XNAS:CFFC Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012


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 EXCHANGE ACT OF 1934

   For the transition period from __________________________ to__________________________

Commission file number    000-18261


COMMUNITY FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)


VIRGINIA
 
54-1532044
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification Number)


38 North Central Ave., Staunton, VA                                                                                                           24401
(Address of principal executive offices)                                                                                                                       (Zip Code)


(540) 886-0796
(Issuer’s telephone number)


None
(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 and 15(d) of the Securities Exchange Act of 1934 during the past 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 o

Indicate by check mark whether the registrant (1) has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (& 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a small reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act:

 
Large accelerated filer o
Accelerated filer o
Non-Accelerated filer o
Smaller reporting company x
   
(do not check if a small
   
   
reporting company)
   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes  o   No x

Number of shares of common stock, par value $.01 per share, outstanding at the close of business on August 10, 2012:  4,361,658.

 
 
 
 




COMMUNITY FINANCIAL CORPORATION

INDEX


PART I.
FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements
 
     
 
Consolidated Balance Sheets at June 30, 2012 (unaudited)
and March 31, 2012
1
     
 
Consolidated Statements of  Operations for the
Three Months Ended June 30, 2012 and 2011
(unaudited)
2
     
 
Consolidated Statements of Cash Flows for the Three
Months Ended June 30, 2012 and 2011 (Unaudited)
3
     
 
Notes to Unaudited Interim Consolidated
Financial Statements
4
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
20
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
31
     
Item 4.
Controls and Procedures
31
     
PART II.
OTHER INFORMATION
32
     
Signature Page
 
35
     
Exhibit Index
 
36
























 
 
 
 

Part I.   Financial Information
Item 1.     Financial Statements

COMMUNITY FINANCIAL CORPORATION
 
CONSOLIDATED BALANCE SHEETS
 
             
   
June 30,
   
March 31,
 
   
2012
   
2012
 
   
(Unaudited)
       
ASSETS
           
Cash (including interest-bearing deposits of approximately $1,066,026 and $2,910,622)
  $ 6,843,939     $ 8,233,185  
Securities
               
   Held to maturity (fair value of $17,344,335 and $11,343,500 respectively)
    17,331,000       11,344,000  
   Available for sale, at fair value
    38,647       38,647  
Restricted investment in Federal
   Home Loan Bank stock, at cost
    4,601,300       5,206,300  
Loans receivable, net of allowance for loan
losses of $8,510,203 and $8,910,121
    437,972,655       445,098,108  
Real estate owned, net of valuation allowance of $1,894,378 and $2,502,944
    7,543,843       9,259,432  
Property and equipment, net
    8,322,781       8,430,736  
Bank owned life insurance
    6,839,954       6,781,869  
Accrued interest receivable
               
   Loans
    1,721,233       1,757,001  
   Investments
    35,153       36,610  
Prepaid expenses and other assets
    7,240,286       7,721,063  
Total Assets
  $ 498,490,791     $ 503,906,951  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Liabilities
               
   Deposits
  $ 368,082,721     $ 372,417,944  
   Borrowings
    76,000,000       78,000,000  
   Advance payments by borrowers for
   taxes and insurance
    138,692       268,465  
   Other liabilities
    2,807,168       2,817,936  
                 
      Total Liabilities
    447,028,581       453,504,345  
                 
Stockholders’ Equity
               
   Preferred stock $.01 par value, $1,000 liquidation
               
       preference, authorized 3,000,000                 
      shares, 12,643 shares outstanding
    12,643,000       12,643,000  
   Common stock, $0.01 par value, authorized
      10,000,000 shares, 4,361,658 shares outstanding
    43,617       43,617  
   Warrants
    603,153       603,153  
   Discount on preferred stock
    (176,906 )     (207,065 )
   Additional paid in capital
    5,599,052       5,599,052  
   Retained earnings
    34,123,825       33,094,380  
   Accumulated other comprehensive (loss)
    (1,373,531 )     (1,373,531 )
   Total Stockholders’ Equity
    51,462,210       50,402,606  
                 
Total Liabilities and Stockholders’ Equity
  $ 498,490,791     $ 503,906,951  

See accompanying notes to unaudited interim consolidated financial statements.

 
1
 
 


COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
             
   
Three Months Ended
 
   
June 30,
 
   
2012
   
2011
 
   
(Unaudited)
(Unaudited)
 
             
INTEREST INCOME
           
  Loans
  $ 5,991,735     $ 6,821,445  
  Investment securities
    50,214       9,467  
  Other
    60,118       78,799  
    Total interest income
    6,102,067       6,909,711  
                 
INTEREST EXPENSE
               
  Deposits
    632,285       954,227  
  Borrowed money
    47,451       45,164  
    Total interest expense
    679,736       999,391  
                 
  NET INTEREST INCOME
    5,422,331       5,910,320  
                 
PROVISION FOR LOAN LOSSES
    184,412       706,253  
                 
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES
    5,237,919       5,204,067  
                 
NONINTEREST INCOME
               
  Service charges, fees and commissions
    811,885       862,111  
  Other
    95,929       112,157  
   Total noninterest income
    907,814       974,268  
                 
NONINTEREST EXPENSE
               
  Compensation & benefits
    2,237,589       2,414,502  
  Occupancy
    403,737       407,191  
  Data processing
    397,127       443,716  
  Federal insurance premium
    108,444       119,587  
  Advertising
    152,901       102,765  
  Real estate owned and collection
    353,346       1,517,827  
  Other
    492,374       321,064  
    Total noninterest expense
    4,145,518       5,326,652  
                 
INCOME BEFORE TAXES
    2,000,215       851,683  
                 
INCOME TAX EXPENSE
    782,573       303,684  
                 
NET INCOME
  $ 1,217,642     $ 547,999  
                 
Effective Dividend on Preferred Stock
    188,197       188,197  
NET INCOME AVAILABLE   TO COMMON STOCKHOLDERS
  $ 1,029,445     $ 359,802  
BASIC EARNINGS PER COMMON SHARE
  $ 0.24     $ 0.08  
DILUTED EARNINGS PER COMMON SHARE
  $ 0.24     $ 0.08  
DIVIDENDS PER COMMON SHARE
  $ 0.00     $ 0.00  

See accompanying notes to unaudited interim consolidated financial statements.
 
 
 
2
 
 
 
 
 
COMMUNITY FINANCIAL CORPORATION
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
       
   
Three Months Ended
 
   
June 30,
 
   
2012
   
2011
 
   
(Unaudited)
   
(Unaudited)
 
OPERATING ACTIVITIES
           
  Net income
  $ 1,217,642     $ 547,999  
  Adjustments to reconcile net income to
               
    net cash provided by operating activities
               
      Provision for loan losses
    184,412       706,253  
      Losses/impairment on foreclosed assets
    2,233,274       1,105,538  
      Depreciation
    147,297       157,463  
      Decrease in net deferred loan fees
    (916 )     (11,868 )
      Deferred income tax (benefit)
    (841,841 )     (30,677 )
      (Increase) decrease in other assets
    (518,002 )     115,466  
      (Decrease) in other liabilities
    (140,541 )     (66,349 )
                 
        Net cash provided by operating activities
    2,281,325       2,523,825  
                 
INVESTING ACTIVITIES
               
  Proceeds from maturities of held to maturity securities
    3,000,000       1,000,000  
  Purchase of held to maturity securities
    (8,987,000 )     (2,500,000 )
  Net decrease in loans
    8,624,902       2,979,683  
  Purchases of property and equipment
    (39,341 )     (87,105 )
  Redemption of FHLB stock
    605,000       157,400  
  Improvement to real estate owned
    (24,370 )     (62,679 )
  Proceeds from sale of real estate owned
    2,433,729       2,502,511  
                 
     Net cash provided by investing activities
    5,612,920       3,989,810  
                 
FINANCING ACTIVITIES
               
  Dividends paid
    (158,038 )     (158,038 )
  Net (decrease) in deposits
    (7,125,453 )     (7,948,519 )
  (Repayment of) proceeds from advances and other borrowed money
    (2,000,000 )     896,366  
                 
    Net cash (used in) financing activities
    (9,283,491 )     (7,210,191 )
                 
 INCREASE(DECREASE)IN CASH AND CASH EQUIVALENTS
    (1,389,246 )     (696,556 )
                 
CASH AND CASH EQUIVALENTS – beginning of period
    8,233,185       7,897,955  
                 
CASH AND CASH EQUIVALENTS – end of period
  $ 6,843,939     $ 6,643,083  
                 
Supplemental Schedule of Non-Cash
               
  Investing and Financing Activities
               
Transfers from loans to real estate acquired through foreclosure
  $ 969,780     $ 2,348,333  

See accompanying notes to unaudited interim consolidated financial statements

 
3
 
 


COMMUNITY FINANCIAL CORPORATION
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012

NOTE 1. - BASIS OF PRESENTATION

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

The accompanying consolidated financial statements include the accounts of Community Financial Corporation ("Community" or the "Company") and its wholly-owned subsidiary, Community Bank (the "Bank").  All significant intercompany balances and transactions have been eliminated in consolidation.

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the three months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending March 31, 2013.

The Company made application to the Treasury Department to participate in the TARP program and received an investment by the Treasury Department of $12,643,000 in the form of preferred stock during the year ended March 31, 2009.  The Company also issued to the U.S. Treasury a warrant to purchase 351,194 shares of common stock at $5.40 per share.

On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform Act. The Dodd-Frank Act imposed new restrictions and an expanded framework of regulatory oversight for financial institutions, including depository institutions. In addition, the new law changed the jurisdictions of existing bank regulatory agencies and in particular transfers the regulation of federal savings associations from the Office of Thrift Supervision to the Office of Comptroller of the Currency, effective July 21, 2011. At the same time, responsibility for regulation of savings and loan holding companies was transferred to the Board of Governors of the Federal Reserve System (Federal Reserve).


NOTE 2. - STOCK-BASED COMPENSATION PLAN
The Company recognizes the cost of employee services received in exchange for awards of equity instruments, such as stock options and restricted stock, based on the fair value of those awards at the date of grant.

There were no stock options granted and no stock-based compensation expense was recognized during the three month period ended June 30, 2012.

The following summarizes the stock option activity for the three months ended June 30, 2012:

       
Weighted
Intrinsic
   
Weighted
 
Average
Value of
   
Average
 
Remaining
Unexercised
   
Exercise
 
Contractual
In-the-Money
   
Shares
   
Price
 
Term
Options
                 
Options outstanding, March 31, 2012
    243,900     $ 9.23      
Granted
    ---       ---      
Exercised
    ---       ---      
Forfeited
    6,000       10.01      
Options outstanding June 30, 2012
    237,900       9.21  
3.4
 
Options exercisable, June 30, 2012
    237,900     $ 9.21  
3.4
---
 
There were no options exercised during the three months ended June 30, 2012.

 
4
 
 

NOTE 3. - EARNINGS PER SHARE

Basic earnings per common share is based on net income available to common stockholders divided by the weighted average number of common shares outstanding during the period.  Diluted earnings per common share shows the dilutive effect of additional common shares issuable under stock option plans and warrants. Diluted earnings per common share is computed by dividing net income available to common stockholders  by the weighted average number of common shares and common share equivalents outstanding. Basic and diluted earnings per common share are computed in the following table.

   
For the Three Months Ended
 
                                     
   
June 30, 2012
   
June 30, 2011
 
                                     
         
Weighted Average
   
Per Share
         
Weighted Average
   
Per Share
 
   
Income
   
Shares
   
Amount
   
Income
   
Shares
   
Amount
                                     
Basic per common share:
                                   
                                     
 Income available to common stockholders
  $ 1,029,445       4,361,658     $ 0.24     $ 359,802       4,361,658     $ 0.08  
 
Diluted earnings per common share:
                                               
 
Effect of Dilutive Securities
                                               
                                                 
Options and Warrants
    ---       3,563               ---       63,903          
                                                 
 Income available to common stockholders
  $ 1,029,445       4,365,221     $ 0.24     $ 359,802       4,425,561     $ 0.08  

During the quarter ended June 30, 2012, 217,900 stock options and 351,194 warrants were excluded in the calculation of earnings per share because they would have been anti-dilutive. During the quarter ended June 30, 2011, 165,700 stock options and 351,194 warrants were excluded in the calculation of earnings per share because they would have been anti-dilutive.

NOTE 4. - STOCKHOLDERS' EQUITY

On July 17, 2012, the OCC imposed an individualized minimum capital requirement (“IMCR”) on the Bank, increasing its minimum leverage capital ratio from 4.0% to 8.5% and its total risk-based capital ratio from 8.0% to 12.5%, because of the Bank’s condition and risk profile.  As noted below, the Bank’s capital levels at June 30, 2012, exceeded the ratios required by the IMCR.  In addition to these minimum capital requirements, the Bank is required to have the capital ratios noted below to be deemed well-capitalized under the OCC prompt corrective action regulations.  The Bank was well-capitalized at June 30, 2012.  The Bank’s regulatory capital is characterized as “well capitalized” due to the issuance of preferred stock under the U.S. Treasury Capital Purchase Program. The Company received $12,643,000 from the U.S. Treasury through the sale of 12,643 shares of preferred stock. The Company also issued to the U.S. Treasury a warrant to purchase 351,194 shares of common stock at $5.40 per share. The preferred shares pay a cumulative dividend of 5% per year for the first five years and 9% per year thereafter.  The preferred shares are redeemable at any time by the Company at 100% of the issue price, subject to the approval of the Company’s and the Bank’s federal regulators.


 
5
 
 

The following table presents the Bank’s regulatory capital ratios at June 30, 2012:

   
Actual
 Capital Levels
   
Minimum Required at
 Capital Levels
   
Minimum Required
Capital Levels
 Under the IMCR4
   
Minimum Capital
Levels to be Deemed
 Well-Capitalized
 
   
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
 
               
(Dollars in thousands)
             
Leverage Capital1
  $ 51,703       10.30 %   $ 20,079       4.0 %   $ 42,668       8.5 %   $ 25,099       5.0 %
Tier 1 Risk-Based Capital2
  $ 51,703       12.34 %     N/A       N/A       N/A       N/A     $ 25,143       6.0 %
Total Risk-Based Capital3
  $ 56,959       13.59 %   $ 33,524       8.0 %   $ 52,382       12.5 %   $ 41,905       10.0 %
_______________________________________________________
1.
Tier 1 Capital to Total Assets of $502.0 million.
2.
Tier 1 Capital to Risk-Weighted Assets of $419.1 million.
3.
Total Capital to Risk-Weighted Assets of $419.1 million.
4.
The IMCR was not effective until July 17, 2012.

The Company’s primary source of funds for the payment of dividends to its common and preferred stockholders is dividends received from the Bank.  Under a written agreement between the OCC and the Bank, the Bank must receive OCC approval before paying a dividend to the Company.  In addition, under the Agreement and Plan of Merger with City Holding Company described in Note 12 - Subsequent Events, the Company has agreed not to pay dividends to common stockholders pending the consummation of the acquisition.

NOTE 5. - SUPPLEMENTAL INFORMATION - STATEMENT OF CASH FLOWS

Total interest paid for the three months ended June 30, 2012 and 2011 was $686,367 and $1,013,743, respectively. Total income taxes paid for the three months ended June 30, 2012 and 2011 was $0 and $66,440.

NOTE 6. - COMPREHENSIVE INCOME

Comprehensive income is defined as "the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners." Comprehensive income for the Company includes net income, unrealized gains and losses on securities available for sale and pension liability adjustments. For the three-month periods ended June 30, 2012 and 2011, net income and comprehensive income were the same.

NOTE 7. – DEFINED BENEFIT PENSION PLAN

The Company has a non-contributory defined benefit pension plan for which the components of net periodic benefit cost are as follows:

   
Three Months Ended
 
   
June 30,
 
       
   
2012
   
2011
 
             
             
Service cost
  $ 92,944     $ 84,662  
Interest cost
    78,503       68,629  
Expected return on plan assets
    (79,680 )     (70,980) )
Recognized net actuarial loss
    17,318       14,153  
                 
    $ 109,085     $ 96,464  


 
6
 
 

The Company made a contribution of $550,595 to the plan during the June 30, 2012 quarter for the fiscal year ended March 31, 2012.  The Company anticipates making all contributions for the current fiscal year prior to March 31, 2013.

NOTE 8. – SECURITIES

Management evaluates securities for other than temporary impairment at least quarterly, and more frequently when economic or market concerns warrant such evaluation.  Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether the Company intends to sell the investments or it is more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis.

Securities

A summary of the amortized cost and estimated market values of securities is as follows:

June 30, 2012
                       
         
Gross
   
Gross
   
Estimated
 
   
Amortized
   
Unrealized
   
Unrealized
   
Market
 
   
Cost
   
Gains
   
Losses
   
Value
 
Held to Maturity
                       
                         
United States government and
                       
agency obligations
  $ 13,000,000     $ 15,595     $ 2,260     $ 13,013,335  
                                 
   Other
    4,331,000       -       -       4,331,000  
      17,331,000       15,595       2,260       17,344,335  
Available for Sale
                               
                                 
Equity securities
    38,647       -       -       38,647  
                                 
    $ 17,369,647     $ 15,595     $ 2,260     $ 17,382,982  

March 31, 2012
                       
         
Gross
   
Gross
   
Estimated
 
   
Amortized
   
Unrealized
   
Unrealized
   
Market
 
   
Cost
   
Gains
   
Losses
   
Value
 
Held to Maturity
                       
                         
United States government and
                       
agency obligations
  $ 10,000,000     $ 17,430     $ 17,900     $ 9,999,530  
                                 
   Other
    1,344,000       -       -       1,344,000  
      11,344,000       17,430       17,900       11,343,530  
Available for Sale
                               
                                 
Equity securities
    38,647       -       -       38,647  
                                 
    $ 11,382,647     $ 17,430     $ 17,900     $ 11,382,177  

United States government and agency obligations.  The unrealized gain or loss on the investments in direct obligations of U.S. government agencies was caused by interest rate increases or decreases.  The contractual terms of these investments do not permit the issuer to settle at a price less than the amortized cost basis of the investment.  Because the Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell the investment before recovery of the amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2012.  Three securities were in a loss position at June 30, 2012.

 
7
 
 


The Company's investment in Federal Home Loan Bank (“FHLB”)  stock totaled $4,601,300 at June 30, 2012.  FHLB stock is generally viewed as a long-term investment and as a restricted security, which is carried at cost, because there is no market for the stock, other than the FHLBs or member institutions.  Therefore, when evaluating FHLB stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value.  We do not consider this investment to be other-than-temporarily impaired at June 30, 2012 and no impairment has been recognized.  FHLB stock is shown in restricted investments on the balance sheet and is not part of the AFS securities portfolio.

NOTE 9. - FAIR VALUE MEASUREMENTS

Generally accepted accounting principles define fair value, establish a framework for measuring fair value, establish a three-level valuation hierarchy for disclosure of fair value measurements and enhance disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

·           Level 1
Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
   
·           Level 2
Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instrument.
   
·           Level 3
Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:

Securities Available for Sale.  Where quoted prices are available in an active market, securities are classified within level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities.  If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities.  In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within level 3 of the valuation hierarchy.  Currently, all of the Company’s securities are considered to be Level 2 securities.

The following table presents the balances of financial assets measured at fair value on a recurring basis as of June 30, 2012:

          
Fair Value Measurements Using
 
         
Quoted Prices
             
         
in Active
   
Significant
       
         
Markets for
   
Other
   
Significant
 
         
Identical
   
Observable
   
Unobservable
 
         
Assets
   
Inputs
   
Inputs
 
Description
 
Balance
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets
                       
June 30, 2012
                       
Equity securities
  $ 38,647     $ -     $ 38,647     $ -  
                                 
March 31, 2012
                               
Equity securities
  $ 38,647     $ -     $ 38,647     $ -  

Certain assets are measured at fair value on a nonrecurring basis in accordance with generally accepted accounting principles. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

 
8
 
 


The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements:

Impaired loans

Generally accepted accounting principles apply to loans measured for impairment using  practical expedients, including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent).  Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral.  The fair value of a Level 2 collateral dependent loan is generally determined by a recent appraisal in the last twelve months.  The fair value of a Level 3 collateral dependent loan is determined by reference to an appraisal older than twelve months in addition to cash flow analysis and/or other market evaluations.

Other real estate owned

Certain assets such as other real estate owned (OREO) are measured at the lesser of cost or fair value less cost to sell.  The fair value of Level 2 collateral dependent real estate is generally determined by a recent appraisal in the last twelve months.  The fair value of Level 3 collateral dependent real estate is determined by reference to an appraisal older than twelve months in addition to cash flow analysis and/or other market evaluations.

The following table summarizes the Company’s financial assets that were measured at fair value on a nonrecurring basis during the period.

         
Carrying Value
             
         
Quoted Prices
             
         
in Active
   
Significant
       
         
Markets for
   
Other
   
Significant
 
         
Identical
   
Observable
   
Unobservable
 
         
Assets
   
Inputs
   
Inputs
 
Description
 
Balance
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets
                       
June 30, 2012
                       
   Impaired loans net of
                       
     valuation allowance
  $ 6,234,174     $ -     $ 5,196,305     $ 1,037,869  
   Real estate owned
  $ 7,543,843     $ -     $ 2,939,851     $ 4,603,992  
                                 
March 31, 2012
                               
    Impaired loans net of
                               
      valuation allowance
  $ 4,675,569     $ -     $ 1,582,600     $ 3,092,969  
     Real estate owned
  $ 9,259,432     $ -     $ 6,697,877     $ 2,561,555  

The changes in Level 3 assets measured at estimated fair value on a nonrecurring basis during the period ended June 30, 2012 were as follows:

   
Fair Value Measurements at June 30, 2012
 
   
Impaired
   
Other Real
 
   
Loans
   
Owned
 
Balance April 1, 2012
  $ 3,092,969     $ 2,561,555  
Total gains (losses) realized/unrealized
               
  included in earnings (write downs)
     (134,216      (70,324
Newly impaired/New OREO
    204,316        ---  
Sales
    (85,200 )      (537,820
Settlements/Foreclosures/Payoffs
    (25,000 )      ---  
Transfers into Level 3
    ---        2,996,581  
Transfers out of Level 3
     (2,015,000      (346,000
Balance June 30, 2012
  $ $1,037,869     $ 4,603,992  


 
9
 
 


The following table displays quantitative information about Level 3 Fair Value Measurements for June 30, 2012.

   
Quantitative information about Level 3 Fair Value Measurements for June 30, 2012
                 
                Range
   
Fair
 
Valuation
 
Unobservable
 
Weighted
   
Value
 
Technique(s)
 
Input
 
Average
Assets
               
                 
Impaired loans
  $ 167,701   Discounted Appraised Value   Selling cost   5%-10%(6)%
                   
     884,068   Internal Evaluations        
                   
Other real estate owned
  $ 4,603,992   Discounted   Selling cost   5%-10%(6%)

The Company uses real estate appraisals to value impaired loans and future cash flows or other appropriate methods to determine fair value.  Real estate appraisals used to determine fair value for impaired loans secured by real estate as of June 30, 2012 had been obtained on Level 2 loans within the last twelve months and Level 3 loans within the last nineteen months.  With the use of these methods, we provide valuation allowances for anticipated losses when management determines that a decline in the value of the collateral or expected cash flows has occurred.  The Company does not generally believe obtaining real estate appraisals as frequently as quarterly is of significant value in determining fair value.  The delay between ordering and receiving an appraisal and our historical experience that real estate values do not generally fluctuate significantly quarter to quarter are factors influencing this decision.  Updated appraisals are obtained periodically and in those instances where management has reason to believe a material change may have occurred in the fair value of the collateral.  Evaluation of impairment requires judgment and estimates, and management uses all relevant and timely information available to determine specific reserves on impaired loans, including appraisals and cash flow analysis.  Loans are partially or completely charged off in the period when they are deemed uncollectible in accordance with ASC 310-35.

The accounting standard excludes certain financial instruments and all non-financial instruments from its disclosure requirements.  Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.

Cash and cash equivalents

For those short-term investments, the carrying amount is a reasonable estimate of fair value.

Securities

Fair values for securities, excluding FHLB stock, 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.  The carrying value of FHLB stock approximates fair value based on the redemption provisions of the FHLB stock and is therefore not included in the following table.  The Company’s investment in FHLB stock totaled $4.6 million at June 30, 2012.  FHLB stock is generally viewed as a long term investment and as a restricted investment security which is carried at cost.

Loans receivable

For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.  Fair values for certain mortgage loans (e.g., one-to four-family residential), credit card loans, and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics.  Fair values for other loans (e.g., commercial real estate and investment property mortgage loans, commercial and industrial loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit

 
10
 
 

quality.  Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Deposit liabilities

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

Borrowings

For FHLB advances that mature within one year of the balance sheet date, carrying value is considered a reasonable estimate of fair value.  The fair values of all other FHLB advances are estimated using discounted cash flow analysis based on the Company's current incremental borrowing rate for similar types of advances.

Securities sold under agreements to repurchase

Securities sold under agreements to repurchase are treated as short-term borrowings and the carrying value approximates fair value.

Accrued interest

The carrying amounts of accrued interest approximate fair value.

Off-balance sheet instruments

The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counterparties.  For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date.  At June 30, 2012 and March 31, 2012, the fair value of loan commitments and standby letters of credit were deemed immaterial.

The estimated fair values of the Company’s financial instruments are as follows (in thousands):

         
Fair Value Measurements at June 30, 2012 using
 
 
                             
         
Quoted Prices
                   
         
in Active
   
Significant
             
         
Markets for
   
Other
   
Significant
       
         
Identical
   
Observable
   
Unobservable
       
   
Carrying
   
Assets
   
Inputs
   
Inputs
   
Fair
 
   
Value
   
(Level 1)
   
(Level 2)
   
(Level 3)
   
Value
 
FINANCIAL ASSETS:
                             
   Cash and due from banks
  $ 6,843     $ 6,843     $ --     $ --     $ 6,843  
   Securities
    17,370               17,383               17,383  
   FHLB restricted stock
    4,601               4,601               4,601  
   Loans, net
    437,973               427,256       1,052       428,308  
   Accrued interest receivable
    1,756               1,756               1,756  
   Bank owned life insurance     6,840               6,840               6,840  
 
                                       
FINANCIAL LIABILITIES:
                                       
   Deposits
                                       
     Non-interest bearing demand deposits
    38,866               38,490               38,490  
     Interest bearing deposits
    329,217               330,381               330,381  
   Borrowings
    76,000               75,992               75,992  
   Accrued interest payable
    23               23               23  

 
 
11
 
 
 

 
Note 10. - Loans Receivable, Net

Loans receivable are summarized as follows:

   
June 30, 2012
   
March 31, 2012
 
             
Residential
  $ 183,062,596     $ 182,430,665  
Commercial - real estate
    131,554,776       137,562,743  
Construction and land development
    43,391,541       50,113,695  
Commercial – non real estate
    54,335,834       48,618,808  
Consumer – non real estate
    33,440,349       34,583,824  
      445,785,096       453,309,735  
Less:
               
     Deferred loan (costs), net
    (697,762 )     (698,494 )
     Allowance for loan losses
    8,510,203       8,910,121  
      7,812,441       8,211,627  
    $ 437,972,655     $ 445,098,108  

Loans serviced for others amounted to approximately $133,720 at June 30, 2012, and $138,129 at March 31, 2012.  These loans serviced for others are not included in the accompanying consolidated balance sheets.

Allowance for loan losses is summarized as follows:

   
Three Months Ended
   
Year Ended
 
   
June 30, 2012
   
March 31, 2012
 
Balance at beginning of period
  $ 8,910,121     $ 7,845,950  
Provision for loan loss
    184,412       4,908,198  
Loans charged-off
    (674,169 )     (4,026,264 )
Recoveries of loans previously charged off
    89,839       182,237  
Balance at end of period
  $ 8,510,203     $ 8,910,121  

Beginning with the quarter ended December 31, 2011, the Bank has used an enhanced approach to assessing the qualitative factors related to the calculation of general reserves to recognize the increased levels of non-performing assets and current economic conditions.

The allowance for loan losses allocated by segment is as follows:

Three Months Ended June 30, 2012
 
   
Commercial –
         
Construction and
                   
   
Non Real
   
Commercial –
   
Land
   
Consumer – Non
             
   
Estate
   
Real Estate
   
Development
   
Real Estate
   
Residential
   
Total
 
Allowance for Loan Losses:
                                   
Beginning Balance
  $ 1,332,392     $ 566,317     $ 1,802,771     $ 498,687     $ 4,709,954     $ 8,910,121  
    Provision
    233,926       1,208,701       (269,188 )     56,553       (1,045,579 )     184,413  
    Chargedoff
    (103,080 )     ---       (82,469 )     (90,091 )     (398,530 )     (674,170 )
    Recoveries
    300       ---       56,772       22,320       10,447       89,839  
Ending Balance
  $ 1,463,538     $ 1,775,018     $ 1,507,886     $ 487,469     $ 3,276,292     $ 8,510,203  
Individually evaluated for impairment
  $ 563,185     $ 664,291     $ 67,744     $ 71,515     $ 454,437     $ 1,821,172  
Collectively evaluated for impairment
    900,353       1,110,727       1,440,142       415,954       2,821,855       6,689,031  
Loans:
                                               
Individually evaluated for impairment
  $ 1,458,186     $ 10,386,542     $ 2,600,182     $ 183,137     $ 11,930,362     $ 26,558,409  
Collectively evaluated for impairment
    52,877,648       121,168,234       40,791,359       33,257,212       171,132,234       419,226,687  
Ending Balance:
  $ 54,335,834     $ 131,554,776     $ 43,391,541     $ 33,440,349     $ 183,062,596     $ 445,785,096  
 
 
 
12
 
 
 

 

Year Ended March 31, 2012
 
   
Commercial –
         
Construction
   
Consumer –
             
   
Non Real
   
Commercial –
   
and Land
   
Non Real
             
   
Estate
   
Real Estate
   
Development
   
Estate
   
Residential
   
Total
 
Allowance for Loan Losses:
                                   
Beginning Balance
  $ 99,408     $ 2,223,090     $ 549,393     $ 352,948     $ 4,621,111     $ 7,845,950  
    Provision
    1,589,086       (1,450,445 )     1,397,349       227,148       3,145,060       4,908,198  
    Chargedoff
    (364,344 )     (206,328 )     (144,509 )     (189,741 )     (3,121,342 )     (4,026,264 )
    Recoveries
    8,242       ---       538       108,332       65,125       182,237  
Ending Balance
  $ 1,332,392     $ 566,317     $ 1,802,771     $ 498,687     $ 4,709,954     $ 8,910,121  
Individually evaluated for impairment
  $ 566,942     $ 116,583     $ 140,900     $ 77,666     $ 608,969     $ 1,511,060  
Collectively evaluated for impairment
    765,450       449,734       1,661,871       421,021       4,100,985       7,399,061  
                                                 
Loans:
                                               
Individually evaluated for impairment
  $ 1,571,433     $ 11,697,126     $ 3,319,004     $ 455,411     $ 10,143,625     $ 27,186,599  
Collectively evaluated for impairment
    47,047,375       125,865,617       46,794,691       34,128,413       172,287,040       426,123,136  
Ending Balance:
  $ 48,618,808     $ 137,562,743     $ 50,113,695     $ 34,583,824     $ 182,430,665     $ 453,309,735  

Changes in the collectively evaluated for impairment loan categories for the March 31, 2012 and June 30, 2012 periods are related primarily to the Bank’s charge-off experience for the respective prior twelve month periods. There has not been a change in the Bank’s methodology in determining the allowance for loan losses.

In accordance with ASC 310, Receivables, 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. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment unless the Company believes an individual impairment analysis is warranted.

The Company uses real estate appraisals to value impaired loans and future cash flows or other appropriate methods to determine fair value. With the use of these methods, we provide valuation allowances for anticipated losses when management determines that a decline in the value of the collateral or expected cash flows has occurred.

Regarding the fair value disclosures specifically included in the June 30, 2012 and March 31, 2012 disclosures, all impaired loans were included in Levels 2 or 3 of the fair value hierarchy based on our methodology described above and in the relevant filings. The loans were disclosed in the fair value measurements disclosure net of the related specific impairments.

 
13
 
 


Impaired loans by class are as follows:

Three Months Ended June 30, 2012
 
         
Unpaid
         
Average
   
Interest
 
   
Recorded
   
Principal
   
Related
   
Recorded
   
Income
 
   
Investment
   
Balance
   
Allowance
   
Investment
   
Recognized
 
With no related allowance:
                             
Commercial – Non Real Estate
                             
    Commercial & Industrial
  $ 397,674     $ 397,674     $ ---     $ 522,208     $ 5,856  
Commercial Real Estate
                                       
    Commercial Real Estate
    7,529,232       7,529,232       ---       9,697,878       59,026  
    Multifamily
    ---       ---       ---       707,843       ---  
Construction and Land Development
                                       
    Residential
    489,489       489,489       ---       696,660       6,119  
    Other Construction and Land Development
    1,021,249       1,021,249       ---       1,198,733       6,467  
Consumer – Non Real Estate
                                       
    Automobile
    1,187       1,187       ---       68,228       ---  
    Other
    9,819       9,819       ---       73,401       ---  
Residential
                                       
    Single Family
    8,465,530       8,465,530       ---       7,245,477       68,432  
    Equity Lines and Loans
    588,883       588,883       ---       963,550       1,311  
                                         
With allowance recorded:
                                       
Commercial – Non Real Estate
                                       
    Commercial & Industrial
  $ 1,060,512     $ 1,060,512     $ 563,185     $ 851,381     $ ---  
Commercial Real Estate
                                       
    Commercial Real Estate
    1,839,478       1,839,478       598,478       1,548,464       ---  
    Multifamily
    1,017,832       1,017,832       65,813       315,632       ---  
Construction and Land Development
                                       
    Residential
    ---       ---       ---       ---       ---  
    Other Construction and Land Development
    1,089,444       1,089,444       67,744       713,043       ---  
Consumer – Non Real Estate
                                       
    Automobile
    ---       ---       ---       ---       ---  
    Other
    172,131       172,131       71,515       170,402       ---  
Residential
                                       
    Single Family
    2,336,148       2,336,148       266,760       2,976,273       ---  
    Equity Lines and Loans
    539,801       539,801       187,677       458,640       ---  
                                         
Total:
                                       
Commercial – Non Real Estate
                                       
    Commercial & Industrial
  $ 1,458,186     $ 1,458,186     $ 563,185     $ 1,373,589     $ 5,856  
Commercial Real Estate
                                       
    Commercial Real Estate
    9,368,710       9,368,710       598,478       11,246,342       59,026  
    Multifamily
    1,017,832       1,017,832       65,813       1,023,475       ---  
Construction and Land Development
                                       
    Residential
    489,489       489,489       ---       696,660       6,119  
    Other Construction and Land Development
    2,110,693       2,110,693       67,744       1,911,776       6,467  
Consumer – Non Real Estate
                                       
    Automobile
    1,187       1,187       ---       68,228       ---  
    Other
    181,950       181,950       71,515       243,803       ---  
Residential
                                       
    Single Family
    10,801,678       10,801,678       266,760       10,221,750       68,432  
    Equity Lines and Loans
    1,128,684       1,128,684       187,677       1,422,190       1,311  
 
 
 
14
 
 
 

 

Year Ended March 31, 2012
 
         
Unpaid
         
Average
   
Interest
 
   
Recorded
   
Principal
   
Related
   
Recorded
   
Income
 
   
Investment
   
Balance