XNAS:MNRK Monarch Financial Holdings Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

XNAS:MNRK Fair Value Estimate
Premium
XNAS:MNRK Consider Buying
Premium
XNAS:MNRK Consider Selling
Premium
XNAS:MNRK Fair Value Uncertainty
Premium
XNAS:MNRK Economic Moat
Premium
XNAS:MNRK Stewardship
Premium
 

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_______________________________________________________
FORM 10-Q
_______________________________________________________
ý
QUARTERLY REPORT UNDER SECTION 13 0R 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended: March 31, 2012
OR
¨
TRANSITION REPORT UNDER SECTIONS 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-34565
 _______________________________________________________
MONARCH FINANCIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
 _______________________________________________________
 
VIRGINIA
6022
20-4985388
(State of other jurisdiction of
Incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification No.)
1435 Crossways Blvd.
Chesapeake, Virginia 23320
(757) 389-5111
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report) 
 _______________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    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 definition of “large accelerated filer,” and “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes   ¨  No  ý
The number of shares of common stock outstanding as of May 4, 2012 was 5,981,489.
 
 
 
 
 




(This page intentionally left blank.)


2


MONARCH FINANCIAL HOLDINGS, INC.
FORM 10-Q
March 31, 2012
INDEX
 
PART I.
 
 
ITEM 1.
 
 
 
 
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2012 and March 31, 2011
 
 
 
 
 
 
 
ITEM 2.
 
ITEM 3.
 
ITEM 4.
PART II.
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
Mine Safety Disclosures
 
Item 5.
 
Item 6.

3


PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MONARCH FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CONDITION
 
Unaudited
 
 
 
March 31, 2012
 
December 31, 2011
ASSETS:
 
 
 
Cash and due from banks
$
19,976,387

 
$
20,090,991

Interest bearing bank balances
17,075,445

 
10,188,033

Federal funds sold
1,643,905

 
1,466,560

Total cash and cash equivalents
38,695,737

 
31,745,584

Investment securities available-for-sale, at fair value
8,841,098

 
9,186,697

Loans held for sale
243,178,666

 
211,555,094

Loans held for investment, net of unearned income
598,357,479

 
607,612,446

Less: allowance for loan losses
(10,400,000
)
 
(9,930,000
)
Loans, net
587,957,479

 
597,682,446

Property and equipment, net
23,086,055

 
23,093,883

Restricted equity securities
7,242,450

 
6,420,500

Bank owned life insurance
7,007,498

 
6,946,166

Goodwill
775,000

 
775,000

Intangible assets, net
416,668

 
461,311

Other real estate owned
2,231,500

 
3,368,700

Other assets
18,388,966

 
17,551,547

Total assets
$
937,821,117

 
$
908,786,928

LIABILITIES:
 
 
 
Deposits:
 
 
 
Demand deposits—non-interest bearing
$
149,519,532

 
$
133,855,101

Demand deposits—interest bearing
43,282,123

 
40,930,378

Savings deposits
17,261,604

 
17,915,622

Money market deposits
297,285,326

 
269,749,851

Time deposits
304,333,186

 
277,641,145

Total deposits
811,681,771

 
740,092,097

Borrowings:
 
 
 
Trust preferred subordinated debt
10,000,000


10,000,000

Federal funds purchased
4,350,000



Federal Home Loan Bank advances
19,766,990

 
70,927,481

Total borrowings
34,116,990

 
80,927,481

Other liabilities
13,240,169

 
10,920,522

Total liabilities
859,038,930

 
831,940,100

STOCKHOLDERS’ EQUITY:
 
 
 
Preferred stock, $5 par value, 1,185,300 shares authorized; none issued

 

Noncumulative perpetual preferred stock, series B, liquidation value of $20.0 million, $5 par; 800,000 shares authorized, issued and outstanding
4,000,000

 
4,000,000

Common stock, $5 par value; 20,000,000 shares authorized; issued and outstanding, 5,981,489 shares (includes nonvested shares of 87,550) at March 31, 2012 and 5,999,989 shares (includes nonvested shares of 83,550); at December 31, 2011
29,469,695

 
29,582,195

Additional paid-in capital
22,616,394

 
22,475,738

Retained earnings
22,424,066

 
20,537,960

Accumulated other comprehensive loss
(341,645
)
 
(363,028
)
Total Monarch Financial Holdings, Inc. stockholders’ equity
78,168,510

 
76,232,865

Noncontrolling interests
613,677

 
613,963

Total equity
78,782,187

 
76,846,828

Total liabilities and stockholders’ equity
$
937,821,117

 
$
908,786,928

The accompanying notes are an integral part of the consolidated financial statements.

4


ITEM 1. FINANCIAL STATEMENTS (CONTINUED)

MONARCH FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
 
3 Months Ended March 31,
 
2012
 
2011
Interest income:
 
 
 
Interest and fees on loans
$
10,881,036

 
$
9,443,210

Interest on investment securities
46,231

 
40,551

Interest on federal funds sold
6,259

 
27,041

Dividends on equity securities
37,500

 
32,515

Interest on other bank accounts
3,548

 
1,075

Total interest income
10,974,574

 
9,544,392

Interest expense:
 
 
 
Interest on deposits
1,281,787

 
1,757,675

Interest on trust preferred subordinated debt
122,850

 
121,500

Interest on borrowings
62,507

 
22,985

Total interest expense
1,467,144

 
1,902,160

Net interest income
9,507,430

 
7,642,232

Provision for loan losses
1,930,679

 
1,001,454

Net interest income after provision for loan losses
7,576,751

 
6,640,778

Non-interest income:
 
 
 
Mortgage banking income
16,584,211

 
9,004,237

Service charges and fees
414,051

 
386,320

Other
397,746

 
303,949

Total noninterest income
17,396,008

 
9,694,506

Non-interest expenses:
 
 
 
Personnel Expense
15,362,719

 
$
9,250,504

Loan expense
1,615,131

 
1,312,481

Occupancy and equipment expenses
1,599,081

 
1,387,033

Marketing expense
410,291

 
273,756

Data processing
345,990

 
305,833

Foreclosed property expense
(97,433
)
 
42,942

Other
1,646,031

 
1,553,206

Total noninterest expenses
20,881,810

 
14,125,755

Income before income taxes
4,090,949

 
2,209,529

Income tax provision
(1,421,541
)
 
(699,474
)
Net income
2,669,408

 
1,510,055

Less: Net income attributable to noncontrolling interests
(153,302
)
 
(136,798
)
Net income attributable to Monarch Financial Holdings, Inc.
$
2,516,106

 
$
1,373,257

Preferred stock dividend and accretion of discount
(390,000
)
 
(390,000
)
Net income available to common stockholders
$
2,126,106

 
$
983,257

Basic net income per share
$
0.36

 
$
0.16

Diluted net income per share
$
0.30

 
$
0.16


The accompanying notes are an integral part of the consolidated financial statements.

5


ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
MONARCH FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
Three Months Ended
 
 
March 31,
 
 
2012
 
2011
Net Income
 
$
2,669,408

 
$
1,510,055

Other comprehensive income (loss):
 

 

Change in unrealized loss on interest rate swap, net of income taxes
 
18,647

 
66,511

Change in unrealized gains on securities available for sale, net of income taxes
 
2,736

 
(19,879
)
Other comprehensive income
 
21,383

 
46,632

Total comprehensive income
 
2,690,791

 
1,556,687

Less: Comprehensive income attributable to noncontrolling interests
 
(153,302
)
 
(136,798
)
Comprehensive income attributable to Monarch Financial Holdings, Inc.
 
$
2,537,489

 
$
1,419,889

 
 
 
 
 
Unrealized loss on interest rate swap
 
$
28,252

 
$
100,715

Income tax expense
 
(9,605
)
 
(34,204
)
Net unrealized loss on interest rate swap
 
$
18,647

 
$
66,511

 
 
 
 
 
Unrealized holding gains on securities available for sale
 
$
4,146

 
$
(30,120
)
Income tax (expense) benefit
 
(1,410
)
 
10,241

Net unrealized gains on securities available for sale
 
$
2,736

 
$
(19,879
)

The accompanying notes are an integral part of the consolidated financial statements.

6


ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
 MONARCH FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited)
 
Common Stock
 
Additional
Paid-In
Capital
 
Preferred
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interest
 
Total
Shares
 
Amount
 
Balance—December 31, 2010
5,969,039

 
$
29,845,195

 
$
22,131,351

 
$
4,000,000

 
$
15,925,106

 
$
(333,247
)
 
$
165,092

 
$
71,733,497

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Net income for the three months ended March 31, 2011
 
 
 
 
 
 
 
 
1,373,257

 
 
 
136,798

 
1,510,055

Other comprehensive income
 
 
 
 
 
 
 
 
 
 
46,632

 
 
 
46,632

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,556,687

Stock-based compensation expense, net of forfeitures and income taxes
(3,700
)
 
(18,500
)
 
120,250

 
 
 
 
 
 
 
 
 
101,750

Cash dividend declared on series B noncumulative perpetual preferred stock (7.8%)
 
 
 
 
 
 
 
 
(390,000
)
 
 
 
 
 
(390,000
)
Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
(147,713
)
 
(147,713
)
Balance—March 31, 2011
5,965,339

 
$
29,826,695

 
$
22,251,601

 
$
4,000,000

 
$
16,908,363

 
$
(286,615
)
 
$
154,177

 
$
72,854,221

Balance—December 31, 2011
5,916,439

 
$
29,582,195

 
$
22,475,738

 
$
4,000,000

 
$
20,537,960

 
$
(363,028
)
 
$
613,963

 
$
76,846,828

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income for the three months ended March 31, 2012
 
 
 
 
 
 
 
 
2,516,106

 
 
 
153,302

 
2,669,408

Other comprehensive income
 
 
 
 
 
 
 
 
 
 
21,383

 
 
 
21,383

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2,690,791

Stock-based compensation expense, net of forfeitures and income taxes
(22,500
)
 
(112,500
)
 
140,656

 
 
 
 
 
 
 
 
 
28,156

Cash dividend declared on series B noncumulative perpetual preferred stock (7.8%)
 
 
 
 
 
 
 
 
(390,000
)
 
 
 
 
 
(390,000
)
Cash dividend declared on common. stock ($0.04 per share)
 
 
 
 
 
 
 
 
(240,000
)
 
 
 
 
 
(240,000
)
Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
(153,588
)
 
(153,588
)
Balance—March 31, 2012
5,893,939

 
$
29,469,695

 
$
22,616,394

 
$
4,000,000

 
$
22,424,066

 
$
(341,645
)
 
$
613,677

 
$
78,782,187

The accompanying notes are an integral part of the consolidated financial statements.


7


ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
MONARCH FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
3 Months Ended March 31,
 
March 31, 2012
 
March 31, 2011
Operating activities:
 
 
 
Net income
$
2,669,408

 
$
1,510,055

Adjustments to reconcile to net cash from (used in) operating activities:
 
 
 
Provision for loan losses
1,930,679

 
1,001,454

Depreciation
468,048

 
378,188

Accretion of discounts and amortization of premiums, net
3,055

 
6,604

Deferral of loan costs, net of deferred fees
(19,556
)
 
(20,988
)
Amortization of intangible assets
44,643

 
44,643

Stock-based compensation
28,156

 
101,750

Appreciation of bank-owned life insurance
(61,332
)
 
(67,715
)
Loss from rate lock commitments

 
125,847

Net gain on sale of other real estate
(99,109
)
 

Amortization of deferred gain
(40,862
)
 
(40,863
)
Changes in:
 
 
 
Loans held for sale
(31,623,572
)
 
80,081,885

Interest receivable
103,348

 
(27,447
)
Other assets
(973,542
)
 
3,222,209

Other liabilities
2,387,351

 
(577,361
)
Net cash from (used in) operating activities
(25,183,285
)
 
85,738,261

Investing activities:
 
 
 
Purchases of available-for-sale securities
(1,668,329
)
 
(36,503,183
)
Proceeds from sales and maturities of available-for-sale securities
2,015,019

 
10,526,525

Proceeds from sale of other real estate
1,649,309

 
656,482

Purchases of premises and equipment
(437,050
)
 
(2,097,261
)
Purchase of restricted equity securities, net of redemptions
(821,950
)
 
(166,450
)
Loan originations, net of principal repayments
7,400,844

 
(9,190,391
)
Net cash from (used in) investing activities
8,137,843

 
(36,774,278
)
Financing activities:
 
 
 
Net increase in noninterest-bearing deposits
15,664,431

 
5,779,399

Net increase (decrease) in interest-bearing deposits
55,925,243

 
(41,613,494
)
Cash dividends paid on preferred stock
(390,000
)
 
(390,000
)
Cash dividends paid on common stock
(240,000
)
 

Net (decrease) increase of FHLB advances and federal funds purchased
(46,810,491
)
 
11,168,198

Distributions to noncontrolling interests
(153,588
)
 
(147,713
)
Net cash from (used in) financing activities
23,995,595

 
(25,203,610
)
CHANGE IN CASH AND CASH EQUIVALENTS
6,950,153

 
23,760,373

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
31,745,584

 
27,375,747

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
38,695,737

 
$
51,136,120

SUPPLEMENTAL SCHEDULES AND CASH FLOW INFORMATION
 
 
 
Cash paid for:
 
 
 
Interest on deposits and other borrowings
$
1,337,548

 
$
1,886,036

Income taxes
$

 
$
7,600

Loans transferred to foreclosed real estate during the year
$
413,000

 
$
1,087,600

Unrealized gain on securities available for sale
$
4,146

 
$
(30,120
)
Unrealized gain on interest rate swap
$
28,252

 
$
100,715

The accompanying notes are an integral part of the consolidated financial statements.

8


MONARCH FINANCIAL HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments consisting of normal recurring accruals necessary to present fairly Monarch Financial Holdings, Inc.’s financial position as of March 31, 2012; the consolidated statements of income for the three months ended March 31, 2012 and 2011; the consolidated statements of comprehensive income for the three months ended March 31, 2012 and 2011; the consolidated statements of changes in stockholders’ equity for the three months ended March 31, 2012 and 2011; and the consolidated statements of cash flows for the three months ended March 31, 2012 and 2011. These financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore, do not include all of the disclosures and notes required by generally accepted accounting principles. The financial statements include the accounts of Monarch Financial Holdings, Inc. and its subsidiaries, and all significant intercompany accounts and transactions have been eliminated. Operating results for the three months period ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ended December 31, 2012. Certain prior year amounts have been reclassified to conform to current year presentations.
Recent Accounting Pronouncements
In April 2011, the FASB issued ASU 2011-03, “Transfers and Servicing (Topic 860) - Reconsideration of Effective Control for Repurchase Agreements.” The amendments in this ASU remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this ASU are effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The adoption of the new guidance did not have a material impact on our consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU is the result of joint efforts by the FASB and International Accounting Standards Board (IASB) to develop a single, converged fair value framework on how (not when) to measure fair value and what disclosures to provide about fair value measurements. The ASU is largely consistent with existing fair value measurement principles in U.S. GAAP (Topic 820), with many of the amendments made to eliminate unnecessary wording differences between U.S. GAAP and International Financial Reporting Standards (IFRS). The amendments are effective for interim and annual periods beginning after December 15, 2011 with prospective application. Early application is not permitted. We have included the required disclosures in our consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) - Presentation of Comprehensive Income.” The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments require that all non-owner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement of comprehensive income should include the components of net income, a total for net income, the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present all the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The amendments do not change the items that must be reported in other comprehensive income, the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share. The amendments in this ASU should be applied retrospectively. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption is permitted because compliance with the amendments is already permitted. The amendments do not require transition disclosures. We have included the required disclosures in our consolidated financial statements.

In September 2011, the FASB issued ASU 2011-08, “Intangible - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment.”  The amendments in this ASU permit an entity to first assess qualitative factors related to goodwill to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill test described in Topic 350.  The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent.  Under the amendments in this ASU, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying

9


amount.  The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity's financial statements for the most recent annual or interim period have not yet been issued.  The adoption of the new guidance did not have a material impact on our consolidated financial statements.

In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210) - Disclosures about Offsetting Assets and Liabilities.” This ASU requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. We do not expect the adoption of ASU 2011-11 to have a material impact on our consolidated financial statements.

In December 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220) - Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” The amendments are being made to allow the Board time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the Board is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05. All other requirements in ASU 2011-05 are not affected by ASU 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. We have included the required disclosures in our consolidated financial statements.

NOTE 2. GENERAL
We are a Virginia-chartered bank holding company engaged in business and consumer banking, investment and insurance sales, and mortgage origination and brokerage. We were created on June 1, 2006 through a reorganization plan, under the laws of the Commonwealth of Virginia, in which Monarch Bank became our wholly-owned subsidiary. Monarch Bank was incorporated on May 1, 1998, and opened for business on April 14, 1999. Our corporate office and main office are located in the Greenbrier area of Chesapeake. In addition we have nine other Virginia banking offices – in the Great Bridge area in Chesapeake, the Lynnhaven area, the Town Center area, the Oceanfront, the Kempsville area, and the Hilltop area in Virginia Beach, the Ghent area and in the downtown area in Norfolk, and the southwest area in Suffolk. Our North Carolina banking division operates as OBX Bank through two offices in Kitty Hawk and Nags Head.
In August 2001, we formed Monarch Investment, LLC, to enable us to offer additional services to our clients. We own 100% of Monarch Investment, LLC. Monarch Investment, LLC owns a minority interest in Infinex Financial Group (Infinex), a broker-dealer headquartered in Meriden, Connecticut. Monarch Investment, LLC, provides non-deposit investment services under the name of Monarch Investments, through Infinex.
In January 2003, Monarch Investment, LLC, purchased a noncontrolling interest in Bankers Insurance, LLC, in a joint venture with the Virginia Bankers Association and many other community banks. Bankers Insurance, LLC, is a full service property/casualty and life/health agency that ranks as one of the largest agencies in Virginia. Bankers Insurance, LLC, provides insurance to our customers and to the general public.
In February 2004, we formed Monarch Capital, LLC, for the purpose of engaging in the commercial real estate brokerage business. We own a 100% interest in Monarch Capital, LLC.
In May 2007, we expanded banking operations into northeastern North Carolina with the opening of a banking office in the town of Kitty Hawk, under the name of OBX Bank (OBX). We opened a second office in the town of Nags Head in December 2009. OBX Bank, which operates as our division, is led by a local management team and a local advisory board of directors.
In June 2007, we announced the expansion of our mortgage operations through the acquisition of a team of experienced mortgage bankers, and our mortgage division began operating as Monarch Mortgage (MM). MM originates and sells conventional, FHA, VA and VHDA residential loans and offers additional mortgage products such as construction-permanent loans for Monarch Bank’s loan portfolio. Their primary office is in Virginia Beach with additional offices in Chesapeake, Norfolk, Richmond, Midlothian, Manassas, Fairfax, Fredericksburg, Woodbridge, Alexandria, Oakton and Reston, Virginia, Rockville, Waldorf,

10


Crofton, Dunkirk, Bowie, Towson and Greenbelt, Maryland and Kitty Hawk, Wilmington, Mooresville, Southport and Charlotte, North Carolina, and Greenwood, South Carolina.
In July 2007, Monarch Investment, LLC, purchased a 51% ownership in Coastal Home Mortgage, LLC, from another bank. This joint venture provides residential loan services through Monarch Mortgage. The 49% ownership is shared by four individuals involved in commercial and residential construction in the Hampton Roads area.
In October 2007, Monarch Investment, LLC, formed a title insurance company, Real Estate Security Agency, LLC (RESA), along with TitleVentures, LLC. Monarch Investment, LLC, owns 75% of RESA and TitleVentures, LLC, owns 25%. RESA offers residential and commercial title insurance to the clients of Monarch Mortgage and Monarch Bank.
In March 2010, Monarch Investment, LLC, formed Regional Home Mortgage, LLC, in Chesapeake, Virginia. Monarch Investment, LLC, owns 51% of the company and TREG Funding, LLC owns 49%, which was formed for the primary purpose of providing residential mortgages to clients of TREG Funding, LLC. TREG Funding, LLC is associated with The Real Estate Group, a leading realty firm in Chespeake and Virginia Beach, Virginia.
In September 2010, Monarch Investment, LLC, formed Monarch Home funding, LLC, in Norfolk, Virginia. The primary purpose of the company, of which Monarch Investment, LLC, owns 51% and Danaus, LLC, owns 49%, is to provide residential mortgages to clients of Danaus, LLC. Danaus, LLC is associated with Nancy Chandler Associates, a leading realty firm with offices in Norfolk and Chesapeake, Virginia.
In March 2011, Monarch Investment, LLC, formed Crossways Holdings, LLC, in Chesapeake, Virginia. Crossways Holdings, LLC is a single member limited liability company, formed for the purpose of acquiring, maintaining, utilizing and disposing of assets for Monarch Bank.
NOTE 3. EARNINGS PER SHARE (“EPS”)
Basic earnings per share (EPS) exclude dilution and are computed by dividing income available to common shareholders by the weighted-average number of shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised, converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations.
  
3 months ended March 31,
  
2012
 
2011
Net income
$
2,516,106

 
$
1,373,257

Less: non-cumulative perpetual preferred dividend
(390,000
)
 
(390,000
)
Net income (numerator, basic)
2,126,106

 
983,257

Weighted average shares outstanding (denominator)
5,981,489

 
5,969,717

Income per common share—basic
$
0.36

 
$
0.16

Net income (numerator, diluted)
$
2,516,106

 
1,373,257

Weighted average shares—diluted (denominator)
8,503,151

 
8,490,328

Income per common share—diluted
$
0.30

 
$
0.16

Dilutive effect-average number of common shares
21,662

 
20,611

Dilutive effect-average number of convertible non-cumulative perpetual preferred, if converted
2,500,000

 
2,500,000

Dilutive effect-average number of shares
2,521,662

 
2,520,611

 
For the three months ended March 31, 2012 and 2011, average options to purchase 105,687 and 121,198 shares, respectively, were not included in the computation of earnings per common share, because they were anti-dilutive.
800,000 shares of non-cumulative perpetual preferred stock, which are each convertible to 3.125 shares of common stock, are included in the denominator of our diluted earnings per share calculation at the converted value of 2,500,000 shares for the three months ended March 31, 2012 and 2011. Additionally, for the three months ended March 31, 2012 and 2011, the non-cumulative perpetual preferred dividend paid on our preferred shares has been excluded from the numerator.


11


NOTE 4. INVESTMENT SECURITIES
Securities available-for-sale consists of the following:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
March 31, 2012
 
 
 
 
 
 
 
U.S. government agency obligations
$
5,056,584

 
$
43,705

 
$
(5,045
)
 
$
5,095,244

Mortgage-backed securities
1,751,430

 
15,003

 

 
1,766,433

Municipal securities
1,394,551

 
72,995

 

 
1,467,546

Corporate debt securities
500,000

 
11,875

 

 
511,875

 
$
8,702,565

 
$
143,578

 
$
(5,045
)
 
$
8,841,098

 
 
 
 
 
 
 
 
  
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
December 31, 2011
 
 
 
 
 
 
 
U.S. government agency obligations
$
6,058,680

 
$
48,244

 
$
(1,331
)
 
$
6,105,593

Mortgage-backed securities
1,249,269

 
12,556

 
(2,977
)
 
1,258,848

Municipal securities
1,244,362

 
69,555

 
(3,016
)
 
1,310,901

Corporate debt securities
500,000

 
11,355

 

 
511,355

 
$
9,052,311

 
$
141,710

 
$
(7,324
)
 
$
9,186,697

No held-to-maturity securities existed at March 31, 2012 or December 31, 2011.
The amortized cost and fair value of securities by contractual maturity date at March 31, 2012 are as follows:
 
Securities available-for-sale:
Amortized
Cost
 
Fair Value
Due in one year or less
$
500,046

 
$
500,625

Due from one to five years
4,174,220

 
4,232,131

Due from five to ten years
1,149,671

 
1,144,917

Due after ten years
2,878,628

 
2,963,425

Total
$
8,702,565

 
$
8,841,098

There are no investments in our securities portfolio that have been in a continuous unrealized loss position for more than 12 months. If we were to have unrealized losses in our securities portfolio for more than 12 months, we have the ability to carry such investments to the final maturity of the instruments. Other-than-temporarily impaired (“OTTI”) guidance for investments state that an impairment is OTTI if any of the following conditions exists: the entity intends to sell the security; it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis; or, the entity does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell). An impaired security identified as OTTI should be separated and losses should be recognized in earnings. Based on this guidance, there were no securities considered OTTI at March 31, 2012 or December 31, 2011 and there were no losses related to OTTI recognized in accumulated other comprehensive income at March 31, 2012 or December 31, 2011.




12


NOTE 5. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSS
The following table provides a breakdown, by class of our loans held for investment at March 31, 2012 and December 31, 2011.
Loans held for Investment
 
 
March 31, 2012
 
December 31, 2011
Commercial
$
80,150,851

 
$
81,209,758

Real estate
 
 
 
Construction
139,547,912

 
139,255,002

Residential (1-4 family)
84,977,815

 
85,750,291

Home equity lines
74,162,094

 
74,870,706

Multifamily
21,026,795

 
26,710,732

Commercial
194,275,714

 
196,198,979

Real estate subtotal
513,990,330

 
522,785,710

Consumers
 
 
 
Consumer and installment loans
4,133,546

 
3,548,466

Overdraft protection loans
52,917

 
58,232

Loans to individuals subtotal
4,186,463

 
3,606,698

Total gross loans
598,327,644

 
607,602,166

Unamortized loan costs, net of deferred fees
29,835

 
10,280

Loans held for investment, net of unearned income
598,357,479

 
607,612,446

Allowance for loan losses
(10,400,000
)
 
(9,930,000
)
Total net loans
$
587,957,479

 
$
597,682,446

We have certain lending policies and procedures in place that are designed to balance loan growth and income with an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, credit concentrations, policy exceptions, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.
Our loan portfolio is divided into three loan types; commercial, real estate and consumer. Some of these loan types are further broken down into classes. The commercial loan portfolio is not broken down further, and includes commercial and industrial loans which are usually secured by the assets being financed or other business assets. The real estate portfolio is broken down into construction, residential 1-4 family, home equity lines, multifamily, and commercial real estate loan segments. The consumer loan portfolio is segmented into consumer and installment loans, and overdraft protection loans.
Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, we examine current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and normally incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.
Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation or sale of the income producing property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing our commercial real estate portfolio are diverse in terms of type. This

13


diversity helps reduce our exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on purpose, collateral, geography, cash flow, loan to value and risk grade criteria. As a general rule, we avoid financing special purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. At March 31, 2012, approximately 56% and at December 31, 2011, approximately 55% of the outstanding principal balance of our commercial real estate loans portfolio was secured by owner-occupied properties.
With respect to loans to developers and builders that are secured by non-owner occupied properties that we may originate from time to time, we generally require the borrower to have an existing relationship with the Company and a proven record of success. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of considerable funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, supply and demand, government regulation of real property, general economic conditions and the availability of long-term financing.
We generally require multifamily real estate loan borrowers to have an existing relationship with the Company, a proven record of success and guarantor financial strength, commensurate with the project size. The underlying feasibility of a multifamily project is stress tested for sensitivity to both capitalization and interest rate changes. Each project is underwritten separately and additional underwriting standards are required for the guarantors, which include, but are not limited to, a maximum loan-to-value percentage, global cash flow analysis and contingent liability analysis. Sources of repayment for these types of loans may be rent rolls or sales of the developed property, either by unit or as a whole.
Consumer and residential loan originations utilize analytics to supplement the underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed. This monitoring, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend, sensitivity analysis, shock analysis and outlook reports are reviewed by management on a regular basis. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage, collection remedies, the number of such loans a borrower can have at one time and documentation requirements.
We perform periodic reviews on various segments of our loan portfolio in addition to presenting our larger loan relationships for loan committee review. We utilize an independent company to perform a periodic review to evaluate and validate our credit risk program. Results of these reviews are presented to management and our board. Additionally, we are subject to annual examination by our regulators. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as our policies and procedures.
We have an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. This methodology begins with a look at the three loan types; commercial, real estate, and consumer. Loans within the commercial and real estate categories are evaluated on an individual or relationship basis and assigned a risk grade based on the characteristics of the loan or relationship. Loans within the consumer type are assigned risk grades and evaluated as a pool, unless specifically identified through delinquency or other signs of credit deterioration, at which time the identified loan would be individually evaluated.
We designate loans within our loans held for investment portfolio as either “pass” or “watch list” based on nine numerical risk grades which are assigned to the loans. These numeric designations represent, from best to worst: minimal, modest, average, acceptable, acceptable with care, special mention, substandard, doubtful and loss. Special mention, substandard, doubtful and loss risk grades are watch list.
A loan risk graded as loss is generally charged-off when identified. A loan risk graded as doubtful is considered watch list and classified as nonaccrual. We had one loan in our portfolio classified as doubtful at March 31, 2012 and none at December 31, 2011. There were no loans classified as a loss on March 31, 2012 or December 31, 2011. Special mention loans and substandard loans are considered watch list risk grades and may or may not be classified as nonaccrual, based on current performance. Watch list graded loans or relationships are evaluated individually to determine if all, or a portion of our investment in the borrower, is at risk. If a risk is quantified, a specific loss allowance is assigned to the identified loan or relationship. We evaluate our investment in the borrower using either the present value of expected future cash flows, discounted at the historical effective interest rate of the loan, or for a collateral-dependent loan, the fair value of the underlying collateral.


14


Pass loans are evaluated for loss based on risk rating. Loans with a risk rating of modest to acceptable with care having lower risk profiles, are assigned an expected loss factor. The loss factor, which is multiplied by the outstanding principal within each risk grade to arrive at an overall loss estimate, is based on a three-year moving average “look-back” at our historical losses, adjusted for environmental risk factors described below.
Additional metrics, in the form of environmental risk factors, may be applied to a specific class or risk grade of loans within the portfolio based on local or national trends, identifiable events or other economic factors. For the periods presented, four environmental factors were applied to the general risk grade groups. The first environmental factor was applied to our real estate construction loans due to the concentration in our portfolio. The second environmental factor was applied to our home equity lines based on delinquency rates. The third environmental factor was applied to all satisfactory loans based on economic conditions, including local unemployment and gross regional product. The final environmental factor was applied to all pass loans based on trends in our nonperforming assets. The assumptions used to determine the allowance are reviewed to ensure that their theoretical foundation, data integrity, computational processes, and reporting practices are appropriate and properly documented.
We utilize various sources in assessing the economic conditions in our target markets and areas of concentration. We track unemployment trends in both Hampton Roads and Virginia compared to the national average. We monitor trends in our industry and among our peers through reports such as the Uniform Bank Performance Report which are made available to us through the Federal Financial Institutions Examination Council. Additionally, we utilize various industry sources that include information published by CB Richard Ellis, an international firm specializing in commercial real estate reporting and REIS, a provider of commercial real estate information and analytics to monitor local, state and national trends.
We evaluate the adequacy of our allowance for loan losses monthly. A degree of imprecision or uncertainty is inherent in our allowance estimates because it requires that we incorporate a range of probable outcomes which may change from period to period. It requires that we exercise judgment as to the risks inherent in our portfolios, economic uncertainties, historical loss and other subjective factors, including industry trends. No single statistic or measurement determines the adequacy of the allowance for loan loss. Changes in the allowance for loan loss and the related provision expense can materially affect net income.
The following table segregates our portfolio between pass and watchlist loans, delineated by segments, within loan type for March 31, 2012 and December 31, 2011.
 

15


  
March 31, 2012
  


Watchlist



Weighted
Average
Risk Grade

Pass

Special Mention

Substandard

Total

Commercial
$
72,840,109


$
2,267,613


$
5,043,129


$
80,150,851


4.01

Real estate
 

 

 



 
Construction
126,317,460


4,505,905


8,724,547


139,547,912


4.11

Residential (1-4 family)
76,874,357


1,545,501


6,557,957


84,977,815


4.33

Home equity lines
71,576,158


2,204,760


381,176


74,162,094


4.10

Multifamily
18,780,722




2,246,073


21,026,795


3.81

Commercial
185,461,484


2,164,958


6,649,272


194,275,714


4.02

Real estate subtotal
479,010,181


10,421,124


24,559,025


513,990,330


4.10

Consumers








 
Consumer and installment loans
4,114,538




19,008


4,133,546


3.76

Overdraft protection loans
52,917






52,917


4.01

Loans to individuals subtotal
4,167,455




19,008


4,186,463


3.76

Total gross loans
$
556,017,745


$
12,688,737


$
29,621,162


$
598,327,644


4.09


  
December 31, 2011



Watchlist



Weighted
Average
Risk Grade
  
Pass

Special Mention

Substandard

Total

Commercial
$
72,166,118


$
3,073,611


$
5,970,029


$
81,209,758


4.06

Real estate
 
 
 
 
 



 
Construction
124,747,757


495,479


14,011,766


139,255,002


4.08

Residential (1-4 family)
75,240,661


1,259,491


9,250,139


85,750,291


4.43

Home equity lines
71,487,540


2,229,059


1,154,107


74,870,706


4.12

Multifamily
24,408,006




2,302,726


26,710,732


3.82

Commercial
187,102,529


1,518,206


7,578,244


196,198,979


4.06

Real estate subtotal
482,986,493


5,502,235


34,296,982


522,785,710


4.12

Consumers








 
Consumer and installment loans
3,528,103




20,364


3,548,467


3.78

Overdraft protection loans
58,231






58,231


4.07

Loans to individuals subtotal
3,586,334




20,364


3,606,698


3.78

Total gross loans
$
558,738,945


$
8,575,846


$
40,287,375


$
607,602,166


4.11



16


An aging of our loan portfolio by class as of March 31, 2012 and December 31, 2011 is as follows:
 
Age Analysis of Past Due Loans
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Greater
Than
90 Days
 
Total
Past Due
 
Current
 
Recorded
Investment  >
90 days and
Accruing
 
Recorded
Investment
Nonaccrual
Loans
March 31, 2012

 

 

 

 

 

 

Commercial
$
12,703

 
$

 
$
1,022,192

 
$
1,034,895

 
$
79,115,956

 
$
226

 
$
1,654,635

Real estate
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction
643,355

 

 
2,376,612

 
3,019,967

 
136,527,945

 
1,259,431

 
1,117,181

Residential (1-4 family)
1,104,265

 

 
3,776,788

 
4,881,053

 
80,096,762

 
461,302

 
3,613,536

Home equity lines
189,848

 
99,830

 

 
289,678

 
73,872,416

 

 
599,482

Multifamily

 

 

 

 
21,026,795

 

 

Commercial

 

 
229,088

 
229,088

 
194,046,626

 

 
229,088

Real estate subtotal
1,937,468

 
99,830

 
6,382,488

 
8,419,786

 
505,570,544

 
1,720,733

 
5,559,287

Consumers

 

 

 

 

 

 

Consumer and installment loans
41,541

 

 
14,590

 
56,131

 
4,077,415

 
14,590

 
19,008

Overdraft protection loans

 

 

 

 
52,917

 

 

Loans to individuals subtotal
41,541

 

 
14,590

 
56,131

 
4,130,332

 
14,590

 
$19,008
Total gross loans
$
1,991,712

 
$
99,830

 
$
7,419,270

 
$
9,510,812

 
$
588,816,832

 
$
1,735,549

 
$
7,232,930

December 31, 2011

 

 

 

 

 

 

Commercial:
$
676,519

 
$
21,870

 
$
1,060,983

 
$
1,759,372

 
$
79,450,386

 
$

 
$
1,654,635

Real estate
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction

 

 
128,722

 
128,722

 
139,126,280

 

 
128,723

Residential (1-4 family)
5,692,220

 
871,229

 
861,815

 
7,425,264

 
78,325,027

 
138,562

 
1,224,263

Home equity lines
109,851

 
102,600

 
257,450

 
469,901

 
74,400,805

 

 
856,932

Multifamily

 

 

 

 
26,710,732

 

 

Commercial

 
195,074

 
34,015

 
229,089

 
195,969,890

 
39,018

 
229,088

Real estate subtotal
5,802,071

 
1,168,903

 
1,282,002

 
8,252,976

 
514,532,734

 
177,580

 
2,439,006

Consumers

 

 

 

 

 

 

Consumer and installment loans
36,469

 

 

 
36,469

 
3,511,997

 

 
20,365

Overdraft protection loans

 

 

 

 
58,232

 

 

Loans to individuals subtotal
36,469

 

 

 
36,469

 
3,570,229

 

 
20,365

Total gross loans
$
6,515,059

 
$
1,190,773

 
$
2,342,985

 
$
10,048,817

 
$
597,553,349

 
$
177,580

 
$
4,114,006

The column “recorded investment nonaccrual loans”, in the Age Analysis table above, includes nonaccrual loans totaling $6,600,034 and $3,378,147, and restructured loans on nonaccrual status totaling $632,670 and $735,859, at March 31, 2012 and December 31, 2011, respectively.



17


     We currently have one commercial loan totaling $632,670 and one residential 1-4 family loan totaling $103,189, classified as troubled debt restructured loans. We have not restructured any loans in the first quarter of 2012. The commercial loan was restructured during the fourth quarter of 2011. We have not had any defaults on restructured loans within twelve months of restructuring, during either the quarter ended March 31, 2012.

A summary of the activity in the allowance for loan losses account is as follows:
 
Allocation of the Allowance for Loan Losses
 
 
 
 
Real Estate
March 31, 2012
 
Commercial
 
Construction
 
Residential
 
Home Equity
 
Multifamily
 
Commercial
Allowance for credit losses:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
1,946,528

 
$
1,426,135

 
$
2,733,263

 
$
1,070,309

 
$
345,770

 
$
2,223,506

Charge-offs
 
(49,887
)
 
(300,000
)
 
(1,000,000
)
 
(144,133
)
 

 

Recoveries
 
10,836

 
568

 
6,445

 
14,698

 

 

Provision
 
741,966

 
842,135

 
491,315

 
56,238

 
(42,802
)
 
(11,916
)
Ending balance
 
$
2,649,443

 
$
1,968,838

 
$
2,231,023

 
$
997,112

 
$
302,968

 
$
2,211,590

Ending balance
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
1,952,279

 
$
776,363

 
$
1,500,765

 
$
284,214

 
$
127,096

 
$
454,570

Collectively evaluated for impairment
 
697,164

 
1,192,475

 
730,258

 
712,898

 
175,872

 
1,757,020

Financing receivables:
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance
 
$
80,150,851

 
$
139,547,912

 
$
84,977,815

 
$
74,162,094

 
$
21,026,795

 
$
194,275,714

Ending balance: individually evaluated for impairment
 
5,043,130

 
12,917,750

 
7,019,260

 
1,201,841

 
2,246,072

 
6,649,271

Ending balance: collectively evaluated for impairment
 
75,107,721

 
126,630,162

 
77,958,555

 
72,960,253

 
18,780,723

 
187,626,443

 
 
 
Consumers
 
 
 
 
 
 
Consumer and
Installment loans
 
Overdraft
Protection
 
Unallocated
 
Total
Allowance for credit losses:
 
 
 
 
 
 
 
 
Beginning balance
 
$
27,099

 
$
4,370

 
$
153,020

 
$
9,930,000

Charge-offs
 

 

 

 
(1,494,020
)
Recoveries
 
614

 
180

 

 
33,341

Provision
 
10,349

 
(3,586
)
 
(153,020
)
 
1,930,679

Ending balance
 
$
38,062

 
$
964

 
$

 
$
10,400,000

Ending balance
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$

 
$

 
$

 
$
5,095,287

Collectively evaluated for impairment
 
38,062

 
964

 

 
5,304,713

Financing receivables:
 
 
 
 
 
 
 
 
Ending balance
 
$
4,133,546

 
$
52,917

 
$

 
$
598,327,644

Ending balance: individually evaluated for impairment
 
33,598

 

 

 
35,110,922

Ending balance: collectively evaluated for impairment
 
4,099,948

 
52,917

 

 
563,216,722


18


Year Ended
 
 
 
Real Estate
December 31, 2011
 
Commercial
 
Construction
 
Residential
 
Home Equity
 
Multifamily
 
Commercial
Allowance for credit losses:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
919,774

 
$
1,931,797

 
$
2,114,094

 
$
2,443,275

 
$
146,923

 
$
1,308,073

Charge-offs
 
(907,116
)
 
(798,943
)
 
(983,445
)
 
(3,158,030
)
 

 
(276,361
)
Recoveries
 
55,398

 
65,100

 
196,478

 
367,442

 

 
10

Provision
 
1,878,472

 
228,181

 
1,406,136

 
1,417,622

 
198,847

 
1,191,784

Ending balance
 
$
1,946,528

 
$
1,426,135

 
$
2,733,263

 
$
1,070,309

 
$
345,770

 
$
2,223,506

Ending balance
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
1,306,744

 
$
307,429

 
$
2,073,889

 
$
393,003

 
$
131,601

 
$
570,648

Collectively evaluated for impairment
 
639,784

 
1,118,706

 
659,374

 
677,306

 
214,169

 
1,652,858

Financing receivables:
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance
 
$
81,209,758

 
$
139,255,002

 
$
85,750,291

 
$
74,870,706

 
$
26,710,732

 
$
196,198,979

Ending balance: individually evaluated for impairment
 
6,631,666

 
14,011,766

 
9,250,139

 
1,947,178

 
2,302,727

 
7,829,251

Ending balance: collectively evaluated for impairment
 
74,578,092

 
125,243,236

 
76,500,152

 
72,923,528

 
24,408,005

 
188,369,728

 
 
 
Consumers
 
 
 
 
 
 
Consumer and
Installment loans
 
Overdraft
Protection
 
Unallocated
 
Total
Allowance for credit losses:
 
 
 
 
 
 
 
 
Beginning balance
 
$
84,384

 
$
466

 
$
89,014

 
$
9,037,800

Charge-offs
 
(960
)
 
(1,745
)
 

 
(6,126,600
)
Recoveries
 
12,447

 
2,038

 

 
698,913

Provision
 
(68,772
)
 
3,611

 
64,006

 
6,319,887

Ending balance
 
$
27,099

 
$
4,370

 
$
153,020

 
$
9,930,000

Ending balance
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$

 
$

 

 
$
4,783,314

Collectively evaluated for impairment
 
27,099

 
4,370

 
153,020

 
5,146,686

Financing receivables:
 
 
 
 
 
 
 
 
Ending balance
 
$
3,548,466

 
$
58,232

 
$

 
$
607,602,166

Ending balance: individually evaluated for impairment
 
20,364

 

 

 
41,993,091

Ending balance: collectively evaluated for impairment
 
3,528,102

 
58,232

 

 
565,609,075

The $1.0 million charge off in the first quarter of 2012 under residential real estate was a business purpose loan that was secured by liens on residential real estate. The business activity failed and the account was subsequently charged off.
A loan is considered impaired when, based on current information and events; it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. All amounts due according to the contractual terms means that both the contractual interest payments and the contractual principal payments of a loan will be collected as scheduled in the loan agreement. In addition to loans 90 days past due and still accruing, nonaccrual loans and restructured loans,

19


all loans risk graded doubtful or substandard qualify, by definition, as impaired. The following table sets forth our impaired loans at March 31, 2012 and December 31, 2011.
Impaired Loans
 
With No Related Allowance
  
Recorded
Investment
 
Unpaid Principal
Balance
 
Average Recorded
Investment
 
Interest Income
Recognized
March 31, 2012
 
 
 
 
 
 
 
Commercial
$
2,242,314

 
$
2,242,314

 
$
2,616,606

 
$
47,540

Real estate
 
 
 
 
 
 
 
Construction
9,352,032

 
9,352,032

 
9,149,032

 
147,524

Residential (1-4 family)
2,983,839

 
2,983,839

 
2,993,839

 
33,146

Home equity lines
683,067

 
683,067

 
683,198

 
9,771

Multifamily

 

 

 

Commercial
3,556,434

 
5,156,434

 
3,568,658

 
70,829

Consumers
 
 
 
 
 
 
 
Consumer and installment loans
33,598

 
33,598

 
34,452

 
584

Overdraft protection loans

 

 

 

Total
$
18,851,284

 
$
20,451,284

 
$
19,045,785

 
$
309,394

December 31, 2011
 
 
 
 
 
 
 
Commercial
$
1,429,128

 
$
1,429,128

 
$
1,490,481

 
$
106,008

Real estate

 

 

 

Construction
12,624,485

 
12,624,485

 
13,224,612

 
846,676

Residential (1-4 family)
3,976,594

 
3,976,594

 
4,089,612

 
246,109

Home equity lines
793,071

 
793,071

 
793,189

 
39,746

Multifamily
824,126

 
824,126