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Oak Ridge Financial Services Inc. Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: August 13, 2010 04:19PM
Oak Ridge Financial Services Inc. (BKOR) filed Quarterly Report for the period ended 2010-06-30.
Highlight of Business Operations:
We anticipate that a prolonged economic slowdown will place significant pressure on the consumers and businesses in North Carolina. We have attempted to proactively address the needs of the Bank, our borrowers, and the community through our Community Loan Investment Program, which has been in place since February 2009, and offers incentives to buyers of our builders homes financed by the Bank. Through our Community Loan Investment Program, which is being utilized by the majority of our builders, we have been able to move 12 out of 21 jumbo homes and 12 out of 18 conventional homes out of our builder construction portfolio either to permanent mortgages placed with other lenders or permanent mortgages financed by the Bank to qualified borrowers. The program has resulted in the reduction of our exposure to jumbo homes from $11.1 million to $5.7 million, and the reduction of our exposure to conventional homes from $4.6 million to $1.5 million. We have also extended this program to cover the residential lot inventory of our development borrowers. This program can be accessed through our website at www.bankofoakridge.com.
Management has continued to focus on providing additional liquidity sources, both on-balance sheet and off. During the year ended December 31, 2009, we reduced our borrowings with the FHLB from $22 million to $9 million. The reduction in borrowings with the FHLB has provided us with additional availability to meet unforeseen liquidity demands that may arise. Additionally, during 2009 noninterest bearing deposits increased $2.3 million and interest bearing checking, savings, and money market accounts increased $20.2 million. Time deposits, which represent our highest cost source of deposit funding, decreased by $1.4 million. For the first six months of 2010 noninterest bearing deposits increased $4.9 million and interest bearing checking, savings, and money market accounts increased $17.5 million. Time deposits decreased by $18.6 million, reflecting our continuing strategy to reduce our dependence on this type of funding. We believe that the increase in noninterest bearing and interest bearing checking, savings and money market balances has been due to increased marketing, advertising and sales activities as well as a general dislike of large banks by consumers and businesses, however, some of the increase has likely been due to a flight to the safety of FDIC insured deposits by consumers and businesses. As of June 30, 2010, we currently have securities with a market value of $5.0 million pledged to the FHLB, and have unpledged securities held in safekeeping at the FHLB with a market value of $40.2 million that could be pledged or sold if needed. The Bank also has unused Federal Funds purchased lines totaling $6.0 million with two correspondent banks. In addition, management has plans to continue to build off-balance sheet sources of liquidity.
The Company was able to bolster its capital levels through its $7.7 million participation in the Capital Purchase Program (CPP) on January 30, 2009. Of the total $7.7 million CPP funds received, to date $1.1 million of the CPP funds have been contributed to the Bank as additional equity capital. Approximately $6.7 million in unused capital are retained by the Company but could be pushed down to the Bank if needed. With total risk-based capital levels at the Bank of 11.50% and 11.45% at June 30, 2010 and December 31, 2009, respectively, the Bank is above the minimum 10% requirement to be classified as well-capitalized. If the remaining $6.7 million of available capital at the Company were contributed to the Bank as additional equity capital, the Banks total risk-based capital ratio would be 13.9% at June 30, 2010 and would place it well above the minimum well-capitalized requirement of 10%. Despite healthy capital levels, due to significant uncertainty surrounding the depth or the length of the current economic slowdown, management continues to be diligent in its efforts to maintain healthy levels of excess capital above minimum requirements. In 2009 and 2010, the Companys Board of Directors and senior executives had four separate presentations with investment firms to look at the feasibility of raising common equity to allow the Company to repay the U.S. Treasury for its $7.7 million investment in the Company through the CPP. The Company has concluded that at the current time it is not feasible, due to weak equity market conditions, or preferable, due to the potential dilution of current shareholders, to raise common equity in the open markets. However, the Company is exploring the establishment of an Employee Stock Ownership Plan (ESOP) as one possible vehicle to generate common equity. During the three months ended June 30, 2010, the Company, at the request of the Board of Directors, made a $300,000 pre-tax ESOP accrual that may be contributed to the ESOP once it is established. The Company believes that there are many advantages to an ESOP as a vehicle to raise capital, with the principal ones being favorable tax treatment of ESOP contributions, possible lower dilution to existing shareholders compared to a common equity offering, and the promotion in the Banks marketplace of every employee as a participant in the ESOP owning a part of the Company.
Pretax, pre-loan loss provision, ESOP accrual and gain on sale of securities, and post-CPP dividend payment (Proforma earnings), earnings were $977 thousand for the three months ended June 30, 2010, compared to $579 thousand for the same period in 2009, an increase of approximately $398 thousand. Pretax, pre-loan loss provision, ESOP accrual and gain on sale of securities, and post-CPP dividend payment, earnings were $1.9 million for the six months ended June 30, 2010, compared to $1.0 million for the same period in 2009, an increase of approximately $820 thousand.
Net interest income (the difference between the interest earned on assets, such as loans and investment securities and the interest paid on liabilities, such as deposits and other borrowings) is our primary source of operating income. Net interest income for the three months ended June 30, 2010 was $3.2 million, an increase of $226 thousand or 7.5% when compared to net interest income of $3.0 million for the three months ended June 30, 2009. For the six months ended June 30, 2010, net interest income was $6.6 million, an increase of $1.1 million or 19.8% when compared to net interest income of $5.5 million for the same period in 2009.
Interest income decreased $597 thousand or 11.8% for the three months ended June 30, 2010 compared to the same three months of 2009. Interest income decreased $659 thousand or 6.8% for the six months ended June 30, 2010 compared to the same six months in 2009. The decreases for the three and six months ended June 30, 2010 are primarily due to decreases in rates eaned on these assets. The yield on average earning assets decreased 85 basis points for the quarter ended June 30, 2010 to 5.47% from 6.32% for the same period in 2009. For the first six months of 2010, the yield on average earning assets decreased 59 basis points to 5.62% compared to 6.21% at June 30, 2009. Management attributes the decrease in the yield on our earning assets to the decline in yields available on investments as well as a slight decline in the offering rates on new loans.
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