FIRST BANCSHARES, INC.
FIRST BANCSHARES, INC.
FIRST BANCSHARES, INC. AND SUBSIDIARIES | |
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited) | |
| | | | | |
| | December 31, | | June 30, | |
| | 2010 | | 2010 | |
| | | | | |
ASSETS | | | | | |
Cash and cash equivalents | $ | 9,694,687 | $ | 20,182,593 | |
Certificates of deposit purchased | | 6,471,578 | | 7,221,578 | |
Securities available-for-sale | | 64,256,711 | | 60,304,479 | |
Securities held to maturity, fair market value at: | | | | | |
December 31, 2010, $8,348,120; June 30, 2010, $2,072,084 | | 8,493,854 | | 2,012,940 | |
Federal Home Loan Bank stock, at cost | | 434,000 | | 434,000 | |
Loans receivable, net of allowances for loan losses at: | | | | | |
December 31, 2010, $2,521,843; June 30, 2010, $2,526,862 | | 101,255,832 | | 108,683,381 | |
Loans held for sale | | 88,308 | | - | |
Accrued interest receivable | | 790,996 | | 819,752 | |
Prepaid FDIC insurance premiums | | 991,997 | | 1,196,465 | |
Prepaid expenses | | 283,266 | | 380,487 | |
Property and equipment, net | | 6,067,358 | | 6,051,423 | |
Real estate owned and other repossessed assets | | 5,281,585 | | 3,945,628 | |
| | 110,183 | | 135,241 | |
Income taxes recoverable | | 138,674 | | 152,975 | |
Other assets | | 125,955 | | 136,031 | |
Total assets | $ | 204,484,984 | $ | 211,656,973 | |
| | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | |
Deposits | $ | 175,170,721 | $ | 180,075,425 | |
Retail repurchase agreements | | 5,071,799 | | 5,352,402 | |
Advances from Federal Home Loan Bank | | 3,000,000 | | 3,000,000 | |
Accrued expenses | | 698,852 | | 617,915 | |
Total liabilities | | 183,941,372 | | 189,045,742 | |
| | | | | |
Preferred stock, $.01 par value; 2,000,000 shares | | | | | |
authorized, none issued | | - | | - | |
| | | | | |
Common stock, $.01 par value; 8,000,000 shares | | | | | |
authorized, 2,895,036 issued at December 31, 2010 | | | | | |
and June 30, 2010, 1,550,815 shares outstanding at | | | | | |
December 31, 2010 and June 30, 2010 | | 28,950 | | 28,950 | |
Paid-in capital | | 18,059,366 | | 18,056,714 | |
Retained earnings - substantially restricted | | 20,998,870 | | 22,538,555 | |
Treasury stock - at cost; 1,344,221 shares | | (19,112,627) | | (19,112,627) | |
Accumulated other comprehensive income | | 569,053 | | 1,099,369 | |
Total stockholders' equity | | 20,543,612 | | 22,611,231 | |
Total liabilities and stockholders' equity | $ | 204,484,984 | $ | 211,656,973 | |
| | | | | |
See notes to consolidated financial statements |
FIRST BANCSHARES, INC. AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited) |
| | December 31, | | | June 30, | |
| | 2011 | | | 2011 | |
| | | | | | |
ASSETS | | | | | | |
Cash and cash equivalents | | $ | 18,673,314 | | | $ | 24,798,915 | |
Certificates of deposit purchased | | | 250,000 | | | | 2,939,675 | |
Securities available-for-sale | | | 65,010,336 | | | | 54,080,467 | |
Securities held to maturity, fair market value at: | | | | | | | | |
December 31, 2011, $5,849,166; June 30, 2011, $18,193,227 | | | 5,770,670 | | | | 18,145,893 | |
Federal Home Loan Bank stock, at cost | | | 428,800 | | | | 428,800 | |
Loans receivable, net of allowances for loan losses at: | | | | | | | | |
December 31, 2011, $1,666,325; June 30, 2011, $1,982,599 | | | 94,280,054 | | | | 95,816,656 | |
Loans held for sale | | | - | | | | 61,140 | |
Accrued interest receivable | | | 702,480 | | | | 778,420 | |
Prepaid FDIC insurance premiums | | | 721,355 | | | | 752,998 | |
Prepaid expenses | | | 273,916 | | | | 439,677 | |
Property and equipment, net | | | 5,649,971 | | | | 5,897,731 | |
Real estate owned and other repossessed assets | | | 3,356,872 | | | | 4,913,828 | |
| | | 60,067 | | | | 85,126 | |
Income taxes recoverable | | | 53,751 | | | | 138,360 | |
Bank-owned life insurance | | | 3,032,396 | | | | - | |
Other assets | | | 40,415 | | | | 66,123 | |
Total assets | | $ | 198,304,397 | | | $ | 209,343,809 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
Deposits | | $ | 171,995,638 | | | $ | 180,660,992 | |
Retail repurchase agreements | | | 5,140,732 | | | | 6,416,491 | |
Advances from Federal Home Loan Bank | | | 3,000,000 | | | | 3,000,000 | |
Accrued expenses | | | 1,060,533 | | | | 1,201,657 | |
Total liabilities | | | 181,196,903 | | | | 191,279,140 | |
| | | | | | | | |
Preferred stock, $.01 par value; 2,000,000 shares | | | | | | | | |
authorized, none issued | | | - | | | | - | |
Common stock, $.01 par value; 8,000,000 shares | | | | | | | | |
authorized, 2,895,036 issued at December 31, 2011 | | | | | | | | |
and June 30, 2011, 1,550,815 shares outstanding at | | | | | | | | |
December 31, 2011 and June 30, 2011 | | | 28,950 | | | | 28,950 | |
Paid-in capital | | | 18,062,191 | | | | 18,061,442 | |
Retained earnings - substantially restricted | | | 17,487,366 | | | | 18,437,566 | |
Treasury stock - at cost; 1,344,221 shares | | | (19,112,627 | ) | | | (19,112,627 | ) |
Accumulated other comprehensive income | | | 641,614 | | | | 649,338 | |
Total stockholders' equity | | | 17,107,494 | | | | 18,064,669 | |
Total liabilities and stockholders' equity | | $ | 198,304,397 | | | $ | 209,343,809 | |
| | | | | | | | |
| | | | | | | | |
See notes to consolidated financial statements | |
|
FIRST BANCSHARES, INC. AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) |
| | | | | | | | | | | | |
| | Three Months Ended | | | Six Months Ended | |
| | December 31, | | | December 31, | |
| | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| | | | | | | | | | | | |
Interest Income: | | | | | | | | | | | | |
Loans receivable | | $ | 1,320,726 | | | $ | 1,525,133 | | | $ | 2,651,562 | | | $ | 3,131,791 | |
Securities | | | 327,971 | | | | 521,609 | | | | 808,635 | | | | 1,076,635 | |
Other interest-earning assets | | | 13,620 | | | | 46,783 | | | | 38,058 | | | | 88,784 | |
Total interest income | | | 1,662,317 | | | | 2,093,525 | | | | 3,498,255 | | | | 4,297,210 | |
Interest Expense: | | | | | | | | | | | | | | | | |
Deposits | | | 325,324 | | | | 485,101 | | | | 669,419 | | | | 1,085,267 | |
Retail repurchase agreements | | | 19,290 | | | | 19,647 | | | | 41,105 | | | | 38,387 | |
Borrowed funds | | | 37,874 | | | | 37,873 | | | | 75,747 | | | | 75,747 | |
Total interest expense | | | 382,488 | | | | 542,621 | | | | 786,271 | | | | 1,199,401 | |
Net interest income | | | 1,279,829 | | | | 1,550,904 | | | | 2,711,984 | | | | 3,097,809 | |
Provision for loan losses | | | 18,204 | | | | 408,000 | | | | 73,840 | | | | 471,181 | |
Net interest income after | | | | | | | | | | | | | | | | |
provision for loan losses | | | 1,261,625 | | | | 1,142,904 | | | | 2,638,144 | | | | 2,626,628 | |
Non-interest Income: | | | | | | | | | | | | | | | | |
Service charges and other fee income | | | 208,170 | | | | 255,144 | | | | 433,204 | | | | 537,864 | |
Gain on sale of loans | | | - | | | | 739 | | | | 3,036 | | | | 3,109 | |
Gain (loss) on sale of investments | | | (17,561 | ) | | | - | | | | 96,401 | | | | - | |
Gain (loss) on sale of property and | | | | | | | | | | | | | | | | |
equipment and real estate owned | | | 9,713 | | | | 6,456 | | | | (35,986 | ) | | | (59,250 | ) |
Provision for loss on real estate owned | | | (584,410 | ) | | | (500,000 | ) | | | (591,691 | ) | | | (500,000 | ) |
Income from bank-owned life insurance | | | 24,426 | | | | - | | | | 32,396 | | | | - | |
Other | | | 13,968 | | | | 12,032 | | | | 24,709 | | | | 79,401 | |
Total non-interest income | | | (345,694 | ) | | | (225,629 | ) | | | (37,931 | ) | | | 61,124 | |
Non-interest Expense: | | | | | | | | | | | | | | | | |
Compensation and employee benefits | | | 856,449 | | | | 852,382 | | | | 1,790,499 | | | | 1,719,126 | |
Occupancy and equipment | | | 329,483 | | | | 328,372 | | | | 647,330 | | | | 654,249 | |
Professional fees | | | 149,118 | | | | 180,193 | | | | 403,447 | | | | 345,726 | |
Deposit insurance premiums | | | (86,931 | ) | | | 108,654 | | | | 37,889 | | | | 215,817 | |
Other | | | 244,703 | | | | 639,820 | | | | 586,639 | | | | 1,004,886 | |
Total non-interest expense | | | 1,492,822 | | | | 2,109,421 | | | | 3,465,804 | | | | 3,939,804 | |
Loss before taxes | | | (576,891 | ) | | | (1,192,146 | ) | | | (865,591 | ) | | | (1,252,052 | ) |
Income taxes | | | 84,609 | | | | 281,494 | | | | 84,609 | | | | 287,633 | |
Net loss | | $ | (661,500 | ) | | $ | (1,473,640 | ) | | $ | (950,200 | ) | | $ | (1,539,685 | ) |
| | | | | | | | | | | | | | | | |
Earnings (loss) per share – basic | | $ | (0.43 | ) | | $ | (0.95 | ) | | $ | (0.61 | ) | | $ | (0.99 | ) |
Earnings (loss) per share – diluted | | | (0.43 | ) | | | (0.95 | ) | | | (0.61 | ) | | | (0.99 | ) |
Dividends per share | | | 0.00 | | | | 0.00 | | | | 0.00 | | | | 0.00 | |
| | | | | | | | | | | | | | | | |
See notes to consolidated financial statements | | | | | | | | | |
FIRST BANCSHARES, INC. AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) |
| | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | December 31, | | December 31, |
| | 2010 | | 2009 | | 2010 | | 2009 |
| | | | | | | | |
Interest Income: | | | | | | | | |
Loans receivable | $ | 1,525,133 | $ | 1,933,255 | $ | 3,131,791 | $ | 4,048,313 |
Securities | | 521,609 | | 494,105 | | 1,076,635 | | 994,723 |
Other interest-earning assets | | 46,783 | | 66,620 | | 88,784 | | 114,816 |
Total interest income | | 2,093,525 | | 2,493,980 | | 4,297,210 | | 5,157,852 |
Interest Expense: | | | | | | | | |
Deposits | | 485,101 | | 788,390 | | 1,085,267 | | 1,652,598 |
Retail repurchase agreements | | 19,647 | | 14,385 | | 38,387 | | 31,888 |
Borrowed funds | | 37,873 | | 48,762 | | 75,747 | | 106,671 |
Total interest expense | | 542,621 | | 851,537 | | 1,199,401 | | 1,791,157 |
Net interest income | | 1,550,904 | | 1,642,443 | | 3,097,809 | | 3,366,695 |
Provision for loan losses | | 408,000 | | (51,324) | | 471,181 | | - |
Net interest income after | | | | | | | | |
provision for loan losses | | 1,142,904 | | 1,693,767 | | 2,626,628 | | 3,366,695 |
Non-interest Income: | | | | | | | | |
Service charges and other fee income | | 255,144 | | 398,197 | | 537,864 | | 842,592 |
Gain on sale of loans | | 739 | | 2,689 | | 3,109 | | 32,404 |
Gain (loss) on sale of property and | | | | | | | | |
equipment and real estate owned | | 6,456 | | (5,365) | | (59,250) | | 42,482 |
Provision for loss on real estate owned | | (500,000) | | (93,000) | | (500,000) | | (128,000) |
Income from bank-owned life insurance | | - | | - | | - | | 15,064 |
Other | | 12,032 | | 33,200 | | 79,401 | | 61,241 |
Total non-interest income | | (225,629) | | 335,721 | | 61,124 | | 865,783 |
Non-interest Expense: | | | | | | | | |
Compensation and employee benefits | | 852,382 | | 912,342 | | 1,719,126 | | 1,846,317 |
Occupancy and equipment | | 328,372 | | 316,442 | | 654,249 | | 699,701 |
Professional fees | | 180,193 | | 140,455 | | 345,726 | | 263,617 |
Deposit insurance premiums | | 108,654 | | 177,876 | | 215,817 | | 264,526 |
Other | | 639,820 | | 327,357 | | 1,004,886 | | 662,190 |
Total non-interest expense | | 2,109,421 | | 1,874,472 | | 3,939,804 | | 3,736,351 |
Income (loss) before taxes | | (1,192,146) | | 155,016 | | (1,252,052) | | 496,127 |
Income taxes | | 281,494 | | 108,475 | | 287,633 | | 250,233 |
Net income (loss) | $ | (1,473,640) | $ | 46,541 | $ | (1,539,685) | $ | 245,894 |
| | | | | | | | |
Earnings (loss) per share – basic | $ | (0.95) | $ | 0.03 | $ | (0.99) | $ | 0.16 |
Earnings (loss) per share – diluted | | (0.95) | | 0.03 | | (0.99) | | 0.16 |
Dividends per share | | 0.00 | | 0.00 | | 0.00 | | 0.00 |
| | | | | | | | |
See notes to consolidated financial statements | | | | |
| | | | | | | | |
FIRST BANCSHARES, INC. AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) |
| | | | | | | | |
| | | | | | |
| | Three Months Ended | | Six Months Ended |
| | December 31, | | December 31, |
| | 2010 | | 2009 | | 2010 | | 2009 |
| | | | |
| | | | | | | | |
Net Income (loss) | $ | (1,473,640) | $ | 46,541 | $ | (1,539,685) | $ | 245,894 |
| | | | | | | | |
Other comprehensive income (loss), net of tax: | | | | | | | | |
Change in unrealized gain (loss) on securities | | | | | | | | |
available-for-sale, net of deferred income | | | | | | | | |
taxes and reclassification adjustment for | | | | | | | | |
gains realized in income | | (518,719) | | (201,000) | | (530,586) | | 6,880 |
| | | | | | | | |
Comprehensive income (loss) | $ | (1,992,359) | $ | (154,459) | $ | (2,070,271) | $ | 252,774 |
| | | | | | | | |
| | | | | | | | |
See notes to consolidated financial statements | | | | |
| | | | | | | | |
| | | | | | | | |
FIRST BANCSHARES, INC. AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) |
| | | | | | | | | | | | |
| | | | | | | | | |
| | Three Months Ended | | | Six Months Ended | |
| | December 31, | | | December 31, | |
| | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| | | | | | |
Net Income (loss) | | $ | (661,500 | ) | | $ | (1,473,640 | ) | | $ | (950,200 | ) | | $ | (1,539,685 | ) |
Other comprehensive income (loss), net of tax: | | | | | | | | | | | | | | | | |
Change in unrealized gain (loss) on securities | | | | | | | | | | | | | | | | |
available-for-sale, net of deferred income | | | | | | | | | | | | | | | | |
taxes and reclassification adjustment for | | | | | | | | | | | | | | | | |
gains realized in income | | | 28,279 | | | | (518,719 | ) | | | (7,724 | ) | | | (530,586 | ) |
Comprehensive income (loss) | | $ | (633,221 | ) | | $ | (1,992,359 | ) | | $ | (957,924 | ) | | $ | (2,070,271 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
See notes to consolidated financial statements | | | | | | | | | |
FIRST BANCSHARES, INC. AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) |
| | | | |
| | Six Months Ended December 31, |
| | 2010 | | 2009 |
Cash flows from operating activities: | | | | |
Net income (loss) | $ | (1,539,685) | $ | 245,894 |
Adjustments to reconcile net income (loss) to net | | | | |
cash provided by operating activities: | | | | |
Depreciation | | 278,469 | | 278,480 |
Amortization | | 25,058 | | 25,057 |
Net amortization of premiums and accretion of (discounts) on securities | | (61,268) | | (54,501) |
Stock based compensation | | 2,652 | | 5,108 |
Provision for loan losses | | 471,181 | | - |
Provision for losses on real estate owned | | 500,000 | | 128,000 |
Gain on the sale of loans | | (3,109) | | (32,404) |
Proceeds from sales of loans originated for sale | | 774,386 | | 955,960 |
Loans originated for sale | | (859,576) | | (83,380) |
Deferred income taxes | | 273,332 | | 868,548 |
Loss (gain) on sale of property and equipment | | | | |
and real estate owned | | 20,939 | | (42,063) |
Loss on sale of repossessed assets | | 38,311 | | - |
Income from bank-owned life insurance | | - | | (15,064) |
Net change in operating accounts: | | | | |
Accrued interest receivable and other assets | | 341,012 | | (1,248,837) |
Deferred loan costs | | 2,637 | | (752) |
Income taxes recoverable | | 14,301 | | (619,665) |
Accrued expenses | | 80,937 | | (723,342) |
Net cash provided by operating activities | | 359,577 | | (312,961) |
| | | | |
Cash flows from investing activities: | | | | |
Purchase of certificates of deposit purchased | | (2,399,000) | | (4,558,392) |
Maturities of certificates of deposit purchased | | 3,149,000 | | 1,795,407 |
Purchase of securities available-for-sale | | (28,204,156) | | (10,158,091) |
Proceeds from maturities of securities available-for-sale | | 23,510,326 | | 9,987,349 |
Purchase of securities held to maturity | | (7,000,000) | | - |
Proceeds from maturities of securities held to maturity | | 518,034 | | 384,587 |
Proceeds from redemption of Federal Home Loan Bank stock | | - | | 1,107,000 |
Net decrease in loans receivable | | 4,730,268 | | 10,355,267 |
Proceeds from redemption of bank owned life insurance policies | | - | | 2,169,089 |
Purchases of property and equipment | | (294,404) | | (109,554) |
Net proceeds from sale of property and equipment | | - | | 313,471 |
Investment in real estate owned and repossessed assets | | (6,500) | | - |
Net proceeds from sale of real estate owned and repossessed assets | | 334,256 | | 996,194 |
Net cash provided by investing activities | | (5,662,176) | | 12,282,327 |
| | | | |
Cash flows from financing activities: | | | | |
Net change in deposits | | (4,904,704) | | (10,167,288) |
Net change in retail repurchase agreements | | (280,603) | | (2,163,858) |
Repayment of borrowed funds | | - | | (7,000,000) |
Net cash used by financing activities | | (5,185,307) | | (19,331,146) |
| | | | |
Net increase in cash and cash equivalents | | (10,487,906) | | (7,361,780) |
Cash and cash equivalents - beginning of period | | 20,182,593 | | 26,217,607 |
Cash and cash equivalents - end of period | $ | 9,694,687 | $ | 18,855,827 |
| | | | |
Supplemental disclosures of cash flow information: | | | | |
Cash paid during the period for: | | | | |
Interest on deposits and borrowed funds | $ | 1,243,862 | $ | 1,936,585 |
Income taxes | | - | | 350 |
| | | | |
Supplemental schedule of non-cash investing and financing activities: | | | | |
Loans transferred to real estate acquired in settlement of loans | $ | 2,222,963 | $ | 3,309,362 |
| | | | |
See notes to consolidated financial statements | | | | |
FIRST BANCSHARES, INC. AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) |
| | | | | | |
| | Six Months Ended | |
| | December 31, | |
| | 2011 | | | 2010 | |
Cash flows from operating activities: | | | | | | |
Net loss | | $ | (950,200 | ) | | $ | (1,539,685 | ) |
Adjustments to reconcile net loss to net | | | | | | | | |
cash provided by operating activities: | | | | | | | | |
Depreciation | | | 264,414 | | | | 278,469 | |
Amortization | | | 25,059 | | | | 25,058 | |
Net amortization of premiums and accretion of (discounts) on securities | | | 199,901 | | | | (61,268 | ) |
Stock based compensation | | | 749 | | | | 2,652 | |
Gain on the sale of securities | | | (96,401 | ) | | | - | |
Provision for loan losses | | | 73,840 | | | | 471,181 | |
Provision for losses on real estate owned | | | 591,691 | | | | 500,000 | |
Gain on the sale of loans | | | (3,036 | ) | | | (3,109 | ) |
Proceeds from sales of loans originated for sale | | | 64,176 | | | | 774,386 | |
Loans originated for sale | | | - | | | | (859,576 | ) |
Deferred income taxes | | | 84,609 | | | | 273,332 | |
Loss on sale of property and equipment | | | | | | | | |
and real estate owned | | | 35,986 | | | | 20,939 | |
Loss on sale of other repossessed assets | | | - | | | | 38,311 | |
Income from bank-owned life insurance | | | (32,396 | ) | | | - | |
Net change in operating accounts: | | | | | | | | |
Accrued interest receivable and other assets | | | 277,409 | | | | 341,012 | |
Deferred loan costs | | | 12,265 | | | | 2,637 | |
Income taxes recoverable | | | - | | | | 14,301 | |
Prepaid FDIC insurance premium | | | 31,642 | | | | - | |
Accrued expenses | | | (137,144 | ) | | | 80 937 | |
Net cash provided by operating activities | | | 442,565 | | | | 359,577 | |
| | | | | | | | |
Cash flows from investing activities: | | | | | | | | |
Purchase of certificates of deposit purchased | | | - | | | | (2,399,000 | ) |
Maturities of certificates of deposit purchased | | | 2,689,675 | | | | 3,149,000 | |
Purchase of securities available-for-sale | | | (50,485,174 | ) | | | (28,204,156 | ) |
Sale of securities available-for-sale | | | 26,164,795 | | | | - | |
Proceeds from maturities of securities available-for-sale | | | 13,285,135 | | | | 23,510,326 | |
Purchase of securities held to maturity | | | - | | | | (7,000,000 | ) |
Proceeds from maturities of securities held to maturity | | | 12,372,955 | | | | 518,034 | |
Net decrease in loans receivable | | | 1,104,189 | | | | 4,730,268 | |
Purchase of bank owned life insurance | | | (3,000,000 | ) | | | - | |
Purchases of property and equipment | | | (168,348 | ) | | | (294,404 | ) |
Investment in real estate owned and repossessed assets | | | - | | | | (6,500 | ) |
Proceeds of insurance claim on repossessed assets | | | 1,787 | | | | - | |
Proceeds from sale of real estate held for investment | | | 134,133 | | | | - | |
Net proceeds from sale of real estate owned and repossessed assets | | | 1,273,800 | | | | 334,256 | |
Net cash provided (used by) by investing activities | | | 3,372,947 | | | | (5,662,176 | ) |
| | | | | | | | |
Cash flows from financing activities: | | | | | | | | |
Net change in deposits | | | (8,665,354 | ) | | | (4,904,704 | ) |
Net change in retail repurchase agreements | | | (1,275,759 | ) | | | (280,603 | ) |
Net cash used by financing activities | | | (9,941,113 | ) | | | (5,185,307 | ) |
| | | | | | | | |
Net increase in cash and cash equivalents | | | (6,125,601 | ) | | | (10,487,906 | ) |
Cash and cash equivalents - beginning of period | | | 24,798,915 | | | | 20,182,593 | |
Cash and cash equivalents - end of period | | $ | 18,673,314 | | | $ | 9,694,687 | |
| | | | | | | | |
Supplemental disclosures of cash flow information: | | | | | | | | |
Cash paid during the period for: | | | | | | | | |
Interest on deposits and borrowed funds | | $ | 794,851 | | | $ | 1,243,862 | |
Income taxes | | | - | | | | - | |
| | | | | | | | |
Supplemental schedule of non-cash investing and financing activities: | | | | | | | | |
Loans transferred to real estate acquired in settlement of loans | | $ | 346,308 | | | $ | 2,222,963 | |
| | | | | | | | |
See notes to consolidated financial statements
FIRST BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed for interim reporting by First Bancshares, Inc. (the "Company") and its consolidated subsidiaries, First Home Savings Bank (the "Bank") and SCMG, Inc. are consistent with the accounting policies followed for annual financial reporting. All adjustments that, in the opinion of management, are necessary for a fair presentation of the results for the periods reported have been included in the accompanying unaudited consolidated financial statements, and all such adjustments are of a normal recurring nature. The accompanying consolidated statement of financial condition as of June 30, 2010,2011, which has been derived from audited financial statements, and the unaudited interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC& #8221;“SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s latest shareholders’ Annual Report on Form 10-K for the year ended June 30, 2010.2011. The results for these interim periods may not be indicative of results for the entire year or for any other period.
2. | ACCOUNTING DEVELOPMENTS |
Accounting Standards Codification. TheIn January 2011, the Financial Accounting Standards Board’sBoard (“FASB”) issued FASB Accounting Standards CodificationStandard Update (“ASC”ASU”) became effective on July 1, 2009. At that date, the ASC became FASB’s officially recognized source of authoritative U. S. generally accepted accounting principles applicable to all public and non-public non-governmental entities, superseding existing FASB, American Institute of Certified Public Accountants (“AICPA”)No. 2011-01, Receivables (Topic 310), Emerging Issues Task Force (“EITF”) and related literature. Rules and interpretive releasesDeferral of the SEC under the authority federal securities laws are also sourcesEffective Date of GAAP for SEC registrants. All other accounting literature is considered non-authoritative. The switch t o the ASC affects the way companies refer to U. S. GAAP in financial statements and accounting policies. Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820); Improving Disclosures about Fair Value Measurements. Troubled Debt Restructurings in Update No. 2010-20. ASU 2010-06 requires newNo. 2011-01 temporarily deferred the effective date for disclosures on transfers into and outrelated to troubled debt restructurings to coincide with the effective date of Level 1 and 2 measurements of the fair value hierarchy and requires separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures relating to the level of disaggregation and inputs and valuation techniques used to measure fair value. ItASU No. 2011-02, which is effective for the first reporting period (including interim periods)periods beginning on or after DecemberJune 15, 2009, except for the requirement to provide the Level 3 activity of purchase, sales, issuances, and settlements on a gross basis, which wil l be effective for fiscal years beginning after December 15, 2010.2011. The adoption of this pronouncement has not had a significant impact on the Company’s consolidated financial statements.
In April 2010,2011, the FASB issued FASB ASU No. 2011-02, Receivables (Topic 310), A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. This guidance will assist creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. The guidance is effective for the first interim or annual period beginning on or after June 15, 2011. The adoption of this pronouncement has not had a significant impact on the Company’s consolidated financial statements.
In May 2011, the FASB issued FASB ASU No. 2011-04, Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”). This guidance amends previous guidance on fair value measurement to achieve common fair value measurement and disclosure requirement in GAAP and IFRS. The guidance is effective for the first interim or annual period beginning after December 15, 2011. The adoption of this pronouncement has not had a significant impact on the Company’s consolidated financial statements.
In June 2011, the FASB issued FASB ASU No. 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income. This guidance improves the comparability, consistency and transparency of financial reporting and increases the prominence of items reported in other comprehensive income. The guidance will facilitate convergence of GAAP and IFRS. The guidance is effective for the annual periods, and interim periods within those years, beginning after December 15, 2011. In December 2011, the FASB issued ASU No. 2010-18,2011-12, Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset—a consensusComprehensive Income (Topic 220) – Deferral of the FASB Emerging Issues Task Force (Topic 310)Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05. ASU No. 2010-18 clarifies that a creditorWhile the FSAB is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should not applycontinue to report reclassification out of accumulated other comprehensive income consistent with the
specific guidance
presentation requirements in ASC 310, Receivables, 40, effect before ASU 2011-05. If ASU 2011-05 is adopted as originally presented, management does not believe it will have a significant impact on the Company’s consolidated financial statements.
Troubled Debt RestructuringsIn September 2011, the FASB issued FASB ASU No. 2011-09, Compensation-Retirement Benefits-Multiemployer Plans (Subtopic 715-80), Disclosures about an Employer’s Participation in a Multiemployer Plan, An Amendment of the FASB Accounting Standards Codification. The amendments create greater transparency in financial reporting by Creditorsrequiring additional disclosures about an employer’s participation in a multiemployer pension plan. The additional disclosures will increase awareness about the commitments that an employer has made to a multiemployer pension plan and the potential future cash flow implications of an employer’s participation in the plan. The adoption of this pronouncement will not have a significant impact on the Company’s consolidated financial statements.
In December 2011, FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, in conjunction with the International Accounting Standards Board's issuance of amendments to acquired loans accountedDisclosures - Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7). While the boards retained the existing offsetting models under U.S. GAAP and IFRS, the new standards require disclosures to allow investors to better compare financial statements prepared under U.S. GAAP with financial statements prepared under IFRS. The new standards are effective for as a pooled asset under ASC 310-30, Loansannual periods beginning January 1, 2013, and Debt Securities Acquiredinterim periods within those annual periods. Retrospective application is required. The amendments in this update will enhance disclosures required by U.S. GAAP by requiring improved information about financial instruments and derivative instruments that are either (1) offset in accordance with Deteriorated Credit Quality. However, that guidanceeither Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in ASC 310-30 continuesaccordance with either Section 210-20-45 or Section 815-10-45. This information will enable users of an entity’s financial statements to apply to acquired loans withinevaluate the effect or potential effect of netting arrangements on an entity’s financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments in the scope of ASC 310-30 that a creditor accounts for individually. This amended guidance is effective for a modification of a loan(s) accounted for within a pool under ASC 310-30 occurring in the first interim or annual period ending on or after July 15, 2010.this update. The amended guidance must be applied prospectively, and early application is permitted. Upon initial application of the amended guidance, an entity may make a one-time election to terminate accounting for loans as a pool under ASC 310-30. An entity may make the election on a pool-by-pool basis. The election does not preclude an entity from applying pool accounting to future acquisitions of loans with credit deterioration. The implementationadoption of this ASUstandard is not expected to have a material impact on the Company’s consolidated financial statements.
3 LOANS RECEIVABLE, NET
In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, which requires significant new disclosures about the allowance for credit losses (also known as “allowance for estimated losses on loans/leases”) and the credit quality of financing receivables. The requirements are intended to enhance transparency regarding credit losses and the credit quality of loan and lease receivables. Under this statement, allowance for credit losses and fair value are to be disclosed by portfolio segment, while credit quality information, impaired financing receivables and nonaccrual status are to be presented by class of financing receivable. Disclosure of the nature and extent, the financial impa ct and segment information of troubled debt restructurings will also be required. The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the portfolio’s risk and performance. This ASU is effective for interim and annual reporting periods ending on or after December 15, 2010. The Company include these disclosures in the notes to the financial statements for the quarter ended December 31, 2010. | At December 31, 2011 and June 30, 2011, loans consisted of the following: |
| | (Dollars in thousands) | |
| | December 31, 2011 | | | June 30, 2011 | |
Type of Loan | | Amount | | | Percent | | | Amount | | | Percent | |
Mortgage Loans: | | | | | | | | | | | | |
Residential | | $ | 53,024 | | | | 55.37 | % | | $ | 54,860 | | | | 56.22 | % |
Commercial Real Estate | | | 30,902 | | | | 32.27 | | | | 29,877 | | | | 30.61 | |
Land | | | 3,381 | | | | 3.53 | | | | 3,283 | | | | 3.36 | |
Second Mortgage Loans | | | 3,750 | | | | 3.91 | | | | 3,945 | | | | 4.04 | |
Total Mortgage Loans | | | 91,057 | | | | 95.08 | | | | 91,965 | | | | 94.23 | |
Consumer Loans: | | | | | | | | | | | | | | | | |
Automobile Loans | | | 688 | | | | 0.72 | | | | 807 | | | | 0.83 | |
Savings Account Loans | | | 964 | | | | 1.01 | | | | 1,143 | | | | 1.17 | |
Mobile Home Loans | | | 112 | | | | 0.12 | | | | 139 | | | | 0.14 | |
Other Consumer Loans | | | 191 | | | | 0.20 | | | | 245 | | | | 0.25 | |
Total Consumer Loans | | | 1,955 | | | | 2.05 | | | | 2,334 | | | | 2.39 | |
Commercial Business Loans | | | 2,748 | | | | 2.87 | | | | 3,302 | | | | 3.38 | |
Total Loans | | | 95,760 | | | | 100.00 | % | | | 97,601 | | | | 100.00 | % |
Add: Unamortized deferred loan costs, | | | | | | | | | | | | | | | | |
net of origination fees | | | 186 | | | | | | | | 199 | | | | | |
Less: Allowance for possible loan losses | | | 1,666 | | | | | | | | 1,983 | | | | | |
Total Loans Receivable, net | | $ | 94,280 | | | | | | | $ | 95,817 | | | | | |
| At December 31, 2010 and June 30, 2010, loans consisted of the following: |
| | (Dollars in thousands) | |
| | December 31, 2010 | | June 30, 2010 | |
| Type of Loan | Amount | Percent | | Amount | Percent | |
Mortgage Loans: | | | | | | |
| Residential | $ 57,766 | 55.78 | % | $ 60,217 | 54.24 | % |
| Commercial Real Estate | 31,225 | 30.15 | | 34,573 | 31.15 | |
| Land | 3,874 | 3.74 | | 4,358 | 3.93 | |
| Second Mortgage Loans | 4,383 | 4.23 | | 4,469 | 4.03 | |
| Total Mortgage Loans | 97,248 | 93.90 | | 103,617 | 93.35 | |
| | | | | | | |
Consumer Loans: | | | | | | |
| Automobile Loans | 948 | 0.92 | | 1,127 | 1.02 | |
| Savings Account Loans | 1,099 | 1.06 | | 1,181 | 1.06 | |
| Mobile Home Loans | 158 | 0.15 | | 188 | 0.17 | |
| Other Consumer Loans | 273 | 0.26 | | 392 | 0.35 | |
| Total Consumer Loans | 2,478 | 2.39 | | 2,888 | 2.60 | |
| | | | | | | |
| Commercial Business Loans | 3,842 | 3.71 | | 4,491 | 4.05 | |
| | | | | | | |
| Total Loans | 103,568 | 100.00 | % | 110,996 | 100.00 | % |
Add: | | | | | | |
| Unamortized deferred loan costs, | | | | | | |
| net of origination fees | 214 | | | 214 | | |
Less: | | | | | | |
| Allowance for possible loan losses | 2,522 | | | 2,527 | | |
Total Loans Receivable, net | $ 101,256 | | | $ 108,683 | | |
Loan Origination'Origination Risk Management. The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.
Commercial business and commercial real estate loans are underwritten after evaluating and understanding the borrower's ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Once it is determined that the borrower's management possesses sound ethics and solid business acumen, the Company's management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial business loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most comme rcialcommercial business loans are secured by the assets being financed, or other
including business assets such as accounts receivable or inventoryequipment, farm equipment and cattle and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.
Commercial real estate loans are subject to underwriting standards and processes similar to commercial business loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company's commercial real estate portfolio are diverse in terms of type and geographic location. This diversity helps reduce the Company's exposure to adverse e conomiceconomic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. As a general rule, the Company avoids financing single-purpose projects unless other underwriting factors are present to help mitigate risk. The Company also utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. At December 31, 2010, 62.4%2011, approximately 26.8% of the outstanding principal balancebalances of the Company's commercial real estate loans were secured by owner-occupied properties.
With respect to loans to developers and builders that are secured by non-owner occupied properties that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.
The Company originates consumer loans utilizing a computer-based credit scoring analysis to supplement the underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by line and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend and outlook reports are reviewed by management on a
regular basis. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value, collection remedies, the total aggregate balance to one borrower and documentation requirements.
The Company maintainsemploys an independent, loan review department thatoutside consultant who reviews and validates the credit risk program on a periodic basis. Results of these reviews are
presented to management.management and the Board of Directors. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company's policies and procedures.
Concentrations of Credit. Most of the Company's lending activity occurs within the State of Missouri, including eleven counties surrounding one of the largest metropolitan areaareas in the State of Missouri, Springfield, as well as other markets. The majority of the Company's loan portfolio consists of 1-4one-to-four family home loans, and commercial business and commercial real estate loans. As of December 31, 20102011 and 2009,June 30, 2011, there were no concentrations of loans related to any single industry in excess of 10% of total loans.
Related Party Loans. In the ordinary course of business, the Company has granted loans to certain directors, executive officers and their affiliates (collectively referred to as "related parties"). These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other unaffiliated persons and do not involve more than normal risk of collectability. Activity in related party loans during the six months ended December 31, 20102011 is presented in the following table.
| | (In Thousands) |
Balance outstanding at June 30, 20102011 | | $ 627,570103 |
Principal additions | | | | | | - |
Principal reductions | | | | | | (26,331)(13) |
Balance at December 31, 20102011 | | | | $ 601,23990 |
Non-Accrual and Past Due Loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management's opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Non-accrual loans segregated by class of loan at December 31, 20102011 and June 30, 20102011 were as follows:
| | (In Thousands) | |
| | December 31, 2011 | | | June 30, 2011 | |
Non-Accrual Loans | | | | | | |
Real Estate: | | | | | | |
Residential | | $ | 50 | | | $ | 452 | |
Commercial and Land | | | 461 | | | | 630 | |
Commercial Business | | | 81 | | | | 251 | |
Consumer | | | 6 | | | | 6 | |
Total Non-Accrual Loans | | $ | 598 | | | $ | 1,339 | |
| | | | (Dollars in Thousands) |
| | | | December 31, | | June 30, |
| | | | 2010 | | 2010 |
Non-Accrual Loans | | | | |
| Real Estate: | | | | |
| | Residential | | $ 573 | | $ 258 |
| | Commercial and Land | | 1,149 | | 3,587 |
| Commercial Business | | 76 | | 82 |
| Consumer | | - | | - |
| | Total Non-Accrual Loans | | $ 1,798 | | $ 3,927 |
| | | | | | | |
Had non-accrual loans performed in accordance with their original contract terms, the Company would have recognized additional interest income, net of tax, of approximately $24,000 during the six month period ended December 31, 2011.
approximately $32,000 and $53,000 during the three month and six month periods ended December 31, 2010.
An age analysis of past due loans, including non-accrual loans, segregated by class of loans, as of December 31, 20102011 was as follows:
| | | (In Thousands) | |
| | | Loans | | | | | | | | | |
| | | 30 - 89 Days | | 90+ Days | | Non- Accrual | | Current | | Total | |
| Type of Loan | | Past Due | | Past Due | | Loans | | Loans | | Loans | |
Mortgage Loans: | | | | | | | | | | | |
| Residential | | $ 733 | | $ - | | $ 50 | | $52,241 | | $53,024 | |
| Commercial Real Estate | | 88 | | - | | 368 | | 30,446 | | 30,902 | |
| Land | | 3 | | - | | 93 | | 3,285 | | 3,381 | |
| Second Mortgage Loans | | 42 | | - | | - | | 3,708 | | 3,750 | |
| Total Mortgage Loans | | 866 | | - | | 511 | | 89,680 | | 91,057 | |
Consumer Loans: | | | | | | | | | | | |
| Automobile Loans | | 10 | | - | | 6 | | 672 | | 688 | |
| Savings Account Loans | | - | | - | | - | | 964 | | 964 | |
| Mobile Home Loans | | - | | - | | - | | 112 | | 112 | |
| Other Consumer Loans | | - | | - | | - | | 191 | | 191 | |
| Total Consumer Loans | | 10 | | - | | 6 | | 1,939 | | 1,955 | |
| Commercial Business Loans | | - | | - | | 81 | | 2,667 | | 2,748 | |
| Total Loans | | $ 876 | | $ - | | $ 598 | | $94,286 | | $95,760 | |
| | | Loans | | | | Total | | | | |
| | | 30 - 89 Days | | Days 90+ | | Past Due | | Current | | Total |
| Type of Loan | | Past Due | | Past Due | | Loans | | Loans | | Loans |
Mortgage Loans: | | (Dollars in thousands) |
| Residential | | $ 1,234 | | $ 173 | | $ 1,407 | | $ 56,359 | | $ 57,766 |
| Commercial Real Estate | | - | | - | | - | | 31,225 | | 31,225 |
| Land | | - | | 25 | | 25 | | 3,849 | | 3,874 |
| Second Mortgage Loans | | 10 | | - | | 10 | | 4,373 | | 4,383 |
| Total Mortgage Loans | | 1,244 | | 198 | | 1,442 | | 95,806 | | 97,248 |
Consumer Loans: | | | | | | | | | | |
| Automobile Loans | | 14 | | - | | 14 | | 934 | | 948 |
| Savings Account Loans | | - | | - | | - | | 1,099 | | 1,099 |
A modification of a loan constitutes a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Company offers various types of concessions when modifying a loan. These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, interest rates below market rates, loan maturity extensions, forbearance agreements, forgiveness of principal, extended amortizations, additional extensions of credit that creates a credit balance that exceeds the collateral value, or other actions. Certain TDRs are classified as nonperforming at the time of restructuring and typically are returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period of at least six months. However, such loans would as TDRs until the borrower's sustained repayment performance is at least twelve months.
When the Company modifies a loan in a TDR, it evaluates any possible impairment similar to other impaired loans based on the current fair value of the collateral, less selling costs for collateral dependent loans. Loans may also be valued based on a discounted cash flow analysis at the loan’s effective interest rate. If it is determined that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs) impairment is recognized through an allowance estimate or a charge-off to the allowance. In periods subsequent to modifications, all TDRs are evaluated, including those that have payment defaults, for possible impairment and recognize impairment through the allowance.
Performing loans classified as TDRs during the six months ended December 31, 2011, segregated by class, are shown in the table below:
Six months ended December 31, 2011 | | |
| | | | | Recorded | | | |
| | | | | Investment | | | |
| | Number of | | | with no | | | Related |
Type of Loan | | Contracts | | | Allowance | | | Allowance |
| | | (In Thousands) |
Mortgage Loans: | | | | | | | | |
Residential | | | - | | | | - | | | | - | |
Commercial Real Estate | | | 1 | | | $ | 474 | | | $ | 62 | |
Land | | | - | | | | - | | | | - | |
Second Mortgage Loans | | | - | | | | - | | | | - | |
| | | | | | | | | | | | |
Total Mortgage Loans | | | 1 | | | | 474 | | | | 62 | |
| Mobile Home Loans | | - | | - | | - | | 158 | | 158 |
| Other Consumer Loans | | 27 | | - | | 27 | | 246 | | 273 |
| Total Consumer Loans | | 41 | | - | | 41 | | 2,437 | | 2,478 |
| Commercial Business Loans | | 581 | | 7 | | 588 | | 3,254 | | 3,842 |
| Total Loans | | $ 1,866 | | $ 205 | | $ 2,071 | | $ 101,497 | | $103,568 |
11
| | | | | | | | | | | | |
Consumer Loans: | | | | | | | | | | | | |
Automobile Loans | | | - | | | | - | | | | - | |
Savings Account Loans | | | - | | | | - | | | | - | |
Mobile Home Loans | | | - | | | | - | | | | - | |
Other Consumer Loans | | | - | | | | - | | | | - | |
Total Consumer Loans | | | - | | | | - | | | | - | |
Commercial Business Loans | | | - | | | | - | | | | - | |
Total Loans | | | 1 | | | $ | 474 | | | $ | 62 | |
For the six months ended December 31, 2011, one commercial real estate loan was renewed and was classified as a TDR due to a reduction of the interest rate and an extension of the amortization term. The financial impact of this modification was immaterial. In addition, there was no material impact on the loan loss allowance as a result of this modification because the loan had been subject to impairment analysis and the reserve was already in place.
There were no TDR loans 90 days or more delinquent and continuing to accrue interest atduring the period July 1, 2011 through December 31, 2010.2011 that have defaulted on their restructured terms. There is one commercial real estate loan that became a TDR in the quarter ended December 31, 2010, and also defaulted on the restructured terms during the same period. The property securing the loan is currently involved in a foreclosure.
As of December 31, 2011, the Bank had $554,000 of performing loans classified as TDRs including the $474,000 commercial real estate loan in the table above which became a TDR during the six months ended December 31, 2011.
Impaired Loans. Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated on an individual loan basis for all loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to princip alprincipal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.
Impaired loans include nonperforming loans but also include loans modified in TDRs where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collections.
Year-end impairedImpaired loans at December 31, 2011 and June 30, 2011 are set forth in the following table. No interest income was recognized on impaired loans subsequent to their classification as impaired.
December 31, 2011 | | Unpaid | | | Recorded | | | Recorded | | | | | | | | | |
| | Contractual | | | Investment | | | Investment | | | Total | | | | | | Average |
| | Principal | | | With No | | | With | | | Recorded | | | Related | | | Recorded |
| | Balance | | | Allowance | | | Allowance | | | Investment | | | Allowance | | | Investment |
| | (In Thousands) |
Residential Real Estate | | $ | 468 | | | $ | 89 | | | $ | 243 | | | $ | 332 | | | $ | 137 | | | $ | 598 | |
Commercial Real Estate | | | 3,690 | | | | 1,566 | | | | 2,057 | | | | 3,623 | | | | 67 | | | | 3,323 | |
Land | | | 529 | | | | 529 | | | | - | | | | 529 | | | | - | | | | 422 | |
Commercial Business | | | 109 | | | | 104 | | | | - | | | | 104 | | | | 5 | | | | 383 | |
Consumer | | | 11 | | | | 11 | | | | - | | | | 11 | | | | - | | | | 14 | |
| | $ | 4,508 | | | $ | 2,299 | | | $ | 2,300 | | | $ | 4,599 | | | $ | 209 | | | $ | 4,740 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2010 | | | | | | | | |
| | Unpaid | | Total | | | | Average | | | |
| | Principal | | Recorded | | Related | | Recorded | | | |
| | Balance | | Investment | | Allowance | | Investment | | | |
Residential Real Estate | | $1,156,736 | | | | $ 193,601 | | $ 951,021 | | | |
Commercial Real Estate | | 4,423,535 | | 4,423,535 | | 1,049,385 | | 4,722,011 | | | |
Land | | 499,221 | | 499,221 | | 32,390 | | 481,985 | | | |
Commercial Business | | 363,200 | | 363,200 | | 65,491 | | 395,909 | | | |
Consumer | | - | | - | | - | | - | | | |
| | $6,442,692 | | $6,442,692 | | $1,340,867 | | $6,550,926 | | | |
| | | | | | | | | | | |
June 30, 2010 | | | | | | | | | | | |
| | Unpaid | | Total | | | | Average | | | |
| | Principal | | Recorded | | Related | | Recorded | | | |
| | Balance | | Investment | | Allowance | | Investment | | | |
Residential Real Estate | | $1,052,316 | | | | $ 165,719 | | $1,378,760 | | | |
Commercial Real Estate | | 7,034,762 | | 7,034,762 | | 1,041,463 | | 3,027,617 | | | |
Land | | 480,296 | | 480,296 | | 19,980 | | 1,453,010 | | | |
Commercial Business | | 587,745 | | 587,745 | | 9,356 | | 1,176,730 | | | |
Consumer | | - | | - | | - | | 3,815 | | | |
| | $9,155,119 | | $9,155,119 | | $1,236,518 | | $7,039,932 | | | |
| | | | | | | | |
12
June 30, 2011 | | | Unpaid Principal Balance | | | | Investment Allowance | | | | Recorded With Allowance | | | | Investment | | | | Allowance | | | | Investment | |
| | (In Thousands) | |
Residential Real Estate | | $ | 847 | | | $ | 460 | | | $ | 364 | | | $ | 824 | | | $ | 23 | | | $ | 913 | |
Commercial Real Estate | | | 3,694 | | | | 1,229 | | | | 1,846 | | | | 3,075 | | | | 618 | | | | 4,154 | |
Land | | | 176 | | | | 176 | | | | - | | | | 176 | | | | - | | | | 351 | |
Commercial Business | | | 829 | | | | 498 | | | | 267 | | | | 764 | | | | 65 | | | | 465 | |
Consumer | | | 14 | | | | 14 | | | | - | | | | 14 | | | | - | | | | 3 | |
| | $ | 5,560 | | | $ | 2,377 | | | $ | 2,477 | | | $ | 4,854 | | | $ | 706 | | | $ | 5,886 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Credit Quality Indicator. As part of the on-going monitoring of the credit quality of the Company's loan portfolio, management tracks certain credit quality indicators including trends related to (i) the weighted-average risk grade of commercial loans, (ii) the level of classified commercial loans, (iii) net charge-offs, (iv) non-performing loans (see details above) and (v) the general economic conditions in the State of Missouri.
The Company utilizes a risk grading matrix to assign a risk grade to each of its commercial loans. Loans are graded on a scale of 1 to 8. A description of the general characteristics of the 8 risk grades is as follows:
· | Grades 1 and 2 - These grades include loans to very high credit quality borrowers. These borrowers are generally (grades 1 and 2), generally have significant capital strength, moderate leverage, stable earnings, growth, and readily available financing alternatives. |
· | Grades 3 - This grade includes loans that are "pass grade" loans to borrowers of acceptable credit quality and risk. These borrowers have satisfactory asset quality and liquidity, adequate debt capacity and coverage, and good management in critical positions. |
· | Grades 4 - This grade includes loans that require ‘increased”increased management attention”. These borrowers generally have limited additional debt capacity and modest coverage and average or below average asset quality, margins, and market share. |
· | Grade 5 - This grade is for "Other Assets EspeciallySpecially Mentioned" in accordance with regulatory guidelines. This grade is intended to be temporary and includes loans to borrowers whose credit quality has clearly deteriorated and are at risk of further decline unless active measures are taken to correct the situation. |
· | Grade 6 - This grade includes "Substandard" loans, in accordance with regulatory guidelines, for which the accrual of interest has not been stopped. By definition under regulatory guidelines, a "Substandard" loan has defined weaknesses which make payment default or principal exposure likely, but not yet certain. Such loans are apt to be dependent upon collateral liquidation, a secondary source of repayment or an event |
| outside of the normal course of business. Also, includingincluded in "Substandard" loans, in accordance with regulatory guidelines, are loans for which the accrual of interest has been stopped. This grade includes loans where interest is more than 90 days past due and not fully secured and loans where a specific valuation allowance may be necessary. |
· | Grade 7 - This grade includes "Doubtful" loans in accordance with regulatory guidelines. Such loans are placed on non-accrual status and may be dependent upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty. Additionally, these loans generally have a specific valuation allowance in excess of 30% of the principal balance. |
· | Grade 8 - This grade includes "Loss" loans in accordance with regulatory guidelines. Such loans are to be charged-off or charged-down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. "Loss" is not intended to imply that the loan or some portion of it will never be paid, nor does it in any way imply that there has been a forgiveness of debt. |
The following tables show the outstanding balance of loans by credit quality indicator and loan segment as of December 31, 2011 and June 30, 2011:
December 31, 2011 | | | | | | | | | | | | | | | |
| | (In Thousands) | |
| | | | | Specially | | | | | | | | | | |
Type of Loan | | Pass | | | Mentioned | | | Substandard | | | Doubtful | | | Total | |
Mortgage Loans: | | | | | | | | | | | | | | | |
Residential | | $ | 52,029 | | | $ | 527 | | | $ | 459 | | | $ | 9 | | | $ | 53,024 | |
Commercial Real Estate | | | 27,041 | | | | 171 | | | | 3,690 | | | | - | | | | 30,902 | |
Land | | | 2,851 | | | | - | | | | 530 | | | | - | | | | 3,381 | |
Second Mortgage Loans | | | 3,750 | | | | - | | | | - | | | | - | | | | 3,750 | |
Total Mortgage Loans | | | 85,671 | | | | 698 | | | | 4,679 | | | | 9 | | | | 91,057 | |
Consumer Loans: | | | | | | | | | | | | | | | | | | | | |
Automobile Loans | | | 677 | | | | - | | | | 11 | | | | - | | | | 688 | |
Savings Account Loans | | | 964 | | | | - | | | | - | | | | - | | | | 964 | |
Mobile Home Loans | | | 112 | | | | - | | | | - | | | | - | | | | 112 | |
Other Consumer Loans | | | 191 | | | | - | | | | - | | | | - | | | | 191 | |
Total Consumer Loans | | | 1,944 | | | | - | | | | 11 | | | | - | | | | 1,955 | |
Commercial Business Loans | | | 2,639 | | | | - | | | | 109 | | | | - | | | | 2,748 | |
Total Gross Loans | | $ | 90,254 | | | $ | 698 | | | $ | 4,799 | | | $ | 9 | | | $ | 95,760 | |
June 30, 2011 | | | | | | | | | | | | | | | |
| | | | | Specially | | | | | | | | | | |
Type of Loan | | Pass | | | Mentioned | | | Substandard | | | Doubtful | | | Total | |
| | (In Thousands) | |
Mortgage Loans: | | | | | | | | | | | | | | | |
Residential | | $ | 54,032 | | | $ | - | | | $ | 828 | | | $ | - | | | $ | 54,860 | |
Commercial Real Estate | | | 26,008 | | | | 176 | | | | 3,694 | | | | - | | | | 29,878 | |
Land | | | 3,107 | | | | - | | | | 176 | | | | - | | | | 3,283 | |
Second Mortgage Loans | | | 3,926 | | | | - | | | | 19 | | | | - | | | | 3,945 | |
Total Mortgage Loans | | | 87,073 | | | | 176 | | | | 4,717 | | | | - | | | | 91,966 | |
Consumer Loans: | | | | | | | | | | | | | | | | | | | | |
Automobile Loans | | | 793 | | | | - | | | | 14 | | | | - | | | | 807 | |
Savings Account Loans | | | 1,143 | | | | - | | | | - | | | | - | | | | 1,143 | |
Mobile Home Loans | | | 138 | | | | - | | | | - | | | | - | | | | 138 | |
Other Consumer Loans | | | 245 | | | | - | | | | - | | | | - | | | | 245 | |
Total Consumer Loans | | | 2,319 | | | | - | | | | 14 | | | | - | | | | 2,333 | |
Commercial Business Loans | | | 2,473 | | | | - | | | | 829 | | | | - | | | | 3,302 | |
Total Gross Loans | | $ | 91,865 | | | $ | 176 | | | $ | 5,560 | | | $ | - | | | $ | 97,601 | |
The following table presents weighted average risk grades for the entire portfolio of each of the types of loans listed, and the total amount of such loans that were classified loansas Risk Grades 6, 7 and 8.
| | | December 31, 2011 | | | | June 30, 2011 | |
| | | Risk Grade | | | Loans | | | | Weighted Risk Grade | | | Classified Loans | |
Commercial Real Estate | | | 3.44 | | | $ | 3,690 | | | | 3.40 | | | $ | 3,694 | |
Land | | | 3.50 | | | | 530 | | | | 3.19 | | | | 176 | |
Commercial Business | | | 3.34 | | | | 109 | | | | 3.81 | | | | 829 | |
Total | | | | | | $ | 4,329 | | | | | | | | $4,699 | |
Net (charge-offs) recoveries, segregated by class of commercial loan.loans, were as follows:
| | | | | | | | | | |
| | | December 31, 2010 | | | June 30, 2010 |
Mortgage Loans: | | | Risk Grade | | | Classified Loans | | | Risk Grade | | | Classified Loans |
Residential | | | 3.12 | | $ | 1,193,059 | | | 3.10 | | $ | 886,597 |
Commercial Real Estate | | | 3.47 | | | 2,931,990 | | | 3.53 | | | 5,395,146 |
Land | | | 3.34 | | | 85,891 | | | 3.22 | | | 73,219 |
Commercial Business | | | 3.97 | | | 823,380 | | | 3.73 | | | 86,930 |
Consumer | | | 2.35 | | | - | | | 2.37 | | | - |
Total | | | | | $ | 5,034,320 | | | | | $ | 6,441,892 |
Note: Classified loan amounts are net of specific reserve | | | | | | |
| | | | | | | |
Net (charge-offs/recoveries, segregated by class of loans, were as follows: | | | | | | | |
| (Dollars in thousands) | | | | | | | |
| December 31, 2010 | | June 30, 2010 | | | | | | | |
Mortgage Loans | $ (499) | | $ (1,814) | | | | | | | |
Commercial Business Loans | 25 | | (840) | | | | | | | |
Consumer Loans | - | | (7) | | | | | | | |
| | | | | | | | | | |
Total | $ (474) | | $ (2,661) | | | | | | | |
| |
| | Six Months Ended | |
| | December 31, 2011 | |
| | (In Thousands) | |
Mortgage Loans: | | | |
Residential | | $ | (49 | ) |
Commercial Real Estate | | | (227 | ) |
Land | | | - | |
Commercial Business Loans | | | (102 | ) |
Consumer Loans | | | (13 | ) |
Total | | $ | (391 | ) |
| | | | |
In assessing the general economic conditions in the State of Missouri, management monitors and tracks the State and Counties Unemployment Rates, DJIA, S&P 500, NASDAQ, Fed Funds, Prime Rate, Crude, Gold, LiborLIBOR and Springfield Builder Permits. Management believes these indexes providesindices provide a reliable indication of the direction of overall economy from expansion to recession throughout the United States and here in the State of Missouri.
Allowance for Possible Loan Losses. The allowance for possible loan losses is a reserve established through a provision for possible loan losses charged to expense, which represents management's best estimate of probable losses that have been incurred within
the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The Company's allowance for possible loan loss methodology includes allowance allocations calculated in accordance with United State General Acceptable Accounting PrincipalsU.S. GAAP calculated in accordance with ASCAccounting Standards Codification (“ASC”) 450 and ASC 310. Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. The Company's process for determining the appropriate level of the allowance for possible loan losses is designed to account for credit deterioration as it occurs. The provision for possible loan l osseslosses reflects loan quality trends, including the levels of and trends related to non- accrualnon-accrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors. The provision for possible loan losses also reflects the totality of actions taken on all loans for a particular period. In other words, the amount of the provision reflects not only the necessary increases in the allowance for possible loan losses related to newly identified criticized loans, but it also reflects actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans or loan pools.
The level of the allowance reflects management's continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management's judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company's control, including, among other things, the performance of the Company's loan portfolio, the economy, changes in intere stinterest rates and the view of the regulatory authorities toward loan classifications.
The Company's Company's allowance for possible loan losses consists of three elements: (i) specific valuation allowances determined in accordance with ASC Topic 310 based on probable losses on specific loans; (ii) historical valuation allowances determined in accordance with ASC Topic 450 based on historical loan loss experience for similar loans with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions; and (iii) general valuation allowances determined in accordance with ASC Topic 450 based on general economic conditions and other qualitative risk factors both internal and external to the Company.
The allowances established for probable losses on specific loans are based on a regular analysis and evaluation of problem loans. Loans are classified based on an internal credit risk grading process that evaluates, among other things: (i) the obligor's ability to repay; (ii) the underlying collateral, if any; and (iii) the economic environment and industry in which the borrower operates. This analysis is performed at the relationship manager level for all commercial loans. When a loan has a calculated gradeRisk Grade of 6 or higher, the officer analyzes the loan to determine whether the loan is impaired and, if impaired, the need to specifically allocate a portion of the allowance for possible loan losses to the loan. Specific valuation allowances are determined by analyzing the borrower's ability to repay amounts owed, collateral deficienc ies,deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower's industry, among other things.
Historical valuation allowances are calculated based on the historical loss experience of specific types of loans and the internal risk grade of such loans at the time they were charged-off. The Company calculates historical loss ratios for pools of similar
loans with similar characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool. The historical loss ratios are periodically updated each quarter based on actual charge-off experience. A historical valuation allowance is established for each pool of similar loans based upon the product of the historical loss ratio and the total dollar amount of the loans in the pool. The Company's pools of similar loans include similarly risk-graded groups of commercial businessand industrial loans, commercial real estate loans, consumer real estate loans and consumer and other loans. Starting in fiscal 2011, each quarterly review has included calculations for “look back periods” of one, two and three years and the Bank used the highest historical loss rate in its allowance calculations.
General valuation allowances are based on general economic conditions and other qualitative risk factors both internal and external to the Company. In general, such valuation allowances are determined by evaluating, among other things: (i) the experience, ability and effectiveness of the Bank's lending management and staff; (ii) the effectiveness of the Company's loan policies, procedures and internal controls; (iii) changes in asset quality; (iv) changes in loan portfolio volume; (v) the composition and concentrations of credit; (vi) the impact of competition on loan structuring andand pricing; (vii) the effectiveness of the internal loan review function; (viii) the impact of environmental r isksrisks on portfolio risks; and (ix) the impact of rising interest rates on portfolio risk. Management evaluates the degree of risk that each one of these components has on the quality of the loan portfolio on a quarterly basis. Each component is determined to have either a high, moderate or low degree of risk. The results are then input into a "general allocation matrix" to determine an appropriate general valuation allowance.
Included in the general valuation allowances are allocations for groups of similar loans with risk characteristics that exceed certain concentration limits established by management. Concentration risk limits have been established, among other things, for certain industry concentrations, large balance and highly leveraged credit relationships that exceed specified risk grades, and loans originated with policy exceptions that exceed specified risk grades.
Loans identified as losses by management, internal/external loan review and/or bank examiners are charged-off. Furthermore, consumer loan accounts are charged-off automatically based on regulatory requirements.
The following table details activity in the allowance for possible loan losses by portfolio segment for the six monthsquarter ended December 31, 2010 for the fiscal year ended June 30, 2010.2011. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
| | (In Thousands) | |
| | | | | Commercial | | | | | | | |
| | Mortgage | | | Business | | | Consumer | | | | |
| | Loans | | | Loans | | | Loans | | | Total | |
| | | | | | | | | | | | |
Balance – June 30, 2011 | | $ | 1,702 | | | $ | 258 | | | $ | 23 | | | $ | 1,983 | |
Provision for loan losses | | | (35 | ) | | | 104 | | | | 5 | | | | 74 | |
Charge-offs | | | (342 | ) | | | (126 | ) | | | (20 | ) | | | (488 | ) |
Recoveries | | | 66 | | | | 24 | | | | 7 | | | | 97 | |
Net (Charge-offs) / Recoveries | | | (276 | ) | | | (102 | ) | | | (13 | ) | | | (391 | ) |
Balance – December 31, 2011 | | $ | 1,391 | | | $ | 260 | | | $ | 15 | | | $ | 1,666 | |
| | | | | | | | | | | | | | | | |
| | (Amounts in Thousands) | |
| | Mortgage Loans: | | | Commercial | | | | | | | |
December 31, 2010 | | | | | Commercial | | | | | | Business | | | Consumer | | | | |
| | Residential | | | RE | | | Land | | | Loans | | | Loans | | | Total | |
Beginning balance – 6-30-2010 | | $ | 462 | | | $ | 1,736 | | | $ | 75 | | | $ | 234 | | | $ | 20 | | | $ | 2,527 | |
Provision for loan losses | | | 152 | | | | 327 | | | | 8 | | | | (11 | ) | | | (5 | ) | | | 471 | |
Charge-offs | | | (150 | ) | | | (375 | ) | | | (2 | ) | | | (1 | ) | | | (11 | ) | | | (539 | ) |
Recoveries | | | 21 | | | | 7 | | | | - | | | | 26 | | | | 9 | | | | 63 | |
Net(Net Charge-offs)/ Recoveries | | | (129 | ) | | | (368 | ) | | | (2 | ) | | | 25 | | | | (2 | ) | | | (476 | ) |
Ending balance – 12-31-2010 | | $ | 485 | | | $ | 1,695 | | | $ | 81 | | | $ | 248 | | | $ | 13 | | | $ | 2,522 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Period-end amount allocated to: | | | | | | | | | | | | | | | | | | | | | | | | |
Loans individually evaluated | | $ | 194 | | | $ | 1,049 | | | $ | 32 | | | $ | 66 | | | $ | - | | | $ | 1,341 | |
for impairment |
Loans collectively evaluated | | | 291 | | | | 646 | | | | 49 | | | | 182 | | | | 13 | | | | 1,181 | |
for impairment |
Ending balance – 12-31-2010 | | $ | 485 | | | $ | 1,695 | | | $ | 81 | | | $ | 248 | | | $ | 13 | | | $ | 2,522 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
June 30, 2010 | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Beginning balance – 6-30-2009 | | $ | 906 | | | $ | 991 | | | $ | 176 | | | $ | 2,027 | | | $ | 86 | | | $ | 4,186 | |
Provision for loan losses | | | 239 | | | | 1,600 | | | | 25 | | | | (953 | ) | | | (59 | ) | | | 852 | |
Transfer from reserve on | | | - | | | | 150 | | | | - | | | | - | | | | - | | | | 150 | |
Letters of Credit |
Charge-offs | | | (694 | ) | | | (1,033 | ) | | | (126 | ) | | | (1,034 | ) | | | (28 | ) | | | (2,915 | ) |
Recoveries | | | 12 | | | | 27 | | | | - | | | | 194 | | | | 21 | | | | 254 | |
Net (Charge-offs) / Recoveries | | | (682 | ) | | | (1,006 | ) | | | (126 | ) | | | (840 | ) | | | (7 | ) | | | (2,661 | ) |
Ending balance – 6-30-2010 | | | 463 | | | | 1,735 | | | | 75 | | | | 234 | | | | 20 | | | | 2,527 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Period-end amount allocated to: | | | | | | | | | | | | | | | | | | | | | | | | |
Loans individually evaluated | | $ | 166 | | | $ | 1,041 | | | $ | 20 | | | $ | 10 | | | $ | - | | | $ | 1,237 | |
for impairment |
Loans collectively evaluated | | | 297 | | | | 694 | | | | 55 | | | | 224 | | | | 20 | | | | 1,290 | |
for impairment |
Ending balance – 6-30-2010 | | $ | 463 | | | $ | 1,735 | | | $ | 75 | | | $ | 234 | | | $ | 20 | | | $ | 2,527 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Period-end amount allocated to: | | | | | | | | | | | | | | | | |
Loans individually evaluated | | $ | 204 | | | $ | 5 | | | $ | - | | | $ | 209 | |
for impairment |
Loans collectively evaluated | | | 1,187 | | | | 255 | | | | 15 | | | | 1,457 | |
for impairment |
Balance – December 31, 2011 | | $ | 1,391 | | | $ | 260 | | | $ | 15 | | | $ | 1,666 | |
The Company's recorded investment in loans as of December 31, 20102011 and 2009June 30, 2011 related to each balance in the allowance for possible loan losses by portfolio segment and disaggregated on the basis of the Company's impairment methodology was as follows:
Net (charge-offs) / recoveries, segregated by class of loans, were as follows: |
| | | December 31, | | June 30, |
| | | 2010 | | 2010 |
| | | ( Dollars in thousands) |
Mortgage Loans: | | | | |
| Residential | | $ (129) | | $ (682) |
| Commercial Real Estate | | (368) | | (1,006) |
| Land | | (2) | | (126) |
Commercial Business Loans | | 25 | | (840) |
Consumer Loans | | (2) | | (7) |
| Total | | $ (476) | | $ (2,661) |
| | | | | |
| | (In Thousands) | |
| | Loans | | | Loans | | | Loans | | | Loans | |
December 31, 2011 | | | | | | | | | | | | |
Loans individually evaluated for impairment | | $ | 4,688 | | | $ | 109 | | | $ | 11 | | | $ | 4,808 | |
Loans collectively evaluated for impairment | | | 86,369 | | | | 2,639 | | | | 1,944 | | | | 90,952 | |
Ending Balance | | $ | 91,057 | | | $ | 2,748 | | | $ | 1,955 | | | $ | 95,760 | |
| | | | | | | | | | | | | | | | |
June 30, 2011 | | | | | | | | | | | | | | | | |
Loans individually evaluated for impairment | | $ | 4,717 | | | $ | 829 | | | $ | 14 | | | $ | 5,560 | |
Loans collectively evaluated for impairment | | | 87,248 | | | | 2,473 | | | | 2,320 | | | | 92,041 | |
Ending Balance | | $ | 91,965 | | | $ | 3,302 | | | $ | 2,334 | | | $ | 97,601 | |
| | | | | | | | | | | | | | | | |
Basic earnings per share is based on net income or loss divided by the weighted average number of shares outstanding during the period. Diluted earnings per share includes the effect, if any, of the issuance of shares eligible to be issued pursuant to stock option agreements.
The table below presents the numerators and denominators used in the basic earnings (loss) per common share computations for the three and six month periods ended December 31, 20102011 and 2009.2010.
| Three Months Ended | Six Months Ended | | | Three Months Ended | | | Six Months Ended | |
| December 31, | | December 31, | | | December 31, | |
| 2010 | 2009 | 2010 | 2009 | | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
Basic earnings (loss) per common share: | | | | | | | | | | | | | | |
Numerator: | | | | | | | | | | | | | | |
Net income (loss) | $(1,473,640) | $46,541 | $(1,539,685) | $ 245,894 | | |
Net loss | | | $ | (661,500 | ) | | $ | (1,473,640 | ) | | $ | (950,200 | ) | | $ | (1,539,685 | ) |
Denominator: | | | | | | | | | | | | | | | | | | |
Weighted average common shares outstanding | 1,550,815 | 1,550,815 | | | | 1,550,815 | | | | 1,550,815 | | | | 1,550,815 | | | | 1,550,815 | |
| | | | | | | | | | | | | | | | | | |
Basic earnings (loss) per common share | $(0.95) | $0.03 | $(0.99) | $0.16 | | | $ | (0.43 | ) | | $ | (0.95 | ) | | $ | (0.61 | ) | | $ | (0.99 | ) |
| | | | | | | | | | | | | | | | | | |
Diluted earnings (loss) per common share: | | | | | | | | | | | | | | | | | | |
Numerator: | | | | | | | | | | | | | | | | | | |
Net income (loss) | $(1,473,640) | $46,541 | $(1,539,685) | $ 245,894 | | |
Net loss | | | $ | (661,500 | ) | | $ | (1,473,640 | ) | | $ | (950,200 | ) | | $ | (1,539,685 | ) |
Denominator: | | | | | | | | | | | | | | | | | | |
Weighted average common shares outstanding | 1,550,815 | 1,550,815 | | |
| | | |
Basic earnings (loss) per common share | $(0.95) | $0.03 | $(0.99 | $0.16 | | |
Weighted average common shares outstanding | | | 1,550,815 | | | | 1,550,815 | | | | 1,550,815 | | | | 1,550,815 | |
| | | | | | | | | | | | | | | | |
Basic earnings (loss) per common share | | $ | (0.43 | ) | | $ | (0.95 | ) | | $ | (0.61 | ) | | $ | (0.99 | ) |
5. COMMITMENTS
At December 31, 20102011 and June 30, 2010,2011, the Company had outstanding commitments to originate loans totaling $441,000$476,000 and $594,000,$356,000, respectively. It is expected that outstanding loan commitments will be funded with existing liquid assets.
The Company uses historical data to estimate the expected term of the options granted, volatilities, and other factors. Expected volatilities are based on the historical volatility of the Company’s common stock over a period of time. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend rate is equal to the dividend rate in effect on the date of grant. There were no grants made during either the fiscal year ended June 30, 20102011 or the six months ended December 31, 2010.2011. The exercise price of options granted under the Company’s incentive plans is equal to the fair market value of the underlying stock at the grant date. The Company assumes no projected forfeiture rates on its st ock-basedstock-based compensation.
A summary of the option activity under the 2004 Stock Option Plan (“Plan”) as of December 31, 2010,2011, and changes during the six months ended December 31, 2010,2011, is presented below:
Options | Shares | | Weighted- Average Exercise Price | Weighted- Average Remaining Term | | Shares | | | Weighted- Average Exercise Price | | | Weighted- Average Remaining Term | |
| | | | ( in months) | | | | | | | | (in months) | |
Outstanding at beginning of period | 22,000 | | $ 16.85 | 76 | | | 22,000 | | | $ | 16.95 | | | | 64 | |
Granted | - | | - | | | | - | | | | - | | | | | |
Exercised | - | | - | | | | - | | | | - | | | | | |
Forfeited or expired | - | | - | | | | - | | | | - | | | | | |
Outstanding at end of period | 22,000 | | $ 16.85 | 70 | | | 22,000 | | | $ | 16.95 | | | | 58 | |
Exercisable at end of period | 15,600 | | $ 16.83 | | | | 20,000 | | | $ | 16.94 | | | | | |
| | | | | | | | | | | | | | | |
A summary of the Company’s non-vested shares as of December 31, 2010,2011, and changes during the six months ended December 31, 2010,2011, is presented below:
Non-vested Options | Options | | Weighted- Average Grant Date Fair Value | | Options | | | Weighted- Average Grant Date Fair Value | |
| | | | | | | | | |
Outstanding at beginning of period | 6,400 | | $ 6.11 | | | 2,000 | | | $ | 5.95 | |
Granted | - | | - | | | - | | | | - | |
Exercised | - | | - | | | - | | | | - | |
Vested | - | | - | | | - | | | | - | |
Forfeited or expired | - | | - | | | - | | | | - | |
Outstanding at end of period | 6,400 | | $ 6.11 | | | 2,000 | | | $ | 5.95 | |
As of December 31, 2010,2011, there was $3,200approximately $375 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of approximately fiveone and one-half months.
7. | FAIR VALUE MEASUREMENTS |
FASB ASC Topic 820-10 definesThe fair value establishesis defined as the price that would be received to sell an asset or paid to transfer a hierarchy for measuringliability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in Generally Accepted Accounting Principles and expands disclosures about fair value measurements. This hierarchy includes three levels and is based upon the valuation techniquesprincipal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price
in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are: (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact. Valuation techniques require the use of inputs that are consistent with the market approach, the income approach and/or the cost approach.
The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy for valuation inputs gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.
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.
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
Securities Available for Sale. Securities classifiedIn general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as available for saleinputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are reportedrecorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the Company's creditworthiness, among other things, as well as unobservable parameters.
Any such valuation adjustments are applied consistently over time. The Company's valuation methodologies may produce a fair value utilizing Level 1calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company's valuation methodologies are appropriate and Level 2 inputs. For equity securities, unadjusted quoted prices in active markets for identical assets are utilizedconsistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the measurementreporting date. For all
Securities Available for Sale: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity of less transparency around the input to the valuation, securities are classified within Level 3 of the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions, among other things.valuation hierarchy.
Impaired Loans.loans: The Company does not record impaired loans at fair value on a recurring basis. However, periodically,From time to time, a loan is considered impaired and an allowance for loan losses is reported atestablished. Once a loan has been identified as impaired, management measures impairment based upon the fair value of the underlying collateral, less estimated costscollateral. Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable. Loan impairment is measured based upon the present value of expected future cash flows discounts at the loan’s effective interest rate, expect where more practical, at the observable market price of the loan based upon appraisals by qualified licensed appraisers hired by the Company, and are, generally, considered Level 2 measurements. In some cases, adjustments are made to sell, if repayment is expected solely fromthe appraised values due to various factors including age of the appraisal, age of comparables included in the appraisal, and known changes in the market and in the collateral. Impaired loans measured at fair value typically consist of loans on non-accrual status and loans with a portion of the allowance for loan losses allocated specifically to the loan. Collateral valuesWhen significant adjustments are estimated using Level 2 inputs, including recent appraisals and Level 3 inputs based on customized discounting criteria. Asunobservable inputs, the resulting fair market measurement is categorized as a result of the significance of the Levellevel 3 inputs, impaired loans fair values have been classified as Level 3.measurement.
Real Estate Owned. Realestate owned: Other real estate owned represents property acquired through foreclosure and settlement of loans. Property acquired is carried at the lower of the principal amount of the loan outstanding at the time of acquisition, plus any acquisition costs, or the estimated fair value of the property, less disposal costs. The Company considers third party appraisals, as well as, independent fair value assessments from realtors or persons involved in selling real estate owned in determining the fair value of particular properties. Accordingly, the valuation of real estate owned is subject to significant external and internal judgment. The Company periodically reviews real estate owned to determine whether the property continues to be carried at the lower of the recorded book value or the fair value of the property less disposal costs.is determined based upon appraisals. As such,with impaired loans, if significant adjustments are made to the Company classifies real estate owned subjected to non-recurringappraised value, based upon unobservable inputs, the resulting fair value adjustmentsmeasurement is categorized as Level 3.a level 3 measurement.
There have been no changes in valuation techniques used for any assets or liabilities measured at fair value during either the six months ended December 31, 2011 or the year ended June 30, 2011.
The following tables summarize financial assets measured at fair value on a recurring basis as of December 31, 20102011 and June 30, 2010,2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
December 31, 2011 | | Level 1 Inputs | | | | | Inputs | | | | | Inputs | | | | | Fair Value | |
| | (In Thousands) | |
Securities available-for-sale: | | | | | | | | | | | | | | | | | | |
U. S. Agency Securities | | $ | - | | | | | $ | 15,275 | | | | | $ | - | | | | | $ | 15,275 | |
Residential mortgage- | | | | | | | | | | | | | | | | | | | | | | |
backed Securities | | | - | | | | | | 49,501 | | | | | | - | | | | | | 49,501 | |
Other | | | - | | | | | | 234 | | | | | | - | | | | | | 234 | |
Total | | $ | - | | | | | $ | 65,010 | | | | | $ | - | | | | | $ | 65,010 | |
December 31, 2010 | | Level 1 | | Level 2 | | Level 3 | | Total | |
| | Inputs | | Inputs | | Inputs | | Fair Value | |
June 30, 2011 | | | Level 1 Inputs | | | | | Inputs | | | | | Inputs | | | | | Fair Value | |
| (dollars in thousands) | | (In Thousands) | |
Securities available-for-sale: | | | | | | | | | | | | | | | | | | | | | | | | | | |
U. S. Agency securities | | $ 3,067 | $ | $28,565 | $ | $ - | $ | $31,632 | |
U. S. Agency Securities | | | $ | - | | | | | | $ | 22,790 | | | | | | $ | - | | | | | | $ | 22,790 | |
Residential mortgage- | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
backed securities | | - | | 32,238 | | - | | 32,238 | |
Municipal securities | | - | | 111 | | - | | 111 | |
backed Securities | | | | - | | | | | | | 30,936 | | | | | | | - | | | | | | | 30,936 | |
Municipal Securities | | | | - | | | | | | | 110 | | | | | | | - | | | | | | | 110 | |
Other | | - | | 276 | | - | | 276 | | | - | | | | | | | 244 | | | | | | | - | | | | | | | 244 | |
Total | | $ 3,067 | | $61,190 | | $ - | | $64,257 | | $ | - | | | | | | $ | 55,058 | | | | | | $ | - | | | | | | $ | 55,058 | |
June 30, 2010 | | Level 1 | | Level 2 | | Level 3 | | Total |
| | Inputs | | Inputs | | Inputs | | Fair Value |
| | (dollars in thousands) |
Securities available-for-sale: | | | | | | | | |
U. S. Agency securities | | $ 5,100 | $ | $21,928 | $ | $ - | $ | $27,028 |
Residential mortgage- | | | | | | | | |
backed securities | | - | | 32,868 | | - | | 32,868 |
Municipal securities | | - | | 132 | | - | | 132 |
Other | | - | | 276 | | - | | 276 |
Total | | $ 5,100 | | $55,204 | | $ - | | $60,304 |
Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets and financial liabilities, excluding impaired loans, real estate owned and other repossessed assets, measured at fair value on a non-recurring basis were not significant at December 31, 2010.
The following tables summarize financial assets measured at fair value on a non-recurring basis as of December 31, 20102011 and June 30, 2010,2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
December 31, 2011 | | | Inputs | | | | | | Level 2 Inputs | | | | | | | Level 3 Inputs | | | | | | | Fair Value | |
| | | (In Thousands) | |
Impaired loans | | $ | - | | | | | $ | - | | | | | | $ | 5,315 | | | | | | $ | 5,315 | |
Real estate owned | | | | | | | | | | | | | | | | 3,796 | | | | | | | 3,796 | |
Repossessed assets | | | - | | | | | | - | | | | | | | 2 | | | | | | | 2 | |
Total | | $ | - | | | | | $ | - | | | | | | $ | 9,113 | | | | | | $ | 9,113 | |
December 31, 2010 | Level 1 | | Level 2 | | Level 3 | | Total |
| Inputs | | Inputs | | Inputs | | Fair Value |
| (dollars in thousands) |
Impaired loans | | $ - | | $ | $ - | | $ | $4,643 | $ | $4,643 |
Real estate owned | | - | | | - | | | 5,281 | | 5,281 |
Other repossessed assets | | - | | | - | | | - | | - |
Total | | $ - | | | $ - | | | $9,924 | | $9,924 |
| | | | | | | |
June 30, 2011 | Level 1 | | Level 2 | | Level 3 | | Total |
| Inputs | | Inputs | | Inputs | | Fair Value |
| (In Thousands) |
Impaired loans | | $ - | | | $ - | | | $ 5,377 | | $ 5,377 |
Real estate owned | | - | | | - | | | 5,503 | | 5,503 |
Total | | $ - | | | $ - | | | $10,880 | | $10,880 |
June 30, 2010 | Level 1 | | Level 2 | | Level 3 | | Total |
| Inputs | | Inputs | | Inputs | | Fair Value |
| (dollars in thousands) |
Impaired loans | | $ - | | $ | $ - | | $ | $8,360 | $ | $8,360 |
Real estate owned | | - | | | - | | | 3,885 | | 3,885 |
Other repossessed assets | | - | | | - | | | 61 | | 61 |
Total | | $ - | | | $ - | | | $12,306 | | $12,306 |
During the six months ended December 31, 2011 and the year ended June 30, 2011, the Company recorded valuation allowances of $3.4 million and $3.1 million, respectively. As of December 31, 2011, management has provided a full valuation allowance for net deferred tax assets resulting from the Company’s cumulative net losses for the last six years. Most of these losses have occurred during the three fiscal years ended June 30, 2011. Realization of deferred tax assets is dependent upon sufficient future taxable income during the period that deductible temporary differences and carry forwards are expected to be available to reduce taxable income.
At December 31, 2011, the Company had net operating loss carry forwards of approximately $5.4 million which are available to offset future taxable income with $1.0 million available through 2029, $1.6 million available through 2030, $1.3 million available through 2031 and $1.5 million available through 2032.
| Certain amounts in the prior period financial statements have been reclassified, with no effect on net income or loss or stockholders’ equity, to be consistent with the current period classification. |
Certain amounts in the prior period financial statements have been reclassified, with no effect on net income or loss or stockholders’ equity, to be consistent with the current period classification.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
General
First Bancshares, Inc. (the “Company”) is a unitary savings and loan holding company whose primary assets are First Home Savings Bank (the “Bank”) and SCMG, Inc. The Company was incorporated on December 31,September 30, 1993, for the purpose of acquiring all of the capital stock of First Home Savings Bank in connection with the Bank's conversion from a state-charted mutual to a state-chartered stock form of ownership. The transaction was completed on December 22, 1993.
On December 31, 2010,2011, the Company had total assets of $204.5$198.3 million, net loans receivable of $101.3$94.3 million, total deposits of $175.2$172.0 million and stockholders’ equity of $20.5$17.1 million. The Company’s common shares trade on The NASDAQNasdaq Global Market of The NASDAQ Stock Market LLC under the symbol “FBSI.”
The following discussion focuses on the consolidated financial condition of the Company and its subsidiaries, at December 31, 2010,2011, compared to June 30, 2010,2011, and the consolidated results of operations for the three-month and six-month periods ended December 31, 2010,2011, compared to the three-month and six-month periods ended December 31, 2009, respectively.2010. This discussion should be read in conjunction with the Company's consolidated financial statements, and notes thereto, for the year ended June 30, 2010.2011.
Recent Developments and Corporate Overview
Economic Conditions
The economic decline thatwhich began in calendar 2008 and whichhas continued to varying degrees though calendar 2010,throughout 2011. The downturn has created significant challenges for financial institutions such as First Home Savings Bank. Dramatic declines in the housing market, marked by falling home prices and increasing levels of mortgage foreclosures, have resulted in significant write-downs of asset values by many financial institutions, including government-sponsored entities and major commercial and investment banks. In addition, many lenders and institutional investors have reduced, and in some cases ceased to provide, funding to borrowers, including other financial institutions, as a result of concern about the stability of the financial markets and the strength of counterparties. While the economy has recently shown some small signs of improvement, no upward trend seems to have been established.
New Federal Legislation
Last year Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) which is significantly changing the current bank regulatory structure and affect the lending, investment, trading and operating activities of financial institutions and their holding companies. On July 21, 2011, the Dodd-Frank Act eliminated the Office of Thrift Supervision (“OTS”), which had been the primary federal regulator for both the Bank and the Company. Effective with elimination of the OTS, the FDIC became the Bank’s primary federal banking regulator and the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) became the Company’s primary federal regulator, each assuming the powers and responsibilities of the Bank’s and Company’s former primary banking regulator, the OTS. As a result of the Company being regulated by the Federal Reserve Board, the Company will eventually be required to comply with the Federal Reserve Board’s regulations that are applicable to bank holding companies, including bank holding company capital requirements. These capital requirements are substantially similar to the capital requirements currently applicable to the Bank. The Dodd-Frank Act also requires the Federal Reserve Board to set minimum capital levels for bank holding companies that are as stringent as those required for the insured depository subsidiaries, and the components of Tier 1 capital would be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions. Bank holding companies with assets of less than $500 million are exempt from these capital requirements. The Dodd-Frank Act requires new capital regulations to be adopted in final form 18 months after the date of enactment of the Dodd-Frank Act (July 21, 2010). Many of the Dodd-Frank Act’s implementing rules and regulations, however, have been delayed and proposed capital regulations were issued by the Federal Reserve in December 2011, which are subject to a comment period ending in March 2012.
In addition to new capital requirements, the Dodd-Frank Act also implements far-reaching changes across the financial regulatory landscape, including provisions that, among other things, has or will:
· | Centralized responsibility for consumer financial protection by creating a new agency within the Federal Reserve Board, the Bureau of Consumer Financial Protection, with broad rulemaking, supervision and enforcement authority for a wide range of consumer protection laws that would apply to all banks and thrifts. Smaller financial institutions, including the Bank, will be subject to the supervision and enforcement of their primary federal banking regulator with respect to the federal consumer financial protection laws. |
· | Provide for new disclosure and other requirements relating to executive compensation and corporate governance. |
· | Made permanent the $250,000 limit for federal deposit insurance and provide unlimited federal deposit insurance until January 1, 2013 for non interest-bearing demand transaction accounts at all insured depository institutions. |
· | Effective July 21, 2011, repealed the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts. |
· | Required all depository institution holding companies to serve as a source of financial strength to their depository institution subsidiaries in the event such subsidiaries suffer from financial distress. |
Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company and the financial services industry more generally. The elimination of the prohibition on the payment of interest on demand deposits could materially increase our interest expense, depending on our competitors’ responses. Provisions in the legislation that require revisions to the capital requirements of the Company and the Bank could require the Company and the Bank to seek additional sources of capital in the future.
Regulatory MattersOrders
On August 17, 2009, the Company and the Bank each entered into a Stipulation and Consent to the Issuance of Order to Cease and Desist from the OTS. In connection with the elimination of the OTS, (collectively the “Orders”).Orders to Cease and Desist have been enforced by the Federal Reserve Board and the FDIC as the primary federal regulators of the Company and the Bank, respectively.
Effective October 25, 2011, the Order to Cease and Desist the Bank entered into with the OTS was terminated. Subsequently, on November 3, 2011, the Bank entered into an informal agreement (“Agreement”) with the Director of the Division of Finance of the State of Missouri (“Division”) and the FDIC (collectively referred to as the “Regulatory Authorities”) as a result of the Bank’s July 18, 2011 Report of Examination (“Report”). Under the terms of the informal Agreement, which is significantly less onerous than the Order to Cease and Desist, the Bank has agreed to:
· | immediately reduce to zero the total amount of assets classified as "Loss" in the Report and in all future examination reports (this requirement has already been completed); |
· | submit to the Regulatory Authorities by December 15, 2011, a written plan to reduce the remaining assets classified in the Report, and to subsequently submit to the Regulatory Authorities a plan to reduce assets classified or listed for Special Mention in any future examination or visitation report; |
· | maintain Tier 1 Capital, exclusive of loan loss reserves, at no less than 7.0 percent of total assets (which the Bank exceeded with Tier 1 Capital of 7.79 percent of total assets at December 31, 2011), and to not (i) declare or pay any dividends, (ii) pay any management fees or bonuses, and (iii) increase any executive's salary or other compensation while the Tier 1 Capital to asset ratio is below 7.0 percent or which would reduce such ratio below 7.0 percent; |
· | maintain the allowance for loan and lease losses at a reasonable and adequate level, consistent with regulatory guidance; |
· | correct the loan documentation exceptions noted in the Report and discontinue certain lending practices without proper documentation; |
· | submit to the Regulatory Authorities by December 15, 2011, a written plan for calendar years 2012, 2013 and 2014, which includes a three-year budget projection; |
· | review and revise the Bank’s funds management policy by December 15, 2011 to include specific recommendations noted in the Report; |
· | take immediate action to correct the violations of law and contraventions to interagency policy statements noted in the Report, including implementing procedures designed to prevent future violations of law and contraventions (this requirement has already been completed); and |
· | advise the Regulatory Authorities by December 15, 2011, and every 90 days thereafter, in a written report of the Bank’s actions taken to comply with the Agreement, which report shall include certain specific items regarding the status of the Bank’s classified assets. |
All customer deposits remain insured to the fullest extent permitted by the FDIC since the Bank entered into the Agreement. The Bank has continued to serve its customers in all areas including making loans, establishing lines of credit, accepting deposits and processing banking transactions.
The provisions of the informal Agreement remain in effect until lifted by the Regulatory Authorities.
Under the terms of the Orders, the BankCompany’s Order to Cease and Desist (“Order”), the Company, without the prior written approval of the OTS,Federal Reserve Board, may not:
· | increase assets during any quarter; |
· | increase brokered deposits; |
· | repurchaseRepurchase shares of the Company’s outstanding common stock; and |
· | issueIssue any debt securities or incur any debt (other than that incurred in the normal course of business). |
Other material provisions of the OrdersOrder require the Bank and the Company to:
· | develop aan acceptable business plan for enhancing, measuring and maintaining profitability, increasing earnings, improving liquidity, maintaining capital levels, acceptable to the OTS;levels; |
· | ensure the Bank’s compliance with applicable laws, rules, regulations and agency guidelines, including the terms of the order;guidelines; |
· | not appoint any new director or senior executive officer or change the responsibilities of any current senior executive officers without notifying the OTS;Federal Reserve Board; |
· | not enter into, renew, extend or revise any compensation or benefit agreements for directors or senior executive officers; |
· | not make any indemnification, severance or golden parachute payments; |
· | enhance its asset classification policy; |
· | provide progress reports to the OTS regarding certain classified assets; |
· | submit a comprehensive plan for reducing classified assets; |
· | develop a plan to reduce its concentration in certain loans contained in the loan portfolio and that addresses the assessment, monitoring and control of the risks associated with the commercial real estate portfolio; |
· | not enter into any arrangement or contract with a third party service provider that is significant to the overall operation or financial condition of the Bank, or that is outside the normal course of business; and |
· | prepare and submit progress reports to the OTS. The Orders will remain in effect until modified or terminated by the OTS.Federal Reserve Board. |
All customer depositsThe Order will remain insured to the fullest extent permittedin effect until modified or terminated by the FDIC since entering intoFederal Reserve Board.
We believe that the Orders. The Bank has continued to serve its customers in all areas including making loans, establishing lines of credit, accepting deposits and processing banking transactions. Neither the Company norare currently in substantial compliance with all of the Bank admitted any wrongdoing in entering intorequirements of the respective StipulationAgreement and Consent to the Issuance of a Cease and Desist Order. The OTS did not impose or recommend any monetary penalties.Order through their normal business operations.
For additional information regarding the terms of the orders,Agreement and the Order, please see our Current Reports on Form 8-K that we filed with the SEC on November 8, 2011 and August 18, 2009.2009, respectively. Further, we may be subject to more severe future regulatory enforcement actions, including but not limited to civil money penalties, if we do not comply with the terms of the Orders.Agreement and the Order.
Review of Loan Portfolio
Since November 2008, in light of a continually worsening economy, and the departure of several loan officers, the BankCompany has conducted ongoing, in depth reviews and analyses of the loans in its portfolio, primarily focusing on its commercial real estate, multi-family, development and commercial business loans. During the yearfiscal years ended June 30, 2009, June 30, 2010 and June 30, 2011, based primarily on this ongoing loan review, and in light of the economic conditions, the BankCompany recorded a provisionprovisions for loan losses of $5.3 million, for the year.$852,000 and $1.2 million, respectively. During the yearsix month period ended June 30, 2010,December 31, 2011, the Company recorded an additional provision for loan losses totaling $852,000 was recorded by the Company. During the three and six months ended December 31, 2010, additional provisions for loan losses of $408,000 and $ 472,000, respectively was recorded.$74,000.
Beginning with the quarter ended December 31,September 30, 2009, and through the quarter ended September 30, 2011, the Company has engaged the services of a consultant with an extensive background in commercial real estate, multi-family, development and commercial business lending. The purpose of hiring the consultant was to assist the Company and the Bank in meeting reporting deadlines established in the Orders and to validate the methodology used internally to review, evaluate and analyze loans. ThisThe consultant performed an extensive review
of the Company’s credits of $250,000 or larger during the quarter ended September 30, 2009 and has performed follow up reviews during each quarter since the first review through the quarter ended December 31, 2010.September 30, 2011 to assist management’s resolution of problem loans. The next scheduled review will be conducted in June 2012, as the Bank has switched to one annual review instead of four quarterly reviews.
Litigation
On January 21, 2011 a jury verdict was entered against the Company and the Bank in the Circuit Court of Ozark County, Missouri, following a jury trial in a claim made by a former employee of the Bank relating to her termination from the Bank in 2007. The former employee claimed that the Bank wrongfully terminated her as a result of her reporting to superiors and Board members what she believed to be illegal activities of two former presidents of the Bank. This alleged cause of action in Missouri is commonly known as a whistleblower lawsuit. Protection for whistleblowers has been carved out as a protected class of employees who, as with certain other classes, such as gender, age, and race for example, cannot be terminated as a result of reporting alleged illegal activities. The jury verdict was against the Bank for $182,000 in compensat orycompensatory damages (lost wages) and for punitive damages in the amount of $235,000, or a total of $417,000. The Bank believes that the verdict relating to the alleged reporting by the former employee of illegal activities is contrary to the facts and the law, and the Bank intends to filefiled post-trial motions including a motion for a new trial and other relief. Accordingly,The post-trial motions were denied by the court, and the Bank hasfiled a notice of appeal. The appeal was filed in September 2011, and the matter was argued on January 11, 2012 in front of the Southern District Court of Appeals for the State of Missouri. The Bank is currently awaiting the decision of the court. During the quarter ended December 31, 2010, the Bank recorded a liability in the amount of $300,000 in connection with this litigation in anticipation of the final amount it will owe the plaintiff. The $300,000 remains on the books at December 31, 2011, pending the final settlement of the judgment. .
In September 2006, the then Chief Financial Officer (“CFO”) of both the Bank and the Company was terminated. Subsequent to her termination, the former CFO filed a lawsuit against the Company and the Bank. The alleged cause of action is a whistleblower lawsuit. The former CFO claimed she was terminated for repeatedly reporting violations of law by two former chief executive officers of the Company and the Bank, and others during her tenure with the organization, and for refusing to sign certifications for the Company’s securities filing with the SEC subsequent to September 15, 2006. The case was successfully mediated in September 2011. The terms of the settlement are confidential, and substantially all of the settlement amount will be paid by the insurance carrier of the Company and the Bank. Both the Company and the Bank deny all claims and assertions made by the former CFO.
Financial Condition
As of December 31, 2010,2011, First Bancshares, Inc. had assets of $204.5$198.3 million, compared to $211.7$209.3 million at June 30, 2010.2011. The decrease in total assets of $7.2$11.0 million, or 3.4%5.3%, was the result of a decrease of $10.5$12.4 million, or 52.0%68.2%, in securities held to maturity, a decease of $6.1 million, or 24.7%, in cash and cash equivalents, a decrease of $2.8 million, or 91.5%, in certificates of deposit purchased, a decrease of $1.5 million, or 1.6%, in loans receivable and a decrease of $7.4$1.6 million, or 6.8%31.7%, in loans receivable.real estate owned. These decreases were partially offset by increasesan increase of $10.4$10.9 million, or 16.7%20.2%, in investment securities available-for-sale and $1.3the purchase of $3.0 million in Bank Owned Life Insurance (“BOLI”). Deposits decreased $8.7 million, or 33.9% in real estate owned and other repossessed assets. Deposits decreased $4.9 million, or 2.7%4.8%, and retail repurchase agreements decreased by $281,000,$1.3 million, or 5.2%19.9%. The decrease in deposits related primarily to the reduction of account balances of one large commercial customer. The decrease in certificates of deposits purchased was due to management's decision to allow these investments to roll off at maturity rather than reinvest at the current low rates. The decrease in securities held to maturity was due to calls on these securities.
Loans receivable net, totaled $101.3$94.3 million at December 31, 2010,2011, a decrease of $7.4$1.5 million, or 6.8%1.6%, from $108.7$95.8 million at June 30, 2010.2011. The decrease in loans is, in part, the result of decreased originations because of the current uncertainty in the economy, both local and national.national economies. These problems have affected many sectors of the economy and have created concerns for individuals and businesses. Housing sales, both new and existing, consumer confidence and other indicators of economic health in our market area have decreased over the last twoseveral years. Additionally, net loans totaling $2.2 million$346,000 were transferred to real estate owned during the six months ended December 31, 2010.2011.
The Company’s deposits decreased by $4.9$8.7 million, or 2.7%4.8%, from $180.1$180.7 million as of June 30, 20102011 to $175.2$172.0 million as of December 31, 2010.2011. The decrease was primarily the result of lower offering rates on mosta reduction in account balances of the Company’s deposit products.one commercial customer. The decision to lower interest rates was made to repositionparticular customer has occasional large deposits which reduce over varying periods of time. The balance of the Company relative to other financial institutions in its market areas, thereby providing better control over deposit cash flows and costs. The Company’s retail repurchase agreements decreased by $281,000,$1.3 million, or 5.2%19.9%, from $5.4$6.4 million at June 30, 20102011 to $5.1 million at December 31, 2010.2011.
As of December 31, 20102011 the Company’s stockholders’ equity totaled $20.5$17.1 million, compared to $22.6$18.1 million as of June 30, 2010.2011. The $2.1 million$957,000 decrease was attributable to the net loss of $1.5 million$950,000 during the six months ended December 31, 2010,2011, and by a negative change in the mark-to-market adjustment, net of taxes, of $531,000 $8,000
on the Company’s available-for-sale securities portfolio. In addition, there was a $749 increase resulting from the accounting treatment of stock based compensation. There were no dividends paid by the Company during the six months ended December 31, 2010.2011.
Non-performing Assets and Allowance for Loan Losses
Generally, when a loan becomes delinquent 90 days or more, or when the collection of principal or interest becomes doubtful, the Company will place the loan on non-accrual status and, as a result of this action, previously accrued interest income on the loan is reversed against current income. The loan will remain on non-accrual status until the loan has been brought current or until other circumstances occur that provide adequate assurance of full repayment of interest and principal.
Non-performing assets decreased $2.3 million from $13.1$10.5 million or 6.2%5.0% of total assets, at June 30, 20102011 to $11.0$8.2 million, or 5.4%4.1% of total assets at December 31, 2010.2011. The Bank’sCompany’s non-performing assets consist of non-accrual loans, past due loans over 90 days, impaired loans not past due or past due less than 90 days, real estate owned and other repossessed assets. The decrease in non-performing assets consisted of a decrease of $2.0 million$741,000 in non-accrual loans, a decrease of $82,000 in accruing 90 days past due commercial business loans, a decrease of $1.3 million$11,000 in impaired loans not past due and a decrease of $60,000 in other repossessed assets. These decreases were partially offset by an increase of $1.4$1.6 million in real estate owned. Repossessed assets increased to $2,000 at December 31, 2011 from none at June 30, 2011. The decrease in non-accrual loans consisted of a decreasedecreases of $2.4 million$169,000 in non-accrual co mmercialcommercial real estate loans, which was partially offset by increases $314,000$402,000 in non-accrual residential mortgages and $76,000$170,000 in non-accruingnon-accrual commercial business loans. At December 31, 2010, thereThere were no loans 90 days past due and still accruing. Whileaccruing at either December 31, 2011 or June 30, 2011. The decrease in non-performing assets have been reduced since June 30, 2010, they remain high as a2011 is the result of twoseveral factors. First isFor the negative economic environment that has existed over the last two topast three years, which has had an adverse impact on individuals and businesses in the Company’s primary market areas. Substantially all of the Company’s problem loans are located in the Company’s primary lending areas. Second, were the concerns regarding the Bank’s underwriting of some of the loans that were originated prior to May 2008. Starting in November 2008, the Company undertook anhas done extensive reviewreviews of the loan portfolio through which significant strides werehave been made in identifying, analyzing and providing reserves on problem loans. The reviews ofDuring the loans in portfolio are an ongoing process. Since May 2008same time period, the BankCompany has required that all loan originations, renewals and modifications to be approved by the Directors’ Loan Committee. Efforts to resolve problem loans by intensifying the Company’s efforts in working with borrowers has yielded some success in resolving problem loans, and where such efforts failed, foreclosures and repossessions have taken place. As discussed below, management believes the allowance for loan losses as of December 31, 2010,2011, was adequate to absorb the known and inherent risks of loss in the loan portfolio at that date.
The following table sets forth information with respect to the Bank'sCompany's non-performing assets at the dates indicated.
| | December 31, | | | June 30, | |
| | 2011 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | | | 2007 | |
| | (In Thousands) | |
Loans accounted for on a non-accrual basis: | | | | | | | | | | | | | | | | | | |
Real estate: | | | | | | | | | | | | | | | | | | |
Residential | | $ | 50 | | | $ | 452 | | | $ | 258 | | | $ | 593 | | | $ | 94 | | | $ | 245 | |
Commercial and land | | | 461 | | | | 630 | | | | 3,587 | | | | 1,714 | | | | 1,882 | | | | 2,171 | |
Commercial business | | | 81 | | | | 251 | | | | 82 | | | | 717 | | | | 316 | | | | 467 | |
Consumer | | | 6 | | | | 6 | | | | - | | | | - | | | | 21 | | | | 6 | |
Total | | $ | 598 | | | $ | 1,339 | | | $ | 3,927 | | | $ | 3,024 | | | $ | 2,313 | | | $ | 2,889 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Accruing loans which are contractually past due 90 days or more: | | | | | | | | | | | | | | | | | | | | | | | | |
Real estate: | | | | | | | | | | | | | | | | | | | | | | | | |
Residential | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 296 | | | $ | 278 | |
Commercial and land | | | - | | | | - | | | | - | | | | 122 | | | | 64 | | | | 81 | |
Commercial business | | | - | | | | - | | | | - | | | | 166 | | | | - | | | | - | |
Consumer | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total | | $ | - | | | $ | - | | | $ | - | | | $ | 288 | | | $ | 360 | | | $ | 359 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total of non-accrual and | | | | | | | | | | | | | | | | | | | | | | | | |
90 days past due loans | | $ | 598 | | | $ | 1,339 | | | $ | 3,927 | | | $ | 3,312 | | | $ | 2,673 | | | $ | 3,248 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Real estate owned | | | 3,355 | | | | 4,914 | | | | 3,885 | | | | 1,549 | | | | 1,206 | | | | 291 | |
Repossessed assets | | | 2 | | | | - | | | | 61 | | | | 158 | | | | - | | | | 2 | |
Other non-performing assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Impaired loans not past due | | | 4,210 | | | | 4,221 | | | | 5,228 | | | | 7,013 | | | | - | | | | - | |
Slow home loans (60 to 90 | | | | | | | | | | | | | | | | | | | | | | | | |
days past due) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total non-performing assets | | $ | 8,165 | | | $ | 10,474 | | | $ | 13,101 | | | $ | 12,032 | | | $ | 3,879 | | | $ | 3,541 | |
| December 31, | | June 30, |
| 2010 | | 2010 | | 2009 | | 2008 | | 2007 | | 2006 |
| (Dollars in thousands) |
Loans accounted for on a non-accrual | | | | | | | | | | | |
basis: | | | | | | | | | | | |
Real estate: | | | | | | | | | | | |
Residential | $ 573 | | $ 258 | | $ 593 | | $ 94 | | $ 245 | | $ 322 |
Commercial and land | 1,149 | | 3,587 | | 1,714 | | 1,882 | | 2,171 | | 306 |
Commercial business | 76 | | 82 | | 717 | | 316 | | 467 | | 65 |
Consumer | - | | - | | - | | 21 | | 6 | | 148 |
Total | $1,798 | | $3,927 | | $3,024 | | $2,313 | | $2,889 | | $ 841 |
| | | | | | | | | | | |
Accruing loans which are contractually past due 90 days or more: | | | | | | | | | | | |
Real estate: | | | | | | | | | | | |
Residential | $ - | | $ - | | $ - | | $ 296 | | $ 278 | | $ - |
Commercial and land | - | | - | | 122 | | 64 | | 81 | | - |
Commercial business | - | | - | | 166 | | - | | - | | - |
Consumer | - | | - | | - | | - | | - | | 3 |
Total | $ - | | $ - | | $ 288 | | $ 360 | | $ 359 | | $ 3 |
| | | | | | | | | | | |
Total of non-accrual and | | | | | | | | | | | |
90 days past due loans | $1,798 | | $3,927 | | $3,312 | | $ 2,673 | | $3,248 | | $ 844 |
| | | | | | | | | | | |
Real estate owned | 5,281 | | 3,885 | | 1,549 | | 1,206 | | 291 | | 497 |
Repossessed assets | - | | 61 | | 158 | | - | | 2 | | - |
Other non-performing assets: | | | | | | | | | | | |
Impaired loans not past due | 3,966 | | 5,228 | | 7,013 | | - | | - | | - |
Slow home loans (60 to 90 days | | | | | | | | | | | |
past due) | - | | - | | - | | - | | - | | - |
Total non-performing assets | $11,045 | | $13,101 | | $12,032 | | $ 3,879 | | $3,541 | | $1,341 |
| | | | | | | | | | | |
Total loans delinquent 90 days | | | | | | | | | | | |
or more to net loans | 0.00% | | 0.00% | | 0.22% | | 0.22% | | 0.23% | | 0.59% |
| | | | | | | | | | | |
Total loans delinquent 90 days | | | | | | | | | | | |
or more to total consolidated assets | 0.00% | | 0.00% | | 0.13% | | 0.14% | | 0.15% | | 0.37% |
| | | | | | | | | | | |
Total non-performing assets | | | | | | | | | | | |
to total consolidated assets | 5.40% | | 6.19% | | 5.23% | | 1.56% | | 1.47% | | 0.59% |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total loans delinquent 90 days | | | | | | | | | | | | | | | | | | | | | | | | |
or more to net loans | | | - | % | | | - | % | | | - | % | | | 0.22 | % | | | 0.22 | % | | | 0.23 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total loans delinquent 90 days | | | | | | | | | | | | | | | | | | | | | | | | |
or more to total consolidated assets | | | - | % | | | - | % | | | - | % | | | 0.13 | % | | | 0.14 | % | | | 0.15 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total non-performing assets | | | | | | | | | | | | | | | | | | | | | | | | |
to total consolidated assets | | | 4.12 | % | | | 5.00 | % | | | 6.19 | % | | | 5.23 | % | | | 1.56 | % | | | 1.47 | % |
Real estate owned and other repossessed assets includesinclude real estate and other assets acquired in the settlement of loans, which is recorded at the estimated fair value less the estimated costs to sell the asset. Any write down at the time of foreclosure is charged against the allowance for loan losses. Subsequently, net expenses related to holding the property and declines in the market value are charged against income. At June 30, 2010,December 31, 2011, real estate owned consisted of eighteen14 properties (ten(four single family residences, seven commercial properties and one parcelthree parcels of farmland)vacant land) with a net book value of $3.9$3.3 million. At June 30, 2010, repossessed collateral consisted of 1,168 radiators, 23 sections of steel shelving, a pallet jack and a moveable staircase and a motorcycle. At December 31, 2010,2011, real estate owned consisted of nineteen24 properties (nine(12 single family residences, nine commercial properties and one parcelthree parcels of farmland)vacant land) with a net book value of $5.3$4.9 million. At December 31, 2010,June 30, 2011, there was no repossessed collateral on the Company’s books.books of either the Bank or the Company. During the six months ended December 31, 2010 four2011, 13 properties and a mobile home located on piece of real estate owned, were sold resulting in a net loss of $21,000. Seven$36,000, and three properties totaling $2.2 million$342,000 were foreclosed on and added to real estate owned during the six months ended December 31, 2010,owned. In addition, one vehicle was repossessed and a write-down of $500,000 was provided on one property.transferred to other repossessed assets.
Classified assets. Federal regulations provide for the classification of loans and other assets as "substandard", "doubtful" or "loss", based on the level of weakness determined to be inherent in the collection of the principal and interest. When loans are classified as either substandard or doubtful, the Company may establish general allowances for loan losses in an amount deemed prudent by
management. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem loans. When assets are classified as loss, the Company is required either to establish a specific allowance for loan losses equal to 100% of that portion of the loan so classified, or to charge-off the amount determined to be loss.such amount. The Company's determination as to the classification of its loans and the amount of its allowances for loan losses are subject to review by its regulatory authorities, which may require the establishment of additional general or specific allowances for loan losses.
On the basis of management's review of its loans and other assets, at December 31, 2010,2011, the Company had classified $5.0$8.3 million of its assets as substandard, none$9,000 as doubtful and none as loss. This compares to classifications at June 30, 20102011 of $7.7$10.5 million as substandard, none as doubtful and none as loss.
We believe the decrease in substandard classified assets to $8.3 million at December 31, 2011 from $10.5 million at June 30, 2011 is an indication that the on-going, in-depth review and analysis of the Company’s loan portfolio is helping the Company make progress in identifying and resolving problem loan issues. In addition, during the six months ended December 31, 2011, an increase in the sale of properties resulted in a reduction in real estate owned. Classified assets at December 31, 20102011 and June 30, 20102011 included in real estate owned were $5.2of $3.4 million and $3.9$4.9 million, respectively. Other repossessed assets were $61,000 June 31, 2010. There were no otherwas $2,000 in repossessed assets on the Company’s books at December 31, 2010.2011.
In addition to the classified loans, the BankCompany has identified an additional $1.0 million$698,000 of credits at December 31, 20102011 as specially mentioned compared to $1.5 million$176,000 at June 30, 2010.2011. The review and analysis of these loans identified them as credits possessing some element or elements of increased risk. Any deterioration in their financial condition could increase the classified loan totals. The increase in the internal watch list is primarily the result of the current state of the economy which had a negative impact on cash flows for both individuals and businesses. This, along with stricter internal policies, which have been in place during the last two years, relating to the identification and monitoring of problem loans, has resulted in an increase in the number and the total dollar amount of loans identified as problem loans.
Allowance for loan losses. The Company establishes its provision for loan losses, and evaluates the adequacy of its allowance for loan losses based upon a systematic methodology consisting of a number of factors including, among others, historic loss experience, the overall level of classified assets and non-performing loans, the composition of its loan portfolio and the general economic environment within which the Bank and its borrowers operate.
At both December 31, 2010 and June 30, 2010,2011, the Company hadhas established an allowance for loan losses of $2.5 million.$1.7 million compared to $2.0 million at June 30, 2011. The changedecrease in the allowance for loan losses was a decrease of approximately $5,000. There were charge offsdue to loans totaling $476,000$391,000 having been charged off during the six months ended December 31, 2010 which were substantially offset by the provision for loan losses of $471,000 during the same period.2011. The allowance represents
approximately 43.8%34.7% and 27.6%35.7% of the total non-performing loans (including impaired loans not past due) at December 31, 20102011 and June 30, 2010,2011, respectively. The allowance for loan losses reflects management’s best estimate of probable losses inherent in the portfolio based on currently available information. The Company believes that the allowance for loan losses as of December 31, 20102011 was adequate to absorb the known and inherent risks of loss in the loan portfolio at that date. While the Company believes the estimates and assumptions used in the determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact the Company’s financial condition and results of operations. Future additions to the allowance may become necessary based upon changing economic conditions, increased loan balances or changes in the underlying collateral of the loan portfolio. In addition, the determination of the amount of the Bank’sCompany’s allowance for loan losses is subject to review by bank regulators as part of the examination process, which may result in the establishment of additional reserves based upon their judgment o fof information available to them at the time of their examination.
Critical Accounting Policies
The Company’sCompany uses estimates and assumptions in its consolidated financial statements are prepared in accordance with accounting principles generally accepted inaccounting principles. Material or critical estimates that are susceptible to significant change include the United States of America. The financial information contained within these statements is, to a significant extent, financial information that is based on approximate measuresdetermination of the financial effectsallowance for loan losses and the associated provision for loan losses, the estimation of transactionsfair value for a number of the Company’s assets, and eventsvaluing deferred tax assets.
Allowance for Loan Losses. Management believes that have already occurred. Based on its consideration ofthe accounting policies that involve the most complex and subjective decisions and assessments, management has identified its most critical accounting policy to be the policyestimate related to the allowance for loan losses.losses is a critical accounting estimate because it is highly susceptible to change from period to period. This may require management to make assumptions about losses on loans; and the impact of a sudden large loss could require increased provisions, which would negatively affect earnings.
Allowance for Loan Losses
The Company’s allowance for loan loss methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan lossManagement recognizes that management believes is appropriate at each reporting date. Quantitative factors include the Company’s historical loss experience, delinquency and charge-off trends, collateral values, changes in non-performing loans, and other factors. Quantitative factors also incorporate known information about individual loans, including borrowers’ sensitivity to interest rate movements. Qualitative factors include the general economic environment in the Company’s markets, including economic conditions throughout the Midwest and, in particular, the state of certain industries. Size and complexity of individual credits in relati on to loan structure, existing loan policies, and pace of portfolio growth are other qualitative factors that are considered in the methodology. As the Company adds new products and increases the complexity of its loan portfolio it will enhance its methodology accordingly. Management may have reported a materially different amount for the provision for loan losses inmay occur over the statementlife of operations to changea loan and that the allowance for loan losses if its assessment of the above factors were different. This discussion and analysis shouldmust be read in conjunction with the Company’s financial statements and the accompanying notes presented elsewhere herein, as well as the portion of this Management’s Discussion and Analysis section entitled “Non-performing Assets and Allowance for Loan Losses.” Although management believes the levels of the allowance as of December 31, 2010 and June 30, 2010 were adequatemaintained at a level necessary to absorb specific losses on impaired loans and probable losses inherent in the loan portfoli o, a decline in local economic conditions, or other factors, could result in additional losses.
Valuation of REO and Foreclosed Assets
Real estate properties acquired through foreclosure or by deed-in-lieu of foreclosure (“REO”) are recorded at fair value less estimated costs to sell. Fair value is generally determined by management based on a number of factors, including third-party appraisals of fair value in an orderly sale. Accordingly, the valuation of REO is subject to significant external and internal judgment. Any differences between management’s assessment of fair value, less estimated costs to sell, and the carrying valueportfolio. Management of the loan at the date a particular property is transferred into REO are charged toBank assesses the allowance for loan losses. Management periodically reviews REO valueslosses on a monthly basis, through the analysis of several different factors including delinquency, charge-off rates and the changing risk profile of the Bank’s loan portfolio, as well as local economic conditions such as unemployment rates, bankruptcies and vacancy rates of business and residential properties. The allowance is increased by the provision for loan losses, which is charged against current period operating results and decreased by the amount of actual loan charge-offs, net of recoveries.
The allowance for loan losses is evaluated on a regular basis by management and is based on management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to determine whetherrepay, the property continuesestimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to be carried atsignificant revision as more information becomes available.
The Company's allowance for possible loan losses consists of three elements: (i) specific valuation allowances determined in accordance with ASC Topic 310 based on probable losses on specific loans; (ii) historical valuation allowances determined in accordance with ASC Topic 450 based on historical loan loss experience for similar loans with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions; and (iii) general valuation allowances determined in accordance with ASC Topic 450 based on general economic conditions and other qualitative risk factors both internal and external to the Company.
For additional information, see Note 3 of Notes to Consolidated Financial Statements included in Item 1 hereof.
As mentioned above, one of the factors taken into consideration in the analysis is charge-off rates which are calculated by loan type. Early in fiscal 2010, the Company shortened the historical time period (“look-back period”) reviewed to calculate these rates from five years to three years. During fiscal 2011 and the first six months of fiscal 2012, each quarterly review has included calculations for “look back periods” of one, two and three years, and, the Company has used the highest historical loss rate in its allowance calculations.
Estimation of Fair Value. The estimation of fair value net of estimated costsis significant to sell. Any further decreases in the value of REO are cons idered valuation adjustments and trigger a corresponding charge to non-interest expense in the Consolidated Statements of Operations. Expenses from the maintenance and operations of REO are included in other non-interest expense.
Deferred Income Taxes
Deferred taxes are determined using the liability (or balance sheet) method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or allnumber of the deferred taxCompany’s assets, will not be realized.including securities and real estate owned.
Declines in the fair value of equity securities below their amortized cost basis that are deemed to be other-than-temporary impairment losses are reflected as realized losses. To determine if an other-than-temporary impairment exists on an equity security, the Company considers (a) the length of time and the extent to which the fair value has been less than cost, (b) the financial condition and near-term prospects of the issuer and (c) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for an anticipated recovery in fair value. To determine if an other-than-temporary-impairment exists on a debt security, the Company first determines if (a) it intends to sell the security or (b) it is more likely than not that it will be required to sell the security before its anticipated recovery. If either of the conditions is met, the Company will recognize an other-than-temporary-impairment in earnings equal to the difference between the fair value of the security and its adjusted cost basis. In estimating other-than-temporary impairment losses on debt securities, management considers a number of factors, including, but not limited to: (1) the length of time and extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) the current market conditions and (4) the intent of the Company to not sell the security or whether it is more-likely-than-not that the Company will be required to sell the security before its anticipated recovery. If neither of the conditions is met, the Company determines (a) the amount of the impairment related to credit loss and (b) the amount of the impairment due to all other factors. The difference between the present values of the cash flows expected to be collected and the amortized cost basis is the credit loss. The amount of the credit loss is included in the consolidated statements of income as an other-than-temporary-impairment on securities and is an adjustment to the cost basis of the security. The portion of the total impairment that is related to all other factors is included in other comprehensive income (loss).
Real estate owned is recorded at fair value less the estimated costs to sell the asset. Any write down at the time of foreclosure is charged against the allowance for loan losses. Subsequently, net expenses related to holding the property and declines in the market value are charged against income.
Deferred Tax Assets. The Company accounts for income taxes according to the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are adjustedmeasured using the enacted tax rates applicable to taxable income for the effectsyears in which those temporary differences are expected to be recovered or settled. Deferred tax assets are evaluated for recoverability using a consistent approach which considers the relative impact of negative and positive evidence, including historical profitability and projections of future taxable income. The Company is required to establish a valuation allowance for deferred tax assets and record a charge to income if it is determined, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized. In evaluating the need for a valuation allowance, the Company estimates future taxable income based on business and tax planning strategies. This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws or variances between our projected operating performance, actual results and rates on the date of enactment.other factors.
Due toThe Company is in a cumulative book taxable loss position. For purposes of establishing a deferred tax valuation allowance, this cumulative book taxable loss position is considered significant, objective evidence that some portion of the cumulative operatingdeferred tax asset might not be realized in the foreseeable future. Net losses overin the last fivepast three fiscal years whichhave resulted in $3.1 milliona cumulative loss of loss carry-forwards,almost $8.6 million. At the end of fiscal 2010, the Company was required to provideprovided a reserve of approximately $1.1 million against its net deferred tax assets duringasset. Please see the fiscal year ended June 30, 2010. During the six months ended December 31, 2010, the Company was required to record an additional $274,000 to provide a full valuation allowance on the netdiscussion below regarding deferred tax asets.assets. The Company concluded that it is more likely than not, that there would not be sufficient future taxable income to realize the deferred tax asset in the foreseeable future.
Results of Operations for the Three Months Ended December 31, 20102011 Compared to the Three Months Ended December 31, 20092010
General. For the three months ended December 31, 2010,2011, the Company reported a net loss of $1.5 million,$662,000, or $(0.95)$(0.43) per diluted share, compared to a net income of $47,000,loss $1.5 million, or $0.03$(0.95) per diluted share, for the same period in 2009.2010. The change to adecrease in net loss for the 20102011 period was primarily attributable to an increasea $617,000 decrease in thenon-interest expense, a $390,000 decrease in provision for loan losses of $408,000 during the 2010 period fromand a negative $51,000 during the 2009 period. The negative provision for the 2009 quarter was the result of the reversal of the provision for loan losses made during the first quarter of fiscal 2010. Based on the analyses performed by the outside consultant and by management, it was determined that the provision made in the quarter ended September 30, 2009, created an excess in the allowance for loan losses, which was reversed in the quarter ended December 31, 2009. In addition, non-interest expense for the three months ended December 31, 2010 increased to $2.1 million from $1.9 million during the same period in 2009. These were also decreases in net interest income of $92,000, in non-interest income of $561,000 and$197,000 decrease in the provision for income taxes, These items were partially offset by a decrease of $173,000.$271,000 in net interest income and a decrease of $120,000 in non-interest income.
Net interest income. The Company’s net interest income for the three months ended December 31, 2010 and 20092011 was $1.3 million, compared to $1.6 million. There was a slightmillion for the same period in 2010. The $271,000 decrease during the three months ended December 31, 2010 that reflects a $400,000$431,000 decrease in interest income partially offset by a $308,000$160,000 decrease in interest expense.
Interest income. Interest income for the three months ended December 31, 20102011 decreased $400,000,$431,000, or 16.1%20.6%, to $2.1$1.7 million compared to $2.5$2.1 million for the same period in 2009.2010. Interest income from loans decreased $408,000$204,000 to $1.3 million for the three months ended December 31, 2011 from $1.5 million from $1.9 millionfor the comparable period in 20092010 as a result of a decrease in average loans to $102.5$93.8 million during the three months ended December 31, 20102011 period from $123.6$102.6 million during the comparable 20092010 period and to a decrease in the yield on loans to 5.90%5.58% during the three months ended December 31, 20102011 from 6.20%5.96% during the comparable period in 2009.2010. The decrease in average loans was the result of a decrease in loanlending volume during and between thesethe three month periods. Additionally, betweenmonths ended December 31, 20092011 compared to the comparable 2010 period, and December 31, 2010 the Bank had loan write-offs tota ling $476,000, transfers of loans totaling $2.2 million to real estate owned and repossessed collateral, and efforts by management to move certain credits out of the Bank. The decrease in yield was the result of a downward trend in interest rates overbetween the three years endingtwo periods. Interest rates began to decrease during the first quarter of calendar 2008, continued to decrease through most of the time since and through December 31, 2010, which resulted in decreased yields on adjustable rate loans and new loans with lower yields replacing some of the higher rate loans that paid off, were written off or transferred to real estate owned or repossessed collateral.2011 remain at exceptionally low levels.
Interest income from investment securities and other interest-earning assets for the three months ended December 31, 2010 increased $28,000,2011 decreased $227,000, or 5.7%39.9%, to $522,000$342,000 from $494,000$568,000 for the same period in 2009.2010. The increasedecrease was the result of an increasea decrease in the yield on these assets to 1.52% for the 2011 period from 2.46% for the 2010 period and by a decrease in the average balance of these assets of $14.6$432,000 to $88.7 million tofor the quarter ended December 31, 2011 from $89.2 million for the three months ended December 31, 2010 fromsame period in 2010.
$74.6 million for the 2009 period, which was substantially offset by decrease in the yield on these assets to 2.84% for the three months ended December 31, 2010 from 3.35% for the 2009 period.
Interest expense. Interest expense for the three months ended December 31, 20102011 decreased $309,000$160,000 or 36.3%29.5%, to $543,000$383,000 from $852,000$543,000 for the same period in 2009.2010. Interest expense on deposits decreased $303,000$160,000 to $485,000$325,000 in the three months ended December 31, 20102011 from $788,000
$485,000 in the same period in 2009.2010. The decrease resulted from a decrease in the average cost of deposits to 1.17% during the three months ended December 31, 2010 from 1.84%0.83% in the 20092011 period from 1.17% in the 2010 period, and by a decrease in average interest-bearing deposit balances of $4.9$8.8 million to $164.9 million during the three months ended December 31, 2010 from $169.8$156.1 million in the 20092011 period from $164.9 million in the 2010 period. Interest expense on other interest-bearing liabilities decreased $6,000 towas $57,000 infor both the three months ended December 31, 2010 from $63,000 in the comparable period in 2009. The decrease in interest expense on other interest-bearing liabilities was attributable to a decrease in the average balance of other interest-bearing liabilities of $2.2 million to $8.1 million during2011 and the three months ended December, 31 2010 from $10.32010. The average balances of other interest-bearing liabilities were approximately $8.1 million duringfor both the 2009 period, which was partially offset by an increase inquarter ended December 31, 2011 and the quarter ended December 31, 2010. The average cost of othe rother interest bearing liabilities to 3.12% during the three months ended December 31, 2010 from 2.72% during the 2009 period. The average outstanding balance of retail repurchase agreements increased to $5.1 million during the three months ended December 31, 2010 from $3.8 million during the comparable period in 2009. This was due to our largest retail repurchase agreement customer having more investable cash during the 2010 period than during 2009 period.approximately 2.79% for both periods.
Net interest margin. The Company’s net interest margin wasdecreased to 2.78% for the three months ended December 31, 2011 from 3.21% for the three months ended December 31, 2010 compared to 3.29% for the three months ended December 31, 2009.2010.
Provision for loan loss. During the quarter ended December 31, 2010,2011, the provision for loan losses totaled $471,000was $18,000, compared to a negative $51,000$408,000 for the quarter ended December 31, 2009.2010. For a discussion of this change,the decrease in the provision for loan losses see “Non-performing Assets and Allowance for Loan Losses” herein.above.
Non-interest income. For the three months ended December 31, 2010,2011, non-interest income totaled a negative $226,000,$346,000, compared to a positive $336,000negative $226,000 for the three months ended December 31, 2009. The $562,000 decrease between2010. In both the two periods resulted primarily from a $500,000 provision2011 quarter and the 2010 quarter, the negative total was the result of provisions for loss on real estate owned duringowned. These provisions totaled $584,000 and $500,000 for the 2011 period and the 2010 period, respectively. In addition, service charges and other fee income decreased by $47,000, or 18.4%, to $208,000 for the 2011 quarter compared to $255,000 for the 2010 quarter, and the Company recorded a $93,000 provision duringloss of $18,000 on the 2009sale of other real estate in the 2011 period. Additionally, thereThere was ano such loss recorded in the 2010 period. These negative changes were partially offset by increases of $3,000 and $2,000 in gain on the sale of foreclosed real estate and other non-interest income, respectively, and $24,000 in income from BOLI. The decrease in service charges and other fee income was due to regulatory changes that have resulted in restrictions on type, number and amount of $143,000, a decrease in profit on the sale of loans of $2,000, and a decrease of $21,000 in other non-interest income. These items were partially offsetfees charged by a positive change of $12,000 in net loss on the sale of property and equipment and real estate owned. The decrease in service charges and other fee inc ome appears to be occurring throughout the financial services industry withinstitutions. We have also observed that account holders are taking greater care that they do not incur overdraft charges foron their accounts. The provisions for loss on foreclosed real estate in both periods were made to expedite the disposal of real estate owned in light of negative market value trends and reduced values noted in new appraisals on foreclosed real estate.
Non-interest expense. Non-interest expense increaseddecreased by $235,000$617,000 from $1.9$2.1 million during the three months ended December 31, 20092010 to $2.1$1.5 million for the three months ended December 31, 2010.2011. This was the result of decreases of $31,000, $196,000 and $395,000 in professional fees, deposit insurance premiums and other non-interest expense, respectively. These decreases were partially offset by increases of $4,000 in compensation and benefits and $1,000 in occupancy and equipment expense. The decrease in other non-interest expense was due primarily to a $300,000 liability recorded in the 2010 period for the possible settlement of the lawsuit discussed
earlier. This expense did not recur in the 2011 period. The decrease in deposit insurance premiums was the result of an adjustment of $213,000 in the balance of the prepaid deposit insurance premiums due to deposit shrinkage.
Income tax expense. State income tax expense and income tax benefits are recorded based on the taxable income or loss of each of the Company. Federal income taxes are calculated based on the combined income of the consolidated group. Pre-tax net income is reduced by non-taxable income items and increased by non-deductible expense items. However, during the year ended June 30, 2011, the Company recorded income tax expense of $1.0 million. This was the result of the recordingreversal of a liabilitycurrent year and previously recorded net deferred tax benefits. In light of $300,000the cumulative net losses the Company has experienced over the last five fiscal years, current accounting standards required that the net deferred tax asset be reserved. Future earnings are expected to enable the Company to recover these reserved deferred tax assets.
The Company recorded an income tax provision of $85,000 for the three months ended December 31, 2011 as compared to an income tax provision of $281,000 for the three months ended December 31, 2010. The $281,000 provision in the quarter ended December 31, 2010 was required to reduce the valuation allowance related to the initial verdictnet deferred tax asset to zero. The $85,000 provision for the quarter ended December 31, 2011 was required to fully reserve deferred state income tax credits.
Results of Operations for the Six Months Ended December 31, 2011 Compared to the Six Months Ended December 31, 2010
General. For the six months ended December 31, 2011, the Company reported a net loss of $950,000, or $(0.61) per diluted share, compared to a net loss $1.5 million, or $(0.99) per diluted share, for the same period in 2010. The decrease in net loss for the 2011 period was primarily attributable to a lawsuit brought by$474,000 decrease in non-interest expense, a former employee, which was discussed$397,000 decrease in Recent Developmentsprovision for loan losses and Corporate Overview. In addition, occupancy and equipment and professional fees increased by $12,000 and $40,000, respectively.a $203,000 decrease in the provision for income taxes, These increasesitems were partially offset by a decrease of $69,000$386,000 in net interest income and a decrease of $99,000 in non-interest income.
Net interest income. The Company’s net interest income for the six months ended December 31, 2011 was $2.7 million, compared to $3.1 million for the same period in 2010. The decrease reflects a $799,000 decrease in interest income partially offset by a $413,000 decrease in interest expense.
Interest income. Interest income for the six months ended December 31, 2011 decreased $799,000, or 18.6%, to $3.5 million compared to $4.3 million for the same period in 2010. Interest income from loans decreased $480,000 to $2.7 million for the six months ended December 31, 2011 from $3.1 million for the comparable period in 2010 as a result of a decrease in average loans to $94.3 million during the 2011 period from $104.7 million during the comparable 2010 period and to a decrease in the yield on loans to 5.58% during the six months ended December 31, 2011 from 5.96% during the comparable period in 2010. The decrease in average loans was the result of a decrease in lending volume during the six months ended December 31, 2011 compared to the comparable 2010 period, and the decrease in yield was the result of a downward trend in interest rates between the two periods. Interest rates began to decrease during the first quarter of calendar 2008, continued to decrease through most of the time since and through December 31, 2011 remain at exceptionally low levels.
Interest income from investment securities and other interest-earning assets for the six months ended December 31, 2011 decreased $319,000, or 27.3%, to $847,000 from $1.2 million for the same period in 2010. The decrease was the result of a decrease in the yield on these assets to 1.83% for the 2011 period from 2.55% for the 2010 period, which was partially offset by an increase in the average balance of these assets of $2.1 million to $91.5 million for the six months ended December 31, 2011 from $89.4 million for the same period in 2010.
Interest expense. Interest expense for the six months ended December 31, 2011 decreased $413,000 or 34.4%, to $786,000 from $1.2 million for the same period in 2010. Interest expense on deposits decreased $416,000 to $669,000 in the six months ended December 31, 2011 from $1.1 million in the same period in 2010. The decrease resulted from a decrease in the average cost of deposits to 0.85% in the 2011 period from 1.30% in the 2010 period, and by a decrease in average interest-bearing deposit balances of $9.9 million to $156.2 million in the 2011 period from $166.1 million in the 2010 period. Interest expense on other interest-bearing liabilities was increased $3,000 during the six months ended December 31, 2011 to $117,000 compared to $114,000 during the six months ended December, 31 2010. The average balances of other interest-bearing liabilities increased by $331,000 to $8.5 million during the 2011 period from $8.2 million during the 2010 period. The average cost of other interest bearing liabilities decreased to 2.73% for the 2011 period from 2.79% for the 2010 period.
Net interest margin. The Company’s net interest margin decreased to 2.90% for the six months ended December 31, 2011 from 3.17% for the six months ended December 31, 2010.
Provision for loan loss. During the six months ended December 31, 2011, the provision for loan losses was $74,000, compared to $471,000 for the six months ended December 31, 2010. For a discussion of the decrease in the provision for loan losses see “Non-performing Assets and Allowance for Loan Losses” above.
Non-interest income. For the six months ended December 31, 2011, non-interest income totaled a negative $38,000, compared to a positive $61,000 for the six months ended December 31, 2010 for a net negative change of $99,000. In both the 2011 and the 2010 six month periods, there were large provisions for loss on real estate owned. These provisions totaled $592,000 and $500,000 for the 2011 and the 2010 periods, respectively. Service charges and other fee income decreased by $105,000, or 19.5%, to $433,000 for the 2011 period compared to $538,000 for the 2010 period. Net loss on the sale of other real estate increased by $15,000, or 71.9%, to a loss of $36,000 in the 2011 period compared to a loss of $21,000 in the 2010 period. Other non-interest income decreased by $16,000, or 39.9%, to $25,000 in 2011 from $41,000 in 2010. These negative changes were partially offset by $24,000 in income from BOLI and $96,000 in profit on the sale of investments. The investment in BOLI occurred during the first quarter of fiscal 2012. The profit on the sale of investments resulted from some portfolio restructuring which also occurred during the first quarter of fiscal 2012. The decrease in service charges and other fee income was due to regulatory changes that have resulted in restrictions on type, number and amount of fees charged by financial institutions. We have also observed that account holders are taking greater care that they do not incur overdraft charges on their accounts. The provisions for loss on foreclosed real estate in both periods were made to expedite the disposal of real estate owned in light of negative market value trends and reduced values noted in new appraisals on foreclosed real estate.
Non-interest expense. Non-interest expense decreased by $474,000 from $3.9 million during the six months ended December 31, 2010 to $3.5 million for the six months ended December 31, 2011. This was the result of a decrease of $418,000 in other non-interest expense, a decrease of $178,000 in deposit insurance premiums and $60,000a decrease of $7,000 in occupancy and equipment expense These decreases were partially offset by increases of $71,000 in compensation and benefits and $58,000 in professional fees. The decrease in other non-interest expense was due primarily to a $300,000 liability recorded in the 2010 period for the possible settlement of the lawsuit discussed earlier. This expense did not recur in the 2011 period. The decrease in deposit insurance premiums was the result of an adjustment of $213,000 in the balance of the prepaid deposit insurance premiums due to deposit shrinkage.
Income tax expense. State income tax expense and income tax benefits are recorded based on the taxable income or loss of each of the Company. Federal income taxes are calculated based on the combined income of the consolidated group. Pre-tax net income is reduced by non-taxable income items and increased by non-deductible expense items. However, during the year ended June 30, 2010,2011, the Company recorded income tax expense of $1.0 million. This was the result of the reversal of current year and previously recorded net deferred tax benefits. In light of the cumulative net losses the Company has experienced over the last five fiscal years, current accounting standards required that the net deferred tax asset be reserved. Future earnings are expected to enable the Company t oto recover these reserved deferred tax assets.
The Company recorded aan income tax expenseprovision of $281,000 for the three months ended December 31, 2010 as compared to a tax expense of $108,000 for the three months ended December 31, 2009. During the quarter ended December 31, 2010, the comprehensive income representing the positive
difference between the market value and the book value of available-for-sale securities decreased by approximately $786,000. This resulted in a reduction in the deferred tax liability related to this item, which created an increase in the net deferred tax asset. The $281,000 provision includes $267,000 which was required to provide a full valuation allowance on the net deferred tax assets.
Results of Operations for the Six Months Ended December 31, 2010 Compared to the Six Months Ended December 31, 2009
General. For the six months ended December 31, 2010, the Company reported a net loss of $1.5 million, or $(0.99) per diluted share, compared to net income of $246,000, or $0.16 per diluted share, for the same period in 2009. The change to a net loss during the first six months of 2010 from net income for the comparable 2009 period was the result of several factors. During the six months ended December 31, 2010 a provision for loan losses of $471,000 was recorded while there was no provision during the 2009 period. In addition, net interest income decreased by $269,000 to $3.1 million for the 2010 period from $3.4 million for the 2009 period. In addition, non-interest expense$85,000 for the six months ended December 31, 2010 increased by $203,000 to $3.9 million from $3.7 mill ion during the same period in 2009. There was also a decrease in non-interest income and an increase in the provision for income taxes, of $805,000 and $38,000, respectively.
Interest income. Interest income for the six months ended December 31, 2010 decreased $861,000, or 16.7%, to $4.3 million2011 as compared to $5.2 million for the same period in 2009. Interestan income from loans decreased $917,000 to $3.1 million from $4.0 million in 2009. This was attributable to a decrease in the yield on loans to 5.94% during the 2010 period from 6.33% during the comparable 2009 period, and to a decrease in the average loan balances to $104.7 million during the six months ended December 31, 2010 from $126.9 million during the 2009 period.
Interest income from investment securities and other interest-earning assets for the six months ended December 31, 2010 increased $55,000 to $1.2 million from $1.1 million for the same period in 2009. The increase was the result of, an increase in the average balance of these assets of $14.9 million to $89.4 million for the six months ended December 31, 2010 from $74.5 million for the same period in 2009, which was partially offset by a decrease in the yield on these assets to 2.59% for the 2010 period from 2.97% for the 2009 period
Interest expense. Interest expense for the six months ended December 31, 2010 decreased $592,000, or 33.0%, to $1.2 million from $1.8 million for the same period in 2009. Interest expense on deposits decreased $567,000 to $1.1 million in the six months ended December 31, 2010 from $1.7 million in the same period in 2009. The decrease resulted from a decrease in average interest-bearing deposit balances of $5.6 million to $166.1 million during the six months ended December 31, 2010 from $171.7 million during the 2009 period, and to a decrease in the average cost of deposits to 1.30% during the six months ended December 31, 2010 from 1.91% in the 2009 period. Interest expense on other interest-bearing liabilities decreased $24,000 to $114,000 in the six months ended December 31, 20 10 from $139,000 in the comparable period in 2009. The decrease in interest expense on other interest-bearing liabilities was due to a decrease in the average outstanding balances of other interest-bearing liabilities to $8.2 million during the six months ended December 31, 2010 from $12.3 million during the 2009 period, which was partially offset by an increase in the average cost on other interest-bearing liabilities to 2.76% during the 2010 period from 2.25% during the 2009 period.
Net interest margin. Net interest margin decreased to 3.17% for the six months ended December 31, 2010 from 3.32% for the six months ended December 31, 2009.
Provision for loan loss. During the six months ended December 31, 2010, there was atax provision for loan losses of $471,000, compared to no provision for the six months ended December 31. 2009. For a discussion of this change, see “Non-performing Assets and Allowance for Loan Losses” herein.
Non-interest income. For the six months ended December 31, 2010, non-interest income totaled $336,000, compared to $866,000 for the six months ended December 31, 2009. The $530,000 decrease between the two periods resulted primarily from an increase of $372,000 in the provision for losses on real estate owned in the 2010 period compared to the 2009 period. There were also decreases of $305,000, $29,000, $63,000 and $20,000 in service charges and other fee income, profit on the sale of loans, net profit/(loss) on sale of property and equipment and real estate owned and other non-interest, respectively. The $101,000 change in net gain on sale of property and equipment and real estate owned was due to a net loss of $59,000 during the six months ended December 31, 2010 compared to net gain of $42,000 during the six months ended December 31, 2009. The decrease in gain on the sale of loans resulted from fewer loans originated for sale during the six months ended December 31, 2010 compared to the six months ended December 31, 2009.
Non-interest expense. Non-interest expense totaled $3.9 million for the six months ended December 31, 2010, compared to $3.7 million for the six months ended December 31, 2009, increasing by $203,000. This was primarily the result of the recording of a liability in a lawsuit brought by a former employee discussed above. Additionally, there was an increase of $82,000 in professional fees. These increases were partially offset by decreases of $127,000 in compensation and benefits, $45,000 in occupancy and equipment expense and $49,000 in deposit insurance premiums. The decreases in compensation and benefits and occupancy and equipment expense are primarily the result of cost reduction and containment efforts begun by current management. The decrease in deposit insurance premiums wa s due to some additional expenses recoded during the six months ended December 31, 2009 period that did not recur in the comparable period in 2010.
Income tax expense. The Company recorded a tax expense of $288,000 for the six months ended December 31, 2010. The $288,000 provision in the six months ended December 31, 2010 as comparedwas required to areduce the valuation allowance related to the net deferred tax expense of $250,000asset to zero. The $85,000 provision for the six months ended December 31, 2009. During the six months ended December 31, 2010, the comprehensive income representing the positive difference between the market value and the book value of available-for-sale securities decreased by $804,000. This resulted in a reduction in the deferred tax liability related to this item, which created an increase in the net deferred tax asset. The $288,000 provision includes $274,000 which2011 was required to provide a full valuation allowance on the netfully reserve deferred state income tax assets.credits.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, borrowings, principal and interest payments on loans, investments, and mortgage-backed securities, and funds provided by other operating activities. While scheduled payments on loans, mortgage-backed securities, and short-term investments are relatively predictable sources of funds, deposit flows and early loan repayments are greatly influenced by general interest rates, economic conditions, and competition.
The Company uses its capital resources principally to meet ongoing commitments to fund maturing certificates of deposits and loan commitments, to maintain liquidity, and to meet operating expenses. At December 31, 2010,2011, the Company had commitments to originate loans totaling $441,000.$476,000. The Company believes that loan repayment and other sources of funds will be adequate to meet its foreseeable short- and long-term liquidity needs.
Regulations require First Home Savingsthe Bank to maintain minimum amounts and ratios of total risk-based capital and Tier 1 capital to risk-weighted assets, and a leverage ratio consisting of Tier 1 capital to average assets. The following table sets forth First Home Savingsthe Bank's actual capital and required capital amounts and ratios at December 31, 20102011 which, at that date, exceeded the minimum capital adequacy requirements.
| Actual | Minimum Requirement For Capital Adequacy Purposes | Minimum Requirement To Be Well Capitalized Under Prompt Corrective Action Provisions | | Actual | | | Minimum Requirement For Capital Adequacy Purposes | | | Minimum Requirement To Be Well Capitalized Under Prompt Corrective Action Provisions | |
At December 31, 2010 | Amount | Ratio | Amount | Ratio | Amount | Ratio | |
At December 31, 2011 | | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | |
(Dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Tangible Capital (to adjusted total assets) | $18,807 | 9.29% | $ 3,038 | 1.50% | - | - - | | $ | 15,561 | | | | 7.79 | % | | $ | 2,995 | | | | 1.50 | % | | | - | | | | - - | |
Tier 1 (Core) Capital (to adjusted total assets) | 18,807 | 9.29% | 8,101 | 4.00% | $10,127 | 5.00% | | | 15,561 | | | | 7.79 | % | | | 7,986 | | | | 4.00 | % | | $ | 9,983 | | | | 5.00 | % |
Tier 1 (Core) Capital (to risk weighted assets) | 18,807 | 18.39% | 4,090 | 4.00% | 6,135 | 6.00% | | | 15,561 | | | | 17.11 | % | | | 3,638 | | | | 4.00 | % | | | 5,457 | | | | 6.00 | % |
Total Risk Based Capital (to risk weighted assets) | 19,970 | 19.53% | 8,180 | 8.00% | 10,225 | 10.00% | | | 16,705 | | | | 18.37 | % | | | 7,276 | | | | 8.00 | % | | | 9,096 | | | | 10.00 | % |
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) established five regulatory capital categories and authorized the banking regulators to take prompt corrective action with respect to institutions in an undercapitalized category. While at December 31, 2010, First Home Savings2011, the Bank still exceeded minimum requirements for the well-capitalizedwell capitalized category, it is not considered well-capitalizedwell capitalized as a result of the ceaseAgreement that was entered into with the Division and desist order currently in place.the FDIC.
This Quarterly Report on Form 10-Q contains certain "forward-looking statements" that relate to the Company within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by the use of words such as "believe," "expect," "anticipate," "intend," "should," "plan," "project," "estimate," "potential," "seek," "strive," or "try" or other conditional verbs such as "will," "would," "should," "could," or "may" or similar expressions. These forward-looking statements relate to, among other things, expectations of the business environment in which we operate and about the Company and the Bank, projections of future performance, perceived opportunities in the market, potential future credit experience, and statements regarding our strategies. Our ability to predict results or the actu alactual effects of our plans or strategies is inherently uncertain. Although we believe that our plans, intentions and expectations, as reflected in these forward-looking statements are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved or realized. Our actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide variety or range of factors including, but not limited to: the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs that may be impacted by deterioration in the housing and commercial real estate markets and may lead to increased losses and non-performing assets in our loan portfolio, result in our allowance for loan losses not being adequate to cover actual losses, and require us to materially increase our reserves; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources; deposit flows; fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas; secondary market conditions for loans and our ability to sell loans in the secondary market; adverse changes in the securities markets; results of examinations of usthe Company by the OfficeFederal Reserve Board and of Thrift Supervision,the Bank by the FDIC, the Missouri Division of Finance and the Federal Deposit Insurance Corporation or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings; the possibility that we will be unable to comply with the conditions imposed upon us by the OrdersBank’s informal Agreement with the Missouri Division of Finance and the FDIC and the Company’s Order to Cease and Desist issu edissued by the Company’s prior banking regulator, the OTS, including but not limited to our ability to reduce our non-performing assets, which could result in the imposition of additional restrictions on our
operations; our ability to control operating costs and expenses; the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; difficulties in reducing risk associated with the loans on our balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential
associated charges; computer systems on which we depend could fail or experience a security breach, or the implementation of new technologies may not be successful; our ability to manage loan delinquency rates; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; legislative or regulatory changes such as the Dodd-Frank Act and its implementing regulations that adversely affect our business including changes in regulatory policies and principles, including the interpretation of regulatory capital or other rules; our ability to attract and retain deposits; further increases in premiums for deposit insurance; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; adv erseadverse changes in the securities markets; the Company’s and Bank’s ability to pay dividends on its common stock; the inability of key third-party providers to perform their obligations to us; changes in accounting policies, principles and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board,FASB, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; the economic impact of war or any terrorist activities; other economic, competitive, governmental, regulatory, and technological factors affecting our operations; pricing, products and services; our ability to lease excess space in Company-owned buildings; and other risks detailed in this Annual Report.Quarterly Report on Form 10-Q. Any of the forward-looking statements that we make in this Form 10-Q and in the other public statements we make may turn out to be wrong because of the inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee. Additionally, t hethe timing and occurrence or non-occurrence of events may be subject to circumstances beyond our control. We caution readers not to place undue reliance on any forward-looking statements. We do not undertake and specifically disclaim any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for future periods to differ materially from those expressed in any forward-looking statements by, or on behalf of, us, and could negatively affect the Company's operating and stock performance.
Any control system, no matter how well designed and operated, can provide only reasonable (not absolute) assurance that its objectives will be met. Furthermore, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
The Company’s management, with the participation of the Company’s Chief Executive Officer President and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as such term is defined in Rules 13a – 15(e) and 15d – 15(e) of the Securities Exchange Act of 1934 (Exchange Act) as of the end of the period covered by the report.
The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management overr ideoverride of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
FIRST BANCSHARES, INC.