XOTC:TCFC Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the 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 Number 0-18279

 

Tri-County Financial Corporation

(Exact name of registrant as specified in its charter)

 

Maryland   52-1652138
(State of other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
3035 Leonardtown Road, Waldorf, Maryland   20601
(Address of principal executive offices)   (Zip Code)

 

(301) 645-5601

(Registrant's telephone number, including area code)

 

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated 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
(Do not check if a smaller reporting company)    

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

 

As of July 31, 2012, the registrant had 3,035,999 shares of common stock outstanding.

 

1
 

  

TRI-COUNTY FINANCIAL CORPORATION

 

FORM 10-Q

 

INDEX

 

PART I - FINANCIAL INFORMATION   Page
     
Item 1 – Financial Statements (Unaudited)    
     
Consolidated Balance Sheets – June 30, 2012 and December 31, 2011   3
     
Consolidated Statements of Income and Comprehensive Income -Three and Six Months Ended June 30, 2012 and 2011   4
     
Consolidated Statements of Cash Flows -Six Months Ended June 30, 2012 and 2011   5
     
Notes to Consolidated Financial Statements   7
     
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations   31
     
Item 3 – Quantitative and Qualitative Disclosures about Market Risk   49
     
Item 4 – Controls and Procedures   49
     
PART II - OTHER INFORMATION    
     
Item 1 –   Legal Proceedings   50
     
Item 1A – Risk Factors   50
     
Item 2 –    Unregistered Sales of Equity Securities and Use of Proceeds   50
     
Item 3 –    Defaults Upon Senior Securities   50
     
Item 4 –    Mine Safety Disclosures   50
     
Item 5 –    Other Information   50
     
Item 6 –    Exhibits   50
     
SIGNATURES   51

 

2
 

 

PART I FINANCIAL STATEMENTS

TRI-COUNTY FINANCIAL CORPORATION

 

ITEM I. FINANCIAL STATEMENTS 
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS JUNE 30, 2012 AND DECEMBER 31, 2011 

 

   June 30, 2012   December 31, 2011 
   (Unaudited)     
Assets          
Cash and due from banks  $11,235,647   $13,074,091 
Federal funds sold   385,000    5,040,000 
Interest-bearing deposits with banks   398,017    1,004,098 
Securities available for sale (AFS), at fair value   40,665,026    41,827,612 
Securities held to maturity (HTM), at amortized cost   126,915,558    153,516,839 
Federal Home Loan Bank and Federal Reserve Bank stock - at cost   5,780,450    5,587,000 
Loans receivable - net of allowance for loan losses of $7,464,137 and $7,655,041   734,414,892    710,088,775 
Premises and equipment, net   19,322,261    16,440,902 
Foreclosed real estate (OREO)   5,562,158    5,028,513 
Accrued interest receivable   3,079,092    3,027,784 
Investment in bank owned life insurance   18,417,201    18,098,085 
Other assets   9,699,419    10,746,024 
           
Total Assets  $975,874,721   $983,479,723 
           
Liabilities and Stockholders' Equity          
           
Liabilities          
Deposits          
Non-interest-bearing deposits  $84,661,470   $81,097,622 
Interest-bearing deposits   731,112,854    746,155,579 
Total deposits   815,774,324    827,253,201 
Short-term borrowings   3,000,000    - 
Long-term debt   60,552,148    60,576,595 
Guaranteed preferred beneficial interest in junior subordinated debentures   12,000,000    12,000,000 
Accrued expenses and other liabilities   8,186,305    8,195,829 
           
Total Liabilities   899,512,777    908,025,625 
           
Stockholders' Equity          
Preferred Stock, Senior Non-Cumulative Perpetual, Series C - par value $1,000;          
authorized 20,000;  issued 20,000   20,000,000    20,000,000 
Common stock - par value $.01; authorized - 15,000,000 shares; issued          
  3,048,084 and 3,026,557 shares, respectively   30,481    30,266 
Additional paid in capital   17,733,436    17,367,403 
Retained earnings   39,283,317    38,712,194 
Accumulated other comprehensive gain   297,350    289,599 
Unearned ESOP shares   (982,640)   (945,364)
           
Total Stockholders' Equity   76,361,944    75,454,098 
           
Total Liabilities and Stockholders' Equity  $975,874,721   $983,479,723 

 

See notes to consolidated financial statements

 

3
 

 

TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2012   2011   2012   2011 
Interest and Dividend Income                    
  Loans, including fees  $9,286,377   $9,012,635   $18,511,260   $17,873,206 
  Taxable interest and dividends on investment securities   815,101    889,515    1,696,918    1,859,352 
  Interest on deposits with banks   1,064    2,282    2,748    3,664 
Total Interest and Dividend Income   10,102,542    9,904,432    20,210,926    19,736,222 
                     
Interest Expenses                    
  Deposits   2,197,377    2,595,961    4,609,719    5,204,481 
  Short-term borrowings   15,910    10,022    31,751    24,455 
  Long-term debt   552,054    562,446    1,147,556    1,161,810 
Total Interest Expenses   2,765,341    3,168,429    5,789,026    6,390,746 
                     
Net Interest Income   7,337,201    6,736,003    14,421,900    13,345,476 
  Provision for loan losses   436,431    890,861    777,505    2,896,691 
                     
Net Interest Income After Provision For Loan Losses   6,900,770    5,845,142    13,644,395    10,448,785 
                     
Noninterest Income                    
Loan appraisal, credit, and miscellaneous charges   202,127    193,633    383,441    351,731 
Net losses on sale of OREO   -    -    (96,917)   - 
Income from bank owned life insurance   159,911    164,509    319,117    324,204 
Service charges   465,391    539,874    1,001,903    966,833 
Gain on sale of loans held for sale   69,366    54,583    135,341    80,158 
Total Noninterest Income   896,795    952,599    1,742,885    1,722,926 
                     
Noninterest Expense                    
Salary and employee benefits   3,170,213    2,675,393    6,490,079    5,426,867 
Occupancy expense   464,319    467,581    901,791    884,972 
Advertising   179,083    115,341    259,091    234,037 
Data processing expense   421,153    288,356    789,593    571,109 
Professional fees   343,295    233,153    568,504    450,241 
Depreciation of furniture, fixtures, and equipment   162,364    102,663    297,289    202,192 
Telephone communications   48,312    44,207    92,086    86,231 
Office supplies   71,928    37,109    133,990    75,900 
FDIC Insurance   447,587    330,022    891,202    656,341 
Valuation allowance on OREO   326,176    -    626,176    315,883 
Other   729,256    629,473    1,211,304    1,130,749 
Total Noninterest Expense   6,363,686    4,923,298    12,261,105    10,034,522 
                     
  Income before income taxes   1,433,879    1,874,443    3,126,175    2,137,189 
  Income tax expense   492,727    654,648    1,079,770    675,896 
Net Income  $941,152   $1,219,795   $2,046,405   $1,461,293 
  Preferred stock dividends   50,000    211,732    100,000    423,465 
Net Income Available to Common Shareholders  $891,152   $1,008,063   $1,946,405   $1,037,828 
                     
Net Income  $941,152   $1,219,795   $2,046,405   $1,461,293 
Other comprehensive income net of tax:                    
  Net unrealized holding gains arising during period   49,657    130,007    7,751    32,557 
Comprehensive income  $990,809   $1,349,802   $2,054,156   $1,493,850 
                     
Per Common Share                    
Basic earnings  $0.29   $0.33   $0.64   $0.34 
Diluted earnings  $0.29   $0.33   $0.64   $0.34 
Cash dividends paid  $0.40   $0.40   $0.40   $0.40 

 

See notes to consolidated financial statements

 

4
 

 

TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2012 AND 2011                                                                              

 

   Six Months Ended 
   June 30, 
   2012   2011 
         
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income  $2,046,405   $1,461,293 
Adjustments to reconcile net income to net cash provided by operating activities:          
           
Provision for loan losses   777,505    2,896,691 
Depreciation and amortization   521,935    434,471 
Loans originated for resale   (3,292,600)   (2,992,200)
Proceeds from sale of loans originated for sale   3,402,426    3,051,520 
Gain on sale of loans held for sale   (135,341)   (80,158)
Net loss on the sale of OREO   96,917    - 
Net amortization of premium/discount on investment securities   204,597    85,186 
  Increase in OREO valuation allowance   626,176    315,883 
Increase in cash surrender of bank owned life insurance   (319,116)   (324,204)
Deferred income tax benefit   (345,542)   259,178 
Increase in accrued interest receivable   (51,308)   (228,474)
Stock based compensation   263,612    245,294 
Decrease in deferred loan fees   (11,099)   (456,619)
Decrease in accounts payable, accrued expenses, other liabilities   (9,524)   (370,871)
Decrease (Increase) in other assets   1,388,154    (2,349,931)
           
Net cash provided by operating activities   5,163,197    1,947,059 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of AFS investment securities   (10,077,772)   (60,648)
Proceeds from sale, redemption or principal payments of AFS investment securities   11,252,526    5,758,869 
Purchase of HTM investment securities   (849,785)   (99,951)
Proceeds from maturities or principal payments of HTM investment securities   27,246,045    20,195,654 
Net (increase) decrease of FHLB and Federal Reserve stock   (193,450)   357,800 
Loans originated or acquired   (125,552,773)   (142,803,152)
Principal collected on loans   98,929,725    102,193,367 
Purchase of premises and equipment   (3,403,294)   (1,796,266)
Proceeds from sale of OREO   299,302    - 
           
Net cash used in investing activities   (2,349,476)   (16,254,327)

 

5
 

 

TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2012 AND 2011   (continued)                                                                           

 

   Six Months Ended 
   June 30, 
   2012   2011 
         
CASH FLOWS FROM FINANCING ACTIVITIES:          
Net (decrease) increase in deposits  $(11,478,877)  $29,349,504 
Payments of long-term borrowings   (24,447)   (10,023,487)
Net increase in short term borrowings   3,000,000    1,044,127 
Exercise of stock options   67,391    58,284 
Dividends Paid   (1,321,571)   (1,633,321)
Net change in unearned ESOP shares   (1,942)   (100,061)
Redemption of common stock   (153,800)   (224,625)
           
Net cash (used in) provided by financing activities   (9,913,246)   18,470,421 
           
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS  $(7,099,525)  $4,163,153 
           
CASH AND CASH EQUIVALENTS - JANUARY 1   19,118,189    9,823,436 
           
CASH AND CASH EQUIVALENTS - JUNE 30  $12,018,664   $13,986,589 
           
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:          
Cash paid during the six months for:          
Interest  $5,797,788   $6,516,129 
Income taxes  $1,020,000   $929,500 
Transfer from loans to foreclosed real estate  $1,555,770   $6,230,707 
Issuance of common stock for payment of compensation  $263,612   $245,294 

 

See notes to consolidated financial statements

 

6
 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SIX MONTHS ENDED JUNE 30, 2012 AND 2011

 

1.BASIS OF PRESENTATION

General - The consolidated financial statements of Tri-County Financial Corporation (the “Company”) and its wholly owned subsidiary, Community Bank of Tri-County (the “Bank”), and the Bank’s wholly owned subsidiary, Community Mortgage Corporation of Tri-County, included herein are unaudited. However, they reflect all adjustments consisting only of normal recurring accruals that, in the opinion of management, are necessary to present fairly the Company’s financial condition, results of operations, and cash flows for the periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The Company believes that the disclosures are adequate to make the information presented not misleading. The balances as of December 31, 2011 have been derived from audited financial statements. There have been no significant changes to the Company’s accounting policies as disclosed in the 2011 Annual Report. The results of operations for the three and six months ended June 30, 2012 are not necessarily indicative of the results of operations to be expected for the remainder of the year or any other period. Certain previously reported amounts have been restated to conform to the 2012 presentation.

 

These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s 2011 Annual Report.

 

2.NATURE OF BUSINESS

The Company provides a variety of financial services to individuals and businesses through its offices in Southern Maryland and King George, Virginia. Its primary deposit products are demand, savings and time deposits, and its primary lending products are commercial and residential mortgage loans, commercial loans, construction and land development loans, home equity and second mortgages and commercial equipment loans.

 

3.FAIR VALUE MEASUREMENTS

The Company adopted FASB ASC Topic 820, “Fair Value Measurements” and FASB ASC Topic 825, “The Fair Value Option for Financial Assets and Financial Liabilities”, which provides a framework for measuring and disclosing fair value under generally accepted accounting principles. FASB ASC Topic 820 requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, available for sale investment securities) or on a nonrecurring basis (for example, impaired loans).

 

FASB ASC Topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC Topic 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

The Company utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis such as loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

 

Under FASB ASC Topic 820, the Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine the fair value. These hierarchy levels are:

 

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

 

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

 

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

 

7
 

 

Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s monthly or quarterly valuation process.

 

There were no transfers between levels of the fair value hierarchy and the Company had no Level 3 fair value assets or liabilities for the six months ended June 30, 2012 and the year ended December 31, 2011, respectively. The following is a description of valuation methodologies used for assets and liabilities recorded at fair value:

 

Securities Available for Sale

Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities (“GSEs”), municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

 

Loans Receivable

The Company does not record loans at fair value on a recurring basis, however, from time to time, a loan is considered impaired and an allowance for loan loss is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan are considered impaired. Management estimates the fair value of impaired loans using one of several methods, including the collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Impaired loans not requiring a specific allowance represent loans for which the fair value of expected repayments or collateral exceed the recorded investment in such loans. At December 31, 2011, substantially all of the impaired loans were evaluated based upon the fair value of the collateral. In accordance with FASB ASC 820, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the loan as nonrecurring Level 3.

 

Loans Held for Sale

Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value, in the aggregate. Fair value is derived from secondary market quotations for similar instruments. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.

 

Mortgage loans held for sale are generally sold with the mortgage servicing rights retained by the Company. The carrying value of mortgage loans sold is reduced by the cost allocated to the associated servicing rights. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold, using the specific identification method.

 

Foreclosed Real Estate (OREO)

Foreclosed real estate is adjusted for fair value upon transfer of the loans to foreclosed assets. Subsequently, foreclosed real estate is carried at the lower of carrying value and fair value. Fair value is based upon independent market prices, appraised value of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset at nonrecurring Level 3.

 

8
 

 

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The tables below present the recorded amount of assets as of June 30, 2012 and December 31, 2011 measured at fair value on a recurring basis.

 

   June 30, 2012 
Description of Asset  Fair Value   Quoted Prices in Active Markets for Identical Assets
(Level 1)
   Significant   Other Observable Inputs
(Level 2)
   Significant Unobservable Inputs
(Level 3)
 
                 
Available for sale securities                    
Asset-backed securities issued by GSEs                    
CMOs  $34,228,118   $-   $34,228,118   $- 
MBS   2,222,160    -    2,222,160    - 
Corporate equity securities   37,331    -    37,331    - 
Bond mutual funds   4,177,417    -    4,177,417    - 
Total available for sale securities  $40,665,026   $-   $40,665,026   $- 

 

   December 31, 2011 
Description of Asset  Fair Value   Quoted Prices in Active Markets for Identical Assets
(Level 1)
   Significant   Other Observable Inputs
(Level 2)
   Significant Unobservable Inputs
(Level 3)
 
                 
Available for sale securities                    
Asset-backed securities issued by GSEs                    
CMOs  $35,062,072   $-   $35,062,072   $- 
MBS   2,648,043    -    2,648,043    - 
Corporate equity securities   37,262    -    37,262    - 
Bond mutual funds   4,080,235    -    4,080,235    - 
Total available for sale securities  $41,827,612   $-   $41,827,612   $- 

 

9
 

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The Company may be required from time to time to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis as of June 30, 2012 and December 31, 2011 are included in the table below.

 

   June 30, 2012 
Description of Asset  Fair Value   Quoted Prices in Active Markets for Identical Assets
(Level 1)
   Significant   Other Observable Inputs
(Level 2)
   Significant Unobservable Inputs
(Level 3)
 
                 
Loans with impairment                    
Commercial real estate  $1,700,643   $-   $1,700,643   $- 
Home equity and second mtg.   54,318    -    54,318    - 
Residential first mortgage   1,424,853    -    1,424,853    - 
Commercial loans   291,323    -    291,323    - 
Total loans with impairment  $3,471,137   $-   $3,471,137   $- 
                     
Foreclosed Real Estate  $5,562,158   $-   $5,562,158   $- 

 

   December 31, 2011 
Description of Asset  Fair Value   Quoted Prices in Active Markets for Identical Assets
(Level 1)
   Significant   Other Observable Inputs
(Level 2)
   Significant Unobservable Inputs
(Level 3)
 
                 
Loans with impairment                    
Commercial real estate  $1,170,467   $-   $1,170,467   $- 
Construction and land development   1,313,550    -    1,313,550    - 
Residential first mortgage   505,206    -    505,206    - 
Commercial loans   5,110,241    -    5,110,241    - 
Total loans with impairment  $8,099,464   $-   $8,099,464   $- 
                     
Foreclosed Real Estate  $5,028,513   $-   $5,028,513   $- 

 

Loans with impairment have unpaid principal balances of $4,989,245 and $10,096,399 at June 30, 2012 and December 31, 2011, respectively, and include impaired loans with a specific allowance.

 

4.INCOME TAXES

The Company files a consolidated federal income tax return with its subsidiaries. Deferred tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. It is the Company’s policy to recognize accrued interest and penalties related to unrecognized tax benefits as a component of tax expense.

 

5.EARNINGS PER COMMON SHARE

Basic earnings per common share are computed by dividing net income less dividends on preferred shares, by the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed by dividing net income less dividends on preferred shares, by the weighted average number of common shares outstanding during the period, including any potential dilutive common shares outstanding, such as options and warrants. As of June 30, 2012 and 2011, there were 101,549 and 102,524 shares, respectively, excluded from the diluted net income per share computation because the exercise price of the stock options were greater than the market price, and thus were anti-dilutive. Basic and diluted earnings per share have been computed based on weighted-average common and common equivalent shares outstanding as follows:

 

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   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2012   2011   2012   2011 
Net Income  $941,152   $1,219,795   $2,046,405   $1,461,293 
Less: Dividends payable on preferred stock   (50,000)   (211,732)   (100,000)   (423,465)
Net income available to common shareholders  $891,152   $1,008,063   $1,946,405   $1,037,828 
                     
Average number of common shares outstanding   3,045,979    3,024,625    3,041,679    3,017,112 
Effect of dilutive options   24,786    31,830    14,841    37,489 
Average number of shares used to calculate diluted earnings per share   3,070,765    3,056,455    3,056,520    3,054,601 

 

6.STOCK-BASED COMPENSATION

 

The Company has stock option and incentive arrangements to attract and retain key personnel. In May 2005, the 2005 Equity Compensation Plan (the “Plan”) was approved by the shareholders, which authorizes the issuance of restricted stock, stock appreciation rights, stock units and stock options to the Board of Directors and key employees. Compensation expense for service based awards is recognized over the vesting period. Performance based awards are recognized based on a vesting, if applicable, and the probability of achieving the goals.

 

Stock-based compensation expense totaled $81,189 and $93,810 for the six months ended June 30, 2012 and 2011, respectively, which consisted of grants of restricted stock and restricted stock units. Stock-based compensation included director compensation for stock granted in lieu of cash compensation. All outstanding options were fully vested at December 31, 2011. The Company has not granted any stock options since 2007.

 

The fair value of the Company’s employee stock options is estimated on the date of grant using the Black-Scholes option pricing model. The Company estimates expected market price volatility and expected term of the options based on historical data and other factors.

 

The exercise price for options is set at the discretion of the committee administering the Plan, but is not less than the market value of the shares as of the date of grant. An option’s maximum term is 10 years and the options vest at the discretion of the committee. The following tables below summarize outstanding and exercisable options at June 30, 2012 and December 31, 2011.

 

       Weighted       Weighted-Average 
       Average   Aggregate   Contractual Life 
       Exercise   Intrinsic   Remaining In 
   Shares   Price   Value   Years 
                 
Outstanding at January 1, 2012   264,156   $17.90   $175,911      
Granted at fair value   -    -           
Exercised   (5,799)   12.63    9,570      
Expired   -                
Forfeited   (2,044)   19.73           
Outstanding at June 30, 2012   256,313   $18.00   $302,545    1.4 
                     
Exercisable at June 30, 2012   256,313   $18.00   $302,545    1.4 

 

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       Weighted       Weighted-Average 
       Average   Aggregate   Contractual Life 
       Exercise   Intrinsic   Remaining In 
   Shares   Price   Value   Years 
                 
Outstanding at January 1, 2011   299,237   $16.86   $524,392      
Granted at fair value   -    -           
Exercised   (33,163)   8.75    286,061      
Expired   (338)   8.44           
Forfeited   (1,580)   15.00           
                     
Outstanding at December 31, 2011   264,156   $17.90   $175,911    1.7 
                     
Exercisable at December 31, 2011   264,156   $17.90   $175,911    1.7 

 

Options outstanding are all currently exercisable and are summarized as follows:

 

Number Outstanding   Weighted Average  Weighted Average 
June 30, 2012   Remaining Contractual Life  Exercise Price 
         
 14,848   1 years  $11.56 
 54,098   2 years   12.95 
 85,817   3 years   15.89 
 80,138   4 years   22.29 
 21,411   6 years   27.70 
 256,313       18.00 

 

The aggregate intrinsic value of outstanding stock options and exercisable stock options was $302,545 and $175,911 at June 30, 2012 and December 31, 2011, respectively. Aggregate intrinsic value represents the difference between the Company’s closing stock price on the last trading day of the period, which was $16.40 and $15.00 at June 30, 2012 and December 31, 2011, respectively, and the exercise price multiplied by the number of options outstanding.

 

The Company has outstanding restricted stock and stock units granted in accordance with the Plan. The following tables below summarize the unvested restricted stock awards and units outstanding at June 30, 2012 and December 31, 2011.

 

   Restricted Stock   Restricted Stock Units 
                 
   Number of Shares   Weighted
 Average Grant
Date Fair Value
   Number of Units   Fair Value 
                 
Nonvested at January, 2012   8,113   $16.47    6,845   $15.00 
Granted   15,473    15.09    2,105    16.40 
Vested   (5,158)   15.09    (3,739)   14.80 
                     
Nonvested at June 30, 2012   18,428   $15.70    5,211   $16.40 

 

 

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   Restricted Stock   Restricted Stock Units 
   Number of Shares   Weighted
 Average Grant
Date Fair Value
   Number of Units   Fair Value 
                 
Nonvested at January 1, 2011   2,720   $11.90    3,739   $15.00 
Granted   12,934    16.49    3,106    15.00 
Vested   (7,541)   14.86    -    - 
                     
Nonvested at December 31, 2011   8,113   $16.47    6,845   $15.00 

 

7.GUARANTEED PREFERRED BENEFICIAL INTEREST IN JUNIOR SUBORDINATED DEBENTURES

On June 15, 2005, Tri-County Capital Trust II (“Capital Trust II”), a Delaware business trust formed, funded and wholly owned by the Company, issued $5,000,000 of variable-rate capital securities in a private pooled transaction. The variable rate is based on the 90-day LIBOR rate plus 1.70%. The Trust used the proceeds from this issuance, along with the $155,000 for Capital Trust II’s common securities, to purchase $5,155,000 of the Company’s junior subordinated debentures. The interest rate on the debentures and the trust preferred securities is variable and adjusts quarterly. These capital securities qualify as Tier I capital and are presented in the Consolidated Balance Sheets as “Guaranteed Preferred Beneficial Interests in Junior Subordinated Debentures.” Both the capital securities of Capital Trust II and the junior subordinated debentures are scheduled to mature on June 15, 2035, unless called by the Company.

 

On July 22, 2004, Tri-County Capital Trust I (“Capital Trust I”), a Delaware business trust formed, funded and wholly owned by the Company, issued $7,000,000 of variable-rate capital securities in a private pooled transaction. The variable rate is based on the 90-day LIBOR rate plus 2.60%. The Trust used the proceeds from this issuance, along with the Company’s $217,000 capital contribution for Capital Trust I’s common securities, to purchase $7,217,000 of the Company’s junior subordinated debentures. The interest rate on the debentures and the trust preferred securities is variable and adjusts quarterly. These debentures qualify as Tier I capital and are presented in the Consolidated Balance Sheets as “Guaranteed Preferred Beneficial Interests in Junior Subordinated Debentures.” Both the capital securities of Capital Trust I and the junior subordinated debentures are scheduled to mature on July 22, 2034, unless called by the Company.

 

8.PREFERRED STOCK

Small Business Lending Fund Preferred Stock

On September 22, 2011, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with the Secretary of the Treasury (the “Secretary”), pursuant to which the Company issued 20,000 shares of the Company’s Senior Non-Cumulative Perpetual Preferred Stock, Series C (the “Series C Preferred Stock”), having a liquidation amount per share equal to $1,000, for a total purchase price of $20,000,000. The Purchase Agreement was entered into, and the Series C Preferred Stock was issued, as authorized by the Small Business Lending Fund program.

 

The Series C Preferred Stock is entitled to receive non-cumulative dividends, payable quarterly. The dividend rate, as a percentage of the liquidation amount, can fluctuate on a quarterly basis during the first 10 quarters during which the Series C Preferred Stock is outstanding, based upon changes in the level of “Qualified Small Business Lending” or “QSBL” (as defined in the Purchase Agreement) by the Bank. Based upon the increase in the Bank’s level of QSBL over the baseline level calculated under the terms of the Purchase Agreement, the dividend rate for the initial dividend period has been set at one percent (1%). For the second through ninth calendar quarters, the dividend rate may be adjusted to between one percent (1%) and five percent (5%) per annum, to reflect the amount of change in the Bank’s level of QSBL. If the level of the Bank’s qualified small business loans declines so that the percentage increase in QSBL as compared to the baseline level is less than 10%, then the dividend rate payable on the Series C Preferred Stock would increase. For the tenth calendar quarter through four and one half years after issuance, the dividend rate will be fixed at between one percent (1%) and seven percent (7%) based upon the increase in QSBL as compared to the baseline. After four and one half years from issuance, the dividend rate will increase to nine percent (9%). In addition, beginning on January 1, 2014, and on all Series C Preferred Stock dividend payment dates thereafter ending on April 1, 2016, the Company will be required to pay to the Secretary, on each share of Series C Preferred Stock, but only out of assets legally available, a fee equal to 0.5% of the liquidation amount per share of Series C Preferred Stock.

 

The Series C Preferred Stock is non-voting, except in limited circumstances. If the Company misses five dividend payments, whether or not consecutive, the holder of the Series C Preferred Stock will have the right, but not the obligation, to appoint a representative as an observer on the Company’s Board of Directors. The Series C Preferred Stock may be redeemed at any time at the Company’s option, at a redemption price of 100% of the liquidation amount plus accrued but unpaid dividends to the date of redemption for the current period, subject to the approval of our federal banking regulator. The Company is permitted to repay its SBLF funding in increments of 25% or $5.0 million, subject to the approval of our federal banking regulator.

 

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The Series C Preferred Stock was issued in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. The Company has agreed to register the Series C Preferred Stock under certain circumstances set forth in Annex E to the Purchase Agreement. The Series C Preferred Stock is not subject to any contractual restrictions on transfer.

 

Redemption of Series A and B Preferred Stock - Troubled Asset Relief Program’s (TARP) Capital Purchase Program

On September 22, 2011, the Company entered into a letter agreement (the “Repurchase Letter”) with the United States Department of the Treasury (the “Treasury”), in which the Company agreed to redeem, out of the proceeds of the issuance of the Series C Preferred Stock, all 15,540 outstanding shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A, liquidation amount $1,000 per share (the “Series A Preferred Stock”), for a redemption price of $15,619,858, including accrued but unpaid dividends to the date of redemption and all 777 outstanding shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series B, liquidation amount $1,000 per share (the “Series B Preferred Stock”), for a redemption price of $784,187, including accrued but unpaid dividends to the date of redemption.

 

The Company issued Series A Preferred Stock and Series B Preferred Stock on December 19, 2008. It was outstanding until redemption of 100% of all Series A Preferred Stock and Series B Preferred Stock on September 22, 2011. The annual dividend rates paid for Series A Preferred Stock and Series B Preferred Stock were 5% and 9%, respectively.

 

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9.SECURITIES

 

   June 30, 2012 
   Amortized   Gross Unrealized   Gross Unrealized   Estimated 
   Cost   Gains   Losses   Fair Value 
Securities available for sale (AFS)                    
    Asset-backed securities issued by GSEs                    
      Residential MBS  $2,004,078   $218,082   $-   $2,222,160 
      Residentail CMOs   34,035,060    204,893    11,835    34,228,118 
    Corporate equity securities   37,310    306    285    37,331 
    Bond mutual funds   3,893,639    283,778    -    4,177,417 
Total securities available for sale  $39,970,087   $707,059   $12,120   $40,665,026 
                     
Securities held to maturity (HTM)                    
    Asset-backed securities issued by GSEs                    
      Residential MBS  $32,870,312   $1,233,232   $-   $34,103,544 
      Residential CMOs   84,304,790    709,054    33,639    84,980,205 
    Asset-backed securities issued by Others:                  - 
      Residential MBS   -    -    -    - 
      Residential CMOs   8,990,484    175,927    998,052    8,168,359 
Total debt securities held to maturity   126,165,586    2,118,213    1,031,691    127,252,108 
                     
    U.S. government obligations   749,972    -         749,972 
    Other investments   -    -    -    - 
Total securities held to maturity  $126,915,558   $2,118,213   $1,031,691   $128,002,080 

 

   December 31, 2011 
   Amortized   Gross Unrealized   Gross Unrealized   Estimated 
   Cost   Gains   Losses   Fair Value 
Securities available for sale (AFS)                    
    Asset-backed securities issued by GSEs                    
      Residential MBS  $2,412,959   $235,084   $-   $2,648,043 
      Residentail CMOs   34,848,180    248,508    34,616    35,062,072 
    Corporate equity securities   37,310    241    289    37,262 
    Bond mutual funds   3,840,473    239,762    -    4,080,235 
Total securities available for sale  $41,138,922   $723,595   $34,905   $41,827,612 
                     
Securities held to maturity (HTM)                    
    Asset-backed securities issued by GSEs                    
      Residential MBS  $35,929,199   $854,497   $10,960   $36,772,736 
      Residential CMOs   106,998,467    1,104,141    27,411    108,075,197 
    Asset-backed securities issued by Others                  - 
      Residential CMOs   9,839,222    15,364    1,421,477    8,433,109 
Total debt securities held to maturity   152,766,888    1,974,002    1,459,848    153,281,042 
                     
    U.S. government obligations   749,951    -    -    749,951 
Total securities held to maturity  $153,516,839   $1,974,002   $1,459,848   $154,030,993 

 

At June 30, 2012, certain asset-backed securities with a carrying value of $8.5 million were pledged to secure certain deposits. At June 30, 2012, asset-backed securities with a carrying value of $10.5 million were pledged as collateral for advances from the Federal Home Loan Bank of Atlanta.

 

At June 30, 2012 and December 31, 2011, the AFS and HTM asset-backed securities investment portfolios were $162,615,864, or 97%, and $190,477,003, or 98%, respectively, of the Company’s total AFS and HTM portfolios.

 

At June 30, 2012, 95% of the asset-backed securities portfolio was rated AAA by Standard & Poor’s or equivalent credit rating from other major rating agency. AFS asset-backed securities issued by GSEs had an average life of 2.92 years and average duration of 2.78 years and are guaranteed by their issuer as to credit risk. HTM asset-backed securities issued by GSEs had an average life of 3.09 years and average duration of 2.92 years and are guaranteed by their issuer as to credit risk.

 

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At December 31, 2011, 96% of the asset-backed securities portfolio was rated AAA by Standard & Poor’s or equivalent credit rating from other major rating agency. AFS asset-backed securities issued by GSEs had an average life of 1.65 years and average duration of 1.61 years and are guaranteed by their issuer as to credit risk. HTM asset-backed securities issued by GSEs had an average life of 2.72 years and average duration of 2.57 years and are guaranteed by their issuer as to credit risk.

 

During the six months ended June 30, 2012 and for the year ended December 31, 2011, there were no sales of available for sale securities or held to maturity securities.

 

We believe that the securities with unrealized losses will either recover in market value or be paid off as agreed. The Company intends to, and has the ability to, hold these securities to maturity. We believe that the losses are the result of general perceptions of safety and creditworthiness of the entire sector and a general disruption of orderly markets in the asset class. No charges related to other-than-temporary impairment were made during the six months ended June 30, 2012 and the year ended December 31, 2011. During the year ended December 31, 2009, the Company recorded a charge of $148,000 related to other-than-temporary impairment on a single CMO issue. At June 30, 2012, the CMO issue had a par value of $999,000, a market fair value of $768,000 and a carrying value of $607,000.

 

Management has the ability and intent to hold the securities with unrealized losses classified as held to maturity until they mature, at which time the Company will receive full value for the securities. Because our intention is not to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, management considers the unrealized losses in the held-to-maturity portfolio to be temporary, except for the single CMO issue noted above, for which an other-than-temporary charge was recorded in 2009 in the amount of $148,000.

 

AFS Securities

At June 30, 2012, the AFS investment portfolio had a fair value of $40,665,026 with unrealized losses from their amortized cost of $12,120. Asset-backed securities and corporate securities with unrealized losses had a fair value of $11,019,712 and all unrealized losses were for less than twelve months.

 

At December 31, 2011, the AFS investment portfolio had a fair value of $41,827,612 with unrealized losses from their amortized cost of $34,905. Asset-backed securities and corporate securities with unrealized losses had a fair value of $18,170,977 and all unrealized losses were for less than twelve months.

 

HTM Securities

Gross unrealized losses and estimated fair value by length of time that the individual HTM securities have been in a continuous unrealized loss position at June 30, 2012 were as follows:

 

June 30, 2012  Less Than 12   More Than 12         
   Months   Months   Total 
   Fair Value   Unrealized Loss   Fair Value   Unrealized Loss   Fair Value   Unrealized Losses 
Asset-backed securities issued by GSEs  $18,789,945   $20,457   $2,568,623   $13,182   $21,358,568   $33,639 
Asset-backed securities issued by other   134,765    2,167    6,405,636    995,885    6,540,401    998,052 
   $18,924,710   $22,624   $8,974,259   $1,009,067   $27,898,969   $1,031,691 

 

At June 30, 2012, the HTM investment portfolio had an estimated fair value of $128,002,080, of which $27,898,969, or 22% of the securities, had some unrealized losses from their amortized cost. Of these securities, $21,358,568, or 77%, were mortgage-backed securities issued by GSEs and the remaining $6,540,401, or 23%, were asset-backed securities issued by others.

 

HTM securities issued by GSEs are guaranteed by the issuer. Total unrealized losses on the asset-backed securities issued by GSEs were $33,639, or 0.03%, of the amortized cost of $117,175,102. HTM asset-backed securities issued by GSEs with unrealized losses had an average life of 1.31 years and an average duration of 1.28 years. We believe that the securities will either recover in market value or be paid off as agreed. The Company intends to, and has the ability to, hold these securities to maturity.

 

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HTM asset-backed securities issued by others are mortgage-backed securities. All of the securities have credit support tranches that absorb losses prior to the tranches which the Company owns. The Company reviews credit support positions on its securities regularly. Total unrealized losses on the asset-backed securities issued by others were $998,052, or 11.10%, of the amortized cost of $8,990,484. HTM asset-backed securities issued by others with unrealized losses had an average life of 2.44 years and an average duration of 1.79 years.

 

Gross unrealized losses and estimated fair value by length of time that the individual HTM securities have been in a continuous unrealized loss position at December 31, 2011 were as follows:

 

December 31, 2011  Less Than 12   More Than 12         
   Months   Months   Total 
   Fair Value   Unrealized Loss   Fair Value   Unrealized Loss   Fair Value   Unrealized Losses 
Asset-backed securities issued by GSEs  $30,220,777   $33,796   $2,847,703   $4,575   $33,068,480   $38,371 
Asset-backed securities issued by other   131,301    11,507    6,632,200    1,409,970    6,763,501    1,421,477 
   $30,352,078   $45,303   $9,479,903   $1,414,545   $39,831,981   $1,459,848 

 

At December 31, 2011, the HTM investment portfolio had an estimated fair value of $154,030,993, of which $39,831,981, or 26% of the securities, had some unrealized losses from their amortized cost. Of these securities, $33,068,480, or 83%, were mortgage-backed securities issued by GSEs and the remaining $6,763,501, or 17%, were asset-backed securities issued by others.

 

HTM securities issued by GSEs are guaranteed by the issuer. Total unrealized losses on the asset-backed securities issued by GSEs were $38,371, or 0.03%, of the amortized cost of $142,927,666. HTM asset-backed securities issued by GSEs with unrealized losses had an average life of 2.06 years and an average duration of 1.96 years. We believe that the securities will either recover in market value or be paid off as agreed. The Company intends to, and has the ability to, hold these securities to maturity.

 

HTM asset-backed securities issued by others are mortgage-backed securities. All of the securities have credit support tranches that absorb losses prior to the tranches which the Company owns. The Company reviews credit support positions on its securities regularly. Total unrealized losses on the asset-backed securities issued by others were $1,421,477, or 14.45%, of the amortized cost of $9,839,222. HTM asset-backed securities issued by others with unrealized losses had an average life of 2.35 years and an average duration of 1.61 years.

 

Credit Quality of Asset-Backed Securities

The tables below present the Standard & Poor’s or equivalent credit rating from other major rating agencies for AFS and HTM asset-backed securities issued by GSEs and others at June 30, 2012 and December 31, 2011 by carrying value. GSE asset-backed securities that were downgraded by Standard and Poor’s during 2011 were treated as AAA based on regulatory guidance.

 

June 30, 2012  December 31, 2011
Credit Rating    Amount    Credit Rating    Amount  
AAA  $153,953,157   AAA  $181,958,323 
A+   136,928   A+   142,808 
A   788,302   A   - 
BBB   162,882   BBB   1,258,268 
BBB-   1,234,498   BBB-   1,061,017 
BB+   1,122,404   BB+   1,240,901 
BB   517,236   BB   337,998 
BB-   1,215,199   BB-   615,716 
B+   -   B+   246,345 
CCC+   3,485,258   CCC+   3,615,627 
Total  $162,615,864   Total  $190,477,003 

 

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10.FORECLOSED REAL ESTATE (OREO)

Foreclosed assets are presented net of an allowance for losses. An analysis of the activity in foreclosed assets is as follows.

 

   Six Months Ended June 30, 
   2012   2011 
Balance at beginning of year  $5,028,513   $10,469,302 
Additions to underlying property   1,555,770    6,781,857 
Disposals of  underlying property   (395,949)   (6,388,395)
Valuation allowance   (626,176)   (315,883)
Balance at end of period  $5,562,158   $10,546,881 

 

During the six months ended June 30, 2012, the Bank disposed of two OREO properties for proceeds of $299,032 and recognized net losses of $96,917. Current year OREO additions include two construction and land development projects valued at $1,038,000 that the Bank utilized the deposit method to account for the sale and transfer of legal title to the borrower. Payments of principal and interest will be recorded as a deposit (liability) until the transaction qualifies for full accrual or installment accounting treatment. As of June 30, 2012, the Bank has received $109,000 in payments on these projects. OREO carrying amounts reflect management’s estimate of the realizable value of these properties incorporating current appraised values, local real estate market conditions and related costs.

 

Expenses applicable to foreclosed assets include the following.

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2012   2011   2012   2011 
Valuation allowance  $326,176   $-   $626,176   $315,883 
Operating expenses   32,546    150,582    30,845    294,450 
   $358,722   $150,582   $657,021   $610,333 


Operating expenses for the six months ended June 30, 2012 included $7,600 in deposits refunded on sold foreclosed real estate.

 

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11.LOANS

 

Loans consist of the following:

 

   June 30, 2012   December 31, 2011 
         
Commercial real estate  $398,017,392   $370,383,885 
Residential first mortgages   178,459,492    164,543,309 
Construction and land development   32,405,839    36,744,865 
Home equity and second mortgage   22,525,909    24,138,324 
Commercial loans   93,096,685    101,968,056 
Consumer loans   1,007,453    1,000,983 
Commercial equipment   17,151,518    19,760,753 
    742,664,288    718,540,175 
Less:          
Deferred loan fees   785,259    796,359 
Allowance for loan loss   7,464,137    7,655,041 
    8,249,396    8,451,400 
           
   $734,414,892   $710,088,775 

 

At June 30, 2012, the Bank’s allowance for loan losses totaled $7,464,137 or 1.01% of loan balances as compared to $7,655,041 or 1.07% of loan balances at December 31, 2011. Management’s determination of the adequacy of the allowance is based on a periodic evaluation of the portfolio with consideration given to the overall loss experience, current economic conditions, size, growth and composition of the loan portfolio, financial condition of the borrowers and other relevant factors that, in management’s judgment, warrant recognition in providing an adequate allowance.

 

At December 31, 2011, gross loans included $2,356,196 from the sale of two foreclosed real estate properties that the Bank financed during 2011 that did not qualify for full accrual sales treatment under ASC Topic 360-20-40 “Property Plant and Equipment – Derecognition.” The Bank utilized the cost recovery method and deferred gain of $410,268. At June 30, 2012 and December 31, 2011, the deferred gain balance for these transactions was $410,268.

 

Risk Characteristics of Portfolio Segments

The Company manages its credit products and exposure to credit losses (credit risk) by the following specific portfolio segments (classes) which are levels at which the Company develops and documents its allowance for loan loss methodology. These segments are:

 

Commercial Real Estate

Commercial and other real estate projects include office buildings, retail locations, churches and other special purpose buildings. The Bank offers both fixed-rate and adjustable-rate loans under these product lines. The primary security on a commercial real estate loan is the real property and the leases that produce income for the real property. The Bank generally limits its exposure to a single borrower to 15% of the Bank’s capital. Loans secured by commercial real estate are generally limited to 80% of the lower of the appraised value or sales price at origination and have an initial contractual loan payment period ranging from three to twenty years.

 

Loans secured by commercial real estate are larger and involve greater risks than one-to-four family residential mortgage loans. Because payments on loans secured by such properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to a greater extent to adverse conditions in the real estate market or the economy.

 

Residential First Mortgages

Residential first mortgage loans made by the Bank are generally long term loans, amortized on a monthly basis, with principal and interest due each month. The initial contractual loan payment period for residential loans typically ranges from ten to 30 years. The Bank’s experience indicates that real estate loans remain outstanding for significantly shorter time periods than their contractual terms. Borrowers may refinance or prepay loans at their option, without penalty. The Bank originates both fixed-rate and adjustable-rate residential first mortgages.

 

The annual and lifetime limitations on interest rate adjustments may limit the increases in interest rates on these loans. There are also unquantifiable credit risks resulting from potential increased costs to the borrower as a result of repricing of adjustable-rate mortgage loans. During periods of rising interest rates, the risk of default on adjustable-rate mortgage loans may increase due to the upward adjustment of interest cost to the borrower.

 

19
 

 

Construction and Land Development

The Bank offers loans for the construction of one-to-four family dwellings. Generally, these loans are secured by the real estate under construction as well as by guarantees of the principals involved. In addition, the Bank offers loans to acquire and develop land, as well as loans on undeveloped, subdivided lots for home building by individuals.

 

A decline in demand for new housing might adversely affect the ability of borrowers to repay these loans. Construction and land development loans are inherently riskier than providing financing on owner-occupied real estate. The Bank’s risk of loss is affected by the accuracy of the initial estimate of the market value of the completed project as well as the accuracy of the cost estimates made to complete the project. In addition, the volatility of the real estate market has made it increasingly difficult to ensure that the valuation of land associated with these loans is accurate. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, the Bank may be required to advance funds beyond the amount originally committed to permit completion of the development. If the estimate of value proves to be inaccurate, a project’s value might be insufficient to assure full repayment. As a result of these factors, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the project rather than the ability of the borrower or guarantor to repay principal and interest. If the Bank forecloses on a project, there can be no assurance that the Bank will be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs.

 

Home Equity and Second Mortgage Loans

The Bank maintains a portfolio of home equity and second mortgage loans. These products contain a higher risk of default than residential first mortgages as in the event of foreclosure, the first mortgage would need to be paid off prior to collection of the second mortgage. This risk has been heightened as the market value of residential property has declined.

 

Commercial Loans

The Bank offers commercial loans to its business customers. The Bank offers a variety of commercial loan products including term loans and lines of credit. Such loans are generally made for terms of five years or less. The Bank offers both fixed-rate and adjustable-rate loans under these product lines. When making commercial business loans, the Bank considers the financial condition of the borrower, the borrower’s payment history of both corporate and personal debt, the projected cash flows of the business, the viability of the industry in which the consumer operates, the value of the collateral, and the borrower’s ability to service the debt from income. These loans are primarily secured by equipment, real property, accounts receivable, or other security as determined by the Bank.

 

Commercial loans are made on the basis of the borrower’s ability to make repayment from the cash flows of the borrower’s business. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself.

 

Consumer Loans

The Bank has developed a number of programs to serve the needs of its customers with primary emphasis upon loans secured by automobiles, boats, recreational vehicles and trucks. The Bank also makes home improvement loans and offers both secured and unsecured personal lines of credit. Consumer loans entail greater risk from other loan types due to being secured by rapidly depreciating assets or the reliance on the borrower’s continuing financial stability.

 

Commercial Equipment Loans

These loans consist primarily of fixed-rate, short-term loans collateralized by a commercial customer’s equipment. When making commercial equipment loans, the Bank considers the same factors it considers when underwriting a commercial business loan. Commercial loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself. In the case of business failure, collateral would need to be liquidated to provide repayment for the loan. In many cases, the highly specialized nature of collateral equipment would make full recovery from the sale of collateral problematic.

 

Allowance for Loan Losses

The following table details activity in the allowance for loan losses at and for the three and six months ended June 30, 2012 and June 30, 2011, respectively, and the year ended December 31, 2011 and loan receivable balances at June 30, 2012 and June 30, 2011, respectively, and at December 31, 2011. An allocation of the allowance to one category of loans does not prevent the Company’s ability to utilize the allowance to absorb losses in a different category. The loan receivables are disaggregated on the basis of the Company’s impairment methodology.

 

20
 

 

   Commercial
Real Estate
   Residential First Mortgage   Construction and Land
 Development
   Home Equity and Second Mtg.   Commercial Loans   Consumer
 Loans
   Commercial Equipment   Total 
At and For the Three Months Ended June 30, 2012                                        
                                         
Allowance for loan losses:                                        
Balance at April 1,  $3,385,036   $644,008   $448,406   $265,138   $2,793,049   $18,350   $361,811   $7,915,798 
Charge-offs   (85,381)   -    -    (41,942)   (649,699)   (14)   (149,794)   (926,830)
Recoveries   -    37,247    -    -    1,491    -    -    38,738 
Provisions   178,803    220,250    148,448    (10,405)   (176,350)   (20   75,705    436,431 
Balance at June 30,  $3,478,458   $901,505   $596,854   $212,791   $1,968,491   $18,316   $287,722   $7,464,137 
At and For the Six Months Ended June 30, 2012                                        
                                         
Allowance for loan losses:                                        
Balance at January 1,  $2,525,199   $539,205   $354,385   $143,543   $3,850,294   $19,119   $223,296   $7,655,041 
Charge-offs   (121,833)   -    -    (41,942)   (693,048)   (999)   (149,794)   (1,007,616)
Recoveries   -    37,247    -    -    1,960    -    -    39,207 
Provisions   1,075,092    325,053    242,469    111,190    (1,190,715)   196    214,220    777,505 
Balance at June 30,  $3,478,458   $901,505   $596,854   $212,791   $1,968,491   $18,316   $287,722   $7,464,137 
Ending balance: individually
   evaluated for impairment
  $604,063   $247,408   $134,500   $47,200   $484,937   $-   $-   $1,518,108 
Ending balance: collectively
   evaluated for impairment
  $2,874,395   $654,097   $462,354   $165,591   $1,483,554   $18,316   $287,722   $5,946,029 
Loan receivables:                                        
Ending balance  $398,017,392   $178,459,492   $32,405,839   $22,525,909   $93,096,685   $1,007,453   $17,151,518   $742,664,288 
Ending balance: individually
   evaluated for impairment
  $38,727,469   $6,328,588   $7,812,520   $409,348   $18,536,881   $68,192   $803,700   $72,686,698 
Ending balance: collectively
   evaluated for impairment
  $359,289,923   $172,130,904   $24,593,319   $22,116,561   $74,559,804   $939,261   $16,347,818   $669,977,590 

 

 

   Commercial
Real Estate
   Residential First Mortgage   Construction and Land
 Development
   Home Equity and Second Mtg.   Commercial Loans   Consumer
 Loans
   Commercial Equipment   Total 
At and For the Year Ended December 31, 2011                                        
                                         
Allowance for loan losses:                                        
Balance at January 1,  $3,313,983   $204,073   $1,266,625   $97,519   $2,552,039   $32,209   $202,699   $7,669,147 
Charge-offs   (1,249,038)   (49,002)   (213,007)   -    (2,441,076)   (3,000)   (150,005)   (4,105,128)
Recoveries   -    967    -    -    1,936    968    -    3,871 
Provisions   460,254    383,167    (699,233)   46,024    3,737,395    (11,058)   170,602    4,087,151 
Balance at December 31,  $2,525,199   $539,205   $354,385   $143,543   $3,850,294   $19,119   $223,296   $7,655,041 
Ending balance: individually
   evaluated for impairment
  $423,093   $113,000   $100,000   $42,340   $1,318,502   $-   $-   $1,996,935 
Ending balance: collectively
   evaluated for impairment
  $2,102,106   $426,205   $254,385   $101,203   $2,531,792   $19,119   $223,296   $5,658,106 
Loan receivables:                                        
Ending balance  $370,383,885   $164,543,309   $36,744,865   $24,138,324   $101,968,056   $1,000,983   $19,760,753   $718,540,175 
Ending balance: individually
   evaluated for impairment
  $31,166,090   $5,849,538   $9,057,433   $492,319   $23,896,287   $82,036   $371,936   $70,915,639 
Ending balance: collectively
   evaluated for impairment
  $339,217,795   $158,693,771   $27,687,432   $23,646,005   $78,071,769   $918,947   $19,388,817   $647,624,536 

 

 

21
 

 

   Commercial
Real Estate
   Residential First Mortgage   Construction and Land
 Development
   Home Equity and Second Mtg.   Commercial Loans   Consumer
 Loans
   Commercial Equipment   Total 
At and For the Three Months Ended June 30, 2011                                        
                                         
Allowance for loan losses:                                        
Balance at April 1,  $3,375,402   $345,935   $970,283   $95,455   $2,312,814   $28,453   $153,435   $7,281,777 
Charge-offs   (265,014)   1    3    -    (809,044)   -    1    (1,074,053)
Recoveries   -    -    -    -    -    1,074    -    1,074 
Provisions   359,721    13,603    (114,354)   1,077    611,268    (2,570)   22,116    890,861 
Balance at June 30,  $3,470,109   $359,539   $855,932   $96,532   $2,115,038   $26,957   $175,552   $7,099,659 
At and For the Six Months Ended June 30, 2011                                        
                                         
Allowance for loan losses:                                        
Balance at January 1,  $3,313,983   $204,073   $1,266,625   $97,519   $2,552,039   $32,209   $202,699   $7,669,147 
Charge-offs   (780,064)   (49,004)   (213,017)   -    (2,377,194)   (1,000)   (48,004)   (3,468,283)
Recoveries   -    -    -    -    -    2,104    -    2,104 
Provisions   936,190    204,470    (197,676)   (987)   1,940,193    (6,356)   20,857    2,896,691 
Balance at June 30,  $3,470,109   $359,539   $855,932   $96,532   $2,115,038   $26,957   $175,552   $7,099,659 
Ending balance: individually
   evaluated for impairment
  $297,488   $-   $-   $-   $1,068,912   $-   $27,780   $1,394,180 
Ending balance: collectively
   evaluated for impairment
  $3,172,621   $359,539   $855,932   $96,532   $1,046,126   $26,957   $147,772   $5,705,479 
Loan receivables:                                        
Ending balance  $375,502,810   $149,807,743   $31,937,744   $24,133,071   $99,908,997   $1,123,217   $17,412,667   $699,826,249 
Ending balance: individually
   evaluated for impairment
  $29,327,021   $4,027,547   $7,353,446   $580,470   $21,361,108   $147,665   $472,981   $63,270,238 
Ending balance: collectively
   evaluated for impairment
  $346,175,789   $145,780,196   $24,584,298   $23,552,601   $78,547,889   $975,552   $16,939,686   $636,556,011 

 

 

Non-accrual and Past Due Loans

Loans are reviewed on a regular basis and are placed on non-accrual status when, in the opinion of management, the collection of additional interest is doubtful. The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in the process of collection. There were no accruing loans 90 days or greater past due at June 30, 2012 and December 31, 2011. Consumer loans are typically charged-off no later than 90 days past due. In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Non-accrual loans are evaluated for impairment on a loan by loan basis in accordance with the Company’s impairment methodology.

 

All interest accrued but not collected from loans that are placed on non-accrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. Non-accrual loans as of June 30, 2012 and December 31, 2011 were as follows:

 

   June 30, 2012   December 31, 2011 
   Dollars   Number
 of Loans
   Dollars   Number
 of Loans
 
                 
Commercial real estate  $1,675,021    8   $2,866,539    11 
Residential first mortgages   3,430,204    9    2,438,771    7 
Construction and land development   331,888    3    1,413,550    2 
Home equity and second mortgage   227,296    5    291,285    7 
Commercial loans   5,204,771    9    2,263,916    4 
Consumer loans   -    -    500    1 
Commercial equipment   102,814    4    236,056    3 
   $10,971,994    38   $9,510,617    35 

 

Non-accrual loans on which the recognition of interest has been discontinued, which did not have a specific allowance for impairment, amounted to $9,371,381 and $4,193,893 at June 30, 2012 and December 31, 2011, respectively. Interest due at stated rates, but not recognized on these balances at June 30, 2012 and December 31, 2011 was $355,654 and $172,399, respectively. Non-accrual loans with a specific allowance for impairment on which the recognition of interest has been discontinued amounted to $1,600,613 and $5,316,724 at June 30, 2012 and December 31, 2011, respectively. Interest due not recognized on these balances at June 30, 2012 and December 31, 2011 was $243,664 and $242,705, respectively.

 

22
 

 

An analysis of past due loans as of June 30, 2012 and December 31, 2011 were as follows:

 

June 30, 2012  Current   31-60
 Days
   61-89
 Days
   90 or Greater
Days
   Total
 Past Due
   Total
Loan
 Receivables
 
                         
Commercial real estate  $393,504,269   $2,838,102   $-   $1,675,021   $4,513,123   $398,017,392 
Residential first mortgages   173,820,097    1,109,678    99,513    3,430,204    4,639,395    178,459,492 
Construction and land dev.   32,073,951    -    -    331,888    331,888    32,405,839 
Home equity and second mtg.   22,110,912    87,929    99,772    227,296    414,997    22,525,909 
Commercial loans   85,783,837    1,467,140    640,937    5,204,771    7,312,848    93,096,685 
Consumer loans   1,007,262    191    -    -    191    1,007,453 
Commercial equipment   16,760,851    32,213    255,640    102,814    390,667    17,151,518 
Total  $725,061,179   $5,535,253   $1,095,862   $10,971,994   $17,603,109   $742,664,288 
                               
December 31, 2011                              
                               
Commercial real estate  $367,415,647   $101,699   $-   $2,866,539   $2,968,238   $370,383,885 
Residential first mortgages   160,785,337    1,319,201    -    2,438,771    3,757,972    164,543,309 
Construction and land dev.   35,331,315    -    -    1,413,550    1,413,550    36,744,865 
Home equity and second mtg.   23,618,693    228,346    -    291,285    519,631    24,138,324 
Commercial loans   95,961,076    49,781    3,693,283    2,263,916    6,006,980    101,968,056 
Consumer loans   991,838    8,645    -    500    9,145    1,000,983 
Commercial equipment   19,450,929    24,869    48,899    236,056    309,824    19,760,753 
Total  $703,554,835   $1,732,541   $3,742,182   $9,510,617   $14,985,340   $718,540,175 

 

Credit Quality Indicators

A risk grading scale is used to assign grades to commercial real estate, construction and land development, commercial loans and commercial equipment loans. Loans are graded at inception, annually thereafter when financial statements are received, and at other times when there is an indication that a credit may have weakened or improved. Only commercial loan relationships with an aggregate exposure to the Bank of $750,000 or greater are risk rated.

 

Residential first mortgages, home equity and second mortgages and consumer loans are evaluated for creditworthiness in underwriting and are monitored on an ongoing basis based on borrower payment history. These loans are classified as unrated unless they are part of a larger commercial relationship that requires grading or are troubled debt restructures or nonperforming loans with an Other Assets Especially Mentioned (OAEM) or higher risk rating due to a delinquent payment history. At June 30, 2012 and December 31, 2011, $4,615,179 and $5,708,203 of these loans were rated OAEM or higher.

 

Management regularly reviews credit quality indicators as part of its individual loan reviews and on a monthly and quarterly basis. The overall quality of the Bank’s loan portfolio, including the composition of the loan portfolio, is assessed using the Bank’s risk grading scale, net charge-offs, nonperforming loans, delinquencies, performance of troubled debt restructured loans and the general economic conditions in the Company’s geographical market. This review process is assisted by frequent internal reporting of loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming and potential problem loans. Credit quality indicators and allowance factors are adjusted based on management’s judgment during the monthly and quarterly review process.

 

Loans subject to risk ratings are graded on a scale of 1 to 10.

 

Ratings 1 thru 6 - Pass

Ratings 1 thru 6 have asset risks ranging from excellent low risk to adequate. The specific rating assigned considers customer history of earnings, cash flows, liquidity, leverage, capitalization, consistency of debt service coverage, the nature and extent of customer relationship and other relevant specific business factors such as the stability of the industry or market area, changes to management, litigation or unexpected events that could have an impact on risks.

  

Rating 7 - OAEM (Other Assets Especially Mentioned) – Special Mention

These credits, while protected by the financial strength of the borrowers, guarantors or collateral, have reduced quality due to economic conditions, less than adequate earnings performance or other factors which require the Lending Officer to direct more than normal attention to the credit. Financing alternatives may be limited and/or command higher risk interest rates. OAEM classified loans are the first adversely classified assets on our Watch List. These relationships will be reviewed at least quarterly.

 

23
 

 

Rating 8 - Substandard

Substandard assets are assets that are inadequately protected by the sound worth or paying capacity of the borrower or of the collateral pledged. These assets have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard. The loans may have a delinquent history or combination of weak collateral, weak guarantor strength or operating losses. These assets listed may include assets with histories of repossessions or some that are non-performing bankruptcies. These relationships will be reviewed at least quarterly.

 

Rating 9 - Doubtful

Doubtful assets have many of the same characteristics of Substandard with the exception that the Bank has determined that loss is not only possible but is probable and the risk is close to certain that loss will occur. When a loan is assigned to this category the Bank will identify the probable loss and it will receive a specific reserve in the loan loss allowance analysis. These relationships will be reviewed at least quarterly.

 

Rating 10 - Loss

Once an asset is identified as a definite loss to the Bank, it will receive the classification of “loss”. There may be some future potential recovery; however it is more practical to write off the loan at the time of classification. Losses will be taken in the period in which they are determined to be uncollectable.

 

24
 

 

Credit quality indicators as of June 30, 2012 and December 31, 2011 were as follows:

 

Credit Risk Profile by Internally Assigned Grade        
                 
   Commercial Real Estate   Construction and Land Dev. 
   6/30/2012   12/31/2011   6/30/2012   12/31/2011 
                 
Unrated  $13,327,650   $1,003,553   $150,378   $- 
Pass   348,635,657    338,952,446    24,448,778    27,687,432 
Special mention   6,100,480    -    -    - 
Substandard   29,903,605    30,391,213    7,806,683    9,057,433 
Doubtful   50,000    -    -    - 
Loss   -    36,673    -    - 
Total  $398,017,392   $370,383,885   $32,405,839   $36,744,865 
                     

 

   Commercial Loans   Commercial Equipment 
   6/30/2012   12/31/2011   6/30/2012   12/31/2011 
                 
Unrated  $2,635,510   $586,124   $1,069,660   $391,786 
Pass   71,931,585    78,183,487    15,380,972    19,209,380 
Special mention   538,440    -    695,735    - 
Substandard   17,991,150    23,198,445    5,151    159,587 
Doubtful   -    -    -    - 
Loss   -    -    -    - 
Total  $93,096,685   $101,968,056   $17,151,518   $19,760,753 

 

Credit Risk Profile Based on Payment Activity                
                         
   Residential First Mortgages   Home Equity and Second Mtg.   Consumer Loans 
   6/30/2012   12/31/2011   6/30/2012   12/31/2011   6/30/2012   12/31/2011 
                         
Performing  $175,029,288   $162,104,538   $22,298,613   $23,847,039   $1,007,453   $1,000,483 
Nonperforming   3,430,204    2,438,771    227,296    291,285    -    500 
Total  $178,459,492   $164,543,309   $22,525,909   $24,138,324   $1,007,453   $1,000,983 

 

Impaired Loans and Troubled Debt Restructures (TDRs)

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.

 

Large groups of smaller homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures unless such loans are the subject of a troubled debt restructuring agreement or are risk rated as OAEM or above or are part of a commercial relationship that requires grading.

 

Interest payments made on impaired loans are applied to principal unless collectability of the principal amount is reasonably assured. Interest recognized on impaired loans is on a cash basis. Impaired loans, including TDRs, at June 30, 2012 and June 30, 2011, respectively, and at December 31, 2011 were as follows:

 

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June 30, 2012  Unpaid Contractual Principal Balance   Recorded Investment With No Allowance   Recorded Investment With Allowance   Total
 Recorded Investment
   Related Allowance   Six Month Average Recorded Investment   Six Month Interest Income Recognized   Three Month Average Recorded Investment   Three Month Interest Income Recognized 
                                     
Commercial real estate  $7,809,718   $5,097,362   $2,304,706   $7,402,068   $604,063   $7,836,028   $225,935   $7,821,751   $91,009 
Residential first mortgages   2,579,409    907,147    1,672,261    2,579,409    247,408    2,585,146    58,717    2,583,098    26,312 
Construction and land dev.   1,851,415    1,716,915    134,500    1,851,415    134,500    2,189,748    29,988    2,020,582    12,947 
Home equity and second mtg.   101,518    -    101,518    101,518    47,200    101,518    -    101,518    - 
Commercial loans   2,670,650    1,894,390    776,260    2,670,650    484,937    2,664,394    51,967    2,671,025    23,628 
Total  $15,012,710   $9,615,814   $4,989,245   $14,605,060   $1,518,108   $15,376,834   $366,607   $15,197,974   $153,896 

 

December 31, 2011  Unpaid Contractual Principal Balance   Recorded Investment With No Allowance   Recorded Investment With Allowance   Total
 Recorded Investment
   Related Allowance   Average Recorded Investment   Interest Income Recognized 
                             
Commercial real estate  $8,405,656   $6,404,447   $1,593,560   $7,998,006   $423,093   $6,880,651   $375,203 
Residential first mortgages   618,206    -    618,206    618,206    113,000    618,835    10,294 
Construction and land dev.   3,130,466    1,716,915    1,413,550    3,130,466    100,000    3,193,938    84,107 
Home equity and second mtg.   42,340    -    42,340    42,340    42,340    42,340    - 
Commercial loans   8,798,072    2,369,329    6,428,743    8,798,072    1,318,502    9,188,371    314,216 
Commercial equipment   129,876    129,876    -    129,876    -    147,035    8,905 
Total  $21,124,616   $10,620,567   $10,096,399   $20,716,966   $1,996,935   $20,071,170   $792,725 

 

June 30, 2011  Unpaid Contractual Principal Balance   Recorded Investment With No Allowance   Recorded Investment With Allowance   Total
 Recorded Investment
   Related Allowance   Six Month Average Recorded Investment   Six Month Interest Income Recognized   Three Month Average Recorded Investment   Three Month Interest Income Recognized 
                                     
Commercial real estate  $11,107,498   $8,446,709   $2,253,139   $10,699,848   $297,488   $9,131,959   $271,124   $9,927,954   $129,907 
Construction and land dev.   1,716,915    1,716,915    -    1,716,915    -    1,716,915    41,300    1,716,915    15,899 
Commercial loans   9,157,106    2,652,194    6,504,912    9,157,106    1,068,912    10,568,967    201,326    9,862,888    95,834 
Commercial equipment   234,139    206,358    27,780    234,139    27,780    264,955    11,880    258,778    2,976 
Total  $22,215,658   $13,022,176   $8,785,831   $21,808,008   $1,394,180   $21,682,796   $525,630   $21,766,535   $244,616 

 

At June 30, 2012 and December 31, 2011, impaired loans totaled $14,605,060 and $20,716,966, respectively. Impaired loans had specific allocations within the allowance for loan losses or have been reduced by charge-offs to recoverable values. Allocations of the allowance for loan losses relative to impaired loans at June 30, 2012 and December 31, 2011 were $1,518,108 and $1,996,935, respectively.

 

The Company considers all TDRs to be impaired and defines TDRs as loans whose terms have been modified to provide for a reduction of either interest or principal because of deterioration in the financial condition of the borrower. A loan extended or renewed at a stated interest rate equal to the current interest rate for new debt with similar risk is not considered a TDR. Once an obligation has been classified as a TDR it continues to be considered a TDR until paid in full or until the loan returns to performing status and yields a market interest rate equal to the current interest rate for new debt with similar risk. TDRs are evaluated by management on a regular basis utilizing the Company’s risk grading scale and must have a passing loan grade to be removed as a TDR. TDRs are evaluated for impairment on a loan-by-loan basis in accordance with the Company’s impairment methodology. The Company does not participate in any specific government or Company-sponsored loan modification programs. All restructured loan agreements are individual contracts negotiated with a borrower.

 

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TDRs, included in the impaired loan schedule above, as of June 30, 2012 and December 31, 2011 were as follows:

 

   June 30, 2012   December 31, 2011 
   Dollars   Number
 of Loans
   Dollars   Number
 of Loans
 
                 
Commercial real estate  $5,880,022    10   $7,696,921    10 
Residential first mortgages   907,147    2    -    - 
Construction and land development   1,716,915    1    1,716,915    1 
Commercial loans   1,894,390    2    2,369,329    3 
Commercial equipment   -    -    129,876    1 
   $10,398,474    15   $11,913,041    15 

 

At June 30, 2012, $10,106,139 or 97.19%, of TDRs were performing according to the terms of their restructured agreements compared to $11,113,326 or 93.3%, at December 31, 2011. Allocations of the allowance for loan losses relative to TDR impaired loans at June 30, 2012 and December 31, 2011 were $267,658 and $300,000, respectively. Interest income in the amount of $277,360 and $524,397 was recognized on these loans for the six months ended June 30, 2012 and year ended December 31, 2011, respectively.

 

During the six months ended June 30, 2012, the Bank modified five commercial real estate loans totaling $1,327,421 and two residential first mortgages totaling $907,368.

 

For the year ended December 31, 2011, TDR loans charged-off or transferred to OREO were $187,891. TDRs charged-off were for two commercial equipment loans totaling $76,592 and one TDR was transferred to foreclosed real estate for a commercial loan of $111,299. For the six months ended June 30, 2012, one commercial real estate relationship consisting of two commercial mortgage TDR loans was charged-off in the amount of $121,660 with the balance of $382,500 transferred to OREO.

 

12.NEW ACCOUNTING STANDARDS

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures” defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. Additional guidance issued Accounting Standards Update 2010-06 (“ASU”) under ASC Topic 820 requires expanded disclosures related to fair value measurements including (1) the amounts of significant transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy and the reasons for the transfers, (2) the reasons for transfers of assets or liabilities in or out of Level 3 of the fair value hierarchy, with significant transfers disclosed separately, (3) the policy for determining when transfers between levels of the fair value hierarchy are recognized and (4) for recurring fair value measurements of assets and liabilities in Level 3 of the fair value hierarchy, a gross presentation of information about purchases, sales, issuances and settlements. ASU 2010-06 further clarifies that (1) fair value measurement disclosures should be provided for each class of assets and liabilities (rather than major category), which would generally be a subset of assets or liabilities within a line item in the statement of financial position and (2) company’s should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for each class of assets and liabilities included in Levels 2 and 3 of the fair value hierarchy. The disclosures related to the gross presentation of purchases, sales, issuances and settlements of assets and liabilities included in Level 3 of the fair value hierarchy were required for the Company beginning January 1, 2011. The remaining disclosure requirements and clarifications made by ASU 2010-06 became effective for the Company on January 1, 2010. Adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

ASU No. 2011-02; A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring (“TDR”).
In April, 2011, FASB issued ASU No. 2011-02 intended to provide additional guidance to assist creditors in determining whether a restructuring of a receivable meets the criteria to be considered a troubled debt restructuring. This ASU was effective for the first interim or annual period beginning on or after June 15, 2011, and was applied retrospectively to the beginning of the annual period of adoption. As a result of applying the ASU, the Company may identify receivables that are newly considered impaired. The Company adopted the applicable guidance during the third quarter ended September 30, 2011 and it did not have a material impact on required disclosures in the Company’s consolidated financial statements.

 

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ASU No. 2011-03; Transfers and Servicing (Topic 860) - Reconsideration of Effective Control for Repurchase Agreements. ASU 2011-03 is intended to improve financial reporting of repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. ASU 2011-03 removes from the assessment of effective control (i) 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 (ii) the collateral maintenance guidance related to that criterion. ASU 2011-03 was effective for the Company on January 1, 2012 and did not have a material impact on the Company’s consolidated financial statements.

 

ASU 2011-04; “Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU 2011-04 amends Topic 820, “Fair Value Measurements and Disclosures,” to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards. ASU 2011-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures. ASU 2011-04 was effective for the Company January 1, 2012 and did not have a material impact on the Company’s consolidated financial statements.

 

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

 

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13.    FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Therefore, any aggregate unrealized gains or losses should not be interpreted as a forecast of future earnings or cash flows. Furthermore, the fair values disclosed should not be interpreted as the aggregate current value of the Company.

 

June 30, 2012          Fair Value Measurements 
Description of Asset  Carrying Amount   Fair Value   Quoted Prices in Active Markets for Identical Assets
(Level 1)
   Significant 
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
Assets:                         
Investment Securities - Available for Sale  $40,665,026   $40,665,026   $-   $40,665,026   $- 
Investment Securities - Held to Maturity   126,915,558    128,002,081    749,973    127,252,108    - 
Federal Home Loan Bank and Federal Reserve Stock   5,780,450    5,818,000    -    5,818,000    - 
Loans   734,414,892    755,143,310    -    755,143,310    - 
Foreclosed Real Estate   5,562,158    5,562,158    -    5,562,158    - 
                          
Liabilities:                         
Savings, NOW and money market accounts  $378,524,653   $378,524,653   $-   $378,524,653   $- 
Time Deposits   437,249,671    442,937,199    -    442,937,199    - 
Long-Term Debt   60,552,148    -    -    -    - 
Short Term Borrowings   3,000,000    3,000,000    -    3,000,000    - 
Guaranteed preferred beneficial interest in junior subordinated debentures   12,000,000    2,400,000    -    2,400,000    - 

 

 

December 31, 2011          Fair Value Measurements 
Description of Asset  Carrying Amount   Fair Value   Quoted Prices in Active Markets for Identical Assets
(Level 1)
   Significant  
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable Inputs
(Level 3)
 
Assets:                         
Investment Securities - Available for Sale  $41,827,612   $41,827,612   $-   $41,827,612   $- 
Investment Securities - Held to Maturity   153,516,839    154,030,993    749,951    153,281,042    - 
Federal Home Loan Bank and Federal Reserve Stock   5,587,000    5,624,000    -    5,624,000    - 
Loans   710,088,775    726,238,000    -    726,238,000    - 
Foreclosed Real Estate   5,028,513    5,028,513    -    5,028,513    - 
                          
Liabilities:                         
Savings, NOW and money market accounts  $371,737,480   $371,737,480   $-   $371,737,480   $- 
Time Deposits   455,515,721    462,192,000    -    462,192,000    - 
Long-Term Debt   60,576,595    61,353,000    -    61,353,000    - 
Guaranteed preferred beneficial interest in junior subordinated debentures   12,000,000    2,400,000    -    2,400,000    - 

 

At June 30, 2012, the Company had outstanding loan commitments and standby letters of credit of $21.4 million and $22.7 million, respectively. Based on the short-term lives of these instruments, the Company does not believe that the fair value of these instruments differs significantly from their carrying values.

 

Valuation Methodology

 

Investment securities - Fair values are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. FHLB and FRB stock are carried and valued at cost.

 

Loans receivable - For conforming residential first-mortgage loans, the market price for loans with similar coupons and maturities was used. For nonconforming loans with maturities similar to conforming loans, the coupon was adjusted for credit risk. Loans which did not have quoted market prices were priced using the discounted cash flow method. The discount rate used was the rate currently offered on similar products. Loans priced using the discounted cash flow method included residential construction loans, commercial real estate loans, and consumer loans. The estimated fair value of loans held for sale is based on the terms of the related sale commitments.

 

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Foreclosed real estate - Fair value is based upon independent market prices, appraised value of the collateral or management’s estimation of the value of the collateral.

 

Deposits - The fair value of checking accounts, saving accounts, and money market accounts was the amount payable on demand at the reporting date.

 

Time certificates - The fair value was determined using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar products.

 

Long-term debt and other borrowed funds - These were valued using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar borrowings.

 

Guaranteed preferred beneficial interest in junior subordinated securities - These were valued using discounted cash flows. The discount rate was equal to the rate currently offered on similar borrowings.

 

Off-balance sheet instruments - The Company charges fees for commitments to extend credit. Interest rates on loans for which these commitments are extended are normally committed for periods of less than one month. Fees charged on standby letters of credit and other financial guarantees are deemed to be immaterial and these guarantees are expected to be settled at face amount or expire unused. It is impractical to assign any fair value to these commitments.

 

The fair value estimates presented herein are based on pertinent information available to management as of June 30, 2012 and December 31, 2011. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, current estimates of fair value may differ significantly from the amount presented herein.

 

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ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This document contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of Tri-County Financial Corporation (the “Company”) and Community Bank of Tri-County (the “Bank”). These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. The Company and the Bank’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors that could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, changes in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality and composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company and the Bank’s market area, changes in real estate market values in the Company and the Bank’s market area and changes in relevant accounting principles and guidelines. Additional factors that may affect our results are discussed in Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (the “Form 10-K”). These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

 

GENERAL

 

The Company is a bank holding company organized in 1989 under the laws of the State of Maryland. It owns all the outstanding shares of capital stock of the Bank. The Company engages in no significant activity other than holding the stock of the Bank, paying its subordinated debt and preferred stock obligations, and directing the business of the Bank. Accordingly, the information set forth in this report, including financial statements and related data, relates primarily to the Bank and its subsidiaries.

 

The Bank has sought to organically increase total assets through its targeted loan product lines. The Bank believes that its ability to offer fast, flexible, local decision-making will continue to attract significant new business relationships and enhance asset growth. The Bank’s marketing is directed towards growth in commercial loans, residential first mortgages and commercial real estate loans and increasing its balances of consumer and business transaction deposit accounts. The Bank believes that increases in transaction deposit accounts will lessen the Bank’s dependence on higher-cost funding, such as certificates of deposit and borrowings. Although management believes that this strategy will increase financial performance over time, increasing the balances of certain products, such as commercial lending and transaction accounts, may also increase the Bank’s noninterest expense. It recognizes that certain lending and deposit products increase the possibility of losses from credit and other risks.

 

The Bank continues to evaluate its allowance for loan losses and the associated provision to compensate for the inherent risk in the loan portfolio. Any evaluation of the allowance for loan losses is inherently inexact and reflects management’s expectations as to future interest rates and economic conditions in the region as well as individual borrowers’ circumstances. Management believes that its allowance for loan losses is adequate. For further information on the Bank’s allowance for loan losses see the discussion in the sections captioned “Financial Condition” and “Critical Accounting Policies” as well as the relevant discussions in the Form 10-K and Annual Report for the year ended December 31, 2011.

 

The Bank conducts business through its main office in Waldorf, Maryland and ten branch offices in Charles, Calvert and St. Mary’s counties in Southern Maryland and in King George, Virginia. The Bank is the second largest overall deposit holder in the Tri-County area according to the most recent 2011 FDIC Summary of Deposit Survey. The Bank completed the building of its operations center during the second quarter of 2012 in Waldorf, Maryland.

The Company’s results are influenced by local and national economic conditions. These conditions include the level of short-term interest rates such as the federal funds rate, the differences between short- and long-term interest rates, the value of real estate in our markets, the prospects for economic growth or decline, and the rates of anticipated and current inflation. Local conditions, including employment growth or declines, may have direct or indirect effects on our borrowers’ ability to meet their obligations.

 

On September 23, 2011, the U.S. Department of Treasury purchased $20.0 million in the Company’s preferred stock under the Small Business Lending Fund (the “SBLF”). The SBLF is a program intended to encourage small business lending by providing capital to qualified community banks at favorable rates. SBLF dividend rates can fluctuate between 1% and 7% during the first four and one half years, depending on the level of the Bank’s small business lending. As of December 31, 2011, the Company’s dividend rate on the SBLF funds was 1%. The Company used $16.4 million of the proceeds from this investment to redeem all of the preferred stock that it sold to the Treasury under the TARP Capital Purchase Program (“TARP”) on December 19, 2008 as well as to pay any accrued but unpaid dividends. The net proceeds, after repurchasing the TARP securities, were invested by the Company in the Bank. During 2012, if the Company maintains its current investment in qualified small business lending, annual preferred dividends will decrease to $200,000 compared with previously paid annual TARP preferred dividends of $846,930. For additional information regarding SBLF, refer to Note 18 of the Consolidated Financial Statements as presented in the Company’s Form 10-K for the year ended December 31, 2011.

 

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SELECTED FINANCIAL DATA                
   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2012   2011   2012   2011 
                 
Condensed Income Statement                    
Interest and Dividend Income  $10,102,542   $9,904,432   $20,210,926   $19,736,222 
Interest Expense   2,765,341    3,168,429    5,789,026    6,390,746 
Net Interest Income   7,337,201    6,736,003    14,421,900    13,345,476 
Provision for Loan Loss   436,431    890,861    777,505    2,896,691 
Noninterest Income   896,795    952,599    1,742,885    1,722,926 
Noninterest Expense   6,363,686    4,923,298    12,261,105    10,034,522 
Income Before Income Taxes   1,433,879    1,874,443    3,126,175    2,137,189 
Income Tax Expense   492,727    654,648    1,079,770    675,896 
Net Income   941,152    1,219,795    2,046,405    1,461,293 
Preferred Stock Dividends   50,000    211,732    100,000    423,465 
Net Income Available to Common Shareholders   891,152    1,008,063    1,946,405    1,037,828 
                     
Per Common Share                    
Basic Earnings  $0.29   $0.33   $0.64   $0.34 
Diluted Earnings  $0.29   $0.33   $0.64   $0.34 
Cash Dividends Declared  $0.40   $0.40   $0.40   $0.40 
Book Value  $18.49   $18.07   $18.49   $18.07 

 

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RESULTS OF OPERATIONS – SIX MONTHS ENDED JUNE 30, 2012

 

Net income available to common shareholders for the six-month period ended June 30, 2012 increased $908,577 to $1,946,405 ($0.64 basic and diluted earnings per common share), compared to $1,037,828 ($0.34 basic and diluted earnings per common share) for the same period in the prior year. The increase in net income available to common shareholders for the six months ended June 30, 2012 compared to the same six months in 2011 was due to a decrease in the provision for loan losses of $2,119,186, an increase in net interest income of $1,076,424 and noninterest income of $19,959 and a reduction in preferred stock dividends of $323,465. These positive impacts to net income were offset by increases in noninterest expense of $2,226,583 and income tax expense of $403,874.

 

   Six Months Ended June 30,         
   2012   2011   $ Change   % Change 
Interest and Dividend Income                    
  Loans, including fees  $18,511,260   $17,873,206   $638,054    3.57%
  Taxable interest and dividends on investment securities   1,696,918    1,859,352    (162,434)   (8.74%)
  Interest on deposits with banks   2,748    3,664    (916)   (25.00%)
Total Interest and Dividend Income   20,210,926    19,736,222    474,704    2.41%
                     
Interest Expenses                    
  Deposits   4,609,719    5,204,481    (594,762)   (11.43%)
  Short-term borrowings   31,751    24,455    7,296    29.83%
  Long-term debt   1,147,556    1,161,810    (14,254)   (1.23%)
Total Interest Expenses   5,789,026    6,390,746    (601,720)   (9.42%)
                     
Net Interest Income   14,421,900    13,345,476    1,076,424    8.07%
  Provision for loan losses   777,505    2,896,691    (2,119,186)   (73.16%)
                     
Net Interest Income After Provision For Loan Losses  $13,644,395   $10,448,785   $3,195,610    30.58%

 

Interest and dividend income increased by $474,704 due to the growth of $88.0 million to the average balance of interest-earning assets from $809.1 million for the six months ended June 30, 2011 to $897.1 million for the six months ended June 30, 2012. This growth was partially offset by a reduction in the average yield on interest-earning assets from 4.88% for the six months ended June 30, 2011 to 4.51% for the six months ended June 30, 2012.

 

Interest expense decreased $601,720 due to a reduction in the average cost of funds on interest-bearing liabilities from 1.75% for the six months ended June 30, 2011 to 1.43% for the six months ended June 30, 2012. This was achieved by a decrease in the average rates paid on certificates of deposits and money market accounts, which declined from 1.96% and 1.02%, respectively, for the six months ended June 30, 2011 to 1.67% and 0.68%, respectively, for the six months ended June 30, 2012. The decline in the average cost of funds was partially offset by higher average deposit balances. Average customer deposits increased $75.4 million from $652.6 million for the six months ended June 30, 2011 to $728.0 million for the six months ended June 30, 2012.

 

The Company has been successful in increasing its core deposits and reducing the cost of funds in the low interest rate environment over the last several years and has limited the effect of the lower interest rate environment on loan rates through pricing and interest rate floors.

 

33
 

 

The following table presents information on the average balances of the Company’s interest-earning assets and interest-bearing liabilities and interest earned or paid thereon for the six months ended June 30, 2012 and 2011, respectively. There are no tax equivalency adjustments.

 

   For the Six Months Ended June 30, 
       2012           2011     
           Average           Average 
   Average       Yield/   Average       Yield/ 
dollars in thousands  Balance   Interest   Cost   Balance   Interest   Cost 
Assets                              
Interest-earning assets:                              
Loan portfolio (1)  $712,597   $18,511    5.20%  $653,757   $17,873    5.47%
Investment securities, federal funds                              
sold and interest-bearing deposits   184,477    1,700    1.84%   155,359    1,863    2.40%
Total interest-earning assets   897,074    20,211    4.51%   809,116    19,736    4.88%
Cash and cash equivalents   8,393              10,531           
Other assets   53,564              54,154           
Total Assets  $959,031             $873,801           
                               
Liabilities and Stockholders' Equity                              
Interest-bearing liabilities:                              
Savings  $31,716   $38    0.24%  $32,528   $55    0.34%
Interest-bearing demand and money                              
market accounts   252,889    860    0.68%   195,638    994    1.02%
Certificates of deposit   443,425    3,711    1.67%   424,464    4,156    1.96%
Long-term debt   59,870    977    3.26%   62,268    1,007    3.23%
Short-term debt   7,228    32    0.89%   3,953    24    1.21%
Guaranteed preferrred beneficial interest                              
in junior subordinated debentures   12,000    171    2.85%   12,000    155    2.58%
                               
Total Interest-Bearing Liabilities   807,128    5,789    1.43%   730,851    6,391    1.75%
                               
Noninterest-bearing demand deposits   67,434              64,466           
Other liabilities   7,421              6,636           
Stockholders' equity   77,048              71,848           
Total Liabilities and Stockholders' Equity  $959,031             $873,801           
                               
Net interest income       $14,422             $13,345      
                               
Interest rate spread             3.07%             3.13%
Net yield on interest-earning assets             3.22%             3.30%
Ratio of average interest-earning                              
assets to average interest bearing                              
liabilities             111.14%             110.71%

 

(1) Average balance includes nonaccrual loans

 

34
 

 

The table below sets forth certain information regarding changes in interest income and interest expense of the Bank for the periods indicated. For each category of interest earning asset and interest bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by old rate); and (2) changes in rate (changes in rate multiplied by old volume). Changes in rate volume (changes in rate multiplied by the change in volume) have been allocated to changes due to volume.

 

   Six months ended June 30, 2012 
   compared to six months ended 
       June 30, 2011     
       Due to     
   Volume   Rate   Total 
             
Interest income:               
Loan portfolio  $1,528   $(890)  $638 
Investment securities, federal funds               
sold and interest bearing deposits   268    (431)   (163)
Total interest-earning assets  $1,796   $(1,321)  $475 
                
Interest-bearing liabilities:               
Savings   (1)   (16)   (17)
Interest-bearing demand and money               
market accounts   195    (329)   (134)
Certificates of deposit   159    (604)   (445)
Long-term debt   (39)   9    (30)
Short-term debt   14    (6)   8 
Guaranteed preferrred beneficial interest               
in junior subordinated debentures   -    16    16 
Total interest-bearing liabilities  $328   $(930)  $(602)
Net change in net interest income  $1,468   $(391)  $1,077 

 

The Company’s provision for loan losses decreased $2,119,186 and reflected improving asset quality and a decrease in the allowance for specific nonperforming loans based on management’s estimate of realizable value. The provision for loan losses was impacted by increasing average loan balances, economic conditions that affected the loss factors used to compute the allowance, the level of delinquencies and charge-offs. Overall delinquency, which includes all loans greater than 30 days past due increased from 2.09% at December 31, 2011 to 2.37% at June 30, 2012. Nonperforming loans as a percentage of total loans were 1.48% at June 30, 2012 compared to 1.65% at March 31, 2012 and 1.32% at December 31, 2011. Net charge-offs decreased $2,460,667 from $3,468,283 for the six months ended June 30, 2011 to $1,007,616 for the six months ended June 30, 2012.

 

The following table shows the components of noninterest income and the dollar and percentage changes for the periods presented.

 

   Six Months Ended June 30,         
   2012   2011   $ Change   % Change 
Noninterest Income                    
Loan appraisal, credit, and miscellaneous charges  $383,441   $351,731   $31,710    9.02%
Net losses on sale of OREO   (96,917)   -    (96,917)   n/a