XOTC:FRTR Fraternity Community Bancorp Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 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: 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 August 9, 2012, the registrant had 1,585,500 shares of common stock issued and outstanding.

 

 

 


Table of Contents

INDEX

 

          PAGE  

PART I.

   FINANCIAL INFORMATION   

Item 1.

   Consolidated Statements of Financial Condition as of June 30, 2012 (unaudited) and December 31, 2011      1   
   Consolidated Statements of Income for the Three and Six Months Ended June 30, 2012 and 2011 (unaudited)      2   
   Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2012 and 2011 (unaudited)      3   
   Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2012 and 2011 (unaudited)      4   
   Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011 (unaudited)      5   
   Notes to Consolidated Financial Statements      7   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      35   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      47   

Item 4.

   Controls and Procedures      47   

PART II.

   OTHER INFORMATION   

Item 1.

   Legal Proceedings      48   

Item 1A.

   Risk Factors      48   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      48   

Item 3.

   Defaults Upon Senior Securities      48   

Item 4.

   Mine Safety Disclosures      48   

Item 5.

   Other Information      48   

Item 6.

   Exhibits      48   

SIGNATURES

  

 

i


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FRATERNITY COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 

     June 30,     December 31,  
     2012     2011  
     (unaudited)        
ASSETS     

Cash and cash equivalents:

    

Cash and due from banks

   $ 729,267      $ 1,033,637   

Interest-bearing deposits in other banks

     19,815,286        13,889,505   
  

 

 

   

 

 

 

Total cash and cash equivalents

     20,544,553        14,923,142   
  

 

 

   

 

 

 

Investment securities:

    

Available-for-sale - at fair value

     25,749,399        31,419,356   

Held-to-maturity - at amortized cost (fair value approximates $7,685,383 and $7,970,403, respectively)

     7,405,173        7,837,293   

Loans—net of allowance for loan losses of $1,250,000 (2012 and 2011)

     110,105,690        111,924,984   

Other real estate owned

     1,693,676        0   

Property and equipment, net

     778,967        740,501   

Federal Home Loan Bank stock—at cost—restricted

     1,282,600        1,306,500   

Ground rents—net of valuation allowance of $45,500 (2012 and 2011)

     850,746        854,996   

Accrued interest receivable

     575,755        605,197   

Investment in bank-owned life insurance

     4,438,999        4,354,252   

Deferred income taxes

     648,529        630,908   

Other assets

     753,641        733,956   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 174,827,728      $ 175,331,085   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

  

 

Liabilities:

    

Deposits

   $ 119,733,719      $ 121,200,060   

Advances from the Federal Home Loan Bank

     22,500,000        22,500,000   

Advances by borrowers for taxes and insurance

     1,666,532        831,448   

Other liabilities

     648,204        682,888   
  

 

 

   

 

 

 

Total liabilities

     144,548,455        145,214,396   
  

 

 

   

 

 

 

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, 1,585,500 shares at June 30, 2012, 1,587,000 shares at December 31, 2011

     15,855        15,870   

Additional paid in capital

     14,927,785        14,944,647   

Retained earnings — substantially restricted

     16,325,251        16,170,684   

Unearned ESOP shares

     (1,110,900     (1,163,800

Accumulated other comprehensive income

     121,282        149,288   
  

 

 

   

 

 

 

Total stockholders’ equity

     30,279,273        30,116,689   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 174,827,728      $ 175,331,085   
  

 

 

   

 

 

 

See accompanying notes.

 

 

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Table of Contents

FRATERNITY COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2012      2011     2012      2011  

INTEREST INCOME:

          

Interest and fees on loans:

          

Real estate loans

   $ 1,441,905       $ 1,464,351      $ 2,909,201       $ 2,925,503   

Other loans

     1,102         1,217        2,281         2,472   

Interest and dividends on investments and bank deposits

     258,785         271,216        534,740         469,433   

Income from ground rents owned

     14,233         12,601        25,876         24,734   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest income

     1,716,025         1,749,385        3,472,098         3,422,142   
  

 

 

    

 

 

   

 

 

    

 

 

 

INTEREST EXPENSE:

          

Interest on deposits

     444,937         622,831        906,713         1,291,122   

Interest on borrowings

     170,574         223,140        339,928         444,016   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest expense

     615,511         845,971        1,246,641         1,735,138   
  

 

 

    

 

 

   

 

 

    

 

 

 

NET INTEREST INCOME

     1,100,514         903,414        2,225,457         1,687,004   

PROVISION FOR LOAN LOSSES

     105,234         458        178,254         60,516   
  

 

 

    

 

 

   

 

 

    

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     995,280         902,956        2,047,203         1,626,488   
  

 

 

    

 

 

   

 

 

    

 

 

 

NON-INTEREST INCOME:

          

Gain on sale of investments

     114,134         47,694        114,134         47,694   

Income on bank-owned life insurance

     42,835         45,363        84,747         89,144   

Gain on sale of loans

     7,848         0        26,789         0   

Other income

     10,102         10,833        22,400         22,113   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total non-interest income

     174,919         103,890        248,070         158,951   
  

 

 

    

 

 

   

 

 

    

 

 

 

NON-INTEREST EXPENSES:

          

Salaries and employee benefits

     539,994         527,717        1,113,182         1,034,256   

Occupancy expenses

     120,539         120,016        246,855         249,678   

Legal fees

     74,227         29,289        120,178         37,872   

Federal Deposit Insurance premiums

     32,974         37,368        68,532         77,510   

Accounting and auditing expense

     35,519         29,240        67,230         58,991   

Data processing expense

     99,167         104,963        208,701         204,264   

Directors fees

     22,232         25,317        48,711         50,134   

Other general and administrative expenses

     107,161         122,421        221,511         223,746   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total non-interest expenses

     1,031,813         996,331        2,094,900         1,936,451   
  

 

 

    

 

 

   

 

 

    

 

 

 

INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT)

     138,386         10,515        200,373         (151,012

INCOME TAX EXPENSE (BENEFIT)

     35,975         (13,041     45,806         (93,941
  

 

 

    

 

 

   

 

 

    

 

 

 

NET INCOME (LOSS)

   $ 102,411       $ 23,556      $ 154,567       $ (57,071
  

 

 

    

 

 

   

 

 

    

 

 

 

EARNINGS (LOSS) PER COMMON SHARE - BASIC

   $ 0.07       $ 0.02      $ 0.10       $ (0.04
  

 

 

    

 

 

   

 

 

    

 

 

 

EARNINGS (LOSS) PER COMMON SHARE - DILUTED

   $ 0.07       $ 0.02      $ 0.10       $ (0.04
  

 

 

    

 

 

   

 

 

    

 

 

 

See accompanying notes.

 

 

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Table of Contents

FRATERNITY COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2012     2011     2012     2011  

NET INCOME (LOSS)

   $ 102,411      $ 23,556      $ 154,567      $ (57,071

OTHER COMPREHENSIVE INCOME, NET OF TAX:

        

Unrealized gains (losses) on available-for-sale securities:

        

Unrealized holding gains (losses) arising during the period

     (698     556,988        67,458        615,293   

Less: income taxes on unrealized gains (losses) arising during the period

     279        (222,795     (26,983     (246,117
  

 

 

   

 

 

   

 

 

   

 

 

 
     (419     334,193        40,475        369,176   
  

 

 

   

 

 

   

 

 

   

 

 

 

Less: Reclassification adjustment for realized gains

     (114,134     (47,694     (114,134     (47,695

Income taxes on reclassification adjustment

     45,653        19,078        45,653        19,078   
  

 

 

   

 

 

   

 

 

   

 

 

 
     (68,481     (28,616     (68,481     (28,617
  

 

 

   

 

 

   

 

 

   

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS)

     (68,900     305,577        (28,006     340,559   
  

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME (LOSS)

   $ 33,511      $ 329,133      $ 126,561      $ 283,488   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

3


Table of Contents

Fraternity Community Bancorp, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

For the Six Months Ended June 30, 2012 and 2011

 

     Common
Stock
    Additional
Paid In
Capital
    Retained
Earnings
    Unearned
ESOP Shares
    Accumulated
Other
Comprehensive
Income (Loss)
    Total
Stockholders’
Equity
 

Balance, December 31, 2010

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

Net Loss

     0        0        (57,071     0        0        (57,071

Other Comprehensive Income

     0        0        0        0        340,559        340,559   

Acquisition of unearned ESOP shares

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

Issuance of Common Stock

     15,870        14,949,545        0        0        0        14,965,415   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2011

   $ 15,870      $ 14,949,545      $ 16,089,714      $ (1,269,600   $ 180,349      $ 29,965,878   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2011

   $ 15,870      $ 14,944,647      $ 16,170,684      $ (1,163,800   $ 149,288      $ 30,116,689   

Net Income

     0        0        154,567        0        0        154,567   

Other Comprehensive Income

     0        0        0        0        (28,006     (28,006

Common shares repurchased

     (15     (16,466     0        0        0        (16,481

ESOP shares released or committed for release

     0        (396     0        52,900        0        52,504   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2012

   $  15,855      $ 14,927,785      $ 16,325,251      $ (1,110,900   $ 121,282      $ 30,279,273   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

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Table of Contents

FRATERNITY COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

 

     Six Months Ended     Six Months Ended  
     June 30, 2012     June 30, 2011  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income (loss)

   $ 154,567      $ (57,071

Adjustments to reconcile net income (loss) provided by operating activities:

    

Depreciation

     43,155        43,319   

Gain on sale of available-for-sale securities

     (114,134     (47,694

Gain on sale of loans

     (26,789     0   

Origination of loans held for sale

     (1,827,000     0   

Proceeds from sale of loans held for sale

     1,853,789        0   

Amortization/accretion of premium/discount

     376,441        154,164   

Increase in value of bank-owned life insurance

     (84,747     (89,144

Stock based compensation (ESOP)

     52,504        0   

Provision for loan losses

     178,254        60,516   

Changes in operating assets and liabilities:

    

Accrued interest receivable and other assets

     (1,683,919     1,276,640   

Other liabilities

     (34,684     155,710   
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (1,112,563     1,496,440   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Net decrease in loans

     1,306,937        941,064   

Redemption of ground rents

     4,250        0   

Acquisition of property and equipment

     (81,621     (53,737

Purchase of:

    

Investment securities available-for-sale

     (7,101,050     (19,227,443

Proceeds from:

    

Sales and maturities of investment securities available-for-sale

     10,187,699        3,528,310   

Principal paydowns on investment securities available-for-sale

     2,314,836        2,058,680   

Principal paydowns on investment securities held-to-maturity

     392,658        0   

Sale of Federal Home Loan Bank stock

     23,900        44,200   

Sale of other real estate owned

     334,103        0   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     7,381,712        (12,708,926
  

 

 

   

 

 

 

 

5


Table of Contents

Fraternity Community Bancorp, Inc.

Consolidated Statements of Cash Flows (Continued)

 

     Six Months Ended
June 30, 2012
    Six Months Ended
June 30, 2011
 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net decrease in deposits

     (1,466,341     (5,216,884

Repayments of Federal Home Loan Bank borrowings

     0        (83,333

Acquisition of ESOP Shares

     0        (1,269,600

Repurchase of common shares

     (16,481     0   

Proceeds from issuance of Common Stock, net

     0        14,965,415   

Increase in advances by borrowers for taxes and insurance

     835,084        1,090,535   
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (647,738     9,486,133   
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     5,621,411        (1,726,353

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

     14,923,142        25,881,831   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 20,544,553      $ 24,155,478   
  

 

 

   

 

 

 

Cash paid for interest

   $ 1,246,820      $ 1,735,170   
  

 

 

   

 

 

 

Cash paid for taxes

   $ 0      $ 0   
  

 

 

   

 

 

 

Transfer of loans to other real estate owned

   $ 2,027,779      $ 1,167,936   
  

 

 

   

 

 

 

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.

 

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Table of Contents

FRATERNITY COMMUNITY BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FRATERNITY COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTH PERIODS

ENDED JUNE 30, 2012 AND 2011

(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 and Loan Association (the “Bank”), a federally chartered savings association. 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. All material intercompany accounts and transactions have been eliminated in consolidation.

In accordance with the Office of the Comptroller of the Currency (the “OCC”) 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 six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012, 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, 2011. Certain amounts from prior period financial statements have been reclassified to conform to the current period’s presentation.

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.

 

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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 six month periods ended June 30, 2012 or 2011.

 

     Three Months Ended
June 30, 2012
     Three Months Ended
June 30, 2011
     Six Months Ended
June 30, 2012
     Six Months Ended
June 30, 2011
 

Net Income (Loss)

   $ 102,411       $ 23,556       $ 154,567       $ (57,071
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding

     1,473,547         1,460,040         1,472,524         1,460,040   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic and diluted earnings (loss) per share

   $ .07       $ .02       $ .10       $ (.04
  

 

 

    

 

 

    

 

 

    

 

 

 

2. INVESTMENT SECURITIES

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

 

     June 30, 2012 (unaudited)  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

Available-for-sale:

           

Bank Notes and Corporate Bonds

   $ 2,497,105       $ 25,055       $ 4,395       $ 2,517,765   

Obligations of U.S. Government Agencies

     3,999,000         11,420         920         4,009,500   

Mortgage-backed securities:

           

FNMA

     4,805,506         101,953         136         4,907,323   

GNMA

     10,082,381         85,147         5,921         10,161,607   

FHLMC

     1,315,009         7,079         0         1,322,088   

FNMA CMO

     2,517,078         1,201         5,128         2,513,151   

Private Label CMO

     335,727         0         17,762         317,965   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 25,551,806       $ 231,855       $ 34,262       $ 25,749,399   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

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Table of Contents
     June 30, 2012 (unaudited)  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

Held-to-maturity:

           

Municipal Bonds

   $ 547,671       $ 27,059       $ 0       $ 574,730   

SBA Pools

     1,963,906         19,243         5,661         1,977,488   

Mortgage-backed securities:

           

FNMA

     4,893,596         239,569         0         5,133,165   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 7,405,173       $ 285,871       $ 5,661       $ 7,685,383   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2011  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

Available-for-sale:

           

Bank Notes and Corporate Bonds

   $ 2,495,526       $ 7,844       $ 16,935       $ 2,486,435   

Obligations of U.S. Government Agencies

     6,696,656         126,082         0         6,822,738   

Mortgage-backed securities:

           

FNMA

     9,370,220         119,118         172         9,489,166   

GNMA

     7,019,669         31,425         41,879         7,009,215   

FHLMC

     2,334,789         7,438         17,889         2,324,338   

FHLMC

     2,636,100         67,091         0         2,703,191   

Private Label CMO

     623,176         5,259         44,162         584,273   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 31,176,136       $ 364,257       $ 121,037       $ 31,419,356   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2011  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

Held-to-maturity:

           

Municipal Bonds

   $ 551,202       $ 17,283       $ 0       $ 568,485   

SBA Pools

     2,345,921         12,401         0         2,358,322   

Mortgage-backed securities:

           

FNMA

     4,940,170         103,426         0         5,043,596   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 7,837,293       $ 133,110       $ 0       $ 7,970,403   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The amortized cost and fair value of debt securities at June 30, 2012 and December 31, 2011 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.

 

     June 30, 2012
Available-for-Sale (unaudited)
 
     Amortized
Cost
     Fair
Value
 

Due in one year through five years

   $ 2,502,029       $ 2,522,621   

Due in five years through ten years

     1,414,472         1,436,303   

Due after ten years

     21,635,305         21,790,475   
  

 

 

    

 

 

 
   $ 25,551,806       $ 25,749,399   
  

 

 

    

 

 

 

 

     June 30, 2012
Held-to-Maturity (unaudited)
 
     Amortized
Cost
     Fair
Value
 

Due in one year through five years

   $ 916,703       $ 911,041   

Due in five years through ten years

     4,893,596         5,133,165   

Due after ten years

     1,594,874         1,641,177   
  

 

 

    

 

 

 
   $ 7,405,173       $ 7,685,383   
  

 

 

    

 

 

 

 

     December 31, 2011
Available-for-Sale
 
     Amortized
Cost
     Fair
Value
 

Due in one year through five years

   $ 2,502,994       $ 2,493,771   

Due in five years through ten years

     6,513,583         6,654,782   

Due after ten years

     22,159,559         22,270,803   
  

 

 

    

 

 

 
   $ 31,176,136       $ 31,419,356   
  

 

 

    

 

 

 

 

     December 31, 2011
Held-to-Maturity
 
     Amortized
Cost
     Fair
Value
 

Due in one year through five years

   $ 1,243,103       $ 1,254,845   

Due in five years through ten years

     4,940,170         5,043,596   

Due after ten years

     1,654,020         1,671,962   
  

 

 

    

 

 

 
   $ 7,837,293       $ 7,970,403   
  

 

 

    

 

 

 

 

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Table of Contents

The Bank recognized gross gains on sales of available-for-sale securities of $124,019 and $47,694 for the six months ended June 30, 2012 and 2011, respectively. The Bank recognized gross losses on sales of available-for-sale securities of $9,885 and $0 for the six months ended June 30, 2012 and 2011, respectively.

Securities with unrealized losses, segregated by length of impairment, as of June 30, 2012 and December 31, 2011 were as follows:

 

     Less than 12 Months      More than 12 Months      Total  

June 30, 2012

(unaudited)

   Estimated
Fair Value
     Unrealized
Losses
     Estimated
Fair Value
     Unrealized
Losses
     Estimated
Fair Value
     Unrealized
Losses
 

Available-for-sale:

                 

Bank Notes and Corporate Bonds

   $ 1,495,605       $ 4,395       $ 0       $ 0       $ 1,495,605       $ 4,395   

Obligation of U.S. Government Agencies

     1,998,080         920         0         0         1,998,080         920   

Mortgage-backed securities:

                 

FNMA

     33,843         35         6,270         101         40,113         136   

GNMA

     1,457,944         5,921         0         0         1,457,944         5,921   

FHLMC

     0         0         0         0         0         0   

Private Label CMO

     1,492,849         5,128         317,965         17,762         1,810,814         22,890   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 6,478,321       $ 16,399       $ 324,235       $ 17,863       $ 6,802,556       $ 34,262   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Held-to-Maturity:

   $ 1,977,488       $ 5,661       $ 0       $ 0       $ 1,977,488       $ 5,661   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Less than 12 Months      More than 12 Months      Total  

December 31, 2011

   Estimated
Fair Value
     Unrealized
Losses
     Estimated
Fair Value
     Unrealized
Losses
     Estimated
Fair Value
     Unrealized
Losses
 

Available-for-sale:

                 

Bank Notes and Corporate Bonds

   $ 1,483,065       $ 16,935       $ 0       $ 0       $ 1,483,065       $ 16,935   

Mortgage-backed securities:

                 

FNMA

     7,336         132         1,444         40         8,780         172   

GNMA

     4,022,149         41,879         0         0         4,022,149         41,879   

FHLMC

     1,598,353         17,889         0         0         1,598,353         17,889   

Private Label CMO

     0         0         293,611         44,162         293,611         44,162   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 7,110,903       $ 76,835       $ 295,055       $ 44,202       $ 7,405,958       $ 121,037   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Held-to-Maturity:

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

11


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 Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in cost.

Furthermore, as of June 30, 2012, 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 Bank 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 June 30, 2012, management believes the impairments detailed in the table above are temporary and no impairment loss has been realized in the Bank’s consolidated income statement.

3. LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans and allowance for loan losses consisted of the following:

 

     June 30, 2012
(unaudited)
    December 31,
2011
 

Real Estate Loans:

    

Owner Occupied One-to-four family

   $ 70,438,333      $ 75,958,333   

Non Owner Occupied One-to-four family

     13,108,316        11,932,813   

Home Equity Lines of Credit

     9,775,591        9,501,693   

Commercial Real Estate

     12,745,220        10,040,391   

Residential Construction

     3,296,760        3,088,974   

Land

     1,927,105        2,584,476   
  

 

 

   

 

 

 

Total Real Estate Loans

     111,291,325        113,106,680   

Consumer Loans

     46,859        50,486   

Commercial Loans

     17,506        17,818   
  

 

 

   

 

 

 

Total Loans

     111,355,690        113,174,984   

Less:

    

Allowance for loan losses

     (1,250,000     (1,250,000
  

 

 

   

 

 

 

Total loans and allowance for loan losses

   $ 110,105,690      $ 111,924,984   
  

 

 

   

 

 

 

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:

Owner Occupied 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

 

12


Table of Contents

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.

Non Owner Occupied One -To- Four Family Real Estate Loans. Loans secured by investment properties represent a unique credit risk to us and, as a result, we adhere to special underwriting guidelines. Of primary concern in non-owner occupied real estate lending is the consistency of rental income of the property. Payments on loans secured by rental properties often depend on the maintenance of the property and the payment of rent by its tenants. Payments on loans secured by rental properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. We generally require collateral on these loans to be a first mortgage along with an assignment of rents and leases, although we might accept a second mortgage where the combined loan-to-value ratio is low.

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.

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.

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.

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.

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

 

13


Table of Contents

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.

The balance of impaired loans was $2,848,522 and $4,101,788 as of June 30, 2012 and December 31, 2011, 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 $2,586,529 and $3,838,051 at June 30, 2012 and December 31, 2011, respectively. Accruing loans past due more than 90 days totaled $0 at June 30, 2012 and December 31, 2011.

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, owner occupied one-to-four family residential, non owner occupied one-to-four family real estate, 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. 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 Bank’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 their 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 June 30, 2012 there are five loans totaling $1,278,880 classified as troubled debt restructurings.

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 June 30, 2012 and December 31, 2011:

 

14


Table of Contents

Credit Risk Analysis of Loans Receivable

As of June 30, 2012 (unaudited)

 

    Owner
Occupied

1-4 Family
Residential
    Non Owner
Occupied

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

Pass

  $ 66,274,449      $ 12,108,772      $ 9,416,512      $ 11,547,941      $ 3,296,760      $ 1,815,105      $ 46,859      $ 17,506      $ 104,523,904   

Special Mention

    2,487,175        525,250        35,553        1,197,279        0        0        0        0        4,245,257   

Substandard

    1,676,709        474,294        323,526        0        0        112,000        0        0        2,586,529   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 70,438,333      $ 13,108,316      $ 9,775,591      $ 12,745,220      $ 3,296,760      $ 1,927,105      $ 46,859      $ 17,506      $ 111,355,690   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Credit risk profile based on

payment activity:

                 

Performing

  $ 68,761,624      $ 12,634,022      $ 9,452,065      $ 12,745,220      $ 3,296,760      $ 1,815,105      $ 46,859      $ 17,506      $ 108,769,161   

Nonperforming

    1,676,709        474,294        323,526        0        0        112,000        0        0        2,586,529   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 70,438,333      $ 13,108,316      $ 9,775,591      $ 12,745,220      $ 3,296,760      $ 1,927,105      $ 46,859      $ 17,506      $ 111,355,690   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

15


Table of Contents

Credit Risk Analysis of Loans Receivable

As of December 31, 2011

 

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

Pass

  $ 70,944,566      $ 10,929,017      $ 9,045,770      $ 8,835,392      $ 1,523,776      $ 2,275,454      $ 50,486      $ 17,818      $ 103,622,279   

Special Mention

    3,618,817        924,975        362,614        1,204,999        0        0        0        0        6,111,405   

Substandard

    1,394,950        78,821        93,309        0        1,565,198        309,022        0        0        3,441,300   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 75,958,333      $ 11,932,813      $ 9,501,693      $ 10,040,391      $ 3,088,974      $ 2,584,476      $ 50,486      $ 17,818      $ 113,174,984   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Credit risk profile based on

payment activity:

                 

Performing

  $ 74,563,383      $ 11,457,241      $ 9,408,384      $ 10,040,391      $ 1,523,776      $ 2,275,454      $ 50,486      $ 17,818      $ 109,336,933   

Nonperforming

    1,394,950        475,572        93,309        0        1,565,198        309,022        0        0        3,838,051   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 75,958,333      $ 11,932,813      $ 9,501,693      $ 10,040,391      $ 3,088,974      $ 2,584,476      $ 50,486      $ 17,818      $ 113,174,984   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Aged Analysis of Past Due Loans Receivable

As of June 30, 2012 (unaudited)

 

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

30-59 Days Past Due

  $ 2,210,919      $ 307,338      $ 65,887      $ 0      $ 0      $ 0      $ 0      $ 0      $ 2,584,144   

60-89 Days Past Due

    207,038        0        465,627        0        0        0        0        0        672,665   

Greater Than 90 Days

Past Due

    1,583,712        166,956        92,663        0        0        112,000        0        0        1,955,331   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Past Due

    4,001,669        474,294        624,177        0        0        112,000        0        0        5,212,140   

Current

    66,436,664        12,634,022        9,151,414        12,745,220        3,296,760        1,815,105        46,859        17,506        106,143,550   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Loans Receivable

  $ 70,438,333      $ 13,108,316      $ 9,775,591      $ 12,745,220      $ 3,296,760      $ 1,927,105      $ 46,859      $ 17,506      $ 111,355,690   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Recorded Investment

> 90 Days and Accruing

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

17


Table of Contents

Aged Analysis of Past Due Loans Receivable

As of December 31, 2011

 

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

30-59 Days Past Due

   $ 40,965       $ 0       $ 0       $ 0       $ 0       $ 0       $ 0       $ 0       $ 40,965   

60-89 Days Past Due

     3,273         0         29,557         0         0         0         0         0         32,830   

Greater Than 90 Days Past Due

     1,299,668         78,821         69,528         0         1,565,198         309,022         0         0         3,322,237   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Past Due

     1,343,906         78,821         99,085         0         1,565,198         309,022         0         0         3,396,032   

Current

     74,614,427         11,853,992         9,402,608         10,040,391         1,523,776         2,275,454         50,486         17,818         109,778,952   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans Receivable

   $ 75,958,333       $ 11,932,813       $ 9,501,693       $ 10,040,391       $ 3,088,974       $ 2,584,476       $ 50,486       $ 17,818       $ 113,174,984   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Recorded Investment > 90 Days and Accruing

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

18


Table of Contents

The following table details activity in the allowance for loan and lease losses by portfolio segment for the periods indicated:

 

    Six Months Ended
June 30, 2012
(unaudited)
    Three Months Ended
June 30, 2012
(unaudited)
 

Allowance at beginning of period

  $ 1,250,000      $ 1,250,000   

Charge-offs:

   

Real estate loans:

   

Owner Occupied one-to-four Family

    133,065        49,350   

Non Owner Occupied one-to-four Family

    0        0   

Lines of Credit

    0        0   

Commercial

    0        0   

Residential Construction

    44,940        44,940   

Land

    20,585        20,585   

Commercial Loans:

   

Consumer

    0        0   
 

 

 

   

 

 

 

Total Charge-offs

  $ 198,590      $ 114,875   

Recoveries

    20,336        9,640   
 

 

 

   

 

 

 

Net Charge-offs

    178,254        105,235   

Provision for Loan Losses

    178,254        105,235   
 

 

 

   

 

 

 

Allowance at end of period

  $ 1,250,000      $ 1,250,000   
 

 

 

   

 

 

 

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

    1.12     1.12
 

 

 

   

 

 

 

Net Charge-offs to average loans outstanding during period

    0.16     0.09
 

 

 

   

 

 

 

 

19


Table of Contents

The following tables represent the allocation of the allowance for loan and lease losses and the related loans by portfolio segment at June 30, 2012 and December 31, 2011:

Allowance for Loan Losses and Recorded Investment in Loans Receivable

As of June 30, 2012

 

     Owner
Occupied

1-4 Family
Residential
    Non Owner
Occupied

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

Allowance for loan losses:

                         

Beginning Balance

   $ 495,271      $ 77,051       $ 145,830      $ 190,767       $ 28,952      $ 120,372      $ 2,858      $ 1,008      $ 0       $ 187,891      $ 1,250,000   

Charge-offs

     (133,065     0         0        0         (44,940     (20,585     0        0        0         0        (198,590

Recoveries

     18,338        0         1,998        0         0        0        0        0        0         0        20,336   

Provision

     222,903        86,803         (76,938     411         48,956        (62,577     (1,855     (756     42,728         (81,421     178,254   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Ending Balance

   $ 603,447      $ 163,854       $ 70,890      $ 191,178       $ 32,968      $ 37,210      $ 1,003      $ 252      $ 42,728       $ 106,470      $ 1,250,000   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Ending Balance Individually evaluated for impairment

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

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Ending Balance Collectively evaluated for impairment

   $ 603,447      $ 163,854       $ 70,890      $ 191,178       $ 32,968      $ 37,210      $ 1,003      $ 252      $ 42,728       $ 106,470      $ 1,250,000   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Loans Receivable:

                         

Ending Balance

   $ 70,438,333      $ 13,108,316       $ 9,775,591      $ 12,745,220       $ 3,296,760      $ 1,927,105      $ 46,859      $ 17,506         $ 0      $ 111,355,690   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

      

 

 

   

 

 

 

Ending Balance Individually evaluated for impairment

   $ 2,412,996      $ 0       $ 323,526      $ 0       $ 0      $ 112,000      $ 0      $ 0         $ 0      $ 2,848,522   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

      

 

 

   

 

 

 

Ending Balance Collectively evaluated for impairment

   $ 68,025,337      $ 13,108,316       $ 9,452,065      $ 12,745,220       $ 3,296,760      $ 1,815,105      $ 46,859      $ 17,506         $ 0      $ 108,507,168   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

      

 

 

   

 

 

 

 

20


Table of Contents

Allowance for Loan Losses and Recorded Investment in Loans Receivable

As of December 31, 2011

 

     Owner
Occupied

1-4 Family
Residential
    Non Owner
Occupied

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

Allowance for loan losses:

                           

Beginning Balance

   $ 536,549      $ 0       $ 407,352      $ 75,473       $ 80,789      $ 173,024      $ 3,259      $ 0       $ 0       $ 23,554       $ 1,300,000   

Charge-offs

     (61,929     0         0        0         0        (75,718     (440     0         0         0         (138,087

Recoveries

     850        0         21,685        0         0        0        0        0         0         0         22,535   

Provision

     19,801        77,051         (283,207     115,294         (51,837     23,066        39        1,008         0         164,337         65,552   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance

   $ 495,271      $ 77,051       $ 145,830      $ 190,767       $ 28,952      $ 120,372      $ 2,858      $ 1,008       $ 0       $ 187,891       $ 1,250,000   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance Individually evaluated for impairment

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

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance Collectively evaluated for impairment

   $ 495,271      $ 77,051       $ 145,830      $ 190,767       $ 28,952      $ 120,372      $ 2,858      $ 1,008       $ 0       $ 187,891       $ 1,250,000   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Loans Receivable:

                           

Ending Balance

   $ 75,958,333      $ 11,932,813       $ 9,501,693      $ 10,040,391       $ 3,088,974      $ 2,584,476      $ 50,486      $ 17,818          $ 0       $ 113,174,984   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

       

 

 

    

 

 

 

Ending Balance Individually evaluated for impairment

   $ 1,658,687      $ 475,572       $ 93,309      $ 0       $ 1,565,198      $ 309,022      $ 0      $ 0          $ 0       $ 4,101,788   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

       

 

 

    

 

 

 

Ending Balance Collectively evaluated for impairment

   $ 74,299,646      $ 11,457,241       $ 9,408,384      $ 10,040,391       $ 1,523,776      $ 3,799,230      $ 50,486      $ 17,818          $ 0       $ 109,073,196   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

       

 

 

    

 

 

 

 

21


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 June 30, 2012 and December 31, 2011 is as follows:

 

     June 30, 2012     December 31,  
     (unaudited)     2011  

Non-Accrual Loans

   $ 2,586,529      $ 3,838,051   

Other Real Estate Owned, net

     1,693,676        0   

Loans 90 days or more past due and still accruing

     0        0   
  

 

 

   

 

 

 

Total Nonperforming Assets

   $ 4,280,205      $ 3,838,051   
  

 

 

   

 

 

 

Troubled Debt Restructurings

   $ 1,278,880      $ 1,562,084   
  

 

 

   

 

 

 

Troubled Debt Restructurings included In Non-Accrual Loans

   $ (1,016,887   $ (1,298,347
  

 

 

   

 

 

 

Troubled Debt Restructurings and Total Nonperforming Assets

   $ 4,542,198      $ 4,101,788   
  

 

 

   

 

 

 

 

22


Table of Contents

The following table is a summary of the recorded investment in non-accrual loans by loan class as of the dates indicated:

 

     June 30, 2012      December 31,  
     (unaudited)      2011  

Real estate Loans:

     

Owner-occupied one-to-four family

   $ 1,676,709       $ 1,394,950   

Non owner-occupied one-to-four family

     474,294         475,572   

Lines of credit

     323,526         93,309   

Commercial

     0         0   

Residential Construction

     0         1,565,198   

Land

     112,000         309,022   
  

 

 

    

 

 

 

Total Real Estate Loans

   $ 2,586,529       $ 3,838,051   
  

 

 

    

 

 

 

Commercial and consumer loans :

     

Commercial

   $ 0       $ 0   

Consumer

     0         0   
  

 

 

    

 

 

 

Total commercial and consumer

   $ 0       $ 0   
  

 

 

    

 

 

 

Total Loans

   $ 2,586,529       $ 3,838,051   
  

 

 

    

 

 

 

At June 30, 2012 and December 31, 2011, there were no loans 90 days past due or more and still accruing interest. At June 30, 2012, the Company had twenty three loans on non-accrual status with foregone interest in the amount of $129,045. At December 31, 2011, the Company had eighteen loans on non-accrual status with foregone interest of $249,839.

 

23


Table of Contents

Impaired Loans

As of and for the Six Months Ended June 30, 2012 (unaudited)

 

    Owner
Occupied

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

Loans With A Valuation Allowance:

                 

Unpaid Principal Balance

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

Related Allowance for Loan Losses

    0        0        0        0        0        0        0        0        0   

Average Recorded Investment

    0        0        0        0        0        0        0        0        0   

Interest Income recognized

    0        0        0        0        0        0        0        0        0   

Loans Without a Valuation Allowance:

                 

Unpaid Principal Balance

  $ 1,938,702      $ 474,294      $ 323,526      $ 0      $ 0      $ 112,000      $ 0      $ 0      $ 2,848,522   

Average Recorded Investment

    1,686,128        474,908        256,322        0        1,043,466        242,848        0        0        3,703,672   

Interest Income recognized

    12,796        8,128        7,029        0        0        0        0        0        27,953   

Totals:

                 

Unpaid Principal Balance

  $ 1,938,702      $ 474,294      $ 323,526      $ 0      $ 0      $ 112,000      $ 0      $ 0      $ 2,848,522   

Average Recorded Investment

    1,686,128        474,908        256,322        0        1,043,466        242,848        0        0        3,703,672   

Interest Income recognized

    12,796        8,128        7,029        0        0        0        0        0        27,953   

 

24


Table of Contents

Impaired Loans

As of December 31, 2011

 

    Owner
Occupied

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

Loans With A Valuation Allowance:

                 

Unpaid Principal Balance

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

Related Allowance for Loan Losses

    0        0        0        0        0        0        0        0        0   

Average Recorded Investment

    0        0        0        0        0        0        0        0        0   

Interest Income recognized

    0        0        0        0        0        0        0        0        0   

Loans Without a Valuation Allowance:

                 

Unpaid Principal Balance

  $ 1,658,688      $ 475,572      $ 93,309      $ 0      $ 1,565,198      $ 309,022      $ 0      $ 0      $ 4,101,789   

Average Recorded Investment

    1,634,963        138,598        94,114        0        1,565,198        310,397        110        0        3,743,380   

Interest Income recognized

    19,081        28,520        554        0        0        0        0        0        48,155   

Totals:

                 

Unpaid Principal Balance

  $ 1,658,688      $ 475,572      $ 93,309      $ 0      $ 1,565,198      $ 309,022      $ 0      $ 0      $ 4,101,789   

Average Recorded Investment

    1,634,963        138,598        94,114        0        1,565,198        310,397        110        0        3,743,380   

Interest Income recognized

    19,081        28,520        554        0        0        0        0        0        48,155   

 

25


Table of Contents

Loans may be periodically modified in a troubled debt restructuring (TDR), where the Company will make concessions to a borrower having financial difficulty to help the borrower remain current on the loan and/or to avoid foreclosure. When we modify loans in a TDR, we evaluate any possible impairment similar to other impaired loans. If we determine that the value of the modified loan is less than the recorded investment in the loan, impairment is recognized through a charge-off through the allowance. At June 30, 2012, we had five loans that were restructured totaling $1,278,880. Three loans, totaling $936,016 were secured by owner-occupied one-to-four family residential properties, one loan totaling $112,000 is secured by a residential lot, and one loan totaling $230,864 is a home equity line of credit. At December 31, 2011, we had five loans totaling $1,562,084 that were restructured. Four loans, totaling $1,447,084 were secured by owner-occupied one-to-four family residential properties, and one loan totaling $115,000 was secured by a residential lot.

The following table is a summary of impaired loans that were modified due to a TDR by class for the three and six months ending June 30, 2012. The pre-modification and post-modification outstanding recorded investments disclosed in the table below represent the loan carrying amounts immediately prior to the modification and the carrying amounts immediately after the modification:

Modifications for the Six Months Ending June 30, 2012

 

     Number of
Contracts
     Pre-Modification
Outstanding
Recorded
Investments
     Post-Modification
Outstanding
Recorded
Investments
 

Troubled Debt Restructuring:

        

Lines of Credit

     1       $ 230,864       $ 230,864   
  

 

 

    

 

 

    

 

 

 

Modifications for the Three Months Ending June 30, 2012

 

     Number of
Contracts
     Pre-Modification
Outstanding
Recorded
Investments
     Post-Modification
Outstanding
Recorded
Investments
 

Troubled Debt Restructuring:

        

Lines of Credit

     1       $ 230,864       $ 230,864   
  

 

 

    

 

 

    

 

 

 

The following table presents loans by loan class modified as TDR’s within the previous twelve months from, and for which there was a payment default (90 days or more past due) during the three and six months ended June 30, 2012:

 

     Three Months Ended 6/30/2012      Six Months Ended 6/30/2012  
     Number of
Contracts
     Recorded
Investment
     Number of
Contracts
     Recorded
Investment
 
     0       $ 0         0       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

26


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 six months ended June 30, 2012 and 2011 was $52,504 and $0, respectively.

A summary of ESOP shares at June 30, 2012 is as follows:

 

Shares released or committed for release

     15,870   
  

 

 

 

Unearned shares

     111,090   
  

 

 

 

Total ESOP shares

     126,960   
  

 

 

 

Fair Value of unearned shares

   $ 1,227,545   
  

 

 

 

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 June 30, 2012 and December 31, 2011 (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 June 30, 2012 (unaudited):

          

Total Risk-Based Capital (to risk-weighted assets)

   $ 25,034         25.51   $ 7,851         8.0

Tier I Capital (to risk-weighted assets)

   $ 23,807         24.26   $ 3,925         4.0

Tier I Capital (to adjusted total assets)

   $ 23,807         13.63   $ 5,240         3.0

 

     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 December 31, 2011:

          

Total Risk-Based Capital (to risk-weighted assets)

   $ 24,827         26.46   $ 7,506         8.0

Tier I Capital (to risk-weighted assets)

   $ 23,654         25.21   $ 3,753         4.0

Tier I Capital (to adjusted total assets)

   $ 23,654         13.50   $ 5,256         3.0

On May 24, 2012, the Company authorized the repurchase of up to 158,700 shares of its common stock. Repurchases, if any, by the Company pursuant to this authorization are expected to enable the Company to repurchase its shares at an attractive price, and to provide a source of liquidity for the Company’s shares. As of June 30, 2012, there have been 1,500 shares repurchased by the Company, for an aggregate expenditure totaling $16,500, at an average price of $10.99.

6. FAIR VALUE MEASUREMENTS

Effective January 1, 2008, the Company 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:

 

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Table of Contents

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.

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

 

    Fair Value at
June 30,

2012
(unaudited)
    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 and Corporate Bonds

  $ 2,517,765      $ 0      $ 2,517,765      $ 0   

Obligations of U.S. Government agencies

    4,009,500        0        4,009,500        0   

FNMA

    4,907,323        0        4,907,323        0   

GNMA

    10,161,607        0        10,161,607        0   

FHLMC

    1,322,088        0        1,322,088        0   

FNMA CMO

    2,513,151        0        2,513,151        0   

Private label CMO

    317,965        0        317,965        0   
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 25,749,399      $ 0      $ 25,749,399      $ 0   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets measured at fair value

  $ 25,749,399      $ 0      $ 25,749,399      $ 0   
 

 

 

   

 

 

   

 

 

   

 

 

 
    Fair Value at
December 31,

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 and Corporate Bonds

  $ 2,486,435      $ 0      $ 2,486,435      $ 0   

Obligations of U.S. Government agencies

    6,822,738        0        6,822,738        0   

FNMA

    9,489,166        0        9,489,166        0   

GNMA

    7,009,215        0        7,009,215        0   

FHLMC

    2,324,338        0        2,324,338        0   

FNMA CMO

    2,703,191        0        2,703,191        0   

Private label CMO

    584,273        0        584,273        0   
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 31,419,356      $ 0      $ 31,419,356      $ 0   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets measured at fair value

  $ 31,419,356      $ 0      $ 31,419,356      $ 0   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Securities classified as available-for-sale are reported at fair value utilizing Level 2 Inputs. For these securities, the Bank obtains fair values from an external pricing service or bid quotations received from securities dealers. 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.

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 June 30, 2012 and December 31, 2011, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the assets:

 

     Fair Value at
June 30, 2012
(unaudited)
     Quoted
Prices
(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Impaired Loans:

   $ 0       $ 0       $ 0       $ 0   

Construction

     1,938,702         0         1,938,702         0   

Owner occupied one-to-four Family

     474,294         0         474,294         0   

Non owner occupied one-to-four Family

     323,526         0         323,526         0   

Home Equity Lines of Credit

     112,000         0         112,000         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Land

   $ 2,848,522       $ 0       $ 2,848,522       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other real estate owned:

   $ 1,693,676       $ 0       $ 1,693,676       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Fair Value at
December 31, 2011
     Quoted
Prices
(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Impaired Loans:

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

Construction

     1,658,687         0         1,658,687         0   

Owner occupied one-to-four Family

     475,572         0         475,572         0   

Non owner occupied one-to-four Family

     93,309         0         93,309         0   

Home Equity Lines of Credit

     309,022         0         309,022         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Land

   $ 4,101,788       $ 0       $ 4,101,788       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other real estate owned:

   $ 0       $ 0       $ 0       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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.

Other Real Estate Owned

We record our other real estate owned at the lower of cost or estimated fair value less estimated selling costs. Estimated fair value is generally based upon an independent appraisal of the collateral. We consider these collateral values to be estimated using Level 2 inputs.

7. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value estimates, methods, and assumptions are set forth below for the Bank’s financial instruments as of June 30, 2012 and December 31, 2011.

 

     June 30, 2012 (unaudited)  
     Carrying
Value
     Estimated Fair Value  
        Level One      Level Two      Level Three      Total  

Assets:

              

Cash and cash equivalents

   $ 20,544,553       $ 20,544,553       $ 0       $ 0       $ 20,544,553   

Securities—available-for-sale

     25,749,399         0         25,749,399         0         25,749,399   

Securities—held-to-maturity

     7,405,173         0         7,685,383         0         7,685,383   

Loans, gross

     111,355,690         0         2,848,522         113,582,923         116,431,445   

Federal Home Loan Bank stock

     1,282,600         0         1,282,600         0         1,282,600   

Investment in bank-owned life insurance

     4,438,999         4,438,999         0         0         4,438,999   

Liabilities:

              

Deposit accounts and advances by borrowers

     121,400,251         0         122,276,074         0         122,276,074   

Advances from the FHLB

     22,500,000         0         23,335,687         0         23,335,687   

 

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Table of Contents
     December 31, 2011  
     Carrying
Value
     Estimated Fair Value  
        Level One      Level Two      Level Three      Total  

Assets:

              

Cash and cash equivalents

   $ 14,923,142       $ 14,923,142       $ 0       $ 0       $ 14,923,142   

Securities—available-for-sale

     31,419,356         0         31,419,356         0         31,419,356   

Securities—held-to-maturity

     7,837,293         0         7,970,403         0         7,970,403   

Loans, gross

     113,174,984         0         4,101,788         112,732,563         116,834,351   

Federal Home Loan Bank stock

     1,306,500         0         1,306,500         0         1,306,500   

Investment in bank-owned life insurance

     4,354,252         4,354,252         0         0         4,354,252   

Liabilities:

              

Deposit accounts and advances by borrowers

     122,031,508         0         122,998,429         0         122,998,429   

Advances from the FHLB

     22,500,000         0         23,223,703         0         23,223,703   

 

     June 30, 2012      December 31,  
     (unaudited)      2011  

Off-Balance Sheet Instruments:

     

Commitments to extend credit

   $ 2,335,700       $ 0   

Unused lines of credit

   $ 11,332,465       $ 12,006,256   

(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.

 

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Table of Contents

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

(f) 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.

(g) Advances from the FHLB—Fair values are estimated by discounting carrying values using a cash flow approach based on market rates as of June 30, 2012 and December 31, 2011.

(h) 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.

(i) 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.

8. RECENT ACCOUNTING PRONOUNCEMENTS

All pending but not yet effective accounting standards updates were evaluated and only those listed below could have a material impact on the Company’s financial condition or results of operations.

ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.” ASU 2011-05 amends Topic 220, “Comprehensive Income,” to require that all non-owner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, ASU 2011-05 requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented. The option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. ASU 2011-05 became effective for the Company on January1, 2012; however, certain provisions related to the presentation of reclassification adjustments have been deferred by ASU 2011-12 “Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05,” as further discussed below. In connection with the application of ASU 2011-05, the Company’s financial statements now include separate statements of comprehensive income.

ASU 2011-12 “Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in

 

33


Table of Contents

Accounting Standards Update No. 2011-05.” ASU 2011-12 defers changes in ASU 2011-05 that relate to the presentation of reclassification adjustments to allow the FASB time to redeliberate whether to require presentation of such adjustments on the face of the financial statements to show the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income. ASU 2011-12 allows entities to continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU No. 2011-05. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12. ASU 2011-12 became effective for the Company on January 1, 2012 and did not have a significant impact on the Company’s financial statements.

 

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Table of Contents

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