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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x	Quarterly report under section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended March 31, 2011

or

 

¨	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 33-76644

 

 

COMMUNITYCORP

(Exact name of registrant as specified in its charter)

 

 

 

South Carolina		57-1019001
(State or other jurisdiction of incorporation)		(I.R.S. Employer Identification No.)

1100 N. Jefferies Boulevard

Walterboro, SC 29488

(Address of principal executive offices, including zip code)

(843) 549-2265

(Issuer’s telephone number, including area code)

 

 

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  x    NO  ¨

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  ¨    NO  ¨

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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		¨  (Do not check if a smaller reporting company)		Smaller reporting company		x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:

233,003 shares of common stock, $5.00 par value, as of April 28, 2011

 

 

 

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Index

 

				Page No.
PART I. - FINANCIAL INFORMATION
Item 1.		Financial Statements (Unaudited)
		Condensed Consolidated Balance Sheets - March 31, 2011 and December 31, 2010			3
		Condensed Consolidated Statements of Operations - Three months ended March 31, 2011 and 2010			4
		Condensed Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income - Three months ended March 31, 2011 and 2010			5
		Condensed Consolidated Statements of Cash Flows - Three months ended March 31, 2011 and 2010			6
		Notes to Condensed Consolidated Financial Statements			7 - 17
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			18 - 25
Item 3.		Quantitative and Qualitative Disclosure About Market Risk			25
Item 4.		Controls and Procedures			25
PART II. - OTHER INFORMATION
Item 1.		Legal Proceedings			26
Item 1A.		Risk Factors			26
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			26
Item 3.		Defaults Under Senior Securities			26
Item 4.		Removed and Reserved			26
Item 5.		Other Information			26
Item 6.		Exhibits			26
Signatures					27

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COMMUNITYCORP

Condensed Consolidated Balance Sheets

 

		March 31,				December 31,
		2011				2010
Assets:
Cash and cash equivalents:
Cash and due from banks		$	3,513,710			$	4,206,974
Interest bearing deposits			11,380,149				9,966,826
Federal funds sold			3,944,000				2,004,000
Total cash and cash equivalents			18,837,859				16,177,800
Time deposits with other banks			750,000				1,000,000
Investment securities:
Securities available-for-sale			28,977,455				26,955,350
Securities held-to-maturity (estimated fair value of $309,067 in 2011 and $309,023 in 2010)			299,894				299,885
Nonmarketable equity securities			302,300				302,300
Total investment securities			29,579,649				27,557,535
Loans receivable			102,761,061				105,297,684
Less allowance for loan losses			(1,961,282	)			(2,019,497	)
Loans receivable, net			100,799,779				103,278,187
Premises and equipment, net			2,876,624				2,903,212
Accrued interest receivable			720,470				785,859
Other real estate owned			2,760,195				2,764,189
Other assets			1,195,301				1,361,893
Total assets		$	157,519,877			$	155,828,675
Liabilities:
Deposits:
Noninterest-bearing transaction accounts		$	15,358,963			$	14,077,860
Interest-bearing transaction accounts			21,139,718				21,295,198
Money market savings accounts			4,287,630				4,116,167
Savings			15,502,266				14,452,567
Time deposits $100,000 and over			45,919,462				46,142,153
Other time deposits			37,038,061				37,499,876
Total deposits			139,246,100				137,583,821
Accrued interest payable			397,807				451,331
Other liabilities			98,128				154,686
Total liabilities			139,742,035				138,189,838
Shareholders’ Equity:
Preferred stock, $5 par value, 3,000,000 shares authorized and unissued
Common stock, $5 par value, 3,000,000 shares authorized; 300,000 shares issued			1,500,000				1,500,000
Capital surplus			1,737,924				1,737,924
Retained earnings			18,843,203				18,782,807
Accumulated other comprehensive income			13,857				(64,752	)
Treasury Stock (66,997 shares issued and outstanding)			(4,317,142	)			(4,317,142	)
Total shareholders’ equity			17,777,842				17,638,837
Total liabilities and shareholders’ equity		$	157,519,877			$	155,828,675

See notes to condensed consolidated financial statements.

 

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COMMUNITYCORP

Condensed Consolidated Statements of Operations

(Unaudited)

 

		Three Months Ended March 31,
		2011				2010
Interest income:
Loans, including fees		$	1,563,983			$	1,835,457
Securities			197,908				214,583
Other interest income			10,803				12,858
Total			1,772,694				2,062,898
Interest expense:
Deposit accounts			404,587				605,259
Other interest expense			—				1
			404,587				605,260
Net interest income			1,368,107				1,457,638
Provision for loan losses			225,000				365,000
Net interest income after provision for loan losses			1,143,107				1,092,638
Noninterest income:
Service charges			103,644				99,242
Other income			32,306				41,511
Total			135,950				140,753
Noninterest expenses:
Salaries and benefits			498,198				494,103
Net occupancy expense			64,988				62,931
Equipment expense			90,780				93,380
Other operating expenses			414,694				302,872
Total			1,068,660				953,286
Income before taxes			210,397				280,105
Income tax provision			33,500				75,000
Net income		$	176,897			$	205,105
Earnings per share:
Weighted average common shares outstanding			233,003				234,010
Net income per common share		$	.76			$	.88

See notes to condensed consolidated financial statements.

 

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COMMUNITYCORP

Condensed Consolidated Statement of Shareholders’ Equity and Comprehensive Income

for the three months ended March 31, 2011 and 2010

(Unaudited)

 

		Common stock								Capital Surplus				Accumulated Other Comprehensive Income (Loss)				Retained Earnings				Treasury Stock				Total
		Shares				Amount
Balance, December 31, 2010			300,000			$	1,500,000			$	1,737,924			$	(64,752	)		$	18,782,807			$	(4,317,142	)		$	17,638,837
Cash dividends paid ($ .50 per share)																			(116,501	)							(116,501	)
Net income for the period																			176,897								176,897
Other comprehensive income, net of tax benefit of $41,405															78,609												78,609
Comprehensive income																											255,506
Balance, March 31, 2011			300,000			$	1,500,000			$	1,737,924			$	13,857			$	18,843,203			$	(4,317,142	)		$	17,777,842
Balance, December 31, 2009			300,000			$	1,500,000			$	1,737,924			$	286,072			$	18,440,398			$	(4,218,741	)		$	17,745,653
Cash dividends paid ($ .50 per share)																			(117,001	)							(117,001	)
Net income for the period																			205,105								205,105
Other comprehensive income, net of tax expense of $19,934															37,847												37,847
Comprehensive income																											242,952
Purchase of treasury stock																							(98,401	)			(98,401	)
Balance, March 31, 2010			300,000			$	1,500,000			$	1,737,924			$	323,919			$	18,528,502			$	(4,317,142	)		$	17,773,203

See notes to condensed consolidated financial statements.

 

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COMMUNITYCORP

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

		Three Months Ended March 31,
		2011				2010
Cash flows from operating activities:
Net income		$	176,897			$	205,105
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			225,000				365,000
Depreciation expense			57,767				59,536
Net premium amortization of investment securities			7,687				18,309
(Increase) decrease in accrued interest receivable			65,389				(3,186	)
Decrease in accrued interest payable			(53,524	)			(92,073	)
Decrease in other assets			243,688				198,314
Increase (decrease) in other liabilities			(56,558	)			9,309
Net cash provided by operating activities			666,346				760,314
Cash flows from investing activities:
Proceeds from maturities of securities available-for-sale			574,049				3,153,996
Purchases of securities available-for-sale			(2,483,837	)			(400,000	)
Purchases of nonmarketable equity securities			—				(100	)
Net decrease in loans to customers			2,138,902				645,556
Net decrease in time deposits in other banks			250,000				—
Purchases of premises and equipment			(31,179	)			(16,577	)
Net cash provided by investing activities			447,935				3,382,875
Cash flows from financing activities:
Net increase (decrease) in demand deposits, interest-bearing transaction accounts and savings accounts			2,346,785				(1,687,054	)
Net increase (decrease) in time deposits			(684,506	)			1,034,294
Cash dividends paid			(116,501	)			(117,001	)
Purchase of treasury stock			—				(98,401	)
Net cash provided (used) by financing activities			1,545,778				(868,162	)
Net increase in cash and cash equivalents			2,660,059				3,275,027
Cash and cash equivalents, beginning of period			16,177,800				17,694,266
Cash and cash equivalents, end of period		$	18,837,859			$	20,969,293
Cash paid during the period for:
Income taxes		$	10,000			$	—
Interest		$	458,111			$	697,333
Supplemental noncash investing and financing activities
Foreclosures on loans		$	114,506			$	—

See notes to condensed consolidated financial statements.

 

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1 - BASIS OF PRESENTATION

The accompanying consolidated financial statements have been prepared in accordance with the requirements for interim financial statements and, accordingly, they are condensed and omit disclosures, which would substantially duplicate those contained in the most recent annual report to shareholders. The financial statements as of March 31, 2011 and for the interim periods ended March 31, 2011 and 2010 are unaudited and, in our opinion, include all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation. The results of operations for the three months ended March 31, 2011 are not necessarily indicative of the results which may be expected for the entire calendar year. The financial information as of December 31, 2010 has been derived from the audited financial statements as of that date. For further information, refer to the financial statements and the notes included in Communitycorp’s 2010 Annual Report.

NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS

The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting, and / or disclosure of financial information by the Company.

In July 2010, the Receivables topic of the Accounting Standards Codification (“ASC”) was amended by Accounting Standards Update (“ASU”) 2010-20 to require expanded disclosures related to a company’s allowance for credit losses and the credit quality of its financing receivables. The amendments require the allowance disclosures to be provided on a disaggregated basis. The Company is required to include these disclosures in their interim and annual financial statements. See Note 6.

Disclosures about Troubled Debt Restructurings (“TDRs”) required by ASU 2010-20 were deferred by the Financial Accounting Standards Board (“FASB”) in ASU 2011-01 issued in January 2011. In April 2011 FASB issued ASU 2011-02 to assist creditors with their determination of when a restructuring is a TDR. The determination is based on whether the restructuring constitutes a concession and whether the debtor is experiencing financial difficulties as both events must be present.

Disclosures related to TDRs under ASU 2010-20 will be effective for reporting periods beginning after June 15, 2011.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

NOTE 3 - COMPREHENSIVE INCOME

The components of other comprehensive income and related tax effects are as follows:

 

		Pre-tax Amount				Tax Expense (Benefit)				Net-of-tax Amount
For the Three Months Ended March 31, 2011:
Unrealized gains on securities available-for-sale		$	120,014			$	(41,405	)		$	78,609
Reclassification adjustment for gains (losses) realized in net income			—				—				—
Other comprehensive income - net unrealized gains on securities		$	120,014			$	(41,405	)		$	78,609
For the Three Months Ended March 31, 2010:
Unrealized gains on securities available-for-sale		$	57,781			$	19,934			$	37,847
Reclassification adjustment for gains (losses) realized in net income			—				—				—
Other comprehensive income - net unrealized gains on securities		$	57,781			$	19,934			$	37,847

 

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Accumulated other comprehensive income consists of the net unrealized gains and (losses) on securities available for sale, net of the deferred tax effects.

NOTE 4 - RECLASSIFICATIONS

Certain captions and amounts in the financial statements in the Company’s Form 10-Q for the quarter ended March 31, 2010 and Form 10-K for the year ended December 31, 2010 were reclassified to conform to the March 31, 2011 presentation.

NOTE 5 - INVESTMENT SECURITIES

Securities Available-for-Sale

The amortized cost and estimated fair values of securities available-for-sale were:

 

		Amortized Cost				Gross Unrealized								Fair Value
						Gains				Losses
March 31, 2011
Government-sponsored enterprises		$	14,892,174			$	9,618			$	301,946			$	14,599,846
Mortgage-backed securities			3,148,913				24,639				16,229				3,157,323
Obligations of state and local governments			10,715,212				335,824				30,750				11,020,286
Other			200,000				—				—				200,000
Total		$	28,956,299			$	370,081			$	348,925			$	28,977,455
December 31, 2010
Government-sponsored enterprises		$	13,891,989			$	11,473			$	312,020			$	13,591,442
Mortgage-backed securities			1,842,249				24,286				15,269				1,851,266
Obligations of state and local governments			11,119,970				247,905				55,233				11,312,642
Other			200,000				—				—				200,000
Total		$	27,054,208			$	283,664			$	382,522			$	26,955,350

The following table shows gross unrealized losses and fair value, aggregated by investment category, and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2011 and December 31, 2010.

 

		March 31, 2011								December 31, 2010
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
Less Than 12 Months
Government-sponsored enterprises		$	12,890,228			$	301,946			$	12,379,970			$	312,019
Mortgaged-backed Securities			1,982,790				16,229				964,073				15,270
Obligations of state and local governments			996,806				30,750				2,151,511				55,233
			15,869,824				348,925				15,495,554				382,522
12 Months or More
Obligations of state and local governments			—				—				—				—
Obligations of state and local governments		$	15,869,824			$	348,925			$	15,495,544			$	382,522

A total of thirty-five available-for-sale securities were in a loss position at March 31, 2011. Of these securities, none were in a loss position of twelve months or more. The Company believes that the deterioration in value is attributable to changes in market interest rates and not in credit quality and considers these losses temporary. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities before recovery of their amortized costs. Management evaluates investment securities in a loss position based on length of impairment, severity of impairment and other factors.

The amortized cost and estimated fair values of securities available-for-sale based on their contractual maturities are summarized below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations without penalty.

 

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		March 31, 2011
		Amortized Cost				Fair Value
Due in one year or less		$	205,042				205,326
Due after one year but within five years			2,611,917				2,637,252
Due after five years but within ten years			15,244,224				15,352,419
Due after ten years			7,746,203				7,625,135
			25,807,386				25,820,132
Mortgage-backed securities			3,148,913				3,157,323
Total		$	28,956,299			$	28,977,455

Securities Held-To-Maturity

The amortized cost and estimated fair values of securities held-to-maturity were:

 

		Amortized Cost				Gross Unrealized								Fair Value
						Gains				Losses
March 31, 2011 -
Obligations of state and local governments		$	299,894			$	9,173			$	—			$	309,067
December 31, 2010 -
Obligations of state and local governments		$	299,885			$	9,138			$	—			$	309,023

The amortized cost and estimated fair values of securities held-to-maturity based on their contractual maturities are summarized below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations without penalty.

 

		March 31, 2011
		Amortized Cost				Fair Value
Due after one year but within five years		$	99,894			$	101,477
Due after five years but within ten years			200,000				207,590
Total		$	299,894			$	309,067

NOTE 6 - LOANS RECEIVABLE

Loans consisted of the following:

 

		March 31,				December 31,
		2011				2010
Real estate – construction		$	12,150,272			$	12,674,197
Real estate – mortgage			74,752,125				76,149,357
Commercial and industrial			11,104,202				11,602,305
Consumer and other			4,754,462				4,871,825
Total gross loans		$	102,761,061			$	105,297,684
The loan portfolio consisted of loans having :
Variable rates loans		$	1,605,731			$	1,556,700
Fixed rates			101,155,330				103,740,984
Total gross loans		$	102,761,061			$	105,297,684

 

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Transactions in the allowance for loan losses are summarized below:

 

		March 31,				December 31,
		2011				2010
Balance, beginning of year		$	2,019,497			$	2,053,340
Provision charged to operations			225,000				1,866,000
Recoveries on loans previously charged-off			858				11,932
Loans charged-off			(284,073	)			(1,911,775	)
Balance, end of year		$	1,961,282			$	2,019,497

The following is an analysis of the allowance for loan losses by class of loans for the three months ended March 31, 2011 and the year ended December 31, 2010

March 31, 2011

 

						Real Estate Loans
(Dollars in Thousands)		Total				Construction				Mortgage				Total Real Estate Loans				Commercial				Consumer and Other
Beginning Balance		$	2,019			$	807			$	404			$	1,211			$	606			$	202
Charge-offs			(284	)			(161	)			(57	)			(218	)			(60	)			(6	)
Recoveries			1				—				1				1				—				—
Provisions			225				139				44				183				42				—
Ending balance		$	1,961			$	785			$	392			$	1,177			$	588			$	196
December 31, 2010
						Real Estate Loans
(Dollars in Thousands)		Total				Construction				Mortgage				Total Real Estate Loans				Commercial				Consumer and Other
Beginning Balance		$	2,053			$	826			$	413			$	1,239			$	616			$	198
Charge-offs			(1,912	)			(765	)			(382	)			(1,147	)			(574	)			(191	)
Recoveries			12				—				—				—				4				8
Provisions			1,866				746				373				1,119				560				187
Ending balance		$	2,019			$	807			$	404			$	1,211			$	606			$	202

At March 31, 2011 and December 31, 2010 the allocation of the allowance for loan losses and the recorded investment in loans summarized on the basis of the Company’s impairment methodology was as follows:

March 31, 2011

 

						Real Estate Loans
(Dollars in Thousands)		Total				Construction				Mortgage				Total Real Estate Loans				Commercial				Consumer and Other
Allowance for Loan Losses
Examined for Impairment
Individually		$	600			$	475			$	40			$	515			$	65			$	20
Collectively			1,361				310				352				662				523				176
Allowance for Loan Losses		$	1,961			$	785			$	392			$	1,177			$	588			$	196

 

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						Real Estate Loans
(Dollars in Thousands)		Total				Construction				Mortgage				Total Real Estate Loans				Commercial				Consumer and Other
Total Loans
Examined for Impairment
Individually		$	7,321			$	3,005			$	3,917			$	6,922			$	288				111
Collectively			95,440				9,145				70,835				79,980				10,816				4,644
Total Loans		$	102,761			$	12,150			$	74,752			$	86,902			$	11,104			$	4,755
December 31, 2010
						Real Estate Loans
(Dollars in Thousands)		Total				Construction				Mortgage				Total Real Estate Loans				Commercial				Consumer and Other
Allowance for Loan Losses
Examined for Impairment
Individually		$	373			$	296			$	25			$	321			$	40				12
Collectively			1,646				511				379				890				566				190
Allowance for Loan Losses		$	2,019			$	807			$	404			$	1,211			$	606			$	202
Total Loans
Examined for Impairment
Individually		$	7,703			$	3,162			$	4,121			$	7,283			$	303				117
Collectively			97,595				9,512				72,029				81,541				11,299				4,755
Total Loans		$	105,298				12,674				76,150				88,824				11,602				4,872

The Company identifies impaired loans through its normal internal loan review process. Loans on the Company’s problem loan watch list are considered potentially impaired loans. These loans are evaluated in determining whether all outstanding principal and interest are expected to be collected. Loans are not considered impaired if a minimal delay occurs and all amounts due including accrued interest at the contractual interest rate for the period of delay are expected to be collected.

 

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The following summarizes the Company’s impaired loans by class as of March 31, 2011 and December 31, 2010.

March 31, 2011

 

(Dollars in Thousands)		Recorded Investment				Unpaid Principal Balance				Related Allowance
With no related allowance recorded:
Real estate
Construction		$	1,260			$	1,260			$	—
Mortgage			3,817				4,087				—
Total real estate loans			5,077				5,347				—
Commercial			207				243				—
Consumer and other			59				59				—
			5,343				5,649				—
With an allowance recorded:
Real estate
Construction		$	1,745			$	1,830			$	475
Mortgage			100				100				40
Total real estate loans			1,845				1,930				515
Commercial			81				722				65
Consumer and other			52				52				20
			1,978				2,704				600
Total
Real estate
Construction		$	3,005			$	3,090			$	475
Mortgage			3,917				4,187				40
Total real estate loans			6,922				7,277				515
Commercial			288				965				65
Consumer and other			111				111				20
Total		$	7,321			$	8,353				600
December 31, 2010
With no related allowance recorded:
Real estate
Construction		$	1,326			$	1,294			$	—
Mortgage			4,016				4,196				—
Total real estate loans			5,342				5,490				—
Commercial			218				249				—
Consumer and other			62				61
			5,622				5,800				—
With an allowance recorded:
Real estate
Construction		$	1,836			$	1,879			$	296
Mortgage			105				103				25
Total real estate loans			1,941				1,982				321
Commercial			85				741				40
Consumer and other			55				53				12
			2,081				2,776				373
Total
Real estate
Construction		$	3,162			$	3,173			$	296
Mortgage			4,121				4,299				25
Total real estate loans			7,283				7,472				321
Commercial			303				990				40
Consumer and other			117				114				12
Total		$	7,703			$	8,576				373

 

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The average recorded investment in impaired loans for the three months and year ended March 31, 2011 and December 31, 2010, was $7,511,922 and $8,512,074, respectively.

Nonaccrual loans were $5,218,190 and $4,805,658 at March 31, 2011 and December 31, 2010, respectively.

Interest income on impaired loans other than nonaccrual loans is recognized on an accrual basis. Interest income on nonaccrual loans is recognized only as collected. During the three months ended March 31, 2011 and for the year ended December 31, 2010, interest income recognized on nonaccrual loans was $9,245 and $30,674, respectively. If the nonaccrual loans had been accruing interest at their original contracted rates, related income would have been $84,035 and $275,415 for the quarter ended March 31, 2011 and for the year ended December 31, 2010, respectively.

A summary of current, past due and nonaccrual loans as of March 31, 2011 and December 31, 2010 were as follows:

March 31, 2011

 

		Past Due				Past Due Over 90 days
(Dollars in Thousands)		30-89 Days				and Accruing				Non- Accruing				Total Past Due				Current				Total Loans
Real estate
Construction		$	381			$	—			$	2,886			$	3,267			$	8,883			$	12,150
Mortgage			786				—				2,079				2,865				71,887				74,752
Total real estate loans			1,167				—				4,965				6,132				80,770				86,902
Commercial			95				—				194				289				10,815				11,104
Consumer and other			61				1				59				121				4,634				4,755
Totals		$	1,323			$	1			$	5,218			$	6,542			$	96,219			$	102,761
December 31, 2010
		Past Due				Past Due Over 90 days
(Dollars in Thousands)		30-89 Days				and Accruing				Non- Accruing				Total Past Due				Current				Total Loans
Real estate
Construction		$	397			$	—			$	3,010			$	3,407			$	9,267			$	12,674
Mortgage			768				—				1,533				2,301				73,849				76,150
Total real estate loans			1,165				—				4,543				5,708				83,116				88,824
Commercial			99				—				203				302				11,300				11,602
Consumer and other			63				—				60				123				4,749				4,872
Totals		$	1,327			$	—			$	4,806			$	6,133			$	99,165			$	105,298

Loans are categorized into risk categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The following definitions are utilized for risk ratings, which are consistent with the definitions used in supervisory guidance:

Special Mention - Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

 

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As of March 31, 2011 and December 31, 2010, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

March 31, 2011

 

						Real Estate Loans
(Dollars in Thousands)		Total				Construction				Mortgage				Total Real Estate Loans				Commercial				Consumer and Other
Pass		$	98,765			$	8,753			$	74,752			$	83,505			$	10,709			$	4,551
Special mention			498				246				—				246				163				89
Substandard			3,368				3,021				—				3,021				233				114
Doubtful			130				130				—				130				—				—
Total		$	102,761			$	12,150			$	74,752			$	86,902			$	11,105			$	4,754
December 31, 2010
						Real Estate Loans
(Dollars in Thousands)		Total				Construction				Mortgage				Total Real Estate Loans				Commercial				and Other Consumer
Pass		$	98,620			$	8,847			$	76,150			$	84,997			$	9,793			$	3,830
Special mention			1,378				681				—				681				551				146
Substandard			5,300				3,146				—				3,146				1,258				896
Doubtful			—				—				—				—				—				—
Total		$	105,298			$	12,674			$	76,150			$	88,824			$	11,602			$	4,872

NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value of significant financial instruments:

Cash and Due from Banks and Interest-bearing Deposits with Other Banks - The carrying amount is a reasonable estimate of fair value.

Time Deposits in other Banks - The carrying amount is a reasonable estimate of fair value.

Nonmarketable Equity Securities - The carrying amount of nonmarketable equity securities is a reasonable estimate of fair value since no ready market exists for these securities.

Loans Receivable - For certain categories of loans, such as variable rate loans which are repriced frequently and have no significant change in credit risk, fair values are based on the carrying amounts. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Deposits - The fair value of demand deposits, savings, and money market accounts is the amount payable on demand at the reporting date. The fair values of certificates of deposit are estimated using a discounted cash flow calculation that applies current interest rates to a schedule of aggregated expected maturities.

Accrued Interest Receivable and Payable - The carrying value of these instruments is a reasonable estimate of fair value.

Off-Balance Sheet Financial Instruments - Fair values of off-balance sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.

 

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The carrying values and estimated fair values of the Company’s financial instruments were as follows:

 

		March 31 2011								December 31 2010
		Carrying Amount				Estimated Fair Value				Carrying Amount				Estimated Fair Value
Financial Assets:
Cash and due from banks		$	14,893,859			$	14,893,859			$	14,173,800			$	14,173,800
Federal funds sold			3,944,000				3,944,000				2,004,000				2,004,000
Time deposits with other banks			750,000				750,000				1,000,000				1,000,000
Securities available-for-sale			28,977,455				28,977,455				26,955,350				26,955,350
Securities held-to-maturity			299,894				309,067				299,885				309,023
Nonmarketable equity securities			302,300				302,300				302,300				302,300
Loans receivable, gross			102,761,061				102,415,168				105,297,684				105,748,184
Financial Liabilities:
Demand deposit, interest-bearing transaction, money market, and savings accounts		$	56,288,577			$	56,288,577			$	53,941,792			$	53,941,792
Time deposits			82,957,523				83,191,511				83,642,029				84,001,754

 

		Notional Amount				Notional Amount
Off-Balance Sheet Financial Instruments:
Commitments		$	5,251,000			$	5,855,857
Standby letters of credits			822,000				850,000

The generally accepted accounting principles (GAAP) provide a framework for measuring and disclosing fair value which requires disclosures about the fair value of assets and liabilities recognized in the balance sheet, whether the measurements are made on a recurring basis (for example, available-for-sale investment securities) or on a nonrecurring basis (for example, impaired loans).

Fair value is defined as the exchange in price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The Company utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

Fair Value Hierarchy

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine the fair value. These levels are:

 

Level 1 —		Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2 —		Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 —		Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques.

 

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Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.

Securities Available-for-Sale - Securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange such as the New York Stock Exchange, Treasury securities that are traded by dealers or brokers in active over-the counter markets and money market funds. Level 2 securities include mortgage backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

Loans - The Company does not record loans at fair value on a recurring basis, however, from time to time, a loan is considered impaired and an allowance for loan loss is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan are considered impaired. Once a loan is identified as individually impaired, management measures impairment. The fair value of impaired loans is estimated using one of several methods, including the collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring a specific allowance represent loans for which the fair value of expected repayments or collateral exceed the recorded investment in such loans. At March 31, 2011 and December 31, 2010, substantially all of the impaired loans were evaluated based upon the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the loan as nonrecurring Level 3.

Other Real Estate Owned - Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate owned. Real estate acquired in settlement of loans is recorded initially at estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charges to earnings if the estimated fair value of the property less estimated selling costs declines below the initial recorded value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3.

The table below presents the Company’s assets measured at fair value on a recurring basis as of March 31, 2011, and December 31, 2010, aggregated by the level in the fair value hierarchy within which those measurements fall.

Available-for-Sale Securities:

 

		Total				Level 1				Level 2				Level 3
March 31, 2011
Government-sponsored enterprises		$	14,599,846			$	—			$	14,599,846			$	—
Mortgage-backed securities			3,157,323				—				3,157,323				—
Obligations of state and local governments			11,020,286				—				11,020,286				—
Other			200,000				—				200,000				—
Total		$	28,977,455			$	—			$	28,977,455			$	—
December 31, 2010
Government-sponsored enterprises		$	13,591,442			$	—			$	13,591,442			$	—
Mortgage-backed securities			1,851,266				—				1,851,266				—
Obligations of state and local governments			11,312,642				—				11,312,642				—
Other			200,000				—				200,000				—
Total		$	26,955,350			$	—			$	26,955,350			$	—

There were no liabilities measured at fair value on a recurring basis at March 31, 2011 and December 31, 2010.

 

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Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

The following table presents the assets and liabilities measured at fair value on a nonrecurring basis as of March 31, 2011 and December 31, 2010, aggregated by level in the fair value hierarchy within which those measurements fall.

 

		Total				Level 1				Level 2				Level 3
March 31, 2011
Impaired loans		$	6,720,415			$	—			$	6,720,415			$	—
Other real estate owned			2,760,195				—				2,760,195				—
Total assets at fair value		$	9,480,610			$	—			$	9,480,610			$	—
December 31, 2010
Impaired loans		$	7,329,757			$	—			$	7,329,757			$	—
Other real estate owned			2,764,189				—				2,764,189				—
Total assets at fair value		$	10,093,946			$	—			$	10,093,946			$	—

There were no liabilities measured at fair value on a nonrecurring basis at March 31, 2011 and December 31, 2010.

Impaired loans which are measured for impairment using the fair value of collateral for collateral dependent loans, had a carrying value of $7,320,602 at March 31, 2011 with a valuation allowance of $600,187. Impaired loans had a carrying value of $7,703,241 at December 31, 2010 with a valuation allowance of $373,484.

Other real estate owned, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying value of $2,760,195 and $2,764,189 at March 31, 2011 and December 31, 2010, respectively. There were no write downs of other real estate owned for the three months ended March 31, 2011 or for the year ended December 31, 2010 were $0 and $202,662, respectively.

The Company has no assets or liabilities whose fair values are measured using level 3 inputs.

NOTE 8 - SUBSEQUENT EVENTS

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Nonrecognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewed events occurring through the date the financial statements were issued and no subsequent events occurred requiring accrual or disclosure.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion of the Company’s financial condition as of March 31, 2011 compared to December 31, 2010, and the results of operations for the three months ended March 31, 2011 compared to the three months ended March 31, 2010. These comments should be read in conjunction with the Company’s condensed financial statements and accompanying footnotes appearing in this report. This report contains “forward-looking statements” relating to, without limitation, future economic performance, plans and objectives of management for future operations, and projections of revenues and other financial items that are based on the beliefs of the Company’s management, as well as assumptions made by and information currently available to the Company’s management. The words “expect,” “estimate,” “anticipate,” and “believe,” as well as similar expressions, are intended to identify forward-looking statements. The Company’s actual results may differ materially from the results discussed in the forward-looking statements, and the Company’s operating performance each quarter is subject to various risks and uncertainties that are discussed in detail in the Company’s filings with the Securities and Exchange Commission.

Results of Operations

Net income for the quarter ended March 31, 2011 was $176,897, or $0.76 per share, compared to $205,105, or $0.88 per share, for the quarter ended March 31, 2010, resulting in a decrease of $28,208.

An increase in our other real estate owned negatively impacted our 2011 operating results compared to 2010 by $98,202

Net Interest Income

The largest component of total income is net interest income, the difference between the income earned on assets and the interest accrued or paid on deposits and borrowings used to support such assets. The volume and mix of assets and liabilities and their sensitivity to interest rate movement determine changes in net interest income. Net interest margin is determined by dividing annualized net interest income by average earning assets. Net interest spread is derived from determining the weighted-average rate of interest paid on deposits and borrowings and subtracting them from the weighted-average yield on earning assets.

Net interest income for the quarter ended March 31, 2011, was $1,368,107, compared to $1,457,638 for the same period last year, a decrease of $89,531, or 6.14%. This decrease is primarily attributable to the decrease in the average volume of our outstanding loans, which generally are our highest yielding assets

For the quarter ended March 31, 2011, average-earning assets totaled $146,578,738 with an annualized average yield of 4.90%. Average earning assets and annualized average yield were $147,175,520 and 5.68%, respectively, for the quarter ended March 31, 2010. For the quarter ended March 31, 2011, average interest-bearing liabilities totaled $124,015,114 with an annualized average cost of 1.32%. Average interest-bearing liabilities and annualized average cost were $131,122,735 and 1.87%, respectively, for the quarter ended March 31, 2010.

Our net interest margin and net interest spread were 3.79% and 3.58% for the quarter ended March 31, 2011 compared to 4.02% and 3.81%, respectively for the quarter ended March 31, 2010. The decreases were primarily attributable to the decrease in the average volume of our outstanding loans, which generally are our highest yielding assets. For the quarter ended March 31, 2011 and 2010, the average volume of our loans was 71.17% and 79.01% of our total average earnings assets, respectively.

Details of the components of earning assets and interest-bearing liabilities are discussed in the following paragraphs.

Because loans often provide a higher yield than other types of earning assets, one of our goals is to maintain our loan portfolio as the largest component of total earning assets. Loans comprised approximately 71.17% and 79.01% of average earning assets for the quarter ended March 31, 2011 and 2010, respectively. Loan interest income was $1,563,983 and $1,835,457 for quarter ended March 31, 2011 and 2010, respectively. The annualized average yield on loans was 6.08% and 6.40% for the quarter ended March 31, 2011 and 2010, respectively. Average balances of loans decreased to $104,319,807 during the quarter ended March 31, 2011, a decrease of $11,970,087 from the average balance of $116,289,894 during the quarter ended March 31, 2010. The decrease in the annualized yield on loans is mainly attributable to the decline in the average volume of our outstanding loans. Fixed rate loans averaged approximately 98% of our loan portfolio for the first quarter of 2011 and 97 % for the first quarter of 2010.

 

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Investment securities averaged $28,138,016 or 19.20% of average earning assets, for first quarter of 2011 compared to $23,926,625 or 16.26% of average earning assets, for the same period in 2010. Interest earned on investment securities amounted to $197,908 for the quarter ended March 31, 2011, compared to $214,583 for the comparable period last year. Investment securities yielded 2.85% and 3.64% for the quarter ended March 31, 2011 and 2010, respectively.

Total interest expense for the quarter ended March 31, 2011 and 2010 was $404,587 and $605,260 respectively. The largest component of interest expense is interest on deposit accounts. Interest expense on deposit accounts was $404,587 and $605,259, for the quarter ended March 31, 2011 and 2010, respectively. The average balance of interest bearing deposits decreased to $124,015,114 during the quarter ended March 31, 2011 from $131,122,146 for the quarter ended March 31, 2010. The annualized average cost of deposits was 1.32% for the quarter ended March 31, 2011 compared to 1.87% for the same period in 2010.

For the quarter ended March 31, 2011 and 2010, interest expense on other interest-bearing liabilities was insignificant.

Provision and Allowance for Loan Losses

We have developed policies and procedures for evaluating the overall quality of our credit portfolio and the timely identification of potential problem credits. On a quarterly basis, our Board of Directors reviews and approves the appropriate level for the allowance for loan losses based upon management’s recommendations, the results of our internal monitoring and reporting system, and an analysis of economic conditions in our market. The objective of management has been to fund the allowance for loan losses at a level greater than or equal to our internal risk measurement system for loan risk.

Additions to the allowance for loan losses, which are expensed as the provision for loan losses on our statement of operations, are made periodically to maintain the allowance at an appropriate level based on management’s analysis of the potential risk in the loan portfolio. Loan losses and recoveries are charged or credited directly to the allowance. The amount of the provision is a function of the level of loans outstanding, the level of nonperforming loans, historical loan loss experience, the amount of loan losses actually charged against the reserve during a given period, and current and anticipated economic conditions.

The allowance represents an amount which management believes will be adequate to absorb inherent losses on existing loans that may become uncollectible. Our judgment as to the adequacy of the allowance for loan losses is based on a number of assumptions about future events, which we believe to be reasonable, but which may or may not prove to be accurate. Our determination of the allowance for loan losses is based on regular evaluations of the collectability of loans, including consideration of factors such as the balance of impaired loans, the quality, mix, and size of our overall loan portfolio, economic conditions that may affect the borrower’s ability to repay, the amount and quality of collateral securing the loans, our historical loan loss experience, and a review of specific problem loans. We also consider subjective issues such as changes in our lending policies and procedures, changes in the local and national economy, changes in volume or type of credits, changes in the volume or severity of problem loans, quality of loan review and board of director oversight, concentrations of credit, and peer group comparisons.

More specifically, in determining our allowance for loan losses, we regularly review loans for specific and impaired reserves based on the appropriate impairment assessment methodology. Pooled reserves are determined using historical loss trends measured over a five-year average, adjusted for environmental risk, which is then applied to risk rated loans grouped by Federal Financial Examination Council (“FFIEC”) call code and segmented by impairment status. The pooled reserves are calculated by applying the appropriate historical loss ratio to the loan categories. Impaired loans greater than a minimum threshold established by management are excluded from this analysis. The sum of all such amounts determines our pooled reserves.

We track our portfolio and analyze loans grouped by FFIEC call code categories. The first step in this process is to risk grade each and every loan in the portfolio based on one common set of parameters. These parameters include items like debt-to-worth ratio, liquidity of the borrower, net worth, experience in a particular field and other factors such as underwriting exceptions. Weight is also given to the relative strength of any guarantors on the loan.

After risk grading each loan, we then segment the portfolio by FFIEC call code groupings, separating out substandard or impaired loans. The remaining loans are grouped into “performing loan pools.” The loss history for each performing loan pool is measured over a specific period of time to create a loss factor. The relevant look back period is determined by the Bank, regulatory guidance, and current market events. The loss factor is then applied to

 

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the pool balance and the reserve per pool calculated. Loans deemed to be substandard but not impaired are segregated and a loss factor is applied to this pool as well. Finally, impaired loans are segmented based upon size; smaller impaired loans are pooled and a loss factor applied, while larger impaired loans are assessed individually using the appropriate impairment measuring methodology. Finally, certain qualitative factors are utilized to assess economic and other trends not currently reflected in the loss history. These factors include concentration of credit across the portfolio, the experience level of management and staff, effects of changes in risk selection and underwriting practice, industry conditions and the current economic and business environment. A quantitative value is assigned to each of the factors, which is then applied to the performing loan pools. Negative trends in the loan portfolio increase the quantitative values assigned to each of the qualitative factors and, therefore, increase the reserve. For example, as general economic and business conditions decline, this qualitative factor’s quantitative value will increase, which will increase reserve requirement for this factor. Similarly, positive trends in the loan portfolio, such as improvement in general economic and business conditions, will decrease the quantitative value assigned to this qualitative factor, thereby decreasing the reserve requirement for this factor. These factors are reviewed and updated by our risk management committee on a regular basis to arrive at a consensus for our qualitative adjustments.

Periodically, we adjust the amount of the allowance based on changing circumstances. We recognize loan losses to the allowance and add subsequent recoveries back to the allowance for loan losses. In addition, on a quarterly basis we informally compare our allowance for loan losses to various peer institutions; however, we recognize that allowances will vary as financial institutions are unique in the make-up of their loan portfolios and customers, which necessarily creates different risk profiles for the institutions. If our allowance was significantly different from our peer group, we would carefully review our assessment procedures again to ensure that all procedures were completed accurately and all environmental risk factors were thoroughly considered. There can be no assurance that charge-offs of loans in future periods will not exceed the allowance for loan losses as estimated at any point in time or that provisions for loan losses will not be significant to a particular accounting period, especially considering the overall weakness in the economic environment in our market areas.

Various regulatory agencies review our allowance for loan losses through their periodic examinations, and they may require additions to the allowance for loan losses based on their judgment about information available to them at the time of their examinations. Our losses will undoubtedly vary from our estimates, and it is possible that charge-offs in future periods will exceed the allowance for loan losses as estimated at any point in time.

As of March 31, 2011 and 2010, the allowance for loan losses was $1,961,282 and $2,069,976, respectively, a decrease of $108,964, or 5.25%, from the 2010 allowance. However, as a percentage of total loans, the allowance for loan losses was 1.91% and 1.79% at March 31, 2011 and 2010, respectively. The decrease in the dollar amount of our allowance for loan losses was driven by the significant reduction of our loan portfolio, while we continue to charge off loan losses once they are identified.

 

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For the quarter ended March 31, 2011 and 2010, the provision for loan losses was $225,000 and $365,000, respectively. This represents a decrease of $140,000. The decline is largely attributable to the decline in our loan portfolio. At March 31, 2011 and 2010, our loans totaled $102,761,061 and $115,463,662, respectively.

We believe the allowance for loan losses at March 31, 2011, is adequate to meet potential loan losses inherent in the loan portfolio, and, as described earlier, maintain the flexibility to adjust the allowance should our local economy and loan portfolio either improve or decline in the future.

Noninterest Income

Noninterest income for the first quarter of 2011 was $135,950 compared to $140,753 for the first quarter of 2010.

Noninterest Expense

Total noninterest expense for the three months ended March 31, 2011 and 2010 was $1,068,660 and $953,286, respectively. This represented an increase in noninterest expense of $115,374, or 12.10%. Salaries and employee benefits increased $4,095, or 0.83%, from $494,103 for the three months ended March 31, 2010 to $498,198 for the comparable period in 2011. For the three months ended March 31, 2011, other operating expenses were $414,694, or $111,822, higher than the three months ended March 31, 2010. This increase is mainly attributable to the increase in other real estate owned expenses, which increased $98,202. The total of net occupancy and equipment expense was $155,768 and $156,311 for the first quarter of 2011 and 2010, respectively.

Income Taxes

The income tax provision for the three months ended March 31, 2011 was $33,500 compared to $75,000 for the same period in 2010. The decrease in the provision resulted primarily from the relationship of tax exempt income to net income before taxes

Assets and Liabilities

During the first three months of 2011, total assets increased $1,691,202 or 1.09%, when compared to December 31, 2010. The balance of the federal funds sold was $3,944,000 at March 31, 2011 and $2,004,000 at December 31, 2010. Total investment securities increased $2,022,114 from December 31, 2010 to $29,579,649 at March 31, 2011. Gross loans decreased $2,536,623, or 2.41%, to $102,761,061 at March 31, 2011.

For the three months ended March 31, 2011, total liabilities increased $1,552,197 or 1.12% and total deposits increased $1,662,279 or 1.21% from December 31, 2010.

For more analysis of the components of the changes in asset and liabilities, see the following discussion of major balance sheet categories and the Consolidated Statements of Cash Flows included in “Item 1. Financial Statements.”

We closely monitor and seek to maintain appropriate levels of interest earning-assets and interest-bearing liabilities so that maturities of assets are such that adequate funds are provided to meet customer withdrawals and loan demand.

 

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Loans

At March 31, 2011, our total loans were $102,761,061 compared to $105,297,684 at December 31, 2010, a decrease of $2,536,623 or 2.41%. At March 31, 2011 and December 31, 2010, approximately 98% and 99% of our loan portfolio consisted of fixed rate loans, respectively. Balances within the major loans receivable categories as of March 31, 2011 and December 31, 2010 are as follows:

 

		March 31, 2011				December 31, 2010
Real estate – construction		$	12,150,272			$	12,674,197
Real estate – mortgage			74,752,125				76,149,357
Commercial and industrial			11,104,202				11,602,305
Consumer and other			4,754,462				4,871,825
Total gross loans		$	102,761,061			$	105,297,684
The loan portfolio consisted of loans having:
Variable rates loans		$	1,605,731			$	1,556,700
Fixed rates			101,155,330				103,740,984
Total gross loans		$	102,761,061			$	105,297,684

Risk Elements in the Loan Portfolio

The following table sets forth the Company’s nonperforming assets at the dates indicated:

 

		March 31,
		2011				2010
Loans impaired and included in nonaccrual loans		$	2,102,412			$	3,926,894
Loans impaired and not included in nonaccrual			5,218,190				4,803,218
Total impaired loans			7,320,602				8,730,112
Loans 90 days or more past due and still accruing interest			—				2,543
Total impaired and nonperforming loans			7,320,602				8,732,655
Other real estate owned			2,760,195				340,000
Total impaired and nonperforming assets		$	10,080,797			$	9,072,655
Nonperforming assets to total assets			6.40	%			5.51	%
Total impaired and nonperforming loans to total loans			7.12	%			8.29	%
Allowance for loan losses as a percentage of impaired and nonperforming loans			26.79	%			23.70	%

The following tables summarize information on impaired loans for the quarters ended March 31, 2011 and 2010.

 

		2011				2010
Impaired loans with specific allowance		$	1,977,978			$	2,821,588
Impaired loans with no specific allowance			5,342,624				5,908,524
Total impaired loans		$	7,320,602			$	8,730,112
Related specific allowance		$	600,187			$	875,001
Average recorded investment in impaired loans			7,511,922				8,744,192

At March 31, 2011 real estate or other collateral secured practically all of the loans that were considered impaired. In the event of foreclosure on these loans, there can be no assurance that in liquidation, the collateral can be sold for its estimated fair market value or even for an amount at least equal to or greater than the loan amount.

The results our internal review process and applying the allowance model methodology are the primary determining factors in management’s assessment of the adequacy of the allowance for loan losses.

 

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Activity in the Allowance for Loan Losses is as follows:

 

		Three Months Ended March  31,
		2011				2010
Balance, January 1,		$	2,019,497			$	2,053,340
Provision for loan losses for the period			225,000				365,000
Net loans charged-off for the period			(283,215	)			(348,364	)
Balance, end of period		$	1,961,282			$	2,069,976
Gross loans outstanding, end of period		$	102,761,061			$	115,463,662
Allowance for loan losses to loans outstanding			1.91	%			1.79	%

Deposits

Deposits account for practically all of our interest bearing liabilities. Total average deposits decreased from $145,105,616 in 2010 to $138,062,443 in 2011. This represents a decrease of $7,043,173, or 4.85% from the 2010 amount.

The following table summarizes our average deposits for the three months ended March 31, 2011 and 2010.

 

		2011								2010
		Amount				Percent of Deposits				Amount				Percent of Deposits
Noninterest-bearing demand		$	14,047,329				10.17	%		$	13,983,471				9.64	%
Interest-bearing demand			20,930,067				15.16				21,741,628				14.98
Savings accounts			19,341,440				14.01				16,103,592				11.10
Time deposits			83,743,607				60.66				93,276,925				64.28
Total deposits		$	138,062,443				100.00	%		$	145,105,616				100.00	%

Our actual deposits at March 31, 2011 and December 31, 2010 were $139,246,100 and $137,583,821, respectively, representing an increase of $1,662,279, or 1.21%.

Core deposits, which exclude certificates of deposit of $100,000 or more, provide a relatively stable funding source for our loan portfolio and other earning assets. Our core deposits were $93,326,638 and $91,441,668 at March 31, 2011 and December 31, 2010, respectively. A stable base of deposits is expected to be our primary source of funding to meet both our short-term and long-term liquidity needs in the future.

Deposits, and particularly core deposits, have been our primary source of funding and have enabled us to meet successfully both our short-term and long-term liquidity needs. We anticipate that such deposits will continue to be our primary source of funding in the future. Our loan-to-deposit ratio was 73.80% and 76.53% on March 31, 2011 and December 31, 2010, respectively.

We did not have any brokered deposits at March 31, 2011 or December 31, 2010.

Liquidity

Liquidity needs are met by us through scheduled maturities of loans and investments on the asset side and through pricing policies on the liability side for demand deposit accounts and short-term borrowings. The level of liquidity is measured by the loan-to-total funds ratio (total deposits plus short-term borrowings if any), which was 73.80% at March 31, 2011 and 76.53% at December 31, 2010.

Asset liquidity is provided from several sources, including amounts due from banks and federal funds sold. Available-for-sale securities, particularly those maturing within one year, provide a secondary source of liquidity. Additionally, funds from maturing loans are a source of liquidity.

 

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At March 31, 2011 the Bank had available an unused short-term line of credit to purchase up to $10,000,000 of federal funds from unrelated correspondent institutions. The Bank also has a credit availability agreement with the Federal Home Loan Bank totaling 15 percent of the Bank’s assets as of any quarter end. As of March 31, 2011, the available credit totaled approximately $23,370,000 and there were no borrowings outstanding. Any borrowings from the Federal Home Loan Bank will be secured by a blanket lien on all of the Bank’s 1-4 family residential first lien mortgage loans and or investment securities.

Interest Rate Sensitivity

Interest rate sensitivity is defined as the exposure to variability in net interest income resulting from changes in market-based interest rates. Asset/liability management is the process by which we monitor and control the mix, maturities, and interest sensitivity of our assets and liabilities. Asset/liability management seeks to ensure adequate liquidity and to maintain an appropriate balance between interest-sensitive assets and liabilities to minimize potentially adverse impacts on earnings from changes in market interest rates. Interest rate sensitivity can be managed by repricing assets or liabilities, selling securities available-for-sale, replacing an asset or liability at maturity, or adjusting the interest rate during the life of an asset or liability. We believe that interest rate risk management becomes increasingly important in an interest rate environment and economy such as the one that we are currently experiencing.

We monitor interest rate sensitivity by measuring our interest sensitivity through a “gap” analysis, which is the positive or negative dollar difference between assets and liabilities that are subject to interest rate repricing within a given time period. Currently we are liability-sensitive over periods with maturity dates of less than twelve months. However, since interest rates and yields on various interest sensitive assets and liabilities do not all adjust in the same degree when there is a change in prevailing interest rates (such as prime rate), the traditional gap analysis is only a general indicator of rate sensitivity and net interest income volatility. As stated in “Results of Operations for the Three Months Ended March 31, 2011 Compared to the Three Months Ended March 31, 2010 – Net Interest Income,” our net interest margin decreased during the current period. If the net interest margin were to continue decline, the net income will likely decline also.

Capital Resources

Total shareholders’ equity at March 31, 2011 and December 31, 2010 was $17,777,842 or 11.29% and $17,638,837 or 11.32%, respectively, of total assets.

The following table shows the return on average assets (net income divided by average total assets), return on average equity (net income divided by average equity), and equity to assets ratio (average equity divided by average total assets) for the three months ended March 31, 2011 and 2010.

 

		March 31,
		2011				2010
Return on average assets			0.46	%			0.51	%
Return on average equity			4.05				4.67
Average equity to average assets ratio			11.32				10.88

Bank holding companies, such as ours, and their banking subsidiaries are required by banking regulators to meet certain minimum levels of capital adequacy, which are expressed in the form of certain ratios. Capital is separated into Tier 1 capital (essentially common shareholders’ equity less intangible assets) and Tier 2 capital (essentially the allowance for loan losses limited to 1.25% of risk-weighted assets). The first two ratios, which are based on the degree of credit risk in our assets, provide the weighting of assets based on assigned risk factors and include off-balance sheet items such as loan commitments and stand-by letters of credit. The ratio of Tier 1 capital to risk-weighted assets must be at least 4.0% and the ratio of total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets must be at least 8.0%. The capital leverage ratio supplements the risk-based capital guidelines. Banks and bank holding companies are required to maintain a minimum ratio of Tier 1 capital to adjusted quarterly average total assets of 3.0%.

 

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The following table summarizes the Bank’s various capital ratios at March 31, 2011 and December 31, 2010:

 

		March 31, 2011				December 31, 2010
Tier 1 capital (to risk-weighted assets)			13.70	%			15.23	%
Total capital (to risk-weighted assets)			14.95	%			16.49	%
Tier 1 capital (leverage ratio)			10.63	%			11.15	%

The Federal Reserve Board has similar requirements for bank holding companies. The Company is currently not subject to these requirements because the Federal Reserve guidelines contain an exemption for bank holding companies of less than $500,000,000 in consolidated assets.

Regulatory Matters

We are not aware of any current recommendations by regulatory authorities which, if they were to be implemented, would have a material effect on liquidity, capital resources or operations.

Off-Balance Sheet Risk

Through the operations of our Bank, we have made contractual commitments to extend credit in the ordinary course of our business activities. These commitments are legally binding agreements to lend money to our customers at predetermined interest rates for a specified period of time. At March 31, 2011, we had issued commitments to extend credit of $5,251,000 and standby letters of credit of $822,000 through various types of commercial lending arrangements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, commercial and residential real estate.

Critical Accounting Policies

We have adopted various accounting policies, which govern the application of accounting principles generally accepted in the United States in the preparation of our financial statements. Our significant accounting policies are described in the notes to the consolidated financial statements at December 31, 2010 as filed in our annual report on Form 10-K. Certain accounting policies involve significant judgments and assumptions by us, which have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgments and assumptions we make, actual results could differ from these judgments and estimates which could have a material impact on our carrying values of assets and liabilities and our results of operations.

We believe the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in preparation of our consolidated financial statements. Refer to the portion of this discussion that addresses our allowance for loan losses for a description of our processes and methodology for determining our allowance for loan losses.

Recently Issued Accounting Standards

Accounting standards which have been issued or proposed by the Financial Accounting Standards Board that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

Not applicable since we are a smaller reporting company.

Item 4. Controls and Procedures

Within 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our principal executive officer and

 

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principal financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

In addition, we reviewed our internal controls, and there have been no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date of their last evaluation.

PART II – Other Information

Item 1. Legal Proceedings

There are no material pending legal proceedings to which we are a party or of which any of our properties are the subject.

Item 1A. Risk Factors

There has been no change in the risk factors, which were reported on Form 10-K for the year ended December 31, 2010.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable

Item 3. Default Upon Senior Securities

Not applicable

Item 4. Removed and Reserved

Not applicable

Item 5. Other Information

Not applicable

Item 6. Exhibits

 

31.1		Rule 13a-14(a) Certification of the Principal Executive Officer.
31.2		Rule 13a-14(a) Certification of the Principal Financial Officer.
32		Section 1350 Certifications.

 

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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.

COMMUNITYCORP

 

Date:		May 13, 2011		By:		/s/ W. ROGER CROOK
						W. Roger Crook
						President & Chief Executive Officer
Date:		May 13, 2011		By:		/s/ GWEN P. BUNTON
						Gwen P. Bunton
						Chief Financial Officer

 

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