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Oak Ridge Financial Services Inc. Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: August 12, 2011 02:36PM
Oak Ridge Financial Services Inc. (BKOR) filed Quarterly Report for the period ended 2011-06-30.
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 builder homes financed by the Bank. Through our Community Loan Investment Program, which is being utilized by the majority of our builders, as of June 30, 2011 we have been able to move 17 out of 19 jumbo homes and 15 out of 19 conventional homes out of our builders 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 $10.5 million to $1.2 million, and the reduction of our exposure to conventional homes from $4.9 million to $800 thousand. 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 six months ended June 30, 2011, we had a continuation of the significant shift that was present in 2010 in our deposit mix, as noninterest-bearing and interest-bearing checking accounts increased $4.2 million and $445 thousand, respectively, from December 31, 2010 to June 30, 2011, driven by what we believe was a move away from large financial institutions to smaller community banks like ours. The increase in noninterest-bearing and interest-bearing checking accounts allowed us to decrease time deposits by $11.9 million from December 31, 2010 to June 30, 2011.
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 $4.6 million of the CPP funds have been contributed to the Bank as additional equity capital. Approximately $3.3 million in unused capital, which includes approximately $100,000 in earnings since the Company received the CPP funds, 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 13.2% at June 30, 2011, the Bank is above the minimum 10% requirement to be classified as well-capitalized. If the remaining $3.3 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 14.5% at June 30, 2011 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 early 2011, the Companys Board of Directors and senior executives had two 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 equity in the open markets. However, the Company established an Employee Stock Ownership Plan (ESOP) in the second quarter of 2010 as one possible vehicle to generate equity. During the year ended December 31, 2010, the Company, at the request of the Board of Directors, made a $900,000 pre-tax ESOP accrual that may be converted to common equity of the Company at a later date. During the six months ended June 30, 2011, the Banks Board of Directors authorized a $25,000 ESOP accrual. 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 an equity offering, and the promotion in our marketplace of every employee as a participant in the ESOP owning a part of the Company.
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, 2011 was $3.5 million, an increase of $274 thousand or 8.5% when compared to net interest income of $3.2 million for the three months ended June 30, 2010. For the six months ended June 30, 2011, net interest income was $7.0 million, an increase of $449 thousand or 6.8% when compared to net interest income of $6.6 million for the same period in 2010.
Interest income decreased $54 thousand or 1.2% for the three months ended June 30, 2011 compared to the same three months of 2010. Interest income decreased $247 thousand or 2.7% for the six months ended June 30, 2011 compared to the same six months in 2010. The decreases for the three and six months ended June 30, 2011 are primarily due to decreases in rates earned on these assets. The yield on average earning assets decreased 19 basis points for the three months ended June 30, 2011 to 5.28% from 5.47% for the same period in 2010. For the first six months of 2011, the yield on average earning assets decreased 28 basis points to 5.34% compared to 5.62% at June 30, 2010. 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.
Noninterest income increased $121 thousand or 11.9% to $1.1 million for the three months ended June 30, 2011 compared to $1.0 million for the same period in 2010. For the six months ended June 30, 2011 noninterest income decreased $254 thousand or 11.5% to $2.0 million compared to $2.2 million for the same period in 2010. The increase in noninterest income in the three months ended June 30, 2011 is primarily due to a gain of on sale of securities of $257 thousand compared to no such income during the same period in 2010. The year to date increase in noninterest income is the result of decreases in the majority of noninterest income categories with the exception of investment and insurance commissions and debit card interchange income. Service charges on deposit accounts decreased $56 thousand and $99 thousand, respectively for the three and six months ended June 30, 2011 as compared to the same periods in 2010. The primary reason for this decline were decreases in non sufficient funds fees due to a greater customer awareness of such fees and regulations regarding such fees that affect the entire banking industry. Gain on sale of securities increased $257 thousand for the three months ended June 30, 2011 compared to the same period in 2010, and decreased $129 thousand for the six months ended June 30, 2011 compared to the same period of 2010. The change in the three months ended June 30, 2011 was due to no sale of securities in 2010 during this period of time. The decline in the six months ended June 30, 2011 compared to the same period in 2010 was due to a greater gain on sale of securities in 2010 as compared to 2011. Mortgage loan origination fees decreased $81 thousand and $76 thousand, respectively for the three and six months ended June 30, 2011 as compared to the same periods in 2010. The primary reason for the decrease was a decline in mortgage closings from 2010 to 2011 as the overall market for home purchases and refinancing remained relatively weak. Investment and insurance commissions were relatively unchanged in the three and six months ending June 30, 2011 compared to the same periods in 2010. Fee income from accounts receivable financing decreased $29 thousand and $11 thousand, respectively for the three and six months ended June 30, 2011 as compared to the same periods in 2010. The primary reason for the decrease was lower receivables of existing clients in 2011 as compared to 2010. Debit card interchange income increased $41 thousand and $69 thousand for the three and six months ended June 30, 2011, respectively, as compared to the same periods in 2010. The primary reason for the increase was primarily the result of continued emphasis by management in the promotion of a debit card rewards program that caused higher cardholder usage in 2011 as compared to 2010. To a lesser extent, some of the increases were caused by the continued growth of checking accounts at the Bank during the three and six months ending June 30, 2011 as compared to the same periods in 2010.