FASB ASC 820 defines fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk including our own credit risk.
In addition to defining fair value, FASB ASC 820 expands the disclosure requirements regarding fair value and establishes a fair value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. The level in the fair value hierarchy within which a fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis at September 30, 2012 and December 31, 2011. All of the mortgage-backed securities reported at fair value on September 30, 2012, and December 31, 2011, were secured by first mortgage loans on residential real estate.
| | September 30, 2012 | | | December 31, 2011 | |
| | Carrying Amount | | | Fair Value | | | Carrying Amount | | | Fair Value | |
| | (In Thousands) | |
Financial Assets | | | | | | | | | | | | |
Cash and Cash Equivalents | | $ | 7,209 | | | $ | 7,209 | | | $ | 27,589 | | | $ | 27,589 | |
Certificates of Deposit | | | 481 | | | | 485 | | | | 742 | | | | 745 | |
Securities | | | 87,786 | | | | 91,425 | | | | 82,331 | | | | 85,817 | |
| | | | | | | | | | | | | | | | |
Loans | | | 217,813 | | | | 228,361 | | | | 197,437 | | | | 206,594 | |
Less Allowance for Loan Losses | | | (1,915 | ) | | | (1,915 | ) | | | (1,805 | ) | | | (1,805 | ) |
Loans, Net of Allowance | | | 215,898 | | | | 226,446 | | | | 195,632 | | | | 204,789 | |
| | | | | | | | | | | | | | | | |
Federal Home Loan Bank Stock | | | 1,869 | | | | 1,869 | | | | 1,543 | | | | 1,543 | |
| | | | | | | | | | | | | | | | |
Financial Liabilities | | | | | | | | | | | | | | | | |
Deposits | | $ | 195,913 | | | $ | 200,112 | | | $ | 194,326 | | | $ | 200,413 | |
Borrowings | | | 61,426 | | | | 64,873 | | | | 57,113 | | | | 60,489 | |
| | | | | | | | | | | | | | | | |
Unrecognized Financial Instruments | | | | | | | | | | | | | | | | |
Commitments to Extend Credit | | $ | 30,929 | | | $ | 30,934 | | | $ | 18,518 | | | $ | 18,523 | |
NOTE 7 – SUBSEQUENT EVENTS
In accordance with FASB ASC 855, Subsequent Events, the Company evaluates events and transactions that occur after the balance sheet date for potential recognition in the financial statements. The effect of all subsequent events that provide additional evidence of conditions that existed at the balance sheet date are recognized in the financial statements as of September 30, 2012. In preparing these financial statements, the Company evaluated the events and transactions that occurred through the date these financial statements were issued.
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain forward-looking statements and information relating to the Company and the Bank that are based on the beliefs of management as well as assumptions made by and information currently available to management. In addition, in portions of this document the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “should” and similar expressions or the negative thereof, as they relate to the Company or the Bank or their management, are intended to identify forward-looking statements. Such statements reflect the current views of the Company and/or the Bank with respect to forward-looking events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. The Company does not intend to update these forward-looking statements.
General
The Company’s results of operations are primarily dependent on the results of the Bank, which is a wholly owned subsidiary of the Company. The Bank’s results of operations depend, to a large extent, on net interest income, which is the difference between the income earned on its loan and investment portfolios and the cost of funds, consisting of the interest paid on deposits and borrowings. Results of operations are also affected by provisions for, or recoveries from, the allowance for loan losses, fee income and other non-interest income and non-interest expense. Non-interest expense principally consists of compensation and employee benefits, office occupancy and equipment expense, data processing, advertising and business promotion and other expense. Our results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities. Future changes in applicable law, regulations or government policies may materially impact our financial conditions and results of operations.
Critical Accounting Policies
In reviewing and understanding financial information for the Company, you are encouraged to read and understand the significant accounting policies used in preparing our financial statements. These policies are described in Note 1 of the notes to our financial statements. The accounting and financial reporting policies of the Company conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Accordingly, the financial statements require certain estimates, judgments, and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the period or in future periods.
Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. Subsequent recoveries are added to the allowance. The allowance is an amount that represents the amount of probable and reasonably estimable known and inherent losses in the loan portfolio, based on evaluations of the collectibility of loans. The evaluations take into consideration such factors as changes in the types and amount of loans in the loan portfolio, historical loss experience, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, estimated losses relating to specifically identified loans, and current economic conditions. This evaluation is inherently subjective as it requires material estimates including, among others, exposure at default, the amount and timing of expected future cash flows on impacted loans, the value of collateral, estimated losses on our commercial and residential loan portfolios and general amounts for historical loss experience. All of these estimates may be susceptible to significant change.
While management uses the best information available to make loan loss allowance evaluations, adjustments to the allowance may be necessary based on changes in economic and other conditions or changes in accounting guidance. Historically, our estimates of the allowance for loan loss have not required significant adjustments from management’s initial estimates. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination processes, periodically reviews our allowance for loan losses. The Office of the Comptroller of the Currency may require the recognition of adjustments to the allowance for loan losses based on its judgment of information available to it at the time of its examinations. To the extent that actual outcomes differ from management’s estimates, additional provisions to the allowance for loan losses may be required that would adversely impact earnings in future periods.
Income Taxes. We make estimates and judgments to calculate some of our tax liabilities and determine the recoverability of some of our deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenues and expenses. We also estimate a reserve for deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. These estimates and judgments are inherently subjective. Historically, our estimates and judgments to calculate our deferred tax accounts have not required significant revision to our initial estimates.
In evaluating our ability to recover deferred tax assets, we consider all available positive and negative evidence, including our past operating results, recent cumulative losses and our forecast of future taxable income. In determining future taxable income, we make assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require us to make judgments about our future taxable income and are consistent with the plans and estimates we use to manage our business. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.
Comparison of Financial Condition at September 30, 2012 and December 31, 2011
Total assets were $319.4 million at September 30, 2012, an increase of $6.2 million compared to December 31, 2011. During the first nine months of 2012, cash and cash equivalents decreased by $20.4 million to $7.2 million. Total securities available-for-sale were $13.1 million at September 30, 2012, a decrease of $9.6 million compared to December 31, 2011. This decrease in securities available-for-sale was primarily due to maturities of U.S. Agency issued securities and repayments of principal on mortgage-backed securities during the first nine months of 2012. Total securities held-to-maturity increased by $15.1 million, to $74.7 million, during the first nine months of 2012. This increase in securities held-to-maturity was primarily due to the purchase of $27.4 million in US Agency issued CMOs and $4.0 million in US Agency issued mortgage-backed securities. These purchases were partially offset by $16.1 million in repayments of principal on mortgage-backed securities and CMOs. Net loans receivable were $215.9 million at September 30, 2012, an increase of $20.3 million, or 10.4%, compared to December 31, 2011. During the nine months ended September 30, 2012, our first mortgage loans secured by single family residential loans increased by $10.3 million, our funded home equity loans and lines increased by $3.3 million, our loans secured by multifamily residential collateral increased by $3.1 million, and our first mortgage loans secured by non-residential commercial real estate increased by $5.1 million.
Total impaired loans were $715,000 at September 30, 2012, a decrease of $359,000 compared to December 31, 2011. At these dates, our impaired loans were comprised solely of nonaccrual loans. Other real estate owned increased by $100,000 to $632,000 during the first nine months of 2012. At September 30, 2012, our other real estate owned was comprised of a restaurant located in Baton Rouge, Louisiana with a fair value of $250,000, and the Bank’s participation interest in a $170 million construction loan secured by a multi-use development in Baton Rouge, Louisiana, which had a fair value of $382,000 at such date. Total nonperforming assets were $1.3 million at September 30, 2012, and $1.6 million at December 31, 2011. Expressed as a percentage of total assets, nonperforming assets were 0.42% at September 30, 2012, and 0.51% at December 31, 2011.
Total deposits were $195.9 million at September 30, 2012 and $194.3 million at December 31, 2011. Non-interest bearing deposits increased during the nine month period by $3.0 million, to $12.8 million, and interest-bearing deposits decreased by $1.4 million, to $183.1 million. Total Federal Home Loan Bank advances and other borrowings were $61.4 million at September 30, 2012, an increase of $4.3 million from December 31, 2011. This increase in borrowings was primarily used to fund the growth in our loans receivable during the first nine months of 2012.
Total shareholders’ equity was $55.6 million at September 30, 2012, a decrease of $1.9 million from December 31, 2011. During the first nine months of 2012, the Company acquired 264,878 shares of its common stock at a total cost of $4.3 million pursuant to its repurchase plans. The cost of our stock repurchases during the first nine months of 2012 was partially offset by net income of $1.8 million, and the release of 43,084 shares held by the Company’s Recognition and Retention Plan Trust, with a total cost basis of $543,000, which became vested and were released to plan participants during the period. The Bank’s tier 1 leverage ratio was 15.24% at September 30, 2012 compared to 15.00% at December 31, 2011. Tier 1 risk-based capital and total risk-based capital at the bank level were 28.21% and 29.33%, respectively, at September 30, 2012, and 29.32% and 30.38%, respectively, at December 31, 2011.
Comparison of Our Operating Results for the Three Months and Nine Months Ended September 30, 2012 and 2011
General. Net income for the quarter ended September 30, 2012 was $647,000, an increase of $151,000 from the third quarter of 2011. Diluted earnings per share were $0.24 and $0.17, respectively for the quarters ended September 30, 2012 and 2011. Net interest income was $2.6 million during the third quarter of 2012, an increase of $129,000 compared to the second quarter of 2011. Non-interest income was $548,000 during the third quarter of 2012, an increase of $235,000 compared to the third quarter of 2011. This increase in non-interest income was due primarily to an increase in commissions earned on brokered reverse mortgage loans and an increase in gains on the sale of residential mortgage loans. Non-interest expense was $2.0 million and $1.9 million, respectively, for the quarters ended September 30, 2012, and 2011.
For the nine month period September 30, 2012, net income was $1.8 million, or $0.64 per diluted share, compared to net income of $1.5 million, or $0.50 per diluted share for the nine month period ended September 30, 2011. Net interest income was $7.5 million and $7.3 million, respectively, for the nine month periods ended September 30, 2012 and 2011. Our provision for loan losses during the first nine months of 2012 was $226,000 compared to $59,000 during the first nine months of 2011. Non-interest income increased by $611,000, to $1.4 million, during the nine months ended September 30, 2012 compared to the nine month period ended September 30, 2011. This increase in non-interest income was primarily due to the increase in commissions earned on brokered reverse mortgage loans and an increase in the gain on the sale of loans, referenced previously. Non-interest expense was $5.9 million and $5.6 million, respectively, for the nine month periods ended September 30, 2012 and 2011.
Average Balances, Net Interest Income, and Yields Earned and Rates Paid. The following tables show for the periods indicated the total dollar amount of interest income from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. Tax-exempt income and yields have not been adjusted to a tax-equivalent basis. All average balances are based on monthly balances. Management does not believe that the monthly averages differ significantly from what the daily averages would be.