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Articles 

First Financial Service Corp. Reports Operating Results (10-Q)

August 14, 2012 | About:

First Financial Service Corp. (FFKY) filed Quarterly Report for the period ended 2012-06-30.

First Financial Service Corp. (ky) has a market cap of $14.9 million; its shares were traded at around $3.45 with and P/S ratio of 0.3.

Highlight of Business Operations:

Our non-performing assets are largely comprised of residential housing development assets, building lots, an office building and strip centers most of which are located in Jefferson and Oldham Counties. Non-performing assets were $74.6 million or 6.26% of total assets at June 30, 2012 compared to $68.9 million or 5.61% of total assets at December 31, 2011. The increase in non-performing assets is mainly attributable to an increase of $7.4 million in real estate acquired through foreclosure. We anticipate that our level of real estate acquired through foreclosure will remain at elevated levels for some period of time as foreclosures reflecting both weak economic conditions and soft commercial real estate values continue. During 2011, we had substantially all of our non-performing assets appraised or reappraised, including our high end residential development loans and related other real estate owned and recorded substantial valuation adjustment and charge offs based on those appraisals. The lower values on the appraisals and reviews of properties appraised within the first half of 2012 resulted in $3.6 million in write downs on other real estate owned compared to $9.3 million in total write downs recorded during the first six months of 2011. We believe that we have written down other real estate values to levels that will facilitate their liquidation as indicated by recent sales. We also believe we have appropriately addressed and risk-weighted real estate loans in our portfolio. While deterioration in the portfolio is expected to continue, we believe it will continue to be at a slower pace than the accelerated pace experienced in 2010 and 2011.

Net interest income was $14.0 million for the six month 2012 period compared to $17.0 million for the same 2011 period, while the net interest margin was 2.53% for 2012 compared to 2.88% in 2011. The net interest margin continues to be compressed due to the level of non-performing assets, a decline in average loan balances outstanding, increased liquidity levels and assets being placed into lower yielding investments other than loans. We were carrying substantially more liquid assets as of June 30, 2012 to prepare for the impending branch sales which will settle in cash. We anticipate modest improvement to the net interest margin over the next several quarters as we will not need to carry high levels of liquidity after the branch sales and our focus on restructuring the balance sheet that should result in a decrease to our cost of funds and an improvement to interest income. However, the levels of liquidity may be impacted by acceleration of loan repayments. As a result, we have hired a full time consultant to assist us in being proactive in our efforts to restructure the balance sheet.

In its 2012 Consent Order with the FDIC and KDFI, the Bank agreed to achieve and maintain a Tier 1 capital ratio of 9.0% and a total risk-based capital ratio of 12.0% by June 30, 2012. At June 30, 2012, we were not in compliance with the Tier 1 and total risk-based capital requirements. We notified the bank regulatory agencies that the increased capital levels would not be achieved and anticipate that the FDIC and KDFI will reevaluate our progress toward achieving the higher capital ratios at September 30, 2012. We have also provided them with the pro forma information regarding the Tier 1 and total risk based capital which we are projecting to be over 8.50% and 12.00%, respectively based on June 30, 2012 information and on the consummation of the branch sales.

The large decline in the volume of interest earning assets and the change in the mix of interest earning assets caused a negative impact on net interest income, which decreased $1.7 million and $3.0 million for the three and six month 2012 periods compared to the prior year periods. Average interest earning assets decreased $81.2 million and $79.1 million for the quarter and six month 2012 periods compared to 2011 due to a decrease in average loans and our efforts to increase liquidity by increasing lower yielding investments. The decrease in average loans was due to loan principal payments, payoffs, charge-offs and the conversion of nonperforming loans to other real estate owned properties. Average loan yields were 5.37% and 5.47% for the three and six month 2012 periods compared to average loan yields of 5.57% and 5.64% for the 2011 periods. Additionally, due to the increased regulatory capital ratios requirement as a result of our written agreement with the FDIC and KDFI, we have intentionally not replaced much of this loan run-off as we continue our efforts to reduce our asset size.

The yield on earning assets averaged 3.88% and 4.07% for the three and six month 2012 periods compared to an average yield on earning assets of 4.61% and 4.69% for 2011. This decrease partially was offset by a decrease in our cost of funds which averaged 1.55% and 1.63% for the quarter and six month 2012 periods compared to an average cost of funds of 1.89% and 1.93% for the same periods in 2011. Net interest margin as a percent of average earning assets decreased 42 basis points to 2.42% for the quarter ended June 30, 2012 and 35 basis points to 2.53% for the six months ended June 30, 2012 compared to 2.84% and 2.88% for the 2011 periods.

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About the author:

10qk
Charlie Tian, Ph.D., is the founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

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