Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 quarter ended September 30, 2013
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:0-54271
FRATERNITY COMMUNITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Maryland | 27-3683448 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
764 Washington Boulevard, Baltimore, Maryland | 21230 | |
(Address of principal executive offices) | (Zip Code) |
Issuer’s telephone number, including area code:(410) 539-1313
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, 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 | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of November 8, 2013, the registrant had 1,416,123 shares of common stock issued and outstanding.
Table of Contents
PAGE | ||||||
PART I. | ||||||
Item 1. | 1 | |||||
1 | ||||||
2 | ||||||
3 | ||||||
4 | ||||||
5 | ||||||
7 | ||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 39 | ||||
Item 3. | 51 | |||||
Item 4. | 51 | |||||
PART II. | ||||||
Item 1. | 52 | |||||
Item 1A. | 52 | |||||
Item 2. | 52 | |||||
Item 3. | 52 | |||||
Item 4. | 52 | |||||
Item 5. | 52 | |||||
Item 6. | 53 | |||||
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FRATERNITY COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
ASSETS
September 30, 2013 | December 31, 2012 | |||||||
Cash and cash equivalents: | ||||||||
Cash and due from banks | $ | 1,106,232 | $ | 332,300 | ||||
Interest-bearing deposits in other banks | 12,251,033 | 17,845,981 | ||||||
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Total cash and cash equivalents | 13,357,265 | 18,178,281 | ||||||
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Investment securities: | ||||||||
Available-for-sale - at fair value | 16,964,550 | 18,574,693 | ||||||
Held-to-maturity - at amortized cost (fair value approximates $7,319,673 and $8,017,510, respectively) | 7,271,657 | 7,645,942 | ||||||
Loans - net of allowance for loan losses of $1,501,000 (2013) and $1,395,000 (2012) | 115,649,940 | 114,247,837 | ||||||
Other real estate owned | 1,983,011 | 1,660,364 | ||||||
Property and equipment, net | 975,081 | 809,602 | ||||||
Federal Home Loan Bank stock - at cost - restricted | 1,103,700 | 1,163,000 | ||||||
Ground rents - net of valuation allowance of $44,703 (2013 and 2012) | 832,243 | 844,743 | ||||||
Accrued interest receivable | 559,658 | 529,117 | ||||||
Investment in bank-owned life insurance | 4,650,558 | 4,526,979 | ||||||
Deferred income taxes | 1,215,379 | 825,063 | ||||||
Other assets | 656,691 | 697,618 | ||||||
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TOTAL ASSETS | $ | 165,219,733 | $ | 169,703,239 | ||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Liabilities: | ||||||||
Deposits | $ | 116,166,526 | $ | 118,981,316 | ||||
Advances from the Federal Home Loan Bank | 20,000,000 | 20,000,000 | ||||||
Advances by borrowers for taxes and insurance | 837,149 | 706,124 | ||||||
Other liabilities | 786,671 | 733,132 | ||||||
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Total liabilities | 137,790,346 | 140,420,572 | ||||||
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Stockholders’ Equity: | ||||||||
Preferred stock, $0.01 par value; authorized 1,000,000; none issued | 0 | 0 | ||||||
Common stock, $0.01 par value; authorized 15,000,000; issued and outstanding, 1,426,123 shares at September 30, 2013, 1,506,100 shares at December 31, 2012 | 14,261 | 15,061 | ||||||
Additional paid in capital | 12,577,044 | 13,965,375 | ||||||
Retained earnings - substantially restricted | 16,362,772 | 16,285,930 | ||||||
Unearned ESOP shares | (978,650 | ) | (1,058,000 | ) | ||||
Accumulated other comprehensive (loss) income | (546,040 | ) | 74,301 | |||||
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Total stockholders’ equity | 27,429,387 | 29,282,667 | ||||||
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 165,219,733 | $ | 169,703,239 | ||||
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See accompanying notes.
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FRATERNITY COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
INTEREST INCOME: | ||||||||||||||||
Interest and fees on loans: | ||||||||||||||||
Real estate loans | $ | 1,421,045 | $ | 1,373,143 | $ | 4,228,071 | $ | 4,282,343 | ||||||||
Other loans | 1,386 | 1,119 | 3,943 | 3,400 | ||||||||||||
Interest and dividends on investments and bank deposits | 168,833 | 210,731 | 516,772 | 745,472 | ||||||||||||
Income from ground rents owned | 8,949 | 9,300 | 33,252 | 35,176 | ||||||||||||
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Total interest income | 1,600,213 | 1,594,293 | 4,782,038 | 5,066,391 | ||||||||||||
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INTEREST EXPENSE: | ||||||||||||||||
Interest on deposits | 328,296 | 440,962 | 1,050,642 | 1,347,675 | ||||||||||||
Interest on borrowings - short term | 7,184 | 18,436 | 16,289 | 65,268 | ||||||||||||
Interest on borrowings - long term | 148,158 | 148,158 | 439,644 | 441,254 | ||||||||||||
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Total interest expense | 483,638 | 607,556 | 1,506,575 | 1,854,197 | ||||||||||||
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NET INTEREST INCOME | 1,116,575 | 986,737 | 3,275,463 | 3,212,194 | ||||||||||||
PROVISION FOR LOAN LOSSES | 143,299 | 201,920 | 131,407 | 380,174 | ||||||||||||
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 973,276 | 784,817 | 3,144,056 | 2,832,020 | ||||||||||||
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NON-INTEREST INCOME: | ||||||||||||||||
Gain on sale of investment securities | — | — | 43,335 | 114,134 | ||||||||||||
Income on bank-owned life insurance | 42,056 | 43,564 | 123,579 | 128,311 | ||||||||||||
Gain on sale of loans | — | 33,407 | 50,126 | 60,196 | ||||||||||||
Other income | 5,909 | 3,768 | 16,103 | 26,168 | ||||||||||||
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Total non-interest income | 47,965 | 80,739 | 233,143 | 328,809 | ||||||||||||
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NON-INTEREST EXPENSES: | ||||||||||||||||
Salaries and employee benefits | 628,365 | 573,445 | 1,717,219 | 1,686,627 | ||||||||||||
Occupancy expenses | 138,398 | 127,033 | 408,290 | 373,888 | ||||||||||||
Legal fees | 60,962 | 39,735 | 133,278 | 159,913 | ||||||||||||
Federal Deposit Insurance premiums | 34,469 | 36,635 | 104,850 | 105,167 | ||||||||||||
Accounting and auditing expense | 39,450 | 33,842 | 124,645 | 101,072 | ||||||||||||
Data processing expense | 99,208 | 104,769 | 312,119 | 313,470 | ||||||||||||
Directors fees | 53,008 | 25,567 | 100,817 | 74,278 | ||||||||||||
Other general and administrative expenses | 153,537 | 117,587 | 450,413 | 339,098 | ||||||||||||
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Total non-interest expenses | 1,207,397 | 1,058,613 | 3,351,631 | 3,153,513 | ||||||||||||
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(LOSS) INCOME BEFORE INCOME TAX EXPENSE | (186,156 | ) | (193,057 | ) | 25,568 | 7,316 | ||||||||||
INCOME TAX BENEFIT | (95,027 | ) | (101,834 | ) | (51,274 | ) | (56,028 | ) | ||||||||
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NET (LOSS) INCOME | $ | (91,129 | ) | $ | (91,223 | ) | $ | 76,842 | $ | 63,344 | ||||||
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(LOSS) EARNINGS PER COMMON SHARE - BASIC AND DILUTED | $ | (0.07 | ) | $ | (0.06 | ) | $ | 0.06 | $ | 0.04 | ||||||
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See accompanying notes.
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FRATERNITY COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
NET (LOSS) INCOME | $ | (91,129 | ) | $ | (91,223 | ) | $ | 76,842 | $ | 63,344 | ||||||
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX: | ||||||||||||||||
Unrealized gains on available-for-sale securities: | ||||||||||||||||
Unrealized holding (losses) gains arising during the period | (147,330 | ) | 84,410 | (990,567 | ) | 151,868 | ||||||||||
Less: income taxes on unrealized (losses) gains arising during the period | 58,932 | (33,764 | ) | 396,227 | (60,747 | ) | ||||||||||
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(88,398 | ) | 50,646 | (594,340 | ) | 91,121 | |||||||||||
Less: Reclassification adjustment for realized gains | — | — | (43,335 | ) | (114,134 | ) | ||||||||||
Income taxes on reclassification adjustment | — | — | 17,334 | 45,653 | ||||||||||||
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— | — | (26,001 | ) | (68,481 | ) | |||||||||||
OTHER COMPREHENSIVE (LOSS) INCOME | (88,398 | ) | 50,646 | (620,341 | ) | 22,640 | ||||||||||
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COMPREHENSIVE (LOSS) INCOME | $ | (179,527 | ) | $ | (40,577 | ) | $ | (543,499 | ) | $ | 85,984 | |||||
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See accompanying notes.
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Fraternity Community Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012
(UNAUDITED)
Common Stock | Additional Paid In Capital | Retained Earnings | Unearned ESOP Shares | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity | |||||||||||||||||||
Balance, January 1, 2012 | $ | 15,870 | $ | 14,944,647 | $ | 16,170,684 | $ | (1,163,800 | ) | $ | 149,288 | $ | 30,116,689 | |||||||||||
Net Income | 0 | 0 | 63,344 | 0 | 0 | 63,344 | ||||||||||||||||||
Other Comprehensive Income | 0 | 0 | 0 | 0 | 22,640 | 22,640 | ||||||||||||||||||
Common stock repurchased | (504 | ) | (612,607 | ) | 0 | 0 | 0 | (613,111 | ) | |||||||||||||||
ESOP shares released or committed for release | 0 | 4,576 | 0 | 79,350 | 0 | 83,926 | ||||||||||||||||||
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Balance, September 30, 2012 | $ | 15,366 | $ | 14,336,616 | $ | 16,234,028 | $ | (1,084,450 | ) | $ | 171,928 | $ | 29,673,488 | |||||||||||
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Balance, January 1, 2013 | $ | 15,061 | $ | 13,965,375 | $ | 16,285,930 | $ | (1,058,000 | ) | $ | 74,301 | $ | 29,282,667 | |||||||||||
Net Income | 0 | 0 | 76,842 | 0 | 0 | 76,842 | ||||||||||||||||||
Other Comprehensive Loss | 0 | 0 | 0 | 0 | (620,341 | ) | (620,341 | ) | ||||||||||||||||
Restricted Stock Awards, net of repurchases of $25,364 | 303 | 79,546 | 0 | 0 | 0 | 79,849 | ||||||||||||||||||
Common stock repurchased | (1,103 | ) | (1,496,337 | ) | 0 | 0 | 0 | (1,497,440 | ) | |||||||||||||||
ESOP shares released or committed for release | 0 | 28,460 | 0 | 79,350 | 0 | 107,810 | ||||||||||||||||||
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Balance, September 30, 2013 | $ | 14,261 | $ | 12,577,044 | $ | 16,362,772 | $ | (978,650 | ) | $ | (546,040 | ) | $ | 27,429,387 | ||||||||||
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See accompanying notes.
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FRATERNITY COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, | ||||||||
2013 | 2012 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income | $ | 76,842 | $ | 63,344 | ||||
Adjustments to reconcile net income provided by operating activities: | ||||||||
Depreciation | 78,502 | 65,569 | ||||||
Gain on sale of available-for-sale securities | (43,335 | ) | (114,134 | ) | ||||
Gain on sale of loans | (50,126 | ) | (60,196 | ) | ||||
Origination of loans held for sale | (2,277,084 | ) | (3,240,900 | ) | ||||
Proceeds from sale of loans held for sale | 2,327,210 | 3,301,096 | ||||||
Amortization/accretion of premium/discount | (93,699 | ) | 476,729 | |||||
Increase in value of bank-owned life insurance | (123,579 | ) | (128,311 | ) | ||||
Restricted stock awards | 105,213 | 0 | ||||||
Stock based compensation (ESOP) | 107,810 | 83,926 | ||||||
Provision for loan losses | 131,407 | 380,174 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accrued interest receivable and other assets | 10,386 | (62,230 | ) | |||||
Other liabilities | 53,539 | (25,284 | ) | |||||
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Net cash provided by operating activities | 303,086 | 739,783 | ||||||
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CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Net increase in loans | (1,754,959 | ) | (413,327 | ) | ||||
Redemption of ground rents | 12,500 | 6,650 | ||||||
Acquisition of property and equipment | (243,981 | ) | (134,786 | ) | ||||
Improvements to other real estate owned | (101,198 | ) | 0 | |||||
Purchase of: | ||||||||
Investment securities available-for-sale | (6,503,794 | ) | (7,101,050 | ) | ||||
Proceeds from: | ||||||||
Sales and maturities of investment securities available-for-sale | 5,222,745 | 10,187,699 | ||||||
Principal paydowns on investment securities available-for-sale | 2,081,760 | 3,650,960 | ||||||
Principal paydowns on investment securities held-to-maturity | 310,094 | 427,892 | ||||||
Sale of Federal Home Loan Bank stock | 59,300 | 31,000 | ||||||
Sale of other real estate owned | 0 | 334,103 | ||||||
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Net cash (used in) provided by investing activities | (917,533 | ) | 6,989,141 | |||||
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Fraternity Community Bancorp, Inc.
Consolidated Statements of Cash Flows (Continued)
Nine Months Ended September 30, | ||||||||
2013 | 2012 | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Net decrease in deposits | (2,814,790 | ) | (2,196,678 | ) | ||||
Borrowings from the Federal Home Loan Bank | 5,000,000 | 5,000,000 | ||||||
Repayments of Federal Home Loan Bank borrowings | (5,000,000 | ) | (7,500,000 | ) | ||||
Repurchase of common stock | (1,497,440 | ) | (613,111 | ) | ||||
Repurchase of common stock related to restricted stock awards | (25,364 | ) | 0 | |||||
Increase in advances by borrowers for taxes and insurance | 131,025 | 436 | ||||||
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Net cash used in financing activities | (4,206,569 | ) | (5,309,353 | ) | ||||
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NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (4,821,016 | ) | 2,419,571 | |||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | 18,178,281 | 14,923,142 | ||||||
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CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 13,357,265 | $ | 17,342,713 | ||||
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Cash paid for interest | $ | 1,507,306 | $ | 1,854,533 | ||||
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Cash paid for taxes | $ | 55,064 | $ | 0 | ||||
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Transfer of loans to other real estate owned | $ | 221,449 | $ | 2,077,334 | ||||
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See accompanying notes.
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FRATERNITY COMMUNITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTH PERIODS
ENDED SEPTEMBER 30, 2013 AND 2012
(UNAUDITED)
1. | NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation
Fraternity Community Bancorp, Inc. (the “Company”) was incorporated on October 12, 2010 to serve as the holding company for Fraternity Federal Savings & Loan Association (the “Bank”), a federally chartered savings bank. On March 31, 2011, in accordance with a Plan of Conversion adopted by its Board of Directors and approved by its members, the Bank converted from a federal mutual savings bank to a federal stock savings bank and became the wholly owned subsidiary of the Company. The conversion was accomplished through the sale and issuance of 1,587,000 shares of common stock at a price of $10.00 per share, through which the Company received proceeds of $14,968,610, net of offering expenses of $901,390. In connection with the conversion, the Bank’s Board of Directors adopted an employee stock ownership plan (the “ESOP”) which subscribed for 8% of the sum of the number of shares, or 126,960 shares of common stock sold in the offering. All material intercompany accounts and transactions have been eliminated in consolidation.
In accordance with the Office of the Comptroller of the Currency (the “OCC”) regulations, upon the completion of the conversion, the Bank restricted retained earnings by establishing a liquidation account. The liquidation account will be maintained for the benefit of eligible account holders who continue to maintain their accounts at the Bank after conversion. The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation account. In the event of a complete liquidation of the Bank, and only in such event, each account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying account balances then held. The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X as promulgated by the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Operating results for the nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013, or any other period. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. Certain amounts from prior period financial statements may have been reclassified to conform to the current period’s presentation.
Nature of Operations
The Bank provides a full range of banking services to individuals and businesses through its main office and three branches in the Baltimore metropolitan area. Its primary deposit products are certificates of deposit and demand, savings, NOW, and money market accounts. Its primary lending products are residential and commercial real estate mortgages and consumer loans.
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Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Earnings per Common Share
Basic earnings per share amounts are based on the weighted average number of shares outstanding for the period and the net income applicable to common stockholders. Weighted average shares excludes unallocated ESOP shares. The Company has no dilutive or anti-dilutive potential common shares for the three or nine month periods ended September 30, 2013 or 2012.
Three Months Ended September 30, 2013 | Three Months Ended September 30, 2012 | Nine Months Ended September 30, 2013 | Nine Months Ended September 30, 2012 | |||||||||||||
Net Income | $ | (91,129 | ) | $ | (91,223 | ) | $ | 76,842 | $ | 63,344 | ||||||
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Weighted average common shares outstanding | 1,336,714 | 1,453,158 | 1,352,398 | 1,466,069 | ||||||||||||
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Basic and diluted (loss)/ earnings per share | $ | (0.07 | ) | $ | (0.06 | ) | $ | 0.06 | $ | 0.04 | ||||||
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2. | INVESTMENT SECURITIES |
The amortized cost and fair values of investment securities are as follows:
September 30, 2013 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
Available-for-sale: | ||||||||||||||||
Bank Notes and Corporate Bonds | $ | 1,500,000 | $ | 0 | $ | 2,400 | $ | 1,497,600 | ||||||||
Obligations of U.S. Government Agencies | 5,997,603 | 0 | 613,278 | 5,384,325 | ||||||||||||
Municipal Bonds | 1,000,000 | 0 | 84,790 | 915,210 | ||||||||||||
Mortgage-backed securities: | ||||||||||||||||
FNMA | 6,147,731 | 37,987 | 177,135 | 6,008,583 | ||||||||||||
GNMA | 1,274,855 | 7,118 | 12,903 | 1,269,070 | ||||||||||||
FHLMC | 706,173 | 3,453 | 0 | 709,626 | ||||||||||||
Federal Agency CMO | 943,779 | 0 | 43,901 | 899,878 | ||||||||||||
Private Label CMO | 284,015 | 0 | 3,757 | 280,258 | ||||||||||||
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$ | 17,854,156 | $ | 48,558 | $ | 938,164 | $ | 16,964,550 | |||||||||
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September 30, 2013 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
Held-to-maturity: | ||||||||||||||||
Municipal Bonds | $ | 1,049,310 | $ | 7,912 | $ | 32,320 | $ | 1,024,902 | ||||||||
SBA Pools | 1,448,641 | 0 | 59,238 | 1,389,403 | ||||||||||||
Mortgage-backed securities: | ||||||||||||||||
FNMA | 4,773,706 | 138,426 | 6,764 | 4,905,368 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | 7,271,657 | $ | 146,338 | $ | 98,322 | $ | 7,319,673 | |||||||||
|
|
|
|
|
|
|
|
December 31, 2012 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
Available-for-sale: | ||||||||||||||||
Bank Notes and Corporate Bonds | $ | 2,498,684 | $ | 14,426 | $ | 4,140 | $ | 2,508,970 | ||||||||
Obligations of U.S. Government Agencies | 4,499,056 | 6,344 | 23,720 | 4,481,680 | ||||||||||||
Mortgage-backed securities: | ||||||||||||||||
FNMA | 3,559,558 | 70,278 | 131 | 3,629,705 | ||||||||||||
GNMA | 4,035,379 | 51,846 | 0 | 4,087,225 | ||||||||||||
FHLMC | 1,089,203 | 12,170 | 0 | 1,101,373 | ||||||||||||
Federal Agency CMO | 2,462,680 | 13,422 | 10,379 | 2,465,723 | ||||||||||||
Private Label CMO | 309,081 | 0 | 9,064 | 300,017 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | 18,453,641 | $ | 168,486 | $ | 47,434 | $ | 18,574,693 | |||||||||
|
|
|
|
|
|
|
|
December 31, 2012 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
Held-to-maturity: | ||||||||||||||||
Municipal Bonds | $ | 1,059,606 | $ | 35,745 | $ | 6,122 | $ | 1,089,229 | ||||||||
SBA Pools | 1,740,011 | 19,718 | 22,375 | 1,737,354 | ||||||||||||
Mortgage-backed securities: | ||||||||||||||||
FNMA | 4,846,325 | 344,602 | 0 | 5,190,927 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | 7,645,942 | $ | 400,065 | $ | 28,497 | $ | 8,017,510 | |||||||||
|
|
|
|
|
|
|
|
The amortized cost and fair value of debt securities at September 30, 2013 and December 31, 2012 by contractual maturities are shown below. Expected maturities may differ from contractual maturities because borrowers may have to call or repay obligations with or without call or prepayment penalties.
9
Table of Contents
September 30, 2013 | ||||||||
Available-for-Sale | ||||||||
Amortized Cost | Fair Value | |||||||
Due in one year through five years | $ | 1,508,639 | $ | 1,506,196 | ||||
Due in five years through ten years | 838,261 | 855,863 | ||||||
Due after ten years | 15,507,256 | 14,602,491 | ||||||
|
|
|
| |||||
$ | 17,854,156 | $ | 16,964,550 | |||||
|
|
|
|
September 30, 2013 | ||||||||
Held-to-Maturity | ||||||||
Amortized Cost | Fair Value | |||||||
Due in one year through five years | $ | 3,734,765 | $ | 3,848,655 | ||||
Due in five years through ten years | 2,084,398 | 2,045,313 | ||||||
Due after ten years | 1,452,494 | 1,425,705 | ||||||
|
|
|
| |||||
$ | 7,271,657 | $ | 7,319,673 | |||||
|
|
|
|
December 31, 2012 | ||||||||
Available-for-Sale | ||||||||
Amortized Cost | Fair Value | |||||||
Due in less than one year | $ | 998,684 | $ | 1,013,110 | ||||
Due in one year through five years | 1,503,651 | 1,499,464 | ||||||
Due in five years through ten years | 1,159,145 | 1,183,221 | ||||||
Due after ten years | 14,792,161 | 14,878,898 | ||||||
|
|
|
| |||||
$ | 18,453,641 | $ | 18,574,693 | |||||
|
|
|
|
December 31, 2012 | ||||||||
Held-to-Maturity | ||||||||
Amortized Cost | Fair Value | |||||||
Due in one year through five years | $ | 775,143 | $ | 752,769 | ||||
Due in five years through ten years | 5,361,792 | 5,700,271 | ||||||
Due after ten years | 1,509,007 | 1,564,470 | ||||||
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|
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| |||||
$ | 7,645,942 | $ | 8,017,510 | |||||
|
|
|
|
The Bank recognized gross gains on sales of available-for-sale securities of $43,335 and $124,019 for the nine months ended September 30, 2013 and 2012, respectively. The Bank recognized gross losses on sales of available-for-sale securities of $0 and $9,885 for the nine months ended September 30, 2013 and 2012, respectively.
10
Table of Contents
Securities with unrealized losses, segregated by length of impairment, as of September 30, 2013 and December 31, 2012 were as follows:
Less than 12 Months | More than 12 Months | Total | ||||||||||||||||||||||
Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | |||||||||||||||||||
September 30, 2013 | ||||||||||||||||||||||||
Available-for-sale: | ||||||||||||||||||||||||
Bank Notes and Corporate Bonds | $ | 0 | $ | 0 | $ | 1,497,600 | $ | 2,400 | $ | 1,497,600 | $ | 2,400 | ||||||||||||
Obligations of U.S. Government Agencies | 5,384,325 | 613,278 | 0 | 0 | 5,384,325 | 613,278 | ||||||||||||||||||
Municipal Bonds | 915,210 | 84,790 | 0 | 0 | 915,210 | 84,790 | ||||||||||||||||||
Mortgage-backed securities: | ||||||||||||||||||||||||
FNMA | 4,064,624 | 177,080 | 2,938 | 55 | 4,067,562 | 177,135 | ||||||||||||||||||
GNMA | 1,203,423 | 12,903 | 0 | 0 | 1,203,423 | 12,903 | ||||||||||||||||||
Federal Agency CMO | 899,878 | 43,901 | 0 | 0 | 899,878 | 43,901 | ||||||||||||||||||
Private Label CMO | 280,258 | 3,757 | 0 | 0 | 280,258 | 3,757 | ||||||||||||||||||
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|
|
|
|
|
|
|
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|
| |||||||||||||
$ | 12,747,718 | $ | 935,709 | $ | 1,500,538 | $ | 2,455 | $ | 14,248,256 | $ | 938,164 | |||||||||||||
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|
|
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|
|
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|
|
|
| |||||||||||||
Held-to-Maturity: | ||||||||||||||||||||||||
Municipal Bonds | $ | 478,147 | $ | 32,320 | $ | 0 | $ | 0 | $ | 478,147 | $ | 32,320 | ||||||||||||
Mortgage-backed securities: | ||||||||||||||||||||||||
FNMA | 1,567,166 | 6,764 | 0 | 0 | 1,567,166 | 6,764 | ||||||||||||||||||
SBA Pools | 878,951 | 34,700 | 510,452 | 24,538 | 1,389,403 | 59,238 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
$ | 2,924,264 | $ | 73,784 | $ | 510,452 | $ | 24,538 | $ | 3,434,716 | $ | 98,322 | |||||||||||||
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|
|
|
|
|
|
|
|
|
|
Less than 12 Months | More than 12 Months | Total | ||||||||||||||||||||||
Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | |||||||||||||||||||
December 31, 2012 | ||||||||||||||||||||||||
Available-for-sale: | ||||||||||||||||||||||||
Bank Notes and Corporate Bonds | $ | 0 | $ | 0 | $ | 1,495,860 | $ | 4,140 | $ | 1,495,860 | $ | 4,140 | ||||||||||||
Obligations of U.S. Government Agencies | 2,476,280 | 23,720 | 0 | 0 | 2,476,280 | 23,720 | ||||||||||||||||||
Mortgage-backed securities: | ||||||||||||||||||||||||
FNMA | 29,275 | 48 | 4,978 | 84 | 34,253 | 132 | ||||||||||||||||||
Federal Agency CMO | 1,016,189 | 10,378 | 0 | 0 | 1,016,189 | 10,378 | ||||||||||||||||||
Private Label CMO | 300,017 | 9,064 | 0 | 0 | 300,017 | 9,064 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
$ | 3,821,761 | $ | 43,210 | $ | 1,500,838 | $ | 4,224 | $ | 5,322,599 | $ | 47,434 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Held-to-Maturity: | ||||||||||||||||||||||||
Municipal Bonds | $ | 509,344 | $ | 6,122 | $ | 0 | $ | 0 | $ | 509,344 | $ | 6,122 | ||||||||||||
SBA Pools | 752,769 | 22,375 | 0 | 0 | 752,769 | 22,375 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
$ | 1,262,113 | $ | 28,497 | $ | 0 | $ | 0 | $ | 1,262,113 | $ | 28,497 | |||||||||||||
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11
Table of Contents
Declines in the fair value of investment securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in cost.
Furthermore, as of September 30, 2013, management does not have the intent to sell any of the securities classified as available-for-sale in the table above and believes that it is more likely than not that the Bank will not have to sell any such securities before a recovery of cost. The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of September 30, 2013, management believes the impairments detailed in the table above are temporary and no impairment loss has been realized in the Bank’s consolidated income statement.
3. | LOANS AND ALLOWANCE FOR LOAN LOSSES |
Loans and allowance for loan losses consisted of the following:
September 30, 2013 | December 31, 2012 | |||||||
Real Estate Loans: | ||||||||
Owner Occupied One-to-four family | $ | 80,225,903 | $ | 74,318,470 | ||||
Non Owner Occupied One-to-four family | 11,877,697 | 12,350,230 | ||||||
Home Equity Lines of Credit | 8,469,887 | 10,292,388 | ||||||
Commercial Real Estate | 13,050,291 | 13,668,391 | ||||||
Residential Construction | 2,749,178 | 3,694,508 | ||||||
Land | 688,329 | 1,241,019 | ||||||
|
|
|
| |||||
Total Real Estate Loans | 117,061,285 | 115,565,006 | ||||||
Consumer Loans | 76,382 | 61,152 | ||||||
Commercial Loans | 13,273 | 16,679 | ||||||
|
|
|
| |||||
Total Loans | 117,150,940 | 115,642,837 | ||||||
Less: | ||||||||
Allowance for loan losses | (1,501,000 | ) | (1,395,000 | ) | ||||
|
|
|
| |||||
Total loans and allowance for loan losses | $ | 115,649,940 | $ | 114,247,837 | ||||
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|
|
12
Table of Contents
Management segregates its loan portfolio into portfolio segments which is defined as the level at which the Company develops and documents a systematic method for determining its allowance for loan losses. The portfolio segments are segregated based on loan types and the underlying risk factors present in each loan type. These risk factors are periodically reviewed by management and revised as deemed appropriate. The Company’s loan portfolio is segregated into the following portfolio segments:
Owner Occupied One-To-Four Family Residential Loans. This portfolio segment consists of the origination of first mortgage loans and closed end home equity second mortgage loans secured by one-to-four family residential properties located in our market area. The Company offers both fixed and adjustable rate products on properties located in the Company’s primary market area. These loans are generally for terms of 15, 20 and 30 years amortized on a monthly basis. The Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as employment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.
Non Owner Occupied One-To-Four Family Real Estate Loans. This portfolio segment consists of loans secured by investment properties and represents a unique credit risk to us. As a result, we adhere to special underwriting guidelines. Of primary concern in non-owner occupied real estate lending is the consistency of rental income of the property. Payments on loans secured by rental properties often depend on the maintenance of the property and the payment of rent by its tenants. Payments on loans secured by rental properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. We generally require collateral on these loans to be a first mortgage along with an assignment of rents and leases, although we might accept a second mortgage where the combined loan-to-value ratio is low.
Home Equity Lines of Credit. This portfolio segment consists primarily of open end, second mortgage loans secured by one-to-four family residential properties. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as employment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.
Commercial Real Estate Loans. This portfolio segment consists primarily of loans secured by commercial real estate. Loans secured by commercial real estate generally may have larger balances and more risk of default than one-to-four family mortgage loans. The increased risk is the result of several factors, including the concentration of principal in a limited number of loans and borrowers, the impact of local and general economic conditions on the borrower’s ability to repay the loan, and the increased difficulty of evaluating and monitoring these types of loans.
Residential Construction Loans. This portfolio segment includes construction loans to individuals and builders, primarily for the construction of residential properties. Construction financing generally involves greater risk than long-term financing on improved, owner-occupied real estate. Our portfolio consists of both construction/permanent loans to individuals for their principal residence as well as speculative construction loans to builders. Construction loans are underwritten on the basis of the estimated value of the property as completed. For our construction/permanent loans to individuals for their principal residence, repayment is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as employment levels. Repayment can also be impacted by changes in property values on residential properties. For our speculative construction loans to builders, repayment is primarily dependent on the cashflows of the builder and the success of the project. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long term financing.
13
Table of Contents
Land Loans. This portfolio segment consists primarily of first mortgage loans on developed residential land. Land loans have a higher level of risk than loans for the purchase of existing homes since collateral values can only be estimated at the time the loan is approved.
Consumer Loans. This portfolio segment includes small balance unsecured loans to individuals, automobile loans and deposit account loans. Consumer loans are generally originated at higher interest rates than residential mortgage loans because of their higher risk. Collections are highly dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. In the case where collateral may be present, repossessed collateral for a defaulted loan may not provide an adequate source of repayment as a result of damage, loss or depreciation.
Commercial Loans. This portfolio segment consists of unsecured lines of credit and closed end loans to business owners that have personal guarantees. These loans generally have higher interest rates and shorter terms than one-to-four family residential loans. These loans have a higher level of risk than one-to-four family residential loans. The increased risk is due to the increased difficulty of monitoring and higher risk of default since their repayment generally depends on the successful operation of the borrower’s business.
The balance of impaired loans was $4,946,943 and $5,112,266 as of September 30, 2013 and December 31, 2012, respectively. A loan is impaired when it is not likely the lender will collect the full value of the loan because the creditworthiness of a borrower has deteriorated. All of our impaired loans are either a troubled debt restructuring or are on nonaccrual status.
Non-Performing/Past Due Loans - Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations, which typically occurs when principal or interest payments are more than 90 days past due. Non-accrual loans totaled $2,182,996 and $4,852,783 at September 30, 2013 and December 31, 2012, respectively. There were no accruing loans that were more than 90 days past due at September 30, 2013 and December 31, 2012.
Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan losses, we have segmented our loan portfolio by product type. Our loan segments are owner occupied one-to-four family residential, non owner occupied one-to-four family residential, home equity lines of credit (“HELOC”), commercial real estate, residential construction, land, consumer and commercial.
To establish the allowance for loan losses, loans are pooled by portfolio class and an historical loss percentage is applied to each class. The historical loss percentage is based upon the previous eight quarters history. This rolling history is utilized so that we have the most current and relevant charge-off trend data. These charge-offs are segregated by loan segment and compared to their respective loan segment average balances for the same period in order to calculate the charge-off percentage. That calculation determines the required allowance for loan loss level. The Company then applies additional loss multipliers to the different segments of loans to reflect various environmental factors. For individually evaluated loans (impaired loans), we do additional analyses to determine the impairment. Management applies judgment to develop its own view of loss probability within that range, using external and internal parameters with the objective of establishing an allowance for loss inherent within these portfolios as of the reporting date.
The Company’s policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those assets characterized by the distinct possibility
14
Table of Contents
that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets (or portions of assets) classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted. Assets that do not expose us to risk sufficient enough to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve close attention, are required to be designated as special mention.
Modifications of terms for our loans and their inclusion as troubled debt restructurings are based on individual facts and circumstances. Loan modifications that are included as troubled debt restructurings may involve either an increase or reduction of the interest rate, extension of the term of the loan, or deferral or forgiveness of principal or interest payments. As of September 30, 2013 there were seven loans totaling $4,152,977 classified as troubled debt restructurings. As of December 31, 2012, there were seven loans totaling $3,532,094 classified as troubled debt restructurings.
15
Table of Contents
The following tables show credit quality indicators, the aging of receivables, and disaggregated balances of loans receivable and the allowance for loan losses as of September 30, 2013 and December 31, 2012:
Credit Risk Analysis of Loans Receivable
As of September 30, 2013
Owner Occupied 1-4 Family Residential | Non Owner Occupied 1-4 Family Residential | Home Equity Lines of Credit | Commercial Real Estate | Construction | Land | Consumer | Commercial | Total | ||||||||||||||||||||||||||||
Pass | $ | 78,234,646 | $ | 11,091,089 | $ | 8,088,449 | $ | 11,877,670 | $ | 2,749,178 | $ | 688,329 | $ | 76,382 | $ | 13,273 | $ | 112,819,016 | ||||||||||||||||||
Special Mention | 458,988 | 517,319 | 0 | 0 | 0 | 0 | 0 | 0 | 976,307 | |||||||||||||||||||||||||||
Substandard | 1,532,269 | 269,289 | 381,438 | 1,172,621 | 0 | 0 | 0 | 0 | 3,355,617 | |||||||||||||||||||||||||||
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|
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|
|
|
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|
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|
|
|
|
| |||||||||||||||||||
Total | $ | 80,225,903 | $ | 11,877,697 | $ | 8,469,887 | $ | 13,050,291 | $ | 2,749,178 | $ | 688,329 | $ | 76,382 | $ | 13,273 | $ | 117,150,940 | ||||||||||||||||||
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| |||||||||||||||||||
Credit risk profile based on payment activity: | ||||||||||||||||||||||||||||||||||||
Performing | $ | 78,693,634 | $ | 11,608,408 | $ | 8,088,449 | $ | 13,050,291 | $ | 2,749,178 | $ | 688,329 | $ | 76,382 | $ | 13,273 | $ | 114,967,944 | ||||||||||||||||||
Nonperforming | 1,532,269 | 269,289 | 381,438 | 0 | 0 | 0 | 0 | 0 | 2,182,996 | |||||||||||||||||||||||||||
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|
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| |||||||||||||||||||
Total | $ | 80,225,903 | $ | 11,877,697 | $ | 8,469,887 | $ | 13,050,291 | $ | 2,749,178 | $ | 688,329 | $ | 76,382 | $ | 13,273 | $ | 117,150,940 | ||||||||||||||||||
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16
Table of Contents
Credit Risk Analysis of Loans Receivable
As of December 31, 2012
Owner Occupied 1-4 Family Residential | Non Owner Occupied 1-4 Family Residential | Home Equity Lines of Credit | Commercial Real Estate | Construction | Land | Consumer | Commercial | Total | ||||||||||||||||||||||||||||
Pass | $ | 70,246,078 | $ | 11,460,323 | $ | 9,974,239 | $ | 12,480,780 | $ | 3,694,508 | $ | 1,146,519 | $ | 61,152 | $ | 16,679 | $ | 109,080,278 | ||||||||||||||||||
Special Mention | 0 | 522,164 | 0 | 0 | 0 | 0 | 0 | 0 | 522,164 | |||||||||||||||||||||||||||
Substandard | 4,072,392 | 367,743 | 318,149 | 1,187,611 | 0 | 94,500 | 0 | 0 | 6,040,395 | |||||||||||||||||||||||||||
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|
|
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|
| |||||||||||||||||||
Total | $ | 74,318,470 | $ | 12,350,230 | $ | 10,292,388 | $ | 13,668,391 | $ | 3,694,508 | $ | 1,241,019 | $ | 61,152 | $ | 16,679 | $ | 115,642,837 | ||||||||||||||||||
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| |||||||||||||||||||
Credit risk profile based on payment activity: | ||||||||||||||||||||||||||||||||||||
Performing | $ | 70,246,079 | $ | 11,982,487 | $ | 9,974,239 | $ | 13,668,391 | $ | 3,694,508 | $ | 1,146,519 | $ | 61,152 | $ | 16,679 | $ | 110,790,054 | ||||||||||||||||||
Nonperforming | 4,072,391 | 367,743 | 318,149 | 0 | 0 | 94,500 | 0 | 0 | 4,852,783 | |||||||||||||||||||||||||||
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| |||||||||||||||||||
Total | $ | 74,318,470 | $ | 12,350,230 | $ | 10,292,388 | $ | 13,668,391 | $ | 3,694,508 | $ | 1,241,019 | $ | 61,152 | $ | 16,679 | $ | 115,642,837 | ||||||||||||||||||
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17
Table of Contents
Aged Analysis of Past Due Loans Receivable
As of September 30, 2013
Owner Occupied 1-4 Family Residential | Non Owner Occupied 1-4 Family Residential | Home Equity Lines of Credit | Commercial Real Estate | Construction | Land | Consumer | Commercial | Total | ||||||||||||||||||||||||||||
30-59 Days Past Due | $ | 28,434 | $ | 442,497 | $ | 76,374 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 547,305 | ||||||||||||||||||
60-89 Days Past Due | 6,459 | 0 | 90,192 | 0 | 0 | 0 | 0 | 0 | 96,651 | |||||||||||||||||||||||||||
Greater Than 90 Days Past Due | 668,908 | 269,289 | 91,542 | 0 | 0 | 0 | 0 | 0 | 1,029,739 | |||||||||||||||||||||||||||
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| |||||||||||||||||||
Total Past Due | 703,801 | 711,786 | 258,108 | 0 | 0 | 0 | 0 | 0 | 1,673,695 | |||||||||||||||||||||||||||
Current | 79,522,102 | 11,165,911 | 8,211,779 | 13,050,291 | 2,749,178 | 688,329 | 76,382 | 13,273 | 115,477,245 | |||||||||||||||||||||||||||
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Total Loans Receivable | $ | 80,225,903 | $ | 11,877,697 | $ | 8,469,887 | $ | 13,050,291 | $ | 2,749,178 | $ | 688,329 | $ | 76,382 | $ | 13,273 | $ | 117,150,940 | ||||||||||||||||||
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Recorded Investment > 90 Days and Accruing | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||||
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18
Table of Contents
Aged Analysis of Past Due Loans Receivable
As of December 31, 2012
Owner Occupied 1-4 Family Residential | Non Owner Occupied 1-4 Family Residential | Home Equity Lines of Credit | Commercial Real Estate | Construction | Land | Consumer | Commercial | Total | ||||||||||||||||||||||||||||
30-59 Days Past Due | $ | 158,522 | $ | 0 | $ | 90,192 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 248,714 | ||||||||||||||||||
60-89 Days Past Due | 10,160 | 0 | 492,475 | 0 | 0 | 0 | 0 | 0 | 502,635 | |||||||||||||||||||||||||||
Greater Than 90 Days Past Due | 1,040,634 | 367,743 | 92,109 | 0 | 0 | 94,500 | 0 | 0 | 1,594,986 | |||||||||||||||||||||||||||
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Total Past Due | 1,209,316 | 367,743 | 674,776 | 0 | 0 | 94,500 | 0 | 0 | 2,346,335 | |||||||||||||||||||||||||||
Current | 73,109,154 | 11,982,487 | 9,617,612 | 13,668,391 | 3,694,508 | 1,146,519 | 61,152 | 16,679 | 113,296,502 | |||||||||||||||||||||||||||
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Total Loans Receivable | $ | 74,318,470 | $ | 12,350,230 | $ | 10,292,388 | $ | 13,668,391 | $ | 3,694,508 | $ | 1,241,019 | $ | 61,152 | $ | 16,679 | $ | 115,642,837 | ||||||||||||||||||
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Recorded Investment > 90 Days and Accruing | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||||
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19
Table of Contents
The following tables detail activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2013 and 2012. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
Owner Occupied 1-4 Family Residential | Non Owner Occupied 1-4 Family Residential | Home Equity Lines of Credit | Commercial Real Estate | Construction | Land | Consumer | Commercial | Unallocated | Total | |||||||||||||||||||||||||||||||
Three months ended: | ||||||||||||||||||||||||||||||||||||||||
September 30, 2013 | ||||||||||||||||||||||||||||||||||||||||
Beginning Balance | $ | 797,121 | $ | 266,468 | $ | 61,965 | $ | 170,490 | $ | 18,930 | $ | 14,223 | $ | 852 | $ | 250 | $ | 19,701 | $ | 1,350,000 | ||||||||||||||||||||
Provision for loan losses | 110,716 | 91,941 | (3,892 | ) | (39,987 | ) | 8,562 | (5,619 | ) | 767 | (59 | ) | (19,130 | ) | 143,299 | |||||||||||||||||||||||||
Charge-offs | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||
Recoveries | 3,702 | 3,000 | 999 | 0 | 0 | 0 | 0 | 0 | 0 | 7,701 | ||||||||||||||||||||||||||||||
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Net recoveries (charge-offs) | 3,702 | 3,000 | 999 | 0 | 0 | 0 | 0 | 0 | 0 | 7,701 | ||||||||||||||||||||||||||||||
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Ending Balance | $ | 911,539 | $ | 361,409 | $ | 59,072 | $ | 130,503 | $ | 27,492 | $ | 8,604 | $ | 1,619 | $ | 191 | $ | 571 | $ | 1,501,000 | ||||||||||||||||||||
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September 30, 2012 | ||||||||||||||||||||||||||||||||||||||||
Beginning Balance | $ | 646,175 | $ | 163,854 | $ | 70,890 | $ | 191,178 | $ | 32,968 | $ | 37,210 | $ | 1,003 | $ | 252 | $ | 106,470 | $ | 1,250,000 | ||||||||||||||||||||
Provision for loan losses | 196,002 | 108,913 | 2,896 | (14,315 | ) | 10,196 | 328 | 617 | (17 | ) | (102,700 | ) | 201,920 | |||||||||||||||||||||||||||
Charge-offs | 0 | (59,847 | ) | 0 | 0 | 0 | 0 | (88 | ) | 0 | 0 | (59,935 | ) | |||||||||||||||||||||||||||
Recoveries | 2,016 | 0 | 999 | 0 | 0 | 0 | 0 | 0 | 0 | 3,015 | ||||||||||||||||||||||||||||||
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Net recoveries (charge-offs) | 2,016 | (59,847 | ) | 999 | 0 | 0 | 0 | (88 | ) | 0 | 0 | (56,920 | ) | |||||||||||||||||||||||||||
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Ending Balance | $ | 844,193 | $ | 212,920 | $ | 74,785 | $ | 176,863 | $ | 43,164 | $ | 37,538 | $ | 1,532 | $ | 235 | $ | 3,770 | $ | 1,395,000 | ||||||||||||||||||||
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20
Table of Contents
Owner Occupied 1-4 Family Residential | Non Owner Occupied 1-4 Family Residential | Home Equity Lines of Credit | Commercial Real Estate | Construction | Land | Consumer | Commercial | Unallocated | Total | |||||||||||||||||||||||||||||||
Nine months ended: | ||||||||||||||||||||||||||||||||||||||||
September 30, 2013 | ||||||||||||||||||||||||||||||||||||||||
Beginning Balance | $ | 810,892 | $ | 206,099 | $ | 74,807 | $ | 191,357 | $ | 36,945 | $ | 32,217 | $ | 868 | $ | 240 | $ | 41,575 | $ | 1,395,000 | ||||||||||||||||||||
Provision for loan losses | 120,222 | 218,389 | (18,732 | ) | (60,854 | ) | (9,453 | ) | (77,863 | ) | 751 | (49 | ) | (41,004 | ) | 131,407 | ||||||||||||||||||||||||
Charge-offs | (25,777 | ) | (66,079 | ) | 0 | 0 | 0 | 0 | 0 | 0 | 0 | (91,856 | ) | |||||||||||||||||||||||||||
Recoveries | 6,202 | 3,000 | 2,997 | 0 | 0 | 54,250 | 0 | 0 | 0 | 66,449 | ||||||||||||||||||||||||||||||
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Net (charge-offs) recoveries | (19,575 | ) | (63,079 | ) | 2,997 | 0 | 0 | 54,250 | 0 | 0 | 0 | (25,407 | ) | |||||||||||||||||||||||||||
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Ending Balance | $ | 911,539 | $ | 361,409 | $ | 59,072 | $ | 130,503 | $ | 27,492 | $ | 8,604 | $ | 1,619 | $ | 191 | $ | 571 | $ | 1,501,000 | ||||||||||||||||||||
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September 30, 2012 | ||||||||||||||||||||||||||||||||||||||||
Beginning Balance | $ | 495,271 | $ | 77,051 | $ | 145,830 | $ | 190,767 | $ | 28,952 | $ | 120,372 | $ | 2,858 | $ | 1,008 | $ | 187,891 | $ | 1,250,000 | ||||||||||||||||||||
Provision for loan losses | 461,633 | 195,716 | (74,042 | ) | (13,904 | ) | 59,152 | (62,249 | ) | (1,238 | ) | (773 | ) | (184,121 | ) | 380,174 | ||||||||||||||||||||||||
Charge-offs | (133,065 | ) | (59,847 | ) | 0 | 0 | (44,940 | ) | (20,585 | ) | (88 | ) | 0 | 0 | (258,525 | ) | ||||||||||||||||||||||||
Recoveries | 20,354 | 0 | 2,997 | 0 | 0 | 0 | 0 | 0 | 0 | 23,351 | ||||||||||||||||||||||||||||||
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Net (charge-offs) recoveries | (112,711 | ) | (59,847 | ) | 2,997 | 0 | (44,940 | ) | (20,585 | ) | (88 | ) | 0 | 0 | (235,174 | ) | ||||||||||||||||||||||||
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Ending Balance | $ | 844,193 | $ | 212,920 | $ | 74,785 | $ | 176,863 | $ | 43,164 | $ | 37,538 | $ | 1,532 | $ | 235 | $ | 3,770 | $ | 1,395,000 | ||||||||||||||||||||
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21
Table of Contents
The following table details the amount of the allowance for loan losses allocated to each portfolio segment as of September 30, 2013, December 31, 2012 and September 30, 2012, detailed on the basis of the impairment methodology used by the Company.
Owner Occupied 1-4 Family Residential | Non Owner Occupied 1-4 Family Residential | Home Equity Lines of Credit | Commercial Real Estate | Construction | Land | Consumer | Commercial | Unallocated | Total | |||||||||||||||||||||||||||||||
September 30, 2013 | ||||||||||||||||||||||||||||||||||||||||
Loans individually evaluated for impairment | $ | 210,773 | $ | 64,234 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 275,007 | ||||||||||||||||||||
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Loans collectively evaluated for impairment | $ | 700,766 | $ | 297,175 | $ | 59,072 | $ | 130,503 | $ | 27,492 | $ | 8,604 | $ | 1,619 | $ | 191 | $ | 571 | $ | 1,225,993 | ||||||||||||||||||||
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Balance at September 30, 2013 | $ | 911,539 | $ | 361,409 | $ | 59,072 | $ | 130,503 | $ | 27,492 | $ | 8,604 | $ | 1,619 | $ | 191 | $ | 571 | $ | 1,501,000 | ||||||||||||||||||||
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December 31, 2012 | ||||||||||||||||||||||||||||||||||||||||
Loans individually evaluated for impairment | $ | 189,862 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 189,862 | ||||||||||||||||||||
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Loans collectively evaluated for impairment | $ | 621,030 | $ | 206,099 | $ | 74,807 | $ | 191,357 | �� | $ | 36,945 | $ | 32,217 | $ | 868 | $ | 240 | $ | 41,575 | $ | 1,205,138 | |||||||||||||||||||
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Balance at December 31, 2012 | $ | 810,892 | $ | 206,099 | $ | 74,807 | $ | 191,357 | $ | 36,945 | $ | 32,217 | $ | 868 | $ | 240 | $ | 41,575 | $ | 1,395,000 | ||||||||||||||||||||
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September 30, 2012 | ||||||||||||||||||||||||||||||||||||||||
Loans individually evaluated for impairment | $ | 189,862 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 189,862 | ||||||||||||||||||||
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Loans collectively evaluated for impairment | $ | 654,331 | $ | 212,920 | $ | 74,785 | $ | 176,863 | $ | 43,164 | $ | 37,538 | $ | 1,532 | $ | 235 | $ | 3,770 | $ | 1,205,138 | ||||||||||||||||||||
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Balance at September 30, 2012 | $ | 844,193 | $ | 212,920 | $ | 74,785 | $ | 176,863 | $ | 43,164 | $ | 37,538 | $ | 1,532 | $ | 235 | $ | 3,770 | $ | 1,395,000 | ||||||||||||||||||||
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22
Table of Contents
The Company’s recorded investment in loans as of September 30, 2013, December 31, 2012 and September 30, 2012 related to each balance in the allowance for loan losses by portfolio segment and detailed on the basis of the impairment methodology used by the Company was as follows:
Owner Occupied 1-4 Family Residential | Non Owner Occupied 1-4 Family Residential | Home Equity Lines of Credit | Commercial Real Estate | Construction | Land | Consumer | Commercial | Unallocated | Total | |||||||||||||||||||||||||||||||
September 30, 2013 | ||||||||||||||||||||||||||||||||||||||||
Loans individually evaluated for impairment | $ | 4,083,976 | $ | 269,289 | $ | 593,678 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 4,946,943 | ||||||||||||||||||||
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Loans collectively evaluated for impairment | $ | 76,141,927 | $ | 11,608,408 | $ | 7,876,209 | $ | 13,050,291 | $ | 2,749,178 | $ | 688,329 | $ | 76,382 | $ | 13,273 | $ | 0 | $ | 112,203,997 | ||||||||||||||||||||
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Balance at September 30, 2013 | $ | 80,225,903 | $ | 11,877,697 | $ | 8,469,887 | $ | 13,050,291 | $ | 2,749,178 | $ | 688,329 | $ | 76,382 | $ | 13,273 | $ | 0 | $ | 117,150,940 | ||||||||||||||||||||
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December 31, 2012 | ||||||||||||||||||||||||||||||||||||||||
Loans individually evaluated for impairment | $ | 4,331,874 | $ | 367,743 | $ | 318,149 | $ | 0 | $ | 0 | $ | 94,500 | $ | 0 | $ | 0 | $ | 0 | $ | 5,112,266 | ||||||||||||||||||||
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Loans collectively evaluated for impairment | $ | 69,986,596 | $ | 11,982,487 | $ | 9,974,239 | $ | 13,668,391 | $ | 3,694,508 | $ | 1,146,519 | $ | 61,152 | $ | 16,679 | $ | 0 | $ | 110,530,571 | ||||||||||||||||||||
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Balance at December 31, 2012 | $ | 74,318,470 | $ | 12,350,230 | $ | 10,292,388 | $ | 13,668,391 | $ | 3,694,508 | $ | 1,241,019 | $ | 61,152 | $ | 16,679 | $ | 0 | $ | 115,642,837 | ||||||||||||||||||||
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September 30, 2012 | ||||||||||||||||||||||||||||||||||||||||
Loans individually evaluated for impairment | $ | 4,118,893 | $ | 367,743 | $ | 330,262 | $ | 0 | $ | 0 | $ | 110,500 | $ | 0 | $ | 0 | $ | 0 | $ | 4,927,398 | ||||||||||||||||||||
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Loans collectively evaluated for impairment | $ | 65,120,838 | $ | 12,379,058 | $ | 9,971,395 | $ | 12,633,089 | $ | 4,316,409 | $ | 1,804,696 | $ | 66,341 | $ | 16,326 | $ | 0 | $ | 106,308,152 | ||||||||||||||||||||
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Balance at September 30, 2012 | $ | 69,239,731 | $ | 12,746,801 | $ | 10,301,657 | $ | 12,633,089 | $ | 4,316,409 | $ | 1,915,196 | $ | 66,341 | $ | 16,326 | $ | 0 | $ | 111,235,550 | ||||||||||||||||||||
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23
Table of Contents
Management reviews and identifies loans and investments that require designation as nonperforming assets and troubled debt restructurings. Nonperforming assets include loans accounted for on a non-accrual basis, loans past due by 90 days or more but still accruing, and other real estate owned. Troubled debt restructurings include loans in which the borrower was having financial difficulty, and we agreed to modify the loan. Information with respect to nonperforming assets and troubled debt restructurings at September 30, 2013 and December 31, 2012 is as follows:
September 30, 2013 | December 31, 2012 | |||||||
Non-Accrual Loans: | ||||||||
Owner-occupied one-to-four family | $ | 1,532,269 | $ | 4,072,391 | ||||
Non owner-occupied one-to-four family | 269,289 | 367,743 | ||||||
Home Equity Lines of credit | 381,438 | 318,149 | ||||||
Land | 0 | 94,500 | ||||||
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Total Non-Accrual Loans | 2,182,996 | 4,852,783 | ||||||
Other Real Estate Owned, net | 1,983,011 | 1,660,364 | ||||||
Loans 90 days or more past due and still accruing | 0 | 0 | ||||||
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Total Nonperforming Assets | $ | 4,166,007 | $ | 6,513,147 | ||||
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Troubled Debt Restructurings | $ | 4,152,977 | $ | 3,532,094 | ||||
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Troubled Debt Restructurings included In Non-Accrual Loans | $ | (1,389,030 | ) | $ | (3,272,611 | ) | ||
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Troubled Debt Restructurings and Total Nonperforming Assets | $ | 6,929,954 | $ | 6,772,630 | ||||
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At September 30, 2013 and December 31, 2012, there were no loans 90 days past due or more and still accruing interest. At September 30, 2013, the Company had twenty three loans on non-accrual status with foregone interest in the amount of $156,579. At December 31, 2012, the Company had twenty nine loans on non-accrual status with foregone interest of $157,571.
24
Table of Contents
Information on impaired loans for the nine months ended September 30, 2013 and year ended December 31, 2012 is as follows:
As of September 30, 2013 | As of December 31, 2012 | |||||||||||||||||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | Recorded Investment | Unpaid Principal Balance | Related Allowance | |||||||||||||||||||
With no allowance recorded: | ||||||||||||||||||||||||
Owner Occupied one-to-four family residential | $ | 1,044,973 | $ | 1,059,700 | $ | 0 | $ | 2,035,761 | $ | 2,040,518 | $ | 0 | ||||||||||||
Non Owner Occupied one-to-four family residential | 16,751 | 82,830 | 0 | 367,743 | 395,474 | 0 | ||||||||||||||||||
Home Equity Lines of Credit | 593,678 | 593,678 | 0 | 318,149 | 318,149 | 0 | ||||||||||||||||||
Construction | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Land | 0 | 0 | 0 | 94,500 | 162,984 | 0 | ||||||||||||||||||
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Total with no allowance | $ | 1,655,402 | $ | 1,736,208 | $ | 0 | $ | 2,816,153 | $ | 2,917,125 | $ | 0 | ||||||||||||
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|
|
| |||||||||||||
With an allowance recorded: | ||||||||||||||||||||||||
Owner Occupied one-to-four family residential | $ | 3,039,002 | $ | 3,039,002 | $ | 210,773 | $ | 2,296,113 | $ | 2,296,113 | $ | 189,862 | ||||||||||||
Non Owner Occupied one-to-four family residential | 252,539 | 280,270 | 64,234 | 0 | 0 | 0 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total with an allowance | $ | 3,291,541 | $ | 3,319,272 | $ | 275,007 | $ | 2,296,113 | $ | 2,296,113 | $ | 189,862 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Grand total: | ||||||||||||||||||||||||
Owner Occupied one-to-four family residential | $ | 4,083,975 | $ | 4,098,702 | $ | 210,773 | $ | 4,331,874 | $ | 4,336,631 | $ | 189,862 | ||||||||||||
Non Owner Occupied one-to-four family residential | 269,290 | 363,100 | 64,234 | 367,743 | 395,474 | 0 | ||||||||||||||||||
Home Equity Lines of Credit | 593,678 | 593,678 | 0 | 318,149 | 318,149 | 0 | ||||||||||||||||||
Construction | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Land | 0 | 0 | 0 | �� | 94,500 | 162,984 | 0 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Grand total | $ | 4,946,943 | $ | 5,055,480 | $ | 275,007 | $ | 5,112,266 | $ | 5,213,238 | $ | 189,862 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
25
Table of Contents
Information on impaired loans for the three and nine months ended September 30, 2013 is as follows:
For the Three Months Ended September 30, 2013 | For the Nine Months Ended September 30, 2013 | |||||||||||||||
Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | |||||||||||||
With no allowance recorded: | ||||||||||||||||
Owner Occupied one-to-four family residential | $ | 1,482,732 | $ | 4,400 | $ | 1,879,046 | $ | 13,866 | ||||||||
Non Owner Occupied one-to-four family residential | 150,520 | 0 | 199,082 | 0 | ||||||||||||
Home Equity Lines of Credit | 550,819 | 6,543 | 471,586 | 18,137 | ||||||||||||
Construction | 0 | 0 | 0 | 0 | ||||||||||||
Land | 0 | 0 | 31,000 | 0 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total with no allowance | $ | 2,184,071 | $ | 10,943 | $ | 2,580,714 | $ | 32,003 | ||||||||
|
|
|
|
|
|
|
| |||||||||
With an allowance recorded: | ||||||||||||||||
Owner Occupied one-to-four family residential | $ | 2,830,981 | $ | 43,772 | $ | 2,589,404 | $ | 66,793 | ||||||||
Non Owner Occupied one-to-four family residential | 94,153 | 0 | 62,768 | 0 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total with an allowance | $ | 2,925,134 | $ | 43,772 | $ | 2,652,172 | $ | 66,793 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Grand total: | ||||||||||||||||
Owner Occupied one-to-four family residential | $ | 4,313,713 | $ | 48,172 | $ | 4,468,450 | $ | 80,659 | ||||||||
Non Owner Occupied one-to-four family residential | 244,673 | 0 | 261,850 | 0 | ||||||||||||
Home Equity Lines of Credit | 550,819 | 6,543 | 471,586 | 18,137 | ||||||||||||
Construction | 0 | 0 | 0 | 0 | ||||||||||||
Land | 0 | 0 | 31,000 | 0 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Grand total | $ | 5,109,205 | $ | 54,715 | $ | 5,232,886 | $ | 98,796 | ||||||||
|
|
|
|
|
|
|
|
26
Table of Contents
Information on impaired loans for the three and nine months ended September 30, 2012 is as follows:
For the Three Months Ended September 30, 2012 | For the Nine Months Ended September 30, 2012 | |||||||||||||||
Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | |||||||||||||
With no allowance recorded: | ||||||||||||||||
Owner Occupied one-to-four family residential | $ | 1,880,741 | $ | 27,680 | $ | 1,720,291 | $ | 47,215 | ||||||||
Non Owner Occupied one-to-four family residential | 421,019 | 0 | 448,117 | 8,128 | ||||||||||||
Home Equity Lines of Credit | 326,894 | 3,564 | 274,807 | 11,086 | ||||||||||||
Construction | 0 | 0 | 782,599 | 0 | ||||||||||||
Land | 111,250 | 0 | 209,761 | 0 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total with no allowance | $ | 2,739,904 | $ | 31,244 | $ | 3,435,575 | $ | 66,429 | ||||||||
|
|
|
|
|
|
|
| |||||||||
With an allowance recorded: | ||||||||||||||||
Owner Occupied one-to-four family residential | $ | 1,148,056 | $ | 4,214 | $ | 574,028 | $ | 79,674 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total with an allowance | $ | 1,148,056 | $ | 4,214 | $ | 574,028 | $ | 79,674 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Grand total: | ||||||||||||||||
Owner Occupied one-to-four family residential | $ | 3,028,797 | $ | 31,894 | $ | 2,294,319 | $ | 126,889 | ||||||||
Non Owner Occupied one-to-four family residential | 421,019 | 0 | 448,117 | 8,128 | ||||||||||||
Home Equity Lines of Credit | 326,894 | 3,564 | 274,807 | 11,086 | ||||||||||||
Construction | 0 | 0 | 782,599 | 0 | ||||||||||||
Land | 111,250 | 0 | 209,761 | 0 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Grand total | $ | 3,887,960 | $ | 35,458 | $ | 4,009,603 | $ | 146,103 | ||||||||
|
|
|
|
|
|
|
|
27
Table of Contents
The following table reflects impaired loans as of September 30, 2013 and December 31, 2012. A loan is impaired when it is not likely the lender will collect the full value of the loan because the creditworthiness of a borrower has deteriorated.
September 30, 2013 | December 31, 2012 | |||||||
Impaired performing loans: | ||||||||
Owner occupied one-to-four family | $ | 0 | $ | 0 | ||||
Non owner occupied one-to-four family | 0 | 0 | ||||||
Home equity lines of credit | 0 | 0 | ||||||
Commercial | 0 | 0 | ||||||
Construction | 0 | 0 | ||||||
Land | 0 | 0 | ||||||
Troubled debt restructurings: | ||||||||
Owner occupied one-to-four family | 2,551,706 | 259,483 | ||||||
Non owner occupied one-to-four family | 0 | 0 | ||||||
Home equity lines of credit | 212,241 | 0 | ||||||
Commercial | 0 | 0 | ||||||
Construction | 0 | 0 | ||||||
Land | 0 | 0 | ||||||
|
|
|
| |||||
Total impaired performing loans | 2,763,947 | 259,483 | ||||||
|
|
|
| |||||
Impaired nonperforming loans (nonaccrual): | ||||||||
Owner occupied one-to-four family | 143,239 | 1,120,320 | ||||||
Non owner occupied one-to-four family | 269,289 | 367,743 | ||||||
Home equity lines of credit | 381,438 | 92,109 | ||||||
Commercial | 0 | 0 | ||||||
Construction | 0 | 0 | ||||||
Land | 0 | 0 | ||||||
Troubled debt restructurings: | ||||||||
Owner occupied one-to-four family | 1,389,030 | 2,952,071 | ||||||
Non owner occupied one-to-four family | 0 | 0 | ||||||
Home equity lines of credit | 0 | 226,040 | ||||||
Commercial | 0 | 0 | ||||||
Construction | 0 | 0 | ||||||
Land | 0 | 94,500 | ||||||
|
|
|
| |||||
Total impaired nonperforming loans (nonaccrual) | 2,182,996 | 4,852,783 | ||||||
|
|
|
| |||||
Total impaired loans | $ | 4,946,943 | $ | 5,112,266 | ||||
|
|
|
|
Loans may be periodically modified in a troubled debt restructuring (TDR), where the Company will make concessions to a borrower having financial difficulty to help the borrower remain current on the loan and/or to avoid foreclosure. When we modify loans in a TDR, we evaluate any possible impairment similar to other impaired loans. If we determine that the value of the modified loan is less than the recorded investment in the loan, impairment is generally recognized through a charge-off through the allowance, however, if a specific reserve has been established, impairment is recognized through the provision for loan losses. At September 30, 2013, we had seven loans that were restructured totaling $4,152,977. Six loans totaling
28
Table of Contents
$3,940,736 were secured by owner-occupied one-to-four family residential properties, and one loan totaling $212,241 is a home equity line of credit. At December 31, 2012, we had seven loans totaling $3,532,094 that were restructured. Five loans totaling $3,211,554 were secured by owner-occupied one-to-four family residential properties, one loan totaling $94,500 is secured by a residential lot, and one loan totaling $226,040 is a home equity line of credit.
The following table is a summary of impaired loans that were modified due to a TDR by class for the three and nine months ended September 30, 2013 and 2012. The pre-modification and post-modification outstanding recorded investments disclosed in the table below represent the loan carrying amounts immediately prior to the modification and the carrying amounts immediately after the modification:
Modifications for the Nine Months Ended September 30, 2013
Number of Contracts | Pre-Modification Outstanding Recorded Investments | Post-Modification Outstanding Recorded Investments | ||||||||||
Troubled Debt Restructuring: | ||||||||||||
Owner occupied one-to-four family residential | 1 | $ | 769,303 | $ | 748,393 | |||||||
|
|
|
|
|
|
Modifications for the Nine Months Ended September 30, 2012
Number of Contracts | Pre-Modification Outstanding Recorded Investments | Post-Modification Outstanding Recorded Investments | ||||||||||
Troubled Debt Restructuring: | ||||||||||||
Home Equity Line of Credit | 3 | $ | 2,526,977 | $ | 2,337,115 | |||||||
|
|
|
|
|
|
Modifications for the Three Months Ended September 30, 2013
Number of Contracts | Pre-Modification Outstanding Recorded Investments | Post-Modification Outstanding Recorded Investments | ||||||||||
Troubled Debt Restructuring: | ||||||||||||
Owner occupied one-to-four family residential | 0 | $ | 0 | $ | 0 | |||||||
|
|
|
|
|
|
Modifications for the Three Months Ended September 30, 2012
Number of Contracts | Pre-Modification Outstanding Recorded Investments | Post-Modification Outstanding Recorded Investments | ||||||||||
Troubled Debt Restructuring: | ||||||||||||
Home Equity Line of Credit | 2 | $ | 2,296,113 | $ | 2,106,251 | |||||||
|
|
|
|
|
|
29
Table of Contents
The following table presents loans by loan class modified as TDR’s within the previous twelve months from, and for which there was a payment default (90 days or more past due) during the three and nine months ended September 30, 2013 and 2012:
Three Months Ended September 30, 2013 | Nine Months Ended September 30, 2013 | |||||||||||||
Number of Contracts | Recorded Investment | Number of Contracts | Recorded Investment | |||||||||||
2 | $ | 646,141 | 2 | $ | 646,141 | |||||||||
|
|
|
|
|
|
Three Months Ended September 30, 2012 | Nine Months Ended September 30, 2012 | |||||||||||||
Number of Contracts | Recorded Investment | Number of Contracts | Recorded Investment | |||||||||||
0 | $ | 0 | 0 | $ | 0 | |||||||||
|
|
|
|
|
|
|
|
4. | EMPLOYEE RETIREMENT PLANS |
In connection with the conversion to stock form, the Company established an Employee Stock Ownership Plan (ESOP) for the exclusive benefit of eligible employees. The ESOP borrowed funds from the Company in an amount sufficient to purchase 126,960 shares, or 8% of the Common Stock issued in the offering. The shares were acquired at a price of $10.00 per share.
The loan is secured by the shares purchased and will be repaid by the ESOP with funds from contributions made by the Bank and dividends received by the ESOP, with funds from any contributions on ESOP assets. Contributions will be applied to repay interest on the loan first and the remainder will be applied to principal. The loan is expected to be repaid over a period of 12 years.
Shares purchased with the loan proceeds are held in a suspense account for allocation among participants as the loan is repaid. Contributions to the ESOP and shares released from the suspense account are allocated among participants in proportion to their compensation, relative to total compensation, of all active participants. Participants will vest their accrued benefits under the employee stock ownership plan at the rate of 33.33% per year beginning in year two. Vesting is accelerated upon retirement, death or disability of the participant, or a change in control of the Bank. Forfeitures will be reallocated to remaining plan participants. Benefits may be payable upon retirement, death, disability, separation of service, or termination of the ESOP.
The debt of the ESOP, in accordance with generally accepted accounting principles, is eliminated in consolidation and the shares pledged as collateral are reported as unearned ESOP shares in the consolidated balance sheet. Contributions to the ESOP shall be sufficient to pay principal and interest currently due under the loan agreement. As shares are committed to be released from collateral, the Company reports compensation expense equal to the average market price of the shares for the respective period, and the shares become outstanding for earnings per share computations. Dividends on allocated ESOP shares are recorded as a reduction of debt and accrued interest. ESOP compensation expense for the nine months ended September 30, 2013 and 2012 was $107,810 and $83,926, respectively.
30
Table of Contents
A summary of ESOP shares at September 30, 2013 and 2012 is as follows:
2013 | 2012 | |||||||
Shares committed for release and released and allocated | 29,095 | 18,515 | ||||||
|
|
|
| |||||
Unearned shares | 97,865 | 108,445 | ||||||
|
|
|
| |||||
Total ESOP shares | 126,960 | 126,960 | ||||||
|
|
|
| |||||
Fair Value of unearned shares | $ | 1,345,644 | $ | 1,344,718 | ||||
|
|
|
|
5. | RESTRICTED STOCK AWARDS |
Restricted stock awards have been granted to officers and key employees of the Company. Restricted stock awards are subject to forfeiture if employment terminates prior to the lapse of the restrictions. The Company grants restricted stock awards that typically vest over three years. Restricted stock awards are expensed over the vesting period. Shares of restricted stock are considered issued and outstanding shares of the Company at the grant date and have the same dividend and voting rights as other shares of common stock. During the nine months ended September 30, 2013 and 2012, the Company granted restricted stock awards in the amount of 33,000 and 0 shares, respectively. The amount recognized as compensation expense during the nine months ended September 30, 2013 and 2012 was $105,213 and $0, respectively, using $12.75 as a share price. 8,252 shares were immediately vested, and 24,748 shares remains to be recognized over the next three years. The amount of compensation expense still to be recognized as of September 30, 2013 is $315,537.
6. | REGULATORY MATTERS |
The Bank is subject to various regulatory capital requirements administered by its primary federal regulator, the Office of the Comptroller of the Currency (OCC). Failure to meet the minimum regulatory capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that if undertaken, could have a direct material effect on the Bank and the consolidated financial statements. Under the regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines involving quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification under the prompt corrective action guidelines are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of: total risk-based capital and Tier I capital to risk-weighted assets (as defined in the regulations), Tier I capital to adjusted total assets (as defined), and tangible capital to adjusted total assets (as defined).
31
Table of Contents
As of September 30, 2013 and December 31, 2012 (the most recent notification from the OCC), the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. Nothing has come to management’s attention since the institution’s most recent notification of being classified as “well capitalized” that would cause such classification to change. The following table details the Bank’s capital position:
Actual | For Capital Adequacy Purposes and to be Well Capitalized Under the Prompt Corrective Action Provisions | |||||||||||||||
Amount | Ratio | Amount | Ratio | |||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||
As of September 30, 2013: | ||||||||||||||||
Total Risk-Based Capital (to risk-weighted assets) | $ | 25,037 | 27.10 | % | $ | 9,239 | 10.0 | % | ||||||||
Tier I Capital (to risk-weighted assets) | $ | 23,878 | 25.84 | % | $ | 5,544 | 6.0 | % | ||||||||
Tier I Capital (to adjusted total assets) | $ | 23,878 | 14.40 | % | $ | 8,291 | 5.0 | % |
Actual | For Capital Adequacy Purposes and to be Well Capitalized Under the Prompt Corrective Action Provisions | |||||||||||||||
Amount | Ratio | Amount | Ratio | |||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||
As of December 31, 2012: | ||||||||||||||||
Total Risk-Based Capital (to risk-weighted assets) | $ | 24,982 | 25.95 | % | $ | 9,627 | 10.0 | % | ||||||||
Tier I Capital (to risk-weighted assets) | $ | 23,776 | 24.70 | % | $ | 5,776 | 6.0 | % | ||||||||
Tier I Capital (to adjusted total assets) | $ | 23,776 | 14.02 | % | $ | 8,479 | 5.0 | % |
On May 8, 2012, the Company authorized the repurchase of up to 158,700 shares of its common stock. Repurchases, if any, by the Company pursuant to this authorization are expected to enable the Company to repurchase its shares at an attractive price, and to provide a source of liquidity for the Company’s shares. As of September 30, 2013, there have been 158,700 shares repurchased by the Company, for an aggregate expenditure totaling $2,051,977, at an average price of $12.93.
On July 25, 2013, the Company authorized the repurchase of up to 142,830 shares of its common stock. Repurchases, if any, by the Company pursuant to this authorization are expected to enable the Company to repurchase its shares at an attractive price and to provide a source of liquidity for the Company’s shares. As of September 30, 2013, there have been 32,500 shares repurchased by the Company, for an aggregate expenditure totaling $435,675, at an average price of $13.41.
32
Table of Contents
7. | ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) |
The following table presents the changes in each component of accumulated other comprehensive income (loss), net of tax, for the three and nine months ended September 30, 2013 and 2012:
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, 2013 | September 30, 2012 | September 30, 2013 | September 30, 2012 | |||||||||||||
Net Unrealized Gain and Losses on Investment Securities | Net Unrealized Gain and Losses on Investment Securities | Net Unrealized Gain and Losses on Investment Securities | Net Unrealized Gain and Losses on Investment Securities | |||||||||||||
Beginning Balance | $ | (457,642 | ) | $ | 121,282 | $ | 74,301 | $ | 149,288 | |||||||
Other comprehensive (loss) income before reclassifications | (88,398 | ) | 50,646 | (594,340 | ) | 91,121 | ||||||||||
Amounts reclassified from accumulated other comprehensive loss | 0 | 0 | (26,001 | ) | (68,481 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Net current period other comprehensive (loss) income | (88,398 | ) | 50,646 | (620,341 | ) | 22,640 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Ending Balance | $ | (546,040 | ) | $ | 171,928 | $ | (546,040 | ) | $ | 171,928 | ||||||
|
|
|
|
|
|
|
|
The following table presents the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the nine months ended September 30, 2013 and 2012:
For the Nine Months Ended September 30, 2013 | For the Nine Months Ended September 30, 2012 | |||||||||
Amount Reclassified from Accumulated Other Comprehensive Income | Amount Reclassified from Accumulated Other Comprehensive Income | Affected Line Item in the Statement Where Net Income Is Presented | ||||||||
Reclassification adjustment for realized gains | $ | (43,335 | ) | $ | (114,134 | ) | Non-Interest Income | |||
17,334 | 45,653 | Income Tax Expense | ||||||||
|
|
|
| |||||||
Total Reclassification for the Period | $ | (26,001 | ) | $ | (68,481 | ) | Net of Tax | |||
|
|
|
|
8. | FAIR VALUE MEASUREMENTS |
The authoritative accounting guidance for fair value measurements defines fair value, establishes a framework for measuring fair value and defines disclosures about fair value measurements. This guidance applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. In this guidance, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, the guidance establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy is as follows:
Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.
33
Table of Contents
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.
The following table presents the Company’s assets measured at fair value on a recurring basis:
Fair Value at September 30, 2013 | 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: | ||||||||||||||||
Bank Notes and Corporate Bonds | $ | 1,497,600 | $ | 0 | $ | 1,497,600 | $ | 0 | ||||||||
Obligations of U.S. Government agencies | 5,384,325 | 0 | 5,384,325 | 0 | ||||||||||||
Municipal Bonds | 915,210 | 0 | 915,210 | 0 | ||||||||||||
FNMA | 6,008,583 | 0 | 6,008,583 | 0 | ||||||||||||
GNMA | 1,269,070 | 0 | 1,269,070 | 0 | ||||||||||||
FHLMC | 709,626 | 0 | 709,626 | 0 | ||||||||||||
Federal Agency CMO | 899,878 | 0 | 899,878 | 0 | ||||||||||||
Private label CMO | 280,258 | 0 | 280,258 | 0 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | 16,964,550 | $ | 0 | $ | 16,964,550 | $ | 0 | |||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets measured at fair value | $ | 16,964,550 | $ | 0 | $ | 16,964,550 | $ | 0 | ||||||||
|
|
|
|
|
|
|
|
Fair Value at December 31, 2012 | 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: | ||||||||||||||||
Bank Notes and Corporate Bonds | $ | 2,508,970 | $ | 0 | $ | 2,508,970 | $ | 0 | ||||||||
Obligations of U.S. Government agencies | 4,481,680 | 0 | 4,481,680 | 0 | ||||||||||||
FNMA | 3,629,705 | 0 | 3,629,705 | 0 | ||||||||||||
GNMA | 4,087,225 | 0 | 4,087,225 | 0 | ||||||||||||
FHLMC | 1,101,373 | 0 | 1,101,373 | 0 | ||||||||||||
Federal Agency CMO | 2,465,723 | 0 | 2,465,723 | 0 | ||||||||||||
Private label CMO | 300,017 | 0 | 300,017 | 0 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | 18,574,693 | $ | 0 | $ | 18,574,693 | $ | 0 | |||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets measured at fair value | $ | 18,574,693 | $ | 0 | $ | 18,574,693 | $ | 0 | ||||||||
|
|
|
|
|
|
|
|
34
Table of Contents
Securities classified as available-for-sale are reported at fair value utilizing Level 2 Inputs. For these securities, the Bank obtains fair values from an external pricing service or bid quotations received from securities dealers. The observable data may include dealer quotes, cash flows, U.S. Treasury yield curve, trading levels, credit information, and the terms and conditions of the security, among other things.
Financial Instruments Measured on a Nonrecurring Basis
The Company may be required, from time to time, to measure certain other financial assets and liabilities at fair value on a nonrecurring basis. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets.
For assets measured at fair value on a nonrecurring basis as of September 30, 2013 and December 31, 2012, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the assets:
Fair Value at September 30, 2013 | Quoted Prices (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
Impaired Loans: | ||||||||||||||||
Owner occupied one-to-four family | $ | 3,873,203 | $ | 0 | $ | 3,873,203 | $ | 0 | ||||||||
Non owner occupied one-to-four family | 205,055 | 0 | 205,055 | 0 | ||||||||||||
Home Equity Lines of Credit | 593,678 | 0 | 593,678 | 0 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | 4,671,936 | $ | 0 | $ | 4,671,936 | $ | 0 | |||||||||
|
|
|
|
|
|
|
| |||||||||
Other real estate owned: | $ | 1,983,011 | $ | 0 | $ | 1,983,011 | $ | 0 | ||||||||
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|
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|
Fair Value at December 31, 2012 | Quoted Prices (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
Impaired Loans: | ||||||||||||||||
Owner occupied one-to-four family | $ | 4,142,012 | $ | 0 | $ | 4,142,012 | $ | 0 | ||||||||
Non owner occupied one-to-four family | 367,743 | 0 | 367,743 | 0 | ||||||||||||
Home Equity Lines of Credit | 318,149 | 0 | 318,149 | 0 | ||||||||||||
Land | 94,500 | 0 | 94,500 | 0 | ||||||||||||
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| |||||||||
$ | 4,922,404 | $ | 0 | $ | 4,922,404 | $ | 0 | |||||||||
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|
|
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|
|
| |||||||||
Other real estate owned: | $ | 1,660,364 | $ | 0 | $ | 1,660,364 | $ | 0 | ||||||||
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|
|
Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment in accordance with FASB guidance. Allowable methods for estimating fair value include using the fair value of the collateral for collateral dependent loans or,
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where a loan is determined not to be collateral dependent, using the discounted cash flow method. In our determination of fair value, we have categorized both methods of valuation as estimates based on Level 2 inputs.
If the impaired loan is identified as collateral dependent, then the fair value method measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal or utilizing some other method of valuation for the collateral and applying a discount factor to the value based on our loan review policy and procedures.
If the impaired loan is determined not to be collateral dependent, then the discounted cash flow method is used. This method requires the impaired loan to be recorded at the present value of expected future cash flows discounted at the loan’s effective interest rate. The effective interest rate of a loan is the contractual interest rate adjusted for any net deferred loan fees or costs, premiums, or discounts existing at origination or acquisition of the loan.
Other Real Estate Owned
We record our other real estate owned at the lower of cost or estimated fair value less estimated selling costs. Estimated fair value is generally based upon an independent appraisal of the collateral. We consider these collateral values to be estimated using Level 2 inputs.
9. | FAIR VALUE OF FINANCIAL INSTRUMENTS |
Fair value estimates, methods, and assumptions are set forth below for the Company’s financial instruments as of September 30, 2013 and December 31, 2012.
September 30, 2013 | ||||||||||||||||||||
Estimated Fair Value | ||||||||||||||||||||
Carrying Value | Level One | Level Two | Level Three | Total | ||||||||||||||||
Assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 13,357,265 | $ | 13,357,265 | $ | 0 | $ | 0 | $ | 13,357,265 | ||||||||||
Securities - available-for-sale | 16,964,550 | 0 | 16,964,550 | 0 | 16,964,550 | |||||||||||||||
Securities - held-to-maturity | 7,271,657 | 0 | 7,319,673 | 0 | 7,319,673 | |||||||||||||||
Loans, net of allowance | 115,649,940 | 0 | 4,671,936 | 112,715,557 | 117,387,493 | |||||||||||||||
Federal Home Loan Bank stock | 1,103,700 | 0 | 1,103,700 | 0 | 1,103,700 | |||||||||||||||
Investment in bank-owned life insurance | 4,650,558 | 4,650,558 | 0 | 0 | 4,650,558 | |||||||||||||||
Liabilities: | ||||||||||||||||||||
Deposit accounts and advances by borrowers | 117,003,675 | 0 | 0 | 117,557,950 | 117,557,950 | |||||||||||||||
Advances from the FHLB | 20,000,000 | 0 | 0 | 20,567,323 | 20,567,323 |
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December 31, 2012 | ||||||||||||||||||||
Estimated Fair Value | ||||||||||||||||||||
Carrying Value | Level One | Level Two | Level Three | Total | ||||||||||||||||
Assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 18,178,281 | $ | 18,178,281 | $ | 0 | $ | 0 | $ | 18,178,281 | ||||||||||
Securities - available-for-sale | 18,574,693 | 0 | 18,574,693 | 0 | 18,574,693 | |||||||||||||||
Securities - held-to-maturity | 7,645,942 | 0 | 8,017,510 | 0 | 8,017,510 | |||||||||||||||
Loans, net of allowance | 114,247,837 | 0 | 4,922,404 | 114,602,043 | 119,524,447 | |||||||||||||||
Federal Home Loan Bank stock | 1,163,000 | 0 | 1,163,000 | 0 | 1,163,000 | |||||||||||||||
Investment in bank-owned life insurance | 4,526,979 | 4,526,979 | 0 | 0 | 4,526,979 | |||||||||||||||
Liabilities: | ||||||||||||||||||||
Deposit accounts and advances by borrowers | 119,687,440 | 0 | 0 | 120,305,935 | 120,305,935 | |||||||||||||||
Advances from the FHLB | 20,000,000 | 0 | 0 | 20,805,808 | 20,805,808 |
September 30, 2013 | December 31, 2012 | |||||||
Off-Balance Sheet Instruments: | ||||||||
Commitments to extend credit | $ | 300,000 | $ | 1,093,450 | ||||
Unused lines of credit | $ | 10,176,294 | $ | 10,191,076 |
(a)Cash and Cash Equivalents - The carrying amount for cash on hand and in banks approximates fair value due to the short maturity of these instruments.
(b)Securities - The fair value of securities excluding Federal Home Loan Bank stock, is based on bid prices received from an external pricing service or bid quotations received from securities dealers.
(c)Loans - Loans were segmented into portfolios with similar financial characteristics. Loans were also segmented by loan category. Each loan category was further segmented by fixed and adjustable rate interest terms and performing and nonperforming categories. The fair value of residential loans was calculated by discounting anticipated cash flows based on weighted-average contractual maturity, weighted-average coupon, and discount rate.
The fair value for nonperforming loans was determined by reducing the carrying value of nonperforming loans by the Company’s historical loss percentage for each specific loan category.
(d)Federal Home Loan Bank Stock - The fair value of Federal Home Loan Bank stock approximates its carrying value based on the redemption provisions of the Federal Home Loan Bank.
(e)Investments in Bank-Owned Life Insurance - The fair value of the insurance contracts approximates the carrying value.
(f)Deposits and Advances by Borrowers - The fair value of deposits with no stated maturity, such as noninterest bearing deposits, interest-bearing NOW accounts, money market and statement savings accounts, is deemed to be equal to the carrying amounts. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate for certificates of deposit was estimated using the rate currently offered for deposits of similar remaining maturities.
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(g)Advances from the FHLB - Fair values are estimated by discounting carrying values using a cash flow approach based on market rates as of September 30, 2013 and December 31, 2012.
(h)Off-Balance Sheet Financial Instruments - The Company’s adjustable rate commitments to extend credit move with market rates and are not subject to interest rate risk. The rates and terms of the Company’s fixed rate commitments to extend credit are competitive with others in the various markets in which the Company operates. The fair values of these instruments are immaterial.
(i)Limitations - Fair value estimates are made at a specific point in time, based on relevant market information and information about financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect estimates.
10. | RECENT ACCOUNTING PRONOUNCEMENTS |
ASU 20 12-02, “ Intangibles - Goodwill and Other (Topic 350) - Testing Indefinite-Lived Intangible Assets for Impairment.”ASU 2012-02 gives entities the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that an indefinite-lived intangible asset is impaired. If, after assessing the totality of events or circumstances, an entity determines it is more likely than not that an indefinite-lived intangible asset is impaired, then the entity must perform the quantitative impairment test. If, under the quantitative impairment test, the carrying amount of the intangible asset exceeds its fair value, an entity should recognize an impairment loss in the amount of that excess. Permitting an entity to assess qualitative factors when testing indefinite-lived intangible assets for impairment results in guidance that is similar to the goodwill impairment testing guidance in ASU 2011-08. ASU 2012-02 became effective for the Company on January 1, 2013 and did not have a significant impact on the Company’s financial statements.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking Statements
When used in this Report, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties including changes in economic conditions in the Company’s market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company’s market area, competition and information provided by third-party vendors and the matters described under “Part I, Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.
The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
General
Fraternity Community Bancorp, Inc. (the “Company”) is a Maryland corporation incorporated on October 12, 2010 by Fraternity Federal Savings and Loan Association (the “Bank”) to be its holding company following the Bank’s conversion from the mutual to the stock form of organization (the “Conversion”). The Conversion was completed on March 31, 2011 and also on that date, the Company completed its public stock offering and issued 1,587,000 shares of its common stock for aggregate proceeds of $15,870,000, and net proceeds of $14,968,610. The Company’s business is the ownership of the outstanding capital stock of the Bank. The Company does not own or lease any property but instead uses the premises, equipment and other property of the Bank with payment of appropriate rental fees as required by applicable law and regulations, under the terms of an expense allocation agreement between the Company and the Bank.
Founded in 1913, the Bank is a community-oriented financial institution, dedicated to serving the financial service needs of customers and businesses within its market area, which consists of Baltimore City and Baltimore, Carroll and Howard Counties in Maryland. We offer a variety of deposit products and provide loans secured by real estate located in our market area. Our real estate loans consist primarily of one-to four-family mortgage loans, as well as commercial real estate loans, land loans, home equity lines of credit and residential construction loans. We also offer consumer loans and, to a limited extent, commercial business loans. We currently operate out of our corporate headquarters and main office in Baltimore and full-service branch offices located in Cockeysville, Ellicott City and Hampstead, Maryland. We are subject to extensive regulation, examination and supervision by the Office of the Comptroller of the Currency, our primary federal regulator, and the Federal Deposit Insurance Corporation, our deposit insurer.
The Company and the Bank maintain an Internet website athttp://www.fraternityfed.com. Information on our website should not be considered a part of this Quarterly Report on Form 10-Q.
Critical Accounting Policies
We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. The following represent our critical accounting policies:
Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established
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through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: loss exposure at default; the amount and timing of future cash flows on impaired loans; value of collateral; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the allowance monthly and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions and other factors related to the collectability of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic or other conditions differ substantially from the assumptions used in making the evaluation. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, periodically reviews our allowance for loan losses and may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings.
Comparison of Financial Condition at September 30, 2013 and December 31, 2012
Assets. At September 30, 2013, total assets decreased by $4.5 million to $165.2 million at September 30, 2013 from $169.7 million at December 31, 2012. The decrease in assets for the nine months ended September 30, 2013 was due mainly to a $4.8 million decrease in cash and cash equivalents from $18.2 million at December 31, 2012 to $13.4 million at September 30, 2013. Offsetting this was an increase of $1.4 million in loans receivable, net, from $114.2 million at December 31, 2012 to $115.6 million at September 30, 2013. Other real estate owned increased from $1.7 million at December 31, 2012 to $2.0 million at September 30, 2013.
Loans. Net loans receivable increased by $1.4 million, or 1.2%, from $114.2 million at December 31, 2012 to $115.6 million at September 30, 2013, primarily as a result of increased loan demand. Owner occupied one-to-four family loans increased by $5.9 million, or 7.9%, from $74.3 million at December 31, 2012 to $80.2 million at September 30, 2013 and residential construction loans decreased by $945,000, or 25.6%, from $3.7 million at December 31, 2012 to $2.7 million at September 30, 2013 due to six residential construction loans totaling $3.5 million converting to owner occupied one-to-four family loans during the period and originating five new construction loans during the period.
Cash and Cash Equivalents. Cash and cash equivalents decreased by $4.8 million, or 26.5%, from $18.2 million at December 31, 2012 to $13.4 million at September 30, 2013 primarily as a result of a decrease in our deposits of $2.8 million. This decrease was the result of our strategy to be less aggressive on our certificate of deposit pricing due to weak loan demand, high liquidity and desire to decrease our cost of funds.
Securities. Our available-for-sale securities decreased by $1.6 million, or 8.7%, from $18.6 million at December 31, 2012 to $17.0 million at September 30, 2013. During the nine months ended September 30, 2013 we sold securities totaling $5.2 million, purchased securities totaling $6.5 million, and had principal payments of $2.4 million on our securities. Our held-to-maturity securities decreased by $374,300, or 4.9%, from $7.6 million at December 31, 2012 to $7.3 million at September 30, 2013.
Deposits. Total deposits decreased by $2.8 million, from $119.0 million at December 31, 2012, to $116.2 million at September 30, 2013, primarily as a result of certificates of deposits maturing that had carried much higher interest rates, and depositors looking for a higher yield elsewhere than the current low interest rates we are offering on those products currently.
Borrowings. Total borrowings remained stable at $20.0 million at September 30, 2013 and December 31, 2012.
Stockholders’ Equity. Stockholders’ Equity decreased by $1.9 million, or 6.3%, from $29.3 million at December 31, 2012 to $27.4 million at September 30, 2013. $1.5 million of this decrease was due to the repurchase of 110,300 shares of the Company’s stock during the nine months ended September 30, 2013, pursuant to the repurchase plan approved by the board of directors on May 8, 2012 and July 25, 2013. As of September 30, 2013,
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the Company has completed the repurchase of all shares approved under the May 8, 2012 plan, and the Company has repurchased 32,500 shares approved under the July 25, 2013 plan. $620,300 of the decrease was due to a change in accumulated other comprehensive (loss) income. As of December 31, 2012 we had accumulated other comprehensive income of $74,300 as compared to an accumulated other comprehensive loss of $546,000 at September 30, 2013. This change is due to the sharp increase in long term rates that affect our available for sale investment portfolio. If interest rates were to continue to increase, we may experience additional increases in our accumulated other comprehensive loss.
Results of Operations for the Three Months Ended September 30, 2013 and 2012 (unaudited)
Overview. We had a net loss of $91,100 for the three months ended September 30, 2013, as compared to a net loss of $91,200 for the three months ended September 30, 2012. Net interest income increased for the three months ended September 30, 2013 by $129,800, or 13.2%, from $986,700 for the three months ended September 30, 2012 to $1,116,500 for the three months ended September 30, 2013. Our provision for loan losses decreased by $58,600, or 29.0%, from $201,900 for the three months ended September 30, 2012 to $143,300 for the three months ended September 30, 2013. Non-interest income decreased by $32,700, or 40.6%, for the three months ended September 30, 2013, from $80,700 for the three months ended September 30, 2012 to $48,000 for the three months ended September 30, 2013. Non-interest expense increased by $148,800, or 14.1%, for the three months ended September 30, 2013, from $1,058,600 for the three months ended September 30, 2012 to $1,207,400 for the three months ended September 30, 2013. Income tax benefit decreased by $6,800, or 6.7%, from $101,800 for the three months ended September 30, 2012 to $95,000 for the three months ended September 30, 2013.
Net Interest Income. Net interest income increased by $129,800, or 13.2%, from $986,700 for the three months ended September 30, 2012 to $1,116,500 for the three months ended September 30, 2013. The increase in net interest income is primarily attributable to a lower level of interest earning assets and interest bearing liabilities. Our interest rate spread has improved from 2.16% for the three months ended September 30, 2012 to 2.72% for the three months ended September 30, 2013, primarily due to a 39 basis point decrease in the average cost of time deposits and an $8.6 million decrease in the average balance of interest bearing deposits in other banks.
Interest on loans receivable, net increased by $48,100, or 3.5%, from $1,374,300 for the three months ended September 30, 2012 to $1,422,400 for the three months ended September 30, 2013, despite a 13 basis point decrease in the average yield. The decrease in the average yield on loans was attributable to market rates remaining at an historically low level. The average balance of loans receivable, net increased by $7.0 million, or 6.4%, from $109.4 million at September 30, 2012 to $116.4 million at September 30, 2013.
Interest on investment securities available-for-sale decreased by $32,600, or 24.7%, for the three months ended September 30, 2013 as compared to the three months ended September 30, 2012, as the result of an $8.0 million, or 31.8%, decrease in the average balance of investment securities available-for-sale, offset in part by a 22 basis point increase in the average yield. Interest on investment securities held-to-maturity decreased by $4,000, or 7.0%, for the three months ended September 30, 2013 as compared to the three months ended September 30, 2012, as the result of a $72,500, or 1.0%, decrease in the average balance of investment securities held-to-maturity and a 19 basis point decrease in the average yield.
Interest on cash and cash equivalents remained low by historical standards during the three months ended September 30, 2013 and 2012 due to the historically low prevailing market rates during those periods.
During the three months ended September 30, 2013, we were able to reduce interest paid on deposits primarily as the result of time deposits being rolled over at lower rates in response to general declines in market interest rates, lower average balances of these time deposits and decreases in the cost of other deposits due to a decline in market rates. Interest on time deposits decreased by $103,300, or 24.6%, from $419,500 for the three months ended September 30, 2012, to $316,200 for the three months ended September 30, 2013, due to a 39 basis point decrease in the average cost of time deposits and a $3.3 million, or 3.5%, decrease in the average balance of time deposits. Interest on brokered deposits increased by $100, or 2.0%, from $3,700 for the three months ended September 30, 2012, to $3,800 for the three months ended September 30, 2013, as the average balance of brokered deposits increased from $328,500 for the three months ended September 30, 2012 to $335,800 for the three months
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ended September 30, 2013. Interest on NOW and money market accounts decreased by $1,800, or 49.9%, from $3,600 for the three months ended September 30, 2012, to $1,800 for the three months ended September 30, 2013, due to a 12 basis point decrease in the average cost of NOW and money markets. Interest on passbook accounts decreased by $7,700, or 54.3%, from $14,100 for the three months ended September 30, 2012 to $6,500 for the three months ended September 30, 2013, due primarily to a 17 basis point decrease in the average cost of passbook accounts. The average balance of passbook accounts decreased during the three months ended September 30, 2013, from $16.6 million as of September 30, 2012 to $15.0 million as of September 30, 2013.
Interest on other interest-bearing liabilities, which consist of Federal Home Loan Bank advances, decreased by $11,300, or 6.8%, from $166,600 for three months ended September 30, 2012 to $155,300 for the three months ended September 30, 2013, due to a $1.7 million, or 7.7%, decrease in the average balance of other interest-bearing liabilities. At September 30, 2013 and December 31, 2012, we had $20.0 million of Federal Home Loan Bank advances, of which $15.0 million are long-term advances that carry large prepayment penalties. The remaining $5.0 million are long-term advances that do not carry large prepayment penalties.
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Average Balances and Yields. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Average balances have been calculated using monthly balances, and non-accrual loans are included in average balances only. Amortization of net deferred loan fees are included in interest income on loans and are insignificant. No tax-equivalent adjustments were made. Nonaccruing loans have been included in the table as loans carrying a zero yield.
Three Months Ended September 30, | ||||||||||||||||||||||||
2013 | 2012 | |||||||||||||||||||||||
Average Balance | Interest and Dividends | Yield/ Cost | Average Balance | Interest and Dividends | Yield/ Cost | |||||||||||||||||||
Assets: | ||||||||||||||||||||||||
Interest-bearing deposits in other banks | $ | 10,848,901 | $ | 7,933 | .29 | % | $ | 19,483,978 | $ | 11,483 | .24 | % | ||||||||||||
Loans receivable, net (3) | 116,446,775 | 1,422,430 | 4.89 | 109,438,408 | 1,374,263 | 5.02 | ||||||||||||||||||
Investment securities available-for-sale (1) | 17,030,030 | 99,225 | 2.33 | 24,981,506 | 131,787 | 2.11 | ||||||||||||||||||
Investment securities held-to-maturity (2) | 7,295,729 | 54,089 | 2.97 | 7,368,315 | 58,138 | 3.16 | ||||||||||||||||||
Other interest-earning assets | 1,998,209 | 16,536 | 3.31 | 2,188,412 | 18,622 | 3.40 | ||||||||||||||||||
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Total interest-earning assets | 153,619,644 | 1,600,213 | 4.17 | 163,460,619 | 1,594,293 | 3.90 | ||||||||||||||||||
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Noninterest-earning assets | 9,880,562 | 8,945,391 | ||||||||||||||||||||||
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| |||||||||||||||||||||
Total assets | $ | 163,500,206 | $ | 172,406,010 | ||||||||||||||||||||
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Liabilities and equity: | ||||||||||||||||||||||||
Time deposits | $ | 91,525,081 | $ | 316,234 | 1.38 | % | $ | 94,852,608 | $ | 419,515 | 1.77 | % | ||||||||||||
NOW and money market | 6,099,206 | 1,795 | .12 | 6,031,856 | 3,580 | .24 | ||||||||||||||||||
Passbook | 15,001,955 | 6,465 | .17 | 16,627,077 | 14,140 | .34 | ||||||||||||||||||
Brokered deposits | 335,759 | 3,802 | 4.53 | 328,513 | 3,727 | 4.54 | ||||||||||||||||||
Federal Home Loan Bank advances | 20,000,000 | 155,342 | 3.11 | 21,666,667 | 166,594 | 3.08 | ||||||||||||||||||
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| |||||||||||||||||
Total interest-bearing liabilities | 132,962,001 | 483,638 | 1.45 | 139,506,721 | 607,556 | 1.74 | ||||||||||||||||||
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Noninterest-bearing liabilities | 2,889,333 | 2,856,876 | ||||||||||||||||||||||
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| |||||||||||||||||||||
Total liabilities | 135,851,334 | 142,363,597 | ||||||||||||||||||||||
Total equity | 27,648,872 | 30,042,413 | ||||||||||||||||||||||
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Total liabilities and equity | $ | 163,500,206 | $ | 172,406,010 | ||||||||||||||||||||
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Net interest income | $ | 1,116,575 | $ | 986,737 | ||||||||||||||||||||
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Interest rate spread | 2.72 | % | 2.16 | % | ||||||||||||||||||||
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Net interest margin | 2.91 | % | 2.41 | % | ||||||||||||||||||||
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Ratio of average interest-earning assets to average interest-bearing liabilities | 115.54 | % | 117.17 | % | ||||||||||||||||||||
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(1) | Investment securities available-for-sale are presented at fair market value. |
(2) | Investment securities held-to-maturity are presented at amortized cost. |
(3) | Loans placed on nonaccrual status are included in average assets. |
Provision and Allowance for Loan Losses. We maintain an allowance at a level necessary to absorb management’s best estimate of probable loan losses in the portfolio. Management considers, among other factors, historical loss experience, type and amount of loans, borrower concentrations and current conditions of the economy. In addition, the allowance considers the level of loans which management monitors as a result of inconsistent repayment patterns. Management has identified commercial real estate loans as an area for expected increased lending. Such loans carry a higher degree of credit risk than our historical single-family lending.
Our provision for loan losses decreased by $58,600 to $143,300 for the three months ended September 30, 2013 from $201,900 for the three months ended September 30, 2012. At September 30, 2013, the allowance for loan losses was $1.501 million, or 1.28%, of the total loan portfolio, as compared to $1.395 million, or 1.21%, of the total loan portfolio at December 31, 2012.
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Non-accrual loans totaled $2.2 million at September 30, 2013 compared to $4.9 million at December 31, 2012. Net loan recoveries amounted to $7,700 during the three months ended September 30, 2013, compared to net loan charge-offs of $56,900 during the three months ended September 30, 2012. As of September 30, 2013, non-accrual loans included three troubled debt restructured loans totaling $1.4 million, 11 owner occupied one-to-four family residential loans totaling $143,200, five non-owner occupied one-to-four family residential loans totaling $269,300 and four home equity lines of credit totaling $381,400. As of December 31, 2012, non-accrual loans included six troubled debt restructured loans totaling $3.3 million, 21 one-to-four family residential loans totaling $1.5 million and two home equity lines of credit totaling $92,100. The total decrease of $2.7 million in non-accrual loans is primarily due to three troubled debt restructured loans that had previously been on non-accrual status but are now accruing interest due to the borrowers abiding by the payment terms of the restructured loan for more than six months.
Impaired loans totaled $4.9 million at September 30, 2013 compared to $5.1 million at December 31, 2012. As of September 30, 2013, impaired loans included 17 one-to-four family owner-occupied residential loans totaling $4.1 million, five non-owner-occupied one-to-four family residential loans totaling $269,300, and five home equity line of credit loans totaling $593,700. Included in these are seven troubled debt restructured loans totaling $4.2 million. Of these seven troubled debt restructured loans, four loans totaling $2.8 million are on accrual status, while three loans totaling $1.4 million are on non-accrual status. As of December 31, 2012, impaired loans included 21one-to-four family owner-occupied residential loans totaling $4.3 million, five non-owner-occupied one-to-four family residential loans totaling $367,700, four home equity line of credit loans totaling $318,100, and one land loan totaling $94,500. Included in these were seven troubled debt restructured loans totaling $3.5 million, all of which were on non-accrual status.
Other real estate owned totaled $2.0 million at September 30, 2013 compared to $1.7 million at December 31, 2012. Other real estate owned at September 30, 2013 consisted of one luxury residential property that was a speculative construction loan totaling $1.7 million, one non-owner occupied property totaling $45,100, and one owner-occupied property totaling $221,400. Other real estate owned at December 31, 2012 consisted of one luxury residential property that was a speculative construction loan totaling $1.6 million and one non-owner occupied property totaling $49,600.
Management also reviews individual loans for which full collectability may not be reasonably assured and considers, among other matters, the estimated fair value of the underlying collateral. This evaluation is ongoing and results in variations in our provision for loan losses.
The following table provides information with respect to our nonperforming assets as of the dates indicated:
September 30, 2013 | December 31, 2012 | |||||||
(unaudited) | ||||||||
Nonaccrual loans: | ||||||||
Real estate loans: | ||||||||
Owner occupied one-to-four family | $ | 1,532,269 | $ | 4,072,391 | ||||
Non-owner occupied one-to-four family | 269,289 | 367,743 | ||||||
Lines of credit | 381,438 | 318,149 | ||||||
Commercial | 0 | 0 | ||||||
Residential construction | 0 | 0 | ||||||
Land | 0 | 94,500 | ||||||
Commercial | 0 | 0 | ||||||
Consumer | 0 | 0 | ||||||
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Total | $ | 2,182,996 | $ | 4,852,783 | ||||
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September 30, 2013 | December 31, 2012 | |||||||
(unaudited) | ||||||||
Accruing loans past due 90 days or more | $ | 0 | $ | 0 | ||||
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Total of nonaccrual loans and accruing loans 90 days or more past due | $ | 2,182,996 | $ | 4,852,783 | ||||
Other real estate owned | 1,983,011 | 1,660,364 | ||||||
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Total nonperforming assets | $ | 4,166,007 | $ | 6,513,147 | ||||
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Troubled debt restructurings | $ | 4,152,977 | $ | 3,532,094 | ||||
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Troubled debt restructurings included in non-accrual loans | $ | (1,389,030 | ) | $ | (3,272,611 | ) | ||
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Troubled debt restructurings and total nonperforming assets | $ | 6,929,954 | $ | 6,772,630 | ||||
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Total of nonaccrual loans and accruing loans past due 90 days or more to total loans | 1.86 | % | 4.20 | % | ||||
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Total of nonaccrual loans and accruing loans past due 90 days or more to total assets | 1.32 | % | 2.86 | % | ||||
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Total nonperforming assets to total assets | 2.52 | % | 3.84 | % | ||||
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Analysis of Loan Loss Experience.The following table sets forth an analysis of the allowance for loan losses for the periods indicated.
Three Months Ended September 30, | ||||||||
2013 | 2012 | |||||||
Allowance for loan losses at beginning of period | $ | 1,350,000 | $ | 1,250,000 | ||||
Charge-offs: | ||||||||
Real estate loans: | ||||||||
Owner occupied one-to four-family | 0 | 0 | ||||||
Non-owner occupied one-to four-family | 0 | 59,847 | ||||||
Lines of credit | 0 | 0 | ||||||
Commercial | 0 | 0 | ||||||
Residential construction | 0 | 0 | ||||||
Land | 0 | 0 | ||||||
Commercial | 0 | 0 | ||||||
Consumer | 0 | 88 | ||||||
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Total charge-offs | 0 | 59,935 | ||||||
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Recoveries | 7,701 | 3,015 | ||||||
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Net (recoveries) charge-offs | (7,701 | ) | 56,920 | |||||
Provision for loan losses | 143,299 | 201,920 | ||||||
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Allowance at end of period | $ | 1,501,000 | $ | 1,395,000 | ||||
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Allowance for loan losses to total loans at the end of the period | 1.28 | % | 1.21 | % | ||||
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Net charge-offs to average loans outstanding during the period | (.01 | )% | .05 | % | ||||
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Noninterest Income. Total noninterest income decreased by $32,700, or 40.6%, from $80,700 for the three months ended September 30, 2012 to $48,000 for the three months ended September 30, 2013. The decrease was primarily due to a decrease of $33,400, or 100.0%, in the gain on sale of loans.
Noninterest Expenses. Total noninterest expenses increased by $148,800, or 14.1%, from $1,058,600 for the three months ended September 30, 2012 to $1,207,400 for the three months ended September 30, 2013. The increase primarily was attributable to an increase in salaries and employee benefits expense of $54,900, or 9.6%, an increase in directors fees of $27,400, or 107.3%, an increase in legal fees of $21,200, or 53.4%, and an increase in other general and administrative expenses of $36,000, or 30.6%, due mainly to a large increase in advertising expense.
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Income Tax Expense. We recognized an income tax benefit of $95,000 during the three months ended September 30, 2013, as compared to an income tax benefit of $101,800 for the three months ended September 30, 2012.
Results of Operations for the Nine Months Ended September 30, 2013 and 2012 (unaudited)
Overview. We had net income of $76,800 for the nine months ended September 30, 2013, as compared to net income of $63,300 for the nine months ended September 30, 2012. Net interest income increased for the nine months ended September 30, 2013 by $63,300, or 2.0%, from $3,212,200 for the nine months ended September 30, 2012 to $3,275,500 for the nine months ended September 30, 2013. Our provision for loan losses decreased by $248,800, or 65.4%, from $380,200 for the nine months ended September 30, 2012 to $131,400 for the nine months ended September 30, 2013. Non-interest income decreased by $95,700, or 29.1%, for the nine months ended September 30, 2013, from $328,800 for the nine months ended September 30, 2012 to $233,100 for the nine months ended September 30, 2013. Non-interest expense increased by $198,100, or 6.3%, for the nine months ended September 30, 2013, from $3,153,500 for the nine months ended September 30, 2012 to $3,351,600 for the nine months ended September 30, 2013. Income tax benefit decreased by $4,700, or 8.5%, from $56,000 for the nine months ended September 30, 2012 to $51,300 for the nine months ended September 30, 2013.
Net Interest Income. Net interest income increased by $63,300, or 2.0%, from $3,212,200 for the nine months ended September 30, 2012 to $3,275,500 for the nine months ended September 30, 2013. The increase in net interest income is primarily attributable to lower interest rates being paid on interest bearing liabilities. Our interest rate spread has improved from 2.32% for the nine months ended September 30, 2012 to 2.58% for the nine months ended September 30, 2013.
Interest on loans receivable, net decreased by $53,700, or 1.3%, from $4.3 million for the nine months ended September 30, 2012 to $4.2 million for the nine months ended September 30, 2013, due to a 24 basis point decrease in the average yield. The decrease in the average yield on loans was attributable to market rates remaining at an historically low level. The average balance of loans receivable, net increased by $4.1 million, or 3.7%, from $110.7 million at September 30, 2012 to $114.8 million at September 30, 2013.
Interest on investment securities available-for-sale decreased by $214,900, or 41.6%, for the nine months ended September 30, 2013 as compared to the nine months ended September 30, 2012, as the result of a $9.5 million, or 34.3%, decrease in the average balance of investment securities available-for-sale and a 27 basis point decrease in the average yield. Interest on investment securities held-to-maturity decreased by $16,000, or 8.8%, for the nine months ended September 30, 2013 as compared to the nine months ended September 30, 2012, as the result of a $142,500, or 1.9%, decrease in the average balance of investment securities held-to-maturity and a 23 basis point decrease in the average yield.
Interest on cash and cash equivalents remained low by historical standards during the nine months ended September 30, 2013 and 2012 due to the historically low prevailing market rates during those periods.
During the nine months ended September 30, 2013, we were able to reduce interest paid on deposits primarily as the result of time deposits being rolled over at lower rates in response to general declines in market interest rates, lower average balances of these time deposits and decreases in the cost of other deposits due to a decline in market rates. Interest on time deposits decreased by $271,800, or 21.2%, from $1.3 million for the nine months ended September 30, 2012, to $1.0 million for the nine months ended September 30, 2013, due to a 35 basis point decrease in the average cost of time deposits and a $2.4 million, or 2.5%, decrease in the average balance of time deposits. Interest on brokered deposits decreased by $2,100, or 15.4%, from $13,300 for the nine months ended September 30, 2012, to $11,200 for the nine months ended September 30, 2013, as the average balance of brokered deposits decreased from $1.1 million for the nine months ended September 30, 2012 to $333,900 for the nine months ended September 30, 2013. Interest on NOW and money market accounts decreased by $4,700, or 44.0%, from $10,700 for the nine months ended September 30, 2012, to $6,000 for the nine months ended September 30, 2013, due to an 11 basis point decrease in the average cost of NOW and money markets. Interest on
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passbook accounts decreased by $18,500, or 42.3%, from $43,700 for the nine months ended September 30, 2012 to $25,200 for the nine months ended September 30, 2013, due primarily to a 13 basis point decrease in the average cost of passbook accounts. The average balance of passbook accounts decreased during the nine months ended September 30, 2013, from $16.9 million as of September 30, 2012 to $15.9 million as of September 30, 2013.
Interest on other interest-bearing liabilities, which consist of Federal Home Loan Bank advances, decreased by $50,600, or 10.0%, from $506,500 for the nine months ended September 30, 2012 to $455,900 for the nine months ended September 30, 2013, due to a $2.2 million, or 10.0%, decrease in the average balance of other interest-bearing liabilities. At September 30, 2013 and December 31, 2012, we had $20.0 million of Federal Home Loan Bank advances, of which $15.0 million are long-term advances that carry large prepayment penalties. The remaining $5.0 million are long-term advances that do not carry large prepayment penalties.
Average Balances and Yields. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized
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average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Average balances have been calculated using monthly balances, and non-accrual loans are included in average balances only. Amortization of net deferred loan fees are included in interest income on loans and are insignificant. No tax-equivalent adjustments were made. Nonaccruing loans have been included in the table as loans carrying a zero yield.
Nine Months Ended September 30, | ||||||||||||||||||||||||
2013 | 2012 | |||||||||||||||||||||||
Average Balance | Interest and Dividends | Yield/ Cost | Average Balance | Interest and Dividends | Yield/ Cost | |||||||||||||||||||
Assets: | ||||||||||||||||||||||||
Interest-bearing deposits in other banks | $ | 13,938,084 | $ | 26,931 | .26 | % | $ | 17,383,393 | $ | 29,030 | .22 | % | ||||||||||||
Loans receivable, net (3) | 114,797,187 | 4,232,014 | 4.92 | 110,675,721 | 4,285,743 | 5.16 | ||||||||||||||||||
Investment securities available-for-sale (1) | 18,234,231 | 302,133 | 2.21 | 27,741,042 | 516,985 | 2.48 | ||||||||||||||||||
Investment securities held-to-maturity (2) | 7,412,279 | 165,185 | 2.97 | 7,554,820 | 181,141 | 3.20 | ||||||||||||||||||
Other interest-earning assets | 2,016,927 | 55,775 | 3.69 | 2,203,296 | 53,491 | 3.24 | ||||||||||||||||||
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Total interest-earning assets | 156,398,708 | 4,782,038 | 4.08 | 165,558,272 | 5,066,390 | 4.08 | ||||||||||||||||||
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Noninterest-earning assets | 9,468,067 | 8,359,171 | ||||||||||||||||||||||
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Total assets | $ | 165,866,775 | $ | 173,917,443 | ||||||||||||||||||||
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Liabilities and equity: | ||||||||||||||||||||||||
Time deposits | $ | 92,028,062 | $ | 1,008,188 | 1.46 | % | $ | 94,378,106 | $ | 1,279,973 | 1.81 | % | ||||||||||||
NOW and money market | 6,135,635 | 6,008 | .13 | 6,030,341 | 10,723 | .24 | ||||||||||||||||||
Passbook | 15,884,073 | 25,212 | .21 | 16,915,059 | 43,693 | .34 | ||||||||||||||||||
Brokered deposits | 333,919 | 11,235 | 4.49 | 1,141,922 | 13,285 | 1.55 | ||||||||||||||||||
Federal Home Loan Bank advances | 20,000,000 | 455,932 | 3.04 | 22,222,222 | 506,522 | 3.04 | ||||||||||||||||||
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Total interest-bearing liabilities | 134,381,689 | 1,506,575 | 1.49 | 140,687,650 | 1,854,196 | 1.76 | ||||||||||||||||||
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Noninterest-bearing liabilities | 3,173,335 | 3,044,271 | ||||||||||||||||||||||
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Total liabilities | 137,555,024 | 143,731,921 | ||||||||||||||||||||||
Total equity | 28,311,751 | 30,185,522 | ||||||||||||||||||||||
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Total liabilities and equity | $ | 165,866,775 | $ | 173,917,443 | ||||||||||||||||||||
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Net interest income | $ | 3,275,463 | $ | 3,212,194 | ||||||||||||||||||||
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Interest rate spread | 2.58 | % | 2.32 | % | ||||||||||||||||||||
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Net interest margin | 2.79 | % | 2.59 | % | ||||||||||||||||||||
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Ratio of average interest-earning assets to average interest-bearing liabilities | 116.38 | % | 117.68 | % | ||||||||||||||||||||
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(1) | Investment securities available-for-sale are presented at fair market value. |
(2) | Investment securities held-to-maturity are presented at amortized cost. |
(3) | Loans placed on nonaccrual status are included in average assets. |
Provision and Allowance for Loan Losses. We maintain an allowance at a level necessary to absorb management’s best estimate of probable loan losses in the portfolio. Management considers, among other factors, historical loss experience, type and amount of loans, borrower concentrations and current conditions of the economy. In addition, the allowance considers the level of loans which management monitors as a result of inconsistent repayment patterns.
Our provision for loan losses decreased by $248,800 to $131,400 for the nine months ended September 30, 2013 from $380,200 for the nine months ended September 30, 2012. At September 30, 2013, the allowance for loan losses was $1.501 million, or 1.28%, of the total loan portfolio, as compared to $1.395 million, or 1.21%, of the total loan portfolio at December 31, 2012.
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Non-accrual loans totaled $2.2 million at September 30, 2013 compared to $4.9 million at December 31, 2012. Net loan charge-offs amounted to $25,400 during the nine months ended September 30, 2013, compared to net loan charge-offs of $235,200 during the nine months ended September 30, 2012. As of September 30, 2013, non-accrual loans included three troubled debt restructured loans totaling $1.4 million, 11 owner occupied one-to-four family residential loans totaling $143,200, five non-owner occupied one-to-four family residential loans totaling $269,300 and four home equity lines of credit totaling $381,400. As of December 31, 2012, non-accrual loans included six troubled debt restructured loans totaling $3.3 million, 21 one-to-four family residential loans totaling $1.5 million and two home equity lines of credit totaling $92,100. The total decrease of $2.7 million in non-accrual loans is primarily due to three troubled debt restructured loans that had previously been on non-accrual status but are now accruing interest due to the borrowers abiding by the payment terms of the restructured loan for more than six months.
Impaired loans totaled $4.9 million at September 30, 2013 compared to $5.1 million at December 31, 2012. As of September 30, 2013, impaired loans included 17 one-to-four family owner-occupied residential loans totaling $4.1 million, five non-owner-occupied one-to-four family residential loans totaling $269,300, and five home equity line of credit loans totaling $593,700. Included in these are seven troubled debt restructured loans totaling $4.2 million. Of these seven troubled debt restructured loans, four loans totaling $2.8 million are on accrual status, while three loans totaling $1.4 million are on non-accrual status. As of December 31, 2012, impaired loans included 21 one-to-four family owner-occupied residential loans totaling $4.3 million, five non-owner-occupied one-to-four family residential loans totaling $367,700, four home equity line of credit loans totaling $318,100, and one land loan totaling $94,500. Included in these were seven troubled debt restructured loans totaling $3.5 million, all of which were on non-accrual status.
Other real estate owned totaled $2.0 million at September 30, 2013 compared to $1.7 million at December 31, 2012. Other real estate owned at September 30, 2013 consisted of one luxury residential property that was a speculative construction loan totaling $1.7 million, one non-owner occupied property totaling $45,100, and one owner-occupied property totaling $221,400. Other real estate owned at December 31, 2012 consisted of one luxury residential property that was a speculative construction loan totaling $1.6 million and one non-owner occupied property totaling $49,600.
Management also reviews individual loans for which full collectability may not be reasonably assured and considers, among other matters, the estimated fair value of the underlying collateral. This evaluation is ongoing and results in variations in our provision for loan losses.
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Analysis of Loan Loss Experience.The following table sets forth an analysis of the allowance for loan losses for the periods indicated.
Nine Months Ended September 30, | ||||||||
2013 | 2012 | |||||||
Allowance for loan losses at beginning of period | $ | 1,395,000 | $ | 1,250,000 | ||||
Charge-offs: | ||||||||
Real estate loans: | ||||||||
Owner occupied one-to-four family | 25,777 | 133,065 | ||||||
Non-owner occupied one-to-four family | 66,079 | 59,847 | ||||||
Lines of credit | 0 | 0 | ||||||
Commercial | 0 | 0 | ||||||
Residential construction | 0 | 44,940 | ||||||
Land | 0 | 20,585 | ||||||
Commercial | 0 | 0 | ||||||
Consumer | 0 | 88 | ||||||
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Total charge-offs | 91,856 | 258,525 | ||||||
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Recoveries | 66,449 | 23,351 | ||||||
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Net charge-offs | 25,407 | 235,174 | ||||||
Provision for loan losses | 131,407 | 380,174 | ||||||
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Allowance at end of period | $ | 1,501,000 | $ | 1,395,000 | ||||
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Allowance for loan losses to total loans at the end of the period | 1.28 | % | 1.25 | % | ||||
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Net charge-offs to average loans outstanding during the period | .02 | % | .21 | % | ||||
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Noninterest Income. Total noninterest income decreased by $95,700, or 29.1%, from $328,800 for the nine months ended September 30, 2012 to $233,100 for the nine months ended September 30, 2013. The decrease was primarily due to a decrease of $70,800, or 62.0%, in the gain on sale of investments.
Noninterest Expenses. Total noninterest expenses increased by $198,100, or 6.3%, from $3,153,500 for the nine months ended September 30, 2012 to $3,351,600 for the nine months ended September 30, 2013. The increase primarily was attributable to an increase in salaries and employee benefits expense of $30,600, or 1.85%, an increase in directors fees of $26,500, or 35.7%, and an increase in other general and administrative expenses of $111,300, or 32.8%, due mainly to a large increase in advertising expense.
Income Tax Expense. We recognized an income tax benefit of $51,300 during the nine months ended September 30, 2013, as compared to an income tax benefit of $56,000 for the nine months ended September 30, 2012. This income tax benefit is primarily due to tax free income earned on bank-owned life insurance income and municipal bond income.
Liquidity Management.Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds available to meet short-term liquidity needs consist of deposit inflows, loan repayments and maturities and sales of investment securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.
We regularly adjust our investments in liquid assets available to meet short-term liquidity needs based upon our assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and securities and (iv) the objectives of our asset/liability management policy. We do not have long-term debt or other financial obligations that would create long-term liquidity concerns.
Our most liquid assets are cash and cash equivalents. The level of these assets depends on our operating, financing, lending and investing activities during any given period. At September 30, 2013, cash and cash equivalents totaled $13.4 million. Securities classified as available-for-sale, amounting to $17.0 million at September 30, 2013, provide an additional source of liquidity. In addition, at September 30, 2013, we had the ability to borrow a total of approximately $49.8 million from the Federal Home Loan Bank of Atlanta and had $20.0 million in Federal Home Loan Bank advances outstanding. For additional liquidity, if needed, the Bank has a $3.0 million line of credit with another bank, on which we had no outstanding balance at September 30, 2013.
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Certificates of deposit due within one year of September 30, 2013 totaled $49.7 million, or 52.7%, of certificates of deposit. We believe the large percentage of certificates of deposit that mature within one year reflects customers’ hesitancy to invest their funds for long periods due to the recent low interest rate environment and local competitive pressures. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before September 30, 2014. We believe, however, based on past experience, that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.
Capital Management.We are subject to various regulatory capital requirements administered by the Office of the Comptroller of the Currency, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At September 30, 2013, we exceeded all of our regulatory capital requirements and were considered “well capitalized” under regulatory guidelines.
Off-Balance Sheet Arrangements
In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, unused lines of credit and letters of credit. For the three and nine months ended September 30, 2013, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
This item is not applicable as the Company is a smaller reporting company.
Item 4. | Controls and Procedures |
As of the end of the period covered by this report, management of the Company carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures as that term is defined in Rule 13a-5(e). Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
It should be noted that the design of the Company’s disclosure controls and procedures is based in part upon certain reasonable assumptions about the likelihood of future events, and there can be no reasonable assurance that any design of disclosure controls and procedures will succeed in achieving its stated goals under all potential future conditions, regardless of how remote, but the Company’s principal executive and financial officers have concluded that the Company’s disclosure controls and procedures are, in fact, effective at a reasonable assurance level.
There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Securities and Exchange Commission Rule 13a-15 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. | OTHER INFORMATION |
Item 1. | Legal Proceedings |
Periodically, there may be various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.
Item 1A. | Risk Factors |
For information regarding the Company’s risk factors, see the section entitled“Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012 filed with the Securities and Exchange Commission on March 29, 2013. As of the date of this filing, the risk factors of the Company have not changed materially from those reported in the Form 10-K.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
The following table sets forth information regarding stock repurchases during the periods indicated:
Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased As Part of a Publicly Announced Repurchase Program (1) | Maximum Number of Shares That May Yet Be Purchased Under the Repurchase Program (1) | ||||||||||||
July 1-31, 2013 | 0 | $ | 0 | 0 | 142,830 | |||||||||||
August 1-31, 2013 | 5,000 | 13.15 | 5,000 | 137,830 | ||||||||||||
September 1-30, 2013 | 27,500 | 13.45 | 27,500 | 110,330 | ||||||||||||
TOTAL | 32,500 |
(1) | On July 25 2013, Fraternity Community Bancorp, Inc. announced that it had approved a stock repurchase program to acquire up to 142,830 shares, or 10%, of the Company’s outstanding common stock. |
Item 3. | Defaults Upon Senior Securities |
Not applicable.
Item 4. | Mine Safety Disclosures |
Not applicable.
Item 5. | Other Information |
The Company’s 2014 Annual Meeting of Shareholders will be held on May 13, 2014.
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Item 6. | Exhibits |
No. | Description | |
3.1 | Articles of Incorporation of Fraternity Community Bancorp, Inc. (1) | |
3.2 | Bylaws of Fraternity Community Bancorp, Inc. (1) | |
4.0 | Form of Common Stock Certificate of Fraternity Community Bancorp, Inc. (1) | |
31.1 | Rule 13a-14(a) Certification of Chief Executive Officer | |
31.2 | Rule 13a-14(a) Certification of Chief Financial Officer | |
32.0 | Section 1350 Certifications | |
101.0 | The following materials from Fraternity Community Bancorp’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Financial Condition; (ii) the Consolidated Statements of Income (Loss); (iii) the Consolidated Statements of Comprehensive (Loss) Income; (iv) the Consolidated Statements of Changes in Stockholders’ Equity; (v) the Consolidated Statements of Cash Flows; and (vi) the related Notes. |
(1) | Incorporated herein by reference to the Company’s Registration Statement on Form S-1, as amended (File No. 333-170215). |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
November 12, 2013
FRATERNITY COMMUNITY BANCORP, INC. | ||
By: | /s/ Thomas K. Sterner | |
Thomas K. Sterner | ||
Chairman of the Board and Chief Executive Officer (Principal Executive Officer) | ||
By: | /s/ Michelle L. Miller | |
Michelle L. Miller | ||
Chief Financial Officer | ||
(Principal Financial and Accounting Officer) |