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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended September 30, 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: 0-54271

 

 

FRATERNITY COMMUNITY BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   27-3683448

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

764 Washington Boulevard, Baltimore, Maryland   21230
(Address of principal executive offices)   (Zip Code)

Issuer’s telephone number, including area code: (410) 539-1313

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  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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the 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

As of November 14, 2011, the registrant had 1,587,000 shares of common stock issued and outstanding.

 

 

 


Table of Contents

INDEX

 

          PAGE  

PART I.

  

FINANCIAL STATEMENTS

  

Item 1.

  

Consolidated Statements of Financial Condition as of September  30, 2011 (unaudited) and December 31, 2010

     1   
  

Consolidated Statements of Operations for the Nine and Three Months Ended September  30, 2011 and 2010 (unaudited)

     2   
  

Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2011 and 2010 (unaudited)

     3   
  

Consolidated Statements of Cash Flows for the Nine Months Ended September  30, 2011 and 2010 (unaudited)

     4   
  

Notes to Consolidated Financial Statements

     6   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     29   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     42   

Item 4.

  

Controls and Procedures

     42   

PART II.

  

OTHER INFORMATION

  

Item 1.

  

Legal Proceedings

     43   

Item 1A.

  

Risk Factors

     43   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     43   

Item 3.

  

Defaults Upon Senior Securities

     43   

Item 4.

  

[Removed and Reserved]

     43   

Item 5.

  

Other Information

     43   

Item 6.

  

Exhibits

     43   

SIGNATURES

     

 

i


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FRATERNITY COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 

     September 30,
2011
    December 31,
2010
 
     (unaudited)        
ASSETS   

Cash and cash equivalents:

    

Cash and due from banks

   $ 996,951      $ 4,489,851   

Interest-bearing deposits in other banks

     23,402,558        21,391,980   
  

 

 

   

 

 

 

Total cash and cash equivalents

     24,399,509        25,881,831   
  

 

 

   

 

 

 

Investment securities:

    

Available-for-sale - at fair value

     28,046,631        21,365,746   

Held-to-maturity - at amortized cost (fair value approximates $8,191,309 and $ 0, respectively)

     8,017,170        0   

Loans - net of allowance for loan losses of $1,250,000 and $1,300,000 respectively

     109,016,154        110,492,054   

Other real estate owned

     0        2,015,909   

Property and equipment, net

     751,795        755,703   

Federal Home Loan Bank stock - at cost - restricted

     1,329,900        1,395,700   

Ground rents - net of valuation allowance

     860,996        860,996   

Accrued interest receivable

     672,784        585,056   

Investment in bank-owned life insurance

     4,308,722        4,174,397   

Deferred income taxes

     476,082        692,606   

Other assets

     907,021        1,439,479   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 178,786,764      $ 169,659,477   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY   

Liabilities:

    

Deposits

   $ 124,759,989      $ 129,994,645   

Advances from the Federal Home Loan Bank

     22,500,000        22,583,333   

Advances by borrowers for taxes and insurance

     959,385        663,346   

Other liabilities

     524,690        431,578   
  

 

 

   

 

 

 

Total liabilities

     148,744,064        153,672,902   
  

 

 

   

 

 

 

Commitments and contingencies

     0        0   
  

 

 

   

 

 

 

Stockholders’ Equity:

    

Preferred stock, $0.01 par value; authorized 1,000,000; none issued

     0        0   

Common stock, $0.01 par value; authorized 15,000,000; issued and outstanding, 1,587,000 shares at September 30, 2011

     15,870        0   

Additional paid in capital

     14,950,598        0   

Retained earnings - substantially restricted

     16,082,563        16,146,785   

Unearned ESOP shares

     (1,190,250     0   

Accumulated other comprehensive income (loss)

     183,919        (160,210
  

 

 

   

 

 

 

Total stockholders’ equity

     30,042,700        15,986,575   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 178,786,764      $ 169,659,477   
  

 

 

   

 

 

 

See accompanying notes.

 

1


Table of Contents

FRATERNITY COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2011     2010     2011     2010  

INTEREST INCOME:

        

Interest and fees on loans:

        

Real estate loans

   $ 1,441,513      $ 1,636,783      $ 4,367,016      $ 4,989,368   

Other loans

     1,189        1,558        3,661        4,560   

Interest and dividends on investments and bank deposits

     275,687        172,339        745,120        636,583   

Income from ground rents owned

     9,849        11,771        34,583        40,137   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     1,728,238        1,822,451        5,150,380        5,670,648   
  

 

 

   

 

 

   

 

 

   

 

 

 

INTEREST EXPENSE:

        

Interest on deposits

     575,278        730,365        1,866,400        2,239,560   

Interest on borrowings

     225,592        226,945        669,608        675,250   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     800,870        957,310        2,536,008        2,914,810   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INTEREST INCOME

     927,368        865,141        2,614,372        2,755,838   

PROVISION FOR LOAN LOSSES

     6,445        299,620        66,961        1,164,339   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     920,923        565,521        2,547,411        1,591,499   
  

 

 

   

 

 

   

 

 

   

 

 

 

NON-INTEREST INCOME:

        

Gain on sale of investments

     60,020        27,261        107,714        177,722   

Income on bank-owned life insurance

     45,181        48,193        134,325        143,641   

Gain on sale of loans

     7,308        39,476        7,308        72,454   

Gain on sale of other real estate owned

     9,053        —          9,900        —     

Other income

     10,094        15,408        31,360        47,438   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     131,656        130,338        290,607        441,255   
  

 

 

   

 

 

   

 

 

   

 

 

 

NON-INTEREST EXPENSES:

        

Salaries and employee benefits

     650,482        547,744        1,684,738        1,685,066   

Occupancy expenses

     121,783        121,394        371,461        378,593   

Advertising

     16,510        13,539        37,370        40,411   

Data processing expense

     98,013        103,043        302,277        286,804   

Directors fees

     25,817        25,854        75,951        74,002   

Other general and administrative expenses

     175,155        176,114        552,414        588,190   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expenses

     1,087,760        987,688        3,024,211        3,053,066   
  

 

 

   

 

 

   

 

 

   

 

 

 

LOSS BEFORE BENEFIT FOR INCOME TAXES

     (35,181     (291,829     (186,193     (1,020,312

INCOME TAX BENEFIT

     (28,030     (131,316     (121,971     (448,553
  

 

 

   

 

 

   

 

 

   

 

 

 

NET LOSS

   $ (7,151   $ (160,513   $ (64,222   $ (571,759
  

 

 

   

 

 

   

 

 

   

 

 

 

LOSS PER SHARE - BASIC

   $ (0.01     N/A      $ (0.04     N/A   
  

 

 

     

 

 

   

LOSS PER SHARE - DILUTED

   $ (0.01     N/A      $ (0.04     N/A   
  

 

 

     

 

 

   

See accompanying notes.

 

2


Table of Contents

Fraternity Community Bancorp, Inc.

Consolidated Statements of Changes in Stockholders’ Equity

For the Nine Months Ended September 30, 2011 and 2010

(Unaudited)

 

     Common
Stock
     Addtl Pd In
Capital
    Retained
Earnings
    Unearned
ESOP

Shares
    Accumulated
Other
Comprehensive
Income (Loss)
    Total
Stockholder’s
Equity
 

Balance, December 31, 2009

   $ 0       $ 0      $ 17,003,434      $ 0      $ (11,668   $ 16,991,766   

Comprehensive Income/(Loss):

             

Net Loss

     0         0        (571,759     0        0        (571,759

Unrealized gains arising during the period, net of taxes of $88,084

     0         0        0        0        132,126        132,126   

Reclassification adjustment for realized gains, net of taxes of $71,089

     0         0        0        0        (106,633     (106,633
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Other Comprehensive Income

     0         0        0        0        25,493        25,493   
           

 

 

   

 

 

 

Total Comprehensive Income/(Loss)

     0         0        0        0        0        (546,266
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2010

   $ 0       $ 0      $ 16,431,675      $ 0      $ 13,825      $ 16,445,500   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2010

   $ 0       $ 0      $ 16,146,785      $ 0      $ (160,210   $ 15,986,575   

Comprehensive Income/(Loss):

             

Net Loss

     0         0        (64,222     0        0        (64,222

Change in unrealized gain on available for sale securities, net of tax effect of $272,505

     0         0        0        0        408,757        408,757   

Reclassification adjustment for realized gains, net of taxes of $43,086

     0         0        0        0        (64,628     (64,628
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Other Comprehensive Income

     0         0        0        0        344,129        344,129   
           

 

 

   

 

 

 

Total Comprehensive Income

     0         0        0        0        0        279,907   

Acquisition of unearned ESOP shares

     0         0        0        (1,269,600     0        (1,269,600

ESOP shares released

     0         (2,142     0        79,350        0        77,208   

Issuance of Common Stock

     15,870         14,952,740        0        0        0        14,968,610   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2011

   $ 15,870       $ 14,950,598      $ 16,082,563      $ (1,190,250   $ 183,919      $ 30,042,700   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

3


Table of Contents

FRATERNITY COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

 

     2011     2010  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net loss

   $ (64,222   $ (571,759

Adjustments to reconcile net loss provided by operating activities:

    

Depreciation

     64,822        87,485   

Gain on sale of available-for-sale securities

     (107,714     (177,722

Gain on sale of loans

     (7,308     (72,454

Gain on sale of other real estate owned

     (9,900     0   

Origination of loans sold

     (607,500     (5,063,500

Proceeds from loans sold

     614,808        5,135,954   

Amortization/accretion of premium/discount

     205,611        83,300   

Increase in value of bank-owned life insurance

     (134,325     (143,640

Increase in value of other real estate owned

     (302,129     0   

Acquisition of ESOP shares

     77,208        0   

Provision for loan losses

     66,961        1,164,339   

Changes in operating assets and liabilities:

    

Accrued interest receivable and other assets

     444,730        1,877   

Other liabilities

     93,112        338,997   
  

 

 

   

 

 

 

Net cash provided by operating activities

     334,154        782,877   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Net decrease in loans

     1,408,939        2,435,318   

Acquisition of property and equipment

     (60,914     (57,030

Purchase of:

    

Investment securities available-for-sale

     (24,525,876     (16,158,642

Investment securities held-to-maturity

     (8,031,518     0   

Federal Home Loan Bank stock

     0        (208,700

Proceeds from:

    

Sales and maturities on investment securities available-for-sale

     14,644,438        25,130,600   

Principal paydowns on investment securities available-for-sale

     3,671,718        1,756,664   

Principal paydowns on investment securities held-to-maturity

     5,939        0   

Sale of other real estate owned

     2,327,938        0   

Sale of Federal Home Loan Bank stock

     65,800        112,100   
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (10,493,536     13,010,310   
  

 

 

   

 

 

 

 

 

4


Table of Contents

Fraternity Community Bancorp, Inc.

Consolidated Statements of Cash Flows (Continued)

For the nine months ended September 30, 2011 and 2010

 

 

     2011     2010  

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net (decrease) increase in deposits

     (5,234,656     44,421   

Borrowings from the Federal Home Loan Bank

     0        5,000,000   

Repayments of Federal Home Loan Bank borrowings

     (83,333     (5,250,000

Issuance of Common Stock

     13,699,010        0   

Increase in advances by borrowers for taxes and insurance

     296,039        195,635   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     8,677,060        (9,944
  

 

 

   

 

 

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

     (1,482,322     13,783,243   

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

     25,881,831        13,907,553   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 24,399,509      $ 27,690,796   
  

 

 

   

 

 

 

Cash paid for interest

   $ 2,536,078      $ 2,931,297   
  

 

 

   

 

 

 

Cash paid for taxes

   $ 0      $ 0   
  

 

 

   

 

 

 

Transfer of loans to other real estate owned

   $ 0      $ 871,048   
  

 

 

   

 

 

 

On March 31, 2011, the Company loaned $1,269,600 to the Employee Stock Ownership Plan, which was used to purchase 126,960 shares of common stock. The loan is secured by the shares purchased and is shown as Unearned ESOP shares in the consolidated balance sheets.

See accompanying notes.

 

5


Table of Contents

FRATERNITY COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTH PERIODS

ENDED SEPTEMBER 30, 2011 AND 2010

(UNAUDITED)

 

1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Fraternity Community Bancorp, Inc. (the “Company”) was incorporated on October 12, 2010 to serve as the holding company for Fraternity Federal Savings & Loan Association (the “Bank”), a federally chartered savings bank. On March 31, 2011, in accordance with a Plan of Conversion adopted by its Board of Directors and approved by its members, the Bank converted from a federal mutual savings bank to a federal stock savings bank and became the wholly owned subsidiary of the Company. The conversion was accomplished through the sale and issuance of 1,587,000 shares of common stock at a price of $10.00 per share, through which the Company received proceeds of approximately $14,968,600, net of offering expenses of approximately $901,400. In connection with the conversion, the Bank’s Board of Directors adopted an employee stock ownership plan (the “ESOP”) which subscribed for 8% of the sum of the number of shares, or 126,960 shares of common stock sold in the offering. Accordingly, the reported results for the nine months ended September 30, 2010 related solely to the operations of the Bank. All material intercompany accounts and transactions have been eliminated in consolidation.

In accordance with the Office of Thrift Supervision (the “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 holder’s 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.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X as promulgated by the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Operating results for the nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011, or any other period. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. Certain amounts from prior period financial statements have been reclassified to conform to the current period’s presentation.

 

6


Table of Contents

Nature of Operations

Fraternity Federal Savings and Loan (the “Bank”) provides a full range of banking services to individuals and businesses through its main office and three branches in the Baltimore metropolitan area. Its primary deposit products are certificates of deposit and demand, savings, NOW, and money market accounts. Its primary lending products are consumer loans and real estate mortgages.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Earnings per Common Share

Basic earnings per share amounts are based on the weighted average number of shares outstanding for the period and the net income applicable to common stockholders. Weighted average shares excludes unallocated ESOP shares. The Company has no dilutive potential common shares for the three or nine months periods ended September 30, 2011. Because the mutual to stock conversion was not completed until March 31, 2011, the earnings per share data is not presented for the three and nine month periods ended September 30, 2010.

 

     Three Months Ended
September 30, 2011
    Nine Months Ended
September 30, 2011
 

Net Loss

   $ (7,151   $ (64,222
  

 

 

   

 

 

 

Weighted average common shares outstanding

     1,462,685        1,460,922   
  

 

 

   

 

 

 

Earnings per share, basic

   $ (.01   $ (.04
  

 

 

   

 

 

 

 

2. INVESTMENT SECURITIES

The amortized cost and fair values of investment securities are as follows:

 

     September 30, 2011 (unaudited)  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

Available-for-sale:

           

Bank notes

   $ 994,737       $ 26,603       $ 0       $ 1,021,340   

Obligations of U.S. Government agencies

     10,195,224         118,198         0         10,313,422   

Mortgage-backed securities:

           

FNMA

     8,673,650         137,732         186         8,811,196   

GNMA

     4,589,853         39,169         0         4,629,022   

FHLMC

     2,638,332         14,868         0         2,653,200   

Private Label CMO

     655,196         5,737         42,482         618,451   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 27,746,992       $ 342,307       $ 42,668       $ 28,046,631   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

7


Table of Contents
00000000000 00000000000 00000000000 00000000000
     September 30, 2011 (unaudited)  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  

Held-to-maturity:

           

Municipal Bonds

   $ 552,967       $ 10,438       $ 0       $ 563,405   

SBA Pools

     2,500,647         26,202         0         2,526,849   

Mortgage-backed securities:

           

FNMA

     4,963,556         137,499         0         5,101,055   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 8,017,170       $ 174,139       $            0       $   8,191,309   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

00000000000 00000000000 00000000000 00000000000
     December 31, 2010  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  

Available-for-sale:

           

Bank notes

   $ 992,368       $ 13,912       $ 0       $ 1,006,280   

Obligations of U.S. Government agencies

     8,491,391         0         206,391         8,285,000   

Mortgage-backed securities:

           

FNMA

     6,764,443         27,512         48,847         6,743,108   

GNMA

     92,706         9,565         0         102,271   

FHLMC

     4,430,851         10,008         37,817         4,403,042   

Private Label CMO

     855,001         12,096         41,052         826,045   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 21,626,760       $   73,093       $ 334,107       $ 21,365,746   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held-to-maturity:

   $ 0       $ 0       $ 0       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

 

The amortized cost and fair value of debt securities at September 30, 2011 and December 31, 2010 by contractual maturities are shown below. Expected maturities may differ from contractual maturities because borrowers may have to call or repay obligations with or without call or prepayment penalties.

 

00000000000 00000000000
     September 30, 2011
Available-for-sale (unaudited)
 
     Amortized
Cost
     Fair
Value
 

Due in one year through five years

   $ 1,002,940       $ 1,029,397   

Due in five years through ten years

     10,191,901         10,351,432   

Due after ten years

     16,552,151         16,665,802   
  

 

 

    

 

 

 
   $ 27,746,992       $ 28,046,631   
  

 

 

    

 

 

 

 

00000000000 00000000000
     September 30, 2011
Held-to-maturity (unaudited)
 
     Amortized
Cost
     Fair
Value
 

Due in one year through five years

   $ 1,334,476       $ 1,355,084   

Due in five years through ten years

     4,963,556         5,101,056   

Due after ten years

     1,719,138         1,735,169   
  

 

 

    

 

 

 
   $   8,017,170       $   8,191,309   
  

 

 

    

 

 

 

 

8


Table of Contents
     December 31, 2010
Available-for-sale
 
     Amortized
Cost
     Fair
Value
 

Due in one year through five years

   $ 3,001,712       $ 2,969,140   

Due in five years through ten years

     5,313,088         5,249,294   

Due after ten years

     13,311,960         13,147,312   
  

 

 

    

 

 

 
   $ 21,626,760       $ 21,365,746   
  

 

 

    

 

 

 

The Bank recognized gains on sales of available-for-sale securities of $107,714 and $181,785 for the nine months ended September 30, 2011 and 2010, respectively. The Bank recognized gross losses on sales of available-for-sale securities of $0 and $4,063 for the nine months ended September 30, 2011 and 2010, respectively.

Securities with unrealized losses, segregated by length of impairment, as of September 30, 2011 and December 31, 2010 were as follows:

 

0000000000 0000000000 0000000000 0000000000 0000000000 0000000000
     Less than 12 Months      More than 12 Months      Total  
     Estimated
Fair Value
     Unrealized
Losses
     Estimated
Fair Value
     Unrealized
Losses
     Estimated Fair
Value
     Unrealized
Losses
 

September 30, 2011 (unaudited)

                                         

Available-for-sale:

                 

Bank Notes

   $ 0       $ 0       $ 0       $ 0       $ 0       $ 0   

Obligation of U.S. Government Agencies

     0         0         0         0         0         0   

Mortgage-backed securities:

                 

FNMA

     1,462         40         8,057         146         9,519         186   

GNMA

     0         0         0         0         0         0   

FHLMC

     0         0         0         0         0         0   

Private Label CMO

     0         0         305,932         42,482         305,932         42,482   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $          1,462       $          40       $ 313,989       $ 42,628       $      315,451       $   42,668   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

0000000000 0000000000 0000000000 0000000000 0000000000 0000000000
     Less than 12 Months      More than 12 Months      Total  
     Estimated
Fair Value
     Unrealized
Losses
     Estimated
Fair Value
     Unrealized
Losses
     Estimated Fair
Value
     Unrealized
Losses
 

December 31, 2010

                                         

Available-for-sale:

                 

Bank Notes

   $ 0       $ 0       $ 0       $ 0       $ 0       $ 0   

Obligation of U.S. Government Agencies

     8,285,000         206,391         0         0         8,285,000         206,391   

Mortgage-backed securities:

                 

FNMA

     5,284,956         45,823         11,092         3,024         5,296,048         48,847   

GNMA

     0         0         0         0         0         0   

FHLMC

     3,534,420         37,817         0         0         3,534,420         37,817   

Private Label CMO

     0         0         388,721         41,052         388,721         41,052   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 17,104,376       $ 290,031       $ 399,813       $ 44,076       $ 17,504,189       $ 334,107   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

9


Table of Contents

Declines in the fair value of investment securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of the Association to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in cost.

Furthermore, as of September 30, 2011, management does not have the intent to sell any of the securities classified as available-for-sale in the table above and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of September 30, 2011, management believes the impairments detailed in the table above are temporary and no impairment loss has been realized in the Association’s consolidated income statement.

 

3. LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans and allowance for loan losses consisted of the following:

 

     September 30,
2011 (unaudited)
    December 31,
2010
 

Real Estate Loans:

    

One-to-four family

   $ 84,962,572      $ 86,112,695   

Home Equity Lines of Credit

     10,096,867        12,729,750   

Commercial

     7,258,045        3,969,015   

Residential Construction

     4,706,002        5,828,645   

Land

     2,792,689        3,085,127   
  

 

 

   

 

 

 

Total Real Estate Loans

     109,816,175        111,725,232   

Consumer Loans

     54,967        44,177   

Commercial Loans

     395,012        22,645   
  

 

 

   

 

 

 

Total Loans

     110,266,154        111,792,054   

Less:

    

Allowance for loan losses

     (1,250,000     (1,300,000
  

 

 

   

 

 

 

Total loans and allowance for loan losses

   $ 109,016,154      $ 110,492,054   
  

 

 

   

 

 

 

 

10


Table of Contents

The balance of impaired loans was $3,716,197 and $2,754,120 as of September 30, 2011 and December 31, 2010, respectively.

Non-Performing/Past Due Loans - Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations, which typically occurs when principal or interest payments are more than 90 days past due. Non-accrual loans totaled $3,450,772 at September 30, 2011 and $662,585 at December 31, 2010. Accruing loans past due more than 90 days totaled $ 0 at September 30, 2011 and December 31, 2010.

Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan losses, we have segmented our loan portfolio by product type. Our loan segments are residential construction, 1-4 family residential, land, commercial real estate, home equity lines of credit (“HELOC”), consumer and commercial.

To establish the allowance for loan losses, loans are pooled by portfolio class and an historical loss percentage is applied to each class. The historical loss percentage is based upon a rolling 12 month history. That calculation determines the required allowance for loan loss level. The Company then applies additional loss multipliers to the different classes of loans to reflect various environmental factors. These loss estimates are performed under multiple economic scenarios to establish a range of potential outcomes for each criterion. Management applies judgment to develop its own view of loss probability within that range, using external and internal parameters with the objective of establishing an allowance for loss inherent within these portfolios as of the reporting date.

The Company’s policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those assets characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets (or portions of assets) classified as loss are those considered uncollectible and of such little value that there continuance as assets is not warranted. Assets that do not expose us to risk sufficient enough to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve close attention, are required to be designated as special mention.

Modifications of terms for our loans and their inclusion as troubled debt restructurings are based on individual facts and circumstances. Loan modifications that are included as troubled debt restructurings may involve either an increase or reduction of the interest rate, extension of the term of the loan, or deferral or forgiveness of principal or interest payments. As of September 30, 2011 there are 5 loans totaling $1,565,300 classified as troubled debt restructurings. The following is a summary of our troubled debt restructurings as of September 30, 2011 and December 31, 2010:

 

     September 30,
2011 (unaudited)
     December 31,
2010
 

Residential Real Estate

   $ 1,448,772       $ 1,513,885   

Residential Construction

     0         577,650   

Land

     116,500         0   
  

 

 

    

 

 

 

Total

   $ 1,565,272       $ 2,091,535   
  

 

 

    

 

 

 

 

11


Table of Contents

Our four owner-occupied one- to four-family residential troubled debt restructured loans had outstanding balances of $265,400, $260,000, $436,800 and $486,600 at September 30, 2011. Each of these borrowers was experiencing temporary financial difficulty. In each of these instances, there was no principal or interest forgiven nor was there a change in the interest rate. On the $265,400 loan we agreed to modify the loan to allow the borrower to make interest only payments for a period of seven months. At the end of that period, the loan was re-amortized to pay off the loan by the original maturity date. This loan has never been nonaccrual. The interest for the three months ended September 30, 2011 on this loan was $2,499, all of which was recognized as income. The borrower has complied with the repayment terms.

On the $260,000 loan we agreed to modify the loan by allowing a temporary payment plan. The borrower complied with the temporary payment plan. At the conclusion of the temporary payment plan, we agreed to defer the payment of the then accrued interest of $4,000 until the loan was paid off. This loan was never in nonaccrual status during 2010. During 2011 the borrower has had difficulty making his payment. As of September 30, 2011 the loan was greater than 90 days delinquent, and we have started foreclosure proceedings. This loan has been placed on nonaccrual status. After receiving an updated appraisal in July 2011, we charged off $4,756 during the three months ended September 30, 2011.

On the $436,800 loan we agreed to modify the loan by allowing a temporary payment plan. The borrower complied with the temporary payment arrangement. At the conclusion of the temporary payment plan, we agreed to defer the payment of the then accrued interest of $16,000 until the loan was paid off. During 2011 the borrower has had difficulty making his payment. As of September 30, 2011 the loan was greater than 90 days delinquent, and we have started foreclosure proceedings. This loan has been placed on nonaccrual status.

On the $486,600 loan we agreed to modify the loan by allowing a temporary payment plan. At a later date, we agreed to defer the payment of the then accrued interest of $10,000 until the loan is paid off. During 2011 the borrower has had difficulty making his payment. As of September 30, 2011 the loan was greater than 90 days delinquent, and we have started foreclosure proceedings. This loan has been placed on nonaccrual status. This loan previously had a balance of $541,900. During the second quarter of 2011 management performed an evaluation and determined to charge off $34,600 of this loan. After receiving an updated appraisal in September 2011, we charged off an additional $20,700 during the three months ended September 30, 2011.

During the three months ended September 30, 2011 we had one additional troubled debt restructuring. This was on a lot loan that is nonperforming totaling $116,500. We agreed to accept a short sale of $125,000 on this property, plus a promissory note for $30,000 to be repaid over a five year period without interest, however, as of September 30, 2011 no contract has been delivered. This loan was originally $185,500 when it became nonperforming. We had previously charged off $68,500 of that loan based on an updated appraisal in April 2011. The borrower has made one $500 payment under the restructured terms as of September 30, 2011 which has been applied to principal.

We monitor the performance of loans modified monthly. If a loan is in nonaccrual status at the time we restructure it and classify the restructure as a troubled debt restructuring, it is our policy to maintain the loan as nonaccrual until we receive six payments under the restructured terms, unless we have adequate collateral valuations or other analysis to support maintaining the loan on accrual status.

All of the above loans were classified as impaired and measured for loss in accordance with ASC 310-10-35. All of these loans were measured using the present value of discounted cash flows method or the fair value of collateral method. If the loan was analyzed using the present value of discounted cash flows method, the discount rate used was the original note rate. The other significant assumptions used in our discounted cash flow model to determine the fair value of the loans were the schedule of cash flows produced under the modified terms.

 

12


Table of Contents

Generally, interest on loans accrue and is credited to income based on the principal balance outstanding. It is management’s policy to discontinue the accrual of interest income and classify a loan as non-accrual when principal or interest is past due 90 days or more. Loans are not returned to accrual status until principal and interest payments are brought current and future payments appear reasonably certain. Interest accrued and unpaid at the time a loan is placed on non-accrual status is charged against interest income.

Interest income that would have been recorded for the three month period ended September 30, 2011 had nonaccrual loans been current according to their original terms, amounted to approximately $54,700. Interest income that would have been recorded for the nine month period ended September 30, 2011 had nonaccrual loans been current according to their original terms, amounted to approximately $158,900.

Management segregates its loan portfolio into portfolio segments which is defined as the level at which the Company develops and documents a systematic method for determining its allowance for loan losses. The portfolio segments are segregated based on loan types and the underlying risk factors present in each loan type. These risk factors are periodically reviewed by management and revised as deemed appropriate. The Company’s loan portfolio is segregated into the following portfolio segments:

Residential Construction Loans. This portfolio includes construction loans to individuals and builders, primarily for the construction of residential properties. Construction financing generally involves greater risk than long-term financing on improved, owner-occupied real estate. Our portfolio consists of both construction/permanent loans to individuals for their principal residence as well as speculative construction loans to builders. Construction loans are underwritten on the basis of the estimated value of the property as completed. For our construction/permanent loans to individuals for their principal residence, repayment is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as employment levels. Repayment can also be impacted by changes in property values on residential properties. For our speculative construction loans to builders, repayment is primarily dependent on the cashflows of the builder and the success of the project. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long term financing.

One To Four Family Residential Loans. This portfolio segment consists of the origination of first mortgage loans and closed end home equity second mortgage loans secured by one to four family residential properties located in our market area. The Company offers both fixed and adjustable rate products on properties located in the Company’s primary market area. These loans are generally for terms of 15, 20 and 30 years amortized on a monthly basis. The Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as employment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Home Equity Lines of Credit. This portfolio segment consists primarily of open end, second mortgage loans secured by one to four family residential properties. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as employment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Land. This portfolio consists primarily of first mortgage loans on developed residential land. Land loans have a higher level of risk than loans for the purchase of existing homes since collateral values can only be estimated at the time the loan is approved.

 

13


Table of Contents

Commercial Real Estate Loans. This portfolio segment consists primarily of loans secured by commercial real estate. Loans secured by commercial real estate generally may have larger balances and more risk of default than one to four family mortgage loans. The increased risk is the result of several factors, including the concentration of principal in a limited number of loans and borrowers, the impact of local and general economic conditions on the borrower’s ability to repay the loan, and the increased difficulty of evaluating and monitoring these types of loans.

Consumer Loans. This portfolio segment includes small balance unsecured loans to individuals, automobile loans and deposit account loans. Consumer loans are generally originated at higher interest rates than residential mortgage loans because of their higher risk. Collections are highly dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. In the case where collateral may be present, repossessed collateral for a defaulted loan may not provide an adequate source of repayment as a result of damage, loss or depreciation.

Commercial Loans. This portfolio segment consists of unsecured lines of credit and closed end loans to business owners that have personal guarantees. These loans generally have higher interest rates and shorter terms than one to four family residential loans. These loans have a higher level of risk than one to four family residential loans. The increased risk is due to the increased difficulty of monitoring and higher risk of default since their repayment generally depends on the successful operation of the borrower’s business.

 

14


Table of Contents

In accordance with new standards issued under the Disclosures of Credit Quality of Financing Receivables and the Allowance for Loan Losses, the following tables show credit quality indicators, the aging of receivables, and disaggregated balances of loans receivable and the allowance for loan losses as of September 30, 2011 and December 31, 2010:

Credit Risk Analysis of Loans Receivable

As of September 30, 2011

(unaudited)

 

    Construction     1-4 Family
Residential
    Land     Commercial
Real Estate
    Home Equity
Lines of Credit
    Consumer     Commercial     Total  

Pass

  $ 3,140,804      $ 80,597,854      $ 2,482,167      $ 6,048,484      $ 9,638,671      $ 54,527      $ 395,012      $ 102,357,519   

Special Mention

    0        2,619,063        0        1,209,561        363,814        0        0        4,192,438   

Substandard

    1,565,198        1,745,655        310,522        0        94,382        440        0        3,716,197   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 4,706,002      $ 84,962,572      $ 2,792,689      $ 7,258,045      $ 10,096,867      $ 54,967      $ 395,012      $ 110,266,154   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Credit risk profile based on payment activity:

               

Performing

  $ 3,140,804      $ 83,482,342      $ 2,482,167      $ 7,258,045      $ 10,002,485      $ 54,527      $ 395,012      $ 106,815,382   

Nonperforming

    1,565,198        1,480,230        310,522        0        94,382        440        0        3,450,772   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 4,706,002      $ 84,962,572      $ 2,792,689      $ 7,258,045      $ 10,096,867      $ 54,967      $ 395,012      $ 110,266,154   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Credit Risk Analysis of Loans Receivable

As of December 31, 2010

 

    Construction     1-4 Family
Residential
    Land     Commercial
Real Estate
    Home Equity
Lines of Credit
    Consumer     Commercial     Total  

Pass

  $ 3,590,645      $ 85,801,235      $ 2,530,748      $ 3,498,269      $ 12,729,750      $ 44,177      $ 22,645      $ 108,217,469   

Special Mention

    577,000        250,000        0        474,000        0        0        0        1,301,000   

Substandard

    1,611,000        117,101        545,484        0        0        0        0        2,273,585   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 5,778,645      $ 86,168,336      $ 3,076,232      $ 3,972,269      $ 12,729,750      $ 44,177      $ 22,645      $ 111,792,054   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Credit risk profile based on payment activity:

               

Performing

  $ 5,778,645      $ 86,051,235      $ 2,530,748      $ 3,972,269      $ 12,729,750      $ 44,177      $ 22,645      $ 111,129,469   

Nonperforming

    0        117,101        545,484        0        0        0        0        662,585   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 5,778,645      $ 86,168,336      $ 3,076,232      $ 3,972,269      $ 12,729,750      $ 44,177      $ 22,645      $ 111,792,054   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

15


Table of Contents

Aged Analysis of Past Due Loans Receivable

As of September 30, 2011 (unaudited)

 

    Construction     1-4 Family
Residential
    Home Equity
Lines of Credit
    Land     Commercial
Real Estate
    Commercial     Consumer     Total  

30-59 Days Past Due

  $ 0      $ 2,126,942      $ 90,192      $ 0      $ 0      $ 0      $ 0      $ 2,217,134   

60-89 Days Past Due

    0        398,821        0        0        0        0        0        398,821   

Greater Than 90 Days Past Due

    1,565,198        1,480,230        94,382        310,522        0        0        440        3,450,772   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Past Due

    1,565,198        4,005,993        184,574        310,522        0        0        440        6,066,727   

Current

    3,140,804        80,956,579        9,912,293        2,482,167        7,258,045        395,012        54,527        104,199,427   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Loans Receivable

  $ 4,706,002      $ 84,962,572      $ 10,096,867      $ 2,792,689      $ 7,258,045      $ 395,012      $ 54,967      $ 110,266,154   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Recorded Investment > 90 Days and Accruing

  $ 0      $ 0      $ 0      $ 0      $ 0      $ 0      $ 0      $ 0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Aged Analysis of Past Due Loans Receivable

As of December 31, 2010

 

    Construction     1-4 Family
Residential
    Home Equity
Lines of Credit
    Land     Commercial
Real Estate
    Commercial     Consumer     Total  

30-59 Days Past Due

  $ 0      $ 178,711      $ 465,930      $ 0      $ 0      $ 0      $ 642      $ 645,283   

60-89 Days Past Due

    0        249,556        0        0        0        0        0        249,556   

Greater Than 90 Days Past Due

    0        117,101        0        545,484        0        0        0        662,585   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Past Due

    0        545,368        465,930        545,484        0        0        642        1,557,424   

Current

    5,778,645        85,622,968        12,263,820        2,530,748        3,972,269        22,645        43,535        110,234,630   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Loans Receivable

  $ 5,778,645      $ 86,168,336      $ 12,729,750      $ 3,076,232      $ 3,972,269      $ 22,645      $ 44,177      $ 111,792,054   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Recorded Investment > 90 Days and Accruing

  $ 0      $ 0      $ 0      $ 0      $ 0      $ 0      $ 0      $ 0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Allowance for Loan Losses and Recorded Investment in Loans Receivable

For the Nine Months Ended September 30, 2011 (unaudited)

 

    Construction     1-4 Family
Residential
    Home Equity
Lines of Credit
    Land     Commercial
Real Estate
    Commercial     Consumer     Unallocated     Total  

Allowance for loan losses:

                 

Beginning Balance

  $ 80,789      $ 536,550      $ 407,352      $ 173,024      $ 75,473      $ 0      $ 3,259      $ 23,553      $ 1,300,000   

Charge-offs

    0        (61,929     0        (75,718     0        0        0        0        (137,647

Recoveries

    0        0        20,686        0        0        0        0        0        20,686   

Provision

    (11,376     80,375        (269,999     147,187        59,890        0        300        60,584        66,961   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

  $ 69,413      $ 554,996      $ 158,039      $ 244,493      $ 135,363      $ 0      $ 3,559      $ 84,137      $ 1,250,000   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance Individually evaluated for impairment

  $ 0      $ 0      $ 0      $ 0      $ 0      $ 0      $ 0      $ 0      $ 0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance Collectively evaluated for impairment

  $ 69,413      $ 554,996      $ 158,039      $ 244,493      $ 135,363      $ 0      $ 3,559      $ 84,137      $ 1,250,000   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans Receivable:

                 

Ending Balance

  $ 4,706,002      $ 84,962,572      $ 10,096,867      $ 2,792,689      $ 7,258,045      $ 395,012      $ 54,967      $ 0      $ 110,266,154   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance Individually evaluated for impairment

  $ 1,565,198      $ 1,657,997      $ 94,382      $ 310,522      $ 0      $ 0      $ 0      $ 0      $ 3,628,099   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance Collectively evaluated for impairment

  $ 3,140,804      $ 83,304,575      $ 10,002,485      $ 2,482,167      $ 7,258,045      $ 395,012      $ 54,967      $ 0      $ 106,638,055   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Allowance for Loan Losses and Recorded Investment in Loans Receivable

For the Year Ended December 31, 2010

 

    Construction     1-4 Family
Residential
    Home Equity
Lines of Credit
    Land     Commercial
Real Estate
    Commercial     Consumer     Unallocated     Total  

Allowance for loan losses:

                 

Beginning Balance

  $ 18,795      $ 91,335      $ 132,257      $ 7,879      $ 20,986      $ 0      $ 1,166      $ 4,203      $ 276,621   

Charge-offs

    (112,500     (6,784     (207,126     (146,250     0        (6,130     0        0        (478,790

Recoveries

    0        820        712        0        0        0        0        0        1,532   

Provision

    174,494        451,178        481,509        311,395        49,487        6,130        7,093        19,351        1,500,637   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

  $ 80,789      $ 536,549      $ 407,352      $ 173,024      $ 70,473      $ 0      $ 8,259      $ 23,554      $ 1,300,000   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance Individually evaluated for impairment

  $ 0      $ 0      $ 0      $ 0      $ 0      $ 0      $ 0      $ 0      $ 0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance Collectively evaluated for impairment

  $ 80,789      $ 536,549      $ 407,352      $ 173,024      $ 70,473      $ 0      $ 8,259      $ 23,554      $ 1,300,000   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans Receivable:

                 

Ending Balance

  $ 5,778,645      $ 86,168,336      $ 12,729,750      $ 3,076,232      $ 3,972,269      $ 22,645      $ 44,177      $ 0      $ 111,792,054   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance Individually evaluated for impairment

  $ 3,278,057      $ 4,527,466      $ 17,756      $ 545,856      $ 1,989,575      $ 0      $ 0      $ 0      $ 10,358,710   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance Collectively evaluated for impairment

  $ 2,500,588      $ 81,640,870      $ 12,711,994      $ 2,530,376      $ 1,982,694      $ 22,645      $ 44,177      $ 0      $ 101,433,344   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Management reviews and identifies loans and investments that require designation as nonperforming assets and troubled debt restructurings. Nonperforming assets include loans accounted for on a non-accrual basis, loans past due by 90 days or more but still accruing, and other real estate owned. Troubled debt restructurings include loans in which the borrower was having financial difficulty, and we agreed to modify the loan. Information with respect to nonperforming assets and troubled debt restructurings at September 30, 2011 and December 31, 2010 is as follows:

 

     September 30,
2011 (unaudited)
    December 31,
2010
 

Non-Accrual Loans

   $ 3,450,772      $ 662,585   

Other Real Estate Owned, net

     0        2,015,909   

Loans 90 days or more past due and still accruing

     0        0   
  

 

 

   

 

 

 

Total Nonperforming Assets

   $ 3,450,772      $ 2,678,494   
  

 

 

   

 

 

 

Troubled Debt Restructurings

   $ 1,565,272      $ 2,091,535   
  

 

 

   

 

 

 

Troubled Debt Restructurings included In Non-Accrual Loans

     (1,299,847     0   
  

 

 

   

 

 

 

Troubled Debt Restructurings and Total Nonperforming Assets

   $ 3,716,197      $ 4,770,029   
  

 

 

   

 

 

 

Loans Receivable on Nonaccrual Status

As of September 30, 2011

 

    Construction     1-4 Family
Residential
    Home Equity
Lines of
Credit
    Land     Commercial
Real Estate
    Commercial     Consumer     Total  

Unpaid Principal Balance

  $ 1,565,198      $ 1,480,230      $ 94,382      $ 310,522      $ 0      $ 0      $ 440      $ 3,450,772   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans Receivable on Nonaccrual Status

As of December 31, 2010

 

    Construction     1-4 Family
Residential
    Home Equity
Lines of
Credit
    Land     Commercial
Real Estate
    Commercial     Consumer     Total  

Unpaid Principal Balance

  $               0      $    117,101      $          0      $ 545,484      $ 0      $ 0      $     0      $    662,585   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Impaired Loans

As of and for the Nine Months Ended September 30, 2011

 

     Construction      1-4 Family
Residential
     Home Equity
Lines of Credit
     Land    Commercial
Real Estate
     Commercial      Consumer      Total  

Loans With A Valuation Allowance:

                       

Unpaid Principal Balance

   $ 0       $ 0       $ 0       $0    $ 0       $ 0       $ 0       $ 0   

Related Allowance for Loan Losses

     0         0         0       0      0         0         0         0   

Average Recorded Investment

     0         0         0       0      0         0         0         0   

Interest Income recognized

     0         0         0       0      0         0         0         0   

Loans Without a Valuation Allowance:

                       

Unpaid Principal Balance

   $ 1,565,198       $ 1,745,655       $ 94,382       $310,522    $ 0       $ 0       $ 440       $ 3,716,197   

Related Allowance for Loan Losses

     0         0         0       0      0         0         0         0   

Average Recorded Investment

     0         0         0       0      0         0         0         0   

Interest Income recognized

     0         14,310         554       0      0         0         35         14,899   

Totals:

                       

Unpaid Principal Balance

   $ 1,565,198       $ 1,745,655       $ 94,382       $310,522    $ 0       $ 0       $ 440       $ 3,716,197   

Related Allowance for Loan Losses

     0         0         0       0      0         0         0         0   

Average Recorded Investment

     0         0         0       0      0         0         0         0   

Interest Income recognized

     0         14,310         554       0      0         0         35         14,899   

 

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Table of Contents

Impaired Loans

As of and for the Year Ended December 31, 2010

 

     Construction      1-4 Family
Residential
     Home Equity
Lines of Credit
     Land      Commercial
Real Estate
     Commercial      Consumer      Total  

Loans With A Valuation Allowance:

                       

Unpaid Principal Balance

   $ 0       $ 0       $ 0       $ 0       $ 0       $ 0       $ 0       $ 0   

Related Allowance for Loan Losses

     0         0         0         0         0         0         0         0   

Average Recorded Investment

     0         0         0         0         0         0         0         0   

Interest Income recognized

     0         0         0         0         0         0         0         0   

Loans Without a Valuation Allowance:

                       

Unpaid Principal Balance

   $ 577,650       $ 1,630,986       $ 0       $ 545,484       $ 0       $ 0       $ 0       $ 2,754,120   

Related Allowance for Loan Losses

     0         0         0         0         0         0         0         0   

Average Recorded Investment

     577,650         1,641,905         0         678,302         0         0         0         2,897,857   

Interest Income recognized

     37,547         102,774         0         14,708         0         0         0         155,029   

Totals:

                       

Unpaid Principal Balance

   $ 577,650       $ 1,630,986       $ 0       $ 545,484       $ 0       $ 0       $ 0       $ 2,754,120   

Related Allowance for Loan Losses

     0         0         0         0         0         0         0         0   

Average Recorded Investment

     577,650         1,641,905         0         678,302         0         0         0         2,897,857   

Interest Income recognized

     37,547         102,774         0         14,708         0         0         0         155,029   

 

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Table of Contents
4. EMPLOYEE STOCK OWNERSHIP PLAN

In connection with the conversion to stock form, the Company established an Employee Stock Ownership Plan (ESOP) for the exclusive benefit of eligible employees. The ESOP borrowed funds from the Company in an amount sufficient to purchase 126,960 shares, or 8% of the Common Stock issued in the offering. The shares were acquired at a price of $10.00 per share.

The loan is secured by the shares purchased and will be repaid by the ESOP with funds from contributions made by the Bank and dividends received by the ESOP, with funds from any contributions on ESOP assets. Contributions will be applied to repay interest on the loan first and the remainder will be applied to principal. The loan is expected to be repaid over a period of 12 years.

Shares purchased with the loan proceeds are held in a suspense account for allocation among participants as the loan is repaid. Contributions to the ESOP and shares released from the suspense account are allocated among participants in proportion to their compensation, relative to total compensation, of all active participants. Participants will vest their accrued benefits under the employee stock ownership plan at the rate of 33.33% per year beginning in year two. Vesting is accelerated upon retirement, death or disability of the participant, or a change in control of the Bank. Forfeitures will be reallocated to remaining plan participants. Benefits may be payable upon retirement, death, disability, separation of service, or termination of the ESOP.

The debt of the ESOP, in accordance with generally accepted accounting principles, is eliminated in consolidation and the shares pledged as collateral are reported as unearned ESOP shares in the consolidated balance sheet. Contributions to the ESOP shall be sufficient to pay principal and interest currently due under the loan agreement. As shares are committed to be released from collateral, the Company reports compensation expense equal to the average market price of the shares for the respective period, and the shares become outstanding for earnings per share computations. Dividends on allocated ESOP shares are recorded as a reduction of debt and accrued interest. ESOP compensation expense for the nine months ended September 30, 2011 and 2010 was $77,208 and $0, respectively.

A summary of ESOP shares at September 30, 2011 is as follows:

 

Shares committed for release

     7,935   
  

 

 

 

Unearned shares

     119,025   
  

 

 

 

Total ESOP shares

     126,960   
  

 

 

 

Fair Value of unearned shares

   $ 958,151   
  

 

 

 

 

5. REGULATORY MATTERS

The Bank is subject to various regulatory capital requirements administered by its primary federal regulator, the Office of The Comptroller of the Currency (“OCC”). Failure to meet the minimum regulatory capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that if undertaken, could have a direct material effect on the Bank and the consolidated financial statements. Under the regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines involving quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification under the prompt corrective action guidelines are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

 

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Table of Contents

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of: total risk-based capital and Tier I capital to risk-weighted assets (as defined in the regulations), Tier I capital to adjusted total assets (as defined), and tangible capital to adjusted total assets (as defined).

As of September 30, 2011 and December 31, 2010 (the most recent notification from the OCC), the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. Nothing has come to management’s attention since the institution’s most recent notification of being classified as “well capitalized” that would cause such classification to change. The following table details the Bank’s capital position:

 

     Actual     For Capital Adequacy Purposes
and to be Adequately
Capitalized Under the Prompt
Corrective Action Provisions
 
     Amount      Ratio     Amount      Ratio  
     (dollars in thousands)            (dollars in thousands)         

As of September 30, 2011

          

Total Risk-Based Capital

          

(to Risk-Weighted Assets)

   $ 24,682         27.84   $ 7,092         8.0

Tier I Capital

          

(to Risk-Weighted Assets)

   $ 23,573         26.59   $ 3,546         4.0

Tier I Capital

          

(to Adjusted Total Assets)

   $ 23,573         13.20   $ 5,358         3.0

Tangible Capital

          

(to Adjusted Total Assets)

   $ 23,573         13.20   $ 2,679         1.5

As of December 31, 2010

          

Total Risk-Based Capital

          

(to Risk-Weighted Assets)

   $ 17,282         19.03   $ 7,265         8.0

Tier I Capital

          

(to Risk-Weighted Assets)

   $ 16,147         17.78   $ 3,633         4.0

Tier I Capital

          

(to Adjusted Total Assets)

   $ 16,147         9.51   $ 5,094         3.0

Tangible Capital

          

(to Adjusted Total Assets)

   $ 16,147         9.51   $ 2,547         1.5

The following table provides a reconciliation of total equity per the consolidated financial statements to capital amounts reflected in the above table:

 

     September 30,     December 31,  
     2011     2010  

Total Equity

   $ 30,043      $ 15,987   

Adjustment for accumulated other comprehensive (income) loss

     (184     160   

Adjustment for parent company equity

     (6,286     0   
  

 

 

   

 

 

 

Tangible, Tier 1 and Core Capital

     23,573        16,147   

Allowable allowance for loan losses (1.25% of total risk-weighted assets)

     1,109        1,135   
  

 

 

   

 

 

 

Total risk-based capital

   $ 24,682      $ 17,282   
  

 

 

   

 

 

 

 

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Table of Contents
6. FAIR VALUE MEASUREMENTS

Fair value estimates, methods, and assumptions are set forth below for the Bank’s financial instruments as of September 30, 2011 and December 31, 2010.

 

     September 30, 2011      December 31, 2010  
     Carrying Value      Estimated
Fair Value
     Carrying Value      Estimated
Fair Value
 

Assets:

           

Cash and cash equivalents

   $ 24,399,509       $ 24,399,509       $ 25,881,831       $ 25,881,831   

Securities - available-for-sale

     28,046,631         28,046,631         21,365,746         21,365,746   

Loans

     110,266,154         113,673,634         111,792,054         112,785,211   

Fed Home Loan Bank stock

     1,329,900         1,329,900         1,395,700         1,395,700   

Accrued interest receivable

     672,784         672,784         585,056         585,056   

Investment in bank-owned

           

Life insurance

     4,308,722         4,308,722         4,174,397         4,174,397   

Liabilities:

           

Deposit accounts and advances by borrowers

     125,719,374         126,781,852         130,657,991         134,869,657   

Advances from the FHLB

     22,500,000         23,320,523         22,583,333         22,709,624   

 

     September 30,      December 31,  
     2011      2010  

Off-Balance Sheet Instruments:

     

Commitments to extend credit

   $ 2,883,500       $ 1,754,700   

Unused lines of credit

   $ 12,033,238       $ 11,673,096   
     

(a) Cash and Cash Equivalents - The carrying amount for cash on hand and in banks approximates fair value due to the short maturity of these instruments.

(b) Securities - The fair value of securities excluding Federal Home Loan Bank stock, is based on bid prices received from an external pricing service or bid quotations received from securities dealers.

(c) Loans - Loans were segmented into portfolios with similar financial characteristics. Loans were also segmented by type such as residential, multifamily and non-residential, construction and land, second mortgage loans, commercial, and consumer. Each loan category was further segmented by fixed and adjustable rate interest terms and performing and nonperforming categories. The fair value of residential loans was calculated by discounting anticipated cash flows based on weighted-average contractual maturity, weighted-average coupon, and discount rate.

The fair value for nonperforming loans was determined by reducing the carrying value of nonperforming loans by the Company’s historical loss percentage for each specific loan category.

(d) Federal Home Loan Bank Stock - The fair value of Federal Home Loan Bank stock approximates its carrying value based on the redemption provisions of the Federal Home Loan Bank.

(e) Accrued Interest Receivable - The carrying amounts of accrued interest approximate the fair values.

(f) Investments in Bank-Owned Life Insurance - The fair value of the insurance contracts approximates the carrying value.

 

24


Table of Contents

(g) Deposits and Advances by Borrowers - The fair value of deposits with no stated maturity, such as noninterest bearing deposits, interest-bearing NOW accounts, money market and statement savings accounts, is deemed to be equal to the carrying amounts. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate for certificates of deposit was estimated using the rate currently offered for deposits of similar remaining maturities.

(h) Advances from the FHLB - Fair values are estimated by discounting carrying values using a cash flow approach based on market rates as of September 30, 2010 and December 31, 2009.

(i) Off-Balance Sheet Financial Instruments - The Company’s adjustable rate commitments to extend credit move with market rates and are not subject to interest rate risk. The rates and terms of the Company’s fixed rate commitments to extend credit are competitive with others in the various markets in which the Company operates. The fair values of these instruments are immaterial.

(j) Limitations - Fair value estimates are made at a specific point in time, based on relevant market information and information about financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect estimates.

The Company has adopted FASB guidance on Fair Value Measurements which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This guidance applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, the guidance establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy is as follows:

Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.

Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

 

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The following table presents the Bank’s assets measured at fair value on a recurring basis:

 

     Fair Value at
September 30,
2011
     Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Available-for-sale securities:

           

Bank Notes

   $ 1,021,340       $ 0       $ 1,021,340       $ 0   

Obligations of U.S. Government agencies

     10,313,422         0         10,313,422         0   

FNMA

     8,811,196         0         8,811,196         0   

GNMA

     4,629,022         0         4,629,022         0   

FHLMC

     2,653,200         0         2,653,200         0   

Private label CMO

     618,451         0         618,451         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value

   $ 28,046,631       $ 0       $ 28,046,631       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Fair Value at
December 31,
2010
     Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Available-for-sale securities:

           

Bank Notes

   $ 1,006,280       $ 0       $ 1,006,280       $ 0   

Obligations of U.S. Government agencies

     8,285,000         0         8,285,000         0   

FNMA

     6,743,108         0         6,743,108         0   

GNMA

     102,271         0         102,271         0   

FHLMC

     4,403,042         0         4,403,042         0   

Private label CMO

     826,045         0         826,045         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value

   $ 21,365,746       $ 0       $ 21,365,746       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities classified as available-for-sale are reported at fair value utilizing Level 2 Inputs. For these securities, the Association obtains fair values from an independent pricing service and safekeeping custodians. The observable data may include dealer quotes, cash flows, U.S. Treasury yield curve, trading levels, credit information, and the terms and conditions of the security, among other things.

 

26


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Financial Instruments Measured on a Nonrecurring Basis

The Bank may be required, from time to time, to measure certain other financial assets and liabilities at fair value on a nonrecurring basis. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis as of September 30, 2011 and December 31, 2010, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the assets:

 

     Fair Value at
September 30,

2011
     Quoted
Prices

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Impaired Loans

           

One-to-four family

   $ 1,745,655       $ 0       $ 1,745,655       $ 0   

Home Equity Lines of Credit

     94,382         0         94,382         0   

Residential Construction

     1,565,198         0         1,565,198         0   

Land

     310,522         0         310,522         0   

Consumer

     440         0         440         0   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 3,716,197       $ 0       $ 3,716,197       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Fair Value at
December 31,

2010
     Quoted
Prices

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Impaired Loans

           

One-to-four family

   $ 1,630,986       $ 0       $ 1,630,986       $ 0   

Residential Construction

     577,650         0         577,650         0   

Land

     545,484         0         545,484         0   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,754,120       $ 0       $ 2,754,120       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other real estate owned

   $ 2,015,909       $ 0       $ 2,015,909       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Loans for which it is probable that the Bank will not collect all principal and interest due according to contractual terms are measured for impairment in accordance with FASB guidance. Allowable methods for estimating fair value include using the fair value of the collateral for collateral dependent loans or, where a loan is determined not to be collateral dependent, using the discounted cash flow method. In our determination of fair value, we have categorized both methods of valuation as estimates based on Level 2 inputs.

If the impaired loan is identified as collateral dependent, then the fair value method measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal or utilizing some other method of valuation for the collateral and applying a discount factor to the value based on our loan review policy and procedures.

If the impaired loan is determined not to be collateral dependent, then the discounted cash flow method is used. This method requires the impaired loan to be recorded at the present value of expected future cash flows discounted at the loan’s effective interest rate. The effective interest rate of a loan is the contractual interest rate adjusted for any net deferred loan fees or costs, premiums, or discounts existing at origination or acquisition of the loan.

Our method for valuing other real estate owned is the fair value method. This method requires obtaining a current independent appraisal and applying a discount factor to the value based on our loan review policy and procedures.

 

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7. RECENT ACCOUNTING PRONOUNCEMENTS

In April 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-03, “Reconsideration of Effective Control for Repurchase Agreements.” ASU No. 2011-03 affects all entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The amendments in ASU No. 2011-03 remove from the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee. ASU No. 2011-03 also eliminates the requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets. The guidance is effective for the Company’s reporting period ended March 31, 2012. The guidance will be applied prospectively to transactions or modifications of existing transaction that occur on or after January 1, 2012. The adoption of this standard is not expected to have a material impact on the Company’s financial statements.

In April 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-02, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” ASU No. 2011-02 provides additional guidance and clarification to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. The new guidance is effective for the interim and annual periods beginning on or after June 15, 2011 and applies retrospectively to restructurings occurring on or after the beginning of the year of adoption. The adoption of this guidance did not have a material effect on the Company’s financial statements.

In May 2011, the FASB issued guidance amending the fair value measurement topic of ASC by clarifying the application of existing fair value measurement disclosure requirements and by changing particular principles or requirements for measuring fair value or for disclosing information about fair value measurements. The amendments will be effective for the year beginning January 1, 2012.

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income.” This guidance requires companies to present comprehensive income in a single statement below net income or in a separate statement of comprehensive income immediately following the income statement. The guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity, which is our current presentation. This guidance does not change which items are reported in other comprehensive income or the requirement to report reclassifications of items from other comprehensive income to net income. This guidance is effective for fiscal years and interim periods beginning after December 15, 2011 and will require retrospective application for all periods presented.

 

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

Forward-Looking Statements

When used in this Report, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties including changes in economic conditions in the Company’s market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company’s market area, competition and information provided by third-party vendors and the matters described herein under “Part II, Item 1A. Risk Factors” that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

General

Fraternity Community Bancorp, Inc. (the “Company”) is a Maryland corporation incorporated on October 12, 2010 by Fraternity Federal Savings and Loan Association (the “Bank”) to be its holding company following the Bank’s conversion from the mutual to the stock form of organization (the “Conversion”). The Conversion was completed on March 31, 2011 and also on that date, the Company completed its public stock offering and issued 1,587,000 shares of its common stock for aggregate proceeds of $15,870,000, and net proceeds of approximately $14,968,600. The Company’s business is the ownership of the outstanding capital stock of the Bank. The Company does not own or lease any property but instead uses the premises, equipment and other property of the Bank with payment of appropriate rental fees as required by applicable law and regulations, under the terms of an expense allocation agreement between the Company and the Bank.

Founded in 1913, the Bank is a community-oriented financial institution, dedicated to serving the financial service needs of customers and businesses within its market area, which consists of Baltimore City and Baltimore, Carroll and Howard Counties in Maryland. We offer a variety of deposit products and provide loans secured by real estate located in our market area. Our real estate loans consist primarily of one- to four-family mortgage loans, as well as commercial real estate loans, land loans, home equity lines of credit and residential construction loans. We also offer consumer loans and, to a limited extent, commercial business loans. We currently operate out of our corporate headquarters and main office in Baltimore and full-service branch offices located in Cockeysville, Ellicott City and Hampstead, Maryland. We are subject to extensive regulation, examination and supervision by the Office of the Comptroller of the Currency, our primary federal regulator, and the Federal Deposit Insurance Corporation, our deposit insurer.

The Company and the Bank maintain an Internet website at http://www.fraternityfed.com. Information on our website should not be considered a part of this Quarterly Report on Form 10-Q.

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

 

29


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allowance are: loss exposure at default; the amount and timing of future cash flows on impaired 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 the Comptroller of the Currency, 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.

Comparison of Financial Condition at September 30, 2011 and December 31, 2010

Assets. At September 30, 2011, total assets increased by $9.1 million to $178.8 million at September 30, 2011 from $169.7 million at December 31, 2010. The increase in assets for the nine months ended September 30, 2011 was due mainly to the proceeds from the Conversion mentioned above. Available-for-sale investment securities increased by $6.7 million, and held-to-maturity investment securities increased by $8 million. Other real estate owned decreased by $2 million, and loans receivable, net, decreased by $1.5 million as many loan customers took advantage of low long-term mortgage rates and refinanced their mortgage loans. One- to four-family loans decreased to $85.0 million at September 30, 2011 from $86.1 million at December 31, 2010; residential construction loans decreased to $4.7 million at September 30, 2011 from $5.8 million at December 31, 2010; commercial real estate loans increased to $7.3 million at September 30, 2011 from $4.0 million at December 31, 2010; and lines of credit, all of which are secured by one- to four-family residential properties, totaled $10.1 million at September 30, 2011 compared to $12.7 million at December 31, 2010.

At September 30, 2011, we had $28.0 million of securities available-for-sale compared to $21.4 million at December 31, 2010. The increase was due to investing of excess liquidity. At September 30, 2011, we had $8.0 million of securities held-to-maturity compared to $0 at December 31, 2010.

Results of Operations for the Three Months Ended September 30, 2011 and 2010

Overview. We had a net loss of $7,200 for the three months ended September 30, 2011, as compared to a net loss of $160,500 for the three months ended September 30, 2010. The decrease in net loss between the periods was primarily due to a decline in our provision for loan losses of $293,200. This was partially offset by a decrease in benefit for income taxes of $103,300. Noninterest income remained relatively stable, from $130,300 for the three months ended September 30, 2010 to $131,700 for the three months ended September 30, 2011. Noninterest expense increased by $100,000, or 10.1% from $987,700 for the three months ended September 30, 2010 to $1,087,800 for the three months ended September 30, 2011.

Net Interest Income. Net interest income increased by $62,200, or 7.2%, from $865,100 for the three months ended September 30, 2010 to $927,400 for the three months ended September 30, 2011. The increase in net interest income is primarily attributable to a decrease in interest expense as interest rates continue to decline due to current economic conditions.

Interest on loans receivable, net decreased by $195,600, or 11.9%, from $1.6 million for the three months ended September 30, 2010 to $1.4 million for the three months ended September 30, 2011, due to a $7.8 million, or 6.6%, decrease in the average balance of loans and a 32 basis point decrease in the average yield. The decrease in the average balance of loans reflects the current low loan demand. The decrease in the average yield on loans was attributable to market rates remaining at a low level.

Interest on investment securities available-for-sale increased by $65,000, or 39.2%, for the three months ended September 30, 2011 as compared to the three months ended September 30, 2010, as a $13.8 million, or 91.3%, increase in the average balance of investment securities available-for-sale more than offset a 119 basis point

 

30


Table of Contents

decrease in the average yield. Interest on investment securities held-to-maturity increased by $30,600, or 100.0%, for the three months ended September 30, 2011, as we added some held-to-maturity securities to our investment portfolio.

Interest on cash and cash equivalents remained low by historical standards during the three months ended September 30, 2011 and 2010 due to the historically low prevailing market rates during those periods.

During the three months ended September 30, 2011, we were able to reduce interest paid on deposits primarily as the result of time deposits being rolled over at lower rates in response to general declines in market interest rates and decreases in the cost of other deposits due to a decline in market rates. Interest on time deposits decreased by $160,300, or 23.4%, from $684,500 for the three months ended September 30, 2010, to $524,200 for the three months ended September 30, 2011, as a result of a 45 basis point decrease in the average cost of time deposits and a $7.8 million, or 7.3%, decrease in the average balance of time deposits. Interest on brokered deposits remained stable at approximately $25,000 for the three months ended September 30, 2011 and 2010, as both the average balance of, and average rate paid on, brokered deposits remained stable. Interest on NOW and money market accounts remained stable during the three months ended September 30, 2011 as compared to the three months ended September 30, 2010, even with a 21.3% increase in the average balance of NOW and money market accounts. Interest on passbook accounts increased by $4,200, or 23.8%, from $18,000 for the three months ended September 30, 2010 to $22,200 for the three months ended September 30, 2011, due primarily to an increase in the average balance of these accounts. The average balance of passbook accounts increased during the three months ended September 30, 2011, from $12.6 million as of September 30, 2010 to $17.3 million as of September 30, 2011. The average rate paid on passbook accounts remained stable during the three months ended September 30, 2011 as compared to the three months ended September 30, 2010.

Interest on other interest-bearing liabilities, which consist of Federal Home Loan Bank of Atlanta advances, decreased by $1,400, or 0.6%, for the three months ended September 30, 2011 as compared to the three months ended September 30, 2010, due to a $194,400 decrease in the average balance of these other interest-bearing liabilities. At September 30, 2011, we had $22.5 million of Federal Home Loan Bank of Atlanta advances compared to $22.6 in advances as of December 31, 2010.

 

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Average Balances and Yields. The following table 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 balances of assets or liabilities, respectively, for the periods presented. Average balances have been calculated using monthly balances, and nonaccrual loans are included in average balances only. Amortization of net deferred loan fees are included in interest income on loans and are insignificant. No tax-equivalent adjustments were made. Nonaccruing loans have been included in the table as loans carrying a zero yield.

 

     Three Months Ended September 30,  
     2011     2010  
     Average
Balance
     Interest
and
Dividends
     Yield/
Cost
    Average
Balance
     Interest
and
Dividends
     Yield/
Cost
 

Assets:

                

Cash and cash equivalents

   $ 24,247,178       $ 11,871         .20   $ 26,320,507       $ 6,000         .09

Loans receivable net (3)

     109,022,039         1,442,702         5.29        116,785,827         1,638,341         5.61   

Investment securities available-for-sale (1)

     28,998,253         230,592         3.18        15,159,994         165,640         4.37   

Investment securities held-to-maturity (2)

     5,621,632         30,627         2.18        0         0         0.00   

Other interest-earning assets

     2,198,081         12,446         2.26        2,230,454         12,470         2.24   
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-earning assets

     170,087,183         1,728,238         4.06        160,496,782         1,822,451         4.54   
  

 

 

    

 

 

      

 

 

    

 

 

    

Noninterest-earning assets

     7,843,370         0           7,056,453         0      
  

 

 

    

 

 

      

 

 

    

 

 

    

Total assets

     177,930,553         1,728,238           167,553,235         1,822,451      
  

 

 

    

 

 

      

 

 

    

 

 

    

Liabilities and equity:

                

Time deposits

     98,007,152         524,242         2.14        105,763,326         684,524         2.59   

NOW and money market

     5,604,650         3,320         .24        4,618,346         2,970         .26   

Passbook

     17,271,692         22,225         .51        12,598,947         17,951         .57   

Brokered deposits

     2,344,877         25,491         4.35        2,293,407         24,920         4.35   

Other interest-bearing liabilities (Federal Home Loan Bank advances)

     22,500,000         225,592         4.01        22,694,444         226,945         4.00   
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing liabilities

     145,728,371         800,870         2.20        147,968,470         957,310         2.59   
        

 

 

         

 

 

 

Noninterest-bearing liabilities

     2,249,395         0           3,251,093         0      
  

 

 

    

 

 

      

 

 

    

 

 

    

Total liabilities

     147,977,766         800,870           151,219,563         957,310      
     

 

 

         

 

 

    

Total equity

     29,952,787         0           16,333,672         0      
  

 

 

         

 

 

       

Total liabilities and equity

   $ 177,930,553         800,870         $ 167,553,235         957,310      
  

 

 

    

 

 

      

 

 

    

 

 

    

Net interest income

      $ 927,368            $ 865,141      
     

 

 

         

 

 

    

Interest rate spread

           1.86           1.95
        

 

 

         

 

 

 

Net interest margin

           2.18           2.16
        

 

 

         

 

 

 

Ratio of average interest-earning assets to average interest-bearing liabilities

           116.72           108.47
        

 

 

         

 

 

 

 

(1) Investment securities available-for-sale are presented at fair market value.
(2) Investment securities held-to-maturity are presented at amortized cost.
(3) Loans placed on non-accrual status are included in average assets.

 

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Provision for Loan Losses. We maintain an allowance at a level necessary to absorb management’s best estimate of probable loan losses in the portfolio. Management considers, among other factors, historical loss experience, type and amount of loans, borrower concentrations and current conditions of the economy. In addition, the allowance considers the level of loans which management monitors as a result of inconsistent repayment patterns. Management has identified commercial real estate loans as an area for expected increased lending. Such loans carry a higher degree of credit risk than our historical single-family lending.

Our provision for loan losses was $6,400 for the three months ended September 30, 2011 compared to $299,600 for the three months ended September 30, 2010. At September 30, 2011, the allowance for loan losses was $1.25 million, or 1.13%, of the total loan portfolio compared to $1.3 million, or 1.16% of the total loan portfolio, at December 31, 2010.

Management also reviews individual loans for which full collectability may not be reasonably assured and considers, among other matters, the estimated fair value of the underlying collateral. This evaluation is ongoing and results in variations in our provision for loan losses.

Nonaccrual loans totaled $3.5 million at September 30, 2011 compared to $663,000 at December 31, 2010. Net loan charge-offs amounted to $6,400 during the three months ended September 30, 2011, compared to $0 during the three months ended September 30, 2010. As of December 31, 2010, nonaccrual loans included two lot loans totaling $545,500 and three 1-4 family residential loans totaling $117,000. During the nine months ended September 30, 2011, one of the lot loans totaling $360,000 was sold at foreclosure, and the other lot loan totaling $185,500 was written down to $117,000 and a $500 principal payment was received on that loan. That lot loan totaling $116,500 as of September 30, 2011 is included in the nonaccrual loan total at September 30, 2011. During that same period, two of the three 1-4 family residential loans totaling $8,000 were sold at foreclosure. The other 1-4 family residential loan totaling $109,100 is included in the nonaccrual loan total at September 30, 2011. As of September 30, 2011, nonaccrual loans included a $1.6 million speculative construction loan on a residential property where the builder has declared bankruptcy, a $194,000 lot loan to the same builder, four troubled debt restructured loans totaling $1.3 million, two home equity lines of credit totaling $94,000, and five 1-4 family residential loans for $297,000.

Noninterest Income. Total noninterest income remained stable, totaling $130,300 for the three months ended September 30, 2010 compared to $131,700 for the three months ended September 30, 2011. Gains on sale of other real estate owned for the three months ended September 30, 2011 was $9,100.

Noninterest Expenses. Total noninterest expenses increased by $100,100, or 10.1%, from $987,700 for the three months ended September 30, 2010 to $1,087,800 for the three months ended September 30, 2011. The increase primarily was attributable to salaries and employee benefits, relating to a new commercial loan officer and compensation expenses related to our ESOP.

Income Tax Expense. We had an income tax benefit of $28,000 during the three months ended September 30, 2011, due to our incurring a net loss during that period. For the three months ended September 30, 2010, we had an income tax benefit of $131,300.

Results of Operations for the Nine Months Ended September 30, 2011 and 2010

Overview. We had a net loss of $64,200 for the nine months ended September 30, 2011, as compared to a net loss of $571,800 for the nine months ended September 30, 2010. The decrease in net loss between the periods was primarily due to a decline in our provision for loan losses of $1.1 million. This was partially offset by a decrease in benefit from income taxes of $326,600. Noninterest income decreased by $150,700, or 34.1%, from $441,300 for the nine months ended September 30, 2010 to $290,600 for the nine months ended September 30, 2011. Noninterest expense decreased by $28,900, or 0.9%, from $3,053,100 for the nine months ended September 30, 2010 to $3,024,200 for the nine months ended September 30, 2011.

Net Interest Income. Net interest income decreased by $141,400, or 5.1%, from $2,755,800 for the nine months ended September 30, 2010 to $2,614,400 for the nine months ended September 30, 2011. The decrease in

 

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net interest income is primarily attributable to a large decrease in loans receivable as borrowers continued to refinance higher coupon loans to lower rates and demand for new loans remains weak. Other contributing factors include lower yields on both the loan and investment portfolios as higher rate assets are replaced with lower rate ones.

Interest on loans receivable, net decreased by $623,300, or 12.5%, from $5.0 million for the nine months ended September 30, 2010 to $4.4 million for the nine months ended September 30, 2011, due to a $9.6 million, or 8.1%, decrease in the average balance of loans and a 27 basis point decrease in the average yield. The decrease in the average balance of loans reflects the current low loan demand. The decrease in the average yield on loans was attributable to market rates remaining at a low level.

Interest on investment securities available-for-sale increased by $62,300, or 10.0%, for the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010, as a $10.5 million, or 50.1%, increase in the average balance of investment securities available-for-sale was mostly offset by a 106 basis point decrease in the average yield. Interest on investment securities held-to-maturity increased by $30,600, or 100.0%, for the three months ended September 30, 2011, as we added some held-to-maturity securities to our investment portfolio.

Interest on cash and cash equivalents remained low by historical standards during the nine months ended September 30, 2011 and 2010 due to the historically low prevailing market rates during those periods.

During the nine months ended September 30, 2011, we were able to reduce interest paid on deposits primarily as the result of time deposits being rolled over at lower rates in response to general declines in market interest rates and decreases in the cost of other deposits due to a decline in market rates. Interest on time deposits decreased by $391,700, or 18.6%, from $2,104,200 for the nine months ended September 30, 2010, to $1,712,500 for the nine months ended September 30, 2011, as a result of a 42 basis point decrease in the average cost of time deposits and a $3.3 million, or 3.2%, decrease in the average balance of time deposits. Interest on brokered deposits remained stable at approximately $75,000 for the nine months ended September 30, 2011 and 2010, as both the average balance of, and average rate paid on, brokered deposits remained stable. Interest on NOW and money market accounts remained stable during the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010, even with a 11.4% increase in the average balance of NOW and money market accounts. Interest on passbook accounts increased by $16,800, or 32.2%, from $52,200 for the nine months ended September 30, 2010 to $69,000 for the nine months ended September 30, 2011, due primarily to an increase in the average balance of these accounts. The average balance of passbook accounts increased during the nine months ended September 30, 2011, from $12.5 million as of September 30, 2010 to $16.6 million as of September 30, 2011.

Interest on other interest-bearing liabilities, which consist of Federal Home Loan Bank of Atlanta advances, decreased by $5,600, or 0.8%, for the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010, as a $1.4 million decrease in the average balance of other interest-bearing liabilities was partially offset by a 20 basis point increase in the average cost of other interest-bearing liabilities. At September 30, 2011, we had $22.5 million of Federal Home Loan Bank of Atlanta advances compared to $22.6 in advances as of December 31, 2010.

 

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Average Balances and Yields. The following table 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 balances of assets or liabilities, respectively, for the periods presented. Average balances have been calculated using monthly balances, and nonaccrual loans are included in average balances only. Amortization of net deferred loan fees are included in interest income on loans and are insignificant. No tax-equivalent adjustments were made. Nonaccruing loans have been included in the table as loans carrying a zero yield.

 

     Nine Months Ended September 30,  
     2011     2010  
     Average
Balance
     Interest
and
Dividends
     Yield/
Cost
    Average
Balance
     Interest
and
Dividends
     Yield/
Cost
 

Assets:

                

Cash and cash equivalents

   $ 24,164,694       $ 21,840         .12   $ 19,373,894       $ 10,895         .07

Loans receivable net (3)

     109,170,451         4,370,676         5.32        118,809,928         4,993,928         5.59   

Investment securities available-for-sale (1)

     31,477,320         684,437         2.89        20,971,368         622,092         3.95   

Investment securities held-to-maturity (2)

     1,873,877         30,627         2.17        0         0         0.00   

Other interest-earning assets

     2,227,611         42,800         2.56        2,288,168         43,732         2.54   
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-earning assets

     168,913,953         5,150,380         4.06        161,443,358         5,670,647         4.67   
  

 

 

    

 

 

      

 

 

    

 

 

    

Noninterest-earning assets

     8,594,531         0           6,879,359         0      
  

 

 

    

 

 

      

 

 

    

 

 

    

Total assets

     177,508,484         5,150,380           168,322,717         5,670,647      
  

 

 

    

 

 

      

 

 

    

 

 

    

Liabilities and equity:

                

Time deposits

     101,306,434         1,712,484         2.25        104,644,871         2,104,203         2.67   

NOW and money market

     5,305,858         9,679         .24        4,762,107         8,951         .25   

Passbook

     16,592,075         69,021         .55        12,533,641         52,198         .55   

Brokered deposits

     2,335,900         75,216         4.28        2,303,705         74,207         4.28   

Other interest-bearing liabilities (Federal Home Loan Bank advances)

     22,509,259         669,608         3.96        23,888,889         675,250         3.76   
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing liabilities

     148,049,526         2,536,008         2.28        148,133,213         2,914,809         2.62   
        

 

 

         

 

 

 

Noninterest-bearing liabilities

     2,641,633         0           3,390,671         0      
  

 

 

    

 

 

      

 

 

    

 

 

    

Total liabilities

     150,691,159         2,536,008           151,523,884         2,914,809      
     

 

 

         

 

 

    

Total equity

     26,817,325         0           16,798,833         0      
  

 

 

         

 

 

       

Total liabilities and equity

   $ 177,508,484         2,536,008         $ 168,322,717         2,914,809      
  

 

 

    

 

 

      

 

 

    

 

 

    

Net interest income

      $ 2,614,372            $ 2,755,838      
     

 

 

         

 

 

    

Interest rate spread

           1.78           2.05
        

 

 

         

 

 

 

Net interest margin

           2.06           2.27
        

 

 

         

 

 

 

Ratio of average interest-earning assets to

average interest-bearing liabilities

           114.09           108.99
        

 

 

         

 

 

 

 

(1) Investment securities available-for-sale are presented at fair market value.
(2) Investment securities held-to-maturity are presented at amortized cost.
(3) Loans placed on non-accrual status are included in average assets.

 

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Provision for Loan Losses. We maintain an allowance at a level necessary to absorb management’s best estimate of probable loan losses in the portfolio. Management considers, among other factors, historical loss experience, type and amount of loans, borrower concentrations and current conditions of the economy. In addition, the allowance considers the level of loans which management monitors as a result of inconsistent repayment patterns. Management has identified commercial real estate loans as an area for expected increased lending. Such loans carry a higher degree of credit risk than our historical single-family lending.

Our provision for loan losses was $ 67,000 for the nine months ended September 30, 2011 compared to $1,164,300 for the nine months ended September 30, 2010. At September 30, 2011, the allowance for loan losses was $1.25 million, or 1.13%, of the total loan portfolio compared to $1.3 million, or 1.16%, of the total loan portfolio, at December 31, 2010.

Nonaccrual loans totaled $3.5 million at September 30, 2011 compared to $663,000 at December 31, 2010. Net loan charge-offs amounted to $117,000 during the nine months ended September 30, 2011, compared to $336,500 during the nine months ended September 30, 2010. As of December 31, 2010, nonaccrual loans included two lot loans totaling $545,500 and three 1-4 family residential loans totaling $117,000. During the nine months ended September 30, 2011, one of the lot loans totaling $360,000 was sold at foreclosure, and the other lot loan totaling $185,500 was written down to $117,000 and a $500 principal payment was received on that loan. That lot loan totaling $116,500 as of September 30, 2011 is included in the nonaccrual loan total at September 30, 2011. During that same period, two of the three 1-4 family residential loans totaling $8,000 were sold at foreclosure. The other 1-4 family residential loan totaling $109,100 is included in the nonaccrual loan total at September 30, 2011. As of September 30, 2011, nonaccrual loans included a $1.6 million speculative construction loan on a residential property where the builder has declared bankruptcy, a $194,000 lot loan to the same builder, four troubled debt restructured loans totaling $1.3 million, two home equity lines of credit totaling $94,000, and five 1-4 family residential loans for $297,000.

Noninterest Income. Total noninterest income decreased by $150,700, or 34.1%, from $441,300 for the nine months ended September 30, 2010 compared to $290,600 for the nine months ended September 30, 2011. The decrease was primarily due to a decrease in gain on sale of investments of $70,000, and a decrease in gain on sale of loans of $65,100. Gains on sale of other real estate owned for the nine months ended September 30, 2011 was $9,900.

Noninterest Expenses. Total noninterest expenses decreased by $28,900, or 0.9%, from $3,053,100 for the nine months ended September 30, 2010 to $3,024,200 for the nine months ended September 30, 2011. The decrease primarily was attributable to a decrease of $35,800, or 6.1%, in general and administrative expenses.

Income Tax Expense. We had an income tax benefit of $122,000 during the nine months ended September 30, 2011, due to our incurring a net loss during that period. For the nine months ended September 30, 2010, we had an income tax benefit of $448,600.

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 September 30, 2011, cash and cash equivalents totaled $24.4 million. Securities classified as available-for-sale, amounting to $28.0 million at September 30, 2011, provides an additional sources of liquidity. In addition, at September 30, 2011, we had the ability to borrow a total of approximately $31.4 million from the Federal Home Loan Bank of Atlanta and had $22.5 million in Federal Home Loan Bank advances outstanding. For additional liquidity, if needed, we have a $3.0 million line of credit with another bank, on which we had no outstanding balance at September 30, 2011.

 

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At September 30, 2011, we had $14.9 million in commitments to extend credit outstanding. Certificates of deposit due within one year of September 30, 2011 totaled $42.2 million, or 43.1%, 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.

Capital Management. We are subject to various regulatory capital requirements administered by the Office of the Comptroller of the Currency, 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 September 30, 2011, we exceeded all of our regulatory capital requirements and were considered “well capitalized” under regulatory guidelines.

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 the three months and nine months ended September 30, 2011, 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.

Analysis of Nonperforming and Classified Assets

We consider repossessed assets and loans that are 90 days or more past due to be nonperforming assets. Loans are generally placed on nonaccrual status when they become 90 days delinquent, at which time the accrual of interest ceases and the allowance for any uncollectible accrued interest is established and charged against interest income. Typically, payments received on a nonaccrual loan are first applied to the outstanding principal balance.

Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until it is sold. When property is acquired it is recorded at the lower of its cost, which is the unpaid balance of the loan plus foreclosure costs, or fair market value at the date of foreclosure. Any holding costs and declines in fair value after acquisition of the property result in charges against income.

 

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The following table provides information with respect to our nonperforming assets at the dates indicated.

 

     At  
     September 30,
2011
    December 31,
2010
 
     (unaudited)        

Nonaccrual loans:

    

Real estate loans:

    

One-to four-family

   $ 1,480,230      $ 117,101   

Lines of credit

     94,382        0   

Commercial

     0        0   

Residential construction

     1,565,198        0   

Land

     310,522        545,484   

Commercial

     0        0   

Consumer

     440        0   
  

 

 

   

 

 

 

Total

     3,450,772      $ 662,585   
  

 

 

   

 

 

 

Accruing loans past due 90 days or more:

    

Real estate loans:

    

One-to four-family

     0        0   

Lines of credit

     0        0   

Commercial

     0        0   

Residential construction

     0        0   

Land

     0        0   

Commercial

     0        0   

Consumer

     0        0   
  

 

 

   

 

 

 

Total

   $ 0      $ 0   
  

 

 

   

 

 

 

Total of nonaccrual loans and accruing loans 90 days or more past due

   $ 3,450,772      $ 662,585   

Assets acquired through foreclosure

     0        2,015,909   
  

 

 

   

 

 

 

Total nonperforming assets

   $ 3,450,772      $ 2,678,494   
  

 

 

   

 

 

 

Troubled debt restructurings

   $ 1,565,272      $ 2,091,535   
  

 

 

   

 

 

 

Troubled debt restructurings included in non-accrual loans

   $ (1,299,847   $ 0   
  

 

 

   

 

 

 

Troubled debt restructurings and total nonperforming assets

   $ 3,716,197      $ 4,770,029   
  

 

 

   

 

 

 

Total of nonaccrual loans and accruing loans past due 90 days or more to total loans

     3.13     0.59
  

 

 

   

 

 

 

Total of nonaccrual loans and accruing loans past due 90 days or more to total assets

     1.93     0.39
  

 

 

   

 

 

 

Total nonperforming assets to total assets

     1.93     1.58
  

 

 

   

 

 

 

Nonaccrual loans totaled $3.5 million at September 30, 2011 compared to $663,000 at December 31, 2010. As of December 31, 2010, nonaccrual loans included two lot loans totaling $545,500 and three 1-4 family residential loans totaling $117,000. During the nine months ended September 30, 2011, one of the lot loans totaling $360,000 was sold at foreclosure, and the other lot loan totaling $185,500 was written down to $117,000 and a $500 principal payment was received on that loan. That lot loan totaling $116,500 as of September 30, 2011 is included in the nonaccrual loan total at September 30, 2011. During that same period, two of the three 1-4 family residential loans totaling $8,000 were sold at foreclosure. The other 1-4 family residential loan totaling $109,100 is included in the nonaccrual loan total at September 30, 2011. As of September 30, 2011, nonaccrual loans included a $1.6 million speculative construction loan on a residential property where the builder has declared bankruptcy, a $194,000 lot loan to the same builder, four troubled debt restructured loans totaling $1.3 million, two home equity lines of credit totaling $94,000, and five 1-4 family residential loans for $297,000. For a more detailed analysis of troubled debt restructurings, see footnote 3 of the Notes to Consolidated Financial Statements.

 

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As of September 30, 2011, there was no other real estate owned. During the three month period ended September 30, 2011, we settled on our two pieces of other real estate owned totaling $1.1 million at June 30, 2011. We incurred no further losses on either property.

Analysis and Determination of the Allowance for Loan Losses

The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the need to establish allowances against losses on loans on a monthly basis, and any adjustments must be approved quarterly by the Board. When additional allowances are necessary, a provision for loan losses is charged to earnings. Our methodology for assessing the appropriateness of the allowance for loan losses is reviewed periodically by the board of directors. The board of directors also reviews the allowance for loan losses established on a quarterly basis.

General Valuation Allowance. We establish a general valuation allowance for loans that should be adequate to reserve for the estimated credit losses inherent in each segment of our loan portfolio, given the facts and circumstances as of the valuation date for all loans in the portfolio that have not been classified. The allowance is based on our average annual rate of net charge offs experienced over the previous four quarters on each segment of the portfolio and is adjusted for current qualitative factors. If historical loss data is not available for a segment, the estimates used will be based on various components such as industry averages. For purposes of determining the estimated credit losses, the loan portfolio is segmented as follows: (i) one- to four-family first mortgage real estate loans; (ii) one- to four-family second mortgage real estate loans; (iii) one- to four-family home equity lines of credit; (iv) commercial loans; (v) speculative construction loans; (vi) other construction loans; (vii) land loans; and (viii) consumer loans. Qualitative factors that are considered in determining the adequacy of the allowance for loan losses are as follows: (i) trends of delinquent and nonaccrual loans; (ii) economic factors; (iii) concentrations of credit; (iv) changes in the nature and volume of the loan portfolio; and (v) changes in lending staff and loan policies. We do not record allowances for impaired loans in our general allowance; however, the balances of impaired loans are included in the other categories of our allowance for loan losses if there was no loss on the impaired loan when measured individually.

Specific Valuation Allowance. All adversely classified loans meeting the following loan balance thresholds are individually reviewed: (i) speculative construction loans; (ii) commercial loans greater than $500,000; (iii) land loans greater than $500,000; (iv) all other loans greater than $1.5 million; and (v) any other nonperforming loans. Any portion of the recorded investment in excess of the fair value of the collateral less the disposition costs is charged off against the allowance for loan losses. It has been our policy to not maintain specific reserves against impaired loans. Impaired loans are measured for loss using the fair value of collateral less disposition costs method for collateral dependent loans, and the present value of discounted cash flows method for other loans. It has been our policy to directly charge off any loss determined on impaired loans using these methods, and we do not foresee maintaining specific reserves for these loans.

We charge off 100% of the assets or portions thereof classified as loss. The amount of the loss will be the excess of the recorded investment in the loan over the fair value of collateral less disposition costs estimated on the date that a probable loss is identified. Management obtains updated appraisals with respect to loans secured by real estate.

All other adversely classified loans as well as special mention and watch loans are reviewed monthly. Our historical loss experience in each category of loans is utilized in determining the allowance for that group. The determined loss factor in each loan category may be adjusted for qualitative factors as determined by management.

Unallocated Valuation Allowance. Our allowance for loan losses methodology also includes an unallocated component to reflect the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the loan portfolio.

 

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Table of Contents

The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated. The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.

 

     At  
     September 30, 2011 (unaudited)     December 31, 2010  
     Amount      % of
Allowance
to Total
Allowance
    % of
Loans in
Category
to Total
Loans
    Amount      % of
Allowance
to Total
Allowance
    % of
Loans in
Category
to Total
Loans
 

Real estate loans:

              

One-to four-family

   $ 554,996         44.40     77.05   $ 536,549         41.27     77.06

Lines of credit

     158,039         12.65        9.16        407,352         31.33        11.40   

Commercial

     135,363         10.83        6.58        70,473         5.42        3.56   

Residential construction

     69,413         5.55        4.27        80,789         6.21        5.16   

Land

     244,493         19.56        2.53        173,024         13.31        2.76   

Consumer

     3,559         .28        .05        8,259         .64        .04   

Commercial

     0         .00        .36        0         0        .02   

Unallocated

     84,137         6.73        0        23,554         1.82        0   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total

     1,250,000         100.00     100.00   $ 1,300,000         100.00     100.00
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and our results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that the Office of the Comptroller of the Currency (“OCC”), in reviewing our loan portfolio, will not require us to increase our allowance for loan losses. The OCC may require us to increase our allowance for loan losses based on judgments different from ours. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.

 

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Analysis of Loan Loss Experience. The following table sets forth an analysis of the allowance for loan losses for the periods indicated.

 

     Nine Months  Ended
September 30,
 
     2011     2010  

Allowance for loan losses at beginning of period

   $ 1,300,000      $ 276,621   

Charge-offs:

    

Real estate loans:

    

One-to four-family

     61,929        6,785   

Lines of credit

     0        207,126   

Commercial

     0        0   

Residential construction

     0        112,500   

Land

     75,718        11,250   

Commercial

     0        0   

Consumer

     0        0   
  

 

 

   

 

 

 

Total charge-offs

     137,647        337,661   
  

 

 

   

 

 

 

Recoveries

     20,686        821   
  

 

 

   

 

 

 

Net charge-offs

     116,961        336,840   

Provision for loan losses

     66,961        1,164,719   
  

 

 

   

 

 

 

Allowance at end of period

   $ 1,250,000      $ 1,104,500   

Allowance for loan losses to total loans at the end of the period

     1.13     .96
  

 

 

   

 

 

 

Net charge-offs to average loans outstanding during the period

     .11     .28
  

 

 

   

 

 

 

Allowance for loan losses to non performing loans at the end of the period

     36.22     196.20
  

 

 

   

 

 

 

Loans are considered impaired when, based on available information, it is probable that we will not collect all principal and interest payments according to contractual terms. Generally, loans are considered impaired once principal and interest payments are past due and they are placed on nonaccrual. Management also considers the financial condition of the borrower, cash flows of the loan and the value of the related collateral. Impaired loans do not include large groups of smaller balance homogeneous credits such as residential real estate, consumer installment loans, and commercial leases, which are evaluated collectively for impairment. Loans specifically reviewed for impairment are not considered impaired during periods of “minimal delay” in payment (usually 90 days or less), provided eventual collection of all amounts due is expected. The impairment of a loan is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if repayment is expected to be provided by the collateral. Generally, we measure impairment on such loans by reference to the fair value of the collateral. Fair value of the collateral is generally determined using third party appraisals that are reviewed by management for propriety and reasonableness. Third party appraisals are conducted at least annually. Additionally, internal evaluations of collateral value are conducted quarterly to ensure any further deterioration of the collateral value is recognized on a timely basis. Once a loss is determined to have occurred, the loan is charged down to the fair value of the collateral, net of any disposal costs, or net realizable value. Income on impaired loans is recognized in a manner similar to the method followed on nonaccrual loans.

We have classified as impaired, loans that are 90 days or more delinquent, nonaccrual loans, or a troubled debt restructuring. The amount of impaired loans was $3,716,200 as of September 30, 2011.

We measure an impaired loan for loss in the following ways:

 

   

Collateral dependent loans are measured for loss at the point the loan becomes 60 or more days delinquent or at maturity if an extension is requested. We obtain a third party appraisal to determine the fair market value of the collateral. We measure these loans for loss by using the fair value of collateral less disposition costs method and if any loss is determined it is charged off directly. Subsequently, these loans are re-evaluated at least annually by obtaining an updated third party appraisal to determine if there should be any further loss recognition.

 

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Non-collateral dependent loans are measured for loss at the point the loan becomes 90 to 120 days delinquent. If there are no work-out arrangements, we will treat the loan as a collateral dependent loan and measure for loss as stated above. If there is a work-out arrangement, the loan will be measured for loss using the present value of discounted cash flows method. If any loss is determined, it is our policy to charge off this loss directly. As long as the borrower performs under the terms of the work-out arrangement, no further measurement for loss is performed. If the borrower would fail to perform under the work-out arrangement, we will treat the loan as a collateral dependent loan and measure for loss as stated above.

We utilize appraisals performed by third parties to determine the fair value of the real estate securing these loans and an internal review process that consists of monitoring recent market activity, including comparable recent sales activity, listings and general economic conditions in our quarterly evaluation. It is our policy to obtain an updated appraisal on at least an annual basis on our collateral dependent loans. If we have evidence that causes us to believe that additional deterioration may have occurred, we will require a more frequent updated appraisal. Given the cost of more frequent updates and our knowledge of the local market areas in which we lend, we believe this to be prudent.

We have not experienced any significant time lapses between the time a third party appraisal is ordered and the time it is received and used to evaluate if any loss has been incurred and subsequently recognized, if applicable. We have not charged off an amount different from what was determined after evaluating a collateral dependent loan for loss using the fair value of collateral less disposition costs method.

During the nine months ended September 30, 2011, we had charge-offs totaling $137,647. Of this amount, $68,484 related to a residential lot loan , $7,234 was attributable to a speculative residential lot loan that was sold at foreclosure and settled in the first three months of 2011, $60,155 was attributable to 2 residential 1-4 family loans that are troubled debt restructurings, and $1,774 was attributable to 2 residential 1-4 family loan participations that the servicer sold at foreclosure.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

This item is not applicable as the Company is a smaller reporting company.

Item 4. Controls and Procedures

As of the end of the period covered by this report, management of the Company carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures as that term is defined in Rule 13a-5(e). Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

It should be noted that the design of the Company’s disclosure controls and procedures is based in part upon certain reasonable assumptions about the likelihood of future events, and there can be no reasonable assurance that any design of disclosure controls and procedures will succeed in achieving its stated goals under all potential future conditions, regardless of how remote, but the Company’s principal executive and financial officers have concluded that the Company’s disclosure controls and procedures are, in fact, effective at a reasonable assurance level.

There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Securities and Exchange Commission Rule 13a-15 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Periodically, there may be various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

Item 1A. Risk Factors

For information regarding the Company’s risk factors, see the section entitled “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 filed with the Securities and Exchange Commission on March 30, 2011. As of the date of this filing, the risk factors of the Company have not changed materially from those reported in the Form 10-K.

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

The Company’s 2012 Annual Meeting of Shareholders will be held on May 15, 2012.

Item 6. Exhibits

 

No.

  

Description

    3.1    Articles of Incorporation of Fraternity Community Bancorp, Inc. (1)
    3.2    Bylaws of Fraternity Community Bancorp, Inc. (1)
  31.0    Rule 13a-14(a) Certification of Chief Executive Officer and Chief Financial Officer
  32.0    Section 1350 Certifications
101.0*    The following materials from Fraternity Community Bancorp’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Financial Condition; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Changes in Stockholders Equity; (iv) the Consolidated Statements of Cash Flows; and (v) the related Notes, tagged as blocks of text.

 

(1) Incorporated herein by reference to the Company’s Registration Statement on Form S-1, as amended (File No. 333-170215).
* Furnished, not filed.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

 

    FRATERNITY COMMUNITY BANCORP, INC.
November 14, 2011      
    By:  

/s/ Thomas K. Sterner

      Thomas K. Sterner
      Chairman of the Board, Chief Executive Officer
      and Chief Financial Officer