Attached files
file | filename |
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EX-31.1 - EX-31.1 - Madison Bancorp Inc | c12245exv31w1.htm |
EX-32.0 - EX-32.0 - Madison Bancorp Inc | c12245exv32w0.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark one)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 0-54081
MADISON BANCORP, INC.
(Exact name of registrant as specified in its charter)
Maryland | 27-258073 | |
(State or other jurisdiction of incorporation or | (I.R.S. Employer Identification No.) | |
organization) | ||
9649 Belair Road, Suite 300, Baltimore, Maryland | 21236 | |
(Address of principal executive offices) | (Zip Code) |
(410) 529-7400
(Registrants telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes o No þ
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definition of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
As of February 10, 2011, there were 608,116 shares of the registrants common stock outstanding.
MADISON BANCORP, INC.
Table of Contents
1
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
MADISON BANCORP, INC AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31, 2010 and March 31, 2010
December 31, | March 31, | |||||||
2010 | 2010 | |||||||
(Unaudited) | (Audited) | |||||||
Assets |
||||||||
Assets |
||||||||
Cash and cash equivalents |
$ | 11,442,859 | $ | 13,354,975 | ||||
Certificates of deposit |
1,448,715 | 956,972 | ||||||
Investment securities available-for-sale |
48,038,395 | 33,480,669 | ||||||
Investment securities held-to-maturity |
0 | 2,283,707 | ||||||
Federal Home Loan Bank stock, at cost |
242,500 | 242,500 | ||||||
Loans receivable, net |
86,619,908 | 90,336,475 | ||||||
Property and equipment, net |
3,860,966 | 3,983,182 | ||||||
Ground rents, net |
464,625 | 477,273 | ||||||
Other real estate owned |
434,000 | 0 | ||||||
Accrued interest receivable |
424,836 | 430,549 | ||||||
Deferred income taxes |
117,630 | 5,828 | ||||||
Prepaid expenses and other assets |
975,611 | 1,337,364 | ||||||
Total Assets |
$ | 154,070,045 | $ | 146,889,494 | ||||
Liabilities and Shareholders Equity |
||||||||
Liabilities |
||||||||
Deposits: |
||||||||
Noninterest bearing |
$ | 6,178,379 | $ | 5,267,672 | ||||
Interest bearing |
133,585,327 | 131,697,595 | ||||||
Total Deposits |
139,763,706 | 136,965,267 | ||||||
Advances from borrowers for taxes and insurance |
221,311 | 557,686 | ||||||
Other liabilities |
265,572 | 303,514 | ||||||
Total Liabilities |
140,250,589 | 137,826,467 | ||||||
Shareholders Equity |
||||||||
Common Stock, $.01 par value, 10,000,000 shares
authorized. Issued: 608,116 shares at December 31, 2010
and 0 at March 31, 2010 |
6,081 | 0 | ||||||
Additional paid-in capital |
5,335,052 | 0 | ||||||
Retained earnings |
8,887,797 | 8,903,564 | ||||||
Unearned ESOP shares |
(397,300 | ) | 0 | |||||
Accumulated other comprehensive income (loss) |
(12,174 | ) | 159,463 | |||||
Total Shareholders Equity |
13,819,456 | 9,063,027 | ||||||
Total Liabilities and Shareholders Equity |
$ | 154,070,045 | $ | 146,889,494 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
2
Table of Contents
MADISON BANCORP, INC AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Three and Nine Months Ended December, 2010 and 2009
Three Months Ended | Nine Months Ended | |||||||||||||||
December 31 | December 31 | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Interest Revenue |
||||||||||||||||
Interest and fees on loans |
$ | 1,251,278 | $ | 1,296,674 | $ | 3,814,392 | $ | 3,844,980 | ||||||||
Investment securities available-for-sale |
230,231 | 228,305 | 665,370 | 649,429 | ||||||||||||
Investment securities held-to-maturity |
15,699 | 72,614 | 63,334 | 306,315 | ||||||||||||
Interest-bearing deposits |
14,185 | 14,633 | 41,306 | 34,097 | ||||||||||||
Other |
6,289 | 6,438 | 21,255 | 22,122 | ||||||||||||
Total Interest Revenue |
1,517,682 | 1,618,664 | 4,605,657 | 4,856,943 | ||||||||||||
Interest Expense |
||||||||||||||||
Interest on deposits: |
||||||||||||||||
Time |
525,558 | 683,402 | 1,658,317 | 2,242,214 | ||||||||||||
Savings |
14,670 | 21,318 | 43,301 | 83,539 | ||||||||||||
NOW and money market demand accounts |
8,769 | 12,898 | 31,449 | 39,863 | ||||||||||||
Other interest expense |
3 | 15 | 42 | 64 | ||||||||||||
Total Interest Expense |
549,000 | 717,633 | 1,733,109 | 2,365,680 | ||||||||||||
Net Interest Income |
968,682 | 901,031 | 2,872,548 | 2,491,263 | ||||||||||||
Provision for Loan Losses |
78,832 | 91,074 | 190,507 | 201,074 | ||||||||||||
Net Interest Income after Provision for Loan Losses |
889,850 | 809,957 | 2,682,041 | 2,290,189 | ||||||||||||
Noninterest Revenue |
||||||||||||||||
Gain (Loss) on disposal of property |
0 | (185 | ) | 0 | (1,367 | ) | ||||||||||
Gain on sale of investment securities |
62,261 | 0 | 118,639 | 0 | ||||||||||||
Other than temporary impairment of securities |
0 | (39,350 | ) | 0 | (193,407 | ) | ||||||||||
Other |
65,876 | 51,563 | 217,063 | 166,920 | ||||||||||||
Total Noninterest Revenue |
128,137 | 12,028 | 335,702 | (27,854 | ) | |||||||||||
Noninterest Expenses |
||||||||||||||||
Salaries and employee benefits |
463,273 | 468,624 | 1,419,270 | 1,477,417 | ||||||||||||
Occupancy & equipment expense |
278,074 | 264,947 | 824,309 | 777,292 | ||||||||||||
Advertising |
2,731 | 3,118 | 6,277 | 9,473 | ||||||||||||
Audit and accounting |
37,581 | 19,388 | 104,571 | 60,223 | ||||||||||||
FDIC premiums and OTS assessments |
100,097 | 69,000 | 297,495 | 294,376 | ||||||||||||
Data processing |
44,246 | 53,264 | 142,332 | 150,487 | ||||||||||||
Stationary and postage |
16,623 | 21,387 | 54,044 | 64,917 | ||||||||||||
Other operating expenses |
73,801 | 43,691 | 185,212 | 162,383 | ||||||||||||
Total Noninterest Expenses |
1,016,426 | 943,419 | 3,033,510 | 2,996,568 | ||||||||||||
Income (Loss) Before Income Taxes |
1,561 | (121,434 | ) | (15,767 | ) | (734,233 | ) | |||||||||
Income Tax Expense (Benefit) |
0 | 0 | 0 | 0 | ||||||||||||
Net Income (Loss) |
$ | 1,561 | $ | (121,434 | ) | $ | (15,767 | ) | $ | (734,233 | ) | |||||
Basic earnings per common share |
$ | 0.00 | N/A | $ | (0.03 | ) | N/A | |||||||||
Diluted earnings per common share |
0.00 | N/A | (0.03 | ) | N/A |
The accompanying notes are an integral part of these consolidated financial statements.
3
Table of Contents
MADISON BANCORP, INC AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders Equity
(Unaudited)
Nine Months Ended December 31, 2010
Accumulated | ||||||||||||||||||||||||
Additional | Unearned | Other | ||||||||||||||||||||||
Common | Paid-in | Retained | ESOP | Comprehensive | Total | |||||||||||||||||||
Stock | Capital | Earnings | Shares | Income | Equity | |||||||||||||||||||
Balance March 31, 2010 |
$ | 0 | $ | 0 | $ | 8,903,564 | $ | 0 | $ | 159,463 | $ | 9,063,027 | ||||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net (Loss) |
(15,767 | ) | (15,767 | ) | ||||||||||||||||||||
Net unrealized gain
on available for sale
securities, net of tax
effect of $(111,802) |
(171,637 | ) | (171,637 | ) | ||||||||||||||||||||
Total comprehensive income |
(187,404 | ) | ||||||||||||||||||||||
Issuance of common stock |
6,081 | 5,333,987 | 5,340,068 | |||||||||||||||||||||
Acquisition of unearned ESOP shares |
(425,680 | ) | (425,680 | ) | ||||||||||||||||||||
ESOP shares released for allocation |
1,065 | 28,380 | 29,445 | |||||||||||||||||||||
Balance December 31, 2010 |
$ | 6,081 | $ | 5,335,052 | $ | 8,887,797 | $ | (397,300 | ) | $ | (12,174 | ) | $ | 13,819,456 | ||||||||||
4
Table of Contents
MADISON BANCORP, INC AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended December 31, 2010 and 2009
December 31, 2010 | December 31, 2009 | |||||||
Cash flows from Operating Activities |
||||||||
Net loss |
$ | (15,767 | ) | $ | (734,233 | ) | ||
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities: |
||||||||
Amortization (accretion) of investment securities |
62,358 | (156,636 | ) | |||||
Decrease in net deferred loan costs |
(19,636 | ) | 23,986 | |||||
Provision for loan losses |
190,507 | 201,074 | ||||||
Loss on sale of ground rents |
6,548 | 0 | ||||||
(Gain) on sale of investment securities |
(118,639 | ) | 0 | |||||
Other than temporary impairment charge |
0 | 193,407 | ||||||
Loss on disposal of property and equipment |
0 | 1,367 | ||||||
Depreciation and amortization |
174,315 | 201,657 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accrued interest receivable |
5,713 | 15,750 | ||||||
Prepaid expenses and other assets |
361,753 | (883,411 | ) | |||||
Other liabilities |
(37,942 | ) | (157,928 | ) | ||||
Net Cash provided by (used in) operating activities |
609,210 | (1,294,967 | ) | |||||
Cash flows from Investing Activities |
||||||||
Decrease (increase) in loans receivable, net |
3,111,696 | (936,710 | ) | |||||
(Increase) in investment certificates of deposit, net |
(491,743 | ) | (953,715 | ) | ||||
Activity in held-to-maturity securities: |
||||||||
Sales |
687,875 | 0 | ||||||
Maturities and repayments |
430,089 | 636,484 | ||||||
Activity in available-for-sale securities: |
||||||||
Sales |
5,381,794 | 0 | ||||||
Maturities, repayments and calls |
16,763,090 | 15,160,602 | ||||||
Purchases |
(36,160,260 | ) | (21,804,732 | ) | ||||
Purchase of property and equipment |
(52,099 | ) | (133,780 | ) | ||||
Proceeds from sale of ground rents |
6,100 | 15,750 | ||||||
Net cash (used in) investing activities |
(10,323,458 | ) | (8,016,101 | ) | ||||
Cash flow from Financing Activities |
||||||||
Increase in deposits, net |
2,798,439 | 8,242,693 | ||||||
(Decrease) in advances from borrowers, net |
(336,375 | ) | (365,615 | ) | ||||
Net Proceeds from the issuance of common stock |
5,340,068 | 0 | ||||||
Net cash provided by financing activities |
7,802,132 | 7,877,078 | ||||||
(Decrease) in Cash and Cash Equivalents |
(1,912,116 | ) | (1,433,990 | ) | ||||
Cash and Cash Equivalents, Beginning of Period |
13,354,975 | 16,321,326 | ||||||
Cash and Cash Equivalents, End of Period |
$ | 11,442,859 | $ | 14,887,336 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Loans transferred to other real estate owned |
$ | 434,000 | $ | 0 | ||||
Cash paid for interest on deposits |
$ | 554,159 | $ | 722,465 |
5
Table of Contents
Note 1: Activities and Summary of Significant Accounting Policies
Madison Bancorp, Inc. (Company) was incorporated on May 20, 2010 to be the holding company for
Madison Square Federal Savings Bank (Bank) in conjunction with the Banks plan of conversion from
mutual to stock form of ownership. On October 6, 2010, in accordance with a Plan of Conversion
adopted by its Board of Directors and approved by its members, the Bank converted from a mutual
savings bank to a stock savings bank and became the wholly owned subsidiary of the Company. The
conversion was accomplished through the sale and issuance of 608,116 shares of common stock at a
price of $10.00 per share, through which the Company received proceeds of $5,340,068, net of
offering expenses of $741,091. In connection with the conversion, the Banks Board of Directors
adopted an employee stock ownership plan (ESOP) which subscribed for 7% of the sum of the number of
shares, or 42,568 shares of common stock sold in the offering. Accordingly, the reported results
for the three months and nine months ended December 31, 2010 relates to the consolidated holding
company and the results for the three months and nine months ended December 31, 2009 related solely
to the operations of the Bank. All material intercompany accounts and transaction have been
eliminated in consolidation.
In accordance with Office of Thrift Supervision (OTS) regulations, upon the completion of the
conversion, the Bank restricted retained earnings by establishing a liquidation account. The
liquidation account will be maintained for the benefit of eligible account holders who continue to
maintain their accounts at the Bank after conversion. The liquidation account will be reduced
annually to the extent that eligible account holders have reduced their qualifying deposits.
Subsequent increases will not restore an eligible account holders interest in the liquidation
account. In the event of a complete liquidation of the Bank, and only in such event, each account
holder will be entitled to receive a distribution from the liquidation account in an amount
proportionate to the adjusted qualifying account balances then held. The Bank may not pay dividends
if those dividends would reduce equity capital below the required liquidation account amount.
Madison Square Federal Savings Bank (the Bank) was incorporated in 1870 under the laws of
the State of Maryland. The Bank is a federally chartered savings bank engaged in banking and
related services primarily in the Baltimore Metropolitan area. Significant accounting policies
followed by the Bank are presented below.
The foregoing consolidated financial statements are unaudited; however, in the opinion of
management we have included all adjustments (comprising only normal recurring accruals) necessary
for a fair presentation of the results of the interim period. We derived the balances as of March
31, 2010 from audited financial statements. These statements should be read in conjunction with
Madison Bancorps financial statements and accompanying notes included in Madison Bancorps
Registration Statement on Form S-1, as amended, with the US Securities and Exchange Commission
which was declared effective August 12, 2010. We have made no significant changes to Madison
Bancorps accounting policies as disclosed in the Form S-1.
Principles of consolidation: The consolidated financial statements include the accounts of
the Company and the Bank and its subsidiary, Madison Financial Services Corporation (MFSC). MFSC is
engaged in the business of insurance brokerage services primarily in the Baltimore Metropolitan
area. All significant accounts and intercompany transactions have been eliminated.
Reclassification Certain amounts in prior periods financial statements have been
reclassified to conform to the current periods presentation. The reclassifications had no effect
on the Companys financial condition or results of operations.
Subsequent Events We evaluated subsequent events after December 31, 2010 through February
10, 2011, the date this report was available to be issued.
6
Table of Contents
Note 2: Supplemental Disclosure for Earnings per Share
When presented, basic earnings per share are computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the period. Diluted
earnings per share reflect the potential dilution that could occur if securities or other contracts
to issue common stock were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. Because the mutual to stock
conversion was not completed until October 6, 2010, per share earnings data is not meaningful for
prior comparative periods and therefore is not presented. The end of period shares outstanding is
being used for the earnings per share calculation assuming for calculation purposes that the shares
were outstanding for the entire period and not since the issue date of October 6, 2010.
Three Months ended, | Nine Months ended, | |||||||
December 31, 2010 | December 31, 2010 | |||||||
Net Income (loss) |
$ | 1,561 | $ | (15,767 | ) | |||
Average common shares outstanding |
568,430 | 568,430 | ||||||
Earnings per common share, basic |
$ | 0.00 | $ | (0.03 | ) |
7
Table of Contents
Note 3: Investment Securities
On December 31, 2010, the company reclassified the entire held-to-maturity portfolio to
available-for-sale. The amortized cost and estimated fair value of investment securities at
December 31 and March 31, 2010 are summarized as follows:
Gross | Gross | |||||||||||||||
Unrealized | Unrealized | Estimated | ||||||||||||||
Amortized Cost | Gains | Losses | Fair Value | |||||||||||||
December 31, 2010 | ||||||||||||||||
Investment securities
available-for-sale: |
||||||||||||||||
U.S. government agencies |
$ | 9,976,042 | $ | 2,279 | $ | 65,079 | $ | 9,913,242 | ||||||||
Brokered certificates of deposit |
4,534,261 | 2,360 | 20,167 | 4,516,454 | ||||||||||||
Mortgage-backed securities (Agency) |
30,269,562 | 424,876 | 356,078 | 30,338,360 | ||||||||||||
Collateralized mortgage obligations
(Agency) |
2,802,486 | 31,360 | 5,503 | 2,828,343 | ||||||||||||
Collateralized mortgage obligations
(Nonagency) |
476,147 | 47,149 | 81,300 | 441,996 | ||||||||||||
$ | 48,058,498 | $ | 508,024 | $ | 528,127 | $ | 48,038,395 | |||||||||
Gross | Gross | |||||||||||||||
Unrealized | Unrealized | Estimated | ||||||||||||||
Amortized Cost | Gains | Losses | Fair Value | |||||||||||||
March 31, 2010 | ||||||||||||||||
Investment securities
available-for-sale: |
||||||||||||||||
U.S. government agencies |
$ | 4,499,222 | $ | 15,793 | $ | 1,150 | $ | 4,513,865 | ||||||||
Brokered certificates of deposit |
2,670,928 | 0 | 6,425 | 2,664,503 | ||||||||||||
Mortgage-backed securities (Agency) |
26,010,952 | 341,079 | 49,730 | 26,302,301 | ||||||||||||
$ | 33,181,102 | $ | 356,872 | $ | 57,305 | $ | 33,480,669 | |||||||||
Investment securities held-to-maturity: |
||||||||||||||||
Mortgage-backed securities (Agency) |
$ | 1,177,893 | $ | 34,377 | $ | 6,606 | $ | 1,205,664 | ||||||||
Mortgage-backed securities
(Nonagency) |
1,105,814 | 86,774 | 174,963 | 1,017,625 | ||||||||||||
$ | 2,283,707 | $ | 121,151 | $ | 181,569 | $ | 2,223,289 | |||||||||
8
Table of Contents
Note 3: Investment Securities (Continued)
The following is a summary of maturities of securities available-for-sale as of December 31,
2010:
Available-for-sale | ||||||||
Amortized | ||||||||
Cost | Fair Value | |||||||
Amounts maturing in: |
||||||||
One year or less |
$ | 731,261 | $ | 731,895 | ||||
After one year through five years |
8,804,811 | 8,764,225 | ||||||
After five years through ten years |
1,080,581 | 1,080,756 | ||||||
After ten years |
3,893,650 | 3,852,820 | ||||||
14,510,303 | 14,429,696 | |||||||
Mortgage-backed securities (Agency) |
30,269,562 | 30,338,360 | ||||||
Collateralized mortgage obligations
(Agency) |
2,802,486 | 2,828,343 | ||||||
Collateralized mortgage obligations
(Nonagency) |
476,147 | 441,996 | ||||||
$ | 48,058,498 | $ | 48,038,395 | |||||
Proceeds from sales of investment securities were $6.1 million and $0 during the nine months
ended December 30, 2010 and 2009, respectively. During the three month period ended December 31,
2010, we transferred securities with a fair market value of $1.2 million and book value of $1.2
million from the held-to-maturity classification to the available-for-sale classification. The
unrealized loss of $10,000 was recorded in accumulated other comprehensive income at the time of
the transfer.
9
Table of Contents
Note 4: Loans Receivable
Loans receivable consist of the following at December 31, 2010 and March 31, 2010,
respectively:
December 31, | March 31, | |||||||
2010 | 2010 | |||||||
Loans secured by mortgages: |
||||||||
Residential |
||||||||
1-4 Single family |
$ | 57,060,172 | $ | 62,875,698 | ||||
Multifamily |
1,686,019 | 1,736,945 | ||||||
Commercial |
11,716,469 | 11,597,811 | ||||||
Land |
5,783,793 | 4,849,495 | ||||||
Lines of credit |
1,673,656 | 1,407,436 | ||||||
Residential construction |
3,564,183 | 2,395,528 | ||||||
81,484,292 | 84,862,913 | |||||||
Consumer |
877,165 | 1,203,106 | ||||||
Commercial |
4,753,283 | 4,755,553 | ||||||
Total loans receivable |
87,114,740 | 90,821,572 | ||||||
Net deferred costs |
100,268 | 119,903 | ||||||
Allowance for loan losses |
(595,100 | ) | (605,000 | ) | ||||
Loans receivable, net |
$ | 86,619,908 | $ | 90,336,475 | ||||
Note 5: Allowance for Loan Losses
The activity in the allowance for loan losses and information regarding nonaccrual loans is as
follows:
Nine Months | Nine Months | |||||||||||
Ended | Ended | |||||||||||
December 31, | Year Ended | December 31, | ||||||||||
2010 | March 31, 2010 | 2009 | ||||||||||
Balance Beginning of Period |
$ | 605,000 | $ | 379,500 | $ | 379,500 | ||||||
Provision for loan losses |
190,507 | 242,074 | 201,074 | |||||||||
Recoveries: |
||||||||||||
Residential1-4 Single
family |
1,641 | 0 | 0 | |||||||||
Charge Offs: |
||||||||||||
Residential1-4 Single
family |
(28,232 | ) | (16,574 | ) | (16,574 | ) | ||||||
Residential construction |
(173,816 | ) | ||||||||||
Balance End of Period |
$ | 595,100 | $ | 605,000 | $ | 564,000 | ||||||
December 31, | March 31, | |||||||
2010 | 2010 | |||||||
Nonaccrual loans: |
||||||||
Residential1-4 Single family |
$ | 269,181 | $ | 72,297 | ||||
Residential construction |
0 | 607,815 | ||||||
Allowance for loan losses as
percentage of nonaccrual loans |
221.08 | % | 88.96 | % | ||||
Foregone interest on nonaccrual loans |
$ | 15,087 | $ | 22,705 |
10
Table of Contents
Note 6: Fair Value Measurements
Accounting guidance defines fair value to be the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. These standards have also established a
three-level hierarchy for fair value measurements based upon the inputs to the
valuation of an asset or liability.
| Level 1 Valuation is based on quoted prices in active markets for
identical assets and liabilities. |
||
| Level 2 Valuation is determined from quoted prices for similar assets or
liabilities in active markets, quoted prices for identical or similar
instruments in markets that are not active or by model-based techniques in
which all significant inputs are observable in the market. |
||
| Level 3 Valuation is derived from model-based techniques in which at
least one significant input is unobservable and based on the Banks own
estimates about the assumptions that market participants would use to value the
asset or liability. |
Investment securities available-for-sale are the only financial assets measured
at fair value on a recurring basis. As of December 31, 2010 and March 31,
2010, the fair values were measured using the following methodologies:
December 31, 2010 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Investment securities
available-for-sale |
$ | 11,335,920 | $ | 36,099,528 | $ | 602,947 | $ | 48,038,395 | ||||||||
March 31, 2010 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Investment securities
available-for-sale |
$ | 956,772 | $ | 32,520,274 | $ | 3,623 | $ | 33,480,669 | ||||||||
As of March 31, 2010, the Bank owned a mortgage backed agency security measured using a Level
3 methodology. During the quarter ended December 31, 2010, the Bank purchased a U.S. government
security measured using a Level 3 methodology. The change in the unrealized gain on the security
was recorded in comprehensive income. It was not recorded in the net loss for the year.
The Bank measures its other real estate owned, on a nonrecurring basis, at fair value less
cost to sell. As of December 31, 2010, the fair value of other real estate owned was based on
offers and/or appraisals. Cost to sell the real estate was based on standard market factors. The
Bank has categorized its foreclosed real estate as level three. The Bank does not measure the fair
value of its other financial assets or liabilities on a recurring or nonrecurring basis.
11
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Note 6: Fair Value Measurements (Continued)
The estimated fair values of financial instruments at December 31, 2010 and March 31, 2010 are
as follows:
December 31, 2010 | March 31, 2010 | |||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Book | Fair | Book | Fair | |||||||||||||
Value | Value | Value | Value | |||||||||||||
Assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 11,443 | $ | 11,443 | $ | 13,355 | $ | 13,355 | ||||||||
Certificates of deposit |
1,449 | 1,449 | 957 | 957 | ||||||||||||
Investment securities |
48,038 | 48,038 | 35,764 | 35,704 | ||||||||||||
Loans, net |
86,620 | 86,698 | 90,336 | 90,249 | ||||||||||||
Total financial assets |
$ | 147,550 | $ | 147,628 | $ | 140,412 | $ | 140,265 | ||||||||
December 31, 2010 | March 31, 2010 | |||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Book | Fair | Book | Fair | |||||||||||||
Value | Value | Value | Value | |||||||||||||
Liabilities: |
||||||||||||||||
Deposits |
$ | 139,764 | $ | 141,604 | $ | 136,965 | $ | 140,111 | ||||||||
Advanced payments by borrowers for
taxes and insurance |
221 | 221 | 558 | 558 | ||||||||||||
Total financial liabilities |
$ | 139,985 | $ | 141,825 | $ | 137,523 | $ | 140,669 | ||||||||
The following methods and assumptions were used to estimate the fair value disclosures for
financial instruments as of December 31, 2010 and March 31, 2010:
Cash and cash equivalents: The amounts reported at cost approximate the fair value of
these assets.
Investment securities held-to-maturity: The fair values are based on the quoted
market values or values of securities with similar rates and terms. The fair values are provided
to the Bank by a third party.
Loans, net: We estimate the fair value of loans by discounting future cash flows using
current rates for which we would make similar loans to borrowers with similar credit histories.
Deposits: The fair value of demand deposits and savings accounts is the amount payable
on demand. We estimate the fair value of fixed maturity certificates of deposits using the rates
currently offered for deposits of similar remaining maturities.
Note 7: Accounting Standards Updates
Accounting Standards Updates (ASU) No. 2009-16, Transfers and Servicing (Topic-
860)-Accounting for Transfers of Financial Assets amends prior accounting guidance to enhance
reporting about transfers of financial assets, including securitizations, and where companies have
continuing exposure to the risks related to transferred financial assets. ASU 2009-16 also requires
additional disclosures about all continuing involvement with transferred financial assets including
information about gains and losses resulting from transfers during the period. The provisions of
ASU 2009-16 became effective on January 1, 2010 and did not have a significant impact on our
consolidated results of operations or financial position.
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Table of Contents
ASU No. 2009-17, Consolidations (Topic 810)-Improvements to Financial Reporting by
Enterprises Involved with Variable Interest Entities amends prior guidance to change how a company
determines when an entity that is sufficiently capitalized or is not controlled through voting (or
similar rights) should be consolidated. The determination of whether a company is required to
consolidate an entity is based on, among other things, an entitys purpose and design and a
companys ability to direct the activities of the entity that most significantly impact the
entitys economic performance. ASU 2009-17 requires additional disclosures about the reporting
entitys involvement with variable interest entities and any significant changes in risk exposure
due to that involvement as well as its affect on the entitys financial statements. As further
discussed below, ASU No. 2010-10, Consolidations (Topic 810), deferred the effective date of ASU
2009-17 for a reporting entitys interests in investment companies. The provisions of ASU 2009-17
became effective on January 1, 2010 and they did not have a material impact on our consolidated
results of operations or financial position.
ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820)-Improving Disclosures About
Fair Value Measurements requires expanded disclosures related to fair value measurements including
(i) the amounts of significant transfers of assets or liabilities between Levels 1 and 2 of the
fair value hierarchy and the reasons for the transfers, (ii) the reasons for transfers of assets or
liabilities in or out of Level 3 of the fair value hierarchy, with significant transfers disclosed
separately, (iii) the policy for determining when transfers between the levels of the fair value
hierarchy are recognized and (iv) for recurring fair value measurements of assets and liabilities
in Level 3 of the fair value hierarchy, a gross presentation of information about purchases, sales,
issuances and settlements. ASU 2010-06 further clarifies that (i) companies should provide fair
value measurement disclosures for each class of assets and liabilities (rather than major
category), which would generally be a subset of assets or liabilities within a line item in the
statement of financial position and (ii) companies should provide disclosures about the valuation
techniques and inputs used to measure fair value for both recurring and non-recurring fair value
measurements for each class of assets and liabilities included in Levels 2 and 3 of the fair value
hierarchy. ASU No. 2010-06 requires the disclosures related to the gross presentation of purchases,
sales, issuances and settlements of assets and liabilities included in Level 3 of the fair value
hierarchy beginning January 1, 2011. The remaining disclosure requirements and clarifications made
by ASU 2010-06 became effective on January 1, 2010.
ASU No. 2010-10, Consolidations (Topic 810)-Amendments for Certain Investment Funds defers
the effective date of the amendments to the consolidation requirements made by ASU 2009-17 to a
companys interest in an entity (i) that has all of the attributes of an investment company, as
specified under ASC Topic 946, Financial Services-Investment Companies, or (ii) for which it is
industry practice to apply measurement principles of financial reporting that are consistent with
those in ASC Topic 946. As a result of the deferral, companies are not required to apply the ASU
2009-17 amendments to the Subtopic 810-10 consolidation requirements to its interest in an entity
that meets the criteria to qualify for the deferral. ASU 2010-10 also clarifies that any interest
held by a related party should be treated as though it is an entitys own interest when evaluating
the criteria for determining whether such interest represents a variable interest.
ASU 2010-10 also clarifies that companies should not use a quantitative calculation as the
sole basis for evaluating whether a decision makers or service providers fee is variable
interest. The provisions of ASU 2010-10 became effective as of January 1, 2010 and did not have a
material impact on our consolidated results of operations or financial position.
ASU No. 2010-11, Derivatives and Hedging (Topic 815)-Scope Exception Related to Embedded
Credit Derivatives clarifies that the only form of an embedded credit derivative that is exempt
from embedded derivative bifurcation requirement are those that relate to the subordination of one
financial instrument to another. Entities that have contracts containing an embedded credit
derivative feature in a form other than subordination may need to separately account for the
embedded credit derivative feature. The provisions of ASU 2010-11 became effective on July 1, 2010.
This standard did not have a material impact on our consolidated results of operations or financial
position.
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Table of Contents
ASU No. 2010-20, Receivables (Topic 310)-Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses requires entities to provide disclosures designed
to facilitate financial statement users evaluation of (i) the nature of credit risk inherent in
the entitys portfolio of financing receivables, (ii) how that risk is analyzed and assessed in
arriving at the allowance for credit losses, and (iii) the changes and reasons for those changes in
the allowance for credit losses. Disclosures must be disaggregated by portfolio segment, the level
at which an entity develops and documents a systemic method for determining its allowance for
credit losses, and class of financing receivable, which is generally a disaggregation of portfolio
segment. The required disclosures include, among other things, a carry forward of the allowance for
credit losses as well as information about modified, impaired, nonaccrual and past due loans, and
credit quality indicators. ASU 2010-20 will become effective for financial statements as of
December 31, 2010 as it relates to disclosures required as of the end of the reporting period.
Disclosures that relate to activity during a reporting period will be required for financial
statements that include periods beginning on January 1, 2011.
Note 8: Commitment and Financial Instruments with Off-Balance-Sheet Credit Risk
In the normal course of business, the Bank has various outstanding commitments and contingent
liabilities that are not reflected in the accompanying financial statements. Loan commitments and
lines of credit are agreements to lend to a customer as long as there is no violation of any
condition to the contract. Mortgage loan commitments generally have fixed interest rates, fixed
expiration dates, and may require payment of a fee. Other loan commitments generally have fixed
interest rates. Commitments to purchase loans do not represent future cash requirements, as it is
unlikely all loans will be closed prior to the expiration of the commitment. Lines of credit
generally have variable interest rates. Such lines do not represent future cash requirements
because it is unlikely that all customers will draw upon their lines in full at any time. Letters
of credit are commitments issued to guarantee the performance of a customer to a third party.
The Banks maximum exposure to credit loss in the event of nonperformance by the customer is
the contractual amount of the credit commitment. Loan commitments, lines of credit, and letters of
credit are made on the same terms, including collateral, as outstanding loans. Management is not
aware of any accounting loss to be incurred by funding these loan commitments.
At December 31, 2010 the Bank had outstanding firm commitments to originate or purchase loans
as follows:
Mortgage loans commitments fixed rate |
$ | 2,397,000 | ||
Mortgage loans commitments variable rate |
3,153,000 | |||
Commitments to originate nonmortgage loans |
98,000 | |||
Commitments to purchase loans |
737,000 | |||
Unused equity lines of credit (variable rate) |
1,744,000 | |||
Commercial and consumer lines of credit |
814,000 | |||
Standby letters of credit |
473,000 | |||
Total |
$ | 9,416,000 | ||
As of December 31, 2010 the Bank had a commitment to sell a loan in the amount of $450,000.
14
Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operation |
Safe Harbor Statement for Forward-Looking Statements
This report may contain forward-looking statements within the meaning of the federal
securities laws. These statements are not historical facts; rather they are statements based on the
Companys current expectations regarding its business strategies and their intended results and its
future performance. Forward-looking statements are preceded by terms such as expects, believes,
anticipates, intends and similar expressions.
Forward-looking statements are not guarantees of future performance. Numerous risks and
uncertainties could cause or contribute to the Banks actual results, performance and achievements
being materially different from those expressed or implied by the forward-looking statements.
Factors that may cause or contribute to these differences include, without limitation, general
economic conditions, including changes in market interest rates and changes in monetary and fiscal
policies of the federal government; legislative and regulatory changes; the quality and composition
of the loan and investment securities portfolio; loan demand; deposit flows; competition; and
changes in accounting principles and guidelines. Additional factors that may affect our results are
discussed beginning on page 13 of the Companys prospectus dated August 12, 2010 under the section
titled Risk Factors. These factors should be considered in evaluating the forward-looking
statements and undue reliance should not be placed on such statements. Except as required by
applicable law or regulation, the Company assumes no obligation and disclaims any obligation to
update any forward-looking statements.
Critical Accounting Policies
We consider accounting policies involving significant judgments and assumptions by management
that have, or could have, a material impact on the carrying value of certain assets or on income to
be critical accounting policies. The following represent our critical accounting policies:
Allowance for Loan Losses. The allowance for loan losses is the amount estimated by
management as necessary to cover losses inherent in the loan portfolio at the balance sheet date.
The allowance is established through the provision for loan losses, which is charged to income.
Determining the amount of the allowance for loan losses necessarily involves a high degree of
judgment. Among the material estimates required to establish the allowance are: loss exposure at
default; the amount and timing of future cash flows on impacted loans; value of collateral; and
determination of loss factors to be applied to the various elements of the portfolio. All of these
estimates are susceptible to significant change. Management reviews the level of the allowance
monthly and establishes the provision for loan losses based upon an evaluation of the portfolio,
past loss experience, current economic conditions and other factors related to the collectability
of the loan portfolio. Although we believe that we use the best information available to establish
the allowance for loan losses, future adjustments to the allowance may be necessary if economic or
other conditions differ substantially from the assumptions used in making the evaluation. In
addition, the Office of Thrift Supervision, as an integral part of its examination process,
periodically reviews our allowance for loan losses and may require us to recognize adjustments to
the allowance based on its judgments about information available to it at the time of its
examination. A large loss could deplete the allowance and require increased provisions to
replenish the allowance, which would adversely affect earnings.
Fair Value of Investments. Securities are characterized as available-for-sale or
held-to-maturity based on managements ability and intent regarding such investment at acquisition.
On an ongoing basis, management must estimate the fair value of its investment securities based on
information and assumptions it deems reliable and reasonable, which may be quoted market prices or
if quoted market prices are not available, fair values extrapolated from the quoted prices of
similar instruments. Based on this information, an assessment must be made as to whether any
decline in the fair value of an investment security should be considered an other-than-temporary
impairment and recorded in non-interest revenue as a loss on investments. The determination of such
impairment is subject to a variety of factors, including managements judgment and experience.
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Table of Contents
Comparison of Financial Condition at December 31, 2010 and March 31, 2010
Assets. Total assets increased from $146.9 million at March 31, 2010 to $154.1 million at
December 31, 2010. The increase was primarily due to an increase in investment securities
available-for-sale, which were partially offset by decreases in cash and cash equivalents, loans
receivable and investment securities held-to-maturity which were transferred to investments
available-for-sale at the end of the period.
Loans. Net loans receivable decreased by $3.7 million, or 4.1%, from $90.3 million at March
31, 2010 to $86.6 million at December 31, 2010, primarily as a result of the net effect of a $5.8
million decrease in residential mortgage loans, a $119,000 increase in commercial real estate
loans, a $934,000 increase in land loans, a $1.2 million increase in residential construction
loans, a $326,000 decrease in consumer loans, a $2,000 decrease in commercial loans and a $266,000
increase in home equity lines of credit. The decrease in residential mortgage loans was primarily
a result of borrowers refinancing loans elsewhere and normal principal reductions.
Cash and Cash Equivalents. Cash and cash equivalents decreased by $1.9 million, or 14.3%,
from $13.4 million at March 31, 2010 to $11.4 million at December 31, 2010, as excess liquidity was
invested in investment securities.
Securities. Our available-for-sale securities increased by $14.6 million, or 43.5%, from
$33.5 million at March 31, 2010 to $48.0 million at December 31, 2010. The increase in
available-for-sale securities is the result of purchases of $36.2 million of U.S. Agency mortgage
backed securities and collateralized mortgage obligations and brokered certificates of deposits
which were partially funded by the proceeds from the conversion, and the redeploying of available
cash and cash equivalents. We also transferred the remaining securities in the held-to-maturity
portfolio to the available-for-sale portfolio. The increase in available-for-sale securities were
partially offset by $16.8 million of securities being called, having matured, or repayments and
$5.4 million of sales of selected securities. Before the transfer to the available-for-sale
portfolio, our held-to-maturity securities decreased by $1.1 million, or 49.0%, to $1.2 million at
December 31, 2010 from $2.3 million at March 31, 2010. The decrease in the held-to-maturity
securities reflects repayments on mortgage-backed securities of $430,000 and the sales of certain
downgraded securities of $688,000. Proceeds from the sale of available-for-sale securities and
held-to-maturity securities were $5.4 million and $688,000 during the nine months ended December
31, 2010, resulting in gross gains of $148,000 and gross losses of $30,000, respectively. At
December 31, 2010, we also held a $243,000 investment in the common stock of the Federal Home Loan
Bank of Atlanta.
Ground Rent. Our balance in ground rents decreased by $13,000 from $477,000 at March 31, 2010
to $464,000 at December 31, 2010.
Deposits. Total deposits increased by $2.8 million to $139.8 million at December 31, 2010
from $137.0 million at March 31, 2010. Balances of noninterest-bearing deposits increased to $6.2
million at December 31, 2010 from $5.3 million at March 31, 2010. Interest-bearing deposits
increased by $1.9 million to $133.6 million at December 31, 2010 compared to $131.7 million at
March 31, 2010. The majority of the increase was in certificates of deposits which increased by
$1.9 million from $101.1 at March 31, 2010 to $103.0 at December 31, 2010.
Borrowings. We had no borrowings at December 31, 2010 or March 31, 2010.
Results of Operations for the Three Months Ended December 31, 2010 and 2009
Overview. Our net income was $2,000 for the three months ended December 31, 2010, compared to
a net loss of $121,000 for the three months ended December 31, 2009. The net income for the 2010
quarter included improvements in many categories including an increase in net interest income and
gains on sales of available-for-sale securities.
Net Interest Income. Net interest income increased to $969,000 for the three months ended
December 31, 2010 as compared to $901,000 for the three months ended December 31, 2009, due to a
decrease in the cost of funds for deposits, partially offset by a decrease in balances and yield on
earning assets. Our interest rate spread was 2.46% for the three months ended December 31, 2010
compared to 2.38% for the three months ended December 31, 2009 and our net interest margin
increased to 2.61% for the three months ended December 31, 2010 from 2.51% for the three months
ended December 31, 2019.
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Table of Contents
Interest on loans decreased by $45,000. The average balance of loans decreased by $2.0 million
to $88.2 million for the three months ended December 31, 2010 from $90.2 million for the three
months ended December 31, 2009. The average yield on loans decreased to 5.63% for the three months
ended December 31, 2010 from 5.70% for the three months ended December 31, 2009.
Interest on securities available-for-sale increased by $2,000 for the three months ended
December 31, 2010 as compared to the three months ended December 31, 2009, caused by a 93 basis
point decrease in the average yield offset by an $11.6 million increase in the average balance of
investment securities available-for-sale. On December 31, 2010 the entire held-to-maturity
investment portfolio of $1.2 million was transferred to available-for-sale. Interest on securities
held-to-maturity was $16,000 for the three months ended December 31, 2010 as compared to $73,000
for the three months ended December 31, 2009, due to a $1.4 million decrease in the average
balance.
Interest on interest-bearing due from banks was $14,000 for the three months ended December
31, 2010 as compared to $15,000 for the three months ended December 31, 2009, as a result of a $3.3
million decrease in average balances offset by a slight increase in the average yield.
Interest on total deposits decreased to $549,000 for the three months ended December 31, 2010
from $718,000 for the three months ended December 31, 2009, as a 51 basis point decrease in the
average cost of interest-bearing deposits offset a $627,000 increase in the average balance of
interest-bearing deposits. Interest on certificates of deposits decreased $158,000 to $526,000 for
the three months ended December 31, 2010 as a result of the decrease in average cost of deposits
offset by an increase in balances of $1.3 million. Interest on savings deposits decreased $7,000
to $15,000 for the three months ended December 31, 2010 as a result of the decrease in average cost
of deposits offset by an increase in balances of $92,000. Interest on NOW and money market deposit
accounts decreased by $4,000 to $9,000 for the three months ended December 31, 2010 due to a
decrease in the average cost of the deposits and a decrease in balances of $797,000.
Average Balance and Yields. The following table for the three months ended December 31, 2010
presents information regarding average balances of assets and liabilities, the total dollar amounts
of interest income and dividends from average interest-earning assets, the total dollar amounts of
interest expense on average interest-bearing liabilities, and the resulting annualized average
yields and costs. The yields and costs for the periods indicated are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the periods presented.
Average balances have been calculated using daily balances. Amortization of net deferred loan fees
is included in interest income on loans and is insignificant. Non-accruing loans have been included
in the table as loans carrying a zero yield. No tax equivalent adjustments were made.
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Table of Contents
Three Months Ended | ||||||||||||||||||||||||
December 31 | ||||||||||||||||||||||||
2010 | 2009 | |||||||||||||||||||||||
Interest | Interest | |||||||||||||||||||||||
Average | and | Yield/ | Average | and | Yield/ | |||||||||||||||||||
Balance | Dividends | Cost | Balance | Dividends | Cost | |||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Interest-bearing due from banks |
$ | 17,102,278 | $ | 14,185 | 0.33 | % | $ | 20,425,202 | $ | 14,633 | 0.28 | % | ||||||||||||
Investment securities available-for-sale |
39,626,202 | 230,231 | 2.31 | % | 28,033,544 | 228,305 | 3.23 | % | ||||||||||||||||
Investment securities held-to-maturity |
1,458,393 | 15,699 | 4.27 | % | 2,854,799 | 72,614 | 10.09 | % | ||||||||||||||||
Loans receivable, net |
88,189,793 | 1,251,278 | 5.63 | % | 90,187,568 | 1,296,674 | 5.70 | % | ||||||||||||||||
Other interest-earning assets |
712,715 | 6,289 | 3.50 | % | 724,852 | 6,438 | 3.52 | % | ||||||||||||||||
Total interest-earning assets |
147,089,381 | $ | 1,517,682 | 4.09 | % | 142,225,965 | $ | 1,618,664 | 4.52 | % | ||||||||||||||
Non-interest-earning assets |
8,934,506 | 6,036,610 | ||||||||||||||||||||||
Total assets |
$ | 156,023,887 | $ | 148,262,575 | ||||||||||||||||||||
Liabilities and shareholders equity: |
||||||||||||||||||||||||
Time deposits |
$ | 103,389,085 | $ | 525,558 | 2.02 | % | $ | 102,057,270 | $ | 683,402 | 2.66 | % | ||||||||||||
Savings |
22,829,955 | 14,670 | 0.25 | % | 22,737,880 | 21,318 | 0.37 | % | ||||||||||||||||
NOW and money market accounts |
7,277,376 | 8,769 | 0.48 | % | 8,074,483 | 12,898 | 0.63 | % | ||||||||||||||||
Total interest-bearing deposits |
133,496,416 | 548,997 | 1.63 | % | 132,869,633 | 717,618 | 2.14 | % | ||||||||||||||||
Other interest-bearing liabilities |
391,361 | 3 | 0.00 | % | 373,040 | 15 | 0.02 | % | ||||||||||||||||
Total interest-bearing liabilities |
133,887,777 | 549,000 | 1.63 | % | 133,242,673 | 717,633 | 2.14 | % | ||||||||||||||||
Non-interest-bearing deposits |
6,987,958 | 5,233,464 | ||||||||||||||||||||||
Other non-interest-bearing liabilities |
504,825 | 469,478 | ||||||||||||||||||||||
Total liabilities |
141,380,560 | 138,945,615 | ||||||||||||||||||||||
Total shareholders equity |
14,643,327 | 9,316,960 | ||||||||||||||||||||||
Total liabilities and shareholders equity |
$ | 156,023,887 | $ | 148,262,575 | ||||||||||||||||||||
Net interest income |
$ | 968,682 | $ | 901,031 | ||||||||||||||||||||
Interest rate spread |
2.46 | % | 2.38 | % | ||||||||||||||||||||
Net interest margin |
2.61 | % | 2.51 | % | ||||||||||||||||||||
Average interest-earning assets to average
interest-bearing liabilities |
109.86 | % | 106.74 | % | ||||||||||||||||||||
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Table of Contents
Provision for Loan Losses. Our provision for loan losses decreased from $91,000 for the three
months ended December 31, 2009 to $79,000 for the three months ended December 31, 2010. At
December 31, 2010, the allowance for loan losses was $595,000, or 0.68% of the total end of period
loan portfolio, compared to $605,000, or 0.67% of the total end of period loan portfolio, at March
31, 2010. Nonaccrual loans amounted to $269,000, of primarily 1-4 family residential mortgages at
December 31, 2010 and $680,000 of primarily residential construction at March 31, 2010.
Noninterest Revenue. Noninterest revenue increased for the three months ended December 31,
2010 to $128,000 as compared to $12,000 for the three months ended December 31, 2009. The increase
during the 2010 period was primarily due to the gain on sale of certain non-agency and
available-for-sale securities of $62,000 and increased fee income from the sale of non-deposit
products. In addition, the results for the three months ended December 31, 2009 included a loss on
other than temporary impairment of $39,000.
Noninterest Expenses. Noninterest expense increased by $73,000 or 7.7% from $943,000 for the
three months ended December 31, 2009 to $1.0 million for the three months ended December 31, 2010,
primarily due to increases in occupancy and equipment expenses, audit and accounting expenses, and
FDIC premiums, which were partially offset by decreases in compensation expense, data processing
expenses, and stationary and postage.
Income Tax Expense. For the three months ended December 31, 2010, and 2009 we incurred no
income tax expense.
Results of Operations for the Nine Months Ended December 31, 2010 and 2009
Overview. Our net loss was $16,000 for the nine months ended December 31, 2010, compared to a
net loss of $734,000 for the nine months ended December 31, 2009. The net loss for the 2010 year
to date period included improvements in many categories but primarily from increases in net
interest income, gains on sales of securities available-for sale and increase in other noninterest
income.
Net Interest Income. Our net interest income benefited from falling interest rates during the
nine months ended December 31, 2010. Net interest income increased to $2.9 million for the nine
months ended December 31, 2010 as compared to $2.5 million for the nine months ended December 31,
2009. The increase in net interest income is primarily attributable to a 33 basis point increase
in our interest rate spread from 2.19% for the nine months ended December 31, 2009 to 2.52% for the
nine months ended December 31, 2010, as we continued to take advantage of decreasing market
interest rates to reduce our cost of funds while limiting the decrease in yields earned on our
assets. Also contributing to the increase in net interest income was a $4.1 million increase in
the average balance of interest-earning assets from deploying the proceeds of our conversion.
Interest on loans decreased by $31,000, primarily due to a decrease in the average balance of
loans, and due to a slight decrease in the average yield. The average balance of loans decreased
by $153,000 to $89.3 million for the nine months ended December 31, 2010 from $89.4 million for the
nine months ended December 31, 2009. The average yield on loans decreased to 5.67% for the nine
months ended December 31, 2010 from 5.71% for the nine months ended December 31, 2009.
Interest on securities available-for-sale increased by $16,000 for the nine months ended
December 31, 2010 as compared to the nine months ended December 31, 2009, caused by a $7.4 million
increase in the average balance of investment securities available-for-sale offset by a 61 basis
point decrease in the average yield. On December 31, 2010 the entire held-to-maturity investment
portfolio of $1.2 million was transferred to available-for-sale. Interest on securities
held-to-maturity was $63,000 for the nine months ended December 31, 2010 as compared to $306,000
for the nine months ended December 31, 2009 due to the recognition of approximately $150,000 of
discount accretion on our investment securities held-to-maturity during the nine months ended
December 31, 2009. We did not accrete the discount on the securities received in the redemption in
kind for several months of 2009 as we evaluated the portfolio. The decreased yield during the nine
months ended December 31, 2010 was related to slower accretion of the discount related to these
securities.
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Interest on interest-bearing due from banks was $41,000 for the nine months ended December 31,
2010 as compared to $34,000 for the nine months ended December 31, 2009, as a result of an increase
in average balances of investment certificates of deposits of $380,000 offset by a decreases in the
average balance of other interest-bearing due from banks and a slight increase in the average
yield.
Interest on total deposits decreased by $633,000 from $2.4 million for the nine months ended
December 31, 2009 to $1.7 million for the nine months ended December 31, 2010 as a 71 basis point
decrease in the average cost of interest-bearing deposits more than offset the $4.2 million
increase in the average balance of interest-bearing deposits. Interest on certificates of deposits
decreased $584,000 to $1.7 million for the nine months ended December 31, 2010 as a result of the
decrease in average cost of certificates of deposits offset by an increase in average balances of
$3.4 million. Interest on savings deposits decreased $40,000 to $43,000 for the three months ended
December 31, 2010 as a result of an increase in average balances of $1.1 million offset by a
decrease in cost of savings deposits of 25 basis points. Interest on NOW and money market accounts
decreased by $8,000 to $31,000 for the nine months ended December 31, 2010 due to a decrease in the
average cost of the deposits and a decrease in average balance of $317,000.
Average Balance and Yields. The following table for the nine months ended December 31, 2010
and 2009 presents information regarding average balances of assets and liabilities, the total
dollar amounts of interest income and dividends from average interest-earning assets, the total
dollar amounts of interest expense on average interest-bearing liabilities, and the resulting
annualized average yields and costs. The yields and costs for the periods indicated are derived by
dividing income or expense by the average balance of assets or liabilities, respectively, for the
periods presented. Average balances have been calculated using daily balances. Amortization of net
deferred loan fees is included in interest income on loans and is insignificant. Non-accruing loans
have been included in the table as loans carrying a zero yield. No tax equivalent adjustments were
made.
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Nine Months Ended | ||||||||||||||||||||||||
December 31 | ||||||||||||||||||||||||
2010 | 2009 | |||||||||||||||||||||||
Interest | Interest | |||||||||||||||||||||||
Average | and | Yield/ | Average | and | Yield/ | |||||||||||||||||||
Balance | Dividends | Cost | Balance | Dividends | Cost | |||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Interest-bearing balances due from banks |
$ | 17,623,415 | $ | 41,306 | 0.31 | % | $ | 19,546,250 | $ | 34,097 | 0.23 | % | ||||||||||||
Investment securities available-for-sale |
34,672,885 | 665,370 | 2.55 | % | 27,297,341 | 649,429 | 3.16 | % | ||||||||||||||||
Investment securities held-to-maturity |
1,802,920 | 63,334 | 4.66 | % | 2,958,639 | 306,315 | 13.74 | % | ||||||||||||||||
Loans receivable, net |
89,271,062 | 3,814,392 | 5.67 | % | 89,423,671 | 3,844,980 | 5.71 | % | ||||||||||||||||
Other interest-earning assets |
716,805 | 21,255 | 3.94 | % | 731,216 | 22,122 | 4.02 | % | ||||||||||||||||
Total interest-earning assets |
144,087,087 | $ | 4,605,657 | 4.24 | % | 139,957,117 | $ | 4,856,943 | 4.61 | % | ||||||||||||||
Non-interest-earning assets |
7,103,855 | 4,810,827 | ||||||||||||||||||||||
Total assets |
$ | 151,190,942 | $ | 144,767,944 | ||||||||||||||||||||
Liabilities and shareholders equity: |
||||||||||||||||||||||||
Time deposits |
$ | 102,851,672 | $ | 1,658,317 | 2.14 | % | $ | 99,495,982 | $ | 2,242,214 | 2.99 | % | ||||||||||||
Savings |
23,209,295 | 43,301 | 0.25 | % | 22,091,257 | 83,539 | 0.50 | % | ||||||||||||||||
NOW and money market accounts |
7,551,915 | 31,449 | 0.55 | % | 7,868,993 | 39,863 | 0.67 | % | ||||||||||||||||
Total interest-bearing deposits |
133,612,882 | 1,733,067 | 1.72 | % | 129,456,232 | 2,365,616 | 2.43 | % | ||||||||||||||||
Other interest-bearing liabilities |
473,608 | 42 | 0.01 | % | 453,309 | 64 | 0.02 | % | ||||||||||||||||
Total interest-bearing liabilities |
134,086,490 | 1,733,109 | 1.72 | % | 129,909,541 | 2,365,680 | 2.42 | % | ||||||||||||||||
Non-interest-bearing deposits |
5,982,406 | 4,941,600 | ||||||||||||||||||||||
Other non-interest-bearing liabilities |
456,261 | 485,675 | ||||||||||||||||||||||
Total liabilities |
140,525,157 | 135,336,816 | ||||||||||||||||||||||
Total shareholders equity |
10,665,785 | 9,431,128 | ||||||||||||||||||||||
Total liabilities and shareholders equity |
$ | 151,190,942 | $ | 144,767,944 | ||||||||||||||||||||
Net interest income |
$ | 2,872,548 | $ | 2,491,263 | ||||||||||||||||||||
Interest rate spread |
2.52 | % | 2.19 | % | ||||||||||||||||||||
Net interest margin |
2.65 | % | 2.36 | % | ||||||||||||||||||||
Average interest-earning assets to average
interest-bearing liabilities |
107.46 | % | 107.73 | % | ||||||||||||||||||||
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Provision for Loan Losses. Our provision for loan losses decreased from $201,000 for the nine
months ended December 31, 2009 to $191,000 for the nine months ended December 31, 2010. At
December 31, 2010, the allowance for loan losses was $595,000, or 0.68% of the total end of period
loan portfolio, compared to $605,000, or 0.67% of the total end of period loan portfolio, at March
31, 2010. Nonaccrual loans amounted to $269,000, of primarily 1-4 family residential mortgages at
December 31, 2010 and $680,000 of primarily residential construction at March 31, 2010. There was
one loan transferred to other real estate owned (OREO) in the nine months ended December 31, 2010
in the amount of $434,000 after a charge off of $174,000. The loan was classified as nonaccrual
with a specific reserve at March 31, 2010. There was a recovery of $2,000 during the nine months
ended December 31, 2010.
Noninterest Revenue. Noninterest revenue increased for the nine months ended December 31,
2010 to $336,000 as compared to a loss of $28,000 for the nine months ended December 31, 2009. The
increase during the 2010 period was primarily due to the gain on sale of certain non-agency
available-for-sale securities and increased fee income from the sale of non-deposit products. In
addition, the results for the nine months ended December 31, 2009 included an other than temporary
impairment charge of $193,000.
Noninterest Expenses. Noninterest expenses increased by $37,000 from $3.0 million for the
nine months ended December 31, 2009 to $3.0 million for the nine months ended December 31, 2010,
primarily due to increases in occupancy expense, audit, and accounting expenses and other operation
expenses partially offset by reductions in compensation expense, and stationary and postage
expense.
Income Tax Expense. For the nine months ended December 31, 2010 and 2009 we incurred no
income tax expense.
Liquidity and Capital Resources
Liquidity Management. Liquidity is the ability to meet current and future financial
obligations of a short-term nature. Our primary sources of funds available to meet short-term
liquidity needs consist of deposit inflows, loan repayments and maturities and sales of investment
securities. While maturities and scheduled amortization of loans and securities are predictable
sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest
rates, economic conditions and competition.
We regularly adjust our investments in liquid assets available to meet short-term liquidity
needs based upon our assessment of (i) expected loan demand, (ii) expected deposit flows, (iii)
yields available on interest-earning deposits and securities and (iv) the objectives of our
asset/liability management policy. We do not have long-term debt or other financial obligations
that would create long-term liquidity concerns.
Our most liquid assets are cash and cash equivalents and interest-bearing deposits. The level
of these assets depends on our operating, financing, lending and investing activities during any
given period. At December 31, 2010, cash and cash equivalents totaled $11.4 million. Securities
classified as available-for-sale, amounted to $48.0 million after the Company transferred the total
portfolio of the held-to-maturity securities of $1.2 million to the available-for-sale portfolio at
December 31, 2010. The interest-bearing deposits in banks of $1.4 million at December 31, 2010,
provide additional sources of liquidity. Our liquidity has increased as customers have sought the
safety of FDIC insured deposits. In addition, at December 31, 2010, we had the ability to borrow a
total of approximately $30.7 million from the Federal Home Loan Bank of Atlanta. At December 31,
2010, we had no Federal Home Loan Bank advances outstanding.
At December 31, 2010 we had $9.4 million in commitments to extend credit outstanding.
Certificates of deposit due within one year of December 31, 2010 totaled $45.8 million, or 44.4% of
certificates of deposit. We believe the large percentage of certificates of deposit that mature
within one year reflects customers hesitancy to invest their funds for long periods due to the
recent low interest rate environment and local competitive pressures. If these maturing deposits
do not remain with us, we will be required to seek other sources of funds, including other
certificates of deposit and borrowings. Depending on market conditions, we may be required to pay
higher rates on such deposits or other borrowings than we currently pay on the certificates of
deposit due on or before December 31, 2011. We believe, however, based on past experience that a
significant portion of our certificates of deposit will remain with us. We have the ability to
attract and retain deposits by adjusting the interest rates offered.
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Our primary investing activities are the origination of loans and the purchase of securities.
Our primary financing activity is the origination of deposit accounts. Deposit flows are affected
by the overall level of interest rates, the interest rates and product offered by us and our local
competitors and other factors. We generally manage the pricing of our deposits to be competitive.
Occasionally, we offer promotional rates on certain deposit products to attract deposits.
Capital Management. We are subject to various regulatory capital requirements administered by
the Office of Thrift Supervision, including a risk-based capital measure. The risk-based capital
guidelines include both a definition of capital and a framework for calculating risk-weighted
assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At
December 31, 2010, we exceeded all of our regulatory capital requirements and were considered well
capitalized under regulatory guidelines.
The capital from our stock offering significantly increased our liquidity and capital
resources. Over time, the initial level of liquidity will be reduced as net proceeds from the
stock offering are used for general corporate purposes, including the funding of lending
activities. Our financial condition and results of operations were enhanced by the capital from
the offering, resulting in increased net interest-earning assets and revenue. However, the large
increase in equity resulting from the capital raised in the offering will, initially, have an
adverse impact on our return on equity. Following the offering, we may use capital management
tools such as cash dividends and common share repurchases. However, under Office of Thrift
Supervision regulations, we will not be allowed to repurchase any shares during the first year
following the offering, except to fund the restricted stock awards under the equity benefit plan
after its approval by shareholders, unless extraordinary circumstances exist, and we receive
regulatory approval.
Off-Balance Sheet Arrangements. In the normal course of operations, we engage in a variety of
financial transactions that, in accordance with generally accepted accounting principles are not
recorded in our financial statements. These transactions involve, to varying degrees, elements of
credit, interest rate, and liquidity risk. Such transactions are used primarily to manage
customers requests for funding and take the form of loan commitments, unused lines of credit, and
letters of credit. For information about our loan commitments, unused lines of credit, and letters
of credit, see note 8 of the notes to unaudited consolidated financial statements set forth above
in Item 1.
For the three months ended December 31, 2010, we did not engage in any off-balance sheet
transactions reasonably likely to have a material effect on our financial condition, results of
operations or cash flows.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
This item is not applicable as the Company is a smaller reporting company.
Item 4. Controls and Procedures
The Companys management, including the Companys principal executive officer and principal
financial officer, have evaluated the effectiveness of the Companys disclosure controls and
procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange
Act of 1934, as amended, (the Exchange Act). Based upon their evaluation, the principal
executive officer and principal financial officer concluded that, as of the end of the period
covered by this report, the Companys disclosure controls and procedures were effective for the
purpose of ensuring that the information required to be disclosed in the reports that the Company
files or submits under the Exchange Act with the Securities and Exchange Commission (the SEC) (1)
is recorded, processed, summarized and reported within the time periods specified in the SECs
rules and forms, and (2) is accumulated and communicated to the Companys management, including its
principal executive and principal financial officers, as appropriate to allow timely decisions
regarding required disclosure. In addition, based on that evaluation, no change in the Companys
internal control over financial reporting occurred during the quarter ended December 31, 2010 that
has materially affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any pending legal proceedings. The Bank is not involved in any
pending legal proceedings other than routine legal proceedings occurring in the ordinary course of
business. The Banks management believes that such routine legal proceedings, in the aggregate,
are immaterial to the Banks financial condition and results of operations.
Item 1A. Risk Factors
For information regarding the Companys risk factors, see Risk Factors in the Companys
prospectus, filed with the Securities and Exchange Commission pursuant to Rule 424(b)(3) on August
12, 2010. As of December 31, 2010, the risk factors of the Company have not changed materially
from those disclosed in the prospectus.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. [Removed and Reserved]
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits
3.1 | Articles of Incorporation of Madison Bancorp, Inc. (1) |
|||
3.2 | Bylaws of Madison Bancorp, Inc. (2) |
|||
4.0 | Form of Stock Certificate of Madison Bancorp, Inc. (3) |
|||
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer and Chief Financial Officer |
|||
32.0 | Section 1350 Certification |
(1) | Incorporated herein by reference to Exhibit 3.1 to the Companys Registration
Statement on Form S-1 (File No. 333-167455), as amended, initially filed with the
Securities and Exchange Commission on June 11, 2010. |
|
(2) | Incorporated herein by reference to Exhibit 3.2 to the Companys Registration
Statement on Form S-1 (File No. 333-167455), as amended, initially filed with the
Securities and Exchange Commission on June 11, 2010. |
|
(3) | Incorporated herein by reference to Exhibit 4 to the Companys Registration
Statement on Form S-1 (File No. 333-167455), as amended, initially filed with the
Securities and Exchange Commission on June 11, 2010. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MADISON BANCORP, INC. |
||||
Dated: February 10, 2011 | By: | /s/ Michael P. Gavin | ||
Michael P. Gavin | ||||
President and Chief Executive Officer (principal executive) |
||||
/s/ Paul A. Lovelace | ||||
Paul A. Lovelace | ||||
Senior Vice President and Chief Financial Officer (principal financial and accounting officer) |
25