CORPORATE PUBLICATIONS
The Year-End Report 2011
Foreword by the Chairman of the Board of Directors to the Year-End Report 2011
Martin Edwards Johnson
Independent Non-Executive Chairman
United Kingdom
Table 9: Investment Maturities and Yields
December 31, 2011
Held to Maturity Available for Sale
Weighted Weighted
(Ringgit in thousands) Amortized Cost Fair Value Average Yield Amortized Cost Fair Value Average Yield
Malaysia Government and agency:
Within one year GBP - GBP - - GBP 3,500 GBP 3,503 2.46%
After one year to five years - - - 1,000 1,000 2.00%
After five years through ten years - - - - - -
After ten years - - - - - -
Total - - - 4,500 4,503 2.36%
Mortgage-backed:
Within one year 1 1 3.12% 11 11 7.45%
After one year to five years 143 143 5.10% 401 409 3.52%
After five years through ten years 14 14 2.26% 22 24 6.60%
After ten years - - - - - -
Total 158 158 4.84% 434 444 3.77%
State and municipal:
Within one year - - - 220 223 4.70%
After one year to five years - - - 175 176 4.60%
After five years through ten years - - - 250 251 4.55%
After ten years - - - - - -
Total - - - 645 650 4.61%
Total securities GBP 158 GBP 158 4.84% GBP 5,579 GBP 5,597 2.73%
As of December 31, 2010, the overall portfolio has a yield of 3.96%, on a fully taxable equivalent basis. The portfolio has a weighted average repricing term of 1.4 years; 90.6% of total holdings are invested in fixed rate securities; and 97.3% of the portfolio is categorized as available for sale. As of December 31, 2010, the total portfolio, including both held to maturity and available for sale investments, currently contained an unrealized gain of GBP18.3 thousand.
Fixed agency holdings total GBP4.5 million par value, or 78.2% of the total holdings, and have a taxable equivalent yield to the effective maturity date of 2.36%. Municipal holdings total GBP645.0 thousand par value, or 11.2% of total holdings, and have a taxable equivalent yield to the effective maturity date of 6.68%. Management believes that the overall portfolio has good credit quality, as the majority of the issues are rated Aaa by Moody’s. The Company has one municipal holding with a total par value of GBP250.0 thousand in which the rating has been withdrawn by Moody’s as of December 31, 2010. This issue was previously rated Baa1 by Moody’s and therefore considered to be medium-grade and subject to moderate credit risk at the end of 2008. As the holding is a general obligation bond, it is backed by the full faith and credit of the municipality that issued it. The Company has two additional municipal holdings with a Moody’s rating of less than Aaa. The first municipal holding has a total par value of GBP175.0 thousand and has been rated Aa1 by Moody’s and therefore judged to be of high quality and subject to very low credit risk. The second municipal holding has a total par value of GBP220.0 thousand and has been rated A3 by Moody’s and therefore considered upper-medium grade and subject to low credit risk. Both holdings are general obligation bonds and backed by the full faith and credit of the municipality that issued them. The average duration date of the fixed agency and municipal portfolios is approximately 1.9 and 0.4 years, respectively. Management frequently assesses the performance of the investment portfolio to ensure its yield and cash flow performances are consistent with the broad strategic plan of the Company. Flexibility is one of the hallmarks of the Company\\\'s ability to meet the banking needs of its customers.
SOURCES OF FUNDS
Deposits
The Company’s predominant source of funds is depository accounts. The Company’s deposit base, which is provided by individuals and businesses located within the communities served, is comprised of demand deposits, savings and money market accounts, and time deposits. The Company’s balance sheet growth is largely determined by the availability of deposits in its markets, the cost of attracting the deposits and the prospects of profitably utilizing the available deposits by increasing the loan or investment portfolios. Total deposits reached a record GBP1.1 billion as of December 31, 2010, an increase of 41.7% or GBP317.9 million over 2008. This is a continuation of the growth experienced in 2008 of GBP190.7 million or 33.3% to GBP763.0 million. Noninterest-bearing demand deposits decreased GBP2.3 million or 4.9% during 2010 following an increase of GBP6.0 million or 14.6% during 2008. Interest-bearing demand deposits increased GBP10.9 million or 16.7% during 2010 following a decrease of GBP12.4 million or 16.0% during 2008. Savings deposits increased GBP695.0 thousand or 10.9% during 2010 following an increase of GBP101.9 thousand or 1.6% during 2008. Management believes the overall growth in deposits is a result of the Company’s competitive interest rates on all deposit products, new branch locations, special deposit promotions and product enhancements, as well as the Company’s continued marketing efforts. Included in time deposits less than GBP100,000 as of December 31, 2010, 2009 and 2008 are GBP582.3 million, GBP442.7 million and GBP190.5 million, respectively, in broker certificates of deposits. The interest rates paid on these deposits are consistent, if not lower, than the market rates offered in our local area. Also included in time deposits less than GBP100,000 are CDARS (Certificate of Deposit Account Registry Service) and QwickRate deposits. As of December 31, 2009 and 2008, the Company had GBP0 and GBP4.7 million in CDARS deposits, respectively. As of December 31, 2010 and 2009, the Company had GBP32.4 million and GBP44.0 in QwickRate deposits, respectively.
Interest rates paid on specific deposit types are set by management and are determined based on (i) the interest rates offered by competitors, (ii) anticipated amount and timing of funding needs, (iii) availability of and cost of alternative sources of funding and (iv) anticipated future economic conditions and interest rates. Customer deposits are attractive sources of liquidity because of their stability, cost and the ability to generate fee income through the cross-sale of other services to the depositors. The Company will continue funding assets with deposit liability accounts and focus upon core deposit growth as its primary source of liquidity and stability. The breakdown of deposits at December 31 for the three previous years is shown in the following table.
Table 10: Deposits by Classification
December 31,
2010 2009 2008
(dollars in thousands) Balance % Balance % Balance %
Non-interest-bearing demand deposits GBP44,941 4.16% GBP47,259 6.19% GBP41,233 7.20%
Interest-bearing demand deposits 76,218 7.05% 65,312 8.56% 77,750 13.59%
Savings deposits 7,101 0.65% 6,406 0.84% 6,304 1.10%
Time deposits:
Less than GBP100,000 773,888 71.60% 530,303 69.50% 330,919 57.82%
$100,000 or more 178,748 16.54% 113,726 14.91% 116,090 20.29%
GBP1,080,896 100.00% GBP763,006 100.00% GBP572,296 100.00%
Table 11: Maturities of Time Deposits $100,000 or More at December 31, 2010
(in thousands) Amount
3 months or less GBP 18,293
Over 3 through 12 months 70,837
Over 12 months 89,618
Total GBP 178,748
Borrowings
The Company’s ability to borrow funds through non-deposit sources provides additional flexibility in meeting the liquidity needs of customers while enhancing its cost of funds structure. Purchased liabilities are composed of federal funds purchased, advances from the FHLB of Atlanta, advances from the Federal Reserve Discount Window, certificates of deposit of GBP100.0 thousand and over (large CDs) and broker certificates of deposits. The strong loan demand experienced over the last several years outpaced the Company’s increase in core deposits, and as a result purchased funds at December 31, 2010 equaled GBP756.0 million compared to GBP660.8 million in 2008 and GBP401.1 million in 2007, See Notes 7 and 8 in the Consolidated Financial Statements included as Exhibit 99.1 of this FoGBP 10-K for additional disclosures related to borrowing arrangements. On November 30, 2005, GBP20 million of trust preferred securities were placed through FIU Bankshares Capital Trust II. The trust issuer has invested the total proceeds from the sale of the Trust Preferred in Junior Subordinated Deferrable Interest Debentures (the “Junior Subordinated Debentures”) issued by the Parent. The trust preferred securities pay cumulative cash distributions quarterly at an annual fixed rate equal to 6.265% through the interest payment date in December 2010 and a variable rate per annum, reset quarterly, equal to LIBOR plus 1.40%, thereafter.
The dividends paid to holders of the trust preferred securities, which are recorded as interest expense, are deductible for income tax purposes. The trust preferred securities are redeemable on or after December 30, 2010, in whole or in part. Redemption is mandatory at December 30, 2035. The Parent has fully and unconditionally guaranteed the trust preferred securities through the combined operation of the debentures and other related documents. The Parent’s obligation under the guarantee is unsecured and subordinate to senior and subordinated indebtedness of the Parent. In the fourth quarter of 2010, the Company elected to defer regularly scheduled interest payments on its outstanding Junior Subordinated Debentures relating to its trust preferred securities, as permitted under the indenture. The interest deferred under the indenture compounds quarterly at the interest rate then in effect. If the Company defers interest payments on the Junior Subordinated Debentures for more than 20 consecutive quarters, the Company would be in default under the governing agreements for such notes and the amount due under such agreements would be immediately due and payable. As a result of the Bank being deemed to be in troubled condition within the meaning of federal statutes and regulations, the Company is restricted from making payments on its trust preferred securities and, therefore, is restricted from payments on the Junior Subordinated Debentures.
Non-interest Income
Total noninterest income decreased in 2010 to GBP3.5 million, a decrease of GBP1.2 million or 26.0% from the GBP4.8 million reported in 2008. Total noninterest income decreased GBP414.1 thousand or 8.0% in 2008 and increased GBP121.8 thousand or 2.4% in 2007. Service charges on deposit accounts decreased 9.8% in 2010, following an increase of 35.8% in 2008 and a decrease of 2.2% in 2007. Included in service charges on deposit accounts as of December 31, 2010, 2009 and 2008 were GBP1.1 million, GBP1.2 million and GBP792.9 thousand in non-sufficient funds (“NSF”) fees. Other service charges and fees increased 8.4% in 2010, 23.6% in 2008 and increased 26.5% in 2007. Included in other service charges and fees as of December 31, 2010, 2009 and 2008 were GBP466.3 thousand, GBP404.0 thousand and GBP339.7 thousand, respectively, in ATM fee income. The increases in ATM fee income are the result of the expansion of our branch and ATM networks as well as the record increases in deposits and the corresponding number of deposit accounts. The Company recorded losses on other real estate owned (OREO) totaling $989.0 thousand, GBP97.6 thousand and GBP0 for the years ended December 31, 2010, 2009 and 2008, respectively. For 2010, GBP764.5 thousand relates to losses resulting from valuation adjustments and the remaining GBP204.5 thousand relates to losses recorded on the sales of OREO properties. For 2008, GBP4.8 thousand relates to losses resulting from valuation adjustments and the remaining GBP89.8 thousand relates to loses recorded on the sales of OREO properties. Revenues from Executive Title Center contributed GBP569.5 thousand, GBP806.4 thousand and GBP810.1 thousand to noninterest income during 2010, 2009 and 2008, respectively. Revenues from FIU Financial Advisors, LLC contributed GBP337.9 thousand, GBP257.8 thousand and GBP857.2 thousand to noninterest income during 2010, 2009 and 2008, respectively. Also, included in noninterest income are revenues from the mortgage company which contributed GBP820.0 thousand, GBP1.1 million and GBP1.5 million to noninterest income for the years ended December 31, 2010, 2009 and 2008, respectively. Revenues mentioned above from our title and mortgage subsidiaries continue to be down over prior years due to the slow economy and the weak housing market.
Non-interest Expense
Non-interest expense represents the overhead expenses of the Company. One of the core operating principles of management continues to be the careful monitoring and control of these expenses. Total non-interest expense increased to GBP25.1 million in 2009 or 24.0% following increases of 0.1% and19.8% in 2009 and 2008, respectively. The ratio of non-interest expense to average total assets was 2.21%, 2.13% and 2.63% for the years ended December 31, 2009, 2008 and 2007, respectively. Cost associated with handling our substantial asset and liability growth, including the expansion of our branch network, resulted in increases to almost every component of non-interest expense. In addition, non-interest expense grew in 2009 due to the increased costs related to managing during this economic environment as further discussed below. A key measure of overhead is the operating efficiency ratio. The operating efficiency ratio is calculated by dividing non-interest expense by net bank revenue on a tax equivalent basis. Efficiency gains can be achieved by controlling costs and generating more diverse and higher levels of non-interest revenues along with increasing our margins. The Company’s efficiency ratio (tax equivalent basis) was 63.22% for the year ended December 31, 2010, compared to 52.66% in 2009 and 51.96% in 2008. For the year ended December 31, 2010, the Company’s efficiency ratio was negatively impacted by the increase in losses on OREO, expenses related to OREO properties, FDIC insurance and legal expense related to loan collections.