XNAS:SPBC SP 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, D.C. 20549

 

 

FORM 10-Q

 

 

 

x Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period 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 No. 001-34933

 

 

SP Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   27-3347359

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

5224 W. Plano Parkway,
Plano, Texas
  75093
(Address of Principal Executive Offices)   Zip Code

(972) 931-5311

(Registrant’s telephone number)

N/A

(Former name or former address, 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 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 filer, 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   ¨    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

Shares of the Registrant’s common stock, par value $0.01 per share, issued and outstanding as of August 3, 2012 were 1,694,050.

 

 

 


Table of Contents

SP Bancorp, Inc.

FORM 10-Q

Index

 

          Page  
     Part I. Financial Information       

Item 1.

   Financial Statements   
   Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011 (Unaudited)      2   
   Consolidated Statements of Income for the Three and Six Months Ended June 30, 2012 and 2011 (Unaudited)      3   
   Consolidated Statements of Comprehensive Income for the Six Months Ended June 30, 2012 and 2011 (Unaudited)      4   
   Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2012 and 2011 (Unaudited)      5   
   Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011 (Unaudited)      6   
   Notes to Consolidated Financial Statements (Unaudited)      7   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      26   

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk      43   

Item 4.

   Controls and Procedures      43   
   Part II. Other Information   

Item 1.

   Legal Proceedings      43   

Item 1A.

   Risk Factors      43   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      44   

Item 3.

   Defaults upon Senior Securities      44   

Item 4.

   Mine Safety Disclosures      44   

Item 5.

   Other Information      44   

Item 6.

   Exhibits      44   
   Signatures      45   

 

1


Table of Contents

SP Bancorp, Inc.

Consolidated Balance Sheets (Unaudited)

(Dollars in thousands, except per share amounts)

 

     June 30,     December 31,  

ASSETS

   2012     2011  

Cash and due from banks

   $ 3,208      $ 2,978   

Federal funds sold

     3,725        6,950   
  

 

 

   

 

 

 

Total cash and cash equivalents

     6,933        9,928   

Securities available for sale (amortized cost of $16,082 at June 30, 2012 and $24,774 at December 31, 2011)

     16,296        25,097   

Fixed annuity investment

     1,199        1,176   

Loans held for sale

     9,938        4,884   

Loans, net of allowance for losses of $2,186 at June 30, 2012 and $1,754 at December 31, 2011

     218,485        212,688   

Accrued interest receivable

     747        961   

Other real estate owned (“OREO”)

     1,756        1,824   

Premises and equipment, net

     4,300        4,346   

Federal Home Loan Bank (“FHLB”) stock and other restricted stock, at cost

     1,315        2,020   

Bank-owned life insurance (“BOLI”)

     7,307        6,193   

Deferred tax assets

     547        509   

Other assets

     1,906        3,333   
  

 

 

   

 

 

 

Total assets

   $ 270,729     $  272,959   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Deposits:

    

Noninterest-bearing

   $ 21,566     $ 8,898   

Interest-bearing

     204,831        203,036   
  

 

 

   

 

 

 

Total deposits

     226,397        211,934   

Borrowings

     9,045        25,978   

Accrued interest payable

     27        29   

Other liabilities

     2,334        1,891   
  

 

 

   

 

 

 

Total liabilities

     237,803        239,832   
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholders’ equity :

    

Preferred stock, $0.01 par value, 50,000,000 shares authorized; none issued or outstanding

     —          —     

Common stock, $0.01 par value; 100,000,000 shares authorized; 1,699,800 and 1,725,000 shares issued and outstanding, respectively

     17        17   

Additional paid-in capital

     15,032        15,278   

Unallocated Employee Stock Ownership Plan (“ESOP”) shares

     (1,353     (1,018

Retained earnings - substantially restricted

     19,089        18,636   

Accumulated other comprehensive income

     141        214   
  

 

 

   

 

 

 

Total stockholders’ equity

     32,926        33,127   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 270,729     $ 272,959   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

2


Table of Contents

SP Bancorp, Inc.

Consolidated Statements of Income (Unaudited)

(Dollars in thousands, except per share amounts)

 

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

Interest income:

           

Interest and fees on loans

   $ 2,817       $ 2,571       $ 5,589       $ 5,189   

Securities - taxable

     45         119         83         199   

Securities - nontaxable

     26         36         76         70   

Other interest - earning assets

     35         32         67         54   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     2,923         2,758         5,815         5,512   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense:

           

Deposit accounts

     289         365         574         704   

Borrowings

     83         113         170         225   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     372         478         744         929   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     2,551         2,280         5,071         4,583   

Provision for loan losses

     215         291         702         411   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan loss

     2,336         1,989         4,369         4,172   
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest income:

           

Service charges

     274         314         568         634   

Gain on sale of securities available for sale

     180         174         500         202   

Gain on sale of mortgage loans

     512         306         879         529   

Increase in cash surrender value of BOLI

     57         59         113         76   

Other

     101         32         166         137   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

     1,124         885         2,226         1,578   
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest expense:

           

Compensation and benefits

     1,512         1,317         2,960         2,603   

Occupancy costs

     241         257         496         526   

Equipment expense

     59         62         124         131   

Data processing expense

     136         123         270         238   

ATM expense

     60         97         156         188   

Professional and outside services

     341         291         678         523   

Stationery and supplies

     21         28         51         66   

Marketing

     56         44         110         88   

FDIC insurance assessments

     53         78         99         170   

Provision for losses on OREO

     244         —           244         —     

Operations from OREO

     35         29         66         131   

Other

     401         266         678         503   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest expense

     3,159         2,592         5,932         5,167   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income tax expense

     301         282         663         583   

Income tax expense

     66         64         149         148   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 235       $ 218       $ 514       $ 435   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic and diluted earnings per share

   $ 0.15       $ 0.13       $ 0.32       $ 0.27   
  

 

 

    

 

 

    

 

 

    

 

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

SP Bancorp, Inc.

Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in thousands)

 

     Six Months Ended
June 30,
 
     2012     2011  
     (Unaudited)  

Other comprehensive income, before tax:

    

Net change in unrealized gains on available for sale securities

   $ 391      $ 274   

Reclassification adjustment for gain on sale of securities available for sale

     (500     (202
  

 

 

   

 

 

 

Other comprehensive (loss) income before tax

     (109     72   

Income tax benefit (expense)

     36        (26
  

 

 

   

 

 

 

Other comprehensive (loss) income, net of tax

     (73     46   

Net income

     514        435   
  

 

 

   

 

 

 

Comprehensive income

   $ 441      $ 481   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

SP Bancorp, Inc.

Consolidated Statements of Stockholders’ Equity (Unaudited)

(Dollars in thousands)

 

     Common
Stock
     Additional
Paid-In
Capital
    Unallocated
ESOP
Shares
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Total  

Balance, December 31, 2010

   $ 17       $ 15,290      $ (817   $ 17,701      $ (87   $ 32,104   

Additional stock issuance costs

     —           (15     —          —          —          (15

ESOP shares purchased in open market

     —           —          (102     —          —          (102

ESOP shares allocated

     —           3        21        —          —          24   

Net income

     —           —          —          435        —          435   

Unrealized gain on securities available for sale, net of tax of $99

     —           —          —          —          175        175   

Reclassification adjustment for gain on securities available for sale included in net income, net of tax of ($73)

     —           —          —          —          (129     (129
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2011

   $ 17       $ 15,278      $ (898   $ 18,136      $ (41   $ 32,492   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2011

   $ 17       $ 15,278      $ (1,018   $ 18,636      $ 214      $ 33,127   

ESOP shares purchased in the open market

     —           —          (373     —          —          (373

ESOP shares allocated

     —           5        38        —          —          43   

Net income

     —           —          —          514        —          514   

Unrealized gain on securities available for sale, net of tax of $129

     —           —          —          —          262        262   

Reclassification adjustment for gain on securities available for sale included in net income, net of tax of ($165)

     —           —          —          —          (335     (335

Repurchase of common stock

     —           (251     —          (61     —          (312
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2012

   $ 17       $ 15,032      $ (1,353   $ 19,089      $ 141      $ 32,926   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

SP Bancorp, Inc.

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

 

     Six Months Ended June 30,  
     2012     2011  

Cash flows from operating activities:

    

Net income

   $ 514      $ 435   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     143        179   

Amortization of premiums on securities

     243        244   

ESOP expense

     43        24   

Provision for loan losses

     702        411   

Provision for losses on OREO

     244        —     

Gain on sale of securities available for sale

     (500     (202

Gain on sale of mortgage loans

     (879     (529

Proceeds from sale of mortgage loans

     31,516        22,697   

Loans originated for sale

     (35,691     (21,089

Increase in cash surrender value of BOLI

     (113     (76

Decrease (increase) in accrued interest receivable

     214        (46

Decrease (increase) in other assets and deferred tax assets

     1,424        (381

(Increase) in fixed annuity investment

     (23     (22

Increase in accrued interest payable and other liabilities

     441        34   
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (1,722     1,679   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchase of securities available for sale

     (7,332     (20,147

Maturities, calls and principal pay downs on securities available for sale

     1,015        3,842   

Proceeds from sale of securities available for sale

     15,266        16,027   

Redemptions (purchases) of FHLB stock

     705        (2

Originations, net of loan repayments

     (6,499     (6,934

Additions to other real estate owned

     (176     —     

Purchases of premises and equipment

     (97     (52

Purchase of BOLI

     (1,000     (6,000
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     1,882        (13,266
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase in deposit accounts

     14,463        26,769   

Repayment of FHLB advances, net

     (16,933     (4

ESOP shares purchased

     (373     (102

Conversion costs

     —          (15

Repurchase of common stock

     (312     —     
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (3,155     26,648   
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (2,995     15,061   

Cash and cash equivalents at beginning of period

     9,928        11,814   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 6,933      $ 26,875   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Cash transactions:

    

Income taxes paid

   $ 31      $ 377   
  

 

 

   

 

 

 

Interest expense paid

   $ 746      $ 917   
  

 

 

   

 

 

 

Noncash transactions:

    

Transfers of loans to other real estate owned

   $ —        $ 1,783   
  

 

 

   

 

 

 

Transfers of loans held for portfolio to loans held for sale

   $ —        $ 1,459   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

SP Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(Dollars in thousands)

Note 1. Summary of Significant Accounting Policies

General

SharePlus Federal Bank (the “Bank”), is a federal stock savings bank located in Plano, Texas. On October 29, 2010, the Bank completed its conversion from a federal mutual savings bank to a federal capital stock savings bank. A new holding company, SP Bancorp, Inc (the “Company”), was established as part of the conversion. The public offering was consummated through the sale and issuance by SP Bancorp, Inc. of 1,725,000 shares of common stock at $10 per share. Net proceeds of $14.5 million were raised in the stock offering, after deduction of conversion costs of $2.0 million and excluding $0.8 million which was loaned by the Company to a trust for the Employee Stock Ownership Plan (the “ESOP”).

The Bank operates as a full-service bank, including the acceptance of checking and savings deposits, and the origination of single-family mortgage and home equity loans, commercial real estate and business loans, automobile loans, and other personal loans. In addition to the Bank’s home office, the Bank has five branches, one of which is located near downtown Dallas, Texas; one is located near the Bank’s headquarters in Plano, Texas; two branches are located in Louisville, Kentucky; and the other branch is located in Irvine, California. The Bank is regulated by the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation (“FDIC”).

Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, SharePlus Federal Bank. The Company’s principal business is the ownership of the Bank. All significant intercompany accounts and transactions have been eliminated.

Interim Financial Statements

The financial statements of the Company at June 30, 2012 and for the three and six months ended June 30, 2012 and 2011 have been prepared in conformity with U.S. generally accepted accounting principles for interim financial information and predominant practices followed by the financial services industry; and are unaudited. However, in management’s opinion, the interim data at June 30, 2012 and for the three and six months ended June 30, 2012 and 2011 include all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the results of the interim periods. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year.

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. Material estimates that are particularly susceptible to significant changes in the near term include the determination of the allowance for loan losses and valuations pertaining to OREO.

Subsequent Events

Companies are required to evaluate events and transactions that occur after the balance sheet date but before the date the financial statements are issued. They must recognize in the financial statements the effect of all events or transactions that provide additional evidence of conditions that existed at the balance sheet date, including the estimates inherent in the financial preparation process. Entities shall not recognize the impact of events or transactions that provide evidence about conditions that did not exist at the balance sheet date but arose after that date. The Company has evaluated subsequent events through the time of filing these financial statements with the SEC and noted no subsequent events requiring financial statement recognition or disclosure, except as discussed in Note 11 to Consolidated Financial Statements.

 

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Table of Contents

SP Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(Dollars in thousands)

 

Basic and Diluted Earnings Per Share

Earnings per share are based upon the weighted-average shares outstanding. ESOP shares, which have been committed to be released, are considered outstanding.

 

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

Net income

   $ 235       $ 218       $ 514       $ 435   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average shares outstanding (in 000s)

     1,565         1,640         1,597         1,640   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic and diluted earnings per share

   $ 0.15       $ 0.13       $ 0.32       $ 0.27   
  

 

 

    

 

 

    

 

 

    

 

 

 

Recent Authoritative Accounting Guidance

In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” The amendments improve consistency for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. generally accepted accounting principles and International Financial Reporting Standards. The ASU was adopted for the three and six months ended June 30, 2012. The adoption of this guidance did not materially impact the Company.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220).” The amendments require that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. On October 21, 2011, the FASB deferred the effective date of presentation requirements for classification adjustments. The adoption of this ASU resulted in adding separate Consolidated Statements of Comprehensive Income.

Note 2. Stock Conversion

On October 29, 2010, Share Plus Federal Bank completed its conversion from a federal mutual savings bank to a capital stock savings bank. A new holding company, SP Bancorp, Inc., was established as part of the conversion. The public offering was consummated through the sale and issuance by SP Bancorp, Inc. of 1,725,000 shares of common stock at $10 per share. Net proceeds of $14.5 million were raised in the stock offering, after deduction of conversion costs of $2.0 million and excluding $0.8 million which was loaned by the Company to a trust for the ESOP. The ESOP purchased 67,750 shares in the offering and 70,250 shares in the open market. Shares of the Company’s common stock purchased by the ESOP are held in a suspense account until released for allocation to participants. Shares released are allocated to each eligible participant based on the ratio of each such participant’s compensation, as defined in the ESOP, to the total compensation of all eligible plan participants. As the unearned shares are released from suspense, the Bank recognizes compensation expense equal to the fair value of the ESOP shares committed to be released during the year. To the extent that the fair value of the ESOP shares differs from the cost of such shares, the difference is charged or credited to equity as additional paid-in capital.

SP Bancorp, Inc.’s common stock is traded on the NASDAQ Capital Market under the symbol “SPBC.” Voting rights are held and exercised exclusively by the stockholders of SP Bancorp, Inc. Deposit account holders of the Bank continue to be insured by the FDIC. A liquidation account was established in the amount of $17.0 million, which represented the Bank’s total equity capital as of

 

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Table of Contents

SP Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(Dollars in thousands)

 

March 31, 2010, the latest balance sheet date in the final prospectus used in the conversion. The liquidation account is maintained for the benefit of eligible holders who continue to maintain their accounts at the Bank. The liquidation account is 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 eligible 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 declare, pay a dividend on, or repurchase any of its capital stock, if the effect thereof would cause equity capital to be reduced below the liquidation account amount or regulatory capital requirements. Any purchase of the new holding company’s common stock will be conducted in accordance with applicable laws and regulations.

On February 27, 2012, SP Bancorp, Inc. announced that its Board of Directors has authorized a stock repurchase program pursuant to which SP Bancorp, Inc. intends to repurchase up to 5% of its issued and outstanding shares, or up to approximately 86,250 shares.

Open market purchases will be conducted in accordance with the limitations set forth in Rule 10b-18 of the Securities and Exchange Commission and other applicable legal requirements. The repurchase program may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity, and other factors deemed appropriate. These factors may also affect the timing and amount of share repurchases. The repurchase program does not obligate SP Bancorp, Inc. to purchase any particular number of shares, and there is no guarantee as to the exact number of shares to be repurchased by SP Bancorp, Inc.

SP Bancorp, Inc. had repurchased 25,200 shares under the stock repurchase program through June 30, 2012.

 

9


Table of Contents

SP Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(Dollars in thousands)

 

Note 3. Securities

Securities have been classified in the consolidated balance sheets according to management’s intent. At June 30, 2012 and December 31, 2011, all of the Company’s securities were classified as available for sale. The amortized cost of securities and their approximate fair values at June 30, 2012 and December 31, 2011 are as follows:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

Securities Available for Sale

          

June 30, 2012:

          

Municipal securities

   $ 2,136       $ 97       $ —        $ 2,233   

Collateralized mortgage obligations guaranteed by FNMA and FHLMC

     6,611         9         —          6,620   

Mortgage-backed securities guaranteed by SBA, FNMA, GNMA and FHLMC

     7,335         108         —          7,443   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 16,082       $ 214       $ —        $ 16,296   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2011:

          

Municipal securities

   $ 8,737       $ 385       $ —        $ 9,122   

Collateralized mortgage obligations guaranteed by FNMA and FHLMC

     12,809         26         (90     12,745   

Mortgage-backed securities guaranteed by SBA, FNMA, GNMA and FHLMC

     3,228         5         (3     3,230   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 24,774       $ 416       $ (93   $ 25,097   
  

 

 

    

 

 

    

 

 

   

 

 

 

Mortgage-backed securities and collateralized mortgage obligations are backed by single-family mortgage loans. The Company does not hold any securities backed by commercial real estate loans.

For the six months ended June 30, 2012, proceeds from sale of securities available for sale, gross gains and gross losses were $15,266, $581 and $81, respectively.

For the six months ended June 30, 2011, proceeds from sale of securities available for sale, gross gains and gross losses were $16,027, $202 and $0, respectively.

There were no gross unrealized losses at June 30, 2012.

 

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Table of Contents

SP Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(Dollars in thousands)

 

Gross unrealized losses and fair values by investment category and length of time in a continuous unrealized loss position at December 31, 2011 were as follows:

 

     Number of  Security
Positions with
Unrealized losses
     Continuous Unrealized
Losses Existing for
Less than 12 Months
    Continuous Unrealized
Losses Existing for
12 Months or Longer
     Total  
        Market
Value
     Unrealized
Losses
    Market
Value
     Unrealized
Losses
     Market
Value
     Unrealized
Losses
 

December 31, 2011:

                   

Collateralized mortgage obligations

     7       $ 10,019       $ (90   $ —         $ —         $ 10,019       $ (90

Mortgage-backed securities

     1         970         (3     —           —           970         (3
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 
     8       $ 10,989       $ (93   $ —         $ —         $ 10,989         $ (93
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

For all of the above securities available for sale, the gross unrealized losses are generally due to changes in interest rates. 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 prior to anticipated recovery. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent of the Company to sell or whether it would be more-likely-than-not required to sell its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

The scheduled maturities of securities at June 30, 2012 and December 31, 2011 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     June 30, 2012      December 31, 2011  
     Available for Sale      Available for Sale  
     Amortized
Cost
     Market
Value
     Amortized
Cost
     Market
Value
 

After 5 years through 10 years

   $ —         $ —         $ —         $ —     

Due after 10 years

     2,136         2,233         8,737         9,122   
  

 

 

    

 

 

    

 

 

    

 

 

 
     2,136         2,233         8,737         9,122   

Mortgage-backed securities and collateralized mortgage obligations

     13,946         14,063         16,037         15,975   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 16,082       $ 16,296       $ 24,774       $ 25,097   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

SP Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(Dollars in thousands)

 

Note 4. Loans and Allowance for Loan Losses

Loans at June 30, 2012 and December 31, 2011 consisted of the following:

 

     June 30,
2012
    December 31,
2011
 

Commercial business

   $ 8,147      $ 6,986   

Commercial real estate

     42,061        38,348   

One-to-four family

     153,731        150,613   

Home equity

     9,305        9,612   

Consumer

     6,825        8,318   
  

 

 

   

 

 

 
     220,069        213,877   

Premiums, net

     72        71   

Deferred loan costs, net

     530        494   

Allowance for loan losses

     (2,186     (1,754
  

 

 

   

 

 

 
   $ 218,485      $ 212,688   
  

 

 

   

 

 

 

The Bank originates loans to individuals and businesses, geographically concentrated primarily near the Bank’s offices in Dallas and Plano, Texas. Loan balances, interest rates, loan terms and collateral requirements vary according to the type of loan offered and overall credit-worthiness of the potential borrower.

Commercial business. Commercial business loans are made to customers for the purpose of acquiring equipment and other general business purposes. Commercial business loans are made based primarily on the historical and projected cash flow of the borrower and, to a lesser extent, the underlying collateral. Commercial business loans generally carry higher risk of default since their repayment generally depends on the successful operation of the business and the sufficiency of collateral.

Commercial real estate. Commercial real estate loans are secured primarily by office buildings, retail centers, owner-occupied offices, condominiums, developed lots and land. Commercial real estate loans are underwritten based on the economic viability of the property and creditworthiness of the borrower, with emphasis given to projected cash flow as a percentage of debt service requirements. These loans carry significant credit risks as they involve larger balances concentrated with single borrowers or groups of related borrowers. Repayment of loans secured by income-producing properties generally depends on the successful operation of the real estate project and may be subject to a greater extent to adverse market conditions and the general economy.

One-to-four family. One-to-four family loans are underwritten based on the applicant’s employment and credit history and the appraised value of the property.

Home equity. Home equity loans are underwritten similar to one-to-four family loans. Collateral value could be negatively impacted by declining real estate values.

Consumer. Consumer loans include automobile, signature and other consumer loans. Potential credit risks include rapidly depreciable assets, such as automobiles, which could adversely affect the value of the collateral.

 

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Table of Contents

SP Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(Dollars in thousands)

 

Following is an age analysis of past due loans by loan class as of June 30, 2012 and December 31, 2011:

 

     Commercial
Business
     Commercial
Real Estate
     One-to-Four
Family
     Home
Equity
     Consumer      Total  

At June 30, 2012:

                 

Past Due:

                 

30-59 days

   $ —         $ 296       $ 1,364       $ —         $ 10       $ 1,670   

60-89 days

     —           —           148         —           1         149   

90 days or more

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total past due

     —           296         1,512         —           11         1,819   

Current

     8,147         41,765         152,219         9,305         6,814         218,250   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 8,147       $ 42,061       $ 153,731       $ 9,305       $ 6,825       $ 220,069   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2011

                 

Past Due:

                 

30-59 days

   $ —         $ —         $ 2,457       $ 27       $ 16       $ 2,500   

60-89 days

     —           —           161         —           1         162   

90 days or more

     —           —           207         —           —           207   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total past due

     —           —           2,825         27         17         2,869   

Current

     6,986         38,348         147,788         9,585         8,301         211,008   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 6,986       $ 38,348       $ 150,613       $ 9,612       $ 8,318       $ 213,877   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Bank utilizes a nine-point internal risk rating system for commercial real estate and commercial business loans, which provides a comprehensive analysis of the credit risk inherent in each loan. The rating system provides for five pass ratings. Rating grades six through nine comprise the adversely rated credits.

The Bank classifies problem and potential problem loans for all loan types using the regulatory classifications of special mention, substandard, doubtful and loss, which for commercial real estate and commercial business loans correspond to the risk ratings of six, seven, eight and nine, respectively. The regulatory classifications are updated, when warranted.

A loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans include those characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loans classified as doubtful have all of the weaknesses inherent in those classified 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. Loans or portions of loans classified as loss, are those considered uncollectible and of such little value that their continuance is not warranted. Loans that do not expose the Bank to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve management’s close attention, are required to be designated as special mention.

 

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Table of Contents

SP Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(Dollars in thousands)

 

Following is a summary of loans by grade or classification as of June 30, 2012 and December 31, 2011:

 

     Commercial
Business
     Commercial
Real Estate
     One-to-Four
Family
     Home
Equity
     Consumer      Total  

At June 30, 2012:

                 

Credit Quality Indicator:

                 

Credit Risk Profile by Grade or Classification:

                 

Pass

   $ 8,147       $ 34,943       $ 150,584       $ 9,296       $ 6,796       $ 209,766   

Special Mention

     —           —           558         9         28         595   

Substandard

     —           7,118         2,589         —           1         9,708   

Doubtful

     —           —           —           —           —           —     

Loss

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,147       $ 42,061       $ 153,731       $ 9,305       $ 6,825       $ 220,069   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2011

                 

Credit Quality Indicator:

                 

Credit Risk Profile by Grade or Classification:

                 

Pass

   $ 6,986       $ 31,170       $ 148,433       $ 9,600       $ 8,281       $ 204,470   

Special Mention

     —           —           687         12         37         736   

Substandard

     —           7,178         1,493         —           —           8,671   

Doubtful

     —           —           —           —           —           —     

Loss

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,986       $ 38,348       $ 150,613       $ 9,612       $ 8,318       $ 213,877   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

SP Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(Dollars in thousands)

 

Impaired loans and nonperforming loans by loan class at June 30, 2012 and December 31, 2011 were summarized as follows:

 

     Commercial
Business
     Commercial
Real Estate
     One-to-Four
Family
     Home
Equity
     Consumer      Total  

At June 30, 2012:

                 

Impaired loans:

                 

Impaired loans with an allowance for loan losses

   $ —         $ 1,463       $ 392       $ —         $ 13       $ 1,868   

Impaired loans with no allowance for loan losses

     —           3,734         1,540         —           10         5,284   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ —         $ 5,197       $ 1,932       $ —         $ 23       $ 7,152   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unpaid principal balance of impaired loans

   $ —         $ 5,197       $ 1,932       $ —         $ 23       $ 7,152   

Allowance for loan losses on impaired loans

   $ —         $ 130       $ 98       $ —         $ 4       $ 232   

Average recorded investment in impaired loans

   $ —         $ 5,237       $ 1,914       $ 8       $ 26       $ 7,185   

Nonperforming loans:

                 

Nonaccrual loans

   $ —         $ 5,197       $ 1,715       $ —         $ 13       $ 6,925   

Loans past due 90 days and still accruing

     —           —           —           —           —           —     

Troubled debt restructurings (not included in nonaccrual loans)

     —           —           208         —           21         229   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ 5,197       $ 1,923       $ —         $ 34       $ 7,154   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2011

                 

Impaired loans:

                 

Impaired loans with an allowance for loan losses

   $ —         $ —         $ 16       $ —         $ 15       $ 31   

Impaired loans with no allowance for loan losses

     —           5,258         1,741         12         15         7,026   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ —         $ 5,258       $ 1,757       $ 12       $ 30       $ 7,057   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unpaid principal balance of impaired loans

   $ —         $ 5,258       $ 1,757       $ 12       $ 30       $ 7,057   

Allowance for loan losses on impaired loans

   $ —         $ —         $ 14       $ —         $ 5       $ 19   

Average recorded investment in impaired loans

   $ 177       $ 5,319       $ 2,203       $ 101       $ 34       $ 7,834   

Nonperforming loans:

                 

Nonaccrual loans

   $ —         $ —         $ 207       $ —         $ —         $ 207   

Loans past due 90 days and still accruing

     —           —           —           —           —           —     

Troubled debt restructurings (not included in nonaccrual loans)

     —           5,258         1,497         —           64         6,819   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ 5,258       $ 1,704       $ —         $ 64       $ 7,026   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For the six months ended June 30, 2012 and 2011, gross interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was $207 and $149, respectively. Interest income recognized on such loans for the six months ended June 30, 2012 and 2011 was $148 and $30, respectively. Interest income recognized on impaired loans for the six months ended June 30, 2012 and 2011 was $145 and $30, respectively.

 

15


Table of Contents

SP Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(Dollars in thousands)

 

Following is a summary of the activity in the allowance for loan losses by loan class for the six months ended June 30, 2012 and 2011 and total investment in loans at June 30, 2012, December 31, 2011 and June 30, 2011:

 

     Commercial
Business
    Commercial
Real Estate
    One-to-Four
Family
    Home
Equity
    Consumer     Total  

Six Months Ended June 30, 2012

            

Allowance for Loan Losses:

            

Balance, beginning of period

   $ 130      $ 624      $ 778      $ 133      $ 89      $ 1,754   

Provision for loan losses

     63        350        329        (15     (25     702   

Loans charged to the allowance

     —          —          (240     (28     (11     (279

Recoveries of loans previously charged off

     —          —          1        1        7        9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 193      $ 974      $ 868      $ 91      $ 60      $ 2,186   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ —        $ 130      $ 98      $ —        $ 4      $ 232   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 193      $ 844      $ 770      $ 91      $ 56      $ 1,954   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At June 30, 2012:

            

Loans:

            

Ending balance

   $ 8,147      $ 42,061      $ 153,731      $ 9,305      $ 6,825      $ 220,069   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance individually evaluated for impairment

   $ —        $ 5,197      $ 1,932      $ —        $ 23      $ 7,152   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance collectively evaluated for impairment

   $ 8,147      $ 36,864      $ 151,799      $ 9,305      $ 6,802      $ 212,917   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At December 31, 2011:

            

Loans:

            

Ending balance

   $ 6,986      $ 38,348      $ 150,613      $ 9,612      $ 8,318      $ 213,877   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance individually evaluated for impairment

   $ —        $ 5,258      $ 1,757      $ 12      $ 30      $ 7,057   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance collectively evaluated for impairment

   $ 6,986      $ 33,090      $ 148,856      $ 9,600      $ 8,288      $ 206,820   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2011:

            

Allowance for Loan Losses:

            

Balance, beginning of period

   $ 131      $ 1,081      $ 736      $ 60      $ 128      $ 2,136   

Provision for loan losses

     51        112        254        10        (16     411   

Loans charged to the allowance

     (125     (467     (73     —          (31     (696

Recoveries of loans previously charged off

     —          —          —          —          8        8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 57      $ 726      $ 917      $ 70      $ 89      $ 1,859   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ —        $ 218      $ 260      $ 16      $ —        $ 494   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 57      $ 508      $ 657      $ 54      $ 89      $ 1,365   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At June 30, 2011:

            

Loans:

            

Ending balance

   $ 3,594      $ 31,522      $ 141,029      $ 10,117      $ 9,319      $ 195,581   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance individually evaluated for impairment

   $ 319      $ 5,789      $ 3,010      $ 112      $ 23      $ 9,253   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance collectively evaluated for impairment

   $ 3,275      $ 25,733      $ 138,019      $ 10,005      $ 9,296      $ 186,328   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The $291 increase in the provision for loan losses for the six months ended June 30, 2012 versus June 30, 2011 was primarily attributable to an increase in the loss experience factors used to determine the general allowance for loan losses.

We establish an allocated allowance when loans are determined to be impaired, including troubled debt restructurings. The allowance is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. The Company has allocated allowance for loan losses of $232 and $5 to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2012 and December 31, 2011. The Company has not committed to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings at June 30, 2012 and December 31, 2011.

During the periods ended June 30, 2012 and 2011, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

 

16


Table of Contents

SP Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(Dollars in thousands)

 

Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from nine months to five years. Modifications involving an extension of the maturity date were for periods ranging from three months to five years.

Following is a summary of troubled debt restructurings during the six months ended June 30, 2012 and 2011 and loans that have been restructured during the previous twelve months that subsequently defaulted during the six months ended June 30, 2012 and 2011:

 

     Commercial
Business
     Commercial
Real Estate
     One-to-Four
Family
     Home
Equity
     Consumer      Total  

Troubled debt restructurings during the six months ended June 30, 2012:

                 

Number of contracts

     —           —           1         —           —           1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Pre-restructuring outstanding recorded investment

   $ —         $ —         $ 392       $ —         $ —         $ 392   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Post-restructuring outstanding recorded investment

   $ —         $ —         $ 392       $ —         $ —         $ 392   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Troubled debt restructurings during the previous twelve months that subsequently defaulted during the six months ended June 30, 2012

                 

Number of contracts

     —           —           3         —           —           3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Recorded investment

   $ —         $ —         $ 1,264       $ —         $ —         $ 1,264   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Troubled debt restructurings during the six months ended June 30, 2011:

                 

Number of contracts

     —           3         —           —           1         4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Pre-restructuring outstanding recorded investment

   $ —         $ 5,581       $ —         $ —         $ 9       $ 5,590   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Post-restructuring outstanding recorded investment

   $ —         $ 5,251       $ —         $ —         $ 9       $ 5,260   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Troubled debt restructurings during the previous twelve months that subsequently defaulted during the six months ended June 30, 2011

                 

Number of contracts

     —           —           1         —           1         2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Recorded investment

   $ —         $ —         $ 71       $ —         $ 5       $ 76   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Bank originated $35,691 and $21,089 in loans during the six months ended June 30, 2012 and 2011, respectively, which were placed with various correspondent lending institutions. Proceeds on sales of these loans were $31,516 and $22,697 for the six months ended June 30, 2012 and 2011, respectively. Gains on sales of these loans were $879 and $529 for the six months ended June 30, 2012 and 2011, respectively. These loans were sold with servicing rights released.

Loans serviced for the benefit of others amounted to $3,229, $3,257 and $2,578 at June 30, 2012, December 31, 2011 and June 30, 2011, respectively.

Note 5. Borrowings

The Bank periodically borrows from the FHLB of Dallas. At June 30, 2012, the Bank had a total of nine such advances which totaled $9,045. These advances have various maturities ranging from November 19, 2012 through November 17, 2014 at interest rates from 1.96% to 3.09%. At December 31, 2011, the Bank had a total of eleven such advances which totaled $25,978. These advances have various maturities ranging from January 27, 2012 through November 17, 2014 at interest rates from 0.14% to 3.09%.

 

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SP Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(Dollars in thousands)

 

These advances are secured by FHLB of Dallas stock, real estate loans and securities of $124,211 and $121,640, at June 30, 2012 and December 31, 2011, respectively. The Bank had remaining credit available under the FHLB advance program of $115,063 and $95,529 at June 30, 2012 and December 31, 2011, respectively.

Note 6. Income Taxes

The difference between the statutory rate of 34% and the effective tax rates of 22.5% and 25.4% for the six months ended June 30, 2012 and 2011, respectively, was primarily attributable to permanent differences related to tax exempt income consisting of interest on municipal obligations and BOLI income.

There were no significant changes in deferred tax items during the six months ended June 30, 2012.

Note 7. Financial Instruments With Off-Balance Sheet Risk

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of these instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

At June 30, 2012 and December 31, 2011, the approximate amounts of these financial instruments were as follows:

 

     June 30,
2012
     December 31,
2011
 

Commitments to extend credit

   $ 16,591       $ 21,568   
  

 

 

    

 

 

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Bank upon extension of credit is based on managements’ credit evaluation of the counterparty. Collateral held varies but may include cattle, accounts receivable, inventory, property, single and multi-family residences, plant and equipment and income-producing commercial properties. At June 30, 2012 and December 31, 2011, commitments to fund fixed rate loans of $4,442 and $9,239, respectively, were included in the commitments to extend credit. Interest rates on these commitments to fund fixed rate loans, including unsecured loans, ranged from 3.00% to 17.00% at June 30, 2012 and from 3.49% to 17.90% at December 31, 2011.

The Bank has not incurred any significant losses on its commitments in the six months ended June 30, 2012 or 2011. Although the maximum exposure to loss is the amount of such commitments, management anticipates no material losses from such activities.

 

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SP Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(Dollars in thousands)

 

Note 8. Regulatory Capital

The Bank is subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve 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 are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy requires the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), of core capital (as defined) to adjusted tangible assets (as defined) and of tangible capital (as defined) to tangible assets. Management believes, as of June 30, 2012 and December 31, 2011, that the Bank meets all capital adequacy requirements to which it is subject.

At June 30, 2012 and December 31, 2011, the most recent regulatory notification categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.

The following table sets forth the Bank’s capital ratios as of June 30, 2012 and December 31, 2011:

 

     Actual     Minimum for Capital
Adequacy Purposes
    Minimum To Be Well
Capitalized  Under Prompt
Corrective Action Provisions
 
     Amount      Ratio     Amount      Ratio         Amount              Ratio      

As of June 30, 2012:

               

Total capital to risk weighted assets

   $ 31,846         16.35   $ 15,579         8.00   $ 19,474         10.00

Tier 1 capital to risk weighted assets

     29,660         15.23     7,790         4.00     11,684         6.00

Tier 1 capital to assets

     29,660         10.96     10,821         4.00     13,526         5.00

As of December 31, 2011:

               

Tangible capital to tangible assets

   $ 29,319         10.75   $ 4,090         1.50     N/A         N/A   

Total capital to risk weighted assets

     31,073         16.48     15,081         8.00   $ 18,852         10.00

Tier 1 capital to risk weighted assets

     29,319         15.55     7,541         4.00     11,311         6.00

Tier 1 capital to assets

     29,319         10.75     10,905         4.00     13,632         5.00

 

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SP Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(Dollars in thousands)

 

The following is a reconciliation of the Bank’s equity capital under U.S. generally accepted accounting principles to Tangible and Tier 1 capital and Total capital (as defined by the OCC) at June 30, 2012 and December 31, 2011:

 

     June 30,
2012
    December 31,
2011
 

Equity capital

   $ 29,801      $ 29,533   

Unrealized gains on securities, net

     (141     (214
  

 

 

   

 

 

 

Tangible and Tier 1 capital

     29,660        29,319   

Allowance for loan losses

     2,186        1,754   
  

 

 

   

 

 

 

Total capital

   $ 31,846      $ 31,073   
  

 

 

   

 

 

 

Note 9. Fair Value Measurements

Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (1) independent, (2) knowledgeable, (3) able to transact and (4) willing to transact.

The guidance requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, the guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

The fair value hierarchy is as follows:

Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting 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 or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

 

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Table of Contents

SP Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(Dollars in thousands)

 

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 represents assets and liabilities reported on the consolidated balance sheet at their fair value as of June 30, 2012 and December 31, 2011 by level within the ASC 820 fair value measurement hierarchy:

 

            Fair Value Measurements at Reporting Date Using  
     Assets/
Liabilities
Measured
At Fair Value
     Quoted
Prices in
Active Markets
for Identical
Assets

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

(Level 3)
 

June 30, 2012:

           

Measured on a recurring basis:

           

Assets:

           

Securities available for sale:

           

Municipal securities

   $ 2,233       $ —         $ 2,233       $ —     

Collateralized mortgage obligations

     6,620         —           6,620         —     

Mortgage-backed securities

     7,443         —           7,443         —     

Measured on a nonrecurring basis:

           

Assets:

           

Impaired loans

     1,627         —           —           1,627   

Other real estate owned

     280         —           —           280   

December 31, 2011:

           

Measured on a recurring basis:

           

Assets:

           

Securities available for sale:

           

Municipal securities

   $ 9,122       $ —         $ 9,122       $ —     

Collateralized mortgage obligations

     12,745         —           12,745         —     

Mortgage-backed securities

     3,230         —           3,230         —     

Measured on a nonrecurring basis:

           

Assets:

           

Impaired loans

     12         —           —           12   

Other real estate owned

     1,300         —           —           1,300   

There were no transfers between Level 1 and Level 2 categorizations for the periods presented.

 

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SP Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(Dollars in thousands)

 

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

Securities available for sale are classified within Level 2 of the valuation hierarchy. The Company obtains fair value measurements for securities from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S Treasury yield curve, live trading levels, trade execution data, market consensus prepayment spreads, credit information and the bond’s terms and conditions, among other things.

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis. 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). Certain impaired loans are reported at the fair value of underlying collateral if repayment is expected solely from the collateral. Other real estate owned is initially recorded at fair value less estimated costs of disposal, which establishes a new cost basis. For the six months ended June 30, 2012 and for the year ended December 31, 2011, adjustments of $244 and $200, respectively, were recorded to write-down commercial properties included in other real estate owned to its fair value less estimated selling costs. Collateral values are estimated using Level 2 inputs based on observable market data such as independent appraisals or Level 3 inputs based on customized discounting.

For the six months ended June 30, 2012 and for the year ended December 31, 2011, impaired loans (with allocated allowance for losses) with principal balances of $1,855 and $31, respectively, had additional provisions for losses of $228 and $19, respectively.

There were no transfers into or out of Level 3 categorization for the periods presented.

For Level 3 financial and nonfinancial assets measured at fair value on a non-recurring basis at June 30, 2012, the significant unobservable inputs used in the fair value measurements are follows:

 

Assets

   Fair Value      Valuation
Technique
    

Unobservable Input(s)

   Range (Weighted
Average)

Impaired loans

   $  1,627        Collateral method       Adjustments for selling costs    N/A

Foreclosed and repossessed assets

   $ 280         Collateral method       Adjustments for selling costs    N/A

 

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SP Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(Dollars in thousands)

 

Note 10. Disclosure About the Fair Value of Financial Instruments

The carrying amount, estimated fair value and the financial hierarchy of the Company’s financial instruments at June 30, 2012 and December 31, 2011 were as follows:

 

                   Fair Value Measurements at Reporting  
                   Date Using  
     June 30,      Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 
     2012           
     Carrying
Amount
     Estimated
Fair Value
          

Financial assets:

              

Cash and cash equivalents

   $ 6,933       $ 6,933         6,933         —           —     

Securities available for sale

     16,296         16,296         —           16,296         —     

Fixed annuity investment

     1,199         1,199         —           1,199         —     

Restricted stock

     1,315         1,315         —           1,315         —     

Loans and loans held for sale

     228,423         227,794         —           226,158         1,636   

Accrued interest receivable

     747         747         —           747      

Financial liabilities:

              

Deposit accounts

     226,397         223,288         —           223,288         —     

Accrued interest payable

     27         27         —           27         —     

Borrowings

     9,045         9,299         —           9,299         —     

Off-balance sheet assets (liabilities):

              

Commitments to extend credit

     —           —           —           —           —     
                   Fair Value Measurements at Reporting  
                   Date Using  
     December 31,      Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 
     2011           
     Carrying
Amount
     Estimated
Fair Value
          

Financial assets:

              

Cash and cash equivalents

   $ 9,928       $ 9,928         9,928         —           —     

Securities available for sale

     25,097         25,097         —           25,097         —     

Fixed annuity investment

     1,176         1,176         —           1,176         —     

Restricted stock

     2,020         2,020         —           2,020         —     

Loans and loans held for sale

     217,572         217,829         —           217,817         12   

Accrued interest receivable

     961         961         —           961         —     

Financial liabilities:

              

Deposit accounts

     211,934         208,744         —           208,744         —     

Accrued interest payable

     29         29         —           29         —     

Borrowings

     25,978         26,299         —           26,299         —     

Off-balance sheet assets (liabilities):

              

Commitments to extend credit

     —           —           —           —           —     

 

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Table of Contents

SP Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(Dollars in thousands)

 

Fair Values of Financial Instruments

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. ASC 820 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

Cash and short-term instruments

The carrying amounts of cash and short-term instruments approximate their fair value.

Securities

See Note 9 to Consolidated Financial Statements for methods and assumptions used to estimate fair values for securities.

The carrying value of Federal Home Loan Bank stock and other restricted equities approximate fair value based on the redemption provisions of the Federal Home Loan Bank.

Fixed annuity investment

The carrying amount approximates fair value.

Loans and loans held for sale

For variable-rate loans that reprice frequently and have no significant changes in credit risk, fair values are based on carrying values. Fair values for real estate and commercial loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable. Fair value of loans held for sale is based on commitments on hand from investors or prevailing market rates.

Deposits

The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is their carrying amounts). The carrying amounts of variable-rate, fixed term money market accounts and variable-rate certificates of deposit (CD’s) approximate their fair values at the reporting date. Fair values for fixed-rate CD’s are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Advances from Federal Home Loan Bank

The fair value of advances from the Federal Home Loan Bank maturing within 90 days approximates carrying value. Fair value of other advances is based on the discounted value of contractual cash flows based on the Bank’s current incremental borrowing rate for similar borrowing arrangements.

Accrued interest

The carrying amounts of accrued interest approximate their fair values.

 

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SP Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(Dollars in thousands)

 

Off-balance sheet instruments

Commitments to extend credit and standby letters of credit have short maturities and therefore have no significant fair value.

Note 11. Subsequent Event

During the three months ended March 31, 2012, the Bank experienced a fraudulent wire transfer from a customer’s account. The Company accrued and expensed the $50 deductible under its insurance policy during the same period. In August, 2012, the Company was notified by its insurance carrier that its claim for reimbursement of loss was denied. The Company has provided for an additional loss of $228 in connection with this incident during the three months ended June 30, 2012. Although the Company has provided for a total loss of $278, the Company strongly disagrees with the position taken by its insurance carrier and is challenging this decision.

 

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Table of Contents

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis of financial condition and results of operations at June 30, 2012 and for the three and six months ended June 30, 2012 and 2011 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the Unaudited Consolidated Financial Statements and the notes thereto, appearing in Part 1, Item 1 of this report.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-Q contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” and words of similar meaning. These forward-looking statements include, but are not limited to:

 

   

statements of our goals, intentions and expectations;

 

   

statements regarding our business plans, prospects, growth and operating strategies;

 

   

statements regarding the asset quality of our loan and investment portfolios; and

 

   

estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this Form 10-Q.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

 

   

general economic conditions, either nationally or in our market areas, that are worse than expected;

 

   

competition among depository and other financial institutions;

 

   

changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;

 

   

adverse changes in the securities markets;

 

   

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

 

   

our ability to enter new markets successfully and capitalize on growth opportunities;

 

   

our ability to successfully integrate acquired entities, if any;

 

   

changes in consumer spending, borrowing and savings habits;

 

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Table of Contents
   

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;

 

   

changes in our organization, compensation and benefit plans;

 

   

changes in our financial condition or results of operations that reduce capital; and

 

   

changes in the financial condition or future prospects of issuers of securities that we own.

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

Overview

On October 29, 2010, SharePlus Federal Bank completed its conversion from a federal mutual savings bank to a capital stock savings bank. A new holding company, SP Bancorp, Inc., was established as part of the conversion. The public offering was consummated through the sale and issuance by SP Bancorp, Inc. of 1,725,000 shares of common stock at $10 per share. Net proceeds of $14.5 million were raised in the stock offering, after deduction of conversion costs of $2.0 million and excluding $0.8 million which was loaned by the Company to a trust for the Employee Stock Ownership Plan (the “ESOP”). The ESOP purchased 67,750 shares in the offering and 70,250 in the open market.

At June 30, 2012, we had total assets of $270.7 million, compared to $273.0 million at December 31, 2011. This slight decrease was primarily the result of a decrease in securities and cash and cash equivalents, substantially offset by an increase in loans.

During the three months ended June 30, 2012, we had net income of $235,000, compared to a net income of $218,000 for the three months ended June 30, 2011. Higher net income resulted from higher net interest income and noninterest income, partially offset by higher noninterest expense.

During the six months ended June 30, 2012, we had net income of $514,000, compared to a net income of $435,000 for the six months ended June 30, 2011. Higher net income resulted from higher net interest income and noninterest income, partially offset by higher noninterest expense and provision for loan losses.

Our results of operations depend mainly on our net interest income, which is the difference between the interest income we earn on our loan and investment portfolios and the interest expense we incur on our deposits and, to a lesser extent, our borrowings. Results of operations are also affected by service charges and other fees, provision for loan losses, commissions, gain on sales of securities and loans and other income. Our noninterest expense consists primarily of compensation and benefits, occupancy costs, equipment expense, data processing, ATM expense, professional and outside services, FDIC insurance assessments, marketing and income tax expense.

Our results of operations are also significantly affected by general economic and competitive conditions (such as changes in energy prices which have an impact on our Texas market area), as well as changes in interest rates, government policies and actions of regulatory authorities. Future changes in applicable laws, regulations or government policies may materially affect our financial condition and results of operations.

Critical Accounting Policies. There are no material changes to the critical accounting policies disclosed in SP Bancorp, Inc.’s Form 10-K dated December 31, 2011, as filed on March 30, 2012 with the Securities and Exchange Commission.

Economy. Like the national economy, the Texas economy has been weak, but the Texas unemployment rate has been below the national rate for several months. The Dallas-Fort Worth Metroplex unemployment rate was 6.8% in May 2012, compared to 7.9% in

 

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May 2011. The state’s seasonally adjusted unemployment rate decreased from 8.2% in June 2011 to 7.0% in June 2012, and the corresponding U.S. rate decreased from 9.2% to 8.2% during the same period.

Comparison of Financial Condition at June 30, 2012 and December 31, 2011

Summary of Selected Balance Sheet Data.

 

(Dollars in thousands)

   June 30,
2012
     December 31,
2011
     Increase
(Decrease)
    % Change  

Total assets

   $ 270,729       $ 272,959       $ (2,230     (0.82 )% 

Total cash and cash equivalents

     6,933         9,928         (2,995     (30.17

Securities available for sale, at fair value

     16,296         25,097         (8,801     (35.07

Loans held for sale

     9,938         4,884         5,054        103.48   

Loans, net

     218,485         212,688         5,797        2.73   

Other real estate owned

     1,756         1,824         (68     (3.73

Premises and equipment, net

     4,300         4,346         (46     (1.06

Federal Home Loan Bank of Dallas stock and other restricted stock, at cost

     1,315         2,020         (705     (34.90

Bank-owned life insurance

     7,307         6,193         1,114        17.99   

Other assets (1)

     4,399         5,979         (1,580     (26.43

Deposits

     226,397         211,934         14,463        6.82   

Borrowings

     9,045         25,978         (16,933     (65.18

Stockholders’ equity

     32,926         33,127         (201     (0.61

 

1) Includes fixed annuity investment, accrued interest receivable, deferred tax assets and other assets.

Total assets decreased slightly by $2.2 million to $270.7 million at June 30, 2012. Proceeds from sale of securities and cash equivalents were reinvested in loans, including loans held for sale. Customer deposits were used to repay maturing FHLB advances.

Net loans increased to $218.5 million at June 30, 2012, as loan originations were marginally higher than loan collections. Loans held for sale increased as a result of the low interest rate environment.

Deposits increased by $14.5 million, or 6.8%, to $226.4 million at June 30, 2012 from $211.9 million at December 31, 2011. Deposits, in particular noninterest-bearing deposits, increased primarily from deposit inflows from existing customers.

Federal Home Loan Bank advances decreased $16.9 million to $9.0 million at June 30, 2012.

Stockholders’ equity remained virtually unchanged primarily as a result of repurchases of common stock of $312,000 and ESOP shares purchased in the open market of $373,000, substantially offset by net income of $514,000 for the six months ended June 30, 2012.

Comparison of Operating Results for the Three Months Ended June 30, 2012 and 2011

General. We recorded net income of $235,000 for the three months ended June 30, 2012, compared to net income of $218,000 for the same period last year. Net interest income increased by $271,000 to $2.6 million for the three months ended June 30, 2012 from

 

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$2.3 million for the three months ended June 30, 2011, the provision for loan losses decreased by $76,000 and noninterest income increased by $239,000, which was substantially offset by a higher noninterest expense of $567,000.

Summary of Net Interest Income.

 

     Three Months Ended June 30,      Increase
(Decrease)
       

(Dollars in thousands)

       2012              2011            % Change  

Interest income:

          

Interest and fees on loans

   $ 2,817       $ 2,571       $ 246        9.57

Securities - taxable

     45         119       $ (74     (62.18

Securities - nontaxable

     26         36       $ (10     (27.78

Other interest - earning assets

     35         32       $ 3        9.38   
  

 

 

    

 

 

    

 

 

   

Total interest income

     2,923         2,758         165        5.98   
  

 

 

    

 

 

    

 

 

   

Interest expense:

          

Savings deposits

     14         22       $ (8     (36.36

Money market

     21         43       $ (22     (51.16

Demand deposit account

     18         30       $ (12     (40.00

Certificates of deposit

     236         270       $ (34     (12.59
  

 

 

    

 

 

    

 

 

   

Total deposits

     289         365         (76     (20.82

Borrowings

     83         113       $ (30     (26.55
  

 

 

    

 

 

    

 

 

   

Total interest expense

     372         478         (106     (22.18
  

 

 

    

 

 

    

 

 

   

Net interest income

   $ 2,551       $ 2,280       $ 271        11.89
  

 

 

    

 

 

    

 

 

   

 

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Table of Contents

Summary of Average Yields, Average Rates and Average Balances.

 

Average Yields and Rates

      
     Three Months Ended June 30,     Increase
(decrease)
 
     2012     2011    

Loans

     5.05     5.27     (0.22 )% 

Securities - taxable

     1.27     2.51     (1.24

Securities - nontaxable

     3.40     3.59     (0.19

Other interest - earning assets

     0.56     0.45     0.11   

Total interest-earning assets

     4.40     4.48     (0.08

Savings deposits

     0.15     0.25     (0.10

Money market

     0.22     0.40     (0.18

Demand deposit account

     0.13     0.21     (0.08

Certificates of deposit

     1.27     1.59     (0.32

Total deposits

     0.56     0.71     (0.15

Borrowings

     1.54     2.83     (1.29

Total interest-bearing liabilities

     0.65     0.87     (0.22

Net interest rate spread

     3.75     3.61     0.14   

Net interest margin

     3.84     3.70     0.14

 

Average Balances

          
     Three Months Ended
June 30,
     Increase
(Decrease)
       
(Dollars in thousands)    2012      2011        % Change  

Loans

   $ 223,070       $ 195,069       $ 28,001        14.35

Securities - taxable

     14,125         18,968         (4,843     (25.53

Securities - nontaxable

     3,063         4,009         (946     (23.60

Other interest - earning assets

     25,580         28,388         (2,808     (9.89
  

 

 

    

 

 

    

 

 

   

Total interest-earning assets

     265,838         246,434         19,404        7.87   
  

 

 

    

 

 

    

 

 

   

Savings deposits

     37,381         34,860         2,521        7.23   

Money market

     38,828         42,948         (4,120     (9.59

Demand deposit account

     55,658         58,526         (2,868     (4.90

Certificates of deposit

     74,443         67,926         6,517        9.59   
  

 

 

    

 

 

    

 

 

   

Total deposits

     206,310         204,260         2,050        1.00   

Borrowings

     21,584         15,979         5,605        35.08   
  

 

 

    

 

 

    

 

 

   

Total interest-bearing liabilities

     227,894         220,239         7,655        3.48   
  

 

 

    

 

 

    

 

 

   

Net interest-earning assets

   $ 37,944       $ 26,195       $ 11,749        44.85
  

 

 

    

 

 

    

 

 

   

 

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Interest Income. Interest income increased primarily due to our growth in loans, our highest earning asset.

Interest income and fees on loans increased as the increase in the average balance of loans more than offset a decrease in the average yield on our loans. The average yield on our loan portfolio decreased, reflecting a lower market interest rate environment.

Interest income on taxable securities decreased from a decline in the average balance and average yield of our taxable securities. The decline in the average yield on our taxable securities portfolio resulted from lower market interest rates.

Interest Expense. Interest expense decreased as the decrease in the average cost of deposits more than offset the increase in the average balance of deposits. The average rate we paid on deposits decreased as we were able to reprice our deposits downward in the declining market interest rate environment. The increase in the average balance of our deposits resulted primarily from increases in the average balance of certificates of deposit, and to a lesser extent, non-maturity deposits, reflecting our successful marketing efforts.

During the June 2012 quarter, we utilized deposits and overnight and short-term advances to fund loans.

Net Interest Income. Net interest income increased as our net interest-earning assets increased. In addition, our net interest rate spread increased to 3.75% from 3.61%, and we experienced a 14 basis point increase in our net interest margin to 3.84% from 3.70%.

Provision for Loan Losses. We recorded a provision for loan losses of $215,000 for the three months ended June 30, 2012, compared to $291,000 for the same period in 2011. The decrease in the provision for loan losses was primarily attributable to a higher degree of loss exposures in the second quarter of 2011.

Summary of Noninterest Income.

 

      Three Months Ended June 30,      Increase
(Decrease)
       

(Dollars in thousands)

   2012      2011        % Change  

Noninterest income:

          

Service charges

   $ 274       $ 314       $ (40     (12.74 )% 

Gain on sale of securities available for sale

     180         174       $ 6        3.45   

Gain on sale of mortgage loans

     512         306       $ 206        67.32   

Increase in cash surrender value of BOLI

     57         59       $ (2     (3.39

Other

     101         32       $ 69        215.63   
  

 

 

    

 

 

    

 

 

   

Total noninterest income

   $ 1,124       $ 885       $ 239        27.01
  

 

 

    

 

 

    

 

 

   

Noninterest Income. Noninterest income increased primarily due to gains on sale of mortgage loans. Our origination, sale and resulting gains on one-to-four family residential loans in the secondary market is dependent upon relative customer demand, which is affected by current and anticipated market interest rates.

Service charges decreased as a result of lower NSF charges and other deposit fees driven by new regulations related to overdraft protection programs. Other noninterest income increased due primarily to transaction-based fee income generated from the Bank’s mortgage warehouse business.

 

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Table of Contents

Summary of Noninterest Expense.

 

     Three Months Ended June 30,      Increase
(Decrease)
       

(Dollars in thousands)

       2012              2011            % Change  

Noninterest expense:

          

Compensation and benefits

   $ 1,512       $ 1,317       $ 195        14.81

Occupancy costs

     241         257       $ (16     (6.23

Equipment expense

     59         62       $ (3     (4.84

Data processing expense

     136         123       $ 13        10.57   

ATM expense

     60         97       $ (37     (38.14

Professional and outside services

     341         291       $ 50        17.18   

Stationery and supplies

     21         28       $ (7     (25.00

Marketing

     56         44       $ 12        27.27   

FDIC insurance assessments

     53         78       $ (25     (32.05

Operations from OREO

     35         29       $ 6        20.69   

Provision for losses on OREO

     244         —         $ 244        NM   

Other

     401         266       $ 135        50.75   
  

 

 

    

 

 

    

 

 

   

Total noninterest expense

   $ 3,159       $ 2,592       $ 567        21.88
  

 

 

    

 

 

    

 

 

   

NM Not meaningful.

Noninterest Expense. Noninterest expense increased due primarily to a provision for losses on OREO, an increase in other noninterest expense and an increase in compensation and benefits and professional and outside services, partially offset by a decrease in ATM expense and FDIC insurance assessments.

Compensation and benefits increased due to higher salary levels and mortgage commission expense, and additional personnel associated with the mortgage warehouse business. ATM expense decreased due to contract renegotiation efforts in June 2012 to reduce costs, retroactive to February 2012. Professional and outside services reflects higher outside information technology (“IT”) costs and expenses associated with the Company’s public filing requirements with the SEC, partially offset by lower outside consultant fees incurred for general corporate purposes. During the three months ended June 30, 2011, the IT services were performed internally by one employee. FDIC insurance assessments decreased due to a lower insurance assessment rate. The provision for losses on OREO represents a write-down on a commercial real estate property. Other noninterest expense increased as a result of a provision for loss on a fraudulent wire transfer transaction, partially offset by lower legal expenses related to loan matters, travel costs and mortgage servicing costs.

During the three months ended March 31, 2012, the Bank experienced a fraudulent wire transfer from a customer’s account. The Company accrued and expensed the $50,000 deductible under its insurance policy during the same period. In August, 2012, the Company was notified by its insurance carrier that its claim for reimbursement of loss was denied. The Company has provided for an additional loss of $228,000 in connection with this incident during the three months ended June 30, 2012. Although the Company has provided for a total loss of $278,000, the Company strongly disagrees with the position taken by its insurance carrier and is challenging this decision.

Income Tax Expense. We recorded income tax expense of $66,000 for the three months ended June 30, 2012, compared to income tax expense of $64,000 for the same period in 2011. Our effective tax rate was 21.9% for the three months ended June 30, 2012, compared to 22.7% for the three months ended June 30, 2011.

 

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Table of Contents

Comparison of Operating Results for the Six Months Ended June 30, 2012 and 2011

General. We recorded net income of $514,000 for the six months ended June 30, 2012, compared to net income of $435,000 for the same period last year. Net interest income increased by $488,000 to $5.1 million for the six months ended June 30, 2012 from $4.6 million for the six months ended June 30, 2011 and noninterest income increased by $648,000, which was partially offset by a higher provision for loan losses of $291,000 and noninterest expense of $765,000.

Summary of Net Interest Income.

 

     Six Months Ended June 30,      Increase
(Decrease)
    % Change  

(Dollars in thousands)

   2012      2011       

Interest income:

          

Interest and fees on loans

   $ 5,589       $ 5,189       $ 400        7.71

Securities - taxable

     83         199         (116     (58.29

Securities - nontaxable

     76         70         6        8.57   

Other interest - earning assets

     67         54         13        24.07   
  

 

 

    

 

 

    

 

 

   

Total interest income

     5,815         5,512         303        5.50   
  

 

 

    

 

 

    

 

 

   

Interest expense:

          

Savings deposits

     27         41         (14     (34.15

Money market

     42         85         (43     (50.59

Demand deposit account

     35         57         (22     (38.60

Certificates of deposit

     470         521         (51     (9.79
  

 

 

    

 

 

    

 

 

   

Total deposits

     574         704         (130     (18.47

Borrowings

     170         225         (55     (24.44
  

 

 

    

 

 

    

 

 

   

Total interest expense

     744         929         (185     (19.91
  

 

 

    

 

 

    

 

 

   

Net interest income

   $ 5,071       $ 4,583       $ 488        10.65
  

 

 

    

 

 

    

 

 

   

 

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Table of Contents

Summary of Average Yields, Average Rates and Average Balances.

Average Yields and Rates

 

     Six Months Ended June 30,     Increase
(decrease)
 
     2012     2011    

Loans

     5.09     5.32     (0.23 )% 

Securities - taxable

     1.18     2.07     (0.89

Securities - nontaxable

     3.37     3.61     (0.24

Other interest - earning assets

     0.55     0.49     0.06   

Total interest - earning assets

     4.42     4.59     (0.17

Savings deposits

     0.15     0.25     (0.10

Money market

     0.22     0.41     (0.19

Demand deposit account

     0.13     0.21     (0.08

Certificates of deposit

     1.28     1.61     (0.33

Total deposits

     0.57     0.72     (0.15

Borrowings

     1.33     2.82     (1.49

Total interest-bearing liabilities

     0.66     0.88     (0.22

Net interest rate spread

     3.76     3.71     0.05   

Net interest margin

     3.85     3.82     0.03

Average Balances

 

     Six Months Ended June 30,      Increase
(Decrease)
    % Change  
(Dollars in thousands)    2012      2011       

Loans

   $ 219,792       $ 195,076       $ 24,716        12.67

Securities - taxable

     14,043         19,219         (5,176     (26.93

Securities - nontaxable

     4,510         3,878         632        16.30   

Other interest - earning assets

     24,761         22,071         2,690        12.19   
  

 

 

    

 

 

    

 

 

   

Total interest - earning assets

     263,106         240,244         22,862        9.52   
  

 

 

    

 

 

    

 

 

   

Savings deposits

     35,770         33,211         2,559        7.71   

Money market

     38,386         41,212         (2,826     (6.86

Demand deposit account