Attached files
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EXCEL - IDEA: XBRL DOCUMENT - COMMUNITYCORP | Financial_Report.xls |
EX-32 - EXHIBIT 32 - COMMUNITYCORP | v311993_ex32.htm |
EX-31.1 - EXHIBIT 31.1 - COMMUNITYCORP | v311993_ex31-1.htm |
EX-31.2 - EXHIBIT 31.2 - COMMUNITYCORP | v311993_ex31-2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x Quarterly report under section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2012
or
¨ Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period from _________to_________
Commission File Number 33-76644
COMMUNITYCORP
(Exact name of registrant as specified in its charter)
South Carolina | 57-1019001 |
(State or other jurisdiction of incorporation) | (I.R.S. Employer Identification No.) |
1100 N. Jefferies Boulevard
Walterboro, SC 29488
(Address of principal executive offices, including zip code)
(843) 549-2265
(Issuer’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
YES x NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES £ NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ | Accelerated filer ¨ | |
Non-accelerated filer ¨ | Smaller reporting company x | |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:
233,003 shares of common stock, $5.00 par value, as of April 28, 2012
COMMUNITYCORP
Index
Page No. | |||
PART I. - FINANCIAL INFORMATION | |||
Item 1. | Financial Statements (Unaudited) | ||
Condensed Consolidated Balance Sheets – March 31, 2012 and December 31, 2011 | 3 | ||
Condensed Consolidated Statements of Operations - Three months ended March 31, 2012 and 2011 | 4 | ||
Condensed Consolidated Statements of Comprehensive Income - Three months ended March 31, 2012 and 2011 | 5 | ||
Condensed Consolidated Statements of Changes in Shareholders' Equity - Three months ended March 31, 2012 and 2011 | 6 | ||
Condensed Consolidated Statements of Cash Flows - Three months ended March 31, 2012 and 2011 | 7 | ||
Notes to Condensed Consolidated Financial Statements | 8 - 19 | ||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 20 - 28 | |
Item 3. | Quantitative and Qualitative Disclosure About Market Risk | 28 | |
Item 4. | Controls and Procedures | 28 | |
PART II. - OTHER INFORMATION | |||
Item 1. | Legal Proceedings | 29 | |
Item 1A. | Risk Factors | 29 | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 29 | |
Item 3. | Defaults Under Senior Securities | 29 | |
Item 4. | Mine Safety Disclosures | 29 | |
Item 5. | Other Information | 29 | |
Item 6. | Exhibits | 29 | |
Signatures | 30 |
COMMUNITYCORP
Condensed Consolidated Balance Sheets
March 31, | December 31, | |||||||
2012 | 2011 | |||||||
(Unaudited) | (Audited) | |||||||
Assets: | ||||||||
Cash and cash equivalents: | ||||||||
Cash and due from banks | $ | 5,294,251 | $ | 4,359,616 | ||||
Interest bearing deposits | 30,302,294 | 18,119,554 | ||||||
Federal funds sold | 4,414,000 | 7,738,000 | ||||||
Total cash and cash equivalents | 40,010,545 | 30,217,170 | ||||||
Time deposits with other banks | 752,942 | 750,000 | ||||||
Investment securities: | ||||||||
Securities available-for-sale | 29,946,404 | 28,235,661 | ||||||
Securities held-to-maturity (estimated fair value of $208,226 in 2012 and $308,955 in 2011) | 200,000 | 299,921 | ||||||
Nonmarketable equity securities | 259,100 | 259,100 | ||||||
Total investment securities | 30,405,504 | 28,794,682 | ||||||
Loans receivable 91,256,615 | 93,808,071 | |||||||
Less allowance for loan losses | (2,238,804 | ) | (1,967,069 | ) | ||||
Loans receivable, net | 89,017,811 | 91,841,002 | ||||||
Premises and equipment, net | 2,891,639 | 2,801,575 | ||||||
Accrued interest receivable | 683,287 | 664,266 | ||||||
Other real estate owned | 3,785,173 | 3,290,077 | ||||||
Other assets | 1,062,213 | 1,091,864 | ||||||
Total assets | $ | 168,609,114 | $ | 159,450,636 | ||||
Liabilities: | ||||||||
Deposits: | ||||||||
Noninterest-bearing transaction accounts | $ | 16,699,986 | $ | 13,878,196 | ||||
Interest-bearing transaction accounts | 25,480,154 | 22,621,602 | ||||||
Money market savings accounts | 6,671,263 | 4,865,739 | ||||||
Savings | 18,113,451 | 16,606,425 | ||||||
Time deposits $100,000 and over | 46,889,167 | 46,260,817 | ||||||
Other time deposits | 36,202,571 | 36,591,782 | ||||||
Total deposits | 150,056,592 | 140,824,561 | ||||||
Accrued interest payable | 271,129 | 279,389 | ||||||
Other liabilities | 102,111 | 118,264 | ||||||
Total liabilities | 150,429,832 | 141,222,214 | ||||||
Shareholders’ Equity: | ||||||||
Preferred stock, $5 par value, 3,000,000 shares authorized and unissued | ||||||||
Common stock, $5 par value, 3,000,000 shares authorized; 300,000 shares issued | 1,500,000 | 1,500,000 | ||||||
Capital surplus | 1,737,924 | 1,737,924 | ||||||
Retained earnings | 18,984,010 | 18,969,210 | ||||||
Accumulated other comprehensive income | 274,490 | 338,430 | ||||||
Treasury Stock (66,997 shares issued and outstanding) | (4,317,142 | ) | (4,317,142 | ) | ||||
Total shareholders’ equity | 18,179,282 | 18,228,422 | ||||||
Total liabilities and shareholders’ equity | $ | 168,609,114 | $ | 159,450,636 |
See notes to condensed consolidated financial statements.
3 |
COMMUNITYCORP
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
Interest income: | ||||||||
Loans, including fees | $ | 1,408,637 | $ | 1,563,983 | ||||
Securities | 166,902 | 197,908 | ||||||
Other interest income | 21,462 | 10,803 | ||||||
Total | 1,597,001 | 1,772,694 | ||||||
Interest expense: | ||||||||
Deposit accounts | 300,823 | 404,587 | ||||||
Net interest income | 1,296,178 | 1,368,107 | ||||||
Provision for loan losses | 330,000 | 225,000 | ||||||
Net interest income after provision for loan losses | 966,178 | 1,143,107 | ||||||
Noninterest income: | ||||||||
Service charges | 116,824 | 103,644 | ||||||
Other income | 32,954 | 32,306 | ||||||
Total | 149,778 | 135,950 | ||||||
Noninterest expenses: | ||||||||
Salaries and benefits | 454,490 | 498,198 | ||||||
Net occupancy expense | 76,612 | 64,988 | ||||||
Equipment expense | 86,368 | 90,780 | ||||||
Other operating expenses | 331,736 | 414,694 | ||||||
Total | 949,206 | 1,068,660 | ||||||
Income before taxes | 166,750 | 210,397 | ||||||
Income tax provision | 35,448 | 33,500 | ||||||
Net income | $ | 131,302 | $ | 176,897 | ||||
Earnings per share: | ||||||||
Weighted average common shares outstanding | 233,003 | 233,003 | ||||||
Net income per common share | $ | .56 | $ | .76 |
See notes to condensed consolidated financial statements.
4 |
COMMUNITYCORP
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2012 | 2011 | |||||||
Net income from operations | $ | 131,302 | $ | 176,897 | ||||
Other Comprehensive income (loss), before tax: | ||||||||
Unrealized holding gains (losses) on available-for-sale securities arising during period | (97,618 | ) | 120,014 | |||||
Income tax effect | 33,678 | (41,405 | ) | |||||
Other comprehensive income (loss) | (63,940 | ) | 78,609 | |||||
Comprehensive income | $ | 67,362 | $ | 255,506 |
See notes to condensed consolidated financial statements.
5 |
COMMUNITYCORP
Condensed Consolidated Statement of Shareholders’ Equity
for the three months ended March 31, 2012 and 2011
(Unaudited)
Accumulated | ||||||||||||||||||||||||||||
Other | ||||||||||||||||||||||||||||
Comprehensive | ||||||||||||||||||||||||||||
Common stock | Capital | Income | Retained | Treasury | ||||||||||||||||||||||||
Shares | Amount | Surplus | (Loss) | Earnings | Stock | Total | ||||||||||||||||||||||
Balance, December 31, 2011 | 300,000 | $ | 1,500,000 | $ | 1,737,924 | $ | 338,430 | $ | 18,969,210 | $ | (4,317,142 | ) | $ | 18,228,422 | ||||||||||||||
Net income for the period | 131,302 | 131,302 | ||||||||||||||||||||||||||
Other comprehensive loss, net of tax benefit of $33,678 | (63,940 | ) | (63,940 | ) | ||||||||||||||||||||||||
Cash dividends paid ($ .50 per share) | (116,502 | ) | (116,502 | ) | ||||||||||||||||||||||||
Balance, March 31, 2012 | 300,000 | $ | 1,500,000 | $ | 1,737,924 | $ | 274,490 | $ | 18,984,010 | $ | (4,317,142 | ) | $ | 18,179,282 | ||||||||||||||
Balance, December 31, 2010 | 300,000 | $ | 1,500,000 | $ | 1,737,924 | $ | (64,752 | ) | $ | 18,782,807 | $ | (4,317,142 | ) | $ | 17,638,837 | |||||||||||||
Net income for the period | 176,897 | 176,897 | ||||||||||||||||||||||||||
Other comprehensive income, net of tax expense of $41,405 | 78,609 | 78,609 | ||||||||||||||||||||||||||
Cash dividends paid ($ .50 per share) | (116,501 | ) | (116,501 | ) | ||||||||||||||||||||||||
Balance, March 31, 2011 | 300,000 | $ | 1,500,000 | $ | 1,737,924 | $ | 13,857 | $ | 18,843,203 | $ | (4,317,142 | ) | $ | 17,777,842 |
See notes to condensed consolidated
financial statements.
6 |
COMMUNITYCORP
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2012 | 2011 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 131,302 | $ | 176,897 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for loan losses | 330,000 | 225,000 | ||||||
Depreciation expense | 47,965 | 57,767 | ||||||
Net premium amortization of investment securities | 5,503 | 7,687 | ||||||
(Increase) decrease in accrued interest receivable | (19,021 | ) | 65,389 | |||||
Decrease in accrued interest payable | (8,260 | ) | (53,524 | ) | ||||
Decrease in other assets | 63,329 | 243,688 | ||||||
Decrease in other liabilities | (16,153 | ) | (56,558 | ) | ||||
Net cash provided by operating activities | 534,665 | 666,346 | ||||||
Cash flows from investing activities: | ||||||||
Proceeds from maturities of securities available-for-sale | 4,526,127 | 574,049 | ||||||
Proceeds from maturities of securities held to maturity | 100,000 | - | ||||||
Purchases of securities available-for-sale | (6,340,070 | ) | (2,483,837 | ) | ||||
Net decrease in loans to customers | 1,998,095 | 2,138,902 | ||||||
Net (increase) decrease in time deposits in other banks | (2,942 | ) | 250,000 | |||||
Purchases of premises and equipment | (138,029 | ) | (31,179 | ) | ||||
Net cash provided by investing activities | 143,181 | 447,935 | ||||||
Cash flows from financing activities: | ||||||||
Net increase in demand deposits, interest-bearing transaction accounts and savings accounts | 8,992,891 | 2,346,785 | ||||||
Net increase (decrease) in time deposits | 239,139 | (684,506 | ) | |||||
Cash dividends paid | (116,501 | ) | (116,501 | ) | ||||
Net cash provided by financing activities | 9,115,529 | 1,545,778 | ||||||
Net increase in cash and cash equivalents | 9,793,375 | 2,660,059 | ||||||
Cash and cash equivalents, beginning of period | 30,217,170 | 16,177,800 | ||||||
Cash and cash equivalents, end of period | $ | 40,010,545 | $ | 18,837,859 | ||||
Cash paid during the period for: | ||||||||
Income taxes | $ | 2,095 | $ | 10,000 | ||||
Interest | 309,083 | 458,111 | ||||||
Supplemental noncash investing and financing activities | ||||||||
Foreclosures on loans | $ | 495,096 | $ | 114,506 |
See notes to condensed consolidated financial statements.
7 |
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in accordance with the requirements for interim financial statements and, accordingly, they are condensed and omit disclosures, which would substantially duplicate those contained in the most recent annual report to shareholders. The financial statements as of March 31, 2012 and for the interim periods ended March 31, 2012 and 2011 are unaudited and, in our opinion, include all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation. The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results which may be expected for the entire calendar year. The financial information as of December 31, 2011 has been derived from the audited financial statements as of that date. For further information, refer to the financial statements and the notes included in Communitycorp’s 2011 Annual Report.
NOTE 2 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The following is a summary of recent authoritative pronouncements that could impact the accounting reporting and / or disclosure of financial information by the Company.
In April 2011, the criteria used to determine effective control of transferred assets in the Transfers and Servicing topic of the ASC was amended by ASU 2011-03. The requirement for the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms and the collateral maintenance implementation guidance related to that criterion were removed from the assessment of effective control. The other criteria to assess effective control were not changed. The amendments were effective for the Company on January 1, 2012 and had no effect on the financial statements.
ASU 2011-04 was issued in May 2011 to amend the Fair Value Measurement topic of the ASC by clarifying the application of existing fair value measurement and disclosure requirements and by changing particular principles or requirements for measuring fair value or for disclosing information about fair value measurements. The amendments were effective for the Company beginning January 1, 2012 and had no effect on the financial statements.
The Comprehensive Income topic of the ASC was amended in June 2011. The amendment eliminates the option to present other comprehensive income as a part of the statement of changes in stockholders’ equity and requires consecutive presentation of the statement of net income and other comprehensive income. The amendments were applicable to the Company on January 1, 2012 and have been applied retrospectively. In December 2011, the topic was further amended to defer the effective date of presenting reclassification adjustments from other comprehensive income to net income on the face of the financial statements. Companies should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect prior to the amendments while FASB redeliberates future requirements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
NOTE 3 - RECLASSIFICATIONS
Certain captions and amounts in the financial statements in the Company’s Form 10-Q for the quarter ended March 31, 2011 and Form 10-K for the year ended December 31, 2011 were reclassified to conform to the March 31, 2012 presentation.
8 |
NOTE 4 - INVESTMENT SECURITIES
Securities Available-for-Sale
The amortized cost and estimated fair values of securities available-for-sale were:
Amortized | Gross Unrealized | |||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
March 31, 2012 | ||||||||||||||||
Government-sponsored enterprises | $ | 16,087,180 | $ | 24,637 | $ | 61,659 | $ | 16,050,158 | ||||||||
Mortgage-backed securities | 4,402,760 | 107,461 | 5,311 | 4,504,910 | ||||||||||||
Obligations of state and local governments | 8,837,395 | 394,243 | 40,302 | 9,191,336 | ||||||||||||
Other | 200,000 | - | - | 200,000 | ||||||||||||
Total | $ | 29,527,335 | $ | 526,341 | $ | 107,272 | $ | 29,946,404 |
Amortized | Gross Unrealized | |||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
December 31, 2011 | ||||||||||||||||
Government-sponsored enterprises | $ | 16,141,338 | $ | 25,671 | $ | 17,922 | $ | 16,149,087 | ||||||||
Mortgage-backed securities | 3,082,769 | 102,153 | 933 | 3,183,989 | ||||||||||||
Obligations of state and local governments | 8,294,866 | 411,881 | 4,162 | 8,702,585 | ||||||||||||
Other | 200,000 | - | - | 200,000 | ||||||||||||
Total | $ | 27,718,973 | $ | 539,705 | $ | 23,017 | $ | 28,235,661 |
The following table shows gross unrealized losses and fair value, aggregated by investment category, and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2012 and December 31, 2011.
March 31, 2012 | December 31, 2011 | |||||||||||||||
Fair | Unrealized | Fair | Unrealized | |||||||||||||
Value | Losses | Value | Losses | |||||||||||||
Less Than 12 Months | ||||||||||||||||
Government-sponsored enterprises | $ | 9,331,158 | $ | 61,659 | $ | 5,128,646 | $ | 17,922 | ||||||||
Mortgaged-backed securities | 1,031,079 | 5,311 | 507,650 | 933 | ||||||||||||
Obligations of state and local governments | 754,698 | 40,302 | 603,319 | 4,162 | ||||||||||||
$ | 11,116,935 | $ | 107,272 | $ | 6,239,615 | $ | 23,017 |
A total of twenty available-for-sale securities were in a loss position at March 31, 2012. None of these securities were in a loss position for twelve months or more. The Company believes that the decline in value is attributable to changes in market interest rates and not in credit quality and considers these losses temporary. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities before recovery of their amortized costs. Management evaluates investment securities in a loss position based on length of impairment, severity of impairment and other factors.
The amortized cost and estimated fair values of securities available-for-sale based on their contractual maturities are summarized below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations without penalty.
March 31, 2012 | ||||||||
Amortized | ||||||||
Cost | Fair Value | |||||||
Due in one year or less | $ | 405,000 | 407,219 | |||||
Due after one year but within five years | 2,787,725 | 2,889,921 | ||||||
Due after five years but within ten years | 11,060,045 | 11,250,296 | ||||||
Due after ten years | 10,871,805 | 10,894,058 | ||||||
25,124,575 | 25,441,494 | |||||||
Mortgage-backed securities | 4,402,760 | 4,504,910 | ||||||
Total | $ | 29,527,335 | $ | 29,946,404 |
9 |
Securities Held-To-Maturity
The amortized cost and estimated fair values of securities held-to-maturity were:
Amortized | Gross Unrealized | |||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
March 31, 2012 - | ||||||||||||||||
Obligations of state and local governments | $ | 200,000 | $ | 8,226 | $ | - | $ | 208,226 | ||||||||
December 31, 2011 - | ||||||||||||||||
Obligations of state and local governments | $ | 299,921 | $ | 9,034 | $ | - | $ | 308,955 |
The amortized cost and estimated fair values of securities held-to-maturity based on their contractual maturities are summarized below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations without penalty.
March 31, 2012 | ||||||||
Amortized | ||||||||
Cost | Fair Value | |||||||
Due after one year but within five years | $ | 200,000 | $ | 208,226 |
NOTE 5 - LOANS RECEIVABLE
Loans consisted of the following:
March 31, | December 31, | |||||||
2012 | 2011 | |||||||
Real estate – construction | $ | 11,333,293 | $ | 11,684,137 | ||||
Real estate – mortgage | 69,013,906 | 69,916,752 | ||||||
Commercial and industrial | 7,218,982 | 7,682,631 | ||||||
Consumer and other | 3,690,434 | 4,524,551 | ||||||
Total gross loans | $ | 91,256,615 | $ | 93,808,071 | ||||
The loan portfolio consisted of loans having: | ||||||||
Variable rates loans | $ | 3,941,056 | $ | 4,085,650 | ||||
Fixed rates | 87,315,559 | 89,722,421 | ||||||
Total gross loans | $ | 91,256,615 | $ | 93,808,071 |
Transactions in the allowance for loan losses are summarized below:
March 31, | December 31, | |||||||
2012 | 2011 | |||||||
Balance, beginning of year | $ | 1,967,069 | $ | 2,019,497 | ||||
Provision charged to operations | 330,000 | 1,920,500 | ||||||
Recoveries on loans previously charged-off | 1,057 | 15,640 | ||||||
Loans charged-off | (59,322 | ) | (1,988,568 | ) | ||||
Balance, end of year | $ | 2,238,804 | $ | 1,967,069 |
10 |
The following is an analysis of the allowance for loan losses by class of loans for the three months ended March 31, 2012 and the year ended December 31, 2011.
March 31, 2012
Real Estate Loans | ||||||||||||||||||||||||
Total | ||||||||||||||||||||||||
Real | ||||||||||||||||||||||||
(Dollars in Thousands) | Estate | Consumer | ||||||||||||||||||||||
Total | Construction | Mortgage | Loans | Commercial | and Other | |||||||||||||||||||
Beginning Balance | $ | 1,967 | $ | 769 | $ | 384 | $ | 1,153 | $ | 609 | $ | 205 | ||||||||||||
Charge-offs | (59 | ) | - | (43 | ) | (43 | ) | (2 | ) | (14 | ) | |||||||||||||
Recoveries | 1 | - | 1 | 1 | - | - | ||||||||||||||||||
Provisions | 330 | (209 | ) | 1,082 | 873 | (380 | ) | (163 | ) | |||||||||||||||
Ending balance | $ | 2,239 | $ | 560 | $ | 1,424 | $ | 1,984 | $ | 227 | $ | 28 |
December 31, 2011 | ||||||||||||||||||||||||
Real Estate Loans | ||||||||||||||||||||||||
Total | ||||||||||||||||||||||||
Real | ||||||||||||||||||||||||
(Dollars in Thousands) | Estate | Consumer | ||||||||||||||||||||||
Total | Construction | Mortgage | Loans | Commercial | and Other | |||||||||||||||||||
Beginning Balance | $ | 2,019 | $ | 807 | $ | 404 | $ | 1,211 | $ | 606 | $ | 202 | ||||||||||||
Charge-offs | 1,921 | 1,062 | 680 | 1,742 | 128 | 51 | ||||||||||||||||||
Recoveries | 16 | - | 4 | 4 | 8 | 4 | ||||||||||||||||||
Provisions | (1,989 | ) | (1,100 | ) | (704 | ) | (1,804 | ) | (133 | ) | (52 | ) | ||||||||||||
Ending balance | $ | 1,967 | $ | 769 | $ | 384 | $ | 1,153 | $ | 609 | $ | 205 |
At March 31, 2012 and December 31, 2011 the allocation of the allowance for loan losses and the recorded investment in loans summarized on the basis of the Company’s impairment methodology was as follows:
March 31, 2012 | ||||||||||||||||||||||||
Real Estate Loans | ||||||||||||||||||||||||
Total | ||||||||||||||||||||||||
Real | ||||||||||||||||||||||||
(Dollars in Thousands) | Estate | Consumer | ||||||||||||||||||||||
Total | Construction | Mortgage | Loans | Commercial | and Other | |||||||||||||||||||
Allowance for Loan Losses | ||||||||||||||||||||||||
Examined for Impairment | ||||||||||||||||||||||||
Individually | $ | 1,424 | $ | 482 | $ | 766 | $ | 1,248 | $ | 176 | $ | - | ||||||||||||
Collectively | 815 | 78 | 658 | 736 | 51 | 28 | ||||||||||||||||||
Allowance for | ||||||||||||||||||||||||
Loan Losses | $ | 2,239 | $ | 560 | $ | 1,424 | $ | 1,984 | $ | 227 | $ | 28 | ||||||||||||
Total Loans | ||||||||||||||||||||||||
Examined for Impairment | ||||||||||||||||||||||||
Individually | $ | 9,728 | $ | 3,664 | $ | 3,935 | $ | 7,599 | $ | 2,126 | 3 | |||||||||||||
Collectively | 81,529 | 7,669 | 65,079 | 72,748 | 5,093 | 3,688 | ||||||||||||||||||
Total Loans | $ | 91,257 | $ | 11,333 | $ | 69,014 | $ | 80,347 | $ | 7,219 | $ | 3,691 |
11 |
December 31, 2011 | ||||||||||||||||||||||||
Real Estate Loans | ||||||||||||||||||||||||
Total | ||||||||||||||||||||||||
Real | ||||||||||||||||||||||||
(Dollars in Thousands) | Estate | Consumer | ||||||||||||||||||||||
Total | Construction | Mortgage | Loans | Commercial | and Other | |||||||||||||||||||
Allowance for Loan Losses | ||||||||||||||||||||||||
Examined for Impairment | ||||||||||||||||||||||||
Individually | $ | 853 | $ | 389 | $ | 269 | $ | 658 | $ | 195 | $ | - | ||||||||||||
Collectively | 1,114 | 380 | 115 | 495 | 414 | 205 | ||||||||||||||||||
Allowance for | ||||||||||||||||||||||||
Loan Losses | $ | 1,967 | $ | 769 | $ | 384 | $ | 1,153 | $ | 609 | $ | 205 | ||||||||||||
Total Loans | ||||||||||||||||||||||||
Examined for Impairment | ||||||||||||||||||||||||
Individually | $ | 8,894 | $ | 3,585 | $ | 3,236 | $ | 6,821 | $ | 2,063 | 10 | |||||||||||||
Collectively | 84,914 | 8,099 | 66,681 | 74,780 | 5,620 | 4,514 | ||||||||||||||||||
Total Loans | $ | 93,808 | $ | 11,684 | $ | 69,917 | $ | 81,601 | $ | 7,683 | $ | 4,524 |
The Company identifies impaired loans through its normal internal loan review process. Loans on the Company’s problem loan watch list are considered potentially impaired loans. These loans are evaluated in determining whether all outstanding principal and interest are expected to be collected. Loans are not considered impaired if a minimal delay occurs and all amounts due including accrued interest at the contractual interest rate for the period of delay are expected to be collected.
The following summarizes the Company’s impaired loans by class as of March 31, 2012 and December 31, 2011.
March 31, 2012 | ||||||||||||
Unpaid | ||||||||||||
Recorded | Principal | Related | ||||||||||
(Dollars in Thousands) | Investment | Balance | Allowance | |||||||||
With no related allowance recorded: | ||||||||||||
Real estate | ||||||||||||
Construction | $ | 1,915 | $ | 2,776 | $ | - | ||||||
Mortgage | 2,043 | 2,050 | - | |||||||||
Total real estate loans | 3,958 | 4,826 | - | |||||||||
Commercial | 1,825 | 1,868 | - | |||||||||
Consumer and other | 3 | 3 | - | |||||||||
5,786 | 6,697 | - | ||||||||||
With an allowance recorded: | ||||||||||||
Real estate | ||||||||||||
Construction | $ | 1,749 | $ | 1,782 | $ | 482 | ||||||
Mortgage | 1,892 | 2,403 | 766 | |||||||||
Total real estate loans | 3,641 | 4,185 | 1,248 | |||||||||
Commercial | 301 | 301 | 176 | |||||||||
Consumer and other | - | - | - | |||||||||
3,942 | 4,486 | 1,424 | ||||||||||
Total | ||||||||||||
Real estate | ||||||||||||
Construction | $ | 3,664 | $ | 4,558 | $ | 482 | ||||||
Mortgage | 3,935 | 4,453 | 766 | |||||||||
Total real estate loans | 7,599 | 9,011 | 1,248 | |||||||||
Commercial | 2,126 | 2,169 | 176 | |||||||||
Consumer and other | 3 | 3 | - | |||||||||
Total | $ | 9,728 | $ | 11,183 | $ | 1,424 |
12 |
December 31, 2011
(Dollars in Thousands) | Recorded Investment | Unpaid Principal Balance | Related Allowance | |||||||||
With no related allowance recorded: | ||||||||||||
Real estate | ||||||||||||
Construction | $ | 2,205 | $ | 3,099 | $ | - | ||||||
Mortgage | 2,104 | 2,369 | - | |||||||||
Total real estate loans | 4,309 | 5,468 | - | |||||||||
Commercial | 1,851 | 1,894 | - | |||||||||
Consumer and other | 10 | 10 | - | |||||||||
6,170 | 7,372 | - | ||||||||||
With an allowance recorded: | ||||||||||||
Real estate | ||||||||||||
Construction | $ | 1,380 | $ | 1,445 | $ | 389 | ||||||
Mortgage | 1,132 | 1,386 | 269 | |||||||||
Total real estate loans | 2,512 | 2,831 | 658 | |||||||||
Commercial | 212 | 212 | 195 | |||||||||
Consumer and other | - | - | - | |||||||||
2,724 | 3,043 | 853 | ||||||||||
Total | ||||||||||||
Real estate | ||||||||||||
Construction | $ | 3,585 | $ | 4,544 | $ | 389 | ||||||
Mortgage | 3,236 | 3,755 | 269 | |||||||||
Total real estate loans | 6,821 | 8,299 | 658 | |||||||||
Commercial | 2,063 | 2,106 | 195 | |||||||||
Consumer and other | 10 | 10 | - | |||||||||
Total | $ | 8,894 | $ | 10,415 | $ | 853 |
The average recorded investment in impaired loans for the three months and year ended March 31, 2012 and December 31, 2011, was $9,311,083 and $8,697,564, respectively.
Nonaccrual loans were $5,032,522 and $5,389,685 at March 31, 2012 and December 31, 2011, respectively. When the ultimate collectability of a nonaccrual loan principal is in doubt, wholly or partially, all cash receipts are applied to the principal. When this doubt does not exist, cash receipts are applied under the contractual terms of the loan agreement.
Interest income on impaired loans other than nonaccrual loans is recognized on an accrual basis. Interest income on nonaccrual loans is recognized only as collected. During the three months ended March 31, 2012 and for the year ended December 31, 2011, interest income recognized on nonaccrual loans was $9,541 and $36,678, respectively. If the nonaccrual loans had been accruing interest at their original contracted rates, related income would have been $79,511 and $279,833 for the quarter ended March 31, 2012 and for the year ended December 31, 2011, respectively.
A summary of current, past due and nonaccrual loans as of March 31, 2012 and December 31, 2011 were as follows:
March 31, 2012 | ||||||||||||||||||||||||
Past Due | Past Due Over 90 days | |||||||||||||||||||||||
30-89 | and | Non- | Total | Total | ||||||||||||||||||||
(Dollars in Thousands) | Days | Accruing | Accruing | Past Due | Current | Loans | ||||||||||||||||||
Real estate | ||||||||||||||||||||||||
Construction | $ | 176 | $ | - | $ | 3,008 | $ | 3,184 | $ | 8,149 | $ | 11,333 | ||||||||||||
Mortgage | 3,400 | - | 1,979 | 5,379 | 63,635 | 69,014 | ||||||||||||||||||
Total real estate loans | 3,576 | - | 4,987 | 8,563 | 71,784 | 80,347 | ||||||||||||||||||
Commercial | 360 | - | 44 | 404 | 6,815 | 7,219 | ||||||||||||||||||
Consumer and other | 85 | - | 2 | 87 | 3,604 | 3,691 | ||||||||||||||||||
Totals | $ | 4,021 | $ | - | $ | 5,033 | $ | 9,054 | $ | 82,203 | $ | 91,257 |
13 |
December 31, 2011 | ||||||||||||||||||||||||
Past Due | Past Due Over 90 days | |||||||||||||||||||||||
30-89 | and | Non- | Total | Total | ||||||||||||||||||||
(Dollars in Thousands) | Days | Accruing | Accruing | Past Due | Current | Loans | ||||||||||||||||||
Real estate | ||||||||||||||||||||||||
Construction | $ | 1,379 | $ | - | $ | 3,479 | $ | 4,858 | $ | 6,826 | $ | 11,684 | ||||||||||||
Mortgage | 1,969 | - | 1,784 | 3,753 | 66,164 | 69,917 | ||||||||||||||||||
Total real estate loans | 3,348 | - | 5,263 | 8,611 | 72,990 | 81,601 | ||||||||||||||||||
Commercial | 547 | - | 116 | 663 | 7,020 | 7,683 | ||||||||||||||||||
Consumer and other | 148 | - | 11 | 159 | 4,365 | 4,524 | ||||||||||||||||||
Totals | $ | 4,043 | $ | - | $ | 5,390 | $ | 9,433 | $ | 84,375 | $ | 93,808 |
At March 31, 2011 and December 31, 2011 there were no loans past due over 90 days and still accruing interest
Included in the loans above are particular loans that have been modified in order to maximize the collection of loan balances. If, for economic or legal reasons related to the customer’s financial difficulties, the Company grants a concession compared to the original terms and conditions on the loan, the modified loan is classified as a troubled debt restructuring (“TDR”).
As of March 31, 2012 there were four loans classified as TDR totaling $1,006,135. Of the four loans, two totaling $401,036 were performing while two totaling $605,099 were not performing. At December 31, 2011, there were four loans classified as TDR totaling $1,006,041. Of the four loans, two totaling $400,942 were performing while two totaling $605,099 were not performing.
All loans modified in troubled debt restructurings are evaluated for impairment. The nature and extent of impairment of TDRs, including those which have experienced a subsequent default, are considered in determining an appropriate level of allowance for credit losses.
Credit Indicators
Loans are categorized into risk categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The following definitions are utilized for risk ratings, which are consistent with the definitions used in supervisory guidance:
Special Mention - Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.
Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.
14 |
As of March 31, 2012 and December 31, 2011, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
March 31, 2012 | ||||||||||||||||||||||||
Real Estate Loans | ||||||||||||||||||||||||
Total | ||||||||||||||||||||||||
Real | ||||||||||||||||||||||||
(Dollars in Thousands) | Estate | Consumer | ||||||||||||||||||||||
Total | Construction | Mortgage | Loans | Commercial | and Other | |||||||||||||||||||
Pass | $ | 81,429 | $ | 7,669 | $ | 65,031 | $ | 72,700 | $ | 5,092 | $ | 3,637 | ||||||||||||
Special mention | 3,039 | 1,305 | 1,126 | 2,431 | 607 | 1 | ||||||||||||||||||
Substandard | 6,774 | 2,359 | 2,857 | 5,216 | 1,505 | 53 | ||||||||||||||||||
Doubtful | 15 | - | - | - | 15 | - | ||||||||||||||||||
Total Loans | $ | 91,257 | $ | 11,333 | $ | 69,014 | $ | 80,347 | $ | 7,219 | $ | 3,691 |
December 31, 2011 | ||||||||||||||||||||||||
Real Estate Loans | ||||||||||||||||||||||||
Total | ||||||||||||||||||||||||
Real | ||||||||||||||||||||||||
(Dollars in Thousands) | Estate | Consumer | ||||||||||||||||||||||
Total | Construction | Mortgage | Loans | Commercial | and Other | |||||||||||||||||||
Pass | $ | 83,826 | $ | 7,964 | $ | 66,005 | $ | 73,969 | $ | 5,492 | $ | 4,365 | ||||||||||||
Special mention | 3,989 | 1,563 | 1,579 | 3,142 | 769 | 78 | ||||||||||||||||||
Substandard | 5,863 | 2,057 | 2,333 | 4,390 | 1,392 | 81 | ||||||||||||||||||
Doubtful | 130 | 100 | - | 100 | 30 | - | ||||||||||||||||||
Total | $ | 93,808 | $ | 11,684 | $ | 69,917 | $ | 81,601 | $ | 7,683 | $ | 4,524 |
NOTE 6 – OTHER REAL ESTATE OWNED
Transactions in other real estate owned for the three months ended March 31, 2012 and year ended December 31, 2011 are summarized below:
March 31, | December 31, | |||||||
2012 | 2011 | |||||||
Balance, beginning of year | $ | 3,290,077 | $ | 2,764,189 | ||||
Additions | 495,096 | 1,706,317 | ||||||
Write downs | - | (164,864 | ) | |||||
Sales | - | (1,015,565 | ) | |||||
Balance, end of period | $ | 3,785,173 | $ | 3,290,077 |
Other real estate owned expense for the three months ended March 31, 2012 and 2011was $86,432 and $68,203, respectively.
NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of significant financial instruments:
Cash and Due from Banks and Interest-bearing Deposits with Other Banks - The carrying amount is a reasonable estimate of fair value.
Time Deposits in other Banks - The carrying amount is a reasonable estimate of fair value.
Nonmarketable Equity Securities - The carrying amount of nonmarketable equity securities is a reasonable estimate of fair value since no ready market exists for these securities.
15 |
Loans Receivable – For certain categories of loans, such as variable rate loans which are repriced frequently and have no significant change in credit risk, fair values are based on the carrying amounts. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
Deposits - The fair value of demand deposits, savings, and money market accounts is the amount payable on demand at the reporting date. The fair values of certificates of deposit are estimated using a discounted cash flow calculation that applies current interest rates to a schedule of aggregated expected maturities.
Accrued Interest Receivable and Payable - The carrying value of these instruments is a reasonable estimate of fair value.
Off-Balance Sheet Financial Instruments - Fair values of off-balance sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing.
The carrying values and estimated fair values of the Company’s financial instruments were as follows:
March 31 | December 31 | |||||||||||||||
2012 | 2011 | |||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
Financial Assets: | ||||||||||||||||
Cash and due from banks | 5,294,251 | 5,294,251 | $ | 4,359,616 | $ | 4,359,616 | ||||||||||
Interest-bearing deposits with other banks | 30,302,294 | 30,302,294 | 18,119,554 | 18,119,554 | ||||||||||||
Federal funds sold | 4,414,000 | 4,414,000 | 7,738,000 | 7,738,000 | ||||||||||||
Time deposits with other banks | 752,942 | 752,942 | 750,000 | 750,000 | ||||||||||||
Securities available-for-sale | 29,946,404 | 29,946,404 | 28,235,661 | 28,235,661 | ||||||||||||
Securities held-to-maturity | 200,000 | 208,226 | 299,921 | 308,955 | ||||||||||||
Nonmarketable equity securities | 259,100 | 259,100 | 259,100 | 259,100 | ||||||||||||
Loans receivable, gross | 91,256,615 | 91,008,990 | 93,808,071 | 95,635,540 | ||||||||||||
Financial Liabilities: | ||||||||||||||||
Demand deposit, interest-bearing | ||||||||||||||||
transaction, money market, and savings accounts | $ | 66,964,854 | $ | 66,964,854 | $ | 57,971,962 | $ | 57,971,962 | ||||||||
Time deposits | 83,091,738 | 83,332,368 | 82,852,599 | 83,081,840 |
Notional | Notional | ||||||||
Amount | Amount | ||||||||
Off-Balance Sheet Financial Instruments: | |||||||||
Commitments | $ | 5,737,000 | $ | 5,685,949 | |||||
Standby letters of credit | 847,000 | 847,000 | |||||||
The generally accepted accounting principles (GAAP) provide a framework for measuring and disclosing fair value which requires disclosures about the fair value of assets and liabilities recognized in the balance sheet, whether the measurements are made on a recurring basis (for example, available-for-sale investment securities) or on a nonrecurring basis (for example, impaired loans).
Fair value is defined as the exchange in price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
16 |
The Company utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.
Fair Value Hierarchy
The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine the fair value. These levels are:
Level 1 — | Valuation is based upon quoted prices for identical instruments traded in active markets. |
Level 2 — | Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. |
Level 3 — | Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques. |
Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.
Securities Available-for-Sale - Securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange such as the New York Stock Exchange, Treasury securities that are traded by dealers or brokers in active over-the counter markets and money market funds. Level 2 securities include mortgage backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.
Loans - The Company does not record loans at fair value on a recurring basis, however, from time to time, a loan is considered impaired and an allowance for loan loss is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan are considered impaired. Once a loan is identified as individually impaired, management measures impairment. The fair value of impaired loans is estimated using one of several methods, including the collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring a specific allowance represent loans for which the fair value of expected repayments or collateral exceed the recorded investment in such loans. At March 31, 2012 and December 31, 2011, substantially all of the impaired loans were evaluated based upon the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the loan as nonrecurring Level 3.
Other Real Estate Owned - Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate owned. Real estate acquired in settlement of loans is recorded initially at estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charges to earnings if the estimated fair value of the property less estimated selling costs declines below the initial recorded value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3.
17 |
The table below presents the Company’s assets measured at fair value on a recurring basis as of March 31, 2012, and December 31, 2011, aggregated by the level in the fair value hierarchy within which those measurements fall.
Available-for-Sale Securities:
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
March 31, 2012 | ||||||||||||||||
Government-sponsored enterprises | $ | 16,050,158 | $ | - | $ | 16,050,158 | $ | - | ||||||||
Mortgage-backed securities | 4,504,910 | - | 4,504,910 | - | ||||||||||||
Obligations of state and local governments | 9,191,336 | - | 9,191,336 | - | ||||||||||||
Other | 200,000 | - | 200,000 | - | ||||||||||||
Total | $ | 29,946,404 | $ | - | $ | 29,946,404 | $ | - | ||||||||
December 31, 2011 | ||||||||||||||||
Government-sponsored enterprises | $ | 16,149,087 | $ | - | $ | 16,149,087 | $ | - | ||||||||
Mortgage-backed securities | 3,183,989 | - | 3,183,989 | - | ||||||||||||
Obligations of state and local governments | 8,702,585 | - | 8,702,585 | - | ||||||||||||
Other | 200,000 | - | 200,000 | - | ||||||||||||
Total | $ | 28,235,661 | $ | - | $ | 28,235,661 | $ | - |
There were no liabilities measured at fair value on a recurring basis at March 31, 2012 and December 31, 2011.
Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).
The following table presents the assets and liabilities measured at fair value on a nonrecurring basis as of March 31, 2012 and December 31, 2011, aggregated by level in the fair value hierarchy within which those measurements fall.
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
March 31, 2012 | ||||||||||||||||
Impaired loans | $ | 8,303,699 | $ | - | $ | 8,303,699 | $ | - | ||||||||
Other real estate owned | 3,785,173 | - | 3,785,173 | - | ||||||||||||
Total assets at fair value | $ | 12,088,872 | $ | - | $ | 12,088,872 | $ | - | ||||||||
December 31, 2011 | ||||||||||||||||
Impaired loans | $ | 8,041,452 | $ | - | $ | 8,041,452 | $ | - | ||||||||
Other real estate owned | 3,290,077 | - | 3,290,077 | - | ||||||||||||
Total assets at fair value | $ | 11,331,529 | $ | - | $ | 11,331,529 | $ | - |
There were no liabilities measured at fair value on a nonrecurring basis at March 31, 2012 and December 31, 2011.
Impaired loans which are measured for impairment using the fair value of collateral for collateral dependent loans, had a carrying value of $9,728,095 at March 31, 2012 with a valuation allowance of $1,424,396. Impaired loans had a carrying value of $8,894,071 at December 31, 2011 with a valuation allowance of $852,619.
Other real estate owned, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying value of $3,785,173 and $3,290,077 at March 31, 2012 and December 31, 2011, respectively. There were no write downs of other real estate owned for the three months ended March 31, 2012. For the year ended December 31, 2011, write downs were $164,864.
The Company has no assets or liabilities whose fair values are measured using level 3 inputs.
18 |
NOTE 8 - SUBSEQUENT EVENTS
Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Nonrecognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewed events occurring through the date the financial statements were issued and no subsequent events occurred requiring accrual or disclosure.
19 |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion of the Company’s financial condition as of March 31, 2012 compared to December 31, 2011, and the results of operations for the three months ended March 31, 2012 compared to the three months ended March 31, 2011. These comments should be read in conjunction with the Company’s condensed financial statements and accompanying footnotes appearing in this report. This report contains "forward-looking statements" relating to, without limitation, future economic performance, plans and objectives of management for future operations, and projections of revenues and other financial items that are based on the beliefs of the Company’s management, as well as assumptions made by and information currently available to the Company’s management. The words "expect," "estimate," "anticipate," and "believe," as well as similar expressions, are intended to identify forward-looking statements. The Company’s actual results may differ materially from the results discussed in the forward-looking statements, and the Company’s operating performance each quarter is subject to various risks and uncertainties that are discussed in detail in the Company’s filings with the Securities and Exchange Commission.
Results of Operations
Net income for the quarter ended March 31, 2012 was $131,302, or $0.56 per share, compared to $176,897, or $0.76 per share, for the quarter ended March 31, 2011, resulting in a decrease of $45,595, or 25.77%. This decrease is primarily attributable to the increase of $105,000 in our provision for loan losses and to the reduction of $71,929 in net interest income. However, these items were partially offset by the reduction of $119,454 in our other noninterest expenses.
Net Interest Income
General - The largest component of total income is net interest income, the difference between the income earned on assets and the interest accrued or paid on deposits and borrowings used to support such assets. The volume and mix of assets and liabilities and their sensitivity to interest rate movement determine changes in net interest income. Net interest margin is determined by dividing annualized net interest income by average earning assets. Net interest spread is derived from determining the weighted-average rate of interest paid on deposits and borrowings and subtracting it from the weighted-average yield on average assets.
Net interest income for the quarter ended March 31, 2012, was $1,296,178, compared to $1,368,107 for the same period last year, a decrease of $71,929, or 5.26%. This decrease is primarily attributable to the decrease in the average volume of our outstanding loans, which generally are our highest yielding assets.
For the quarter ended March 31, 2012, average-earning assets totaled $151,374,823 with an annualized average yield of 4.24%. Average earning assets and annualized average yield were $146,578,738 and 4.90%, respectively, for the quarter ended March 31, 2011. For the quarter ended March 31, 2012, average interest-bearing liabilities totaled $129,246,106 with an annualized average cost of 0.94%. Average interest-bearing liabilities and annualized average cost were $124,015,114 and 1.32%, respectively, for the quarter ended March 31, 2011.
Our net interest margin and net interest spread were 3.44% and 3.31% for the quarter ended March 31, 2012 compared to 3.79% and 3.58%, respectively for the quarter ended March 31, 2011. The decreases were primarily attributable to the decrease in the average volume of our outstanding loans, which generally are our highest yielding assets. For the quarter ended March 31, 2012 and 2011, the average volume of our loans was 61.19% and 71.17% of our total average earnings assets, respectively.
Details of the components of earning assets and interest-bearing liabilities are discussed in the following paragraphs.
Loans - Because loans often provide a higher yield than other types of earning assets, one of our goals is to maintain our loan portfolio as the largest component of total earning assets. Loans comprised approximately 61.19% and 71.17% of average earning assets for the quarter ended March 31, 2012 and 2011, respectively. Loan interest income was $1,408,637 and $1,563,983 for quarter ended March 31, 2012 and 2011, respectively. The annualized average yield on loans was 6.12% and 6.08% for the quarter ended March 31, 2012 and 2011, respectively. Average balances of loans decreased to $92,630,235 during the quarter ended March 31, 2012, a decrease of $11,689,572 from the average balance of $104,319,807 during the quarter ended March 31, 2011. The slight increase in the annualized yield on loans is mainly attributable to the stabilization of market interest rates and the high volume of fixed rate loans that we maintain in our loan portfolio. Fixed rate loans averaged approximately 96% and 98% of our loan portfolio for the first quarter of 2012 and 2011, respectively.
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Investment Securities - Investment securities averaged $27,777,460, or 18.35% of average earning assets, for first quarter of 2012 compared to $28,138,016 or 19.20% of average earning assets, for the same period in 2011. Interest earned on investment securities amounted to $166,902 for the quarter ended March 31, 2012, compared to $197,908 for the comparable period last year. Investment securities yielded 2.42% and 2.85% for the quarter ended March 31, 2012 and 2011, respectively.
Interest-bearing liabilities – During the first quarter of 2012 and 2011 our only interest-bearing liabilities were interest-bearing deposit accounts. Total interest expense for the quarter ended March 31, 2012 and 2011 was $300,823 and $404,587 respectively. The average balance of interest bearing deposits decreased to $129,246.106 during the quarter ended March 31, 2012 from $124,015,114 for the quarter ended March 31, 2011. The annualized average cost of deposits was 0.94% for the quarter ended March 31, 2012 compared to 1.32% for the same period in 2011.
Provision and Allowance for Loan Losses
We have developed policies and procedures for evaluating the overall quality of our credit portfolio and the timely identification of potential problem credits. On a quarterly basis, our Board of Directors reviews and approves the appropriate level for the allowance for loan losses based upon management’s recommendations, the results of our internal monitoring and reporting system, and an analysis of economic conditions in our market. The objective of management has been to fund the allowance for loan losses at a level greater than or equal to our internal risk measurement system for loan risk.
Additions to the allowance for loan losses, which are expensed as the provision for loan losses on our statement of operations, are made periodically to maintain the allowance at an appropriate level based on management’s analysis of the potential risk in the loan portfolio. Loan losses and recoveries are charged or credited directly to the allowance. The amount of the provision is a function of the level of loans outstanding, the level of nonperforming loans, historical loan loss experience, the amount of loan losses actually charged against the reserve during a given period, and current and anticipated economic conditions.
The allowance represents an amount which management believes will be adequate to absorb inherent losses on existing loans that may become uncollectible. Our judgment as to the adequacy of the allowance for loan losses is based on a number of assumptions about future events, which we believe to be reasonable, but which may or may not prove to be accurate. Our determination of the allowance for loan losses is based on regular evaluations of the collectability of loans, including consideration of factors such as the balance of impaired loans, the quality, mix, and size of our overall loan portfolio, economic conditions that may affect the borrower’s ability to repay, the amount and quality of collateral securing the loans, our historical loan loss experience, and a review of specific problem loans. We also consider subjective issues such as changes in our lending policies and procedures, changes in the local and national economy, changes in volume or type of credits, changes in the volume or severity of problem loans, quality of loan review and board of director oversight, concentrations of credit, and peer group comparisons.
More specifically, in determining our allowance for loan losses, we regularly review loans for specific and impaired reserves based on the appropriate impairment assessment methodology. Pooled reserves are determined using historical loss trends measured over a five-year average, adjusted for environmental risk, which is then applied to risk rated loans grouped by Federal Financial Institutions Examination Council (“FFIEC”) call code and segmented by impairment status. The pooled reserves are calculated by applying the appropriate historical loss ratio to the loan categories. Impaired loans greater than a minimum threshold established by management are excluded from this analysis. The sum of all such amounts determines our pooled reserves.
We track our portfolio and analyze loans grouped by FFIEC call code categories. The first step in this process is to risk grade each and every loan in the portfolio based on one common set of parameters. These parameters include items such as debt-to-worth ratio, liquidity of the borrower, net worth, experience in a particular field, and other factors such as underwriting exceptions. Weight is also given to the relative strength of any guarantors on the loan.
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After risk grading each loan, we then segment the portfolio by FFIEC call code groupings, separating out substandard or impaired loans. The remaining loans are grouped into “performing loan pools.” The loss history for each performing loan pool is measured over a specific period of time to create a loss factor. The relevant look back-period is determined by the Bank, regulatory guidance, and current market events. The loss factor is then applied to the pool balance and the reserve per pool calculated. Loans deemed to be substandard but not impaired are segregated and a loss factor is applied to this pool as well. Finally, impaired loans are segmented based upon size; smaller impaired loans are pooled and a loss factor applied, while larger impaired loans are assessed individually using the appropriate impairment measuring methodology. Finally, certain qualitative factors are utilized to assess economic and other trends not currently reflected in the loss history. These factors include concentration of credit across the portfolio, the experience level of management and staff, effects of changes in risk selection and underwriting practice, industry conditions and the current economic and business environment. A quantitative value is assigned to each of the factors, which is then applied to the performing loan pools. Negative trends in the loan portfolio increase the quantitative values assigned to each of the qualitative factors and, therefore, increase the reserve. For example, as general economic and business conditions decline, this qualitative factor’s quantitative value will increase, which will increase the reserve requirement for this factor. Similarly, positive trends in the loan portfolio, such as improvement in general economic and business conditions, will decrease the quantitative value assigned to this qualitative factor, thereby decreasing the reserve requirement for this factor. These factors are reviewed and updated by our risk management committee on a regular basis to arrive at a consensus for our qualitative adjustments.
Periodically, we adjust the amount of the allowance based on changing circumstances. We recognize loan losses to the allowance and add subsequent recoveries back to the allowance for loan losses. In addition, on a quarterly basis we informally compare our allowance for loan losses to various peer institutions; however, we recognize that allowances will vary as financial institutions are unique in the make-up of their loan portfolios and customers, which necessarily creates different risk profiles for the institutions. If our allowance was significantly different from our peer group, we would carefully review our assessment procedures again to ensure that all procedures were completed accurately and all environmental risk factors were thoroughly considered. There can be no assurance that charge-offs of loans in future periods will not exceed the allowance for loan losses as estimated at any point in time or that provisions for loan losses will not be significant to a particular accounting period, especially considering the overall weakness in the economic environment in our market areas.
Various regulatory agencies review our allowance for loan losses through their periodic examinations, and they may require additions to the allowance for loan losses based on their judgment about information available to them at the time of their examinations. Our losses will undoubtedly vary from our estimates, and it is possible that charge-offs in future periods will exceed the allowance for loan losses as estimated at any point in time.
As of March 31, 2012 and 2011, the allowance for loan losses was $2,238,804 and $1,961,282, respectively, an increase of $277,522, or 14.15%, from the 2011 allowance. However, as a percentage of total loans, the allowance for loan losses was 2.45% and 1.91% at March 31, 2012 and 2011, respectively. The increase in our allowance for loan losses was caused primarily by certain large credits that deteriorated significantly during the past year.
For the quarter ended March 31, 2012 and 2011, the provision for loan losses was $330,000 and $225,000, respectively. This represents an increase of $105,000, or 46.67%. The provision expense estimate is the result of a statistical model that is subject to a great degree of volatility and is sensitive to current loss experience and real estate collateral values in the marketplace. While we expect our current period loss experience to be lower than that realized over the past several years, there can be no assurance that this will occur. We are closely monitoring current economic developments and their impact on our loan portfolio.
We believe the allowance for loan losses at March 31, 2012, is adequate to meet potential loan losses inherent in the loan portfolio, and, as described earlier, maintain the flexibility to adjust the allowance should our local economy and loan portfolio either improve or decline in the future.
Noninterest Income
Noninterest Income - noninterest income for the first quarter of 2012 was $149,778 compared to $135,950 for the first quarter of 2011. The increase in noninterest income is mainly attributable to the $14,624 increase in overdraft fees.
Noninterest Expense
Noninterest Expense - total noninterest expense for the three months ended March 31, 2012 and 2011 was $949,206 and $1,068,660, respectively. This represented a decrease of $119,454, or 11.18%. Salaries and employee benefits decreased $43,708, or 8.77%, from $498,198 for the three months ended March 31, 2011 to $454,490 for the comparable period in 2012. This decrease is due partially to the $25,344 reduction in our expense for salaries and to the reduction in our profit sharing expense of $16,165. For the three months ended March 31, 2012, other operating expenses were $331,736 or $82,958 lower than the three months ended March 31, 2011. The total of net occupancy and equipment expense was $162,980 and $155,768 for the first quarter of 2012 and 2011, respectively.
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Income Taxes - The income tax provision for the years ended March 31, 2012 and 2011 reflects an income tax expense of $35,448 and $33,500, respectively. The change in our tax provision is due primarily to our net income before income taxes and the relationship of our tax exempt income to net income before taxes.
Assets and Liabilities
During the first three months of 2012, total assets increased $9,158,478 or 5.74%, when compared to December 31, 2011. The balance of the federal funds sold was $4,414,000 at March 31, 2012 and $7,738,000 at December 31, 2011. Total investment securities increased $1,610,822 from December 31, 2011 to $30,405,504 at March 31, 2012. Gross loans decreased $2,551,456, or 2.72%, to $91,256,615 at March 31, 2012 from $93,808,071 at December 31, 2011.
For the three months ended March 31, 2012, total liabilities increased $9,207,618 or 6.52% and total deposits increased $9,232,031 or 6.56% from December 31, 2011.
For more analysis of the components of the changes in asset and liabilities, see the following discussion of major balance sheet categories and the Consolidated Statements of Cash Flows included in “Item 1. Financial Statements.”
We closely monitor and seek to maintain appropriate levels of interest earning-assets and interest-bearing liabilities so that maturities of assets are such that adequate funds are provided to meet customer withdrawals and loan demand.
Loans
At March 31, 2012, our total loans were $102,761,061compared to $105,297,684 at December 31, 2011, a decrease of $2,536,623 or 2.41%. At March 31, 2012 and December 31, 2011, approximately 98% and 99% of our loan portfolio consisted of fixed rate loans, respectively. Balances within the major loans receivable categories as of March 31, 2012 and December 31, 2011 are as follows:
March 31, | December 31, | |||||||
2012 | 2011 | |||||||
Real estate – construction | $ | 11,333,293 | $ | 11,684,137 | ||||
Real estate – mortgage | 69,013,906 | 69,916,752 | ||||||
Commercial and industrial | 7,218,982 | 7,682,631 | ||||||
Consumer and other | 3,690,434 | 4,524,551 | ||||||
Total gross loans | $ | 91,256,615 | $ | 93,808,071 | ||||
The loan portfolio consisted of loans having | : | |||||||
Variable rates loans | $ | 3,941,056 | $ | 4,085,650 | ||||
Fixed rates | 87,315,559 | 89,722,421 | ||||||
Total gross loans | $ | 91,256,615 | $ | 93,808,071 |
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Nonperforming Assets
Nonperforming Assets - At March 31, 201 and 2011, loans totaling $5,032,522 and $5,218,190, respectively, were in nonaccrual status. There were no loans ninety days or more overdue and still accruing interest at March 31, 2012 and 2011.
The following table sets forth the Company’s nonperforming assets at the dates indicated:
March 31, | ||||||||
2012 | 2011 | |||||||
Loans 90 days or more past due and still accruing interest | $ | - | $ | - | ||||
Nonaccrual loans | ||||||||
Real estate | ||||||||
Construction | 3,007,584 | 2,886,493 | ||||||
Mortgage | 1,978,465 | 2,078,684 | ||||||
Commercial | 44,000 | 194,231 | ||||||
Consumer and other | 2,473 | 58,782 | ||||||
Total nonperforming loans | 5,032,522 | 5,218,190 | ||||||
Other real estate owned | 3,785,173 | 2,760,195 | ||||||
Total nonperforming assets | $ | 8,817,695 | $ | 7,978,385 | ||||
Nonperforming assets to total assets | 5.23 | % | 5.07 | % | ||||
Total nonperforming loans to total loans | 5.51 | % | 5.08 | % | ||||
Allowance for loan losses as a percentage of nonperforming loans | 44.49 | % | 37.59 | % |
Nonaccrual Loans - Generally, loans are placed on nonaccrual status if principal or interest payments become 90 days past due and/or the collectability of the principal and/or interest is deemed to be doubtful. Once a loan is placed in nonaccrual status, all previously accrued and uncollected interest is reversed against interest income. Interest income on nonaccrual loans is recognized on a cash basis when the ultimate collectability is no longer considered doubtful. Loans are returned to accrual status when the principal and interest amounts contractually due are brought current and future payments are reasonably assured. During the three months ended March 31, 2012 and 2011 interest income recognized on nonaccrual loans was $9,541 and $9,245, respectively. If the nonaccrual loans had been accruing interest at their original contracted rates, related income would have been $79,511 and $84,035 for the quarter ended March 31, 2012 and 2011, respectively. All nonaccruing loans at March 31, 2012 and 2011 were included in our classification of impaired loans at those dates.
Restructured Loans - In situations where, for economic or legal reasons related to a borrower’s financial difficulties, a concession to the borrower is granted that we would not otherwise consider, the related loan is classified as a troubled debt restructuring (“TDR”). The restructuring of a loan may include the transfer of real estate collateral, either through the pledge of additional properties by the borrower or through a transfer to the Bank in lieu of foreclosures. Restructured loans may also include the borrower transferring to the Bank receivables from third parties, other assets, or an equity interest in the borrower in full or partial satisfaction of the loan, a modification of the loan terms, or a combination of the above.
As of March 31, 2012 there were four loans classified as TDR totaling $1,006,135. Of the four loans, two totaling $401,036 were performing while two totaling $605,099 were not performing. At March 31, 2011, there were three loans classified as TDR totaling $885,771. All three of these loans were performing at that time. All restructured loans resulted in either extended maturity or lowered rates and were included in the impaired loan balance.
Impaired Loans - We consider a loan to be impaired when, based upon current information and events, we believe it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Our impaired loans include loans identified as impaired through review of the non-homogeneous portfolio and troubled debt restructurings. Specific allowances are established on impaired loans, if deemed necessary, for the difference between the loan amount and the fair market value less estimated selling costs. Impaired loans may be left on accrual status during the period we are pursuing repayment of the loan. Impairment losses are recognized through an increase in the allowance for loan losses and a corresponding charge to the provision for loan losses. Adjustments to impairment losses due to changes in the fair market value of the collateral properties for impaired loans are also recognized through an increase in the allowance for loan losses and a corresponding charge to the provision for loan losses. When an impaired loan is sold, transferred to other real estate owned, or written-down, the loan is removed from the portfolio through a charge-off to the allowance for loan losses.
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On a quarterly basis, we analyze each loan that is classified as impaired to determine the potential for possible loan losses. This analysis is focused upon determining the then current estimated value of the collateral, local market condition, and estimated costs to foreclose, repair and resell the property. The net realizable value of the property is then computed and compared to the loan balance to determine the appropriate amount of specific reserve for each loan.
The following tables summarize information on our impaired loans at and for the years ended March 31, 2012 and 2011.
2012 | 2011 | |||||||
Impaired loans with specific allowance | $ | 3,941,939 | $ | 1,977,978 | ||||
Impaired loans with no specific allowance | 5,786,156 | 5,342,624 | ||||||
Total impaired loans | $ | 9,728,095 | $ | 7,320,602 | ||||
Related specific allowance | $ | 1,424,396 | $ | 600,187 | ||||
Average recorded investment in impaired loans | 9,311,083 | 7,511,922 | ||||||
Impaired loans included in nonaccrual | 5,032,522 | 5,218,190 | ||||||
Allowance for loan losses as a percentage of impaired loans | 23.01 | % | 26.79 | % |
At March 31, 2012, real estate or other collateral secured practically all of the loans that were considered impaired. The depressed economy of our local market has resulted in an increase in loan delinquencies, defaults and foreclosures. In some cases, this depression has resulted in a significant impairment to the value of our collateral and ability to sell the collateral upon foreclosure at its appraised value. If collateral values further decline, it is also more likely that we would be required to increase our allowance for loan losses.
Included in the impaired loans at March 31, 2012, were 11 borrowers that accounted for approximately 67% of the total amount of the impaired loans at that date.
The results of our internal review process and applying the allowance model methodology are the primary determining factors in management’s assessment of the adequacy of the allowance for loan losses.
Other nonperforming assets - Other nonperforming assets consist of other real estate owned (“OREO”) that was acquired through foreclosure. Other real estate owned is carried at fair market value minus estimated costs to sell. Current appraisals are obtained at time of foreclosure and write-downs, if any, charged to the allowance for loan losses as of the date of foreclosure. On a regular basis, we reevaluate our OREO properties for impairment. Along with gains and losses on disposal, expenses to maintain such assets and subsequent changes in the valuation allowance are included in other noninterest expense.
As of March 31, 2011, we had 23 OREO properties totaling $3,785,173 that were located in our market area. We had one residential property for $8,000. The remaining properties were commercial and investment properties. While we are diligently trying to dispose of our OREO properties, the currently depressed real estate market affects our ability to do so in a timely manner without experiencing additional losses. Additionally, there can be no assurance that these properties can be sold for their carrying values.
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Deposits
Deposits account for all of our interest bearing liabilities. Total average deposits increased from $138,062,443 in 2011 to $143,568,246 in 2012. This represents an increase of $5,505,803, or 3.99% from the 2011 amount.
The following table summarizes our average deposits for the three months ended March 31, 2012 and 2011.
2012 | 2011 | |||||||||||||||
Percent of | Percent of | |||||||||||||||
Amount | Deposits | Amount | Deposits | |||||||||||||
Noninterest-bearing demand | $ | 14,322,140 | 9.98 | % | $ | 14,047,329 | 10.17 | % | ||||||||
Interest-bearing demand | 23,419,289 | 16.31 | 20,930,067 | 15.16 | ||||||||||||
Savings accounts | 22,741,566 | 15.84 | 19,341,440 | 14.01 | ||||||||||||
Time deposits | 83,085,250 | 57.87 | 83,743,607 | 60.66 | ||||||||||||
Total deposits | $ | 143,568,246 | 100.00 | % | $ | 138,062,443 | 100.00 | % |
Our actual deposits at March 31, 2012 and December 31, 2011 were $150,056,592 and $140,824,561, respectively, representing an increase of $9,232,031, or 6.56%.
Core deposits, which exclude certificates of deposit of $100,000 or more, provide a relatively stable funding source for our loan portfolio and other earning assets. Our core deposits were $103,167,425 and $94,563,744 at March 31, 2012 and December 31, 2011, respectively. A stable base of deposits is expected to be our primary source of funding to meet both our short-term and long-term liquidity needs in the future.
Deposits, and particularly core deposits, have been our primary source of funding and have enabled us to meet successfully both our short-term and long-term liquidity needs. We anticipate that such deposits will continue to be our primary source of funding in the future. Our loan-to-deposit ratio was 60.81% and 66.61% on March 31, 2012 and December 31, 2011, respectively.
We did not have any brokered deposits at March 31, 2012 or at December 31, 2011.
Liquidity
Liquidity needs are met by us through scheduled maturities of loans and investments on the asset side and through pricing policies on the liability side for demand deposit accounts and short-term borrowings. The level of liquidity is measured by the loan-to-total funds ratio (total deposits plus short-term borrowings, if any), which was 60.81% at March 31, 2012 and 66.61% at December 31, 2011.
Asset liquidity is provided from several sources, including amounts due from banks and federal funds sold. Available-for-sale securities, particularly those maturing within one year, provide a secondary source of liquidity. Additionally, funds from maturing loans are a source of liquidity.
The Bank had available at March 31, 2012 unused short-term lines of credit to purchase up to $11,500,000 of federal funds from unrelated correspondent institutions. The Bank also has a credit availability agreement with the Federal Home Loan Bank totaling 15 percent of the Bank’s qualifying assets as of any quarter end. As of March 31, 2012, the available credit totaled approximately $25,290,000 and there were no borrowings outstanding. Any borrowings from the FHLB will be secured by a blanket lien on all of the Bank's 1-4 family residential first lien mortgage loans and/or investment securities and the Federal Home Loan Bank stock that has a carrying value of $259,100 as of March 31, 2012.
Interest Rate Sensitivity
Interest rate sensitivity is defined as the exposure to variability in net interest income resulting from changes in market-based interest rates. Asset/liability management is the process by which we monitor and control the mix, maturities, and interest sensitivity of our assets and liabilities. Asset/liability management seeks to ensure adequate liquidity and to maintain an appropriate balance between interest-sensitive assets and liabilities to minimize potentially adverse impacts on earnings from changes in market interest rates. Interest rate sensitivity can be managed by repricing assets or liabilities, selling securities available-for-sale, replacing an asset or liability at maturity, or adjusting the interest rate during the life of an asset or liability. We believe that interest rate risk management becomes increasingly important in an interest rate environment and economy such as the one that we are currently experiencing.
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We monitor interest rate sensitivity by measuring our interest sensitivity through a “gap” analysis, which is the positive or negative dollar difference between assets and liabilities that are subject to interest rate repricing within a given time period. Currently we are liability-sensitive over periods with maturity dates of less than twelve months. However, since interest rates and yields on various interest sensitive assets and liabilities do not all adjust in the same degree when there is a change in prevailing interest rates (such as prime rate), the traditional gap analysis is only a general indicator of rate sensitivity and net interest income volatility. As stated in “Results of Operations for the Three Months Ended March 31, 2012 Compared to the Three Months Ended March 31, 2011 – Net Interest Income,” our net interest margin decreased during the current period. If the net interest margin were to continue decline, the net income will likely decline also.
Capital Resources
Total shareholders' equity at March 31, 2012 and December 31, 2011 was $18,179,282, or 10.78% and $18,228,422, or 11.43%, respectively, of total assets. Average equity was $18,331,063 and $18,160,697 at March 31, 2012 and December 31, 2011, respectively.
The following table shows the return on average assets (net income divided by average total assets), return on average equity (net income divided by average equity), and equity to assets ratio (average equity divided by average total assets) for the three months ended March 31, 2012 and 2011. At March 31, 2012 and December 31, 2011 average assets were 162,294,833 and $158,389,500, respectively.
March 31, | ||||||||
2012 | 2011 | |||||||
Return on average assets | 0.33 | % | 0.45 | % | ||||
Return on average equity | 2.88 | 4.00 | ||||||
Average equity to average assets ratio | 11.29 | 11.32 |
Bank holding companies, such as ours, and their banking subsidiaries are required by banking regulators to meet certain minimum levels of capital adequacy, which are expressed in the form of certain ratios. Capital is separated into Tier 1 capital (essentially common shareholders’ equity less intangible assets) and Tier 2 capital (essentially the allowance for loan losses limited to 1.25% of risk-weighted assets). The first two ratios, which are based on the degree of credit risk in our assets, provide the weighting of assets based on assigned risk factors and include off-balance sheet items such as loan commitments and stand-by letters of credit. The ratio of Tier 1 capital to risk-weighted assets must be at least 4.0% and the ratio of total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets must be at least 8.0%. The capital leverage ratio supplements the risk-based capital guidelines. Banks and bank holding companies are required to maintain a minimum ratio of Tier 1 capital to adjusted quarterly average total assets of 3.0%.
The following table summarizes the Bank’s various capital ratios at March 31, 2012and December 31, 2011:
March 31, 2012 | December 31, 2011 | |||||||
Tier 1 capital (to risk-weighted assets) | 18.01 | % | 17.62 | % | ||||
Total capital (to risk-weighted assets) | 19.28 | % | 18.88 | % | ||||
Tier 1 capital (leverage ratio) | 11.01 | % | 11.13 | % |
The Federal Reserve Board has similar requirements for bank holding companies. The Company is currently not subject to these requirements because the Federal Reserve guidelines contain an exemption for bank holding companies of less than $500,000,000 in consolidated assets.
Regulatory Matters
We are not aware of any current recommendations by regulatory authorities which, if they were to be implemented, would have a material effect on liquidity, capital resources or operations.
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Off-Balance Sheet Risk
Through the operations of our Bank, we have made contractual commitments to extend credit in the ordinary course of our business activities. These commitments are legally binding agreements to lend money to our customers at predetermined interest rates for a specified period of time. At March 31, 2012, we had issued commitments to extend credit of $5,737,000 and standby letters of credit of $847,000 through various types of commercial lending arrangements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, commercial and residential real estate.
Critical Accounting Policies
We have adopted various accounting policies, which govern the application of accounting principles generally accepted in the United States in the preparation of our financial statements. Our significant accounting policies are described in the notes to the consolidated financial statements at December 31, 2011 as filed in our annual report on Form 10-K. Certain accounting policies involve significant judgments and assumptions by us, which have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgments and assumptions we make, actual results could differ from these judgments and estimates which could have a material impact on our carrying values of assets and liabilities and our results of operations.
We believe the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in preparation of our consolidated financial statements. Refer to the portion of this discussion that addresses our allowance for loan losses for a description of our processes and methodology for determining our allowance for loan losses.
Recently Issued Accounting Standards
Accounting standards which have been issued or proposed by the Financial Accounting Standards Board that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Not applicable since we are a smaller reporting company.
Item 4. Controls and Procedures
Within 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
In addition, we reviewed our internal controls, and there have been no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date of their last evaluation.
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PART II – Other Information
Item 1. Legal Proceedings
There are no material pending legal proceedings to which we are a party or of which any of our properties are the subject.
Item 1A. Risk Factors
There has been no change in the risk factors, which were reported on Form 10-K for the year ended December 31, 2011.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable
Item 3. Default Upon Senior Securities
Not applicable
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits
31.1 | Rule 13a-14(a) Certification of the Principal Executive Officer. |
31.2 | Rule 13a-14(a) Certification of the Principal Financial Officer. |
32 | Section 1350 Certifications. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
COMMUNITYCORP
Date: May 7, 2012 | By: | /s/ Peden B. McLeod |
Peden B. McLeod | ||
Chief Executive Officer | ||
Date: May 7, 2012 | By: | /s/ GWEN P. BUNTON |
Gwen P. Bunton | ||
Acting President & Chief Financial Officer |
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