5.
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Other Information
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38
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Item 6.
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Exhibits
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38
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Signature Page
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40
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PART I
ITEM 1. FINANCIAL STATEMENTS
BROOKLYN FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share amounts)
(Unaudited)
March 31,
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September 30,
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|||||||
2011
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2010
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|||||||
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(unaudited)
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(audited)
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Assets
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Cash and due from banks (including interest-earning balances of $28,712 and $9,555, respectively)
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$ | 30,215 | $ | 14,202 | ||||
Securities available-for-sale
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95,506 | 69,107 | ||||||
Loans receivable
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341,572 | 387,783 | ||||||
Less: Allowance for loan losses
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21,887 | 17,941 | ||||||
Loans receivable, net
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319,685 | 369,842 | ||||||
Federal Home Loan Bank of New York (“FHLB”) stock, at cost
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1,766 | 1,803 | ||||||
Bank owned life insurance
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10,099 | 9,880 | ||||||
Accrued interest receivable
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1,656 | 2,061 | ||||||
Premises and equipment, net
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1,628 | 1,822 | ||||||
Prepaid expenses and other assets
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17,760 | 19,039 | ||||||
Total assets
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$ | 478,315 | $ | 487,756 | ||||
Liabilities and Stockholders’ Equity
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Liabilities:
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Deposits:
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Non-interest-bearing deposits
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$ | 16,138 | $ | 16,033 | ||||
Interest-bearing deposits
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151,087 | 154,800 | ||||||
Certificates of deposit
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254,931 | 252,573 | ||||||
Total deposits
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422,156 | 423,406 | ||||||
Borrowings
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9,000 | 10,500 | ||||||
Advance payments by borrowers for taxes and insurance
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2,002 | 2,577 | ||||||
Accrued expenses and other liabilities
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5,106 | 5,534 | ||||||
Total liabilities
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438,264 | 442,017 | ||||||
Stockholders’ equity:
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||||||||
Preferred stock, $0.01 par value, 1,000,000 shares authorized; none issued
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-- | -- | ||||||
Common stock, $0.01 par value, 20,000,000 shares authorized; 13,484,210 issued and 12,882,607 and 12,889,344 outstanding, respectively
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135 | 135 | ||||||
Additional paid-in capital
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43,094 | 43,119 | ||||||
Retained earnings - substantially restricted
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6,953 | 12,687 | ||||||
Treasury shares - at cost, 601,603 shares and 594,866 shares, respectively
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(7,728 | ) | (7,720 | ) | ||||
Unallocated common stock held by employee stock ownership plan (“ESOP”)
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(2,156 | ) | (2,235 | ) | ||||
Unallocated shares of the stock-based incentive plan
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(184 | ) | (259 | ) | ||||
Accumulated other comprehensive income (loss):
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||||||||
Net unrealized gain (loss) on securities, net of income tax benefit
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(63 | ) | 12 | |||||
Total stockholders’ equity
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40,051 | 45,739 | ||||||
Total liabilities and stockholders’ equity
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$ | 478,315 | $ | 487,756 | ||||
See accompanying notes to consolidated financial statements.
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1
BROOKLYN FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
For the Three Months Ended
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For the Six Months Ended
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March 31,
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March 31,
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March 31,
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March 31,
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2011
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2010
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2011
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2010
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Interest income:
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First mortgage and other loans
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$ | 4,506 | $ | 6,907 | $ | 9,485 | $ | 14,095 | ||||||||
Mortgage-backed securities
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664 | 862 | 1,252 | 1,772 | ||||||||||||
Other securities and interest-earning assets
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55 | 82 | 92 | 174 | ||||||||||||
Total interest income
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5,225 | 7,851 | 10,829 | 16,041 | ||||||||||||
Interest expense:
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Deposits
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1,439 | 1,950 | 2,961 | 4,015 | ||||||||||||
Borrowings
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63 | 51 | 129 | 105 | ||||||||||||
Total interest expense
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1,502 | 2,001 | 3,090 | 4,120 | ||||||||||||
Net interest income before provision for loan losses
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3,723 | 5,850 | 7,739 | 11,921 | ||||||||||||
Provision for loan losses
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900 | 12,082 | 4,604 | 23,877 | ||||||||||||
Net interest income (loss) after provision for loan losses
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2,823 | (6,232 | ) | 3,135 | (11,956 | ) | ||||||||||
Non-interest income:
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Total loss on OTTI of securities
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- | (929 | ) | (8 | ) | (2,017 | ) | |||||||||
Less:
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Non-credit portion of OTTI recorded in other comprehensive income (before taxes)
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- | - | - | 776 | ||||||||||||
Net loss on OTTI recognized in earnings
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- | (929 | ) | (8 | ) | (1,241 | ) | |||||||||
Banking fees and service charges
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96 | 199 | 225 | 484 | ||||||||||||
Net loss on sale of securities available-for-sale
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(1,364 | ) | - | (1,364 | ) | - | ||||||||||
Net gain on sale of loans held-for-sale
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39 | 34 | 166 | 94 | ||||||||||||
Other
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148 | 148 | 322 | 290 | ||||||||||||
Total non-interest loss
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(1,081 | ) | (548 | ) | (659 | ) | (373 | ) | ||||||||
Non-interest expense:
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Compensation and employee benefits
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2,027 | 2,027 | 4,198 | 4,059 | ||||||||||||
Occupancy and equipment
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520 | 468 | 976 | 896 | ||||||||||||
FDIC Insurance
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347 | 154 | 603 | 302 | ||||||||||||
Professional fees
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594 | 423 | 954 | 594 | ||||||||||||
Data processing fees
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177 | 168 | 345 | 330 | ||||||||||||
Other
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575 | 385 | 1,040 | 743 | ||||||||||||
Total non-interest expense
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4,240 | 3,625 | 8,116 | 6,924 | ||||||||||||
Loss before income tax expense
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(2,498 | ) | (10,405 | ) | (5,640 | ) | (19,253 | ) | ||||||||
Income tax (benefit) expense
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(35 | ) | (4,454 | ) | 94 | (8,215 | ) | |||||||||
Net loss
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$ | (2,463 | ) | $ | (5,951 | ) | $ | (5,734 | ) | $ | (11,038 | ) | ||||
Loss per common share:
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Basic
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$ | (0.19 | ) | $ | (0.47 | ) | $ | (0.45 | ) | $ | (0.87 | ) | ||||
Diluted
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$ | (0.19 | ) | $ | (0.47 | ) | $ | (0.45 | ) | $ | (0.87 | ) | ||||
Average common shares outstanding:
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Basic
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12,653,133 | 12,625,968 | 12,646,830 | 12,619,455 | ||||||||||||
Diluted
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12,653,133 | 12,625,968 | 12,646,830 | 12,622,373 |
See accompanying notes to consolidated financial statements.
2
BROOKLYN FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands, except for per share amounts)
(Unaudited)
Common Stock
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Additional Paid-in Capital
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Retained Earnings-Substantially Restricted
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Treasury Stock
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Unallocated Common Stock Held by ESOP
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Unallocated Shares of the Stock-based Incentive Plan
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Accumulated Other Comprehensive Income (Loss)
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Total
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Balance at October 1, 2010
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$ | 135 | $ | 43,119 | $ | 12,687 | $ | (7,720 | ) | $ | (2,235 | ) | $ | (259 | ) | $ | 12 | $ | 45,739 | |||||||||||||
Comprehensive income:
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Net loss
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-- | -- | (5,734 | ) | -- | -- | -- | -- | (5,734 | ) | ||||||||||||||||||||||
Net unrealized loss on securities available-for-sale, net of income tax benefit of $69
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-- | -- | -- | -- | -- | -- | (75 | ) | (75 | ) | ||||||||||||||||||||||
Total comprehensive loss
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(5,809 | ) | ||||||||||||||||||||||||||||||
Treasury stock purchased (6,737 shares)
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-- | -- | -- | (8 | ) | -- | -- | -- | (8 | ) | ||||||||||||||||||||||
Allocation of ESOP stock
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-- | (69 | ) | -- | -- | 79 | -- | -- | 10 | |||||||||||||||||||||||
Stock-based incentive plan expense
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-- | 44 | -- | -- | -- | 75 | -- | 119 | ||||||||||||||||||||||||
Dividends paid on common stock
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-- | -- | -- | -- | -- | -- | -- | -- | ||||||||||||||||||||||||
Balance at March 31, 2011
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$ | 135 | $ | 43,094 | $ | 6,953 | $ | (7,728 | ) | $ | (2,156 | ) | $ | (184 | ) | $ | (63 | ) | $ | 40,051 | ||||||||||||
See accompanying notes to consolidated financial statements.
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3
BROOKLYN FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the Six Months Ended
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March 31,
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2011
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2010
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Cash flows from operating activities:
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Net loss
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$ | (5,734 | ) | $ | (11,038 | ) | ||
Adjustments to reconcile net income to net cash used in operating activities:
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ESOP expense
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10 | 79 | ||||||
Stock-based incentive plan expense
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119 | 155 | ||||||
Depreciation and amortization
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251 | 226 | ||||||
Provision for loan losses
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4,604 | 23,877 | ||||||
Income from bank-owned life insurance
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(204 | ) | (175 | ) | ||||
Gross loss on OTTI recognized in earnings
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8 | 1,241 | ||||||
Amortization (accretion) of servicing rights
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32 | (29 | ) | |||||
Accretion of deferred loan fees, net
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(399 | ) | (288 | ) | ||||
Amortization (accretion) of premiums, net of premium (discounts)
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3 | (205 | ) | |||||
Originations of loans held-for-sale
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(4,020 | ) | (3,022 | ) | ||||
Proceeds from sales of loans held-for-sale
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4,120 | 3,065 | ||||||
Principal repayments on loans held-for-sale
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-- | 2 | ||||||
Net gain on sales of loans held-for-sale
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(100 | ) | (94 | ) | ||||
Decrease in accrued interest receivable
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405 | 124 | ||||||
Deferred income tax benefit
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1,334 | (5,215 | ) | |||||
Net loss on sales of securities available-for-sale
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1,364 | -- | ||||||
Decrease (increase) in prepaid expenses and other assets
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178 | (7,377 | ) | |||||
Decrease in accrued expenses and other liabilities
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(428 | ) | (1,947 | ) | ||||
Net cash provided by (used in) operating activities
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1,543 | (621 | ) | |||||
Cash flows from investing activities:
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Repayments in excess of loan originations (Loan originations in excess of repayments)
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24,038 | (6,687 | ) | |||||
Proceeds from the sale of loan notes
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21,708 | -- | ||||||
Principal repayments on mortgage-backed securities held-to-maturity
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-- | 10,203 | ||||||
Principal repayments on mortgage-backed securities available-for-sale
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18,452 | -- | ||||||
Purchases of mortgage-backed securities held-to-maturity
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-- | (6,462 | ) | |||||
Purchases of securities available-for-sale
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(58,321 | ) | -- | |||||
Proceeds from the sale of securities available-for-sale
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11,962 | -- | ||||||
Net redemptions of FHLB stock
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37 | 744 | ||||||
Purchases of bank-owned life insurance
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(15 | ) | (15 | ) | ||||
Purchases of premises and equipment
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(57 | ) | (134 | ) | ||||
Net cash provided by (used in) investing activities
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17,804 | (2,351 | ) | |||||
Cash flows from financing activities:
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(Decrease) increase in deposits
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(1,250 | ) | 28,313 | |||||
Net decrease in short term borrowings
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(1,500 | ) | (23,000 | ) | ||||
Proceeds from long term borrowings
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-- | 5,000 | ||||||
(Decrease) increase in advance payments by borrowers for taxes and insurance
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(575 | ) | 146 | |||||
Purchase of treasury shares
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(8 | ) | (12 | ) | ||||
Payment of cash dividend
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-- | (799 | ) | |||||
Net cash (used in) provided by financing activities
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(3,333 | ) | 9,648 | |||||
Net increase in cash and cash equivalents
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16,014 | 6,676 | ||||||
Cash and cash equivalents at beginning of year
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14,201 | 3,472 | ||||||
Cash and cash equivalents at end of period
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$ | 30,215 | $ | 10,148 | ||||
Supplemental disclosure of cash flow information:
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Cash paid during the period for:
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Interest
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$ | 3,094 | $ | 4,121 | ||||
Taxes
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-- | 4,122 | ||||||
See accompanying notes to consolidated financial statements.
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4
BROOKLYN FEDERAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
Note 1 - Business
BFS Bancorp, MHC
BFS Bancorp, MHC is the federally chartered mutual holding company parent of Brooklyn Federal Bancorp, Inc. The only business that BFS Bancorp, MHC has engaged in is the majority ownership of Brooklyn Federal Bancorp, Inc. BFS Bancorp, MHC was formed upon completion of Brooklyn Federal Savings Bank’s reorganization into the mutual holding company structure. So long as BFS Bancorp, MHC exists, it will own a majority of the voting stock of Brooklyn Federal Bancorp, Inc.
Brooklyn Federal Bancorp, Inc.
Brooklyn Federal Bancorp, Inc. (the “Company”) was formed to serve as the stock holding company for Brooklyn Federal Savings Bank (the “Bank”) as part of the Bank’s reorganization into the mutual holding company structure. The Company completed its initial public offering on April 5, 2005.
The Company issued 9,257,500 shares to BFS Bancorp, MHC, and 3,967,500 shares to depositors resulting in a total of 13,225,000 shares issued and outstanding after completion of the reorganization. At March 31, 2011, there were 12,882,607 total shares outstanding 71.8% of which were owned by BFS Bancorp, MHC.
Brooklyn Federal Savings Bank
The Bank is a federally chartered savings bank headquartered in Brooklyn, NY. The Bank was originally founded in 1887. We conduct our business from our main office and four branch offices. All of our offices are located in New York State. The telephone number at our main office is (718) 855-8500.
Our principal business activity is originating mortgage loans secured by one-to-four-family residential real estate and, to a limited extent, a variety of consumer loans and home equity loans. We offer a variety of deposit accounts, including checking, savings and certificates of deposit, and emphasize personal and efficient service for our customers.
Note 2 - Basis of Presentation
The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with instructions for Form 10-Q. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (all of which are normal and recurring in nature) considered necessary for a fair presentation have been included and all significant inter-company balances and transactions have been eliminated in consolidation. Operating results for the three and six month periods ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending September 30, 2011. The Company’s consolidated financial statements, as presented in the Company’s Form 10-K for the year ended September 30, 2010, should be read in conjunction with these statements.
Note 3 - Use of Estimates
The preparation of consolidated financial statements, in conformity with U.S. GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from current estimates. Estimates associated with the allowance for loan losses, fair values of securities and deferred taxes are particularly susceptible to material change in the near term.
5
Note 4 - Impact of Certain Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2010-06, Fair Value Measurements and Disclosures (“Topic 820”): Improving Disclosures about Fair Value Measurements (“ASU 10-06”). ASU 10-06 revises two disclosure requirements concerning fair value measurements and clarifies two others. It requires separate presentation of significant transfers into and out of Levels 1 and 2 of the fair value hierarchy and disclosure of the reasons for such transfers. It will also require the presentation of purchases, sales, issuances and settlements within Level 3 on a gross basis rather than a net basis. The amendments also clarify that disclosures should be disaggregated by class of asset or liability and that disclosures about inputs and valuation techniques should be provided for both recurring and non-recurring fair value measurements. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. These new disclosure requirements were adopted by the Company during the current period, with the exception of the requirement concerning gross presentation of Level 3 activity, which is effective for fiscal years beginning after December 15, 2010. With respect to the portions of this ASU that were adopted during the current period, the adoption of this standard did not have a material impact on the Company’s financial position, results of operations, cash flows, or disclosures. Management does not believe that the adoption of the remaining portion of this ASU will have a material impact on the Company’s financial position, results of operation, cash flows, or disclosures.
In July 2010, the FASB issued ASU No. 2010-20 which amends the authoritative accounting guidance under Topic 310, Receivables. The guidance amends existing disclosures to provide financial statement users with greater transparency about an entity’s allowance for loan and lease losses and the credit quality of its loan and lease portfolio. Under the new guidelines, the allowance for loan and lease losses and fair value are to be disclosed by portfolio segment, while credit quality information, impaired loans and leases and non-accrual status are to be presented by class of loans and leases. Disclosure of the nature and extent, the financial impact and segment information of troubled debt restructurings will also be required. The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the loan and lease portfolio’s risk and performance. This guidance is effective for interim and annual reporting periods ending on or after December 15, 2010. This ASU was adopted during the current period and did not have a material effect on the Company’s results of operations or financial condition.
In April 2011, the FASB issued ASU No. 2011-02, which amends the authoritative accounting guidance under ASC Topic 310 “Receivables.” The update provides clarifying guidance as to what constitutes a troubled debt restructuring. The update provides clarifying guidance on a creditor’s evaluation of the following: (1) how a restructuring constitutes a concession; and (2) if the debtor is experiencing financial difficulties. The amendments in this update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. In addition, disclosures about troubled debt restructurings which were delayed by the issuance of ASU No. 2011-01, are effective for interim and annual periods beginning on or after June 15, 2011. Adoption of this update is not expected to have a material effect on the Company’s results of operations or financial condition.
6
Note 5 - Securities
Investments in securities at March 31, 2011 and September 30, 2010 are summarized as follows:
March 31, 2011
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Amortized
cost |
Gross
unrealized gains |
Gross
unrealized losses |
Estimated
fair value |
||||||||||||
(In thousands)
|
||||||||||||||||
Securities available-for-sale:
|
||||||||||||||||
Mortgage-backed securities:
|
||||||||||||||||
Government agency
|
$ | 14,208 | $ | 7 | $ | (97 | ) | $ | 14,118 | |||||||
Government-sponsored enterprises
|
60,853 | 320 | (332 | ) | 60,841 | |||||||||||
Private issuers
|
6,080 | 160 | (36 | ) | 6,204 | |||||||||||
Government debentures
|
13,977 | 11 | (152 | ) | 13,836 | |||||||||||
Mutual funds
|
500 | 7 | - | 507 | ||||||||||||
Total securities available-for-sale
|
$ | 95,618 | $ | 505 | $ | (617 | ) | $ | 95,506 | |||||||
September 30, 2010
|
Amortized
cost |
Gross
unrealized gains |
Gross
unrealized losses |
Estimated
fair value |
||||||||||||
(In thousands)
|
||||||||||||||||
Securities available-for-sale:
|
||||||||||||||||
Mortgage-backed securities:
|
||||||||||||||||
Government agency
|
$ | 16,522 | $ | 217 | $ | (2 | ) | $ | 16,737 | |||||||
Government-sponsored enterprises
|
24,440 | 464 | (15 | ) | 24,889 | |||||||||||
Private issuers
|
22,055 | 680 | (1,383 | ) | 21,352 | |||||||||||
Government debentures
|
2,990 | 39 | - | 3,029 | ||||||||||||
Mutual funds
|
3,079 | 21 | - | 3,100 | ||||||||||||
Total securities available-for-sale
|
$ | 69,086 | $ | 1,421 | $ | (1,400 | ) | $ | 69,107 |
The Company acquired all of its mortgage-backed securities by purchase (none resulted from retained interests in loans sold or securitized by the Company). At March 31, 2011, mortgage-backed securities issued by government-sponsored enterprises consisted of (i) Federal Home Loan Mortgage Corporation (“Freddie Mac”) securities with an amortized cost of $10.4 million (compared to $6.9 million at September 30, 2010) and an estimated fair value of $10.5 million (compared to $7.2 million at September 30, 2010) and (ii) Federal National Mortgage Association (“Fannie Mae”) securities with an amortized cost of $53.3 million (compared to $17.5 million at September 30, 2010) and an estimated fair value of $53.1 million (compared to $17.7 million at September 30, 2010) and (iii) Ginnie Mae securities with an amortized cost of $14.2 million (compared to $16.5 million at September 30, 2010) and an estimated fair value of $14.1 million (compared to $16.7 million at September 30, 2010). These are the only securities of individual issuers held by the Company with an aggregate book value exceeding 10% of the Company’s equity at March 31, 2011.
The Company recognized total pre-tax other-than-temporary impairment charges of approximately $8,000 on securities for the six months ended March 31, 2011 which was recognized in earnings (all of which was recognized during the three months ended December 31, 2010 included in this six month period), compared to $0.9 million for the three months ended March 31, 2010 of which $0.5 million was recognized in earnings and $1.2 million for the six months ended March 31, 2010 of which $0.7 million was recognized in earnings. This security was sold during March 2011.
The company sold $13.3 million of securities, realizing a loss of $1.4 million during the six months ended March 31, 2011, compared to no sale of securities for the six months ended March 31, 2010.
At March 31, 2011, the Bank pledged securities having an amortized cost of $22.5 million, with an estimated fair value of $22.7 million, as collateral for advances from the Federal Home Loan Bank of New York.
7
The following table summarizes debt securities available-for-sale at estimated fair value by contractual final maturity as of March 31, 2011. Actual maturities will differ from contractual final maturity due to scheduled monthly payments and due to borrowers having the right to prepay obligations with or without a prepayment penalty.
Amortized
|
Estimated
|
|||||||
cost
|
Fair Value
|
|||||||
(In thousands)
|
||||||||
Securties available-for-sale:
|
||||||||
One year or less
|
$ | - | $ | - | ||||
Over one year through five years
|
6,648 | 6,630 | ||||||
Over five years through ten years
|
20,616 | 20,634 | ||||||
More than ten years
|
67,854 | 67,735 | ||||||
Total securities available-for-sale:
|
$ | 95,118 | $ | 94,999 |
The following table summarizes securities at March 31, 2011 and September 30, 2010 with gross unrealized losses, segregated by the length of time the securities had been in a continuous loss position:
As of March 31, 2011
|
||||||||||||||||||||||||
Less than 12 months
|
12 months or more
|
Total
|
||||||||||||||||||||||
Estimated
fair value |
Gross
unrealized losses |
Estimated
fair value |
Gross
unrealized losses |
Estimated
fair value |
Gross
unrealized losses |
|||||||||||||||||||
(In thousands)
|
||||||||||||||||||||||||
Government agency
|
$ | 14,011 | $ | (96 | ) | $ | 68 | $ | (1 | ) | $ | 14,079 | $ | (97 | ) | |||||||||
Government-sponsored enterprises
|
40,369 | (303 | ) | 1,635 | (29 | ) | 42,004 | (332 | ) | |||||||||||||||
Government debentures
|
10,825 | (152 | ) | - | - | 10,825 | (152 | ) | ||||||||||||||||
Private issuers
|
- | - | 1,071 | (36 | ) | 1,071 | (36 | ) | ||||||||||||||||
Total temporarily impaired secrities
|
$ | 65,205 | $ | (551 | ) | $ | 2,774 | $ | (66 | ) | $ | 67,979 | $ | (617 | ) | |||||||||
As of September 30, 2010
|
||||||||||||||||||||||||
Less than 12 months
|
12 months or more
|
Total
|
||||||||||||||||||||||
Estimated
fair value |
Gross
unrealized losses |
Estimated
fair value |
Gross
unrealized losses |
Estimated
fair value |
Gross
unrealized losses |
|||||||||||||||||||
(In thousands)
|
||||||||||||||||||||||||
Government agency
|
$ | 73 | $ | (2 | ) | $ | - | $ | - | $ | 73 | $ | (2 | ) | ||||||||||
Government-sponsored enterprises
|
2,899 | (15 | ) | - | - | 2,899 | (15 | ) | ||||||||||||||||
Government debentures
|
- | - | - | - | - | - | ||||||||||||||||||
Private issuers
|
- | - | 5,316 | (1,383 | ) | 5,316 | (1,383 | ) | ||||||||||||||||
Total temporarily impaired secrities
|
$ | 2,972 | $ | (17 | ) | $ | 5,316 | $ | (1,383 | ) | $ | 8,288 | $ | (1,400 | ) |
8
Securities in unrealized loss positions are analyzed as part of the Company’s ongoing assessment of OTTI. When the Company intends to sell or is required to sell securities, the Company recognizes an impairment loss equal to the full difference between the amortized cost basis and fair value of those securities. When the Company does not intend to sell or is not required to sell equity or debt securities in an unrealized loss position, potential OTTI is considered based on a variety of factors, including the length of time and extent to which the fair value has been less than cost; adverse conditions specifically related to the industry, the geographic area or financial condition of the issuer or the underlying collateral of a security; the payment structure of the security; changes to the rating of the security by a rating agency; the volatility of the fair value changes; and changes in fair value of the security after the balance sheet date. For mortgage-backed securities, the Company estimates cash flows over the remaining lives of the underlying collateral to assess whether credit losses exist and determines if any adverse changes in cash flows have occurred. The Company’s cash flow estimates take into account expectations of relevant market and economic data as of the end of the reporting period. As of March 31, 2011, the Company does not intend to sell the securities with an unrealized loss position in accumulated other comprehensive loss (“AOCL”), and it is likely that the Company will not be required to sell these securities before recovery of their amortized cost basis. The Company believes that the securities with an unrealized loss in AOCL are not other-than-temporarily impaired as of March 31, 2011.
U.S. Government Agency and Government Sponsored Enterprise Mortgage-backed Securities
The carrying value of the Company’s U.S. Government agency and Government sponsored mortgage-backed securities totaled $75.0 million at March 31, 2011 and comprised 78.5% of total investments and 15.3% of total assets as of that date. At March 31, 2011, there were 24 securities of this type in an unrealized loss position for less than 12 months and 3 securities of this type in an unrealized loss position for 12 months or longer. This category of securities generally includes mortgage pass-through securities and collateralized mortgage obligations issued by U.S. government agencies, such as Ginnie Mae, which guarantees the contractual cash flows associated with those securities and U.S. government-sponsored entities such as Fannie Mae and Freddie Mac, each of which carried the implicit guarantee of the U.S. government to guarantee the contractual cash flows associated with those securities. Those guarantees were strengthened during the 2008-2009 financial crisis during which time Fannie Mae and Freddie Mac each were placed into receivership by the federal government. Through those actions, the U.S. government effectively reinforced the guarantees of those agencies, thereby assuring the creditworthiness of the mortgage-backed securities issued by those agencies.
With credit risk being reduced to negligible levels due to the U.S. government’s support of these agencies, the unrealized losses on the Company’s investment in U.S. Government agency and Government sponsored mortgage-backed securities are due largely to the combined effects of several market-related factors. First, movements in market interest rates significantly impact the average lives of mortgage-backed securities by influencing the rate of principal prepayment attributable to refinancing activity. Changes in the expected average lives of these securities significantly impact their fair values due to the extension or contraction of the cash flows that an investor expects to receive over the life of the security.
Historically, lower market interest rates generally prompt greater refinancing activity, thereby shortening the average lives of mortgage-backed securities and vice-versa. However, prepayment rates are also influenced by fluctuating real estate values and the overall availability of credit in the marketplace, which significantly impacts the ability of borrowers to refinance. The deteriorating real estate market values and reduced availability of credit that has characterized the residential real estate marketplace over the past five years has significantly slowed both real estate purchase and refinancing activities. Consequently, prepayment rates on mortgage-backed securities have generally slowed thereby extending their average lives.
The market price of mortgage-backed securities, being the key measure of the fair value to an investor in those securities, is also influenced by the overall supply and demand for those securities in the marketplace. Absent other factors, an increase in the demand for, or a decrease in the supply of a security increases its price. Conversely, a decrease in the demand for, or an increase in the supply of a security decreases its price.
In sum, the factors influencing the fair value of the Company’s U.S. Government agency and Government sponsored mortgage-backed securities, as described above, generally result from movements in market interest rates and changing real estate and financial market conditions, which affect the supply and demand for those securities. Inasmuch as market conditions fluctuate over time, the impairments of value arising from these changing market conditions are both “noncredit-related” and “temporary” in nature.
9
Finally, the Company purchased these securities at either discounts or nominal premiums relative to their par amounts. Accordingly, the Company expects that the securities will not be settled for a price less than their amortized cost.
In light of the factors noted above, the Company does not consider its U.S. Government agency and Government sponsored mortgage-backed securities with unrealized losses at March 31, 2011 to be “other-than-temporarily” impaired as of that date.
Private Issuer Mortgage-backed Securities
The carrying value of the Company’s private issuer mortgage-backed securities totaled $6.2 million at March 31, 2011 and comprised 6.5% of total investments and 1.3% of total assets as of that date. At March 31, 2011, there was one security of this type in an unrealized loss position for less than 12 months and no securities of this type in an unrealized loss position for 12 months or longer.
Unlike agency and government sponsored mortgage-backed securities, private issuer collateralized mortgage obligations are not explicitly guaranteed by a U.S. government sponsored entity. Rather, these securities generally utilize the structure of the larger investment vehicle to reallocate credit risk among the individual tranches comprised within that vehicle. Through this process, investors in different tranches are subject to varying degrees of risk that the cash flows of their tranche will be adversely impacted by borrowers defaulting on the underlying mortgage loans. The creditworthiness of certain tranches may also be further enhanced by additional credit insurance protection embedded within the terms of the total investment vehicle.
The Company monitors the general level of credit risk for each of its private issuer mortgage-backed securities based upon the ratings assigned to its specific tranches by one or more credit rating agencies. The level of these ratings, and changes thereto, is one of several factors considered by the Company in identifying those securities that may be other-than-temporarily impaired. For example, all impaired private issuer mortgage-backed securities that are rated below investment grade are reviewed individually to determine if the impairment is other-than- temporary.
Additional factors considered by the Company in identifying its other-than-temporarily impaired securities include, but are not limited to, the severity and duration of the impairment, the payment performance of the underlying mortgage loans and trends relating thereto, the original terms of the underlying loans regarding credit quality (e.g., Prime, Alt-A), the geographic distribution of the real estate collateral supporting those loans and any current or anticipated declines in associated collateral values, as well as the degree of protection against credit losses afforded to the Company’s security through the structural characteristics of the larger investment vehicle as noted above. Based upon these additional factors, the impairment of certain investment grade securities may also be reviewed for other-than-temporary impairment.
Securities determined to be potentially other-than-temporarily impaired are individually analyzed to determine the “credit-related” and “noncredit-related” portions of the impairment. As noted earlier, a credit-related impairment generally represents the amount by which the present value of the cash flows that are expected to be collected on an other-than-temporarily impaired security fall below its amortized cost. Projected cash flows for the Company’s private issuer mortgage-backed securities are modeled using an automated securities analytics system that is commonly used by institutional investors and the broker/dealer community. The system generates an individual tranche’s projected cash flows based upon several input assumptions regarding the payment performance of the mortgage loans underlying the larger investment vehicle of which the Company’s tranche is a part. These assumptions include, but may not be limited to, loan prepayment rates, loan default rates, and the severity of actual losses on defaulting loans. The Company generally bases the input values for these assumptions on historical data reported by the analytics system. The Company then calculates the present value of those cash flows based upon the appropriate discount rate required by the applicable accounting guidance.
10
The impairments of those securities whose cash flows, when present valued, fall below the Company’s carrying value due to expected principal losses are identified as other-than-temporary. The amount by which the present value of the expected cash flows falls below the Company’s carrying value of the security is identified as the credit-related portion of the other-than-temporary impairment. The remaining portion, where applicable, is identified as noncredit-related, other-than-temporary impairment.
The impairments of those individually analyzed securities whose cash flows, when present valued, exceed the Company’s carrying value or otherwise reflect no expected principal losses, are generally identified as temporary. Similarly, the impairments associated with those securities that have generally retained their investment-grade credit rating and whose additional factors, as noted above, are not characterized by potentially adverse attributes, are also generally identified as temporary. In these cases, the Company attributes the unrealized losses to the same fluctuating market-related factors as those affecting agency mortgage-backed securities, noting, in particular, the comparatively greater temporary adverse effect on fair value arising from the general illiquidity of private issuer, investment grade mortgage-backed securities in the marketplace compared to agency-guaranteed mortgage-backed securities. In light of these factors, the related impairments are defined as “temporary.”
The classification of impairment as “temporary” is further reinforced by the Company’s stated intent and recognition that we will not be required to sell any of our private issuer mortgage-backed securities which allows for an adequate timeframe during which the fair values of the impaired securities are expected to recover to their amortized cost. Additionally, the Company has concluded that the possibility of being required to sell the securities prior to their anticipated recovery is unlikely.
11
The following table presents a roll-forward of the credit loss component of OTTI on private issuer mortgage-backed securities for which a non-credit component of OTTI was recognized in other comprehensive loss for the three and six months ended March 31, 2011. OTTI recognized in earnings for credit-impaired debt securities is presented as additions in two components, based upon whether the current period is the first time a debt security was credit-impaired (initial credit impairment) or is not the first time a debt security was credit impaired (subsequent credit impairment). Changes in the credit loss component of credit-impaired debt securities were as follows:
For the Three Months ended March 31, 2011
|
Total Other-
Than- Temporary Impairment Loss |
Other-Than-
Temporary Impairment Credit Losses recorded in Earnings |
Other-Than-
Temporary Impairment Credit Losses recorded in Other Comprehensive Income |
|||||||||
(in thousands)
|
||||||||||||
Beginning balance as of January 31, 2011
|
$ | 2,365 | $ | 2,365 | $ | - | ||||||
Add: Initial other-than-temporary credit losses
|
- | - | - | |||||||||
Additional other-than-temporary credit losses
|
- | - | - | |||||||||
Reduction for previous credit losses realized on securities sold during the period
|
(2,365 | ) | (2,365 | ) | - | |||||||
Ending balance as of March 31, 2011
|
$ | - | $ | - | $ | - | ||||||
For the Six Months ended March 31, 2011
|
Total Other-
Than- Temporary Impairment Loss |
Other-Than-
Temporary Impairment Credit Losses recorded in Earnings |
Other-Than-
Temporary Impairment Credit Losses recorded in Other Comprehensive Income |
|||||||||
(in thousands)
|
||||||||||||
Beginning balance as of September 30, 2010
|
$ | 2,357 | $ | 2,357 | $ | - | ||||||
Add: Initial other-than-temporary credit losses
|
- | - | - | |||||||||
Additional other-than-temporary credit losses
|
8 | 8 | - | |||||||||
Reduction for previous credit losses realized on securities sold during the period
|
(2,365 | ) | (2,365 | ) | - | |||||||
Ending balance as of March 31, 2011
|
$ | - | $ | - | $ | - |
12
Note 6 – Loans Receivable, net
The components of the loan portfolio are summarized as follows:
March 31,
|
September 30,
|
|||||||
2011
|
2010
|
|||||||
(In thousands)
|
||||||||
Mortgage loans:
|
||||||||
One- to four-family
|
$ | 74,776 | $ | 73,457 | ||||
Multi-family
|
48,579 | 65,209 | ||||||
Commercial
|
104,695 | 119,727 | ||||||
Construction
|
84,603 | 95,824 | ||||||
Land
|
29,157 | 34,084 | ||||||
341,810 | 388,301 | |||||||
Consumer and other loans:
|
||||||||
Personal loans
|
248 | 331 | ||||||
Loans secured by deposit accounts
|
137 | 118 | ||||||
385 | 449 | |||||||
Total loans receivable
|
342,195 | 388,750 | ||||||
Deferred net loan origination fees
|
(623 | ) | (967 | ) | ||||
Allowance for loan losses
|
(21,887 | ) | (17,941 | ) | ||||
Total loans receivable, net
|
$ | 319,685 | $ | 369,842 | ||||
The following table summarizes the activity in allowance for loan losses for the three and six month periods ended March 31, 2011 and 2010 (dollars in thousands):
For The Three Months Ended
|
||||||||
March
|
March
|
|||||||
2011
|
2010
|
|||||||
(In thousands)
|
||||||||
Balance, beginning of period
|
$ | 21,696 | $ | 19,878 | ||||
Charge-offs
|
(1,261 | ) | (11,572 | ) | ||||
Recoveries/losses
|
552 | - | ||||||
Provision for loan losses
|
900 | 12,083 | ||||||
Balance, end of period
|
$ | 21,887 | $ | 20,389 | ||||
For The Six Months Ended
|
||||||||
March
|
March
|
|||||||
2011 | 2010 | |||||||
(In thousands)
|
||||||||
Balance, beginning of period
|
$ | 17,941 | $ | 10,750 | ||||
Charge-offs
|
(1,261 | ) | (14,238 | ) | ||||
Recoveries/losses
|
603 | - | ||||||
Provision for loan losses
|
4,604 | 23,877 | ||||||
Balance, end of period
|
$ | 21,887 | $ | 20,389 | ||||
13
The following table summarizes the activity in allowance for loan losses and the impairment evaluation for the six months ended March 31, 2011 (dollars in thousands):
For the Six Months Ended March 31, 2011 | ||||||||||||||||||||||||||||
One-to-Four
|
Multi-
|
Commercial
|
Consumer
|
|||||||||||||||||||||||||
Family
|
Family
|
Real Estate
|
Construction
|
Land
|
and Other
|
Total
|
||||||||||||||||||||||
Allowance for loan losses:
|
||||||||||||||||||||||||||||
Beginning balance
|
$ | 547 | $ | 3,125 | $ | 9,485 | $ | 1,664 | $ | 3,104 | $ | 16 | $ | 17,941 | ||||||||||||||
Charge-offs
|
(57 | ) | - | - | (1,073 | ) | (131 | ) | - | (1,261 | ) | |||||||||||||||||
Recoveries/losses
|
3 | 5 | 20 | 572 | 3 | - | 603 | |||||||||||||||||||||
Provision for loan losses
|
(326 | ) | 663 | 577 | 1,370 | 2,329 | (9 | ) | 4,604 | |||||||||||||||||||
Ending balance
|
$ | 166 | $ | 3,793 | $ | 10,082 | $ | 2,534 | $ | 5,305 | $ | 7 | $ | 21,887 | ||||||||||||||
Ending balance: individually
|
||||||||||||||||||||||||||||
evaluated for impairment
|
$ | - | $ | - | $ | 1,061 | $ | - | $ | 6 | $ | - | $ | 1,067 | ||||||||||||||
Ending balance: collectively
|
||||||||||||||||||||||||||||
evaluated for impairment
|
166 | 3,793 | 9,021 | 2,534 | 5,299 | 7 | 20,820 | |||||||||||||||||||||
Ending balance
|
$ | 166 | $ | 3,793 | $ | 10,082 | $ | 2,534 | $ | 5,305 | $ | 7 | $ | 21,887 | ||||||||||||||
Loans:
|
||||||||||||||||||||||||||||
Ending balance: individually
|
||||||||||||||||||||||||||||
evaluated for impairment
|
$ | 1,289 | $ | 29,189 | $ | 51,309 | $ | 54,325 | $ | 18,225 | $ | - | $ | 154,337 | ||||||||||||||
Ending balance: collectively
|
||||||||||||||||||||||||||||
evaluated for impairment
|
73,487 | 19,391 | 53,385 | 30,278 | 10,932 | 385 | 187,858 | |||||||||||||||||||||
Ending balance
|
$ | 74,776 | $ | 48,580 | $ | 104,694 | $ | 84,603 | $ | 29,157 | $ | 385 | $ | 342,195 |
The table below sets forth the amounts and categories of our non-performing assets, net of specific allowances at the dates indicated. We may from time to time agree to modify the contractual terms of a borrower’s loan. In cases where these modifications represent a concession (for which a portion of interest or principal has been forgiven and loans modified at interest rates materially less than current market rates) to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (“TDR”). At March 31, 2011, loans modified in a troubled debt restructuring totaled $35.5 million. There are no unfunded commitments on any of these loans. One loan for $0.4 million is performing in accordance with its new terms and, therefore, is not included in the table below. The remaining total of $35.1 million is in non-accrual status, and is included in the table below.
14
The following table sets forth information with respect to the Company’s non-performing loans (dollars in thousands):
March
|
September
|
|||||||
2011
|
2010
|
|||||||
(Dollars in thousands)
|
||||||||
Non-accrual loans:
|
||||||||
One-to four-family
|
$ | 1,289 | $ | - | ||||
Multi-family
|
23,596 | 23,956 | ||||||
Commercial real estate
|
39,508 | 34,908 | ||||||
Construction
|
35,913 | 7,890 | ||||||
Land
|
8,079 | 5,103 | ||||||
Consumer
|
- | - | ||||||
Total non-accrual loans
|
108,385 | 71,857 | ||||||
Loans past maturity and still accruing:
|
||||||||
Multi-family
|
4,940 | 1,365 | ||||||
Commercial real estate
|
- | 3,713 | ||||||
Construction
|
4,754 | 6,615 | ||||||
Land
|
- | 2,628 | ||||||
Total loans past maturity and still accruing
|
9,694 | 14,321 | ||||||
Total non-performing loans
|
$ | 118,079 | $ | 86,178 |
At March 31, 2011 there were no loans over 90 days past due that were still accruing interest.
For the three and six months ended March 31, 2011, there was $2.7 million and $5.1 million of interest income that would have been recorded had our non-accruing loans been current and in accordance with their original terms.
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. Loans classified as “watch” are characterized by borrowers who have marginal cash flow, marginal profitability, or have experienced an unprofitable year and a declining financial condition. The borrower has in the past satisfactorily handled debts with the bank, but in recent months has either been late, delinquent in making payments, or made sporadic payments. While the bank continues to be adequately secured, margins have decreased or are decreasing, despite the borrower’s continued satisfactory condition. Other characteristics of borrowers in this class include inadequate credit information, weakness of financial statement and repayment capacity, but with collateral that appears to limit exposure. This classification includes loans to established borrowers that are reasonably margined by collateral, but where potential for improvement in financial capacity appears limited. We classify an asset as “special mention” if the asset has a potential weakness that warrants management’s close attention. While “special mention” assets have not deteriorated to the point of being classified as “substandard,” management has concluded that if the potential weakness in the asset is not addressed, the value of the asset may deteriorate, thereby adversely affecting the repayment of the asset. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” As of March 31, 2011, and based on the most recent analysis performed, the risk category by class of loans is as follows (dollars in thousands):
15
One-to-
|
||||||||||||||||||||||||||||
Four
|
Multi-
|
Commercial
|
Consumer
|
|||||||||||||||||||||||||
Family
|
Family
|
Real Estate
|
Construction
|
Land
|
and Other
|
Total
|
||||||||||||||||||||||
Credit Risk by Internally Assigned Rating:
|
||||||||||||||||||||||||||||
Pass
|
$ | 72,227 | $ | 13,325 | $ | 29,223 | $ | - | $ | 2,092 | $ | 385 | $ | 117,252 | ||||||||||||||
Watch
|
1,534 | 2,924 | 16,197 | 8,372 | 3,600 | - | 32,627 | |||||||||||||||||||||
Special Mention
|
18 | 3,129 | 7,063 | 21,906 | 5,240 | - | 37,356 | |||||||||||||||||||||
Substandard
|
1,289 | 29,189 | 47,596 | 54,325 | 18,225 | - | 150,624 | |||||||||||||||||||||
Doubtful
|
- | - | 3,713 | - | - | - | 3,713 | |||||||||||||||||||||
$ | 75,068 | $ | 48,567 | $ | 103,792 | $ | 84,603 | $ | 29,157 | $ | 385 | $ | 341,572 |
The following table presents an aging analysis of the recorded investment of past due loans receivable as of March 31, 2011 (dollars in thousands):
30-59 Days
|
60-89 Days
|
Greater Than
|
Total Past
|
Total Loans
|
||||||||||||||||||||||||
Past Due
|
Past Due
|
90 Days
|
Due
|
TDR (1)
|
Current
|
Receivable
|
||||||||||||||||||||||
One-to-Four Family
|
$ | 399 | $ | - | $ | 943 | $ | 1,342 | $ | 392 | $ | 73,334 | $ | 75,068 | ||||||||||||||
Multi-Family
|
6,515 | - | 9,450 | 15,965 | 13,477 | 19,125 | 48,567 | |||||||||||||||||||||
Commercial Real Estate
|
8,892 | - | 28,912 | 37,804 | 10,681 | 55,307 | 103,792 | |||||||||||||||||||||
Construction
|
15,529 | 3,847 | 12,709 | 32,085 | 9,017 | 43,501 | 84,603 | |||||||||||||||||||||
Land
|
900 | 223 | 5,905 | 7,028 | 1,977 | 20,152 | 29,157 | |||||||||||||||||||||
Consumer and Other
|
1 | 18 | - | 19 | - | 366 | 385 | |||||||||||||||||||||
$ | 32,236 | $ | 4,088 | $ | 57,919 | $ | 94,243 | $ | 35,544 | $ | 211,785 | $ | 341,572 |
(1) |
$0.4 million of TDR loans have performed in accordance with modified terms
|
|
$35.1 million of TDR loans have not performed in accordance with modified terms and are in non-accrual status
|
16
The following table presents the recorded investment and unpaid principal balances for impaired loans with the associated specific allowance amount, if applicable. Management determined the specific allowance based on the current fair value of the collateral, less selling costs (dollars in thousands):
As of and for the six months ended March 31, 2011 | ||||||||||||||||||||
Unpaid
|
Average
|
Interest
|
||||||||||||||||||
Principal
|
Recorded
|
Specific
|
Recorded
|
Income
|
||||||||||||||||
Balance
|
Balance
|
Allowance
|
Investment
|
Recognized
|
||||||||||||||||
Loans without a specific valuation allowance:
|
||||||||||||||||||||
One-to-Four Family
|
$ | 1,347 | $ | 1,289 | $ | 645 | $ | 5 | ||||||||||||
Multi-Family
|
34,045 | 29,189 | 40,875 | 263 | ||||||||||||||||
Commercial Real Estate
|
65,241 | 48,480 | 36,570 | 249 | ||||||||||||||||
Construction
|
55,727 | 54,325 | 35,350 | 318 | ||||||||||||||||
Land
|
21,275 | 17,788 | 8,894 | 36 | ||||||||||||||||
Consumer and Other
|
- | - | ||||||||||||||||||
Loans with a specific valuation allowance:
|
||||||||||||||||||||
One-to-Four Family
|
- | - | $ | - | - | - | ||||||||||||||
Multi-Family
|
- | - | - | - | - | |||||||||||||||
Commercial Real Estate
|
2,829 | 2,829 | 1,061 | 4,122 | 12 | |||||||||||||||
Construction
|
- | - | - | - | - | |||||||||||||||
Land
|
437 | 437 | 6 | 437 | 10 | |||||||||||||||
Consumer and Other
|
- | - | - | - | ||||||||||||||||
Total:
|
||||||||||||||||||||
One-to-Four Family
|
1,347 | 1,289 | - | 645 | 5 | |||||||||||||||
Multi-Family
|
34,045 | 29,189 | - | 40,875 | 263 | |||||||||||||||
Commercial Real Estate
|
68,070 | 51,309 | 1,061 | 40,692 | 261 | |||||||||||||||
Construction
|
55,727 | 54,325 | - | 35,350 | 318 | |||||||||||||||
Land
|
21,712 | 18,225 | 6 | 9,331 | 46 | |||||||||||||||
Consumer and Other
|
- | - | - | - | - | |||||||||||||||
Total substandard loans
|
$ | 180,901 | $ | 154,337 | $ | 1,067 | $ | 126,893 | $ | 893 | ||||||||||
As of and for the year ended September 30, 2010 | ||||||||||||||||||||
Unpaid
|
Average
|
Interest
|
||||||||||||||||||
Principal
|
Recorded
|
Specific
|
Recorded
|
Income
|
||||||||||||||||
Balance
|
Balance
|
Allowance
|
Investment
|
Recognized
|
||||||||||||||||
Loans without a specific valuation allowance:
|
||||||||||||||||||||
One-to-Four Family
|
$ | - | $ | - | $ | - | $ | 7 | ||||||||||||
Multi-Family
|
38,903 | 31,380 | 20,917 | 509 | ||||||||||||||||
Commercial Real Estate
|
64,191 | 47,146 | 35,889 | 369 | ||||||||||||||||
Construction
|
25,726 | 24,660 | 18,882 | 92 | ||||||||||||||||
Land
|
22,582 | 15,938 | 15,206 | 15 | ||||||||||||||||
Consumer and Other
|
- | - | - | |||||||||||||||||
Loans with a specific valuation allowance:
|
||||||||||||||||||||
One-to-Four Family
|
- | - | $ | - | - | - | ||||||||||||||
Multi-Family
|
- | - | - | - | - | |||||||||||||||
Commercial Real Estate
|
5,414 | 5,414 | 1,081 | 3,976 | 27 | |||||||||||||||
Construction
|
- | - | - | - | - | |||||||||||||||
Land
|
437 | 437 | 6 | 437 | 8 | |||||||||||||||
Consumer and Other
|
- | - | - | - | ||||||||||||||||
Total:
|
||||||||||||||||||||
One-to-Four Family
|
- | - | - | - | 7 | |||||||||||||||
Multi-Family
|
38,903 | 31,380 | - | 20,917 | 509 | |||||||||||||||
Commercial Real Estate
|
69,605 | 52,560 | 1,081 | 39,865 | 396 | |||||||||||||||
Construction
|
25,726 | 24,660 | - | 18,882 | 92 | |||||||||||||||
Land
|
23,019 | 16,375 | 6 | 15,643 | 23 | |||||||||||||||
Consumer and Other
|
- | - | - | - | - | |||||||||||||||
Total impaired loans
|
$ | 157,253 | $ | 124,975 | $ | 1,087 | $ | 95,307 | $ | 1,027 |
17
Note 7 - Fair Value Disclosures
FASB issued guidance regarding Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. This guidance applies to other accounting pronouncements that require or permit fair value measurements. The Company adopted the guidance effective for its fiscal year beginning October 1, 2008. The primary effect of the FASB-issued guidance on the Company was to expand the required disclosures pertaining to the methods used to determine fair values.
The FASB-issued guidance establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under this guidance are as follows:
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Observable inputs other than Level 1 prices, such as quoted for similar assets or liabilities; quoted prices in markets that are not active; or inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
18
For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy as reported on the consolidated statements of financial condition at March 31, 2011 and September 30, 2010 are as follows (in thousands):
(Level 1)
|
||||||||||||||||
Quoted Prices
|
(Level 2)
|
|||||||||||||||
in Active
|
Significant
|
(Level 3)
|
||||||||||||||
Markets for
|
Other
|
Significant
|
||||||||||||||
Identical
|
Observable
|
Unobservable
|
||||||||||||||
Description
|
March 31, 2011
|
Assets
|
Inputs
|
Inputs
|
||||||||||||
Mortgage-backed securities:
|
||||||||||||||||
Government agency
|
$ | 14,118 | $ | -- | $ | 14,118 | $ | -- | ||||||||
Government-sponsored enterprises
|
60,841 | -- | 60,841 | -- | ||||||||||||
Private issuers
|
6,204 | -- | 6,204 | -- | ||||||||||||
Government debentures
|
13,836 | 13,836 | -- | -- | ||||||||||||
Mutual funds
|
507 | 507 | -- | -- | ||||||||||||
Total securities available-for-sale
|
$ | 95,506 | $ | 14,343 | $ | 81,163 | $ | -- | ||||||||
(Level 1)
|
||||||||||||||||
Quoted Prices
|
(Level 2)
|
|||||||||||||||
in Active
|
Significant
|
(Level 3)
|
||||||||||||||
Markets for
|
Other
|
Significant
|
||||||||||||||
Identical
|
Observable
|
Unobservable
|
||||||||||||||
Description
|
September 30, 2010
|
Assets
|
Inputs
|
Inputs
|
||||||||||||
Mortgage-backed securities:
|
||||||||||||||||
Government agency
|
$ | 16,737 | $ | -- | $ | 16,737 | $ | -- | ||||||||
Government-sponsored enterprises
|
24,889 | -- | 24,889 | -- | ||||||||||||
Private issuers
|
21,352 | -- | 21,352 | -- | ||||||||||||
Government debentures
|
3,029 | 3,029 | -- | -- | ||||||||||||
Mutual funds
|
3,100 | 3,100 | -- | -- | ||||||||||||
Total securities available-for-sale
|
$ | 69,107 | $ | 6,129 | $ | 62,978 | $ | -- |
19
For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy as reported on the consolidated statement of financial condition at March 31, 2011 and September 30, 2010 is as follows (in thousands):
(Level 1)
|
||||||||||||||||
Quoted Prices
|
(Level 2)
|
|||||||||||||||
in Active
|
Significant
|
(Level 3)
|
||||||||||||||
Markets for
|
Other
|
Significant
|
||||||||||||||
Identical
|
Observable
|
Unobservable
|
||||||||||||||
Description
|
March 31, 2011
|
Assets
|
Inputs
|
Inputs
|
||||||||||||
One-to-Four Family
|
$ | 1,289 | $ | - | $ | - | $ | 1,289 | ||||||||
Multi-Family
|
29,189 | - | - | 29,189 | ||||||||||||
Commercial Real Estate
|
50,248 | - | - | 50,248 | ||||||||||||
Construction
|
54,325 | - | - | 54,325 | ||||||||||||
Land
|
18,219 | - | - | 18,219 | ||||||||||||
Consumer and Other
|
- | - | - | - | ||||||||||||
Total Impaired loans
|
$ | 153,270 | $ | - | $ | - | $ | 153,270 | ||||||||
(Level 1)
|
||||||||||||||||
Quoted Prices
|
(Level 2)
|
|||||||||||||||
in Active
|
Significant
|
(Level 3)
|
||||||||||||||
Markets for
|
Other
|
Significant
|
||||||||||||||
Identical
|
Observable
|
Unobservable
|
||||||||||||||
Description
|
September 30, 2010
|
Assets
|
Inputs
|
Inputs
|
||||||||||||
One-to-Four Family
|
$ | - | $ | - | $ | - | $ | - | ||||||||
Multi-Family
|
31,380 | - | - | 31,380 | ||||||||||||
Commercial Real Estate
|
51,479 | - | - | 51,479 | ||||||||||||
Construction
|
24,660 | - | - | 24,660 | ||||||||||||
Land
|
16,369 | - | - | 16,369 | ||||||||||||
Consumer and Other
|
- | - | - | - | ||||||||||||
Total Impaired loans
|
$ | 123,888 | $ | - | $ | - | $ | 123,888 | ||||||||
The following valuation techniques were used to measure fair value of assets in the tables above:
Securities available-for-sale – The fair value of the securities available-for-sale, which includes mortgage-backed securities, was obtained either through a primary broker/dealer or other third party provider from readily available price quotes as of March 31, 2011 (Level 1) or by obtaining matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2).
Impaired loans –The Company has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. The fair value consists of the loan balances less their specific valuation allowances.
20
The following table summarizes the carrying value and estimated fair value of the Company’s financial instruments at March 31, 2011 and September 30, 2010:
March 31, 2011
|
September 30, 2010
|
|||||||||||||||
Carrying
value |
Estimated
fair value |
Carrying
value |
Estimated
fair value |
|||||||||||||
(In thousands)
|
||||||||||||||||
Financial assets:
|
||||||||||||||||
Cash and due from banks
|
$ | 30,215 | $ | 30,215 | $ | 14,201 | $ | 14,201 | ||||||||
Securities available-for-sale
|
95,506 | 95,506 | 69,107 | 69,107 | ||||||||||||
Securities held-to-maturity
|
- | - | - | - | ||||||||||||
Loans receivable, net
|
341,572 | 317,415 | 369,842 | 369,750 | ||||||||||||
FHLB stock
|
1,766 | N/A | 1,803 | N/A | ||||||||||||
Accrued interest receivable
|
1,656 | 1,656 | 2,061 | 2,061 | ||||||||||||
Financial liabilities:
|
||||||||||||||||
Deposits
|
422,156 | 430,526 | 423,406 | 428,667 | ||||||||||||
Borrowings
|
9,000 | 9,272 | 10,500 | 10,936 | ||||||||||||
Accrued interest payable
|
24 | 24 | 28 | 28 |
The methods and assumptions, not previously presented, used to estimate fair value are described as follows:
Carrying amount is the estimated fair value for cash and due from banks, accrued interest receivable and payable, demand deposits, short-term borrowings, and variable rate loans or deposits that reprice frequently and fully. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair value of borrowings is based on current rates for similar financing. It was not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability. The fair value of off-balance sheet items is not considered material.
Note 8 – Enforcement Actions
The Company and the Bank are subject to enforcement actions and other requirements imposed by federal banking regulators. In particular, and as previously reported, the Bank is subject to a Cease and Desist Order (the “Bank Order”) issued by the OTS on March 31, 2011 that requires, among other things, the Bank to implement an updated business plan to improve the Bank’s core earnings, reduce expenses, maintain an appropriate level of liquidity and achieve profitability. The Bank Order also requires that the Bank achieve and maintain a Tier 1 Capital Ratio equal to or greater than 10% and a Total Risk-Based Capital Ratio equal to or greater than 15%, after the funding of its allowance for loan and lease losses, by April 30, 2011. As of April 30, 2011, the Bank did not meet these capital requirements.
As the Bank failed to achieve the capital ratios required by the Bank Order, the Bank was required to file a Contingency Plan with the OTS within 15 days of April 30, 2011. The Bank Order required that the Contingency Plan detail actions to be taken and specific time frames to achieve either a merger with, or acquisition by, another federally insured depository institution or holding company thereof, or a voluntary dissolution by the later of the date of all required regulatory approvals or sixty (60) days after implementation of the Contingency Plan. The Bank filed the Contingency Plan with the OTS on May 12, 2011 and by letter dated June 15, 2011 the OTS directed the Bank to immediately implement and adhere to such Contingency Plan. The Bank intends to comply with the Contingency Plan and the directive. Moreover, as the holding companies of the Bank, the Company and BFS Bancorp, MHC also are subject to a separate but related Cease and Desist Order issued by the OTS on the same date as the Bank’s Order, which requires, among other terms, that the Company and BFS Bancorp, MHC ensure the Bank’s compliance with the terms of the Bank Order. The Company and BFS Bancorp, MHC intend to comply with their respective orders to ensure the Bank’s compliance with the terms of the Bank Order, including the implementation of the Contingency Plan.
21
There can be no assurance that the actions referred to above will successfully resolve all of the concerns of the federal banking regulatory authorities. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Certain statements contained herein are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “estimate,” “anticipate,” “continue,” or similar terms or variations on those terms, or the negative of those terms. Forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, those related to the economic environment, particularly in the market areas in which the Company operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset-liability management, the financial and securities markets and the availability of and costs associated with sources of liquidity.
The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and advise readers that various factors, including regional and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of lending and investing activities, and competitive and regulatory factors, could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from those anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements except as required by law.
General
The Company’s results of operations depend mainly on its net interest income, which is the difference between the interest income earned on its loan and investment portfolios and interest expense paid on its deposits and borrowed funds. Results of operations are also affected by fee income from banking operations, provisions for loan losses, other-than-temporary impairments, gains (losses) on sales of loans and securities available-for-sale and other miscellaneous income. The Company’s non-interest expenses consist primarily of compensation and employee benefits, office occupancy, technology, FDIC insurance, marketing, general administrative expenses and income tax expense.
The Company’s results of operations are also significantly affected by general economic and competitive conditions, particularly with respect to changes in interest rates, government policies and actions of regulatory authorities. Future changes in applicable laws, regulations or government policies may materially affect the Company’s financial condition and results of operations.
Our website address is www.brooklynbank.com. Information on our website should not be considered a part of this document.
22
Critical Accounting Policies
We consider accounting policies that require management to exercise significant judgment or discretion or make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income, to be critical accounting policies. We consider the following to be our critical accounting policies:
Allowance for Loan Losses. The allowance for loan losses is the estimated amount considered necessary to cover credit losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses that is charged against income. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as one of the most critical for the Bank. The methodology for determining the allowance for loan losses is considered a critical accounting policy by management due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses.
As a substantial amount of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans and discounted cash flow valuations of properties are critical in determining the amount of the allowance required for specific loans. Assumptions for appraisals and discounted cash flow valuations are instrumental in determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly impact the valuation of a property securing a loan and the related allowance determined. The assumptions supporting appraisals and discounted cash flow valuations are carefully reviewed by management to determine that the resulting values reasonably reflect amounts realizable on the related loans.
Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. Consideration is given to a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal and external loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision based on changes in economic and real estate market conditions.
The analysis of the allowance for loan losses has two components: specific and general allocations. Specific allocations are made for loans that are determined to be impaired. Impairment for all classes of loans is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. The general allocation is determined by segregating the remaining loans by portfolio segment, risk weighting (if applicable) and payment history. For all portfolio segments, we also analyze historical loss experience over the prior 18 months, delinquency trends, general economic conditions and geographic and industry concentrations. This analysis establishes factors that are applied to the segments to determine the amount of the general allocations. Actual loan losses may be significantly more than the allowance for loan losses we have established which could have a material negative effect on our financial results.
Other-than-Temporary Impairment of Securities. We evaluate on a quarterly basis whether any securities are other-than-temporarily impaired. In making this determination, we consider the extent and duration of the impairment, the nature and financial health of the issuer and our ability and intent to hold the securities for a period sufficient to allow for any anticipated recovery in market value. Other considerations include, without limitation, a review of the credit quality of the issuer and the existence of a guarantee or insurance, if applicable to the security. If a security is determined to be other-than-temporarily impaired, we record an impairment loss as a charge to income for the period in which the impairment loss is determined to exist, resulting in a reduction to our earnings for that period.
The fair value of the Bank’s investment in a mutual fund that invests primarily in agency and private label mortgage-backed securities has been steadily decreasing, which has caused a corresponding decrease in the fund’s net asset value. In October 2010, the fund lifted the temporary prohibition it had implemented on cash redemptions, thereby giving the Bank the ability to dispose of its remaining $2.7 million investment in this asset. During the six month period ended March 31, 2011, we concluded that this available-for-sale investment did incur an other-than-temporary impairment totaling $8,000 and the Bank charged current earnings for the impairment. This investment was sold in March of 2011.
23
Regarding the remaining securities available-for sale, an other-than-temporary impairment loss must be fully recognized in earnings if an investor has the intent to sell the debt security or if it is more likely than not that the investor will be required to sell the debt security before recovery of its amortized cost basis. However, even if an investor does not expect to sell a debt security, it must evaluate the expected cash flows to be received and determine if a credit loss has occurred. In the event of an other-than-temporary impairment loss, only the amount of impairment associated with the credit loss is recognized in earnings. An other-than-temporary impairment loss relating to factors other than credit losses are recorded in accumulated other comprehensive loss.
Deferred Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, 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. 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. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. We consider the determination of this valuation allowance to be a critical accounting policy because of the need to exercise significant judgment in evaluating the amount and timing of recognition of deferred tax liabilities and assets, including projections of future taxable income. These judgments and estimates are reviewed on a continual basis as regulatory and business factors change. A valuation allowance for deferred tax assets may be required if the amount of taxes recoverable through loss carry-back declines, or if we project lower levels of future taxable income. Such a valuation allowance would be established through a charge to income tax expense which would adversely affect our operating results. As of March 31, 2011, we had recorded a valuation allowance on all of our deferred income taxes. At September 30, 2010 we had recorded a valuation allowance of all but $1.3 million of our deferred income taxes.
Comparison of Financial Condition at March 31, 2011 and September 30, 2010
Overview. Total assets decreased $9.4 million to $478.3 million at March 31, 2011 from $487.7 million at September 30, 2010. This increase was primarily due to an increase in cash and due from banks and securities available-for-sale offset by a decrease in loans receivables.
Cash and Due From Banks. Cash and due from banks increased $16.0 million, or 112.8%, to $30.2 million at March 31, 2011 from $14.2 million at September 30, 2010.
Securities. Investment securities increased $26.4 million, or 38.2%, to $95.5 million at March 31, 2011 from $69.1 million at September 30, 2010. This increase was primarily due to $58.3 million purchases of securities, partially offset by $13.3 million sales of securities, and repayments of approximately $18.5 million.
Net Loans. Loans before allowance for loan losses decreased $46.2 million, or 11.9%, to $341.6 million at March 31, 2011 from $387.8 million at September 30, 2010, primarily due to decreases in commercial real estate loans of $61.7 million and construction loans of $3.5 million offset in part by an increase in one-to-four family loans of $1.9 million and lines of credit of $1.9 million. Due to OTS mandated restrictions the Bank will not originate any multi-family, commercial real estate, construction or land loans without the prior approval of the OTS.
On the basis of management’s review of assets, at March 31, 2011 we classified $37.4 million of our assets as special mention or potential problem loans compared to $62.5 million at September 30, 2010. Loans classified as special mention are not considered “classified” under the OTS regulations but do warrant extra attention.
At March 31, 2011 we classified $154.3 million of loans as substandard or worse compared to $125.0 million at September 30, 2010. Substandard/doubtful loans include $119.0 million of non-performing loans, of which $109.3 million are non-accrual loans and $9.7 million are loans contractually past maturity date for which we continue to accrue interest. Of the $119.0 million in non-accrual loans, $35.1 million are TDR’s and are performing in accordance with their modified terms. We have evaluated each substandard/doubtful loan for potential impairment under ASC 310 “Receivables.” Based upon our analysis $150.5 million of such substandard/doubtful loans did not require an allowance as of March 31, 2011 due to the fact that the collateral value of the real estate, net of estimated selling costs, exceeded the carrying value of the loan. The Company believes that as of March 31, 2011 the allowance for loan losses is adequate to absorb known and inherent losses within the loan portfolio. There can be no assurances that additional provision for loan losses will not be required in future periods.
24
Net charge-offs totaled $1.3 million for the six months ended March 31, 2011 compared to $14.2 million for the six months ended March 31, 2010. Annualized net charge-offs represented 0.19% of average loans for the six months ended March 31, 2011.
Allowance for Loan Losses and Asset Quality
The Company maintains an allowance for loan losses that management believes is sufficient to absorb known and inherent losses in its loan portfolio. The adequacy of the allowance for loan and lease losses (“ALLL”) is determined by management’s continuing review of the Company’s loan portfolio, which includes identification and review of individual factors that may affect a borrower’s ability to repay. Management reviews overall portfolio quality through an analysis of delinquency and non-performing loan data, estimates of the value of underlying collateral and current charge-offs. A review of regulatory examinations, an assessment of current and expected economic conditions and changes in the size and composition of the loan portfolio are also taken into consideration. The ALLL reflects management’s evaluation of the loans presenting identified loss as well as the risk inherent in various segments of the portfolio. As such, an increase in the size of the portfolio or any of its segments could necessitate an increase in the ALLL even though there may not be a decline in credit quality or an increase in potential problem loans.
For additional information regarding the Company’s ALLL policy, please refer to Note 2(h) of Notes to Consolidated Financial Statements, “Nature of Business and Summary of Significant Accounting Policies” included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010.
25
The following table summarizes the activity in ALLL for the six month periods ended March 31, 2011 and 2010 (dollars in thousands):
March
|
March
|
|||||||
2011
|
2010
|
|||||||
(Dollars in thousands)
|
||||||||
Balance at beginning of period
|
$ | 17,941 | $ | 10,750 | ||||
Charge-offs:
|
||||||||
One-to-four-family
|
(58 | ) | (170 | ) | ||||
Multi-family
|
- | (2,692 | ) | |||||
Commercial real estate
|
- | (9,956 | ) | |||||
Construction
|
(1,073 | ) | (255 | ) | ||||
Land
|
(131 | ) | (1,130 | ) | ||||
Consumer and other
|
- | (35 | ) | |||||
Recoveries
|
603 | - | ||||||
Net charge-offs
|
(658 | ) | (14,238 | ) | ||||
Provision for loan losses
|
4,604 | 23,877 | ||||||
Balance at end of period
|
$ | 21,887 | $ | 20,389 | ||||
Ratios:
|
||||||||
Net charge-offs to average loans outstanding
|
0.18 | % | 3.27 | % | ||||
Allowance for loan losses to total loans at end of period
|
6.41 | % | 4.82 | % |
The Company recorded a loan loss provision of $4.6 million for the six months ended March 31, 2011, a decrease of $19.3 million, compared to a $23.9 million provision in the same prior year period. The $4.6 million recognized as provision for the six month period ended March 31, 2011 reflects $1.3 million of charge offs for criticized assets, a $3.9 million increase in general loss allowance and a recovery of $0.6 million. The Company’s future level of non-performing loans will be influenced by economic conditions, including the impact of those conditions on the Bank’s customers, interest rates and other factors existing at the time.
At March 31, 2011 and September 30, 2010, the Bank’s allowance for loan losses was $21.9 million and $17.9 million, respectively.
Non-Performing Loans and Potential Problem Assets
After a one-to-four-family residential loan becomes 15 days late, the Bank delivers a computer-generated late charge notice to the borrower. Approximately one week later, we deliver a reminder notice. When a loan becomes 30 days delinquent, the loan servicing department manager determines whether to send an acceleration letter to the borrower and attempts to make personal contact. After 60 days, we will generally refer the matter to legal counsel who is authorized to commence foreclosure proceedings. Management is authorized to begin foreclosure proceedings on any loan after 60 days, after determining that it is prudent to do so and the proper acceleration letter has been sent.
After a multi-family, commercial real estate or construction loan becomes ten days delinquent, the Bank delivers a computer-generated late charge notice to the borrower and attempts to make personal contact with the borrower. If there is no successful resolution of the delinquency at that time, we may accelerate the payment terms of the loan and issue a letter notifying the borrower of this acceleration. After such loan is 15 days delinquent, we may refer the matter to legal counsel who is authorized to commence foreclosure proceedings. Management is authorized to begin foreclosure proceedings on any delinquent loan after determining that it is prudent to do so.
Loans are reviewed on a regular basis by management’s Asset Classification Committee and are placed on non-accrual status when they become 90 days or more delinquent and collection is doubtful or when, regardless of how many days delinquent the loan is, other factors indicate that the collection of these amounts is doubtful. When loans are placed on non-accrual status, unpaid accrued interest is reversed, and further income is recognized only to the extent received.
26
Non-Performing Loans. Non-performing loans are defined as either in non-accrual status, over 90 days past due and still accruing, and/or past contractual maturity date. At March 31, 2011, $116.0 million of our loans net of specific allowances, or 32.3%, of our total loans, compared to $83.2 million, or 21.6%, at September 30, 2010, were non-accrual and/or past maturity and therefore non-performing. These loans consist of multi-family, commercial real estate, construction and land loans. We are actively pursuing all applicable methods and resources to reduce the number and amount of non-performing loans.
Non-Performing Assets. The table below sets forth the amounts and categories of our non-performing assets, net of specific allowances at the dates indicated. We may from time to time agree to modify the contractual terms of a borrower’s loan. In cases where these modifications represent a concession (for which a portion of interest or principal has been forgiven and loans modified at interest rates materially less than current market rates) to a borrower experiencing financial difficulty, the modification is considered a TDR, or troubled debt restructuring. If a TDR, at the time of its modification, is current, or performing, it will remain in accrual status, so long as the borrower continues to perform in accordance with the modified terms. If a TDR, at the time of its modification, is not performing, the loan will remain in non-accrual status until such time that the borrower has demonstrated the ability to perform in accordance with the modified terms, usually six months. At March 31, 2011, loans modified in a troubled debt restructuring totaled $35.5 million. One loan for $0.4 million is performing in accordance with its new terms and, therefore, is not included in the table below. The remaining total of $35.1 million is in non-accrual status, and included in the table below.
The following table sets forth information with respect to the Company’s non-performing assets (dollars in thousands):
March
|
September
|
|||||||
2011
|
2010
|
|||||||
(Dollars in thousands)
|
||||||||
Non-accrual loans:
|
||||||||
One-to four-family
|
$ | 1,289 | $ | - | ||||
Multi-family
|
23,596 | 23,956 | ||||||
Commercial real estate
|
39,508 | 34,908 | ||||||
Construction
|
35,913 | 7,890 | ||||||
Land
|
8,079 | 5,103 | ||||||
Consumer
|
- | - | ||||||
Total non-accrual loans
|
108,385 | 71,857 | ||||||
Loans past maturity and still accruing:
|
||||||||
Multi-family
|
4,940 | 1,365 | ||||||
Commercial real estate
|
- | 3,713 | ||||||
Construction
|
4,754 | 6,615 | ||||||
Land
|
- | 2,628 | ||||||
Total loans past maturity and still accruing
|
9,694 | 14,321 | ||||||
Past due over 90 days and still accruing
|
- | - | ||||||
Real estate owned
|
- | - | ||||||
Total non-performing loans
|
$ | 118,079 | $ | 86,178 |
For the three and six months ended March 31, 2011, there was $1.3 million and $4.4 million of interest income that would have been recorded had our non-accruing loans been current and in accordance with their original terms.
27
Prepaid Expenses and Other Assets. Prepaid expenses and other assets decreased $1.3 million, or 6.7%, to $17.8 million at March 31, 2011 from $19.0 million at September 30, 2010. The decrease was due primarily to a decrease in insurance premiums.
Deposits. Total deposits decreased $1.2 million, or 0.3%, to $422.2 million at March 31, 2011 from $423.4 million at September 30, 2010. Interest bearing deposits decreased $3.7 to $151.1 million at March 31, 2011 from $154.8 million at September 30, 2010 while certificates of deposit increased $2.4 million to $254.9 million from $252.6 million at September 30, 2010 and non-interest bearing deposits increased $0.1 million to $16.1 million at March 31, 2011 from $16.0 million at September 30, 2010.
Liquidity and Capital Resources. The Company maintains liquid assets at levels it considers adequate to meet its liquidity needs. The Company adjusts its liquidity levels to fund deposit outflows, pay real estate taxes on mortgage loans, repay its borrowings and to fund loan commitments. The Company also adjusts its liquidity levels as appropriate to meet asset and liability management objectives.
The Company’s primary sources of liquidity are deposits, amortization and prepayment of loans and mortgage-backed securities, maturities of investment securities and other short-term investments, and earnings and funds provided from operations, as well as access to FHLB of New York advances. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and rates offered by the Company’s competition. The Company sets the interest rates on its deposits to maintain a desired level of total deposits. In addition, the Company invests excess funds in short-term interest-earning assets, which provide liquidity to meet lending requirements.
A significant portion of our liquidity consists of cash and cash equivalents and securities available for sale, which are a product of our operating, investing and financing activities. At March 31, 2011, $30.2 million of our assets were invested in cash and due from banks and $95.5 million were invested in securities available for sale. Our primary sources of cash are principal repayments on loans, proceeds from the calls and maturities of investment securities, principal repayments of mortgage-backed securities and increases in deposit accounts. Currently, we sell longer-term fixed rate mortgage loans, and we syndicate and sell participation interests in portions of our multi-family, commercial real estate and construction loans. Pursuant to the directive we received from the OTS, except for commitments outstanding as of December 3, 2009, we will not originate any multi-family, commercial real estate, construction or land loans without the prior approval of the OTS. In addition, we invest excess funds in short-term interest-earning assets and other assets, which provide liquidity to meet our lending requirements. There were no certificates of deposit and short-term investment securities (maturing in less than three years) at March 31, 2011. As of March 31, 2011 we had $9.0 million in borrowings outstanding from the Federal Home Loan Bank of New York and we have access to additional Federal Home Loan Bank advances of up to $39.1 million. In addition, we have access to a secured line of credit with the Federal Reserve Bank of New York.
At March 31, 2011 we had $37.8 million in loan commitments outstanding, which included $9.2 million in undisbursed construction loans, $13.4 million in commercial real estate lines of credit, $5.5 million in unused home equity lines of credit and $9.7 million in one-to-four-family loans. Pursuant to the directive we received from the OTS, other than contractual commitments outstanding as of December 3, 2009, the Bank will not originate any multi-family, commercial real estate, construction, or land loans without prior OTS approval. Certificates of deposit due within one year of March 31, 2011 totaled $146.3 million, or 57.4%, of total certificates of deposit. The large percentage of certificates of deposit that mature within one year reflects our customers’ hesitancy to invest their funds for long periods in the current low interest rate environment. If these maturing deposits do not remain with us we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on these deposits or other borrowings than we currently pay on the certificates of deposit due on or before March 31, 2012. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.
28
The following table sets forth the Bank’s capital position at March 31, 2011 and September 30, 2010, as compared to the minimum regulatory capital requirements applicable at that time:
Actual
|
For capital adequacy purposes
|
|||||||||||||||
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||
(Dollars in thousands)
|
||||||||||||||||
At March 31, 2011:
|
||||||||||||||||
Total risk-based capital (to risk weighted assets)
|
$ | 39,977 | 11.1 | % | $ | 28,897 | 8.0 | % | ||||||||
Tier I risk-based capital (to risk weighted assets)
|
35,153 | 9.7 | % | 14,449 | 4.0 | % | ||||||||||
Tangible capital (to tangible assets)
|
35,153 | 7.4 | % | 7,167 | 1.5 | % | ||||||||||
Tier I leverage (core) capital (to adjusted tangible assets)
|
35,153 | 7.4 | % | 14,335 | 3.0 | % | ||||||||||
At September 30, 2010:
|
||||||||||||||||
Total risk-based capital (to risk weighted assets)
|
$ | 45,912 | 10.9 | % | $ | 33,603 | 8.0 | % | ||||||||
Tier I risk-based capital (to risk weighted assets)
|
39,094 | 9.3 | % | 16,802 | 4.0 | % | ||||||||||
Tangible capital (to tangible assets)
|
39,094 | 8.0 | % | 7,289 | 1.5 | % | ||||||||||
Tier I leverage (core) capital (to adjusted tangible assets)
|
39,094 | 8.0 | % | 14,577 | 3.0 | % |
On March 31, 2011, the Bank entered into a cease and desist order issued by the OTS, under which, among other things, the Bank has agreed to achieve and maintain a Tier 1 Capital Ratio of at least 10% and a Total Risk-Based Capital Ratio of at least 15% by April 30, 2011. As a result of the cease and desist order, the Bank is no longer considered “well capitalized”. See Note 8 for additional information pertaining to the cease and desist order.
Off-Balance Sheet Arrangements
The following table sets forth the Bank’s contractual obligations and commercial commitments at March 31, 2011:
|
||||||||||||||||||||
Commitment Expiration by Period | ||||||||||||||||||||
More than
|
More Than
|
|||||||||||||||||||
One Year
|
Three Years
|
|||||||||||||||||||
One Year
|
Through
|
Through
|
More Than
|
|||||||||||||||||
Off-Balance Sheet Arrangements
|
Total
|
or Less
|
Three Years
|
Five Years
|
Five Years
|
|||||||||||||||
To originate loans
|
$ | 9,665 | $ | 9,665 | $ | - | $ | - | $ | - | ||||||||||
Unused lines of credit, including undisbursed construction loans
|
28,151 | 9,313 | 12,513 | 1,476 | 4,849 | |||||||||||||||
Total
|
$ | 37,816 | $ | 18,978 | $ | 12,513 | $ | 1,476 | $ | 4,849 | ||||||||||
Analysis of Earnings
The Company’s profitability is primarily dependent upon net interest income and further affected by provisions for loan losses, non-interest income, non-interest expense and income taxes. The earnings of the Company, which are principally earnings of the Bank, are significantly affected by general economic and competitive conditions, particularly changes in market interest rates, and to a lesser extent by government policies and actions of regulatory authorities.
29
The following tables set forth, for the periods indicated, certain information relating to the Company’s average interest-earning assets, average interest-bearing liabilities, net interest income, interest rate spread and interest rate margin. It reflects the average yield on assets and the average cost of liabilities. Such yields and costs are derived by dividing annualized income or expense by the average balances of assets or liabilities, respectively, for the periods shown. Average balances are derived from daily or month-end balances as available. Management does not believe that using average monthly balances instead of average daily balances represents a material difference in information presented. The average balance of loans includes loans on which the Company has discontinued accruing interest. The average yield and cost include fees, which are considered adjustments to yields (dollars in thousands).
30
BROOKLYN FEDERAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCES
Three months ended March 31,
|
||||||||||||||||||||||||
2011
|
2010
|
|||||||||||||||||||||||
Interest Earning Assets:
|
Average Balance
|
Interest
|
Average Yield/Cost
|
Average Balance
|
Interest
|
Average Yield/Cost
|
||||||||||||||||||
Loans
|
$ | 356,167 | $ | 4,506 | 5.06 | % | $ | 435,643 | $ | 6,907 | 6.34 | % | ||||||||||||
Mortgage-backed securities
|
75,918 | 621 | 3.27 | % | 68,347 | (1) | 862 | 5.04 | % | |||||||||||||||
Investments securities and other interest-earning assets
|
43,857 | 98 | 91.00 | % | 9,705 | (1) | 82 | 3.43 | % | |||||||||||||||
Total interest earning assets
|
475,942 | 5,225 | 4.39 | % | 513,695 | 7,851 | 6.10 | % | ||||||||||||||||
Non-interest earning assets
|
9,463 | 12,893 | ||||||||||||||||||||||
Total Assets
|
$ | 485,405 | $ | 526,588 | ||||||||||||||||||||
Interest Bearing Liabilities:
|
||||||||||||||||||||||||
Savings accounts
|
$ | 66,705 | 66 | 0.40 | % | $ | 63,111 | 92 | 0.59 | % | ||||||||||||||
Money market/NOW accounts
|
84,558 | 136 | 0.65 | % | 85,232 | 250 | 1.19 | % | ||||||||||||||||
Certificates of deposits
|
259,063 | 1,236 | 1.93 | % | 262,158 | 1,608 | 2.49 | % | ||||||||||||||||
Total interest-bearing deposits
|
410,326 | 1,438 | 1.42 | % | 410,501 | 1,950 | 1.93 | % | ||||||||||||||||
Borrowings
|
9,000 | 63 | 2.88 | % | 8,868 | 51 | 2.33 | % | ||||||||||||||||
Total interest bearing liabilities
|
419,326 | 1,501 | 1.45 | % | 419,369 | 2,001 | 1.94 | % | ||||||||||||||||
Non-interest bearing liabilities:
|
24,869 | 28,426 | ||||||||||||||||||||||
Total liabilities
|
444,195 | 447,795 | ||||||||||||||||||||||
Stockholder’s equity
|
41,210 | 78,793 | ||||||||||||||||||||||
Total liabilities & stockholder’s equity
|
485,405 | $ | 526,588 | |||||||||||||||||||||
Net interest income
|
$ | 3,724 | $ | 5,850 | ||||||||||||||||||||
Average interest rate spread
|
2.94 | % | 4.16 | % | ||||||||||||||||||||
Net interest-earning assets
|
56,616 | 94,326 | ||||||||||||||||||||||
Net Interest Margin
|
3.11 | % | 4.56 | % | ||||||||||||||||||||
Ratio of average interest earning assets to interest bearing liabilities
|
113.50 | % | 122.49 | % |
(1) These amounts represent net amounts after OTTI
31
BROOKLYN FEDERAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCES
Six months ended March 31,
|
||||||||||||||||||||||||
2011
|
2010
|
|||||||||||||||||||||||
Interest Earning Assets:
|
Average Balance
|
Interest
|
Average Yield/Cost
|
Average Balance
|
Interest
|
Average Yield/Cost
|
||||||||||||||||||
Loans
|
$ | 341,273 | $ | 9,485 | 5.56 | % | $ | 434,442 | $ | 14,095 | 6.49 | % | ||||||||||||
Mortgage-backed securities
|
85,533 | 1,194 | 2.79 | % | 70,664 | (1) | 1,772 | 5.02 | % | |||||||||||||||
Investments securities and other interest-earning assets
|
43,570 | 150 | 0.69 | % | 8,996 | (1) | 174 | 3.88 | % | |||||||||||||||
Total interest earning assets
|
470,376 | 10,829 | 4.60 | % | 514,102 | 16,041 | 6.24 | % | ||||||||||||||||
Non-interest earning assets
|
14,743 | 12,016 | ||||||||||||||||||||||
Total Assets
|
$ | 485,119 | $ | 526,118 | ||||||||||||||||||||
Interest Bearing Liabilities:
|
||||||||||||||||||||||||
Savings accounts
|
$ | 67,496 | 132 | 0.39 | % | $ | 62,189 | 193 | 0.62 | % | ||||||||||||||
Money market/NOW accounts
|
86,103 | 280 | 0.65 | % | 81,960 | 512 | 1.25 | % | ||||||||||||||||
Certificates of deposits
|
255,857 | 2,549 | 1.99 | % | 258,847 | 3,310 | 2.56 | % | ||||||||||||||||
Total interest-bearing deposits
|
409,456 | 2,961 | 1.45 | % | 402,996 | 4,015 | 2.00 | % | ||||||||||||||||
Borrowings
|
9,000 | 129 | 2.87 | % | 13,543 | 105 | 1.55 | % | ||||||||||||||||
Total interest bearing liabilities
|
418,456 | 3,090 | 1.48 | % | 416,539 | 4,120 | 1.98 | % | ||||||||||||||||
Non-interest bearing liabilities:
|
23,768 | 28,567 | ||||||||||||||||||||||
Total liabilities
|
442,224 | 445,106 | ||||||||||||||||||||||
Stockholder’s equity
|
42,895 | 81,012 | ||||||||||||||||||||||
Total liabilities & stockholder’s equity
|
$ | 485,119 | $ | 526,118 | ||||||||||||||||||||
Net interest income
|
$ | 7,739 | $ | 11,921 | ||||||||||||||||||||
Average interest rate spread
|
3.12 | % | 4.26 | % | ||||||||||||||||||||
Net interest-earning assets
|
$ | 51,920 | $ | 97,563 | ||||||||||||||||||||
Net Interest Margin
|
3.29 | % | 4.63 | % | ||||||||||||||||||||
Ratio of average interest earning assets to interest bearing liabilities
|
112.41 | % | 123.42 | % |
(1) These amounts represent net amounts after OTTI
32
Comparison of Operating Results for the Three Months Ended March 31, 2011 and 2010
Net Loss. Net loss decreased $3.5 million to $2.5 million for the three months ended March 31, 2011 from $6.0 million for the three months ended March 31, 2010. The primary reasons for the decrease were the decrease in the provision for loan losses of $11.2 million and a decrease in other-than-temporary impairment of securities of $0.9 million which were partially offset by a decrease in net interest income of $2.1 million, a loss on the sale of securities of $1.4 million and a reduction in income tax benefit of $4.4 million.
Net Interest Income Before Provision for Loan Losses. Net interest income before provision for loan losses decreased $2.2 million, or 36.3%, to $3.7 million for the three months ended March 31, 2011, compared to $5.9 million for the three months ended March 31, 2010. The Bank’s net interest rate spread decreased 122 basis points to 2.94% for the three months ended March 31, 2011, compared to 4.16% for the three months ended March 31, 2010. The Bank’s net interest margin decreased 145 basis points to 3.11% for the three months ended March 31, 2011, compared to 4.56% for the three months ended March 31, 2010. The primary reason for the decreases in the net interest rate spread and net interest margin for the three months ended March 31, 2011 as compared to the three months ended March 31, 2010, is the average yield on loans, which decreased 128 basis points. The Company’s level of non-accrual loans have increased, thereby reducing loan income which would otherwise have been recognized, and interest rates have trended downward since the three months ended March 31, 2010. Somewhat mitigating the decreases in the net interest rate spread and net interest margin is the lower cost of interest-bearing liabilities, from 1.94% for the three months ended March 31, 2010 to 1.45% for the three months ended March 31, 2011. This is also reflective of the low interest rate environment coupled with the Bank’s decision to conservatively set our interest rates on deposits.
Interest Income. Interest income decreased $2.6 million, or 33.4%, to $5.2 million for the three months ended March 31, 2011 from $7.8 million for the three months ended March 31, 2010. Interest income on loans decreased $2.4 million, or 34.8%, to $4.5 million for the three months ended March 31, 2011 from $6.9 million for the three months ended March 31, 2010. Interest on multi-family and commercial real estate loans, construction loans and one-to-four family loans decreased by $1.8 million, $0.4 million and $0.2 million, respectively. The average yield on loans decreased 128 basis points to 5.06% for the three months ended March 31, 2011, from 6.34% for the three months ended March 31, 2010. The average balance of the loan portfolio decreased $79.5 million, or 18.2%, to $356.2 million for the three months ended March 31, 2011 from $435.6 million for the three months ended March 31, 2010. Interest income on mortgage-backed securities decreased $0.2 million for the three months ended March 31, 2011, compared to the three months ended March 31, 2010. The average yield on mortgage-backed securities decreased 177 basis points to 3.27% for the three months ended March 31, 2011, compared to 5.04% for the quarter ended March 31 2010. The average balance of the mortgage-backed securities portfolio increased $7.6 million, or 11.1%, to $75.9 million at March 31, 2011 from $68.3 million at March 31, 2010. Interest income on investment securities and other interest-earning assets increased by $16 thousand for the three months ended March 31, 2011 compared to the three months ended March 31, 2010. The average yield on investment securities and other interest-earning assets increased 252 basis points to 0.91% for the three months ended March 31, 2011, compared to 3.43% for the three months ended March 31, 2010. The average balance of investment securities and other interest-earning assets increased $34.2 million, or 351.9%, to $43.9 million for the three months ended March 31, 2011 from $9.7 million for the three months ended March 31, 2010.
Interest Expense. Interest expense decreased $0.5 million, or 25.0%, to $1.5 million for the three months ended March 31, 2011, compared to $2.0 million for the three months ended March 31 2010. Interest expense on deposits decreased $0.6 million, or 26.3%, to $1.4 million for the three months ended March 31, 2011, compared to $2.0 million for the three months ended March 31, 2010. Interest expense on FHLB borrowings remained flat at $0.1 million for the three months ended March 31, 2011 and 2010. The decrease in total interest expense was primarily the result of a 51 basis point decrease in the average cost of interest-bearing deposits, to 1.42% for the three months ended, March 31, 2010 compared to 1.93% for the three months ended March 31 2010. The decrease in total interest expense was primarily attributable to a $0.2 million decrease in the average balance of interest-bearing deposits, to $410.3 million for the three months ended March 31, 2011, from $410.5 million for the three months ended March 31, 2010, offset by a 55 basis point increase in the average cost of FHLB borrowings, to 2.88% for the three months ended March 31, 2011, compared to 2.33% for the three months ended March 31, 2010. The average cost of total interest-bearing liabilities decreased 48 basis points to 1.45% for the three months ended March 31, 2011, from 1.94% for the three months ended March 31, 2010.
33
Provision for Loan Losses. The Company recorded a loan loss provision of $0.9 million for the second quarter of fiscal 2011, resulting in a decrease of $11.1 million in loan loss provision during the three months ending March 31, 2011 compared to a $12.1 million loan loss provision taken in the prior year period. The $0.9 million provision for the three month period ended March 31, 2011 reflects $1.3 million in charge offs for criticized assets, $0.1 million increase in the general loss allowance and $0.5 million in recoveries.
Non-interest Loss. Non-interest loss increased $0.5 million, or 97.4%, to a loss of $1.1 million for the three months ended March 31, 2011 from a loss of $0.5 million for the three months ended March 31, 2010. The increase was primarily due to the loss on sale of securities of $1.4 million partially offset be a decrease in impairment charge of $0.9 million for the three months ended March 31, 2011. There were no sales of securities in the three months ended March 31, 2010 and no impairment charge was taken during the three months ended March 31, 2011.
Non-interest Expense. Non-interest expense increased $0.5 million, or 13.8%, to $4.1 million for the three months ended March 31, 2011, from $3.6 million for the three months ended March 31, 2010. The increase resulted primarily from increases in FDIC insurance of $0.2 million and increase in professional fees of $0.2 million.
Income Taxes. Income tax benefit decreased $4.4 million to a benefit of $0.1 million for the three months ended March 31, 2011, compared to an benefit of $4.5 million for the three months ended March 31, 2010. The reason for this decrease in tax benefit was the gain before provision for income taxes at March 31, 2011 compared to a loss before income taxes at March 31, 2010.
Comparison of Operating Results for the Six Months Ended March 31, 2011 and 2010
Net Loss. Net loss decreased $5.3 million to a $5.7 million for the six months ended March 31, 2011 from a $11.0 million for the six months ended March 31, 2010. The primary reasons for the increase were the decrease in the provision for loan losses of $19.3 million and the decrease interest expense of $1.1 million offset by the loss on impairment of investment securities of $1.2 million, a decrease in total interest income of $5.2 million, an increase in non-interest expense of $1.1 million and a decrease in income tax benefit of $8.3 million for the six months ended March 31, 2011 compared to the same period last year.
Net Interest Income Before Provision for Loan Losses. Net interest income before provision for loan losses decreased $4.2 million, or 35.1%, to $7.7 million for the six months ended March 31, 2011 from $11.9 million for the six months ended March 31, 2010. The decrease in net interest income resulted primarily from a decrease in the average yield of interest-earning assets from 6.24% for the six months ended March 31, 2010 to 4.60% for the six months ended March 31, 2011. The average balance of interest-bearing deposits increased by 1.6%, from $403.0 million for the six months ended March 31, 2010 to $409.5 million for the six months ended March 31, 2011. The average cost of interest-bearing liabilities decreased 50 basis points, from 1.98% for the six months ended March 31, 2010 to 1.48% for the six months ended March 31, 2011. The Bank’s net interest rate spread decreased 114 basis points to 3.12% for the six months ended March 31, 2011, compared to 4.26% for the six months ended March 31, 2010. The Bank’s net interest margin decreased 134 basis points to 3.29% from 4.63% for the comparative period. The primary reason for the decreases in the net interest rate spread and net interest margin for the six months ended March 31, 2011, as compared to the six months ended March 31, 2010, is the average yield on loans, which decreased 93 basis points. The Company’s level of non-accrual loans have increased, thereby reducing loan income which would otherwise have been recognized. Somewhat mitigating the decreases in the net interest rate spread and net interest margin is the lower cost of interest-bearing liabilities, from 1.98% for the six months ended March 31, 2010 to 1.48% for the six months ended March 31, 2011. This is also reflective of the low interest rate environment coupled with the Bank’s decision to conservatively set our interest rates on deposits.
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Interest Income. Interest income decreased $5.2 million, or 32.5%, to $10.8 million for the six months ended March 31, 2011 from $16.0 million for the six months ended March 31, 2010. Interest income on loans decreased $4.6 million, or 32.7%, to $9.5 million for the six months ended March 31, 2011 from $14.1 million for the six months ended March 31, 2010. Interest on multi-family and commercial real estate loans, on construction loans and on one-to-four family loans decreased $3.7 million, $0.5 million and $0.4 million, respectively. The average balance of the loan portfolio decreased $93.2 million, or 21.4%, to $341.3 million for the six months ended March 31, 2011 from $434.4 million for the six months ended March 31, 2010. The average yield on loans decreased 93 basis points to 5.56% for the six months ended March 31, 2011, from 6.49% for the six months ended March 31, 2010. Interest income on mortgage-backed securities decreased $0.6 million, or 32.6%, for the six months ended March 31, 2011, compared to the same period last year. The average balance of mortgage-backed securities increased $14.9 million, and the average yield decreased 223 basis points to 2.79% for the six months ended March 31, 2011 compared to 5.02% for the six months ended March 31, 2010. Interest income on investment securities and other interest-earning assets was flat at $0.1 million for the six months ended March 31, 2011 and 2010. The average balance on investment securities and other interest-earning assets increased $34.6 million, or 384.3%, to $43.6 million for the six months ended March 31, 2011 from $9.0 million for the six months ended March 31, 2010. The average yield on investment securities and other interest-earning assets decreased 319 basis points to 0.69% for the six months ended March 31, 2011, compared to 3.88% for the six months ended March 31, 2010.
Interest Expense. Interest expense decreased $1.0 million, or 25.0%, to $3.1 million for the six months ended March 31, 2011, compared to $4.1 million for the six months ended March 31, 2010. Interest expense on deposits decreased $1.0 million, or 26.3%, to $3.0 million for the six months ended March 31, 2011, compared to $4.0 million for the six months ended March 31, 2010. Interest expense on FHLB borrowings remained flat at $0.1 million for the six months ended March 31, 2011 and March 31, 2010. The decrease in total interest expense was primarily the result of a 55 basis point decrease in the average cost of interest-bearing deposits, from 2.00% for the six months ended March 31, 2010 to 1.45% for the six months ended March 31, 2011. The average balance of interest-bearing deposits increased $6.5 million, or 1.6%, from $403.0 million for the six months ended March 31, 2010 to $409.5 million for the six months ended March 31, 2011. The average balance of FHLB borrowings decreased $4.5 million, or 33.5%, for the six months ended March 31, 2011, compared to the six months ended March 31, 2010. The average cost of total interest-bearing liabilities decreased 50 basis points to 1.48% for the six months ended March 31, 2011, from 1.98% for the six months ended March 31, 2010.
Provision for Loan Losses. The Company recorded $4.6 million in loan loss provision for the six months ended March 31, 2011, resulting in a decrease of $19.3 million in loan loss provision in the three month ended March 31, 2011 compared to a $23.9 million loan loss provision in the prior year period for the same reasons noted in the “Provision for Loan Losses” discussion for the three months ended March 31, 2011. Based upon the Company’s evaluation, the $4.6 million in the loan loss provision for the six months ended March 31, 2011, reflects $1.3 million of charge offs for criticized assets, a $3.9 million increase in general loss allowance and a recovery of $0.6 million.
Non-interest Loss. Non-interest loss increased $0.2 million to a loss of $0.7 million for the six months ended March 31, 2011 from a loss of $0.4 million for the six months ended March 31, 2010. The increase was primarily due to a decrease in the impairment charge of $1.2 million to $$8.0 thousand for the three months ended March 31, 2011, from $1.3 million for the three months ended March 31, 2010. There was a $1.4 million loss on the sale of securities for the three months ended March 31, 2011, no securities were sold during the comparable period of the prior year. Banking fees and service charges decreased $0.3 million, or 53.5%, from $0.5 million for the six months ended March 31, 2010 to $0.2 million for the three months ended March 31, 2011.
Non-interest Expense. Non-interest expense increased $1.1 million, or 15.6%, for the six months ended March 31, 2011 compared to the same period last year. Compensation and employee benefits increased $0.1 million, professional fees increased $0.4 million, FDIC insurance expense increased $0.3 million and other expense increased by $0.2 million.
Income Taxes. Income tax expense increased $8.3 million to $0.1 million for the six months ended March 31, 2011, from a benefit of $8.2 million for the six months ended March 31, 2010. The reason for this increase was the income before provision for income taxes in March 2011 compared to loss before provision for income taxes in March 31, 2010.
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ITEM 3.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
The majority of the Company’s assets and liabilities are monetary in nature. Consequently, the Company’s most significant form of market risk is interest rate risk. The Company’s assets, consisting primarily of mortgage loans, have longer maturities than the Company’s liabilities, consisting primarily of deposits. As a result, a principal part of the Company’s business strategy is to manage interest rate risk and reduce the exposure of its net interest income to changes in market interest rates. Accordingly, the Company’s board of directors has approved guidelines for managing the interest rate risk inherent in its assets and liabilities, given the Company’s business strategy, operating environment, capital, liquidity and performance objectives. Senior management monitors the level of interest rate risk on a regular basis and the finance committee of the board of directors meets as needed to review the Company’s asset/liability policies and interest rate risk position.
The Company seeks to manage its interest rate risk in order to minimize the exposure of its earnings and capital to changes in interest rates. During the low interest rate environment that has existed in recent years, the Company has implemented the following strategies to manage its interest rate risk: (i) maintaining a high level of short-term liquid assets invested in cash and cash equivalents, short-term securities and mortgage-related securities that provide significant cash flows; (ii) generally selling longer-term mortgage loans; and (iii) lengthening the average term of the Bank’s certificates of deposit. By investing in short-term, liquid instruments, the Company believes it is better positioned to react to increases in market interest rates. However, investments in shorter-term securities and cash and cash equivalents generally bear lower yields than longer-term investments. Thus, during the recent environment of decreased interest rates, the Bank’s strategy of investing in liquid instruments has resulted in lower levels of interest income than would have resulted from investing in longer-term loans and investments. Management intends to lengthen the maturity of the Company’s interest-earning assets as interest rates increase, which in turn should result in a higher yielding portfolio of interest-earning assets. There have been no material changes in the Company’s interest rate risk since September 30, 2009.
ITEM 4.
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CONTROLS AND PROCEDURES
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We are required to maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2011 (the “Evaluation Date”).
In connection with the completion and audit of the Company’s consolidated financial statements for the fiscal year ended September 30, 2010, management, together with its independent registered public accounting firm, Crowe Horwath LLP, identified certain miscalculations in its allowance for loan losses during and between fiscal year 2010 quarterly periods as disclosed in the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2010. Control procedures in place for reviewing the Company’s methodology for determining the allowance for loan losses did not timely identify the miscalculations, and as such, the Company did not have adequately designed procedures. As a result, management concluded that a material weakness in its internal control associated with the procedures for determining the allowance for loan losses existed as of September 30, 2010 and continued throughout the quarterly period ended March 31, 2011 as it was discovered only after the Evaluation Date. As a result, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, our disclosure controls and procedures were not effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and were not operating in an effective manner.
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There were no significant changes made in our internal controls during the period covered by this report or, to our knowledge, in other factors that has materially affected or is reasonably likely to materially affect, the Company’s internal control over financial reporting. However, following the Evaluation Date, the Company has changed it procedures for dealing with appraisals as part of its determination of the Bank’s allowance for loan losses, as described above, to remediate the material weakness identified in its procedures for the determination of the allowance for loan losses.
PART II - OTHER INFORMATION
ITEM 1.
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LEGAL PROCEEDINGS
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Except as set forth below, there are no material pending legal proceedings to which the Company or its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses.
The Bank is currently subject to two cases filed after the end of the second quarter of fiscal year 2011, as described below, that resulted from actions taken by borrowers whose loans were in default. We believe that such defensive actions are often taken by defaulting borrowers during times of economic uncertainty in an attempt to incentivize the negotiation of more favorable payment terms, but we are not routinely subject to such actions and thus cannot characterize them as ordinary routine litigation incidental to the Bank’s business.
The Bank is a defendant in an action brought by 50-01 Realty LLC filed on April 13, 2011 in the Supreme Court of the State of New York County of Kings. 50-01 Realty LLC is claiming damages of approximately $44 million for alleged breach of contract and misrepresentation regarding a right of first refusal to purchase an outstanding loan. The Bank has filed a motion to dismiss the complaint. Management believes that this case is without merit and intends to vigorously defend the case. It is too preliminary in the proceedings to predict the ultimate results of this matter; however, management does not currently expect that the resolution of these proceedings will have a material adverse effect on the Company’s consolidated financial position or results of operations.
The Bank is also a defendant in an action brought by The Mazel Group and Yehuda Backer on May23, 2011 in the Supreme Court of the State of New York County of Kings. The plaintiffs are claiming damages of up to $100 million, including punitive damages, for alleged breach of contract, tortious interference with precontractual negotiations and breach of duty to protect confidential information. Management has not had an opportunity to date to assess the merits of the case, but intends to vigorously defend the matter. It is too preliminary in the proceedings to predict the ultimate results of this matter; however, management does not currently expect that the resolution of these proceedings will have a material adverse effect on the Company’s consolidated financial position or results of operations.
ITEM 1A.
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RISK FACTORS
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There are no material changes to the risk factors as previously disclosed in the Company’s Form 10-K for the year ended September 30, 2010, as filed with the SEC on June 27, 2011.
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ITEM 2.
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UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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The Company repurchased 6,737 shares of Common Stock in the quarter ending March 31, 2011. Through September 30, 2009, the Board of Directors of the Company approved four common stock repurchase plans. The first repurchase plan was completed in August 2007, purchasing $1.5 million or 102,370 shares at an average cost of $14.65 per share. The second repurchase plan was completed in March 2008, purchasing $2.0 million or 147,339 shares at an average cost of $13.57 per share. The third repurchase plan was completed in October 2008, purchasing $3.0 million or 238,483 shares at an average cost of $12.58 per share. The fourth plan was authorized in November 2008 and through March 31, 2011, the Company has repurchased 113,411 shares at an average cost of $10.82 per share. Stock repurchases will be made from time to time and may be effected through open market purchases, block trades and in privately negotiated transactions. Repurchased stock will be held as treasury stock and will be available for general corporate purposes.
Company Purchases of Common Stock
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||||||||||||||||
Period
|
Total
number of shares purchased |
Average
price paid per share |
Total
number of shares purchased as part of publicly announced plans or programs |
Approximate
dollar value of shares that may yet be purchased under the plans or programs |
||||||||||||
January 1, 2011 through January 31, 2011
|
6,737 | $ | 1.16 | 601,603 | $ | 772,409 | ||||||||||
February 1, 2011 through February 28, 2011
|
- | - | - | - | ||||||||||||
March 1, 2011 through March 31, 2011
|
- | - | - | - | ||||||||||||
Total
|
6,737 | $ | 1.16 | 601,603 | $ | 772,409 |
ITEM 3.
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DEFAULTS UPON SENIOR SECURITIES
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None.
ITEM 4.
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(RESERVED)
|
ITEM 5.
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OTHER INFORMATION
|
None.
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ITEM 6.
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EXHIBITS
|
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3.1
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Certificate of Incorporation of Brooklyn Federal Bancorp, Inc. 1
|
|
3.2
|
Bylaws of Brooklyn Federal Bancorp, Inc. 1
|
|
4
|
Form of Common Stock of Brooklyn Federal Bancorp, Inc. 1
|
|
11
|
Computation of Earnings Per Share
|
|
31.1
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Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)
|
|
31.2
|
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)
|
|
32.1
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32.2
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
1 Filed as exhibits to the Company’s Registration Statement on Form S-1, and any amendments thereto, with the SEC (Registration Statement No. 333-121580).
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BROOKLYN FEDERAL BANCORP, INC. | ||
(Registrant) | ||
Date: June 29, 2011
|
/s/ Gregg J. Wagner | |
Gregg J. Wagner | ||
President and Chief Executive Officer |
Date: June 29, 2011
|
/s/ Michael A. Trinidad | |
Vice President and Chief Financial Officer |
39