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

November 13, 2012 | About:

First Financial Service Corp. (FFKY) filed Quarterly Report for the period ended 2012-09-30.

First Financial Service Corporation has a market cap of $12 million; its shares were traded at around $2.5 with and P/S ratio of 0.2.

Highlight of Business Operations:

We believe that our level of real estate acquired through foreclosure has stabilized and we anticipate decreased levels over the next several quarters as we continue to sell these properties and the inflow has slowed down substantially when compared to 2010 and 2011. 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 nine months of 2012 resulted in $4.9 million in write downs on other real estate owned compared to $7.9 million in total write downs recorded during the first nine 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.

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 $1.6 million and $4.6 million for the three and nine month 2012 periods compared to the prior year periods. Average interest earning assets decreased $165.5 million and $202.9 million for the quarter and nine 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 the 2012 third quarter branch sale, loan principal payments, payoffs, charge-offs and the conversion of nonperforming loans to other real estate owned properties. 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. Average loan yields were 5.43% and 5.45% for the three and nine month 2012 periods compared to average loan yields of 5.44% and 5.57% for the 2011 periods.

The yield on earning assets averaged 3.98% and 4.04% for the three and nine month 2012 periods compared to an average yield on earning assets of 4.50% and 4.62% for 2011. This decrease was partially offset by a decrease in our cost of funds which averaged 1.54% and 1.60% for the quarter and nine month 2012 periods compared to an average cost of funds of 1.83% and 1.90% for the same periods in 2011. Net interest margin as a percent of average earning assets decreased 22 basis points to 2.54% for the quarter ended September 30, 2012 and 31 basis points to 2.53% for the nine months ended September 30, 2012 compared to 2.76% and 2.84% for the 2011 periods.

Real estate owned acquired through foreclosure is recorded at fair value less estimated selling costs at the date of foreclosure. Fair value is based on the appraised market value of the property based on sales of similar assets. The fair value may be subsequently reduced if the estimated fair value declines below the original appraised value. We monitor market information and the age of appraisals on existing real estate owned properties and obtain new appraisals as circumstances warrant. Real estate acquired through foreclosure decreased $434,000 to $28.6 million from December 31, 2011 to September 30, 2012. Real estate acquired through foreclosure includes $9.4 million in land development properties and building lots, which are located primarily in our Jefferson County market. We believe that our level of real estate acquired through foreclosure has stabilized and we anticipate decreased levels over the next several quarters as we continue to sell these properties and the inflow has slowed down substantially when compared to 2010 and 2011. All properties held in other real estate owned are listed for sale with various independent real estate agents.

During the second quarter we entered into a bulk sale contract to sell fourteen other real estate owned properties with a carrying value of $16.1 million scheduled to close during the fourth quarter of 2012, indicating a continued interest in our other real estate owned properties. Approximately $1.1 million of other real estate write downs and the previously mentioned $1.5 million termination fee were recorded during the nine months ended September 30, 2012 as the terms of this agreement were negotiated. As with all sales contracts, completing the sale is subject to both parties meeting all of the terms and conditions of the contracts. In the event that the terms and conditions are not met, by either of the parties, it is possible that the contracts on these sales will be terminated.

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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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