United
States
Securities
and Exchange Commission
Washington,
D.C. 20549
Form
10-K
|
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
|
|
For
the fiscal year ended December 31,
2007
|
OR
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
|
|
|
For
the transition period from
________to_________
|
Commission
File Number 000-51037
SFSB,
INC.
(Exact
name of registrant as specified in its charter)
|
United
States
|
20-2077715
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
1614
Churchville Road, Bel Air, Maryland 21015
(Address
of principal executive offices)
(Zip
Code)
(443)
265-5570
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock: par value $0.01 per share
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes
o
No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.
o
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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
|
Large
accelerated filer
o
|
Accelerated
filer
o
|
|
|
|
|
Non-accelerated
filer
o
(Do not check if
a smaller reporting company)
|
Smaller
reporting company
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes
o
No
x
The
aggregate market value of the common equity held by non-affiliates was
$9,628,510 as of June 29, 2007, based on a sales price of $9.25 per share of
Common Stock, which is the sales price at which shares of Common Stock were
last
sold in over the counter trading on June 29, 2007.
The
number of shares outstanding of the registrant’s Common Stock was 2,817,644 as
of March 20, 2008.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Annual Report to Stockholders for the Fiscal Year Ended December 31,
2007, which is filed as an exhibit to this Annual Report on Form 10-K, are
incorporated by reference into Part II of this Annual Report on Form 10-K.
Portions
of the Proxy Statement for the 2008 Annual Meeting of Stockholders of SFSB,
Inc., to be filed with the Securities and Exchange Commission no later than
120
days after the close of the fiscal year, are incorporated by reference into
Part
III of this Annual Report on Form 10-K.
PART
I
Item
1. Business
BUSINESS
OF SFSB, INC.
SFSB,
Inc. is a federal corporation formed on December 30, 2004 for the purpose of
acquiring all of the common stock of Slavie Federal Savings Bank (the “Bank”)
concurrent with its mutual holding company reorganization. Pursuant to the
reorganization, Slavie Federal Savings Bank converted from a mutual savings
bank
to a capital stock savings bank, with the concurrent formation of SFSB, Inc.
as
the stock, mid-tier holding company of Slavie Federal Savings Bank and the
formation of Slavie Bancorp, MHC as a mutual holding company. SFSB, Inc.’s
executive office is located at 1614 Churchville Road, Bel Air, Maryland 21015,
and its telephone number is (443) 265-5570.
As
part
of the reorganization, we issued, at a price of $10.00 per share, 1,222,401
shares of our common stock pursuant to a subscription offering to Slavie Federal
Savings Bank’s depositors who held a deposit account at the Bank as of December
31, 2002 and 116,630 shares to the Slavie Federal Savings Bank Employee Stock
Ownership Plan, representing 45% of SFSB, Inc.’s outstanding common stock. The
remaining 55% of SFSB, Inc.’s outstanding common stock is owned by Slavie
Bancorp, MHC. Of the approximately $13,390,000 of gross proceeds, approximately
$6,355,000 was contributed to Slavie Federal Savings Bank. So long as Slavie
Bancorp, MHC exists, it will own a majority of the voting stock of SFSB, Inc.
Our
cash
flow depends on earnings from the investment of the net proceeds from the
offering that we retained, and any dividends received from Slavie Federal
Savings Bank. Currently, SFSB, Inc. does not own or lease any property. Instead,
we use the premises, equipment and furniture of Slavie Federal Savings Bank.
At
the present time, we employ only persons who are officers of Slavie Federal
Savings Bank to serve as officers of SFSB, Inc. We also use the support staff
of
Slavie Federal Savings Bank from time to time. We have not separately
compensated these persons. We may hire additional employees, as appropriate,
to
the extent we expand our business in the future.
SFSB,
Inc., as the holding company of Slavie Federal Savings Bank, is authorized
to
pursue other business activities permitted by applicable laws and regulations
for savings and loan holding companies, which may include the acquisition of
banking and financial services companies.
BUSINESS
OF SLAVIE FEDERAL SAVINGS BANK
General
Our
principal business consists of attracting deposits from the general public
in
our market area and investing those funds, together with funds generated from
operations and borrowings, in one- to four-family residential real estate loans
and commercial mortgage loans. We also invest in land and construction loans,
home equity loans and investment securities.
We
derive
our income primarily from interest earned on loans, mortgage-backed securities
and investment securities and commissions from the sale of non-insured
investment products earned through Slavie Financial Services. Our principal
expenses are interest expense on deposits and non-interest expenses, such as
compensation and related expenses, occupancy expenses, deposit insurance
expenses, advertising expenses, data processing expenses, furniture, fixtures
and equipment expenses and other miscellaneous expenses. Funds for these
activities are provided primarily by deposits, repayments (including
prepayments) of outstanding loans and mortgage-backed and investment securities,
commissions from the sale of non-insured investment products, and operating
revenue.
New
products and services
.
In
mid-year 2007, we created an alternative means for our customers to reach their
financial well being potential by offering them investing guidance and financial
planning expertise through a financial services operation, with the addition
of
a certified financial planner, who sells non-insured investment products. During
2007 we also developed a health savings account to assist customers in making
medical expenses more affordable and began offering Coverdell Education Savings
Accounts to assist our customers with planning for educational expenses. In
addition, we offer a merchant bank card service through a third party vendor,
offering the convenience of debit and credit card transaction processing to
our
commercial checking account customers. We have informed our customers of the
launching of these new products and services through the distribution of a
quarterly newsletter, entitled Today’s Slavie.
Market
Area
Currently,
our primary market area is Baltimore City, Baltimore County and Harford County,
Maryland. We service this market area from two offices, one in Harford County,
Maryland and one in northeast Baltimore City, near the Baltimore County border.
The
primary market area reflects a diverse cross section of employment sectors,
which partially mitigates the risk associated with a decline in any particular
economic sector or industry. Once the backbone of the region’s employment base,
the manufacturing sector continues to contract with most of the job growth
during the past few years occurring in services. Government and
finance/insurance/real estate-related employment also constitute major
employment sectors in the market area.
The
primary market area is characterized by two more populous but lower growth
areas
in Baltimore County and Baltimore City, and one smaller, but faster growth
area
in Harford County. Over the last several years, Baltimore City has experienced
a
decline in population, reflecting the outmigration of population to the
surrounding suburban markets, while the population has grown in Baltimore County
(at a rate slower than comparable U.S. and Maryland growth rates) and Harford
County (at rates well above the comparable U.S. and Maryland growth rates).
These trends reflect urban flight to suburban markets for better job
opportunities, a lower cost of living and more affordable housing.
Income
levels in the primary market area tend to reflect the nature of the markets
served, with higher income levels in the more suburban markets. The greater
wealth of the suburban markets is consistent with national trends, in which
the
white collar professionals who work in the cities generally reside in the
surrounding suburbs. Additionally, much of the growth in white collar jobs
has
been occurring in suburban markets in the greater Baltimore area.
Competition
Our
most
direct competition for deposits has come historically from commercial banks,
credit unions and other savings institutions located in our market area,
including many large financial institutions which have greater financial and
marketing resources than we have. In addition, we face significant competition
for investors’ funds from short-term money market securities, mutual funds and
other corporate and government securities. In the past, we relied upon the
Slavic-American community in our market area for a material portion of our
deposits. Today, we believe that deposits from this group account for no more
than 10% of our total deposits. Our ability to attract and retain deposits
depends on our ability to provide a rate of return, liquidity and risk
comparable to that offered by competing investment opportunities.
Our
competition for loans comes primarily from the same financial institutions
that
we compete with for deposits, mortgage companies and independent mortgage
brokers. We compete for loan originations primarily through the interest rates
and loan fees we charge, and the efficiency and quality of services we provide
customers. Factors which affect competition include general and local economic
conditions, current interest rate levels and volatility in the mortgage
markets.
We
expect
competition to increase in the future as a result of legislative, regulatory
and
technological changes and the continuing trend of consolidation in the financial
services industry. Technological advances, for example, have lowered barriers
to
entry, allowed banks to expand their geographic reach by providing services
over
the Internet and made it possible for non-depository institutions to offer
products and services that traditionally have been provided by banks. Changes
in
federal law permit affiliation among banks, securities firms and insurance
companies, which promotes a competitive environment in the financial services
industry. Competition for deposits and the origination of loans could limit
our
growth in the future.
Lending
Activities
General.
Our
principal lending activity has been the origination of first mortgage loans
for
the purchase or refinancing of one- to four-family residential real property
and
the origination of commercial loans, both mortgage and non-real estate loans.
Historically, we have retained the loans that we originated, but in our
continued efforts to boost the yield of our interest earning assets during
a
period of net interest margin compression, management decided to sell a larger
percentage of the Bank’s residential loan originations to facilitate our goal of
increasing and diversifying the mix of commercial loans to residential loans
in
our portfolio.
Our
net
loan portfolio totaled $147,744,000 at December 31, 2007, representing 85.78%
of
total assets. One- to four-family residential real estate mortgage loans
represented $112,198,000, or 74.55%, of our total loan portfolio at December
31,
2007. Other loans secured by real estate include commercial mortgage loans,
construction loans secured by single family properties and acquisition and
development loans, which amounted to $12,273,000, $2,205,000 and $3,135,000,
or
8.15%, 1.47% and 2.08% of the total loan portfolio at December 31,
2007.
Commercial
non-mortgage loans amounted to $3,593,000, or 2.39% of our total loan portfolio
at December 31, 2007. The remainder of our portfolio was comprised of consumer
loans, consisting primarily of home equity loans and lines of credit and other
loans such as deposit account loans, home improvement loans, automobile loans
and overdraft protection loans. At December 31, 2007, home equity and other
consumer loans totaled $16,670,000 and $427,000, respectively, or 11.08% and
0.28% of the total loan portfolio.
We
believe that increasing loan diversification will increase our competitive
profile and improve earnings through higher yields. In that regard, we have
and
will continue to increase our commercial real estate loan portfolio and continue
to grow our commercial business loan portfolio. We focus our commercial lending
activities on small to mid-size businesses in our market area and we seek to
distinguish ourselves by providing responsive personal service and local
decision making.
The
types
of loans that we may originate are subject to federal and state laws and
regulations. Interest rates charged on loans are affected principally by the
demand for such loans, the supply of money available for lending purposes and
the rates offered by our competitors. These factors are, in turn, affected
by
general economic conditions, the monetary policy of the federal government,
including the Federal Reserve Board, legislative and tax policies and
governmental budgetary matters.
A
savings
bank generally may not make loans to one borrower and related entities in an
amount which exceeds 15% of its unimpaired capital and surplus, and an
additional amount equal to 10% of unimpaired capital and surplus if the loan
is
secured by readily marketable collateral (generally financial instruments,
but
not real estate). At December 31, 2007, our regulatory limit on loans-to-one
borrower was $2,665,000 and our five largest loans or groups of loans-to-one
borrower, including related entities, aggregated $2,221,000, $2,093,000,
$1,558,000, $1,500,000 and $1,234,000. Each loan or groups of loans was
performing in accordance with its terms at December 31, 2007.
Loan
Portfolio Composition.
The
following table sets forth the composition of our loan portfolio by type of
loan
as of the dates indicated, including a reconciliation of gross loans receivable
after consideration of the allowance for loan losses and net deferred
fees.
|
|
|
At
December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
|
|
|
|
|
(Dollars
in Thousands)
|
|
|
|
|
Real
Estate Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family
|
|
$
|
112,198
|
|
|
74.55
|
%
|
$
|
117,755
|
|
|
79.48
|
%
|
|
Commercial
mortgage
|
|
|
12,273
|
|
|
8.15
|
|
|
5,753
|
|
|
3.88
|
|
|
Construction
|
|
|
2,205
|
|
|
1.47
|
|
|
300
|
|
|
0.20
|
|
|
Acquisition
and development
|
|
|
3,135
|
|
|
2.08
|
|
|
4,160
|
|
|
2.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
real estate loans
|
|
|
129,811
|
|
|
86.25
|
|
|
127,967
|
|
|
86.37
|
|
|
Commercial
non-real estate
|
|
|
3,593
|
|
|
2.39
|
|
|
2,800
|
|
|
1.89
|
|
|
Consumer
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
|
|
16,670
|
|
|
11.08
|
|
|
16,857
|
|
|
11.38
|
|
|
Other
|
|
|
427
|
|
|
0.28
|
|
|
536
|
|
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
consumer loans
|
|
|
17,097
|
|
|
11.36
|
|
|
17,393
|
|
|
11.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans receivable, gross
|
|
|
150,501
|
|
|
100.0
|
%
|
|
148,160
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
in process
|
|
|
(1,538
|
)
|
|
|
|
|
(60
|
)
|
|
|
|
|
Allowance
for loan losses
|
|
|
(972
|
)
|
|
|
|
|
(850
|
)
|
|
|
|
|
Deferred
loan fees (costs)
|
|
|
(247
|
)
|
|
|
|
|
(132
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans receivable, net
|
|
$
|
147,744
|
|
|
|
|
$
|
147,118
|
|
|
|
|
Maturity
of Loan Portfolio.
The
following tables present certain information at December 31, 2007 regarding
the
dollar amount of certain loans maturing in our portfolio based on their
contractual terms to maturity or scheduled amortization, but does not include
the effect of possible prepayments or due on sale clause payments.
|
|
|
One Year
or less
|
|
More than
1 to 5 years
|
|
More than
5 years
|
|
Totals
|
|
|
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
Estate Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family
|
|
$
|
1,117
|
|
$
|
3,782
|
|
$
|
107,299
|
|
$
|
112,198
|
|
|
Commercial
mortgage
|
|
|
4,771
|
|
|
6,378
|
|
|
1,124
|
|
|
12,273
|
|
|
Construction
|
|
|
705
|
|
|
1,500
|
|
|
-
|
|
|
2,205
|
|
|
Acquisition
and development
|
|
|
1,857
|
|
|
1,278
|
|
|
-
|
|
|
3,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
real estate loans
|
|
|
8,450
|
|
|
12,938
|
|
|
108,423
|
|
|
129,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
non-real estate
|
|
|
1,382
|
|
|
1,722
|
|
|
489
|
|
|
3,593
|
|
|
Consumer
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
|
|
4,204
|
|
|
9,996
|
|
|
2,470
|
|
|
16,670
|
|
|
Other
|
|
|
102
|
|
|
264
|
|
|
61
|
|
|
427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
consumer loans
|
|
|
4,306
|
|
|
10,260
|
|
|
2,531
|
|
|
17,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans receivable, gross
|
|
|
14,138
|
|
|
24,920
|
|
|
111,443
|
|
|
150,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to
four-
family
|
|
Commercial
Mortgage
|
|
Construction
|
|
Acquisition
and
Development
|
|
Commercial
Non R/E
|
|
Home
Equity
|
|
Other
Consumer
Loans
|
|
Totals
|
|
|
|
|
(Dollars
in
Thousands)
|
|
|
|
Total
due after one year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
with
fixed interest rates
|
|
$
|
111,048
|
|
$
|
7,502
|
|
$
|
-
|
|
$
|
1,278
|
|
$
|
1,218
|
|
$
|
9,890
|
|
$
|
325
|
|
$
|
131,261
|
|
|
Total
due after one year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
with
adjustable interest rates
|
|
$
|
33
|
|
$
|
-
|
|
$
|
1,500
|
|
$
|
-
|
|
$
|
993
|
|
$
|
2,576
|
|
$
|
-
|
|
$
|
5,102
|
|
Scheduled
contractual maturities of loans do not necessarily reflect the actual expected
term of the loan portfolio.
One-
to Four-Family Residential Loans
.
Our
primary lending activity consists of the origination of one- to four-family
residential mortgage loans that are primarily secured by properties located
in
the greater Baltimore metropolitan area. At December 31, 2007, $112,198,000,
or
74.55% of our total loan portfolio, consisted of one- to-four family residential
loans. Generally, one- to four-family residential mortgage loans are originated
in amounts up to 80% of the lesser of the appraised value or purchase price
of
the property, with private mortgage insurance required on loans with a
loan-to-value ratio in excess of 80%. Fixed-rate loans are originated for terms
of 10, 15, 20, 30 and 40 years. At December 31, 2007, $112,165,000, or 99.97%
of
our one- to four-family residential mortgage loans were fixed-rate loans. Also,
at December 31, 2007, our largest loan secured by one- to four-family real
estate had a principal balance of $962,000 and was secured by a single-family
residence. This loan was performing in accordance with its terms at December
31,
2007.
We
also
offer adjustable-rate mortgage loans with a one year adjustment period based
on
changes in a designated United States Treasury index. However, in the recent
interest rate environment, there has been very limited demand for these loans.
We did not originate any adjustable rate one- to four-family residential loans
during the year ended December 31, 2007. Our adjustable rate mortgage loans
provide for maximum rate adjustments of 200 basis points per adjustment, with
a
lifetime maximum adjustment of 600 basis points per term. Our adjustable rate
mortgage loans amortize over terms of up to 30 years. At December 31, 2007,
only
$33,000 or 0.03% of our one- to four-family residential mortgage loans had
adjustable rates of interest.
All
one-
to four-family residential mortgage loans that we originate include
“due-on-sale” clauses, which give us the right to declare a loan immediately due
and payable in the event that, among other things, the borrower sells or
otherwise disposes of the real property subject to the mortgage and the loan
is
not repaid.
Regulations
limit the amount that a savings bank may lend relative to the appraised value
of
the real estate securing the loan, as determined by an appraisal of the property
at the time the loan is originated. For all loans, we utilize outside
independent appraisers approved by the board of directors. All borrowers are
required to obtain title insurance. We also require homeowner’s insurance and
fire and casualty insurance and, where circumstances warrant, flood insurance
on
properties securing real estate loans.
Currently,
we do not hold any negative amortization or any type of option adjustable rate
mortgage (option ARM) loans in our loan portfolio. Also, the debt to income
ratio on all adjustable rate loan products that are or will be held in our
loan
portfolio are or will be qualified by using a minimum of the fully indexed
rate
to determine the ability of the borrower to repay the loan. We may originate
these types of loans (option ARMs or loans where the borrower is not qualified
by the fully indexed rate) and sell them to a correspondent lender. In such
a
case, these loans are designated as held for sale and are delivered to the
purchaser as soon as possible following settlement.
Commercial
Real Estate Loans
.
At
December 31, 2007, $12,273,000, or 8.15% of our total loan portfolio, consisted
of commercial real estate loans. Commercial
real
estate loans are secured by office buildings, mixed use properties and other
commercial properties. We generally originate commercial real estate loans
with
maximum terms of up to 30 years with a call feature. The maximum loan-to-value
ratio of commercial real estate loans is 80%. At December 31, 2007, we had
58
commercial real estate loans with an average outstanding balance of $212,000.
At
December 31, 2007, our largest loan secured by commercial real estate had an
outstanding balance of $2,221,000. At December 31, 2007, this loan was
performing in accordance with its terms.
Commercial
real estate lending entails significant additional risks as compared with one-
to four-family residential property lending. Commercial real estate loans
typically involve larger loan balances to single borrowers or groups of related
borrowers. The payment experience on such loans typically is dependent on the
successful operation of the real estate project, retail establishment or
business. These risks can be significantly impacted by supply and demand
conditions in the market for office and retail space and, as such, may be
subject to a greater extent to adverse conditions in the economy generally.
It
is generally our policy to obtain annual financial statements on the borrower’s
business or the project for which commercial real estate loans are originated.
In addition, in the case of commercial real estate loans made to a partnership,
limited liability company or a corporation, we seek, whenever possible, to
obtain personal guarantees and annual financial statements from the principals
of the entity. In general, prior to settlement of a commercial real estate
loan,
we require an appraisal and a Phase I Environmental Site Assessment
Report.
Multi-Family
Loans.
We offer
fixed-rate and adjustable rate multi-family real estate loans with amortization
schedules of up to 30 years. We generally lend up to 80% of the property’s
appraised value. Appraised values are typically determined by independent
appraisers. In deciding to originate a multi-family loan, we review the
creditworthiness of the borrower, the expected cash flows from the property
securing the loan, the cash flow requirements of the borrower, the value of
the
property and the quality of the management involved with the property. We
generally obtain the personal guarantee of the principals when originating
multi-family real estate loans. At December 31, 2007, we had
no
multi-family loans in our loan portfolio.
Multi-family
real estate lending is generally considered to involve a higher degree of credit
risk than one- to four-family residential lending. Such lending may involve
large loan balances concentrated on a single borrower or group of related
borrowers. We generally require a Phase I Environmental Site Assessment Report
on the property securing this type of financing. In addition, the payment
experience on loans secured by income producing properties typically depends
on
the successful operation of the related real estate project. Consequently,
the
repayment of the loan may be subject to adverse conditions in the real estate
market or the economy generally.
Construction
Loans and Acquisition and Development Loans.
We
originate loans to finance the construction of residential dwellings and loans
to acquire and develop land on which to construct residential dwellings. At
December 31, 2007, $2,205,000, or 1.47% of our total loan portfolio, consisted
of a commercial and two residential construction loans, and $3,135,000, or
2.08%
of our total loan portfolio, consisted of acquisition and development
loans
.
Of
this
amount, $1,500,000 constituted our interest in a loan
participation.
Construction
loans generally provide for interest-only payments at fixed-rates of interest,
which are typically fixed at origination, and have terms of six to 12 months.
At
the end of the construction period, the loan generally converts into a permanent
loan at the same interest rate as the construction loan. Construction loans
generally may be considered for loan-to-value ratios of up to 80%. Prior to
committing to fund a construction loan, we require both an appraisal of the
property and a study of projected construction costs. Loan proceeds are
disbursed in increments as construction progresses and as inspections warrant.
We generally use independent fee appraisers for construction disbursement
purposes.
Acquisition
and development loans typically are originated at the prime rate plus a
negotiated margin and, generally, adjust at the effective date of any change
in
the Wall Street Journal published prime rate, with a term of up to 18 months
plus any negotiated extensions. In some instances, loan structure includes
an
interest reserve account, under which the borrower finances projected interest
costs as part of the loan amount. The bank draws this interest reserve account
each month for the amount of interest owing until the project is completed.
Loan-to-value ratios generally do not exceed 75%. Prior to settlement of an
acquisition and development loan, we require an appraisal, Phase I Environmental
Site Assessment Report and a budget of the development costs.
Acquisition,
development and construction financing is generally considered to involve a
higher degree of risk of loss than long-term financing on improved, occupied
real estate. Risk of loss on such loans is dependent largely upon the accuracy
of the initial estimate of the property’s value at completion of development or
construction and the estimated cost (including interest) of development or
construction. We attempt to mitigate this risk by closely monitoring
construction of the project and granting funding draws only after periodic
site
inspections contracted by the bank and evidence of completed work is obtained.
During the development or construction phase, a number of factors could result
in delays and cost overruns. If the estimate of costs proves to be inaccurate,
we may be required to advance funds beyond the amount originally committed
to
permit completion of the project. If the estimate of value proves to be
inaccurate, we may be confronted, at or prior to the maturity of the loan,
with
a project having a value which is insufficient to assure full repayment. As
a
result of the foregoing, this type of lending often involves the disbursement
of
substantial funds with repayment dependent, in part, on the success of the
ultimate project rather than the ability of the borrower or guarantor to repay
principal and interest. If we are forced to foreclose on a project prior to
or
at completion due to a default, there can be no assurance that we will be able
to recover all of the unpaid balance of, and accrued interest on, the loan
as
well as related foreclosure and holding costs.
Commercial
Business Loans
.
To
diversify our loan portfolio, we have grown our commercial business loan
portfolio. We have focused our commercial business lending activities on small
to mid-size businesses in our market area and the loans were made for working
capital or equipment financing. Typically, these loans are secured by equipment,
machinery and other corporate assets and have terms from three to five years
with either fixed rates or variable rates of interest. Commercial business
loans
generally have higher interest rates and shorter terms than one- to four-family
residential mortgage loans, but they also may involve higher average balances,
increased difficulty of loan monitoring and a higher risk of default since
their
repayment generally depends on the successful operation of the borrower’s
business. We attempt to minimize these risks by limiting these loans to viable
businesses and by obtaining personal guarantees from the borrowers whenever
possible. At December 31, 2007, commercial business loans totaled $3,593,000,
or
2.39% of the total loan portfolio.
Consumer
Loans
.
We are
authorized to originate loans for a wide variety of personal and consumer
purposes. Consumer loans consist primarily of home equity loans and lines of
credit, deposit account loans, home improvement loans, automobile loans and
overdraft protection loans. At December 31, 2006, consumer loans totaled
$17,097,000 or 11.36% of the total loan portfolio.
Home
equity loans and lines of credit are secured by a real estate mortgage with
a
security interest in the borrower’s primary residence. These are fixed rate or
variable rate loans indexed to the prime rate with terms of up to 20 years.
At
December 31, 2007, home equity loans totaled $16
,670,000
or
11.08% of the total loan portfolio. At December 31, 2007, $11,548,000, or 69.27%
of our home equity loans were fixed-rate loans and $5,122,000 or 30.73% of
our
home equity loans had adjustable rates of interest.
As
indicated, we also offer deposit account loans for personal purposes, home
improvement loans, automobile loans and overdraft protection loans. At December
31, 2007, $197,000 or 0.13% of our total loan portfolio consisted of deposit
account loans, $95,000 or 0.06% of our total loan portfolio consisted of home
improvement loans, $92,000 or 0.06% of our total loan portfolio consisted of
automobile loans and $43,000 or 0.03% of our total loan portfolio consisted
of
overdraft protection loans.
Consumer
loans generally have shorter terms and higher interest rates than residential
mortgage loans. The procedures for underwriting consumer loans include an
assessment of the applicant’s payment history on other debts and ability to meet
existing obligations and payments on the proposed loan. The underwriting process
also includes, particularly with respect to home equity loans, a comparison
of
the value of the collateral, if any, to the proposed loan amount.
Consumer
loans entail greater risks than one to four-family residential mortgage loans,
particularly consumer loans that are unsecured or that are secured by rapidly
depreciable assets, such as automobiles. In these cases, the repossessed
collateral securing a defaulted loan may not provide an adequate source of
repayment of the outstanding balance, since there is a greater likelihood of
damage, loss or depreciation of the underlying collateral. Further, consumer
loan collections are dependent on the borrower’s continuing financial stability
and are more likely to be adversely affected by job loss, divorce, illness
or
personal bankruptcy. For consumer loans secured by real estate, the risk is
greater than that inherent in the one to four-family loan portfolio in that
the
security for home equity loans is generally not the first lien on the property
and ultimate collection of the loan balance may be dependent on whether value
remains after the collection by a holder with a higher lien. Finally, the
application of various federal and state laws may limit the amount recoverable
in the event of a default of a consumer loan.
Origination
and Servicing of Loans
.
Loan
origination activities are primarily concentrated in the greater Baltimore
metropolitan area, and properties securing our real estate loans are primarily
located in the greater Baltimore metropolitan area. Currently, we sell most
loans that we originate without retaining servicing rights.
New
residential mortgage loans are generated primarily from current and former
borrowers, walk-in customers, referrals from customer and realtors, as well
as
through
several correspondent relationships we established with independent residential
mortgage loan brokers who operate in our market area.
Construction
and acquisition and development loan originations come from builders and the
same channels as residential mortgage loans. Similarly, commercial real estate
loans are generated through contacts in the local community and the same
channels as residential mortgage loans. We have increased originations of
commercial real estate and commercial business loans through established
business relationships. Consumer loans are primarily obtained from existing
and
walk-in customers.
Loan
origination is further supported by advertising, cross-selling and community
service by Slavie employees. Also, from time to time, we will purchase loan
participations which meet our underwriting criteria from other financial
institutions in our market area.
Residential
mortgage loans are typically underwritten to secondary market (Fannie Mae and
Freddie Mac) standards to facilitate the ability to sell loans and thereby
limit
interest rate risk and meet loan portfolio objectives. Historically, we have
generally retained all originated loans in our portfolio. Our growth strategy
contemplates that we only retain for our portfolio those loans meeting our
interest rate risk and balance sheet composition targets and sell the remaining
loans in the secondary market on a servicing released basis. Our goal continues
to be to increase the number of fixed rate loans that we sell on the secondary
market. Over time, we may evaluate selling loans on a servicing retained basis.
During 2007, we sold forty-four residential mortgage loans with a total
principal balance of $7,142,000.
Loan
Approval Procedures and Authority
.
The
loan approval process is intended to assess the borrower’s ability to repay the
loan, the viability of the loan, and the adequacy of the value of the property
that will secure the loan. To assess the borrower’s ability to repay, among
other things, we review the employment and credit history and information on
the
historical and projected income and expenses of mortgagors. We have established
a loan committee consisting of the president/chief executive officer, senior
vice-president/chief lending officer, vice-president of lending and the
assistant vice-president/loan administration. Currently, any two members of
this
committee have the authority to approve loans up to $313,000; loan applications
over $313,000 are submitted to the executive loan committee consisting of either
the president/chief executive officer or the executive vice president/chief
lending officer and one non-management member of the board of directors for
approval. In addition, the board of directors ratifies all loans approved by
the
loan and executive loan committees. All loan applications are processed at
our
main office.
We
require appraisals of all real property securing loans. Appraisals are performed
by independent licensed appraisers. All appraisers are approved by the board
of
directors annually. We require fire and extended coverage insurance in amounts
at least equal to the principal amount of the loan.
The
following table shows our loan origination and repayment activities for the
periods indicated.
|
|
|
Years
Ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
Balance
outstanding at beginning of period
|
|
$
|
147,118
|
|
$
|
144,609
|
|
|
|
|
|
|
|
|
|
|
|
Originations
by Type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
Estate:
|
|
|
|
|
|
|
|
|
One-
to four-family
|
|
|
23,569
|
|
|
14,400
|
|
|
Commercial-real
estate
|
|
|
4,585
|
|
|
1,404
|
|
|
Commercial-non
real estate
|
|
|
-
|
|
|
1,184
|
|
|
Construction(1)
|
|
|
-
|
|
|
-
|
|
|
Consumer
loans:
|
|
|
|
|
|
|
|
|
Home
equity
|
|
|
3,296
|
|
|
9,500
|
|
|
Other
|
|
|
31
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans originated
|
|
|
31,481
|
|
|
26,622
|
|
|
Total
loans purchased
|
|
|
2,212
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
Total
loans or participations sold
|
|
|
7,602
|
|
|
3,741
|
|
|
Principal
repayments
|
|
|
24,382
|
|
|
20,372
|
|
|
Transfers
to foreclosed real estate
|
|
|
1,083
|
|
|
-
|
|
|
Total
deductions
|
|
|
33,067
|
|
|
24,113
|
|
|
|
|
|
|
|
|
|
|
|
Balance
outstanding at end of period
|
|
$
|
147,744
|
|
$
|
147,118
|
|
|
|
(1)
|
Includes
acquisition and development loans.
|
Loan
Origination and Other Fees
.
In
addition to interest earned on loans, we may receive loan origination fees
or
“points” for originating loans. Loan origination fees are a percentage of the
principal amount of the mortgage loan and are charged to the borrower in
connection with the origination of the loan. We also receive fees in connection
with loan modifications, late payments and miscellaneous services related to
loans.
In
accordance with Statement of Financial Accounting Standards No. 91, which
pertains to the accounting for non-refundable fees and costs associated with
originating or acquiring loans, our loan origination fees and certain related
direct loan origination costs are offset, and the resulting net amount is
deferred and amortized as interest income over the contractual life of the
related loans as an adjustment to the yield of such loans. At December 31,
2007,
we had $247,000 in net deferred loan fees.
Asset
Quality
General
.
One of
our key operating objectives continues to be to maintain a high level of asset
quality. Through a variety of strategies, which include aggressive marketing
of
foreclosed properties and repossessed assets and borrower workout arrangements,
we have been proactive in addressing problems with non-performing assets. These
strategies, as well as our emphasis on originating relatively low risk one-
to
four-family residential mortgage loans, quality underwriting, maintenance of
sound credit standards for new loan originations, even in these unfavorable
real
estate market conditions, have supported maintenance of low delinquency ratios.
Our balance of non-performing assets equaled $468,000 or 0.32% of total loans
at
December 31, 2007 and consisted of three non-accruing loans, of which two are
secured by one- to four-family properties totaling $368,000 and one is a
commercial non-real estate loan totaling $100,000.
Collection
Procedures.
After a
loan becomes 15 days delinquent, we deliver a computer generated delinquency
notice to the borrower. A second delinquency notice is sent when the loan
becomes 30 days delinquent. Once a loan becomes 60 days delinquent, we send
an
additional delinquency notice to the borrower and attempt to make personal
contact with the borrower by letter from the head of the collection department
or telephone to establish an acceptable repayment schedule. When a loan is
90
days delinquent and no acceptable resolution has been reached, we send the
borrower a 15 day demand letter. After those 15 days, we will generally refer
the matter to our attorney, who is authorized to commence foreclosure
proceedings. Management is authorized to begin foreclosure proceedings on any
loan after determining that it is prudent to do so. In cases where the borrower
is willing to cooperate and implement a payment plan, we may delay the decision
to foreclose.
Non-performing
Loans and Assets.
Loans
are
reviewed on a regular basis and are generally placed on non-accrual status
when
they become more than 90 days delinquent. When we classify a loan as
non-accrual, we no longer accrue interest on such loan and reverse any interest
previously accrued but not collected. Typically, payments received on a
non-accrual loan are applied to the outstanding principal and interest as
determined at the time of collection of the loan. We return a non-accrual loan
to accrual status when factors indicating doubtful collection no longer exist
and the loan has been brought current. We consider repossessed assets and loans
that are 90 days or more past due to be non-performing assets.
Real
estate and other assets that we acquire as a result of foreclosure or by
deed-in-lieu of foreclosure or repossession on collateral-dependent loans are
classified as real estate owned or other repossessed assets until sold. Such
assets are recorded at foreclosure or other repossession and updated quarterly
at the lower of cost or estimated fair value less estimated selling costs.
Any
portion of the outstanding loan balance in excess of fair value is charged
off
against the allowance for loan losses. If, upon ultimate disposition of the
property, net sales proceeds exceed the net carrying value of the property,
a
gain on sale of real estate or other assets is recorded. At December 31, 2007,
we have real estate owned of $1,083,000 pursuant to the foreclose of the
property securing a commercial land acquisition and development participation
loan. We did not have any real estate owned or other repossessed assets at
December 31, 2006.
Under
current accounting guidelines, a loan is defined as impaired when, based on
current information and events, it is probable that a creditor will be unable
to
collect all amounts due under the contractual terms of the loan agreement.
We
consider one- to four-family mortgage loans and consumer installment loans
to be
homogeneous and, therefore, do not separately evaluate them for impairment.
All
other loans are evaluated for impairment on an individual basis. We generally
classify non-accrual loans as impaired and we are doing so with respect to
a
$100,000 business line of credit, restructured in the third quarter of 2007,
because, for the reasons discussed below, we believe that there is a substantial
likelihood that we will not collect the total amount of the outstanding
principal balance due under the contractual terms of the loan agreement.
As
of
December 31, 2007, we classified the commercial non-real estate loan mentioned
above as impaired. The corporate commercial loan borrower filed Chapter 7
corporate bankruptcy in the third quarter of 2006 and filed Chapter 7 personal
bankruptcy in the second quarter of 2007. In the third quarter of 2007, as
stated above, we restructured the remaining debt to facilitate repayment of
the
loan and the borrower has been paying as agreed.
The
table
below sets forth the amounts and categories of our non-performing assets at
the
dates indicated. During the periods presented, we did not have any troubled
debt
restructurings.
|
|
|
At
December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
Non-accruing
real estate loans:
|
|
|
|
|
|
|
|
|
One-
to four-family
|
|
$
|
368
|
|
$
|
143
|
|
|
Commercial
non-real estate
|
|
|
100
|
|
|
260
|
|
|
Construction(1)
|
|
|
-
|
|
|
1,083
|
|
|
Non-accruing
consumer loans:
|
|
|
|
|
|
|
|
|
Home
equity
|
|
|
-
|
|
|
-
|
|
|
Other
|
|
|
-
|
|
|
-
|
|
|
Total
non-accruing loans
|
|
$
|
468
|
|
$
|
1,486
|
|
|
Accruing
loans delinquent 90 days or more
|
|
|
-
|
|
|
-
|
|
|
Total
non-performing loans
|
|
|
468
|
|
|
1,486
|
|
|
Real
estate owned
|
|
|
1,083
|
|
|
-
|
|
|
Total
non-performing assets
|
|
$
|
1,551
|
|
$
|
1,486
|
|
|
|
|
|
|
|
|
|
|
|
Total
as a percentage of total assets
|
|
|
0.90
|
%
|
|
0.85
|
%
|
|
Total
as a percentage of total loans
|
|
|
1.05
|
%
|
|
1.01
|
%
|
|
|
(1)
|
Includes
acquisition and development loans.
|
For
the
years ended December 31, 2007 and December 31, 2006, gross interest income
which
would have been recorded had our non-accruing loans been current in accordance
with their original terms amounted to $37,000 and $159,000 respectively.
Interest income recognized on such loans for the years ended December 31, 2007
and December 31, 2006 was $1,000 and $29,000, respectively.
Of
the
non-accrual loans, at December 31, 2007, $100,000 consisted of a commercial
non-real estate loan, and $368,000 consisted of one-to-four residential mortgage
loans. Non-accrual loans totaled 0.32% and 1.01% of net loans receivable at
December 31, 2007 and December 31, 2006, respectively.
We
hold a
19% participation (approximately $1,083,000 in unpaid principal balance) in
an
acquisition and development loan. This loan is a foreclosed real estate
participation loan.
As
we
previously reported, the property securing this loan was sold at auction to
the
lead participating bank in the second quarter of 2007, at which time we
reclassified the participation as foreclosed real estate. In June 2007, a real
estate developer made an offer to purchase the property and the lead
participating bank accepted a letter of intent on June 26, 2007 and executed
a
contract with a feasibility study period currently scheduled to expire on June
15, 2008. Settlement on the sale of this property is expected within 90 days
thereafter, or before the end of the third quarter of 2008. We expect to recover
the carrying amount of the real estate pursuant to the sale of the property,
although there can be no assurance that this will be the case.
Other
than as disclosed in the table and paragraphs above, there are no other loans
at
December 31, 2007 about which management has serious doubts concerning the
ability of the borrowers to comply with the present loan repayment terms.
Classified
Assets.
Federal
regulations require that each insured savings institution classify its assets
on
a regular basis. In addition, in connection with examinations of insured
institutions, federal examiners have authority to identify problem assets and,
if appropriate, classify them. There are three classifications for problem
assets: substandard, doubtful and loss. Substandard assets have one or more
defined weaknesses and are characterized by the distinct possibility that the
insured institution will sustain some loss if the deficiencies are not
corrected. Doubtful assets have the weaknesses of substandard assets with the
additional characteristic that the weaknesses make collection or liquidation
in
full on the basis of currently existing facts, conditions and values
questionable, and there is a high possibility of loss. An asset classified
loss
is considered uncollectible and of such little value that continuance as an
asset of the institution is not warranted. Another category designated “special
mention” also must be established and maintained for assets which do not
currently expose an insured institution to a sufficient degree of risk to
warrant classification as substandard, doubtful or loss.
An
insured institution is required to establish general allowances for loan losses
in an amount deemed prudent by management for loans classified substandard
or
doubtful, as well as for other problem loans. General allowances represent
loss
allowances which have been established to recognize the inherent losses
associated with lending activities, but which, unlike specific allowances,
have
not been allocated to particular problem assets. When an insured institution
classifies problem assets as “loss,” it is required either to establish a
specific allowance for losses equal to 100% of the amount of the asset so
classified or to charge off such amount. An institution’s determination as to
the classification of its assets and the amount of its valuation allowances
is
subject to review by the Office of Thrift Supervision which can order the
establishment of additional general or specific loss allowances.
On
the
basis of management’s review of its assets, at December 31, 2007, we had
classified $1,451,000 of our assets as substandard (which consisted of two
non-accruing loans secured by one- to four-family residential properties and
one
commercial land acquisition and development participation loan). At December
31,
2007, we had classified $100,000, or 100% of one loan as “loss” (which consisted
of a commercial non-real estate loan). At December 31, 2007, none of our assets
were classified as special mention or doubtful. The loan portfolio is reviewed
on a monthly basis to determine whether any loans require classification in
accordance with applicable regulations. All classified assets are included
in
non-performing assets for all periods presented.
The
following table shows the aggregate amounts of our classified assets at the
dated indicated.
|
|
|
At
December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
(Dollars
in Thousands)
|
|
|
Special
mention assets
|
|
$
|
-
|
|
$
|
-
|
|
|
Substandard
assets
|
|
|
1,451
|
|
|
1,226
|
|
|
Doubtful
assets
|
|
|
-
|
|
|
-
|
|
|
Loss
assets
|
|
|
100
|
|
|
260
|
|
|
|
|
|
|
|
|
|
|
|
Total
classified assets
|
|
$
|
1,551
|
|
$
|
1,486
|
|
Delinquencies.
The
following tables sets forth information concerning delinquent loans at December
31, 2007 and December 31, 2006, in dollar amounts and as a percentage of our
total loan portfolio.
|
|
|
At
December 31, 2007
|
|
At
December 31, 2006
|
|
|
|
|
30-59
Days
|
|
60-89
Days
|
|
30-59
Days
|
|
60-89
Days
|
|
|
|
|
Principal
Balance of Loans
|
|
%
of Total Loans
|
|
Principal
Balance of Loans
|
|
%
of Total Loans
|
|
Principal
Balance of Loans
|
|
%
of Total Loans
|
|
Principal
Balance of Loans
|
|
%
of Total Loans
|
|
|
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family
|
|
$
|
749
|
|
|
0.51
|
%
|
$
|
361
|
|
|
0.24
|
%
|
$
|
251
|
|
|
0.17
|
%
|
$
|
142
|
|
|
0.10
|
%
|
|
Commercial
real estate
|
|
|
90
|
|
|
0.06
|
|
|
138
|
|
|
0.10
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Construction(1)
|
|
|
-
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Commercial
non-real estate:
|
|
|
69
|
|
|
0.05
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Consumer
loans:
|
|
|
|
|
|
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
|
|
71
|
|
|
0.05
|
|
|
-
|
|
|
-
|
|
|
10
|
|
|
0.01
|
|
|
24
|
|
|
0.02
|
|
|
Other
|
|
|
49
|
|
|
0.03
|
|
|
4
|
|
|
0.00
|
|
|
1
|
|
|
0.00
|
|
|
2
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
delinquent loans
|
|
$
|
1,028
|
|
|
0.70
|
%
|
$
|
503
|
|
|
0.34
|
%
|
$
|
262
|
|
|
0.18
|
%
|
$
|
168
|
|
|
0.11
|
%
|
|
(1)
|
Includes
acquisition and development loans.
|
Allowance
for Loan Losses
General.
The
allowance for loan losses is a valuation allowance for probable credit losses
inherent in the loan portfolio. We evaluate the need to establish allowances
against losses on loans on a monthly basis. When additional allowances are
necessary, a provision for loan losses is charged to earnings.
Our
methodology for assessing the adequacy of the allowance for loan losses consists
of three key elements: (1) specific allowances for identified problem loans,
including certain impaired or collateral-dependent loans; (2) a general
valuation allowance on certain identified problem loans; and (3) a general
valuation allowance on the remainder of the loan portfolio.
Specific
Allowance on Identified Problem Loans.
The loan
portfolio is segregated first between loans that are on our “watch list” and
loans that are not. Our watch list includes:
|
|
·
|
loans
90 or more days delinquent;
|
|
|
·
|
loans
with anticipated losses;
|
|
|
·
|
loans
referred to attorneys for collection or in the process of
foreclosure;
|
|
|
·
|
loans
classified as substandard, doubtful or loss by either our internal
classification system or by regulators during the course of their
examination of us; and
|
|
|
·
|
troubled
debt restructurings and other non-performing
loans.
|
Two
of
our officers review each loan on the watch list and establish an individual
allowance allocation on certain impaired loans based on such factors as: (1)
the
strength of the customer’s personal or business cash flow; (2) the availability
of other sources of repayment; (3) the amount due or past due; (4) the type
and
value of collateral; (5) the strength of our collateral position; (6) the
estimated cost to sell the collateral; and (7) the borrower’s effort to cure the
delinquency.
The
allowance for impaired loans is generally equal to the amounts by which the
discounted cash flows (or collateral value or observable market price) are
lower
than the carrying value of the loan. Under current accounting guidelines, a
loan
is defined as impaired when, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due under the
contractual terms of the loan agreement. With respect to the $100,000 commercial
non-real estate loan, we have made a provision for 100% of the loan balance
because the collateral has no value. Accordingly, we have established a specific
allowance for this loan. The reserve for this impaired loan is
$100,000.
General
Valuation Allowance on Certain Identified Problem Loans.
We
also
establish a general allowance for watch list loans that do not meet the
definition of impaired and do not have an individual allowance. We segregate
these loans by loan category and assign allowance percentages to each category
based on inherent losses associated with each type of lending and consideration
that these loans, in the aggregate, represent an above-average credit risk
and
that more of these loans will prove to be uncollectible compared to loans in
the
general portfolio.
General
Valuation Allowance on the Remainder of the Loan Portfolio.
We
establish another general allowance for loans that are not on the watch list
to
recognize the inherent losses associated with lending activities, but which,
unlike specific allowances, has not been allocated to particular problem assets.
This general valuation allowance is determined by segregating the loans by
loan
category and assigning allowance percentages based on our historical loss
experience and delinquency trends. The allowance may be adjusted for significant
factors that, in management’s judgment, affect the collectibility of the
portfolio as of the evaluation date. These significant factors may include
changes in lending policies and procedures, changes in existing general economic
and business conditions affecting our primary lending areas, credit quality
trends, collateral value, loan volumes and concentrations, seasoning of the
loan
portfolio, specific industry conditions within portfolio segments, recent loss
experience in a particular segment of the portfolio, duration of the current
business cycle and bank regulatory
examination
results. The applied loss factors are reevaluated annually to ensure their
relevance in the current environment.
Although
we believe that we use the best information available to establish the allowance
for loan losses, the evaluation is inherently subjective as it requires
estimates that are susceptible to significant revisions as more information
becomes available or as future events change. If circumstances differ
substantially from the assumptions used in making our determinations, future
adjustments to the allowance for loan losses may be necessary and our results
of
operations could be adversely affected. In addition, the Office of Thrift
Supervision, as an integral part of its examination process, periodically
reviews our allowance for loan losses. The Office of Thrift Supervision may
require us to increase the allowance for loan losses based on its judgments
about information available to it at the time of its examination, which would
adversely affect our results of operations.
The
following table analyzes changes in the allowance for the periods presented.
|
|
|
Years
Ended
December
31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
850
|
|
$
|
474
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs(1)
|
|
|
122
|
|
|
-
|
|
|
Recoveries
|
|
|
-
|
|
|
-
|
|
|
Net
charge-offs
|
|
|
122
|
|
|
-
|
|
|
Provision
for loan losses
|
|
|
244
|
|
|
376
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$
|
972
|
|
$
|
850
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of net charge-offs during the period to average loans outstanding,
net,
during the period
|
|
|
0.08
|
%
|
|
-
|
%
|
|
Ratio
of allowance for loan losses to total loans outstanding
|
|
|
0.66
|
%
|
|
0.57
|
%
|
|
Allowance
for loan losses as a percent of total non-performing loans
|
|
|
207.69
|
%
|
|
57.20
|
%
|
|
(1)
|
Charge
offs consisted of the principal loss a commercial non-real estate
loan of
$120,000 and four overdraft protection lines of credit of $2,000
in 2007
and one overdraft protection line of credit for less than $1,000
in
2006.
|
The
following table sets forth information concerning the allocation of the
allowance for loan losses by loan category at the dates indicated. The
allocation of the allowance to each category is not necessarily indicative
of
future loss in any particular category and does not restrict the use of the
allowance to absorb losses in other categories. During 2007, based on the
factors described above, we reallocated the allowance among our loan categories
to reflect our current beliefs regarding the collectibility of loans in our
portfolio. The large allocation to the commercial non-real estate loan category
is due to the $100,000 commercial non-real estate loan described above. The
allowance for this loan at December 31, 2007 was $100,000.
|
|
|
At
December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
Amount of
Loan Loss
Allowance
|
|
Loan
amounts
by
Category
|
|
Percent of
Loans in
Each
Category to
Total Loans
|
|
Amount of
Loan Loss
Allowance
|
|
Loan
amounts
by
Category
|
|
Percent
of Loans
in Each
Category
to Total
Loans
|
|
|
|
|
|
|
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family
|
|
$
|
246
|
|
$
|
112,198
|
|
|
74.55
|
%
|
$
|
276
|
|
$
|
117,755
|
|
|
79.48
|
%
|
|
Commercial
real estate
|
|
|
172
|
|
|
12,273
|
|
|
8.15
|
|
|
66
|
|
|
5,752
|
|
|
3.88
|
|
|
Commercial
non R/E
|
|
|
338
|
|
|
3,593
|
|
|
2.39
|
|
|
288
|
|
|
2,800
|
|
|
1.89
|
|
|
Construction
|
|
|
102
|
|
|
2,205
|
|
|
1.47
|
|
|
3
|
|
|
300
|
|
|
0.20
|
|
|
Acquisition
and development
|
|
|
35
|
|
|
3,135
|
|
|
2.08
|
|
|
196
|
|
|
4,160
|
|
|
2.81
|
|
|
Home
equity
|
|
|
77
|
|
|
16,670
|
|
|
11.08
|
|
|
17
|
|
|
16,857
|
|
|
11.38
|
|
|
Other
consumer
|
|
|
2
|
|
|
427
|
|
|
0.28
|
|
|
4
|
|
|
536
|
|
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
972
|
|
$
|
150,501
|
|
|
100.00
|
%
|
$
|
850
|
|
$
|
148,160
|
|
|
100.00
|
%
|
The
following table sets forth information concerning the amount of the allowance
for loan losses that is allocated to each of the three key components of the
allowance: the specific allowance for impaired loans, the general allowance
on
certain identified problem loans that do not meet the definition of impaired
and
the general allowance on the remainder of the loan portfolio.
|
|
|
At
December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
Amount
of
Allowance
|
|
Percent
of
Allowance
|
|
Amount
of
Allowance
|
|
Percent
of
Allowance
|
|
|
|
|
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific
allowance
|
|
$
|
100
|
|
|
10.29
|
%
|
$
|
423
|
|
|
49.77
|
%
|
|
General
(identified problem loans)
|
|
|
55
|
|
|
5.66
|
|
|
21
|
|
|
2.47
|
|
|
General
(all other loans)
|
|
|
817
|
|
|
84.05
|
|
|
406
|
|
|
47.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
972
|
|
|
100.00
|
%
|
$
|
850
|
|
|
100.00
|
%
|
Investments
General.
We have
the authority to invest in various types of securities, including
mortgage-backed securities, U.S. Treasury obligations, securities of various
federal agencies and of state and municipal governments, certificates of deposit
at federally-insured institutions, certain bankers’ acceptances and federal
funds. As a member of the Federal Home Loan Bank of Atlanta, we are required
to
maintain an investment in its stock based on percentages specified by the
Federal Home Loan Bank of Atlanta on our outstanding advances. Our investment
strategy is established by our board of directors.
Our
securities must be categorized as either “held to maturity,” “trading
securities” or “available for sale,” based on management’s intent as to the
ultimate disposition of each security. Debt securities may be classified as
“held to maturity” and reported in financial statements at amortized cost only
if management has the positive intent and ability to hold these securities
to
maturity. Securities that might be sold in response to changes in market
interest rates, changes in the security’s prepayment risk, increases in loan
demand, or other similar factors cannot be classified as “held to maturity.” We
do not currently use or maintain a trading account. Debt and equity securities
not classified as “held to maturity” are classified as “available for sale.”
These securities are reported at fair value, and unrealized gains and losses
on
the securities are excluded from earnings and reported, net of the related
tax
effect, as a separate component of equity until realized. Unrealized losses
on
any securities are charged to earnings when, in management’s view, the
impairment becomes other than temporary.
Our
investment policy is designed to provide and maintain adequate liquidity and
to
generate favorable rates of return without incurring undue interest rate or
credit risk. From time to time, investment levels may be increased or decreased
depending upon yields available on investment alternatives and management’s
projections as to the demand for funds to be used in loan originations and
other
activities.
At
December 31, 2007, our investment portfolio consisted of $3,000,000 in federal
agency securities classified as held to maturity, $8,942,000 in mutual fund
securities (which invests in adjustable rate mortgages) classified as available
for sale, $1,844,000 in Federal Home Loan Bank of Atlanta stock and $665,000
in
other interest earning assets, consisting of federal funds sold. We also invest
in mortgage-backed securities, all of which are guaranteed by the United States
Government or agencies thereof, and all of which are classified as held to
maturity. At December 31, 2007, our mortgage-backed securities totaled
$2,247,000, consisting of $1,527,000 in fixed-rate mortgage-backed securities
guaranteed by the Federal National Mortgage Association (Fannie Mae) and the
Federal Home Loan Mortgage Corporation (Freddie Mac), and $720,000 in adjustable
rate mortgage-backed securities guaranteed by the Government National Mortgage
Association (Ginnie Mae). Management does not believe that the recent turmoil
in
the U.S. housing market with the sub-prime lending situation will have an
adverse affect on its securities as these are high quality investments with
short to medium term maturities.
Mortgage-backed
securities represent a participation interest in a pool of one- to four-family
or multi-family mortgages. The mortgage originators use intermediaries
(generally U.S. Government agencies and government sponsored enterprises) to
pool and repackage the participation interest in the form of securities, with
investors receiving the principal and interest payments on the mortgages. Such
U.S. Government agencies and government sponsored enterprises guarantee the
payment of principal and interest to investors.
Mortgage-backed
securities are typically issued with stated principal amounts, and the
securities are backed by pools of mortgages that have loans with interest rates
that are within a range and have varying maturities. The underlying pool of
mortgages,
i.e
.,
fixed-rate or adjustable rate, as well as prepayment risk, are passed on to
the
certificate holder. The life of a mortgage-backed pass-through security
approximates the life of the underlying mortgages.
As
indicated above, our mortgage-backed securities consist of Fannie Mae, Freddie
Mac and Ginnie Mae securities. Fannie Mae is a private corporation chartered
by
the U.S. Congress with a mandate to establish a secondary market for mortgage
loans. Fannie Mae guarantees the timely payment of principal and interest on
Fannie Mae securities. Freddie Mac is a private corporation chartered by the
U.S. Government. Freddie Mac issues participation certificates backed
principally by conventional mortgage loans. Freddie Mac guarantees the timely
payment of interest and the ultimate return of principal on participation
certificates. Fannie Mae and Freddie Mac securities are not backed by the full
faith and credit of the U.S. Government, but because Fannie Mae and Freddie
Mac
are U.S. Government-sponsored enterprises, these securities are considered
to be
among the highest quality investments with minimal credit risks. Ginnie Mae
is a
government agency within the Department of Housing and Urban Development which
is intended to help finance government-assisted housing programs. Ginnie Mae
securities are backed by loans insured by the Federal Housing Administration
or
guaranteed by the Veterans Administration. The timely payment of principal
and
interest on Ginnie Mae securities is guaranteed by Ginnie Mae and backed by
the
full faith and credit of the U.S. Government.
Mortgage-backed
securities generally yield less than the loans which underlie such securities
because of their payment guarantees or credit enhancements which offer nominal
credit risk. In addition, mortgage-backed securities are more liquid than
individual mortgage loans and may be used to collateralize borrowings or other
obligations of Slavie Federal Savings Bank. In general, we purchase
mortgage-backed securities as a means to deploy excess liquidity at more
favorable yields than other investment alternatives. Given the increased equity
from our initial public offering in 2004, we may consider a match funding
strategy whereby mortgage-backed securities of various maturities are purchased
with Federal Home Loan Bank advances.
Amortized
Cost and Estimated Fair Value of Securities.
The
following table sets forth information regarding the amortized cost and
estimated fair values of our securities portfolio at the dates indicated.
|
|
|
At
December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Fair
Value
|
|
|
|
|
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARM
mutual fund
|
|
$
|
9,200
|
|
$
|
8,942
|
|
$
|
8,747
|
|
$
|
8,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available for sale
|
|
$
|
9,200
|
|
$
|
8,942
|
|
$
|
8,747
|
|
$
|
8,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States government agency securities
|
|
$
|
3,000
|
|
$
|
2,987
|
|
$
|
4,000
|
|
$
|
3,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ginnie
Mae
|
|
|
720
|
|
|
720
|
|
|
1,246
|
|
|
1,241
|
|
|
Fannie
Mae
|
|
|
172
|
|
|
174
|
|
|
223
|
|
|
223
|
|
|
Freddie
Mac
|
|
|
1,355
|
|
|
1,327
|
|
|
1,731
|
|
|
1,670
|
|
|
Total
mortgage-backed securities
|
|
|
2,247
|
|
|
2,221
|
|
|
3,200
|
|
|
3,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
held to maturity
|
|
$
|
5,247
|
|
$
|
5,208
|
|
$
|
7,200
|
|
$
|
7,044
|
|
The
following table sets forth the maturities and weighted average yields of
securities at December 31, 2007. Adjustable rate mortgage-backed securities
are
included in the period in which interest rates are next scheduled to adjust.
|
|
|
Less
than 1 Year
|
|
1
to 5 Years
|
|
5
to 10 Years
|
|
Over
10 Years
|
|
Total
Securities
|
|
|
|
|
Carrying
Value
|
|
Weighted
Average Yield
|
|
Carrying
Value
|
|
Weighted
Average Yield
|
|
Carrying
Value
|
|
Weighted
Average Yield
|
|
Carrying
Value
|
|
Weighted
Average Yield
|
|
Carrying
Value
|
|
Weighted
Average Yield
|
|
|
|
|
(Dollars
in Thousands)
|
|
|
Securities
available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARM
mutual fund
|
|
$
|
8,942
|
|
|
5.12
|
%
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
8,942
|
|
|
5.12
|
%
|
|
Total
available for sale
|
|
|
8,942
|
|
|
5.12
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
8,942
|
|
|
5.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States government agency
securities
|
|
$
|
2,000
|
|
|
3.16
|
%
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
1,000
|
|
|
5.63
|
%
|
$
|
3,000
|
|
|
3.98
|
%
|
|
Mortgage-backed
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ginnie
Mae
|
|
|
720
|
|
|
6.14
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
720
|
|
|
6.14
|
|
|
Fannie
Mae
|
|
|
-
|
|
|
-
|
|
|
172
|
|
|
5.50
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
172
|
|
|
5.50
|
|
|
Freddie
Mac
|
|
|
6
|
|
|
5.50
|
|
|
1,349
|
|
|
4.50
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,355
|
|
|
4.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
mortgage-backed
securities
|
|
|
726
|
|
|
6.13
|
|
|
1,521
|
|
|
4.61
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,247
|
|
|
5.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
held to maturity
|
|
|
2,726
|
|
|
3.95
|
|
|
1,521
|
|
|
4.61
|
|
|
-
|
|
|
-
|
|
|
1,000
|
|
|
|
|
|
5,247
|
|
|
4.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,668
|
|
|
4.85
|
%
|
$
|
1,521
|
|
|
4.61
|
%
|
|
-
|
|
|
-
|
|
|
1,000
|
|
|
5.63
|
%
|
$
|
14,189
|
|
|
4.88
|
%
|
Sources
of Funds
General
.
Deposits have traditionally been the primary source of funds for use in lending
and investment activities. In addition to deposits, funds are derived from
repayments (including prepayments) of outstanding loans and mortgage-backed
and
investment securities and operating revenue. While scheduled loan payments
and
income on earning assets are relatively stable sources of funds, deposit inflows
and outflows can vary widely and are influenced by various economic factors.
Borrowings are also used on a short-term basis to compensate for reductions
in
the availability of funds, and on a longer term basis for general operational
purposes. Over the past four years, we heavily relied upon borrowings from
the
Federal Home Loan Bank of Atlanta to support loan growth.
Deposits
.
Deposits are not actively solicited outside of the Baltimore metropolitan area,
and substantially all of our depositors are persons who work or reside within
Baltimore City, Baltimore County and Harford County, Maryland. We offer a
selection of deposit instruments, including demand deposits (non-interest
bearing), NOW accounts, savings accounts, money market accounts and certificates
of deposit. Deposit account terms vary, with the principal differences being
the
minimum balance required, the amount of time the funds must remain on deposit
and the interest rate.
Interest
rates paid, maturity terms, service fees and withdrawal penalties are
established on a periodic basis. Deposit rates and terms are based primarily
on
current operating strategies and market rates, liquidity requirements, rates
paid by competitors and growth goals. Management believes we price our deposits
comparably to rates offered by our competitors. We do not accept brokered
deposits.
We
rely
substantially on competitive rates, customer service, convenience, advertising
and long-standing relationships with customers to attract and retain deposits.
We believe the image of a full service, locally-based institution will continue
to contribute to our ability to attract and retain deposits, particularly with
respect to deposit run-off that results from bank consolidation in the local
market. We will also continue to evaluate opportunities to enhance deposit
growth beyond what is currently projected, through such avenues as establishing
additional branches or through acquisition of another financial institution
or
selected branches, although no such transactions are planned as of the date
of
this report.
To
provide additional convenience to our customers, we are affiliated with an
ATM
network and offer online banking with bill paying capabilities as a convenience
to our personal banking customers, as well as our commercial customers.
Affiliating with an ATM network allows our customers to use the ATM machines
of
another larger financial institution without charge. Currently, we have three
ATM machines, two drive-up machines at each of our offices and a cash dispensing
machine located inside our corporate headquarters building.
The
flow
of deposits is influenced significantly by general economic conditions, changes
in money market and other prevailing interest rates and levels of competition.
We believe the variety of deposit accounts offered allows us to be competitive
in obtaining funds and responding to changes in consumer demand. Based on
experience, management believes our deposits to be relatively stable. However,
the ability to attract and maintain certificates of deposit, and the rates
paid
on these deposits, has been and will continue to be significantly affected
by
market conditions. At December 31, 2007, $89,675,000, or 78.59% of our deposit
accounts were certificates of deposit, of which $57,335,000 have maturities
of
one year or less.
Deposit
Accounts
.
The
following table sets forth the dollar amount of deposits in the various types
of
deposit accounts we offered as of the dates indicated.
|
|
|
At
December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
Weighted
Average
Rate
|
|
Amount
|
|
Weighted
Average
Rate
|
|
Amount
|
|
|
|
|
(Dollars
in Thousands)
|
|
|
NOW
& Money Market Demand
|
|
|
1.90
|
%
|
$
|
15,390
|
|
|
1.47
|
%
|
$
|
15,368
|
|
|
Savings
deposits
|
|
|
1.26
|
|
|
7,718
|
|
|
1.45
|
|
|
9,092
|
|
|
Certificates
of deposit
|
|
|
4.95
|
|
|
89,675
|
|
|
4.84
|
|
|
85,996
|
|
|
Accrued
interest payable
|
|
|
-
|
|
|
14
|
|
|
-
|
|
|
11
|
|
|
Non-interest
bearing deposits
|
|
|
-
|
|
|
1,301
|
|
|
-
|
|
|
1,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4.23
|
%
|
$
|
114,098
|
|
|
4.04
|
%
|
$
|
111,823
|
|
Deposit
Activity
.
The
following table sets forth the deposit activities for the periods
indicated.
|
|
|
Years
Ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
(Dollars
in Thousands)
|
|
|
Beginning
of period
|
|
$
|
111,823
|
|
$
|
109,623
|
|
|
Net
deposits (withdrawals)
|
|
|
(2,390
|
)
|
|
(1,653
|
)
|
|
Interest
credited on deposit accounts
|
|
|
4,665
|
|
|
3,853
|
|
|
Total
increase in deposit accounts
|
|
|
2,275
|
|
|
2,200
|
|
|
Ending
balance
|
|
$
|
114,098
|
|
$
|
111,823
|
|
|
Percent
increase (decrease)
|
|
|
2.03
|
%
|
|
2.01
|
%
|
Large
Certificates of Deposits
.
The
following table indicates the amount of certificates of deposit as of December
31, 2007, by time remaining until maturity.
|
|
|
Three
months
or
less
|
|
Over
three
months
to six months
|
|
Over
six
months
to
twelve
months
|
|
Over
twelve months
|
|
Total
|
|
|
|
|
(Dollars
in Thousands)
|
|
|
Certificates
of deposit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
than $100,000
|
|
$
|
14,146
|
|
$
|
12,873
|
|
$
|
13,354
|
|
$
|
19,588
|
|
$
|
59,961
|
|
|
$100,000
or more
|
|
|
5,000
|
|
|
4,873
|
|
|
7,089
|
|
|
12,752
|
|
|
29,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,146
|
|
$
|
17,746
|
|
$
|
20,443
|
|
$
|
32,340
|
|
$
|
89,675
|
|
Borrowings
.
Slavie
Federal Savings Bank may obtain advances from the Federal Home Loan Bank of
Atlanta upon the security of the common stock it owns in that bank and certain
of its residential mortgage loans and mortgage-backed and other investment
securities, provided certain standards related to creditworthiness have been
met. These advances are made pursuant to several credit programs, each of which
has its own interest rate and range of maturities. Federal Home Loan Bank of
Atlanta advances are generally available to meet seasonal and other withdrawals
of deposit accounts and to permit increased lending.
At
December 31, 2007, Slavie Federal Savings Bank was permitted to borrow up to
$51,667,000 from the Federal Home Loan Bank of Atlanta. We had $34,000,000
and
$39,000,000 of Federal Home Loan Bank advances as of December 31, 2007 and
December 31, 2006, respectively, and we averaged $33,917,000 and $39,250,000
of
Federal Home Loan Bank advances during the years ended December 31, 2007 and
December 31, 2006, respectively. The decrease in borrowings reflects $5,000,000
in short term borrowing repayments. There was $10,000,000 in new long term
borrowings as well as $10,000,000 in long term borrowing repayments. Total
borrowings decreased by $5,000,000 from the prior year. We have relied on
borrowings to an
extent
since the third quarter of 2003 to fund loan growth.
The
following table sets forth certain information regarding the Federal Home Loan
Bank advances for the periods indicated. The table indicates both long and
short-term borrowings.
|
|
|
Years
Ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
(Dollars
in Thousands)
|
|
|
FHLB
Advances:
|
|
|
|
|
|
|
|
|
Maximum
month-end balance
|
|
$
|
34,000
|
|
$
|
39,000
|
|
|
Balance
at end of period
|
|
|
34,000
|
|
|
39,000
|
|
|
Average
balance
|
|
|
33,917
|
|
|
39,250
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average interest rate at end of period
|
|
|
3.47
|
%
|
|
4.35
|
%
|
|
Weighted
average interest rate during period
|
|
|
4.18
|
%
|
|
4.07
|
%
|
|
|
|
|
|
|
|
|
|
Personnel
As
of
December 31, 2007, we had 26
full-time
employees and 9 part-time employees. Our employees are not represented by any
collective bargaining group. Management believes that we have good relations
with our employees.
Subsidiary
Activities
Office
of
Thrift Supervision regulations permit federal savings banks to invest in the
capital stock, obligations or other specified types of securities of
subsidiaries (referred to as “service corporations”) and to make loans to such
subsidiaries and joint ventures in which such subsidiaries are participants
in
an aggregate amount not exceeding 2% of the bank’s assets, plus an additional 1%
of assets if the amount over 2% is used for specified community or inner-city
development purposes. In addition, federal regulations permit banks to make
specified types of loans to such subsidiaries (other than special purpose
finance subsidiaries) in which the bank owns more than 10% of the stock, in
an
aggregate amount not exceeding 50% of the bank’s regulatory capital if the
bank’s regulatory capital is in compliance with applicable regulations.
Slavie
Federal Savings Bank has one subsidiary, Slavie Holdings, LLC, which was formed
as a Maryland limited liability company in August 1999 to acquire and manage
the
real property located at 1614 Churchville Road, Bel Air, Maryland. The
Churchville Road property houses our main office and corporate headquarters.
The
property also houses mixed use office space, which is available for lease.
SUPERVISION
AND REGULATION
The
following discussion of certain laws and regulations which are applicable to
SFSB, Inc. and Slavie Federal Savings Bank, as well as descriptions of laws
and
regulations contained elsewhere in this Report, summarizes the aspects of such
laws and regulations which are deemed to be material to SFSB, Inc. and Slavie
Federal Savings Bank. However, the summary does not purport to be complete
and
is qualified in its entirety by reference to applicable laws and
regulations.
General
Slavie
Federal Savings Bank is examined and supervised by the Office of Thrift
Supervision and the Federal Deposit Insurance Corporation. This regulation
and
supervision establishes a comprehensive framework of activities in which an
institution may engage and is intended primarily for the protection of the
Federal Deposit Insurance Corporation’s deposit insurance funds and depositors
and not stockholders. Under this system of federal regulation, financial
institutions are periodically examined to ensure that they satisfy applicable
standards with respect to their capital adequacy, assets, management, earnings,
liquidity and sensitivity to market interest rates. Following completion of
its
examination, the federal agency critiques the institution’s operations and
assigns its rating (known as an institution’s CAMELS rating). Under federal law,
an institution may not disclose its CAMELS rating to the public. Slavie Federal
Savings Bank also is a member of and owns stock in the Federal Home Loan Bank
of
Atlanta, which is one of the twelve regional banks in the Federal Home Loan
Bank
System. Slavie Federal Savings Bank also is regulated to a lesser extent by
the
Board of Governors of the Federal Reserve System, governing reserves to be
maintained against deposits and other matters. The Office of Thrift Supervision
examines Slavie Federal Savings Bank and prepares reports for the consideration
of its board of directors on any operating deficiencies. Slavie Federal Savings
Bank’s relationship with its depositors and borrowers also is regulated to a
great extent by both federal and state laws, especially in matters concerning
the ownership of deposit accounts and the form and content of Slavie Federal
Savings Bank’s mortgage documents.
Any
change in these laws or regulations, whether by the Federal Deposit Insurance
Corporation, Office of Thrift Supervision or Congress, could have a material
adverse impact on SFSB, Inc. and Slavie Federal Savings Bank and their
operations.
Federal
Banking Regulation
Business
Activities
.
A
federal savings bank derives its lending and investment powers from the Home
Owners’ Loan Act and the regulations of the Office of Thrift Supervision. Under
these laws and regulations, Slavie Federal Savings Bank may invest in mortgage
loans secured by residential and commercial real estate, commercial business
and
consumer loans, certain types of debt securities and certain other assets.
Certain types of lending, such as commercial and consumer loans, are subject
to
an aggregate limit calculated as a specified percentage of Slavie Federal
Savings Bank’s capital assets. Slavie Federal Savings Bank also may establish
subsidiaries that may engage in activities not otherwise permissible for Slavie
Federal Savings Bank, including real estate investment and securities and
insurance brokerage.
Capital
Requirements
.
Office
of Thrift Supervision regulations require savings banks to meet three minimum
capital standards: a 1.5% tangible capital ratio, a 4% leverage ratio (3% for
banks receiving the highest rating on the CAMELS rating system) and an 8%
risk-based capital ratio. The prompt corrective action standards discussed
below, in effect, establish a minimum 2% tangible capital standard.
The
risk-based capital standard for savings banks requires the maintenance of Tier
1
(core) and total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of at least 4% and 8%, respectively. In
determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%,
assigned by the Office of Thrift Supervision based on the risks believed
inherent in the type of asset. Core capital is defined as common stockholders’
equity (including retained earnings), certain noncumulative perpetual preferred
stock and related surplus and minority interests in equity accounts of
consolidated subsidiaries, less intangibles other than certain mortgage
servicing rights and credit card relationships. The components of supplementary
capital currently include cumulative preferred stock, long term perpetual
preferred stock, mandatory convertible securities, subordinated debt and
intermediate preferred stock, the allowance for loan and lease losses limited
to
a maximum of 1.25% of risk-weighted assets and up to 45% of net unrealized
gains
on available-for-sale equity securities with readily determinable fair market
values. Overall, the amount of supplementary capital included as part of total
capital cannot exceed 100% of core capital.
At
December 31, 2007, Slavie Federal Savings Bank’s capital exceeded all applicable
requirements.
Loans-to-One
Borrower
.
A
federal savings bank generally may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of unimpaired capital and
surplus. An additional amount may be loaned, equal to 10% of unimpaired capital
and surplus, if the loan is secured by readily marketable collateral, which
generally does not include real estate. As of December 31, 2007, Slavie Federal
Savings Bank was in compliance with the loans-to-one borrower
limitations.
Qualified
Thrift Lender Test
.
As a
federal savings bank, Slavie Federal Savings Bank is subject to a qualified
thrift lender, or “QTL,” test. Under the QTL test, Slavie Federal Savings Bank
must maintain at least 65% of its “portfolio assets” in “qualified thrift
investments” in at least nine months of the most recent 12-month period.
“Portfolio assets” generally means total assets of a savings institution, less
the sum of specified liquid assets up to 20% of total assets, goodwill and
other
intangible assets, and the value of property used in the conduct of the savings
bank’s business.
“Qualified
thrift investments” includes various types of loans made for residential and
housing purposes, investments related to such purposes, including certain
mortgage-backed and related securities, and loans for personal, family,
household and certain other purposes up to a limit of 20% of portfolio assets.
“Qualified thrift investments” also include 100% of an institution’s credit card
loans, education loans and small business loans. Slavie Federal Savings Bank
also may satisfy the QTL test by qualifying as a “domestic building and loan
association” as defined in the Internal Revenue Code.
A
savings
bank that fails the qualified thrift lender test must either convert to a bank
charter or operate under specified restrictions. At December 31, 2007, Slavie
Federal Savings Bank maintained approximately 84.49% of its portfolio assets
in
qualified thrift investments.
Capital
Distributions
.
Office
of Thrift Supervision regulations govern capital distributions by a federal
savings bank, which include cash dividends, stock repurchases and other
transactions charged to the capital account. A savings bank must file an
application for approval of a capital distribution if:
|
|
·
|
the
total capital distributions for the applicable calendar year exceed
the
sum of the bank’s net income for that year to date plus the bank’s
retained net income for the preceding two years;
|
|
|
·
|
the
bank would not be at least adequately capitalized following the
distribution;
|
|
|
·
|
the
distribution would violate any applicable statute, regulation, agreement
or Office of Thrift Supervision-imposed condition; or
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the
bank is not eligible for expedited treatment of its filings.
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Even
if
an application is not otherwise required, every savings bank that is a
subsidiary of a holding company must still file a notice with the Office of
Thrift Supervision at least 30 days before the board of directors declares
a
dividend or approves a capital distribution.
The
Office of Thrift Supervision may disapprove a notice or application if:
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the
bank would be undercapitalized following the distribution;
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the
proposed capital distribution raises safety and soundness concerns;
or
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the
capital distribution would violate a prohibition contained in any
statute,
regulation or agreement.
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In
addition, the Federal Deposit Insurance Act provides that an insured depository
institution may not make any capital distribution, if after making such
distribution, the institution would be undercapitalized.
Liquidity.
A
federal
savings bank is required to maintain a sufficient amount of liquid assets to
ensure its safe and sound operation.
Community
Reinvestment Act and Fair Lending Laws
.
All
savings banks have a responsibility under the Community Reinvestment Act and
related regulations of the Office of Thrift Supervision to help meet the credit
needs of their communities, including low- and moderate-income neighborhoods.
In
connection with its examination of a federal savings bank, the Office of Thrift
Supervision is required to assess the bank’s record of compliance with the
Community Reinvestment Act. In addition, the Equal Credit Opportunity Act and
the Fair Housing Act prohibit lenders from discriminating in their lending
practices on the basis of characteristics specified in those statutes. A bank’s
failure to comply with the provisions of the Community Reinvestment Act could,
at a minimum, result in denial of certain corporate applications such as
branches or mergers or other restrictions on its activities. The failure to
comply with the Equal Credit Opportunity Act and the Fair Housing Act could
result in enforcement actions by the Office of Thrift Supervision, as well
as
other federal regulatory agencies and the Department of Justice. Slavie Federal
Savings Bank received a satisfactory
Community
Reinvestment Act rating in its most recent federal examination.
Transactions
with Related Parties
.
A
federal savings bank’s authority to engage in transactions with its “affiliates”
is limited by Office of Thrift Supervision regulations and by Sections 23A
and
23B of the Federal Reserve Act (the “FRA”) and Regulation W of the Federal
Reserve Bank (collectively, “Regulation W”). The term “affiliates” for these
purposes generally means any company that controls, is controlled by, or is
under common control with an institution. SFSB, Inc. is an affiliate of Slavie
Federal Savings Bank. In general, transactions with affiliates must be on terms
that are as favorable to the bank as comparable transactions with
non-affiliates. In addition, certain types of these transactions are restricted
to an aggregate percentage of the bank’s capital. Collateral in specified
amounts must usually be provided by affiliates in order to receive loans from
the bank. In addition, Office of Thrift Supervision regulations prohibit a
savings bank from lending to any of its affiliates that are engaged in
activities that are not permissible for bank holding companies and from
purchasing the securities of any affiliate, other than a subsidiary.
In
addition, under Regulation W:
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a
bank and its subsidiaries may not purchase a low-quality asset from
an
affiliate;
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covered
transactions and other specified transactions between a bank or its
subsidiaries and an affiliate must be on terms and conditions that
are
consistent with safe and sound banking practices; and
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with
some exceptions, each loan or extension of credit by a bank to an
affiliate must be secured by collateral with a market value ranging
from
100% to 130%, depending on the type of collateral, of the amount
of the
loan or extension of credit.
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Regulation
W generally excludes all nonbank and nonsavings association subsidiaries of
banks from treatment as affiliates, except to the extent that the Federal
Reserve Board decides to treat these subsidiaries as affiliates.
Slavie
Federal Savings Bank’s authority to extend credit to its directors, executive
officers and 10% shareholders, as well as to entities controlled by such
persons, is currently governed by the requirements of Sections 22(g) and 22(h)
of the FRA and Regulation O of the Federal Reserve Board. Among other things,
these provisions require that extensions of credit to insiders be made on terms
that are substantially the same as, and follow credit underwriting procedures
that are not less stringent than, those prevailing for comparable transactions
with unaffiliated persons and that do not involve more than the normal risk
of
repayment or present other unfavorable features. However, there is an exception
for loans made pursuant to a benefit or compensation program that is widely
available to all employees of the institution and does not give preference
to
insiders over other employees.
These
provisions also require that such extensions of credit not exceed certain
limitations on the amount of credit extended to such persons, individually
and
in the aggregate, which limits are based, in part, on the amount of Slavie
Federal Savings Bank’s capital. In addition, extensions of credit in excess of
certain limits must be approved by Slavie Federal Savings Bank’s board of
directors (with any “interested” director not participating in the voting).
Enforcement.
The
Office of Thrift Supervision has primary enforcement responsibility over federal
savings institutions and has the authority to bring enforcement action against
all “institution-affiliated parties,” including stockholders, and attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers and/or directors of the institution,
receivership, conservatorship or the termination of deposit insurance. Civil
penalties cover a wide range of violations and actions, and range up to $25,000
per day, unless a finding of reckless disregard is made, in which case penalties
may be as high as $1 million per day. The Federal Deposit Insurance Corporation
also has the authority to recommend to the Director of the Office of Thrift
Supervision that enforcement action be taken with respect to a particular
savings institution. If action is not taken by the Director, the Federal Deposit
Insurance Corporation has authority to take action under specified
circumstances.
Standards
for Safety and Soundness.
Federal
law requires each federal banking agency to prescribe certain standards for
all
insured depository institutions. These standards relate to, among other things,
internal controls, information systems and audit systems, loan documentation,
credit underwriting, interest rate risk exposure, asset growth, compensation,
and other operational and managerial standards as the agency deems appropriate.
The federal banking agencies adopted Interagency Guidelines Prescribing
Standards for Safety and Soundness to implement the safety and soundness
standards required under federal law. The guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired. The guidelines address internal controls and information systems,
internal audit systems, credit underwriting, loan documentation, interest rate
risk exposure, asset growth, compensation, fees and benefits. If the appropriate
federal banking agency determines that an institution fails to meet any standard
prescribed by the guidelines, the agency may require the institution to submit
to the agency an acceptable plan to achieve compliance with the standard. If
an
institution fails to meet these standards, the appropriate federal banking
agency may require the institution to submit a compliance plan.
Prompt
Corrective Action Regulations
.
Under
the prompt corrective action regulations, the Office of Thrift Supervision
is
required and authorized to take supervisory actions against undercapitalized
savings banks. For this purpose, a savings bank is placed in one of the
following five categories based on the bank’s capital:
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well-capitalized
(at least 5% leverage capital, 6% Tier 1 risk-based capital and 10%
total
risk-based capital);
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adequately
capitalized (at least 4% leverage capital, 4% Tier 1 risk-based capital
and 8% total risk-based capital);
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undercapitalized
(less than 8% total risk-based capital, 4% Tier 1 risk-based capital
or 3%
leverage capital);
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significantly
undercapitalized (less than 6% total risk-based capital, 3% Tier
1
risk-based capital or 3% leverage capital); and
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critically
undercapitalized (less than 2% tangible capital).
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Generally,
the banking regulator is required to appoint a receiver or conservator for
a
bank that is “critically undercapitalized” within specific time frames. The
regulations also provide that a capital restoration plan must be filed with
the
Office of Thrift Supervision within 45 days of the date a bank receives notice
that it is “undercapitalized,” “significantly undercapitalized” or “critically
undercapitalized,” the performance of which must be guaranteed by any company
controlling the bank up to specified limits. In addition, numerous mandatory
supervisory actions become immediately applicable to the bank, including, but
not limited to, restrictions on growth, investment activities, capital
distributions and affiliate transactions. The Office of Thrift Supervision
may
also take any one of a number of discretionary supervisory actions against
undercapitalized banks, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
At
December 31, 2007, Slavie Federal Savings Bank met the criteria for being
considered “well-capitalized.”
Insurance
of Deposit Accounts
.
Deposit
accounts in Slavie Federal Savings Bank are insured by the Federal Deposit
Insurance Corporation, generally up to a maximum of $100,000 per separately
insured depositor and $250,000 for retirement accounts. Slavie Federal Savings
Bank’s deposits therefore are subject to Federal Deposit Insurance Corporation
deposit insurance assessments.
The
Federal Deposit Insurance Corporation assesses insurance premiums based on
risk,
which allows it to tie each financial institution’s deposit insurance premiums
to the risk it poses to the deposit insurance fund. Under the risk-based
assessment system, the Federal Deposit Insurance Corporation evaluates the
risk
of each financial institution based on its supervisory rating, its financial
ratios, and its long-term debt issuer rating. The rates for nearly all of the
financial institution industry vary between five and seven cents for every
$100
of domestic deposits. Beginning in 2007, the assessments paid by the Bank were
offset by the allocation of $103,000 in credits from the Federal Deposit
Insurance Corporation for prior premiums paid by the Bank. At December 31,
2007,
there was a remaining credit balance of $47,000 to be allocated against future
assessments.
In
2006,
the Federal Deposit Insurance Corporation merged the Bank Insurance Fund (“BIF”)
and the Savings Association Insurance Fund (“SAIF”) into a single fund called
the Deposit Insurance Fund. As a result of a merger, the BIF and the SAIF were
abolished. The merger of the BIF and the SAIF into the Deposit Insurance Fund
does not affect the authority of the Financing Corporation (“FICO”) to impose
and collect, with the approval of the Federal Deposit Insurance Corporation,
assessments for anticipated payments, issuance cost and custodial fees on bonds
issued by the FICO in the 1980s to recapitalize the Federal Savings and Loan
Insurance Corporation. The bonds issued by the FICO are due to mature in 2017
through 2019. For the quarter ended December 31, 2007, the annualized FICO
assessment was equal to 1.14 basis points for each $100 in domestic deposits
maintained at an institution.
Prohibitions
Against Tying Arrangements
.
Federal
savings banks are prohibited, subject to some exceptions, from extending credit
to or offering any other service, or fixing or varying the consideration for
such extension of credit or service, on the condition that the customer obtain
some additional service from the institution or its affiliates or not obtain
services of a competitor of the institution.
Federal
Home Loan Bank System
.
Slavie
Federal Savings Bank is a member of the Federal Home Loan Bank System, which
consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank
System provides a central credit facility primarily for member institutions.
As
a member of the Federal Home Loan Bank of Atlanta, Slavie Federal Savings Bank
is required to acquire and hold shares of capital stock in the Federal Home
Loan
Bank in an amount at least equal to 1% of the aggregate principal amount of
its
unpaid residential mortgage loans and similar obligations at the beginning
of
each year, or 1/20 of its borrowings from the Federal Home Loan Bank, whichever
is greater. As of December 31, 2007, Slavie Federal Savings Bank was in
compliance with this requirement.
Federal
Reserve System
The
Federal Reserve Board regulations require savings banks to maintain
non-interest-earning reserves against their transaction accounts, such as
negotiable order of withdrawal and regular checking accounts. At December 31,
2007, Slavie Federal Savings Bank was in compliance with these reserve
requirements.
Privacy
Requirements of the GLBA
The
Gramm-Leach-Bliley Act of 1999 provided for sweeping financial modernization
for
commercial banks, savings banks, securities firms, insurance companies, and
other financial institutions operating in the United States. Among other
provisions, the Gramm-Leach-Bliley Act places limitations on the sharing of
consumer financial information with unaffiliated third parties. Specifically,
the Gramm-Leach-Bliley Act requires all financial institutions offering
financial products or services to retail customers to provide such customers
with the financial institution’s privacy policy and provide such customers the
opportunity to “opt out” of the sharing of personal financial information with
unaffiliated third parties.
The
USA Patriot Act
Under
the
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001, commonly referred to as the “USA
Patriot Act” or the “Patriot Act”, financial institutions are subject to
prohibitions against specified financial transactions and account relationships,
as well as enhanced due diligence standards intended to detect, and prevent,
the
use of the United States financial system for money laundering and terrorist
financing activities. The Patriot Act requires financial institutions, including
banks, to establish anti-money laundering programs, including employee training
and independent audit requirements, meet minimum standards specified by the
Act,
follow minimum standards for customer identification and maintenance of customer
identification records, and regularly compare customer lists against lists
of
suspected terrorists, terrorist organizations and money launderers
.
The
U.S.
Treasury Department (“Treasury”) has issued a number of implementing regulations
that apply to various requirements of the USA Patriot Act to financial
institutions such as Slavie Federal Savings Bank. Those regulations impose
new
obligations on financial institutions to maintain appropriate policies,
procedures and controls to detect, prevent and report money laundering and
terrorist financing.
Failure
of a financial institution to comply with the USA Patriot Act’s requirements
could have serious legal and reputational consequences for the institution.
We
have adopted appropriate policies, procedures and controls to address compliance
with the requirements of the USA Patriot Act under the existing regulations
and
will continue to revise and update our policies, procedures and controls to
reflect changes required by the USA Patriot Act and Treasury’s regulations.
The
costs
or other effects of the compliance burdens imposed by the Patriot Act or future
anti-terrorist, homeland security or anti-money laundering legislation or
regulations cannot be predicted with certainty.
Check
21
The
Check
Clearing for the 21st Century Act, also known as “Check 21” gives “substitute
checks,” such as a digital image of a check and copies made from that image, the
same legal standing as the original paper check. Some of the major provisions
include:
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allowing
check truncation without making it
mandatory;
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requiring
that every financial institution communicate to accountholders in
writing
a description of its substitute check processing program and their
rights
under the law;
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retaining
in place the previously mandated electronic collection and return
of
checks between financial institutions only when individual agreements
are
in place;
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requiring
that when accountholders request verification, financial institutions
produce the original check (or a copy that accurately represents
the
original) and demonstrate that the account debit was accurate and
valid;
and
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requiring
recrediting of funds to an individual’s account on the next business day
after a consumer proves that the financial institution has
erred.
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Consumer
Credit Reporting
The
Fair
and Accurate Credit Transactions Act amended the federal Fair Credit Reporting
Act. These amendments to the Fair Credit Reporting Act (the “FCRA Amendments”)
include, among other things:
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requirements
for financial institutions to develop policies and procedures to
identify
relevant patterns, practices, and specific forms of activity that
are “red
flags” signaling potential identity theft and, upon the request of a
consumer, place a fraud alert in the consumer's credit file stating
that
the consumer may be the victim of identity theft or other
fraud;
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for
entities that furnish information to consumer reporting agencies
(which
would include us), requirements to implement procedures and policies
regarding the accuracy and integrity of the furnished information,
and
regarding the correction of previously furnished information that
is later
determined to be inaccurate; and
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a
requirement for mortgage lenders to disclose credit scores to
consumers.
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The
FCRA
Amendments also prohibit a business that receives consumer information from
an
affiliate from using that information for marketing purposes unless the consumer
is first provided a notice and an opportunity to direct the business not to
use
the information for such marketing purposes (the “opt-out”), subject to certain
exceptions. We do not share consumer information among our affiliated companies
for marketing purposes, except as allowed under exceptions to the notice and
opt-out requirements. Because none of our affiliates is currently sharing
consumer information with any other affiliate for marketing purposes, the
limitations on sharing of information for marketing purposes do not have a
significant impact on us.
Other
Regulations
Interest
and other charges we collect or contract for are subject to state usury laws
and
federal laws concerning interest rates. For example, under the Service Members
Civil Relief Act, which amended the Soldiers’ and Sailors’ Civil Relief Act of
1940, a lender is generally prohibited from charging an annual interest rate
in
excess of 6% on any obligation of a borrower who is on active duty with the
United States military.
Our
loan
operations are also subject to federal laws applicable to credit transactions,
such as the following:
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The
Federal Truth-In-Lending Act, governing disclosures of credit terms
to
consumer borrowers;
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The
Home Mortgage Disclosure Act of 1975, requiring financial institutions
to
provide information to enable the public and public officials to
determine
whether a financial institution is fulfilling its obligation to help
meet
the housing needs of the community it
serves;
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The
Fair Debt Collection Act, governing the manner in which consumer
debts may
be collected by collection agencies;
and
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The
rules and regulations of the various federal agencies charged with
the
responsibility of implementing these federal
laws.
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Our
deposit operations are subject to the following:
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The
Right to Financial Privacy Act, which imposes a duty to maintain
confidentiality of consumer financial records and prescribes procedures
for complying with administrative subpoenas of financial records;
and
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The
Electronic Funds Transfer Act and Regulation E issued by the Federal
Reserve Board to implement that Act, which govern automatic deposits
to
and withdrawals from deposit accounts and customers' rights and
liabilities arising from the use of automated teller machines and
other
electronic banking services.
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Proposed
Legislation and Regulatory Actions
New
regulations and statutes are regularly proposed that contain wide-ranging
proposals for altering the structures, regulations, and competitive
relationships of the nation’s financial institutions. We cannot predict whether
or in what form any proposed regulation or statute will be adopted or the extent
to which our business may be affected by any new regulation or
statute.
Effect
of Governmental Monetary Policies
Our
earnings are affected by domestic economic conditions and the monetary and
fiscal policies of the United States government and its agencies. The Federal
Reserve Board’s monetary policies have had, and are likely to continue to have,
an important impact on the operating results of financial institutions through
its power to implement national monetary policy in order, among other things,
to
curb inflation or combat a recession. The monetary policies of the Federal
Reserve Board affect the levels of bank loans, investments and deposits through
its control over the issuance of United States government securities, its
regulation of the discount rate applicable to member banks and its influence
over reserve requirements to which member banks are subject. We cannot predict
the nature or impact of future changes in monetary and fiscal
policies.
Holding
Company Regulation
General
.
Slavie
Bancorp, MHC and SFSB, Inc. are nondiversified savings and loan holding
companies within the meaning of the Home Owners’ Loan Act. As such, Slavie
Bancorp, MHC and SFSB, Inc. are registered with the Office of Thrift Supervision
and are subject to Office of Thrift Supervision regulations, examinations,
supervision and reporting requirements. In addition, the Office of Thrift
Supervision has enforcement authority over SFSB, Inc. and Slavie Bancorp MHC,
and their subsidiaries. Among other things, this authority permits the Office
of
Thrift Supervision to restrict or prohibit activities that are determined to
be
a serious risk to the subsidiary savings institution. As federal corporations,
SFSB, Inc. and Slavie Bancorp, MHC are generally not subject to state business
organization laws.
Permitted
Activities
.
Pursuant to Section 10(o) of the Home Owners’ Loan Act and Office of Thrift
Supervision regulations and policy, a mutual holding company and a federally
chartered mid-tier holding company such as SFSB, Inc. may engage in the
following activities: (1) investing in the stock of a savings bank;
(2) acquiring a mutual association through the merger of such association
into a savings bank subsidiary of such holding company or an interim savings
bank subsidiary of such holding company; (3) merging with or acquiring
another holding company, one of whose subsidiaries is a savings bank;
(4) investing in a corporation, the capital stock of which is available for
purchase by a savings bank under federal law or under the law of any state
where
the subsidiary savings bank or banks share their home offices;
(5) furnishing or performing management services for a savings bank
subsidiary of such company; (6) holding, managing or liquidating assets
owned or acquired from a savings subsidiary of such company; (7) holding or
managing properties used or occupied by a savings bank subsidiary of such
company; (8) acting as trustee under deeds of trust; (9) any other
activity (a) that the Federal Reserve Board, by regulation, has determined
to be permissible for bank holding companies under Section 4(c) of the Bank
Holding Company Act of 1956, unless the Director of the Office of Thrift
Supervision, by regulation, prohibits or limits any such activity for savings
and loan holding companies or (b) in which multiple savings and loan
holding companies were authorized (by regulation) to directly engage on March
5,
1987; (10) any activity permissible for financial holding companies under
Section 4(k) of the Bank Holding Company Act, including securities and insurance
underwriting; and (11) purchasing, holding, or disposing of stock acquired
in connection with a qualified stock issuance if the purchase of such stock
by
such savings and loan holding company is approved by the Director of the Office
of Thrift Supervision. If a mutual holding company acquires or merges with
another holding company, the holding company acquired or the holding company
resulting from such merger or acquisition may only invest in assets and engage
in activities listed in (1) through (11) above, and has a period of two years
to
cease any nonconforming activities and divest of any nonconforming investments.
The
Home
Owners’ Loan Act prohibits a savings and loan holding company, including SFSB,
Inc. and Slavie Bancorp, MHC, directly or indirectly, or through one or more
subsidiaries, from acquiring more than 5% of another savings institution or
holding company thereof, without prior written approval of the Office of Thrift
Supervision. It also prohibits the acquisition or retention of, with certain
exceptions, more than 5% of a nonsubsidiary company engaged in activities other
than those permitted by the Home Owners’ Loan Act; or acquiring or retaining
control of an institution that is not federally insured. In evaluating
applications by holding companies to acquire savings institutions, the Office
of
Thrift Supervision must consider the financial and managerial resources, future
prospects of the company and institution involved, the effect of the acquisition
on the risk to the insurance fund, the convenience and needs of the community
and competitive factors.
The
Office of Thrift Supervision is prohibited from approving any acquisition that
would result in a multiple savings and loan holding company controlling savings
institutions in more than one state, subject to two exceptions: (1) the
approval of interstate supervisory acquisitions by savings and loan holding
companies and (2) the acquisition of a savings institution in another state
if the laws of the state of the target savings institution specifically permit
such acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
Waivers
of Dividends by Slavie Bancorp, MHC
.
Office
of Thrift Supervision regulations require Slavie Bancorp, MHC to notify the
Office of Thrift Supervision of any proposed waiver of its receipt of dividends
from SFSB, Inc. The Office of Thrift Supervision reviews dividend waiver notices
on a case-by-case basis, and, in general, does not object to any such waiver
if:
(1) the mutual holding company’s board of directors determines that such
waiver is consistent with such directors’ fiduciary duties to the mutual holding
company’s members; (2) for as long as the savings bank subsidiary is
controlled by the mutual holding company, the dollar amount of dividends waived
by the mutual holding company is considered as a restriction on the retained
earnings of the savings bank, which restriction, if material, is disclosed
in
the public financial statements of the savings bank as a note to the financial
statements; (3) the amount of any dividend waived by the mutual holding
company is available for declaration as a dividend solely to the mutual holding
company, and, in accordance with SFAS 5, where the savings bank determines
that
the payment of such dividend to the mutual holding company is probable, an
appropriate dollar amount is recorded as a liability; and (4) the amount of
any waived dividend is considered as having been paid by the savings bank in
evaluating any proposed dividend under Office of Thrift Supervision capital
distribution regulations. We anticipate that Slavie Bancorp, MHC will waive
dividends paid by SFSB, Inc.
Conversion
of Slavie Bancorp, MHC to Stock Form
.
Office
of Thrift Supervision regulations permit Slavie Bancorp, MHC to convert from
the
mutual form of organization to the capital stock form of organization (a
“Conversion Transaction”). There can be no assurance when, if ever, a Conversion
Transaction will occur, and the board of directors has no current intention
or
plan to undertake a Conversion Transaction. In a Conversion Transaction a new
holding company would be formed as the successor to SFSB, Inc. (the “New Holding
Company”), Slavie Bancorp, MHC’s corporate existence would end, and certain
depositors of Slavie Federal Savings Bank would receive the right to subscribe
for additional shares of the New Holding Company. In a Conversion Transaction,
each share of common stock held by stockholders other than Slavie Bancorp,
MHC
(“Minority Stockholders”) would be automatically converted into a number of
shares of common stock of the New Holding Company determined pursuant to an
exchange ratio that ensures that Minority Stockholders own the same percentage
of common stock in the New Holding Company as they owned in SFSB, Inc.
immediately prior to the Conversion Transaction. Under Office of Thrift
Supervision regulations, Minority Stockholders would not be diluted because
of
any dividends waived by Slavie Bancorp, MHC (and waived dividends would not
be
considered in determining an appropriate exchange ratio), in the event Slavie
Bancorp, MHC converts to stock form. The total number of shares held by Minority
Stockholders after a Conversion Transaction also would be increased by any
purchases by Minority Stockholders in the offering conducted as part of the
Conversion Transaction.
FORWARD
LOOKING STATEMENTS
Some
of
the matters discussed in this annual report and in the annual report to
stockholders incorporated herein by reference, including under the captions
“Business of SFSB, Inc.,” “Business of Slavie Federal Savings Bank,” “Risk
Factors,” “Management’s Discussion And Analysis Of Financial Condition And
Results Of Operations” and elsewhere include forward-looking statements. These
forward-looking statements include statements regarding the development and
introduction of new services, revenues and profitability, deposit growth, future
additional branches, liquidity, allowance for loan losses, underwriting
standards, interest rate sensitivity, loan mix, growth strategy, funding of
unused lines of credit, changes in competitive conditions and our increased
competitive profile, expected recovery of the carrying amount of real estate
in
connection with foreclosed property, market risk and financial and other goals.
Forward-looking statements often use words such as “believe,” “expect,” “plan,”
“may,” “will,” “should,” “project,” “contemplate,” “anticipate,” “forecast,”
“intend,” or other words of similar meaning. You can also identify them by the
fact that they do not relate strictly to historical or current facts. When
you
read a forward-looking statement, you should keep in mind the risk factors
described below and any other information contained in and incorporated into
this annual report which identifies a risk or uncertainty. SFSB, Inc.’s actual
results and the actual outcome of SFSB, Inc.’s expectations and strategies could
be different from that described in this annual report or the information
incorporated into this annual report because of these risks and uncertainties
and you should not put undue reliance on any forward-looking statements. All
forward-looking statements speak only as of the date of this filing, and SFSB,
Inc. undertakes no obligation to make any revisions to the forward-looking
statements to reflect events or circumstances after the date of this filing
or
to reflect the occurrence of unanticipated events.
Item
1A. Risk Factors
You
should consider carefully the following risks, along with the other information
contained in and incorporated into this annual report. The risks and
uncertainties described below are not the only ones that may affect us.
Additional risks and uncertainties also may adversely affect our business and
operations. If any of the following events actually occur, our business and
financial results could be materially adversely affected.
Rising
Interest Rates May Hurt Our Profits and Assets Value.
Interest
rates are still at historically low levels. As a result of low interest rates,
we have experienced strong demand for fixed rate loans, and as of December
31,
2007, $135,101,000, or 89.77%, of our loans had fixed rates. If interest rates
rise, our net interest income and the value of our assets likely would be
reduced because the interest paid on interest-bearing liabilities, such as
deposits and borrowings, would increase more quickly than interest received
on
interest-earning assets, such as loans and investments. Our interest rate spread
(the difference between the average yield earned on our interest-earning assets
and the average rate paid on our interest-bearing liabilities) was 1.51% for
the
year ended December 31, 2007 compared to 1.75% for the year ended December
31,
2006. Our net interest margin (net interest income as a percentage of average
interest-earning assets) was 1.99% for the year ended December 31, 2007 compared
to 2.17% for the year ended December 31, 2006. If interest rates rise, our
interest rate spread and net interest margin could be further compressed, which
would have a negative effect on our profitability.
Changes
in interest rates also affect the value of our interest-earning assets.
According to Office of Thrift Supervision calculations, as of December 31,
2007,
if interest rates increase by 1%, the net value of our assets (our net portfolio
value) will decrease by 13%. If interest rates increase by 2%, the net value
of
our assets (our net portfolio value) will decrease by 30%. For further
discussion of how changes in interest rates could impact us, see “Management’s
Discussion and Analysis of Results of Operations and Financial Condition -
Management of Market Risk.”
Our
Intended Increased Focus on Commercial Real Estate and Commercial Business
Loans
May Not be Successful.
We
intend
to grow our commercial loan portfolio in order to increase both our interest
and
non-interest income. Even with the hiring of two experienced commercial lenders,
we may not be successful in continuing to implement this strategy in a highly
competitive market, where the larger commercial banks have refocused their
marketing efforts to attract the smaller commercial customers we target. As
our
commercial loan origination volume increases, there is an inherent increase
to
our exposure of greater loan default since a commercial loan repayment stream
generally depends on the successful operation of the borrower’s business and, to
a greater extent, may be adversely affected by economic conditions in general.
We attempt to minimize these risks by limiting these loans to viable businesses,
by securing the loan with corporate assets, by monitoring loan activities
closely and by obtaining personal guarantees from the borrowers whenever
possible.
We
Have Limited Recognition and Reputation in the Markets in Which We Will Seek
to
Expand Our Business.
In
recent
years we have proactively sought to position our offices in response to changing
market dynamics and the outmigration of our historic target customer group,
the
Slavic-American population. Thus, in 1976, we relocated our Baltimore City
office to the Baltimore County border. In November 2001, we opened two locations
in
Harford
County, Maryland, a suburban market which features rapid population growth
and
high per capita income, and moved our headquarters to Harford County. However,
our small size, our closing the Edgewood (Harford County) office in February
2006 and lack of a physical presence in Baltimore County, have resulted in
limited name recognition and reputation in Harford County and Baltimore County.
Because
Slavie Federal Savings Bank Currently Serves a Limited Market Area, We Could
be
More Adversely Affected by an Economic Downturn in Our Market Area Than Our
Larger Competitors Which are More Geographically Diverse.
Currently,
our primary market area is limited to Baltimore City, Baltimore County and
Harford County, Maryland. If these areas or the Baltimore metropolitan area
generally suffers an economic downturn, our business and financial condition
may
be severely affected. Our larger competitors serve a more geographically diverse
market area, parts of which may not be affected by the same economic conditions
that exist in our primary market area.
We
Depend Heavily on our Key Personnel, and the Loss of Any of These Personnel
Could Disrupt Our Operations and Our Business Could Suffer.
Mr.
Logan
is our chairman, president and chief executive officer, Mr. Wagner is our
executive vice president, chief lending officer, secretary and a member of
our
board of directors, and Mrs. Wittelsberger is our vice president and chief
financial officer. Mr. Logan, Mr. Wagner and Mrs. Wittelsberger provide valuable
services to us and would be difficult to replace. We do not have employment
agreements with Mr. Logan, Mr. Wagner or Mrs. Wittelsberger and they are
therefore free to unilaterally terminate their employment with us; if any of
Mr.
Logan, Mr. Wagner or Mrs. Wittelsberger were to leave for any reason, our
business could suffer. Moreover, we do not maintain “key-man” life insurance on
Messrs. Logan or Wagner or Mrs. Wittelsberger.
Strong
Competition Within Our Market Area May Limit Our Growth and
Profitability.
Competition
in the banking and financial services industry is intense. In our market area,
we compete with, among others, commercial banks, savings institutions, mortgage
brokerage firms, credit unions, mutual funds and insurance companies operating
locally and elsewhere. Most of these competitors have substantially greater
resources and lending limits than we have and offer certain services that we
do
not or cannot provide. In addition, some of our competitors have recently
offered loans with lower fixed rates and loans on more attractive terms than
Slavie Federal Savings Bank has been willing to offer. Our profitability depends
upon our continued ability to successfully compete in our market area. The
greater resources and deposit and loan products offered by our competition
may
limit our ability to increase our interest earning assets.
Our
Ability to Operate Profitably May Depend on our Ability to Implement Various
Technologies into Our Operations.
The
market for financial services, including banking services, is increasingly
affected by advances in technology, including developments in
telecommunications, data processing, computers, automation, Internet-based
banking and telebanking. Our ability to compete successfully in our markets
may
depend on the extent to which we are able to exploit such technological changes.
However, we cannot assure you that the development of these or any other new
technologies, or our failure in anticipating or responding to such developments,
will not materially adversely affect our business, financial condition or
operating results.
If
Economic Conditions Continue to Deteriorate, Our Results of Operations and
Financial Condition Could be Adversely Affected as Borrowers’ Ability to Repay
Loans Declines and the Value of the Collateral Securing Our Loans
Decreases.
Our
financial results may be adversely affected by changes in prevailing economic
conditions, including decreases in real estate values, changes in interest
rates
which may cause a decrease in interest rate spreads, adverse employment
conditions, the monetary and fiscal policies of the federal government and
other
significant external events. Because most of our loan portfolio is comprised
of
real estate related loans, continued decreases in real estate values could
adversely affect the value of property used as collateral. Although we have
not
been impacted by recent adverse economic changes due to our strict underwriting
standards, further adverse changes in the economy may have a negative effect
on
the ability of our borrowers to make timely repayments of their loans, which
would have an adverse impact on our earnings.
If
Our Allowance for Loan Losses is not Sufficient to Cover Actual Loan Losses,
Our
Earnings Could Decrease.
We
make
various assumptions and judgments about the collectibility of our loan
portfolio, including the creditworthiness of our borrowers and the value of
the
real estate and other assets serving as collateral for the repayment of many
of
our loans. In determining the amount of the allowance for loan losses, we
review, among other things, our loans and our loss and delinquency experience,
and we evaluate economic conditions. If our assumptions are incorrect, our
allowance for loan losses may not be sufficient to cover losses inherent in
our
loan portfolio, resulting in additions to our allowance.
We
are
particularly susceptible to this risk because a large portion of our loans
are
of relatively recent origin due to our growth over the past six years. In
general, loans do not begin to show signs of credit deterioration or default
until they have been outstanding for some period of time, a process we refer
to
as “seasoning.” As a result, a portfolio of older loans will usually behave more
predictably than a newer portfolio. Because a large portion of our loan
portfolio is relatively new, the current level of delinquencies and defaults
may
not be representative of the level that will prevail when the portfolio becomes
more seasoned, which may be higher than current levels. If delinquencies and
defaults increase, we may be required to increase our provision for loan losses.
Material
additions to our allowance would materially decrease our net income. In
addition, bank regulators periodically review our allowance for loan losses
and
may require us to increase our provision for loan losses or recognize further
loan charge-offs. Any increase in our allowance for loan losses or loan
charge-offs may have a material adverse effect on our results of operations
and
financial condition.
Our
Stock Benefit Plans Increase Our Expenses, Which Reduce Our Profitability and
Stockholders’ Equity.
We
have
recognized annual material employee compensation and benefit expenses stemming
from the securities purchased or granted to employees, officers and directors
under our employee stock ownership plan and the equity benefit plans we adopted
with shareholders’ approval in 2005. In 2007, these expenses totaled $171,000.
We cannot predict the total actual amount of these expenses because applicable
accounting practices require that they be based on the fair market value of
the
securities at specific points in the future. We recognize expenses for our
employee stock ownership plan when shares are released to participants’ accounts
and recognize expenses for restricted stock awards over the vesting period
of
awards made to recipients. We also recognize expenses in connection with grants
of stock options.
We
Operate in a Highly Regulated Environment and May be Adversely Affected by
Changes in Laws and Regulations.
We
are
subject to extensive regulation, supervision and examination by the Office
of
Thrift Supervision, our chartering authority, and by the Federal Deposit
Insurance Corporation, as insurer of deposits. Such regulation and supervision
govern the activities in which a financial institution and its holding company
may engage and are intended primarily for the protection of the insurance fund
and depositors as opposed to stockholders. Regulatory authorities have extensive
discretion in connection with their supervisory and enforcement activities,
including the imposition of restrictions on the operation of an institution,
the
classification of assets by the institution and the adequacy of an institution’s
allowance for loan losses. Any change in such regulation and oversight, whether
in the form of regulatory policy, regulations, or legislation, may have a
material impact on our operations.
Our
Profitability Depends On Interest Rates and Changes in Monetary Policy May
Impact Us.
Our
results of operations depend to a large extent on our “net interest income,”
which is the difference between the interest expense incurred in connection
with
our interest-bearing liabilities, such as interest on deposit accounts, and
the
interest income received from our interest-earning assets, such as loans.
Interest rates, because they are influenced by, among other things, expectations
about future events, including the level of economic activity, federal monetary
and fiscal policy and geo-political stability, are not predictable or
controllable. In addition, competitive factors heavily influence the interest
rates we can earn on our loan and investment portfolios and the interest rates
we pay on our deposits. Community banks are often at a competitive disadvantage
in managing their cost of funds compared to the large regional, super-regional
or national banks that have access to the national and international capital
markets. These factors influence our ability to maintain a stable interest
margin.
The
Costs Of Being A Public Company Are Proportionately Higher For Small Companies
Like Us Due To The Requirements Of The Sarbanes-Oxley Act.
The
Sarbanes-Oxley Act of 2002 and the related rules and regulations promulgated
by
the Securities and Exchange Commission have increased the scope, complexity,
and
cost of corporate governance, reporting, and disclosure practices. These
regulations are applicable to SFSB, Inc. We have experienced increasing
compliance costs, including costs related to internal controls, as a result
of
the Sarbanes-Oxley Act. These necessary costs are proportionately higher for
a
company of our size and will affect our profitability more than that of some
of
our larger competitors.
Item
1B. Unresolved Staff Comments
Not
applicable.
Item
2. Properties
We
conduct our business through our main office and one branch office. The net
book
value of our premises, land and equipment was $5,107,000 at December 31, 2007.
The following table provides certain information with respect to our offices
as
of December 31, 2007:
|
Location
|
|
Leased
or Owned
|
|
Year Acquired or
Leased
|
|
Net Book Value of Property
and Leasehold Improvements
|
|
Deposits at
December 31,
2007
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Main
Office
1614
Churchville Road
Bel
Air, MD 21015
|
|
|
Owned
|
|
|
2001
|
|
$
|
4,865
|
|
$
|
26,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branch
Office
3700
East Northern Pkwy
Baltimore,
MD 21206
|
|
|
Owned
|
|
|
1976
|
|
$
|
242
|
|
$
|
87,798
|
|
Item
3. Legal Proceedings
From
time
to time we may be involved in litigation relating to claims arising out of
the
ordinary course of our business. At December 31, 2007, we were not involved
in
any legal proceedings the outcome of which, in management’s opinion, would be
material to our financial condition or results of operations.
Item
4. Submission of Matters to a Vote of Security Holders
No
matter
was submitted during the fourth quarter of the year ended December 31, 2007
to a
vote of security holders of SFSB, Inc.
PART
II
Item
5. Market for Registrant’s Common Equity Related Stockholder Matters and Issuer
Purchases of Equity Securities
Common
Stock
As
of
March 21, 2008, the number of holders of record of SFSB, Inc.’s common stock was
approximately 140. SFSB, Inc.’s common stock is traded on the Over the Counter
Bulletin Board (“OTCBB”) under the symbol “SFBI.OB.”
The
following table reflects the high and low sales information as reported on
the
OTCBB for the periods presented. Quotations reflect inter-dealer prices, without
retail mark-up, mark-down, or commission and may not represent actual
transactions.
|
|
|
2007
Bid Price Range
|
|
2006
Bid Price Range
|
|
|
Quarter
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
1
st
|
|
$
|
9.80
|
|
$
|
9.15
|
|
$
|
9.80
|
|
$
|
9.10
|
|
|
2
nd
|
|
|
9.80
|
|
|
8.75
|
|
|
10.05
|
|
|
9.55
|
|
|
3
rd
|
|
|
9.25
|
|
|
7.50
|
|
|
9.75
|
|
|
9.60
|
|
|
4
th
|
|
|
8.65
|
|
|
8.10
|
|
|
9.95
|
|
|
9.60
|
|
Dividends
To
date,
SFSB, Inc. has not declared or paid any dividends on its common stock. We intend
to begin paying cash dividends at some point in the future but our board of
directors has not determined the amount that may be paid or when such payments
may begin. In determining whether to declare or pay any dividends, the board
of
directors will take into account, among other factors, our financial condition
and results of operations, investment opportunities, expected growth and
compliance with regulatory capital requirements, along with the prevailing
economic, interest rate and stock market environments. Our board of directors
will also consider the regulatory restrictions discussed below that affect
the
payment of dividends by Slavie Federal Savings Bank to us. We cannot guarantee
that we will pay dividends or that, if paid, we will not subsequently reduce
or
eliminate dividends.
If
we pay
dividends to our stockholders, we also will be required to pay dividends to
Slavie Bancorp, MHC, unless Slavie Bancorp, MHC elects to waive the receipt
of
dividends. We anticipate that Slavie Bancorp, MHC would waive dividends payable
by us. Any such waiver of dividends would provide additional capital (in the
amount of the waived dividend) that we would be able to use in our and/or Slavie
Federal Savings Bank’s business. Any decision to waive dividends will be subject
to regulatory approval. Under Office of Thrift Supervision regulations, public
stockholders would not be diluted for any dividends waived by Slavie Bancorp,
MHC in the event Slavie Bancorp, MHC converts to stock form. See “Item 1.
Business - Supervision and Regulation - Holding Company Regulation - Waivers
of
Dividends by Slavie Bancorp, MHC.”
Our
payment of any dividends currently depends upon receipt of dividends from Slavie
Federal Savings Bank because we currently have no source of income other than
dividends from Slavie Federal Savings Bank, earnings from the investment of
the
net proceeds from the offering that we retain, and interest payments with
respect to our loan to the employee stock ownership plan. Office of Thrift
Supervision regulations impose limitations on the amount of dividends that
Slavie Federal Savings Bank can pay to us.
We
currently have no intention to initiate any action which would lead to a return
of capital (as distinguished from a dividend) to our stockholders. Regulations
of the Office of Thrift Supervision prohibit a return of capital through
December 31, 2008, the end of the term of the business plan that we submitted
to
the Office of Thrift Supervision in connection with our 2004 public
offering.
Any
payment of dividends by Slavie Federal Savings Bank to us that would be deemed
to be paid out of Slavie Federal Savings Bank’s bad debt reserves would require
Slavie Federal Savings Bank to pay federal income taxes at the then current
income tax rate on the amount deemed distributed. We do not contemplate any
distribution by Slavie Federal Savings Bank that would result in this type
of
tax liability.
Stock
Repurchases
On
November 21, 2005, SFSB, Inc.’s board of directors adopted a stock repurchase
program to acquire up to 53,561 shares, or approximately 4% of its outstanding
common stock held by persons other than Slavie Bancorp, MHC. SFSB, Inc’s board
of directors approved additional repurchases of up to an additional 66,951
shares on May 10, 2006, 62,334 shares on August 6, 2007 and 59,052 shares on
February 19, 2008, in each case constituting approximately 5% of its outstanding
common stock held by persons other than Slavie Bancorp, MHC at such time. Stock
purchases are made from time to time in the open market at the discretion of
the
management. The repurchase program is dependent upon market conditions and
other
applicable legal requirements and is undertaken within a 12-month period. As
of
December 31, 2007, SFSB, Inc. had repurchased 183,347 shares on the open market
at an average cost of $9.15 per share to fund a stock-based compensation plan.
In accordance with the terms of the stock repurchase program, SFSB, Inc. is
authorized to purchase an additional 58,551 shares before February 19,
2009.
The
table
below summarizes our repurchases of equity securities during the fourth quarter
of 2007.
ISSUER
PURCHASES OF EQUITY SECURITIES
|
Period
|
|
Total
Number of
Shares
Purchased
|
|
Average Price
Paid per
Share
|
|
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
|
|
Maximum Number
of Shares That May
Yet Be Purchased
Under the Plan or
Programs
|
|
|
October
1-31, 2007
|
|
|
0
|
|
|
n/a
|
|
|
0
|
|
|
56,730
|
|
|
November
1-30, 2007
|
|
|
0
|
|
|
n/a
|
|
|
0
|
|
|
56,730
|
|
|
December
1-31, 2007
|
|
|
57,230
|
|
$
|
8.51
|
|
|
57,230
|
|
|
(500)*
|
|
|
Total
Fourth Quarter
|
|
|
57,230
|
|
$
|
8.51
|
|
|
57,230
|
|
|
(500)*
|
|
*The
inadvertent purchase on our behalf of 500 shares in excess of the then-current
authorization was subsequently approved and ratified by the board.
Item
6. Selected Financial Data
The
information contained under the section captioned “Selected Consolidated
Financial and Other Data” of the Annual Report is incorporated herein by
reference.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The
information contained under the section captioned “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” of the Annual Report
is incorporated herein by reference.
Item
7A. Quantitative and Qualitative Disclosures About Market
Risk
The
information contained under the section captioned “Management’s Discussion and
Analysis of Management of Market Risk” of the Annual Report is incorporated
herein by reference.
Item
8. Financial Statements and Supplementary Data
The
information contained under the section captioned “Consolidated Financial
Statements” of the Annual Report is incorporated herein by
reference.
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
There
has
been no occurrence requiring a response to this Item.
Item
9A. Controls and Procedures
As
of the
end of the period covered by this annual report on Form 10-K, SFSB, Inc.’s Chief
Executive Officer and Chief Financial Officer evaluated the effectiveness of
SFSB, Inc.’s disclosure controls and procedures. Based upon that evaluation,
SFSB, Inc.’s Chief Executive Officer and Chief Financial Officer concluded that
SFSB, Inc.’s disclosure controls and procedures are effective as of December 31,
2007. Disclosure controls and procedures are controls and other procedures
that
are designed to ensure that information required to be disclosed by SFSB, Inc.
in the reports that it files or submits under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission’s rules and
forms.
In
addition, there were no changes in SFSB, Inc.’s internal control over financial
reporting (as defined in Rule 13a-15 or Rule 15d-15 under the Securities Act
of
1934, as amended) during the quarter ended December 31, 2007, that have
materially affected, or are reasonably likely to materially affect, SFSB, Inc.’s
internal control over financial reporting.
Management’s
Report On Internal Control Over Financial Reporting
The
management of SFSB, Inc. (“the Company”) is responsible for establishing and
maintaining adequate internal control over financial reporting. The internal
control over financial reporting has been designed under our supervision to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of the Company’s consolidated financial statements for
external reporting purposes in accordance with accounting principles generally
accepted in the United States of America.
Management
has conducted an assessment of the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2007, utilizing the
framework established in
Internal
Control-Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on this assessment, management has determined that the Company’s internal
control over financial reporting as of December 31, 2007 is
effective.
This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the
Company’s independent registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the Company to
provide only management’s report in this annual report.
Item
9B. Other Information
None
PART
III.
Item
10. Directors, Executive Officers and Corporate Governance
Code
of Ethics
SFSB,
Inc.’s Board of Directors has adopted a code of ethics that applies to its
principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions. That Code of
Ethics for Senior Financial Officers has been posted on Slavie Federal Savings
Bank’s internet website at
www.slavie.com
.
A copy
of the Code of Ethics for Senior Financial Officers is also included as an
exhibit to this annual report.
The
remaining information required by this Item 10 is incorporated by reference
from the information appearing under the captions “Election of Directors,”
“Board Meetings and Committees,” “Executive Compensation - Information Regarding
Executive Officers Who are Not Directors and Key Employees” and “Section 16(a)
Beneficial Ownership Reporting Compliance” in the Proxy Statement for the 2008
Annual Meeting of Stockholders of SFSB, Inc.
Item
11. Executive Compensation
The
information required by this Item 11 is incorporated by reference from the
information appearing under the captions “Executive Compensation” and “Director
Compensation” in the Proxy Statement for the 2008 Annual Meeting of Stockholders
of SFSB, Inc.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The
information required by this Item 12 is incorporated by reference from the
information appearing under the captions “Security Ownership of Management and
Certain Security Holders” in the Proxy Statement for the 2008 Annual Meeting of
Stockholders of SFSB, Inc.
Item
13. Certain Relationships and Related Transactions, and Director
Independence
The
information required by this Item 13 is incorporated by reference from the
information appearing under the captions “Election of Directors” and “Certain
Relationships and Related Transactions” in the Proxy Statement for the 2008
Annual Meeting of Stockholders of SFSB, Inc.
Item
14. Principal Accountant Fees and Services
Audit
and Non-Audit Fees
The
following table presents fees for professional audit services rendered by Beard
Miller Company LLP for the audit of SFSB, Inc.’s annual consolidated financial
statements for the years ended December 31, 2007 and December 31, 2006, and
fees
billed for other services rendered by Beard Miller Company LLP during those
periods.
|
|
|
Years
Ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Audit
Fees(1)
|
|
$
|
53,904
|
|
$
|
53,200
|
|
|
Audit
Related Fees(2)
|
|
|
400
|
|
|
-
|
|
|
Tax
Fees(3)
|
|
|
9,946
|
|
|
5,800
|
|
|
All
Other Fees(4)
|
|
|
-
|
|
|
-
|
|
|
Total
|
|
$
|
64,250
|
|
$
|
59,000
|
|
(1)
Audit
Fees consist of fees billed for professional services rendered for the audit
of
SFSB, Inc.’s consolidated annual financial statements and review of the interim
consolidated financial statements included in quarterly reports, and services
that are normally provided by Beard Miller Company LLP in connection with
statutory and regulatory filings or engagements.
(2)
Audit-Related Fees would normally consist of fees billed for assurance and
related services that are reasonably related to the performance of the audit
or
review of SFSB, Inc.’s consolidated (or Slavie Federal Savings Bank’s) financial
statements and are not reported under “Audit Fees.”
(3)
Tax
Fees consist of fees billed for professional services rendered for federal
and
state tax compliance, tax advice and tax planning.
(4)
All
Other Fees would normally consist of fees for services other than the services
reported above.
Policy
on Audit Committee Pre-Approval of Audit and Non-Audit Services of Independent
Auditor
Before
the accountant is engaged by SFSB, Inc. or Slavie Federal Savings Bank to render
any audit or non-audit services, the engagement is approved by SFSB, Inc.’s
audit committee.
Item
15. Exhibits, Financial Statement Schedules
(a)(1)
Financial Statements.
The
following are included in the Consolidated Financial Statements included in
SFSB, Inc.’s Annual Report to Stockholders:
|
|
A.
|
Consolidated
Statements of Financial Condition
|
|
|
B.
|
Consolidated
Statements of Operations
|
|
|
C.
|
Consolidated
Statements of Stockholders’ Equity
|
|
|
D.
|
Consolidated
Statements of Cash Flows
|
(a)(1)
Schedules.
All
financial statement schedules are omitted because they are not applicable,
not
required under the instructions or all the information required is set forth
in
the financial statements or notes thereto.
(a)(3)
Exhibits.
|
Exhibit
No.
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Description
of Exhibits
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2*
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Slavie
Federal Savings Bank Second Amended and Restated Plan of Reorganization
from a Mutual Savings Bank to a Mutual Holding Company and Stock
Issuance
Plan
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3.1*
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Federal
Stock Charter of SFSB, Inc.
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3.2*
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Bylaws
of SFSB, Inc.
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4*
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Form
of Common Stock certificate of SFSB, Inc.
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4.1@
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Advances
and Security Agreement between Slavie Federal Savings Bank and the
Federal
Home Loan Bank of Atlanta
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10.1*
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Form
of Employee Stock Ownership Plan, as amended
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10.2**
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Loan
Documents relating to Employee Stock Ownership Plan
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10.8#
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Terms
of Retirement Benefit Paid to Former President Roger
Schueler
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10.9##
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Form
of 2005 Stock Option Plan
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10.10##
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Form
of 2005 Recognition and Retention Plan
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10.11##
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Form
of Employee Stock Option Agreement
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10.12##
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Form
of Director Stock Option Agreement
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10.13##
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SFSB,
Inc. and Slavie Federal Savings Bank Director Compensation
Policy
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10.14###
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Form
of Restricted Stock Agreement
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13
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Annual
Report to Stockholders
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21@
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Subsidiaries
of Registrant
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23.1
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Consent
of Beard Miller Company LLP
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31.1
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Rule
13a-14(a) Certification of Chief Executive Officer
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31.2
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Rule
13a-14(a) Certification of Chief Financial Officer
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32
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Section
1350 Certification of Chief Executive Officer and Chief Financial
Officer
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The
exhibits which are denominated with one asterisk (*) were previously filed
by
SFSB, Inc. as a part of, and are hereby incorporated by reference from, SFSB,
Inc.’s Registration Statement on Form SB-2, as amended, under the Securities Act
of 1933, Registration Number 333-119128.
The
exhibit which is denominated with two asterisks (**) was previously filed by
SFSB, Inc. as a part of (and as Exhibit Number 99.1), and is hereby incorporated
by reference from, SFSB, Inc.’s Current Report on Form 8-K filed on January 5,
2005.
The
exhibit which is denominated with one number sign (#) was previously filed
by
SFSB, Inc. as a part of, and is hereby incorporated by reference from, SFSB,
Inc.’s Annual Report on Form 10-KSB filed on March 30, 2005.
The
exhibits which are denominated with two number signs (##) were previously filed
by SFSB, Inc. as a part of, and are hereby incorporated by reference from,
SFSB,
Inc.’s Current Report on Form 8-K filed on August 5, 2005.
The
exhibit which is denominated with three number signs (###) was previously filed
by SFSB, Inc. as a part of, and is hereby incorporated by reference from, SFSB,
Inc.’s Current Report on Form 8-K filed on August 26, 2005.
The
exhibits which are denominated with the @ sign were previously filed by SFSB,
Inc. as a part of, and are hereby incorporated by reference from, SFSB, Inc.’s
Annual Report on Form 10-KSB filed on March 30, 2006.
Note:
Exhibits 10.8 through 10.14 relate to management contracts or compensatory
plans
or arrangements.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
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SFSB,
INC.
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Date :
March 31, 2008
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By:
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/s/
Philip E. Logan
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Philip
E. Logan
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President,
Chairman & CEO
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Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
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Name
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Position
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Date
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/s/
Philip E. Logan
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President,
CEO, Chairman and
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March
31, 2008
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Philip
E. Logan
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Principal
Executive Officer; Director
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/s/
Sophie T. Wittelsberger
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Vice
President and Chief Financial Officer,
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March
31, 2008
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Sophie
T. Wittelsberger
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Principal
Financial Officer and Principal Accounting Officer
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/s/
J. Benson Brown
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Director
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March
31, 2008
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J.
Benson Brown
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/s/
Thomas J. Drechsler
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Director
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March
31, 2008
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Thomas
J. Drechsler
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/s/
Robert M. Stahl, IV
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Director
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March
31, 2008
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Robert
M. Stahl, IV
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/s/
James D. Wise
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Director
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March
31, 2008
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James
D. Wise
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/s/
Charles E. Wagner, Jr.
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Executive
Vice
President and
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March
31, 2008
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Charles
E. Wagner, Jr.
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Secretary;
Director
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EXHIBIT
INDEX
|
2*
|
|
Slavie
Federal Savings Bank Second Amended and Restated Plan of Reorganization
from a Mutual Savings Bank to a Mutual Holding Company and Stock
Issuance
Plan
|
|
|
|
|
|
3.1*
|
|
Federal
Stock Charter of SFSB, Inc.
|
|
|
|
|
|
3.2*
|
|
Bylaws
of SFSB, Inc.
|
|
|
|
|
|
4*
|
|
Form
of Common Stock certificate of SFSB, Inc.
|
|
|
|
|
|
4.1@
|
|
Advances
and Security Agreement between Slavie Federal Savings Bank and the
Federal
Home Loan Bank of Atlanta
|
|
|
|
|
|
10.1*
|
|
Form
of Employee Stock Ownership Plan, as amended
|
|
|
|
|
|
10.2**
|
|
Loan
Documents relating to Employee Stock Ownership Plan
|
|
|
|
|
|
10.8#
|
|
Terms
of Retirement Benefit Paid to Former President Roger
Schueler
|
|
|
|
|
|
10.9##
|
|
Form
of 2005 Stock Option Plan
|
|
|
|
|
|
10.10##
|
|
Form
of 2005 Recognition and Retention Plan
|
|
|
|
|
|
10.11##
|
|
Form
of Employee Stock Option Agreement
|
|
|
|
|
|
10.12##
|
|
Form
of Director Stock Option Agreement
|
|
|
|
|
|
10.13##
|
|
SFSB,
Inc. and Slavie Federal Savings Bank Director Compensation
Policy
|
|
|
|
|
|
10.14###
|
|
Form
of Restricted Stock Agreement
|
|
|
|
|
|
13
|
|
Annual
Report to Stockholders
|
|
|
|
|
|
21@
|
|
Subsidiaries
of Registrant
|
|
|
|
|
|
23.1
|
|
Consent
of Beard Miller Company LLP
|
|
|
|
|
|
31.1
|
|
Rule
13a-14(a) Certification of Chief Executive Officer
|
|
|
|
|
|
31.2
|
|
Rule
13a-14(a) Certification of Chief Financial Officer
|
|
|
|
|
|
32
|
|
Section
1350 Certification of Chief Executive Officer and Chief Financial
Officer
|
The
exhibits which are denominated with one asterisk (*) were previously filed
by
SFSB, Inc. as a part of, and are hereby incorporated by reference from, SFSB,
Inc.’s Registration Statement on Form SB-2, as amended, under the Securities Act
of 1933, Registration Number 333-119128.
The
exhibit which is denominated with two asterisks (**) was previously filed by
SFSB, Inc. as a part of, and is hereby incorporated by reference from, SFSB,
Inc.’s Current Report on Form 8-K filed on January 5, 2005.
The
exhibit which is denominated with one number sign (#) was previously filed
by
SFSB, Inc. as a part of, and is hereby incorporated by reference from, SFSB,
Inc.’s Annual Report on Form 10-KSB filed on March 30, 2005.
The
exhibits which are denominated with two number signs (##) were previously filed
by SFSB, Inc. as a part of, and are hereby incorporated by reference from,
SFSB,
Inc.’s Current Report on Form 8-K filed on August 5, 2005.
The
exhibit which is denominated with three number signs (###) was previously filed
by SFSB, Inc. as a part of, and is hereby incorporated by reference from, SFSB,
Inc.’s Current Report on Form 8-K filed on August 26, 2005.
The
exhibits which are denominated with the @ sign were previously filed by SFSB,
Inc. as a part of, and are hereby incorporated by reference from, SFSB, Inc.’s
Annual Report on Form 10-KSB filed on March 30, 2006.
Note:
Exhibits 10.8 through 10.14 relate to management contracts or compensatory
plans
or arrangements.
SFSB (CE) (USOTC:SFBI)
過去 株価チャート
から 3 2025 まで 4 2025
SFSB (CE) (USOTC:SFBI)
過去 株価チャート
から 4 2024 まで 4 2025
