CHFN-12.31.2013-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________
FORM 10-Q
_____________________________________
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2013
OR
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 001-35870
_____________________________________
CHARTER FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
_____________________________________
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Maryland | 90-0947148 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
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1233 O.G. Skinner Drive, West Point, Georgia | 31833 |
(Address of Principal Executive Offices) | (Zip Code) |
(706) 645-1391
(Registrant’s telephone number)
N/A
(Former name or former address, if changed since last report)
_____________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. YES x NO o.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
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| | | |
Large accelerated filer | o | Accelerated filer | o |
Non-accelerated filer | o (Do not check if smaller reporting company) | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO x
The number of shares of the registrant’s common stock outstanding as of January 31, 2014 was 22,817,306.
CHARTER FINANCIAL CORPORATION
Table of Contents
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Item 1. | | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 6. | | |
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Part I. Financial Information
Item 1. Financial Statements
CHARTER FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
|
| | | | | | | |
| (unaudited) | | (audited) |
| December 31, 2013 | | September 30, 2013 |
Assets |
Cash and amounts due from depository institutions | $ | 15,213,753 |
| | $ | 10,069,875 |
|
Interest-earning deposits in other financial institutions | 142,054,215 |
| | 151,382,606 |
|
Cash and cash equivalents | 157,267,968 |
| | 161,452,481 |
|
Loans held for sale, fair value of $3,633,189 and $1,883,244 | 3,576,901 |
| | 1,857,393 |
|
Securities available for sale | 208,064,248 |
| | 215,118,407 |
|
Federal Home Loan Bank stock | 3,940,300 |
| | 3,940,300 |
|
Loans receivable: | |
| | |
|
Not covered under FDIC loss sharing agreements | 486,050,182 |
| | 480,152,265 |
|
Covered under FDIC loss sharing agreements | 103,535,228 |
| | 112,915,868 |
|
Allowance for loan losses (covered loans) | (3,434,733 | ) | | (3,924,278 | ) |
Unamortized loan origination fees, net (non-covered loans) | (1,089,621 | ) | | (1,100,666 | ) |
Allowance for loan losses (non-covered loans) | (8,494,412 | ) | | (8,188,896 | ) |
Loans receivable, net | 576,566,644 |
| | 579,854,293 |
|
Other real estate owned: | |
| | |
|
Not covered under FDIC loss sharing agreements | 1,053,406 |
| | 1,615,036 |
|
Covered under FDIC loss sharing agreements | 10,942,189 |
| | 14,068,846 |
|
Accrued interest and dividends receivable | 2,584,167 |
| | 2,728,902 |
|
Premises and equipment, net | 21,532,396 |
| | 21,750,756 |
|
Goodwill | 4,325,282 |
| | 4,325,282 |
|
Other intangible assets, net of amortization | 697,568 |
| | 803,886 |
|
Cash surrender value of life insurance | 46,233,582 |
| | 39,825,881 |
|
FDIC receivable for loss sharing agreements | 25,332,815 |
| | 29,941,862 |
|
Deferred income taxes | 11,671,045 |
| | 11,350,745 |
|
Other assets | 6,122,419 |
| | 771,779 |
|
Total assets | $ | 1,079,910,930 |
| | $ | 1,089,405,849 |
|
Liabilities and Stockholders’ Equity |
Liabilities: | |
| | |
|
Deposits | $ | 737,654,307 |
| | $ | 751,296,668 |
|
FHLB advances | 60,000,000 |
| | 60,000,000 |
|
Advance payments by borrowers for taxes and insurance | 414,484 |
| | 1,054,251 |
|
Other liabilities | 8,678,081 |
| | 3,277,094 |
|
Total liabilities | 806,746,872 |
| | 815,628,013 |
|
Stockholders’ equity: | |
| | |
|
Common stock, $0.01 par value; 22,997,806 shares issued and outstanding at December 31, 2013 and 22,752,214 shares issued and outstanding at September 30, 2013 | 229,978 |
| | 227,522 |
|
Preferred stock, $0.01 par value; 50,000,000 shares authorized at December 31, 2013 and September 30, 2013 | — |
| | — |
|
Additional paid-in capital | 170,699,298 |
| | 171,729,570 |
|
Unearned compensation – ESOP | (5,984,317 | ) | | (6,480,949 | ) |
Retained earnings | 110,680,450 |
| | 110,141,286 |
|
Accumulated other comprehensive loss | (2,461,351 | ) | | (1,839,593 | ) |
Total stockholders’ equity | 273,164,058 |
| | 273,777,836 |
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|
|
| |
|
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Total liabilities and stockholders’ equity | $ | 1,079,910,930 |
| | $ | 1,089,405,849 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
CHARTER FINANCIAL CORPORATION AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME |
| | | | | | | |
| Three Months Ended December 31, |
| 2013 | | 2012 |
Interest income: | | | |
Loans receivable | $ | 8,154,690 |
| | $ | 10,179,929 |
|
Mortgage-backed securities and collateralized mortgage obligations | 968,713 |
| | 730,255 |
|
Federal Home Loan Bank stock | 30,032 |
| | 34,899 |
|
Other investment securities available for sale | 18,807 |
| | 55,141 |
|
Interest-earning deposits in other financial institutions | 85,297 |
| | 51,686 |
|
Total interest income | 9,257,539 |
| | 11,051,910 |
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Interest expense: | |
| | |
|
Deposits | 885,425 |
| | 1,217,460 |
|
Borrowings | 650,868 |
| | 837,469 |
|
Total interest expense | 1,536,293 |
| | 2,054,929 |
|
Net interest income | 7,721,246 |
| | 8,996,981 |
|
Provision for loan losses, not covered under FDIC loss sharing agreements | 300,000 |
| | 300,000 |
|
Provision for covered loan losses | 2,116 |
| | 94,750 |
|
Net interest income after provision for loan losses | 7,419,130 |
| | 8,602,231 |
|
Noninterest income: | |
| | |
|
Service charges on deposit accounts | 1,428,315 |
| | 1,389,682 |
|
Bankcard fees | 827,211 |
| | 560,715 |
|
Gain on securities available for sale | — |
| | 219,913 |
|
Bank owned life insurance | 307,701 |
| | 255,287 |
|
Gain on sale of loans and loan servicing release fees | 172,385 |
| | 349,973 |
|
Loan servicing fees | 65,348 |
| | 82,470 |
|
Brokerage commissions | 144,525 |
| | 140,694 |
|
FDIC receivable for loss sharing agreements (amortization) accretion | (89,742 | ) | | 147,674 |
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Other | 1,260,671 |
| | 64,795 |
|
Total noninterest income | 4,116,414 |
| | 3,211,203 |
|
Noninterest expenses: | |
| | |
|
Salaries and employee benefits | 4,700,952 |
| | 4,675,942 |
|
Occupancy | 1,892,415 |
| | 1,760,936 |
|
Legal and professional | 553,947 |
| | 323,206 |
|
Marketing | 299,740 |
| | 268,017 |
|
Federal insurance premiums and other regulatory fees | 251,350 |
| | 245,125 |
|
Net cost (benefit) of operations of real estate owned | 288,802 |
| | (192,326 | ) |
Furniture and equipment | 166,022 |
| | 201,946 |
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Postage, office supplies and printing | 225,848 |
| | 246,761 |
|
Core deposit intangible amortization expense | 106,318 |
| | 127,665 |
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Other | 714,682 |
| | 667,636 |
|
Total noninterest expenses | 9,200,076 |
| | 8,324,908 |
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Income before income taxes | 2,335,468 |
| | 3,488,526 |
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Income tax expense | 698,400 |
| | 1,154,239 |
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Net income | $ | 1,637,068 |
| | $ | 2,334,287 |
|
Basic net income per share | $ | 0.07 |
| | $ | 0.12 |
|
Diluted net income per share | $ | 0.07 |
| | $ | 0.12 |
|
Weighted average number of common shares outstanding | 22,006,657 |
| | 19,375,531 |
|
Weighted average number of common and potential common shares outstanding | 22,527,837 |
| | 19,425,275 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
CHARTER FINANCIAL CORPORATION AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
| | | | | | | | |
| | Three Months Ended December 31, |
| | 2013 | | 2012 |
| | | | |
Net income | | $ | 1,637,068 |
| | $ | 2,334,287 |
|
Less reclassification adjustment for net gains realized in net income, net of taxes of $0 and $84,887, respectively | | — |
| | (135,026 | ) |
Net unrealized holding gains (losses) on investment and mortgage securities available for sale arising during the period, net of taxes of $(390,877) and $(272,465), respectively | | (621,758 | ) | | (433,403 | ) |
Comprehensive income | | $ | 1,015,310 |
| | $ | 1,765,858 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
CHARTER FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock | | | | | | | | | | | | |
| Number of shares | | Amount | | Additional paid-in capital | | Treasury stock | | Unearned compensation ESOP | | Retained earnings | | Accumulated other comprehensive income (loss) | | Total stockholders' equity |
| | | | | | | | | | | | | | | |
Balance at September 30, 2012 (audited) | 19,859,219 |
| | $ | 198,592 |
| | $ | 73,483,605 |
| | $ | (39,362,686 | ) | | $ | (3,571,121 | ) | | $ | 111,568,998 |
| | $ | 203,380 |
| | $ | 142,520,768 |
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 6,256,417 |
| | — |
| | 6,256,417 |
|
Dividends paid, $0.35 per share | — |
| | — |
| | — |
| | — |
| | — |
| | (7,684,129 | ) | | — |
| | (7,684,129 | ) |
Elimination of First Charter, MHC entity | — |
| | — |
| | 229,564 |
| | — |
| | — |
| | — |
| | — |
| | 229,564 |
|
Change in unrealized loss on securities | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,042,973 | ) | | (2,042,973 | ) |
Allocation of ESOP common stock | — |
| | — |
| | 31,592 |
| | — |
| | 179,282 |
| | — |
| | — |
| | 210,874 |
|
Interest capitalization into ESOP loan | — |
| | — |
| | — |
| | — |
| | (50,279 | ) | | — |
| | — |
| | (50,279 | ) |
Effect of restricted stock awards | — |
| | — |
| | (700,380 | ) | | 753,422 |
| | — |
| | — |
| | — |
| | 53,042 |
|
Stock option expense | — |
| | — |
| | 69,581 |
| | — |
| | — |
| | — |
| | — |
| | 69,581 |
|
Issuance of common stock in offering | 2,892,995 |
| | 28,930 |
| | 98,615,608 |
| | 39,772,779 |
| | (3,038,831 | ) | | — |
| | — |
| | 135,378,486 |
|
Repurchase of shares and conversion expenses | — |
| | — |
| | — |
| | (1,163,515 | ) | | — |
| | — |
| |
|
| | (1,163,515 | ) |
Balance at September 30, 2013 (audited) | 22,752,214 |
| | $ | 227,522 |
| | $ | 171,729,570 |
| | $ | — |
| | $ | (6,480,949 | ) | | $ | 110,141,286 |
| | $ | (1,839,593 | ) | | $ | 273,777,836 |
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 1,637,068 |
| | — |
| | 1,637,068 |
|
Dividends paid, $0.05 per share | — |
| | — |
| | — |
| | — |
| | — |
| | (1,097,904 | ) | | — |
| | (1,097,904 | ) |
Change in unrealized loss on securities | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (621,758 | ) | | (621,758 | ) |
Allocation of ESOP common stock | — |
| | — |
| | 96,225 |
| | — |
| | 496,632 |
| | — |
| | — |
| | 592,857 |
|
Restricted stock expense | — |
| | — |
| | 67,652 |
| | — |
| | — |
| | — |
| | — |
| | 67,652 |
|
Stock option expense | — |
| | — |
| | 52,082 |
| | — |
| | — |
| | — |
| | — |
| | 52,082 |
|
Issuance of common stock, restricted stock | 360,092 |
| | 3,601 |
| | (3,601 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
Repurchase of shares | (114,500 | ) | | (1,145 | ) | | (1,242,630 | ) | | — |
| | — |
| | — |
| | — |
| | (1,243,775 | ) |
Balance at December 31, 2013 (unaudited) | 22,997,806 |
| | $ | 229,978 |
| | $ | 170,699,298 |
| | $ | — |
| | $ | (5,984,317 | ) | | $ | 110,680,450 |
| | $ | (2,461,351 | ) | | $ | 273,164,058 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
CHARTER FINANCIAL CORPORATION AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | |
| Three Months Ended December 31, |
| 2013 | | 2012 |
Cash flows from operating activities: | | | |
Net income | $ | 1,637,068 |
| | $ | 2,334,287 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | |
|
Provision for loan losses, not covered under FDIC loss sharing agreements | 300,000 |
| | 300,000 |
|
Provision for covered loan losses | 2,116 |
| | 94,750 |
|
Provision for FDIC receivable impairment | 225,000 |
| | — |
|
Depreciation and amortization | 359,930 |
| | 411,150 |
|
Accretion and amortization of premiums and discounts, net | 532,337 |
| | 789,290 |
|
Accretion of fair value discounts related to covered loans | (1,191,982 | ) | | (2,282,333 | ) |
Accretion of fair value discounts related to FDIC receivable | (135,258 | ) | | (147,674 | ) |
Gain on sale of loans and loan servicing release fees | (172,385 | ) | | (349,973 | ) |
Proceeds from sale of loans | 7,361,855 |
| | 13,141,669 |
|
Originations and purchases of loans held for sale | (8,908,980 | ) | | (15,023,619 | ) |
Gain on sale of mortgage-backed securities, collateralized mortgage obligations and other investments | — |
| | (219,913 | ) |
Write down of real estate owned | 200,165 |
| | 236,434 |
|
(Gain) loss on sale of real estate owned | (18,760 | ) | | (140,244 | ) |
Restricted stock award expense | 67,652 |
| | — |
|
Stock option expense | 52,082 |
| | 32,083 |
|
Increase in cash surrender value on bank owned life insurance | (307,701 | ) | | (255,287 | ) |
Changes in assets and liabilities: | |
| | |
|
Decrease in accrued interest and dividends receivable | 144,735 |
| | 361,071 |
|
Decrease (increase) in other assets | 2,483,872 |
| | (673,150 | ) |
Decrease in other liabilities | (1,840,667 | ) | | (3,920,255 | ) |
Net cash provided by (used in) operating activities | 791,079 |
| | (5,311,714 | ) |
Cash flows from investing activities: | |
| | |
|
Proceeds from sales of securities available for sale | — |
| | 13,952,478 |
|
Principal collections on securities available for sale | 6,599,964 |
| | 14,073,340 |
|
Purchase of securities available for sale | (7,050,200 | ) | | (26,389,800 | ) |
Proceeds from maturities or calls of securities available for sale | 6,030,000 |
| | 7,066,500 |
|
Proceeds from redemption of FHLB stock | — |
| | 45,000 |
|
Net decrease in loans receivable | 3,411,876 |
| | 16,050,825 |
|
Net decrease (increase) in FDIC receivable | 4,653,085 |
| | (8,324,986 | ) |
Proceeds from sale of real estate owned | 4,138,741 |
| | 6,358,354 |
|
Purchase of bank owned life insurance | (6,100,000 | ) | | — |
|
Purchases of premises and equipment | (35,252 | ) | | (77,203 | ) |
Net cash provided by investing activities | 11,648,214 |
| | 22,754,508 |
|
Cash flows from financing activities: | |
| | |
|
Purchase of treasury stock and conversion expense | — |
| | (344,044 | ) |
Purchase of shares | (1,243,775 | ) | | — |
|
Dividends paid | (1,097,904 | ) | | — |
|
(Decrease) increase in deposits | (13,642,360 | ) | | 5,856,093 |
|
Principal payments on Federal Home Loan Bank advances | — |
| | (1,000,000 | ) |
Net decrease in advance payments by borrowers for taxes and insurance | (639,767 | ) | | (535,463 | ) |
| | | |
CHARTER FINANCIAL CORPORATION AND SUBSIDIARY UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) |
| | | | | | | |
| Three Months Ended December 31, |
| 2013 | | 2012 |
| | | |
Net cash (used in) provided by financing activities | (16,623,806 | ) | | 3,976,586 |
|
Net increase (decrease) in cash and cash equivalents | (4,184,513 | ) | | 21,419,380 |
|
Cash and cash equivalents at beginning of period | 161,452,481 |
| | 108,828,220 |
|
Cash and cash equivalents at end of period | $ | 157,267,968 |
| | $ | 130,247,600 |
|
Supplemental disclosures of cash flow information: | |
| | |
|
Interest paid | $ | 1,544,631 |
| | $ | 2,091,569 |
|
Income taxes paid | 29,750 |
| | 2,650,110 |
|
Supplemental disclosure of noncash activities: | |
| | |
|
Real estate acquired through foreclosure of collateral on loans receivable | $ | 765,639 |
| | $ | 4,102,125 |
|
Write down of real estate owned reimbursed by the FDIC | 277,574 |
| | 307,402 |
|
(Benefit) provision for covered loan losses reimbursed by the FDIC | (529,798 | ) | | 1,230,250 |
|
Issuance of common stock under stock benefit plan | 592,857 |
| | — |
|
Unrealized loss on securities available for sale, net | (621,758 | ) | | (568,429 | ) |
See accompanying notes to unaudited condensed consolidated financial statements.
CHARTER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Nature of Operations
On April 8, 2013, Charter Financial Corporation, a Maryland corporation (“Charter Financial” or the “Company”), completed its conversion and reorganization pursuant to which First Charter, MHC, our federally chartered mutual holding company, was converted to the stock holding company form of organization. Charter Financial sold 14,289,429 shares of common stock at $10.00 per share, for gross offering proceeds of $142.9 million in its stock offering. CharterBank (the “Bank”), as of April 8, 2013, is 100% owned by Charter Financial and Charter Financial is 100% owned by public stockholders. Concurrent with the completion of the offering, shares of common stock of Charter Financial Corporation, the former federally chartered corporation (“Charter Federal”), were converted into the right to receive 1.2471 shares of Charter Financial’s common stock for each share of Charter Federal common stock that was owned immediately prior to completion of the transaction. Cash in lieu of fractional shares was paid based on the offering price of $10.00 per share. As a result of the offering and the exchange on April 8, 2013, Charter Financial had 22,752,214 shares outstanding. Also, as of April 8, 2013, Charter Federal and First Charter, MHC ceased to exist. As part of the elimination, the net asset position of First Charter, MHC, in the amount of $229,564, was assumed by Charter Financial. Any reference to the Company following April 8, 2013 refers to Charter Financial Corporation, a Maryland corporation. In regards to weighted average shares outstanding, share and per share amounts held by the public prior to April 8, 2013, have been restated to reflect the completion of the second-step conversion at a conversion ratio of 1.2471 unless noted otherwise.
Note 2: Basis of Presentation
The accompanying unaudited interim consolidated financial statements of Charter Financial Corporation and subsidiary include the accounts of the Company and the Bank as of December 31, 2013 and September 30, 2013 (derived from audited financial statements), and for three-month periods ended December 31, 2013 and 2012. All intercompany accounts and transactions have been eliminated in consolidation. The unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the unaudited interim condensed consolidated financial statements include all necessary adjustments, consisting of normal recurring accruals, necessary for a fair presentation for the periods presented. The results of operations for the three-month period ended December 31, 2013 are not necessarily indicative of the results that may be expected for the entire year or any other interim period.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, the estimates used for fair value acquisition accounting and the Federal Deposit Insurance Corporation receivable for loss sharing agreements, estimate of expected cash flows on purchased impaired and other acquired loans, and the assessment for other-than-temporary impairment of investment securities, mortgage-backed securities, collateralized mortgage-backed securities and collateralized mortgage obligations. Certain reclassifications of prior fiscal year balances have been made to conform to classifications used in the current fiscal year. These reclassifications did not change net income or stockholders' equity.
Note 3: Recent Accounting Pronouncements
In February 2013, the FASB issued an update to the accounting standards to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments in this update require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. This update was effective prospectively for reporting periods beginning after December 15, 2012. The adoption of this update increased disclosures within Note 4 of the financial statements.
Note 4: Securities Available for Sale
Securities available for sale are summarized as follows:
|
| | | | | | | | | | | | | | | |
| December 31, 2013 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
Other Investment Securities: | | | | | | | |
Tax-free municipals | $ | 20,766,800 |
| | $ | 42,580 |
| | $ | (60 | ) | | $ | 20,809,320 |
|
Mortgage-backed securities: | |
| | |
| | |
| | |
|
FNMA certificates | 115,041,868 |
| | 454,383 |
| | (3,312,370 | ) | | 112,183,881 |
|
GNMA certificates | 1,624,392 |
| | 121,618 |
| | — |
| | 1,746,010 |
|
FHLMC certificates | 51,428,960 |
| | 180,885 |
| | (903,537 | ) | | 50,706,308 |
|
Collateralized mortgage-backed securities: | | | | | | | |
FNMA | 7,179,514 |
| | 64,392 |
| | — |
| | 7,243,906 |
|
Collateralized mortgage obligations: | |
| | |
| | |
| | |
|
FNMA | 1,774,487 |
| | 50,531 |
| | — |
| | 1,825,018 |
|
FHLMC | 346,195 |
| | 32,901 |
| | — |
| | 379,096 |
|
Private-label mortgage securities: (1) | | | | | | | |
Investment grade | 1,884,040 |
| | 15,726 |
| | (76,093 | ) | | 1,823,673 |
|
Split rating (2) | 1,180,579 |
| | — |
| | (39,156 | ) | | 1,141,423 |
|
Non-investment grade | 10,566,732 |
| | — |
| | (361,119 | ) | | 10,205,613 |
|
Total | $ | 211,793,567 |
| | $ | 963,016 |
| | $ | (4,692,335 | ) | | $ | 208,064,248 |
|
________________________________
| |
(1) | Credit ratings are current as of December 31, 2013. |
| |
(2) | Bonds with split ratings represent securities with both investment and non-investment grades. |
|
| | | | | | | | | | | | | | | |
| September 30, 2013 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
Other investment securities: | | | | | | | |
Tax-free municipals | $ | 14,897,685 |
| | $ | 16,733 |
| | $ | (826 | ) | | $ | 14,913,592 |
|
U.S. government sponsored entities | 5,025,898 |
| | 4,145 |
| | — |
| | 5,030,043 |
|
Mortgage-backed securities: | | | | | | | |
FNMA certificates | 118,466,995 |
| | 526,825 |
| | (2,692,511 | ) | | 116,301,309 |
|
GNMA certificates | 1,727,789 |
| | 117,828 |
| | — |
| | 1,845,617 |
|
FHLMC certificates | 53,419,411 |
| | 330,921 |
| | (584,915 | ) | | 53,165,417 |
|
Collateralized mortgage-backed securities: | | | | | | | |
FNMA | 7,189,766 |
| | 66,719 |
| | — |
| | 7,256,485 |
|
Collateralized mortgage obligations: | | | | | | | |
FNMA | 2,207,643 |
| | 66,727 |
| | — |
| | 2,274,370 |
|
FHLMC | 372,444 |
| | 35,410 |
| | — |
| | 407,854 |
|
Private-label mortgage securities: | | | | | | | |
Investment grade | 2,010,627 |
| | 29,388 |
| | (90,020 | ) | | 1,949,995 |
|
Split rating (1) | 1,292,942 |
| | — |
| | (54,434 | ) | | 1,238,508 |
|
Non-investment grade | 11,294,468 |
| | — |
| | (559,251 | ) | | 10,735,217 |
|
Total | $ | 217,905,668 |
| | $ | 1,194,696 |
| | $ | (3,981,957 | ) | | $ | 215,118,407 |
|
______________________________
| |
(1) | Bonds with split ratings represent securities with both investment and non-investment grades. |
The amortized cost and estimated fair value of investment securities available for sale as of December 31, 2013, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. All of the municipal bonds in the table below are pre-funded and are expected to be prepaid before contractual maturity.
|
| | | | | | | |
| Amortized Cost | | Estimated Fair Value |
| | | |
Less than 1 year | $ | — |
| | $ | — |
|
1-5 years | 3,958,566 |
| | 3,963,544 |
|
Greater than 5 years | 16,808,234 |
| | 16,845,776 |
|
Mortgage-backed securities | 191,026,767 |
| | 187,254,928 |
|
Total | $ | 211,793,567 |
| | $ | 208,064,248 |
|
Proceeds from called or matured securities available for sale during the three months ended December 31, 2013 and 2012, were $6.0 million and $7.1 million, respectively. There were no sales of securities for the three months ended December 31, 2013. Proceeds from sales for the three months ended December 31, 2012 were $14.0 million with gross realized gains on these sales of $219,913. There were no losses realized for the three months ended December 31, 2012.
Securities available for sale with an aggregate carrying amount of $133.4 million and $149.2 million at December 31, 2013 and September 30, 2013, respectively, were pledged to secure FHLB advances.
Securities available for sale that had been in a continuous unrealized loss position for less than 12 months at December 31, 2013 are as follows:
|
| | | | | | | | | | | |
| December 31, 2013 |
| Amortized Cost | | Gross Unrealized Losses | | Estimated Fair Value |
Mortgage-backed securities: | | | | | |
FHLMC certificates | $ | 46,770,929 |
| | $ | (903,537 | ) | | $ | 45,867,392 |
|
FNMA certificates | 97,713,618 |
| | (3,312,370 | ) | | 94,401,248 |
|
Collateralized mortgage obligations: | | | | | |
Private-label mortgage securities | 3,575,351 |
| | (95,153 | ) | | 3,480,198 |
|
Total | $ | 148,059,898 |
| | $ | (4,311,060 | ) | | $ | 143,748,838 |
|
|
| | | | | | | | | | | |
| September 30, 2013 |
| Amortized Cost | | Gross Unrealized Losses | | Estimated Fair Value |
Other investment securities: | | | | | |
Tax-free municipals | $ | 722,803 |
| | $ | (51 | ) | | $ | 722,752 |
|
Mortgage-backed securities: | | | | | |
FHLMC certificates | 21,328,101 |
| | (584,915 | ) | | 20,743,186 |
|
FNMA certificates | 92,575,581 |
| | (2,692,511 | ) | | 89,883,070 |
|
Collateralized mortgage obligations: | | | | | |
Private-label mortgage securities | 3,764,878 |
| | (147,843 | ) | | 3,617,035 |
|
Total | $ | 118,391,363 |
| | $ | (3,425,320 | ) | | $ | 114,966,043 |
|
Securities available for sale that had been in a continuous unrealized loss position for greater than 12 months at December 31, 2013 and September 30, 2013 are as follows:
|
| | | | | | | | | | | |
| December 31, 2013 |
| Amortized Cost | | Gross Unrealized Losses | | Estimated Fair Value |
Other investment securities: | | | | | |
Tax-free municipals | $ | 130,589 |
| | $ | (60 | ) | | $ | 130,529 |
|
Collateralized mortgage obligations: | | | | | |
Private-label mortgage securities | 9,274,147 |
| | (381,215 | ) | | 8,892,932 |
|
Total | $ | 9,404,736 |
| | $ | (381,275 | ) | | $ | 9,023,461 |
|
|
| | | | | | | | | | | |
| September 30, 2013 |
| Amortized Cost | | Gross Unrealized Losses | | Estimated Fair Value |
Other investment securities: | | | | | |
Tax-free municipals | $ | 253,404 |
| | $ | (775 | ) | | $ | 252,629 |
|
Collateralized mortgage obligations: | | | | | |
Private-label mortgage securities | 9,971,596 |
| | (555,862 | ) | | 9,415,734 |
|
Total | $ | 10,225,000 |
| | $ | (556,637 | ) | | $ | 9,668,363 |
|
At December 31, 2013 the Company had approximately $477,000 of gross unrealized losses on private-label mortgage securities with aggregate amortized cost of approximately $12.8 million. During the quarter ended December 31, 2013 the Company did not record any other than temporary impairment charges. Other than previously stated, the Company is projecting that it will receive all contractual cash flows so there is no break in yield or additional other than temporary impairment.
Regularly, the Company performs an assessment to determine whether there have been any events or economic circumstances to indicate that a security on which there is an unrealized loss is impaired other-than-temporarily. The assessment considers many factors including the severity and duration of the impairment, the Company’s intent and ability to hold the security for a period of time sufficient for recovery in value, recent events specific to the industry, and current characteristics of each security such as delinquency and foreclosure levels, credit enhancements, and projected losses and loss coverage ratios. It is possible that the underlying collateral of these securities will perform worse than current expectations, which may lead to adverse changes in cash flows on these securities and potential future other-than-temporary impairment losses. Events that may trigger material declines in fair values for these securities in the future include but are not limited to, deterioration of credit metrics, significantly higher levels of default and severity of loss on the underlying collateral, deteriorating credit enhancement and loss coverage ratios, or further illiquidity. All of these securities were evaluated for other-than-temporary impairment based on an analysis of the factors and characteristics of each security as previously enumerated. The Company considers these unrealized losses to be temporary impairment losses primarily because of continued sufficient levels of credit enhancements and credit coverage levels of less senior tranches to tranches held by the Company. The Company analyzed its investment portfolio as of December 31, 2013 for compliance with the new bank investment criteria under the Volcker Rule. The Company does not believe it currently holds any investments affected by the Volcker Rule.
The following table summarizes the changes in the amount of credit losses on the Company’s investment securities recognized in earnings for the three months ended December 31, 2013 and 2012:
|
| | | | | | | |
| Three Months Ended |
| December 31, |
| 2013 | | 2012 |
| | | |
Beginning balance of credit losses previously recognized in earnings | $ | 380,446 |
| | $ | 380,446 |
|
Amount related to credit losses for securities for which an other-than-temporary impairment was not previously recognized in earnings | — |
| | — |
|
Amount related to credit losses for securities for which an other-than-temporary impairment was previously recognized in earnings | — |
| | — |
|
Ending balance of cumulative credit losses recognized in earnings | $ | 380,446 |
| | $ | 380,446 |
|
The following table shows issuer-specific information, including current par value, book value, fair value, credit rating and unrealized gain (loss) for the Company's portfolio of non-agency collateralized mortgage obligations as of December 31, 2013:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cusip | | Description | | Credit Rating (1) | | Cumulative Net Impairment Losses Recognized in Earnings | | Current Par Value | | Book Value | | Market Value | | Unrealized Gain (Loss) |
| | | | Moody | | S&P | | Fitch | | (dollars in thousands) |
Investment Grade | | | | | | | | | | | |
| | | | |
36228FQF6 | | GSR 2003-4F 1A2 | | n/a | | AA+ | | A | | $ | — |
| | $ | 243 |
| | $ | 243 |
| | $ | 245 |
| | $ | 2 |
|
55265KL80 | | MASTR 2003-8 4A1 | | n/a | | A+ | | AAA | | — |
| | 542 |
| | 539 |
| | 553 |
| | 14 |
|
86359BVF5 | | SARM 2004-6 3A3 | | n/a | | A+ | | n/a | | — |
| | 1,102 |
| | 1,102 |
| | 1,026 |
| | (76 | ) |
| | Total | | | | | | | | $ | — |
| | $ | 1,887 |
| | $ | 1,884 |
| | $ | 1,824 |
| | $ | (60 | ) |
Split Rating | | | | | | | | |
| | |
| | |
| | |
| | |
|
17307GDL9 | | CMLTI 2004-HYB1 A31 | | B1 | | n/a | | BBB | | $ | — |
| | $ | 1,181 |
| | $ | 1,181 |
| | $ | 1,141 |
| | $ | (40 | ) |
| | Total | | | | | | | | $ | — |
| | $ | 1,181 |
| | $ | 1,181 |
| | $ | 1,141 |
| | $ | (40 | ) |
Non-Investment Grade | | | | | | | | |
| | |
| | |
| | |
| | |
|
576433UQ7 | | MARM 2004-13 B1 | | NR | | CCC | | n/a | | $ | 380 |
| | $ | 4,309 |
| | $ | 3,929 |
| | $ | 3,663 |
| | $ | (266 | ) |
576433VN3 | | MARM 2004-15 4A1 | | B3 | | n/a | | CCC | | — |
| | 2,395 |
| | 2,395 |
| | 2,339 |
| | (56 | ) |
576433QD1 | | MARM 2004-7 5A1 | | Ba3 | | BB | | n/a | | — |
| | 4,243 |
| | 4,243 |
| | 4,204 |
| | (39 | ) |
| | Total | | | | | | | | $ | 380 |
| | $ | 10,947 |
| | $ | 10,567 |
| | $ | 10,206 |
| | $ | (361 | ) |
| | Grand Total | | | | | | | | $ | 380 |
| | $ | 14,015 |
| | $ | 13,632 |
| | $ | 13,171 |
| | $ | (461 | ) |
______________________________
| |
(1) | Credit ratings are current as of December 31, 2013. |
Changes in accumulated other comprehensive income by component for the three months ended December 31, 2013 are shown in the table below. All amounts are net of tax. The line item affected in the consolidated statements of income by the reclassified amounts is gain on securities available for sale.
|
| | | |
| Unrealized Losses on Available-for-Sale Securities |
| Three Months Ended December 31, 2013 |
| |
Beginning balance | $ | (1,839,593 | ) |
Other comprehensive loss before reclassifications | (621,758 | ) |
Amounts reclassified from accumulated other comprehensive loss | — |
|
Net current-period other comprehensive loss | (621,758 | ) |
Ending balance | $ | (2,461,351 | ) |
Note 5: Loans Receivable
Loans not covered by loss share agreements are summarized as follows:
|
| | | | | | | |
| December 31, 2013 | | September 30, 2013 |
Loans not covered by loss sharing agreements: | | | |
1-4 family residential real estate | $ | 133,330,740 |
| | $ | 124,571,147 |
|
Commercial real estate | 267,817,681 |
| | 269,609,005 |
|
Commercial | 22,793,335 |
| | 23,773,942 |
|
Real estate construction | 45,199,612 |
| | 44,653,355 |
|
Consumer and other | 16,908,814 |
| | 17,544,816 |
|
Loans receivable, net of undisbursed proceeds of loans in process | 486,050,182 |
| | 480,152,265 |
|
Less: | |
| | |
|
Unamortized loan origination fees, net | 1,089,621 |
| | 1,100,666 |
|
Allowance for loan losses | 8,494,412 |
| | 8,188,896 |
|
Total loans not covered, net | $ | 476,466,149 |
| | $ | 470,862,703 |
|
The carrying amount of covered loans at December 31, 2013 and September 30, 2013, consisted of impaired loans at acquisition date and all other acquired loans and are presented in the following tables.
|
| | | | | | | | | | | |
| December 31, 2013 |
| Impaired Loans at Acquisition | | All Other Acquired Loans | | Total Covered Loans |
Loans covered by loss sharing agreements: | | | | | |
1-4 family residential real estate | $ | 4,235,189 |
| | $ | 5,898,195 |
| | $ | 10,133,384 |
|
Commercial real estate | 43,961,228 |
| | 52,744,845 |
| | 96,706,073 |
|
Commercial | 2,748,131 |
| | 3,133,792 |
| | 5,881,923 |
|
Real estate construction | — |
| | — |
| | — |
|
Consumer and other | 491,899 |
| | 2,582,353 |
| | 3,074,252 |
|
Loans receivable, gross | 51,436,447 |
| | 64,359,185 |
| | 115,795,632 |
|
Less: | |
| | |
| | |
|
Nonaccretable difference | 6,832,140 |
| | 1,656,368 |
| | 8,488,508 |
|
Allowance for covered loan losses | 547,875 |
| | 2,886,858 |
| | 3,434,733 |
|
Accretable discount | 2,591,684 |
| | 970,093 |
| | 3,561,777 |
|
Discount on acquired performing loans | — |
| | 185,012 |
| | 185,012 |
|
Unamortized loan origination fees, net | — |
| | 25,107 |
| | 25,107 |
|
Total loans covered, net | $ | 41,464,748 |
| | $ | 58,635,747 |
| | $ | 100,100,495 |
|
|
| | | | | | | | | | | |
| September 30, 2013 |
| Impaired Loans at Acquisition | | All Other Acquired Loans | | Total Covered Loans |
Loans covered by loss sharing agreements: | | | | | |
1-4 family residential real estate | $ | 4,316,008 |
| | $ | 6,285,647 |
| | $ | 10,601,655 |
|
Commercial real estate | 46,170,021 |
| | 61,572,581 |
| | 107,742,602 |
|
Commercial | 2,844,456 |
| | 4,039,892 |
| | 6,884,348 |
|
Real estate construction | — |
| | — |
| | — |
|
Consumer and other | 500,382 |
| | 2,894,282 |
| | 3,394,664 |
|
Loans receivable, gross | 53,830,867 |
| | 74,792,402 |
| | 128,623,269 |
|
Less: | |
| | |
| | |
|
Nonaccretable difference | 7,757,070 |
| | 3,076,192 |
| | 10,833,262 |
|
Allowance for covered loan losses | 705,446 |
| | 3,218,832 |
| | 3,924,278 |
|
Accretable discount | 3,508,430 |
| | 1,164,941 |
| | 4,673,371 |
|
Discount on acquired performing loans | — |
| | 177,858 |
| | 177,858 |
|
Unamortized loan origination fees, net | — |
| | 22,910 |
| | 22,910 |
|
Total loans covered, net | $ | 41,859,921 |
| | $ | 67,131,669 |
| | $ | 108,991,590 |
|
The following table documents changes in the accretable discount on acquired FAS ASC 310-30 loans during the three months ended December 31, 2013 and the year ended September 30, 2013:
|
| | | | | | | | | | | |
| Impaired Loans At Acquisition | | All Other Acquired Loans | | Total Covered Loans |
| | | | | |
Balance, September 30, 2012 | $ | 9,869,297 |
| | $ | 3,055,050 |
| | $ | 12,924,347 |
|
Loan accretion | (6,834,946 | ) | | (1,957,057 | ) | | (8,792,003 | ) |
Transfer from nonaccretable difference | 474,079 |
| | 66,948 |
| | 541,027 |
|
Balance, September 30, 2013 | 3,508,430 |
| | 1,164,941 |
| | 4,673,371 |
|
Loan accretion | (916,746 | ) | | (275,236 | ) | | (1,191,982 | ) |
Transfer from nonaccretable difference | — |
| | 80,388 |
| | 80,388 |
|
Balance, December 31, 2013 | $ | 2,591,684 |
| | $ | 970,093 |
| | $ | 3,561,777 |
|
The following is a summary of transactions during the three months ended December 31, 2013 and 2012 in the allowance for loan losses on loans covered by loss sharing:
|
| | | | | | | |
| Three Months Ended December 31, |
| 2013 | | 2012 |
| | | |
Balance, beginning of period | $ | 3,924,278 |
| | $ | 10,340,815 |
|
Loans charged off (gross) | (191,033 | ) | | (2,717,463 | ) |
Recoveries on loans previously charged off | 229,170 |
| | 10,650 |
|
(Benefit) provision for loan losses (reversed) charged to FDIC receivable | (529,798 | ) | | 1,230,250 |
|
Provision for loan losses charged to operations | 2,116 |
| | 94,750 |
|
Balance, end of period | $ | 3,434,733 |
| | $ | 8,959,002 |
|
The following table documents changes in the carrying value of the FDIC receivable for loss sharing agreements relating to covered loans and other real estate owned during the three months ended December 31, 2013 and the year ended September 30, 2013:
|
| | | | | | | |
| Three Months Ended December 31, 2013 | | Year Ended September 30, 2013 |
| | | |
Balance, beginning of period | $ | 29,941,862 |
| | $ | 35,135,533 |
|
Payments received from FDIC | (2,846,734 | ) | | (480,550 | ) |
Accretion of fair value adjustment | 135,258 |
| | 675,696 |
|
Impairment | (225,000 | ) | | (642,461 | ) |
Recovery of previous loss reimbursements | (590,392 | ) | | (12,847,769 | ) |
Reduction in previous loss estimates | (2,193,100 | ) | | (3,426,783 | ) |
Provision for estimated losses on covered assets recognized in noninterest expense | 277,574 |
| | 7,691,463 |
|
External expenses qualifying under loss sharing agreements | 833,347 |
| | 3,836,733 |
|
Balance, end of period | $ | 25,332,815 |
| | $ | 29,941,862 |
|
Loan Origination and 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 real estate loans are generally made by the Company to Georgia, Alabama or Florida Panhandle entities and are secured by properties in these states. Commercial real estate lending involves additional risks compared to one- to four-family residential lending. Repayment of commercial real estate loans often depends on the successful operations and income stream of the borrowers, and commercial real estate loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to residential real estate loans. The Company’s underwriting criteria for commercial real estate loans include maximum loan-to-value ratios, debt coverage ratios, secondary sources of repayment, guarantor requirements, net worth requirements and quality of cash flow. As part of the loan approval and underwriting of commercial real estate loans, management undertakes a cash flow analysis, and requires a debt-service coverage ratio of at least 1.15 times. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. At December 31, 2013, approximately 30.3% of the outstanding principal balance of the Company’s commercial real estate loans was secured by owner-occupied properties.
The Company makes construction and land development loans primarily for the construction of one- to four-family residences but also for multi-family and nonresidential real estate projects on a select basis. While current market conditions have suppressed demand for construction and land loans, there are opportunities to lend to quality borrowers in the Company’s market area for construction loans. The Company offers two principal types of construction loans: builder loans, including both speculative (unsold) and pre-sold loans to pre-approved local builders; and construction/permanent loans to property owners that are converted to permanent loans at the end of the construction phase. The number of speculative loans that management will extend to a builder at one time depends upon the financial strength and credit history of the builder. The Company’s construction loan program is expected to remain a modest portion of the loan volume and management generally limits the number of outstanding loans on unsold homes under construction within a specific area.
The Company also originates first and second mortgage loans secured by one- to four-family residential properties within Georgia, Alabama and the Florida Panhandle. Management currently originates mortgages at all branch locations, but utilizes a centralized processing location to reduce the underwriting risk. The Company originates both fixed rate and adjustable rate one- to four-family residential mortgage loans. Fixed rate 30-year conforming loans are generally originated for resale into the secondary market on a servicing-released basis and loans that are non-conforming due to property exceptions and that have adjustable rates are generally retained in the Company’s portfolio. The non-conforming loans originated are not considered to be subprime loans and the amount of subprime and low documentation loans held by the Company is not material.
The majority of the Company’s non-mortgage loans consist of consumer loans, including loans on deposits, second mortgage loans, home equity lines of credit, auto loans and various other installment loans. The Company primarily offers consumer loans (excluding second mortgage loans and home equity lines of credit) as an accommodation to customers. Consumer loans tend to have a higher credit risk than residential mortgage loans because they may be secured by rapidly depreciable assets, or may be
unsecured. The Company’s consumer lending generally follows accepted industry standards for non sub-prime lending, including credit scores and debt to income ratios. The Company also offers home equity lines of credit as a complement to one- to four-family residential mortgage lending. The underwriting standards applicable to home equity credit lines are similar to those for one- to four-family residential mortgage loans, except for slightly more stringent credit-to-income and credit score requirements. Home equity loans are generally limited to 80% of the value of the underlying property unless the loan is covered by private mortgage insurance or a loss sharing agreement. At December 31, 2013, the Company had $11.6 million of home equity lines of credit and second mortgage loans not covered by FDIC loss sharing agreements (“loss sharing”).
The Company’s commercial business loans are generally limited to terms of five years or less. Management typically collateralizes these loans with a lien on commercial real estate or, very rarely, with a lien on business assets and equipment. Management also generally requires the personal guarantee of the business owner. Interest rates on commercial business loans are generally higher than interest rates on residential or commercial real estate loans due to the risk inherent in this type of loan. Commercial business loans are generally considered to have more risk than residential mortgage loans or commercial real estate loans because the collateral may be in the form of intangible assets and/or readily depreciable inventory. Commercial business loans may also involve relatively large loan balances to single borrowers or groups of related borrowers, with the repayment of such loans typically dependent on the successful operation and income stream of the borrower. Such risks can be significantly affected by economic conditions. In addition, commercial business lending generally requires substantially greater supervision efforts by Management compared to residential mortgage or commercial real estate lending.
The Company maintains an internal loan review function that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management. 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. The Company further engages an independent, external loan reviewer on an annual basis.
Nonaccrual and Past Due Loans. Nonaccrual loans not covered by loss sharing, segregated by class of loans were as follows:
|
| | | | | | | |
| December 31, 2013 | | September 30, 2013 |
| | | |
1-4 family residential real estate | $ | 1,510,330 |
| | $ | 1,507,760 |
|
Commercial real estate | 3,231,911 |
| | 1,120,938 |
|
Commercial | 152,775 |
| | 161,036 |
|
Consumer and other | 80,063 |
| | 84,208 |
|
Total | $ | 4,975,079 |
| | $ | 2,873,942 |
|
An age analysis of past due loans not covered by loss sharing, segregated by class of loans at December 31, 2013 and September 30, 2013 were as follows:
December 31, 2013
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 30-89 Days Past Due | | Greater than 90 Days Past Due | | Total Past Due | | Current | | Total Loans | | Loans > 90 Days Accruing |
1-4 family residential real estate | | $ | 1,271,681 |
| | $ | — |
| | $ | 1,271,681 |
| | $ | 132,059,059 |
| | $ | 133,330,740 |
| | $ | — |
|
Commercial real estate | | 4,083,721 |
| | 823,930 |
| | 4,907,651 |
| | 262,910,030 |
| | 267,817,681 |
| | — |
|
Commercial | | 115,370 |
| | — |
| | 115,370 |
| | 22,677,965 |
| | 22,793,335 |
| | — |
|
Real estate construction | | — |
| | — |
| | — |
| | 45,199,612 |
| | 45,199,612 |
| | — |
|
Consumer and other | | 315,293 |
| | — |
| | 315,293 |
| | 16,593,521 |
| | 16,908,814 |
| | — |
|
| | $ | 5,786,065 |
| | $ | 823,930 |
| | $ | 6,609,995 |
| | $ | 479,440,187 |
| | $ | 486,050,182 |
| | $ | — |
|
September 30, 2013
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 30-89 Days Past Due | | Greater than 90 Days Past Due | | Total Past Due | | Current | | Total Loans | | Loans > 90 Days Accruing |
1-4 family residential real estate | | $ | 1,116,477 |
| | $ | 47,283 |
| | $ | 1,163,760 |
| | $ | 123,407,387 |
| | $ | 124,571,147 |
| | $ | 47,283 |
|
Commercial real estate | | 524,803 |
| | 836,510 |
| | 1,361,313 |
| | 268,247,692 |
| | 269,609,005 |
| | — |
|
Commercial | | 113,019 |
| | — |
| | 113,019 |
| | 23,660,923 |
| | 23,773,942 |
| | — |
|
Real estate construction | | 37,312 |
| | — |
| | 37,312 |
| | 44,616,043 |
| | 44,653,355 |
| | — |
|
Consumer and other | | 144,990 |
| | — |
| | 144,990 |
| | 17,399,826 |
| | 17,544,816 |
| | — |
|
| | $ | 1,936,601 |
| | $ | 883,793 |
| | $ | 2,820,394 |
| | $ | 477,331,871 |
| | $ | 480,152,265 |
| | $ | 47,283 |
|
An age analysis of past due loans covered by loss sharing, segregated by class of loans at December 31, 2013 and September 30, 2013 were as follows:
December 31, 2013
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 30-89 Days Past Due | | Greater than 90 Days Past Due | | Total Past Due | | Current | | Total Loans (1) | | Loans > 90 Days Accruing (2) |
1-4 family residential real estate | | $ | 423,417 |
| | $ | 822,683 |
| | $ | 1,246,100 |
| | $ | 7,678,763 |
| | $ | 8,924,863 |
| | $ | 822,683 |
|
Commercial real estate | | 2,432,553 |
| | 6,981,337 |
| | 9,413,890 |
| | 78,688,317 |
| | 88,102,207 |
| | 6,981,337 |
|
Commercial | | 660,977 |
| | 768,899 |
| | 1,429,876 |
| | 3,143,090 |
| | 4,572,966 |
| | 768,899 |
|
Consumer and other | | 70,527 |
| | 87,837 |
| | 158,364 |
| | 2,113,991 |
| | 2,272,355 |
| | 87,837 |
|
| | $ | 3,587,474 |
| | $ | 8,660,756 |
| | $ | 12,248,230 |
| | $ | 91,624,161 |
| | $ | 103,872,391 |
| | $ | 8,660,756 |
|
__________________________________
| |
(1) | Covered loan balances are net of nonaccretable differences and allowance for covered loan losses and have not been reduced by $3,746,789 of accretable discounts and discounts on acquired performing loans. |
| |
(2) | Covered loans contractually past due greater than ninety days are reported as accruing loans because of accretable discounts established at the time of acquisition. |
September 30, 2013
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 30-89 Days Past Due | | Greater than 90 Days Past Due | | Total Past Due | | Current | | Total Loans (1) | | Loans > 90 Days Accruing (2) |
1-4 family residential real estate | | $ | 414,577 |
| | $ | 937,974 |
| | $ | 1,352,551 |
| | $ | 7,991,686 |
| | $ | 9,344,237 |
| | $ | 937,974 |
|
Commercial real estate | | 2,948,186 |
| | 6,926,620 |
| | 9,874,806 |
| | 87,261,044 |
| | 97,135,850 |
| | 6,926,620 |
|
Commercial | | 534,363 |
| | 611,305 |
| | 1,145,668 |
| | 3,950,836 |
| | 5,096,504 |
| | 611,305 |
|
Real estate construction | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Consumer and other | | 2,901 |
| | 97,747 |
| | 100,648 |
| | 2,188,490 |
| | 2,289,138 |
| | 97,747 |
|
| | $ | 3,900,027 |
| | $ | 8,573,646 |
| | $ | 12,473,673 |
| | $ | 101,392,056 |
| | $ | 113,865,729 |
| | $ | 8,573,646 |
|
__________________________________
| |
(1) | Covered loan balances are net of nonaccretable differences and allowance for covered loan losses and have not been reduced by $4,851,229 of accretable discounts and discounts on acquired performing loans. |
| |
(2) | Covered loans contractually past due greater than ninety days are reported as accruing loans because of accretable discounts established at the time of acquisition. |
Impaired Loans. The Company evaluates “impaired” loans, which includes nonperforming loans and accruing troubled debt restructured loans, having risk characteristics that are unique to an individual borrower on a loan-by-loan basis with balances above a specified level. For smaller loans, the allowance is calculated based on the credit grade utilizing historical loss experience and other qualitative factors.
Impaired loans not covered by loss sharing, segregated by class of loans were as follows:
December 31, 2013
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Three Months Ended December 31, 2013 |
| | Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Average Investment in Impaired Loans | | Interest Income Recognized |
With no related allowance recorded: | | |
| | |
| | |
| | |
| | |
|
1-4 family residential real estate | | $ | 1,569,836 |
| | $ | 1,942,952 |
| | $ | — |
| | $ | 1,604,607 |
| | $ | 17,463 |
|
Commercial real estate | | 11,572,702 |
| | 13,578,757 |
| | — |
| | 12,138,602 |
| | 151,147 |
|
Commercial | | 341,064 |
| | 364,223 |
| | — |
| | 1,001,050 |
| | 9,660 |
|
Real estate construction | | — |
| | — |
| | — |
| | — |
| | — |
|
Grand Total: | | $ | 13,483,602 |
| | $ | 15,885,932 |
| | $ | — |
| | $ | 14,744,259 |
| | $ | 178,270 |
|
There were no recorded allowances for impaired loans not covered by loss sharing at December 31, 2013. The recorded investment in accruing troubled debt restructured loans at December 31, 2013 totaled $8,588,586 and is included in the impaired loan table above.
September 30, 2013
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Year Ended September 30, 2013 |
| | Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Average Investment in Impaired Loans | | Interest Income Recognized |
With no related allowance recorded: | | | | | | | | | | |
1-4 family residential real estate | | $ | 1,614,765 |
| | $ | 1,931,968 |
| | $ | — |
| | $ | 1,699,236 |
| | $ | 5,901 |
|
Commercial real estate | | 11,863,525 |
| | 14,090,218 |
| | — |
| | 13,561,174 |
| | 583,465 |
|
Commercial | | 1,661,036 |
| | 1,681,641 |
| | — |
| | 2,299,878 |
| | 74,935 |
|
Real estate construction | | — |
| | — |
| | — |
| | — |
| | — |
|
Grand Total: | | $ | 15,139,326 |
| | $ | 17,703,827 |
| | $ | — |
| | $ | 17,560,288 |
| | $ | 664,301 |
|
There were no recorded allowances for impaired loans not covered by loss sharing at September 30, 2013. The recorded investment in accruing troubled debt restructured loans at September 30, 2013 totaled $12,302,311 and is included in the impaired loan table above.
Credit Quality Indicators. As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio for both loans covered and not covered by loss sharing agreements, management tracks certain credit quality indicators including the level of classified loans, net charge-offs, non-performing loans (see details above) and the general economic conditions in its market areas.
The Company utilizes a risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 8. The risk grade for each individual loan is determined by the loan officer and other approving officers at the time of loan origination and is changed from time to time to reflect an ongoing assessment of loan risk. Risk grades are reviewed on specific loans monthly for all delinquent loans as a part of monthly meetings held by the Loan Committee, quarterly for all nonaccrual and special reserve loans, and annually as part of the Company's internal loan review process. In addition, individual loan risk grades are reviewed in connection with all renewals, extensions and modifications. Risk grades for covered loans are determined by officers within the Special Assets Division based on an ongoing assessment of loan risk. Such risk grades are updated in a manner consistent with non-covered loans, except the grading of such loans are assessed quarterly, as applicable, relating to revised estimates of expected cash flows.
The following table presents the risk grades of the loan portfolio not covered by loss sharing, segregated by class of loans:
December 31, 2013
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 1-4 family residential real estate | | Commercial real estate | | Commercial | | Real estate construction | | Consumer and other | | Total |
| | | | | | | | | | | |
Pass (1-4) | $ | 132,662,937 |
| | $ | 239,387,222 |
| | $ | 19,945,438 |
| | $ | 45,174,826 |
| | $ | 16,869,798 |
| | $ | 454,040,221 |
|
Special Mention (5) | — |
| | 2,009,438 |
| | 983,369 |
| | — |
| | — |
| | 2,992,807 |
|
Substandard (6) | 667,803 |
| | 26,421,021 |
| | 1,864,528 |
| | 24,786 |
| | 39,016 |
| | 29,017,154 |
|
Doubtful (7) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Loss (8) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total not covered loans | $ | 133,330,740 |
| | $ | 267,817,681 |
| | $ | 22,793,335 |
| | $ | 45,199,612 |
| | $ | 16,908,814 |
| | $ | 486,050,182 |
|
September 30, 2013
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 1-4 family residential real estate | | Commercial real estate | | Commercial | | Real estate construction | | Consumer and other | | Total |
| | | | | | | | | | | |
Pass (1-4) | $ | 117,274,336 |
| | $ | 245,346,763 |
| | $ | 20,708,908 |
| | $ | 44,628,569 |
| | $ | 16,756,882 |
| | $ | 444,715,458 |
|
Special Mention (5) | 2,438,309 |
| | 2,094,817 |
| | 996,970 |
| | — |
| | 471,186 |
| | 6,001,282 |
|
Substandard (6) | 4,858,502 |
| | 22,167,425 |
| | 2,068,064 |
| | 24,786 |
| | 315,848 |
| | 29,434,625 |
|
Doubtful (7) | — |
| | — |
| | — |
| | — |
| | 900 |
| | 900 |
|
Loss (8) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total not covered loans | $ | 124,571,147 |
| | $ | 269,609,005 |
| | $ | 23,773,942 |
| | $ | 44,653,355 |
| | $ | 17,544,816 |
| | $ | 480,152,265 |
|
The following table presents the risk grades, ignoring grade enhancement provided by the FDIC loss sharing, of the loan portfolio covered by loss sharing agreements, segregated by class of loans at December 31, 2013 and September 30, 2013. Numerical risk ratings 5-8 constitute classified assets for regulatory reporting; however regulatory authorities consider the FDIC loss sharing percentage of either 80% or 95%, as applicable, as a reduction of the regulatory classified balance for covered loans. With respect to classified assets covered by loss sharing agreements, numerical risk ratings 5-8, for regulatory reporting purposes are done under FDIC guidance reporting the Bank’s non-reimbursable amount of the book balance of the loans as classified. The remaining reimbursable portion is classified as pass, numerical risk ratings 1-4.
December 31, 2013
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 1-4 family residential real estate | | Commercial real estate | | Commercial | | Real estate construction | | Consumer and other | | Total |
| | | | | | | | | | | |
Numerical risk rating (1-4) | $ | 6,383,481 |
| | $ | 41,777,224 |
| | $ | 2,415,343 |
| | $ | — |
| | $ | 2,094,057 |
| | $ | 52,670,105 |
|
Numerical risk rating (5) | 151,024 |
| | 13,500,374 |
| | 580,448 |
| | — |
| | — |
| | 14,231,846 |
|
Numerical risk rating (6) | 2,390,358 |
| | 31,065,252 |
| | 973,534 |
| | — |
| | 178,298 |
| | 34,607,442 |
|
Numerical risk rating (7) | — |
| | 1,759,357 |
| | 603,641 |
| | — |
| | — |
| | 2,362,998 |
|
Numerical risk rating (8) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total covered loans (1) | $ | 8,924,863 |
| | $ | 88,102,207 |
| | $ | 4,572,966 |
| | $ | — |
| | $ | 2,272,355 |
| | $ | 103,872,391 |
|
__________________________________
| |
(1) | Covered loan balances are net of nonaccretable differences and allowances for covered loan losses and have not been reduced by $3,746,789 of accretable discounts and discounts on acquired performing loans. |
September 30, 2013
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 1-4 family residential real estate | | Commercial real estate | | Commercial | | Real estate construction | | Consumer and other | | Total |
| | | | | | | | | | | |
Numerical risk rating (1-4) | $ | 5,318,294 |
| | $ | 45,762,355 |
| | $ | 2,988,721 |
| | $ | — |
| | $ | 1,658,075 |
| | $ | 55,727,445 |
|
Numerical risk rating (5) | 1,094,186 |
| | 20,231,874 |
| | 454,554 |
| | — |
| | 440,058 |
| | 22,220,672 |
|
Numerical risk rating (6) | 2,925,433 |
| | 29,491,113 |
| | 1,058,143 |
| | — |
| | 190,171 |
| | 33,664,860 |
|
Numerical risk rating (7) | 6,324 |
| | 1,650,508 |
| | 595,086 |
| | — |
| | 834 |
| | 2,252,752 |
|
Numerical risk rating (8) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total covered loans (1) | $ | 9,344,237 |
| | $ | 97,135,850 |
| | $ | 5,096,504 |
| | $ | — |
| | $ | 2,289,138 |
| | $ | 113,865,729 |
|
__________________________________
| |
(1) | Covered loan balances are net of nonaccretable differences and allowances for covered loan losses and have not been reduced by $4,851,229 of accretable discounts and discounts on acquired performing loans. |
Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to expense and is an amount that management believes will be adequate to absorb losses on existing loans that become uncollectible, based on evaluations of the collectability of loans. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, historical loss rates, overall portfolio quality, review of specific problem loans, and current economic conditions and trends that may affect a borrower’s ability to repay. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely and subsequent recoveries are added to the allowance.
Management’s allowance for loan losses methodology is a loan classification-based system. Management bases the required reserve on a percentage of the loan balance for each type of loan and classification level. Loans may be classified manually and are automatically classified if they are not previously classified when they reach certain levels of delinquency. Unclassified loans are reserved at different percentages based on the loan loss history of the last two years. Reserve percentages are also adjusted based upon our estimate of the effect that the current economic environment will have on each type of loan.
Management segments its allowance for loan losses into the following four major categories: (1) specific reserves; (2) general allowances for Classified/Watch loans; (3) general allowances for loans with satisfactory ratings; and (4) an unallocated amount. Risk ratings are initially assigned in accordance with CharterBank’s loan and collection policy. An organizationally independent department reviews risk grade assignments on an ongoing basis. Management reviews current information and events regarding a borrowers’ financial condition and strengths, cash flows available for debt repayment, the related collateral supporting the loan and the effects of known and expected economic conditions. When the evaluation reflects a greater than normal risk associated with the individual loan, management classifies the loan accordingly. If the loan is determined to be impaired, management allocates a portion of the allowance for loan losses for that loan based on the fair value of the collateral, if the loan is considered collateral-dependent, as the measure for the amount of the impairment. Impaired and Classified/Watch loans are aggressively monitored.
The allowances for loans by credit grade are further subdivided by loan type. The Company has developed specific quantitative allowance factors to apply to each loan which considers loan charge-off experience over the most recent two years by loan type. In addition, loss estimates are applied for certain qualitative allowance factors that are subjective in nature and require considerable judgment on the part of management. Such qualitative factors include economic and business conditions, the volume of past due loans, changes in the value of collateral of collateral-dependent loans, and other economic uncertainties. An unallocated component of the allowance is also established for losses that specifically exist in the remainder of the portfolio, but have yet to be identified.
An unallocated allowance is generally maintained in a range of 4% to 12% of the total allowance in recognition of the imprecision of the estimates and other factors. In times of greater economic downturn and uncertainty, the higher end of this range is provided.
Through the FDIC-assisted acquisitions of the loans of Neighborhood Community Bank (“NCB”), McIntosh Commercial Bank (“MCB”) and First National Bank of Florida (“FNB”), management established nonaccretable discounts for the acquired impaired loans and also for all other loans of MCB. These nonaccretable discounts were based on estimates of future cash flows. Subsequent to the acquisition dates, management continues to assess the experience of actual cash flows compared to estimates. When management determines that nonaccretable discounts are insufficient to cover expected losses in the applicable covered loan portfolios, the allowance for covered loans is increased with a corresponding provision for covered loan losses as a charge to earnings and an increase in the applicable FDIC receivable based on loss sharing indemnification.
The Company maintained its allowance for loan losses for the quarter ended December 31, 2013 in response to continued weak economic conditions, net charge-offs, financial indicators for borrowers in the real estate sectors, continuing low collateral values of commercial and residential real estate, and nonaccrual and impaired loans. The following table details the allowance for loan losses on loans not covered by loss sharing by portfolio segment for the quarters ended December 31, 2013 and 2012. Allocation of a portion of the allowance to one category of loans does not preclude availability to absorb losses in other categories.
The following tables are a summary of transactions in the allowance for loan losses on loans not covered by loss sharing by portfolio segment:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, 2013 |
| 1-4 family real estate | | Commercial real estate | | Commercial | | Real estate construction | | Consumer and other | | Unallocated | | Total |
Allowance for loan losses: | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Balance at beginning of period | $ | 862,043 |
| | $ | 5,446,357 |
| | $ | 455,833 |
| | $ | 387,302 |
| | $ | 124,717 |
| | $ | 912,644 |
| | $ | 8,188,896 |
|
Charge-offs | (41,409 | ) | | — |
| | (22,035 | ) | | — |
| | (4,550 | ) | | — |
| | (67,994 | ) |
Recoveries | — |
| | 61,120 |
| | 10,010 |
| | — |
| | 2,380 |
| | — |
| | 73,510 |
|
(Credit) provision | (80,870 | ) | | 495,487 |
| | 240,777 |
| | (24,711 | ) | | (68,480 | ) | | (262,203 | ) | | 300,000 |
|
Balance at end of period | $ | 739,764 |
| | $ | 6,002,964 |
| | $ | 684,585 |
| | $ | 362,591 |
| | $ | 54,067 |
| | $ | 650,441 |
| | $ | 8,494,412 |
|
Ending balance: individually evaluated for impairment | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | |
| | $ | — |
|
Loans: | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Ending balance | $ | 133,330,740 |
| | $ | 267,817,681 |
| | $ | 22,793,335 |
| | $ | 45,199,612 |
| | $ | 16,908,814 |
| | |
| | $ | 486,050,182 |
|
Ending balance: individually evaluated for impairment | $ | 1,569,836 |
| | $ | 11,572,702 |
| | $ | 341,064 |
| | $ | — |
| | $ | — |
| | |
| | $ | 13,483,602 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, 2012 |
| 1-4 family real estate | | Commercial real estate | | Commercial | | Real estate construction | | Consumer and other | | Unallocated | | Total |
Allowance for loan losses: | | | | | | | | | | | | | |
Balance at beginning of period | $ | 879,854 |
| | $ | 5,480,132 |
| | $ | 711,594 |
| | $ | 287,129 |
| | $ | 79,627 |
| | $ | 751,559 |
| | $ | 8,189,895 |
|
Charge-offs | (46,270 | ) | | (124,365 | ) | | — |
| | — |
| | (7,479 | ) | | — |
| | (178,114 | ) |
Recoveries | 7,606 |
| | 57,856 |
| | 4,334 |
| | — |
| | 778 |
| | — |
| | 70,574 |
|
Provision (credit) | 137,418 |
| | 276,825 |
| | (355,493 | ) | | 192,101 |
| | 73,478 |
| | (24,329 | ) | | 300,000 |
|
Balance at end of period | $ | 978,608 |
| | $ | 5,690,448 |
| | $ | 360,435 |
| | $ | 479,230 |
| | $ | 146,404 |
| | $ | 727,230 |
| | $ | 8,382,355 |
|
Ending balance: individually evaluated for impairment | $ | — |
| | $ | 23,092 |
| | $ | 14,923 |
| | $ | — |
| | $ | — |
| | |
| | $ | 38,015 |
|
Loans: | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Ending balance | $ | 103,707,236 |
| | $ | 249,612,987 |
| | $ | 17,820,303 |
| | $ | 46,772,520 |
| | $ | 17,897,522 |
| | |
| | $ | 435,810,568 |
|
Ending balance: individually evaluated for impairment | $ | 2,244,408 |
| | $ | 12,010,438 |
| | $ | 2,707,794 |
| | $ | 5,825 |
| | $ | — |
| | |
| | $ | 16,968,465 |
|
The following tables detail the nonaccretable discount and allowance for loan losses on loans covered by loss sharing by portfolio segment:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, 2013 |
| 1-4 family real estate | | Commercial real estate | | Commercial | | Real estate construction | | Consumer and other | | Total |
Nonaccretable differences: (1) | | | | | | | | | | | |
Balance at beginning of period | $ | 1,257,419 |
| | $ | 10,606,752 |
| | $ | 1,787,844 |
| | $ | — |
| | $ | 1,105,525 |
| | $ | 14,757,540 |
|
Charge-offs | (54,490 | ) | | (341,657 | ) | | (82,548 | ) | | — |
| | (95,796 | ) | | (574,491 | ) |
Recoveries | 730 |
| | 12,759 |
| | 4,585 |
| | — |
| | 643 |
| | 18,717 |
|
Reduction in previous loss estimates credited to FDIC receivable | — |
| | (1,377,500 | ) | | (285,000 | ) | | — |
| | (801 | ) | | (1,663,301 | ) |
Provision for loan losses charged to FDIC receivable | — |
| | (237,500 | ) | | (95,000 | ) | | — |
| | (197,298 | ) | | (529,798 | ) |
Provision (credit) for loan losses charged to operations | 4,862 |
| | 13,511 |
| | (5,924 | ) | | — |
| | (10,333 | ) | | 2,116 |
|
Transfer to accretable discount | — |
| | (72,500 | ) | | (15,000 | ) | | — |
| | (42 | ) | | (87,542 | ) |
Balance at end of period | $ | 1,208,521 |
| | $ | 8,603,865 |
| | $ | 1,308,957 |
| | $ | — |
| | $ | 801,898 |
| | $ | 11,923,241 |
|
Covered loans: | |
| | |
| | |
| | |
| | |
| | |
|
Ending contractual balance | $ | 10,133,384 |
| | $ | 96,706,073 |
| | $ | 5,881,923 |
| | $ | — |
| | $ | 3,074,252 |
| | $ | 115,795,632 |
|
______________________________
| |
(1) | Amounts include the allowance for covered loan losses. |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, 2012 |
| 1-4 family real estate | | Commercial real estate | | Commercial | | Real estate construction | | Consumer and other | | Total |
Nonaccretable differences: (1) | | | | | | | | | | | |
Balance at beginning of period | $ | 2,010,709 |
| | $ | 17,485,206 |
| | $ | 8,342,754 |
| | $ | 538,355 |
| | $ | 1,345,963 |
| | $ | 29,722,987 |
|
Charge-offs | (541,943 | ) | | (1,913,367 | ) | | (2,775,183 | ) | | (536,407 | ) | | (105,498 | ) | | (5,872,398 | ) |
Recoveries | 2,652 |
| | 207,303 |
| | 4,629 |
| | 1,000 |
| | 554 |
| | 216,138 |
|
Provision for loan losses charged to FDIC receivable | 33,250 |
| | 299,250 |
| | 855,000 |
| | — |
| | 42,750 |
| | 1,230,250 |
|
Provision for loan losses charged to operations | 16,342 |
| | 27,689 |
| | 48,148 |
| | 536 |
| | 2,035 |
| | 94,750 |
|
Balance at end of period | $ | 1,521,010 |
| | $ | 16,106,081 |
| | $ | 6,475,348 |
| | $ | 3,484 |
| | $ | 1,285,804 |
| | $ | 25,391,727 |
|
Covered loans: | |
| | |
| | |
| | |
| | |
| | |
|
Ending contractual balance | $ | 13,669,173 |
| | $ | 143,935,126 |
| | $ | 21,234,682 |
| | $ | 1,434,345 |
| | $ | 5,452,776 |
| | $ | 185,726,102 |
|
__________________________________
| |
(1) | Amounts include the allowance for covered loan losses. |
For the three month period ended December 31, 2013 and 2012 the following tables present a breakdown of the types of concessions determined to be troubled debt restructurings (“TDRs”) during the period by loan class:
|
| | | | | | | | | | | | | | | | | | | |
| Accruing Loans | | Nonaccrual Loans |
| Three Months Ended December 31, 2013 | | Three Months Ended December 31, 2013 |
| Number of loans | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment | | Number of loans | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment |
Payment structure modification: | | | | | | | | | | | |
Commercial Real Estate | 1 | | $ | 552,961 |
| | $ | 552,961 |
| | — | | $ | — |
| | $ | — |
|
Total | 1 | | $ | 552,961 |
| | $ | 552,961 |
| | — | | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | | | |
| Accruing Loans | | Nonaccrual Loans |
| Three Months Ended December 31, 2012 | | Three Months Ended December 31, 2012 |
| Number of loans | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment | | Number of loans | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment |
Payment structure modification: | | | | | | | | | | | |
Commercial Real Estate | — | | $ | — |
| | $ | — |
| | 1 | | $ | 80,462 |
| | $ | 41,080 |
|
Total | — | | $ | — |
| | $ | — |
| | 1 | | $ | 80,462 |
| | $ | 41,080 |
|
Loans are classified as restructured by the Company when certain modifications are made to the loan terms and concessions are granted to the borrowers due to financial difficulty experienced by those borrowers. The Company only restructures loans for borrowers in financial difficulty that have designed a viable business plan to fully pay off all obligations, including outstanding debt, interest, and fees, either by generating additional income from the business or through liquidation of assets. Generally, these loans are restructured to provide the borrower additional time to execute upon their plans. The concessions granted on TDRs generally include terms to reduce the interest rate or extend the term of the debt obligation.
Loans on nonaccrual status at the date of modification are initially classified as nonaccrual TDRs. Loans on accruing status at the date of concession are initially classified as accruing TDRs if the loan is reasonably assured of repayment and performance is expected in accordance with its modified terms. Such loans may be designated as nonaccrual loans subsequent to the concession date if reasonable doubt exists as to the collection of interest or principal under the restructuring agreement. TDRs are returned to accruing status when there is economic substance to the restructuring, there is documented credit evaluation of the borrower's financial condition, the remaining balance is reasonably assured of repayment in accordance with its modified terms, and the borrower has demonstrated sustained repayment performance in accordance with the modified terms for a reasonable period of time (generally a minimum of six months).
As of December 31, 2013 and 2012, loans with a balance of $0 and $42,000 were modified as troubled debt restructurings and subsequently defaulted within twelve months after their restructure.
Note 6: Derivative Instruments and Hedging Activities
Previously, the Bank entered into interest rate swap contracts in connection with its hedging of specific loans. As of December 31, 2012, the Bank had entered into interest rate swaps totaling approximately $4.5 million using a receive-variable swap to mitigate the exposure to changes in the fair value attributable to the benchmark interest rate (fixed rate) and the hedged items (loans receivable) from the effective date of the hedged instruments. During the quarter ended September 30, 2013, the Company closed out its interest rate contract with an unwind date of August 26, 2013. A gain position of $189,054 was realized on the termination of this contract which is accreting into income as an adjustment to yield over the remaining life of the loans.
Note 7: Income Per Share
Basic net income per share for the three months ended December 31, 2013 and 2012 was computed by dividing net income to common shareholders by the weighted-average number of shares of common stock outstanding, which consists of issued shares less unallocated ESOP shares and less treasury shares in 2012.
Diluted net income per share for the three months ended December 31, 2013 and 2012 was computed by dividing net income by weighted average shares outstanding plus potential common shares resulting from dilutive stock options and unvested restricted stock, determined using the treasury stock method.
Share and share amounts held by the public prior to April 8, 2013 have been restated to reflect the completion of the second-step conversion on April 8, 2013 using a conversion ratio of 1.2471.
|
| | | | | | | |
| Three Months Ended December 31, |
| 2013 | | 2012 |
Numerator: | | | |
Net income | $ | 1,637,068 |
| | $ | 2,334,287 |
|
Denominator: | |
| | |
|
Weighted average common shares outstanding | 22,006,657 |
| | 19,375,531 |
|
Common stock equivalents | 521,180 |
| | 49,744 |
|
Diluted shares | 22,527,837 |
| | 19,425,275 |
|
Net income per share: | |
| | |
|
Basic | $ | 0.07 |
| | $ | 0.12 |
|
Diluted | $ | 0.07 |
| | $ | 0.12 |
|
For the three months ended December 31, 2013 and 2012 there were 142,523 and 19,950, respectively, of dilutive stock options. For the three months ended December 31, 2013 and 2012 there were 378,657 and 29,794 shares, respectively, of unvested restricted stock which were also dilutive. The Company excluded from the calculations of diluted earnings per share for the three month periods ended December 31, 2013 and 2012, 971,680 and 420,927 shares, respectively, which were subject to options issued with exercise prices in excess of the average market value per share during those periods.
Note 8: Real Estate Owned
The following is a summary of transactions in real estate owned:
|
| | | | | | | |
Non-covered real estate owned: | | | |
| Three Months Ended | | Year Ended |
| December 31, 2013 | | September 30, 2013 |
| | | |
Balance, beginning of period | $ | 1,615,036 |
| | $ | 2,106,757 |
|
Real estate acquired through foreclosure of loans receivable | 97,013 |
| | 1,540,046 |
|
Real estate sold | (540,085 | ) | | (1,542,186 | ) |
Write down of real estate owned | (121,898 | ) | | (611,054 | ) |
Gain on sale of real estate owned | 3,340 |
| | 121,473 |
|
Balance, end of period | $ | 1,053,406 |
| | $ | 1,615,036 |
|
|
| | | | | | | |
Covered real estate owned: | |
| | |
|
| Three Months Ended | | Year Ended |
| December 31, 2013 | | September 30, 2013 |
| | | |
Balance, beginning of period | $ | 14,068,846 |
| | $ | 21,903,204 |
|
Real estate acquired through foreclosure of loans receivable | 668,626 |
| | 15,771,880 |
|
Real estate sold | (3,598,656 | ) | | (20,260,362 | ) |
Gain on real estate sold recognized in noninterest expense | 15,420 |
| | 460,189 |
|
Gain on real estate sold payable to (receivable from ) the FDIC | 143,794 |
| | 4,214,243 |
|
Provision for losses on real estate owned recognized in noninterest expense | (78,267 | ) | | (1,072,288 | ) |
Increase of FDIC receivable for loss sharing agreements | (277,574 | ) | | (6,948,020 | ) |
Balance, end of period | $ | 10,942,189 |
| | $ | 14,068,846 |
|
Note 9: Employee Benefits
The Company has a 2002 stock option plan which allows for stock option awards of the Company’s common stock to eligible directors and key employees of the Company. The option price is determined by a committee of the board of directors at the time of the grant and may not be less than 100% of the market value of the common stock on the date of the grant. For options granted under the 2002 stock option plan, when granted, the options vest over periods up to 4 or 5 years from grant date or upon death, disability, or qualified retirement. All options must be exercised within a 10-year period from grant date. The Company may grant either incentive stock options, which qualify for special federal income tax treatment, or nonqualified stock options, which do not receive such tax treatment. The Company’s stockholders have authorized 882,876 shares for the plan of which 68,154 have been issued or retired upon the exercise of the option granted under the plan, 660,059 are granted and outstanding and no shares are available to be granted at December 31, 2013 within this plan. All share and share amounts related to employee benefits have been updated to reflect the completion of the second-step conversion on April 8, 2013 at a conversion ratio of 1.2471.
In addition to the plan above, on December 19, 2013, the Company's stockholders approved the 2013 Equity Incentive Plan which allows for stock option awards of the Company’s common stock to eligible directors and key employees of the Company. The option price is determined by a committee of the board of directors at the time of the grant and may not be less than 100% of the market value of the common stock on the date of the grant. When granted, the options vest over periods no less than 5 years from grant date or upon death or disability. All options must be exercised within a 10 year period from grant date. The Company may grant either incentive stock options, which qualify for special federal income tax treatment, or nonqualified stock options, which do not receive such tax treatment. The Company’s stockholders have authorized 1,428,943 shares for the plan of which 971,680 were granted and outstanding during the quarter ended December 31, 2013, with the remaining 457,263 shares available to be granted at December 31, 2013.
The fair value of the 971,680 options granted during the quarter ended December 31, 2013, was estimated on the date of grant using the Black-Scholes-Merton model with the following assumptions:
|
| | | | |
| | 971,680 Options |
| | |
Risk-free interest rate | | 1.71 | % |
Dividend yield | | 1.85 | % |
Expected life at date of grant (months) | | 66 months |
|
Volatility | | 20.75 | % |
Weighted average grant-date fair value | | $ | 1.86 |
|
The following table summarizes activity for shares under option and weighted average exercise price per share:
|
| | | | | | | | | |
| Shares | | Weighted average exercise price/share | | Weighted average remaining life (years) |
| | | | | |
Options outstanding - September 30, 2013 | 660,059 |
| | $ | 8.44 |
| | 6 |
|
Option exercised | — |
| | — |
| | — |
|
Options forfeited | — |
| | — |
| | — |
|
Options granted | 971,680 |
| | 10.89 |
| | 10 |
|
Options outstanding - December 31, 2013 | 1,631,739 |
| | $ | 9.90 |
| | 8 |
|
Options exercisable - December 31, 2013 | 1,600 |
| | $ | 10.20 |
| | — |
|
The stock price at December 31, 2013 was greater than the exercise prices on 660,059 options outstanding and therefore had an intrinsic value of $1,534,978.
Stock option expense was $52,082 and $32,083 for the three months ended December 31, 2013 and 2012, respectively. The following table summarizes information about the options outstanding at December 31, 2013:
|
| | | | | | | | | | | | | | | |
| Number of shares outstanding at December 31, 2013 | | | | Remaining contractual life in years | | | | Exercise price per share | |
| | | | | | | | | | | | |
| | 397,545 |
| | | | | 5 | | | | $ | 8.82 |
| |
| | 174,594 |
| | | | | 7 | | | | $ | 8.18 |
| |
| | 66,720 |
| | | | | 7 | | | | $ | 7.22 |
| |
| | 16,212 |
| | | | | 8 | | | | $ | 7.34 |
| |
| | 4,988 |
| | | | | 8 | | | | $ | 7.79 |
| |
| | 971,680 |
| | | | | 10 | | | | $ | 10.89 |
| |
| | 1,631,739 |
| | | | | | | | | |
| |
The Company has a recognition and retention plan which has granted 14,965 shares of restricted stock to key employees and directors. As of December 31, 2013, these shares remain in the trust and have not yet vested.
In addition to the above, the Company implemented the 2013 Equity Incentive Plan as described above, which has 571,577 shares authorized, and during the current quarter granted 360,092 shares of restricted stock to key employees and directors. The remaining 211,485 shares are available to be granted at December 31, 2013.
|
| | | | | | |
| Shares | | Weighted average grant date fair value per award |
| | | |
Unvested restricted stock awards-September 30, 2013 | 14,965 |
| | $ | 8.18 |
|
Granted | 360,092 |
| | 10.89 |
|
Vested | — |
| | — |
|
Canceled or expired | — |
| | — |
|
Unvested restricted stock awards-December 31, 2013 | 375,057 |
| | $ | 10.78 |
|
Grants between January 1, 2009 and December 1, 2013 will be expensed to the earlier of scheduled vesting or substantive vesting which is when the recipient becomes qualified for retirement at age 65. Grants subsequent to December 1, 2013 will be expensed to the scheduled vesting.
Note 10: Commitments and Contingent Liabilities
In the normal course of business, the Company makes various commitments and incurs certain contingent liabilities, which are not reflected in the accompanying financial statements. The commitments and contingent liabilities include guarantees, commitments to extend credit, and standby letters of credit. At December 31, 2013, commitments to extend credit and standby letters of credit totaled $72.2 million. The Company does not anticipate any material losses as a result of these transactions.
In the normal course of business, the Company is party (both as plaintiff and defendant) to certain matters of litigation. In the opinion of management, none of these matters should have a material adverse effect on the Company’s financial position or results of operation.
Note 11: Fair Value of Financial Instruments and Fair Value Measurement
Accounting standards define fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Accounting standards also establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The applicable standard describes three levels of inputs that may be used to measure fair value: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data. Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. The
Company evaluates fair value measurement inputs on an ongoing basis in order to determine if there is a change of sufficient significance to warrant a transfer between levels. For example, changes in market activity or the addition of new unobservable inputs could, in the Company’s judgment, cause a transfer to either a higher or lower level. For the three months ended December 31, 2013, there were no transfers between levels.
At December 31, 2013, the Company holds, as part of its investment portfolio, available for sale securities reported at fair value consisting of municipal securities, U.S government sponsored entities, mortgage-backed securities, collateralized mortgage-backed securities and collateralized mortgage obligations. The fair value of the majority of these securities is determined using widely accepted valuation techniques including matrix pricing and broker-quote based applications. Inputs include benchmark yields, reported trades, issuer spreads, prepayment speeds and other relevant items. These are inputs used by a third-party pricing service used by the Company. To validate the appropriateness of the valuations provided by the third party, the Company regularly updates its understanding of the inputs used and compares valuations to an additional third party source.
All of the Company’s available for sale securities fall into Level 2 of the fair value hierarchy. These securities are priced via independent service providers. In obtaining such valuation information, the Company has evaluated the valuation methodologies used to develop the fair values.
The Company also holds assets available for sale reported at fair value consisting of a former branch and a parcel of land adjacent to a current branch and are included in other assets. The fair value of these assets is determined using current appraisals adjusted at management’s discretion to reflect any decline in the fair value of the properties since the time the appraisal was performed. Appraisal values are reviewed and monitored internally and fair value is reassessed at least quarterly or more frequently when circumstances occur that indicate a change in fair value. All of the Company’s assets held for sale fall into level 3 of the fair value hierarchy.
Previously, the Company used interest-rate swaps to provide long-term fixed rate funding to its customers. The majority of these derivatives were exchange-traded or traded within highly active dealer markets. In order to determine the fair value of these instruments, the Company utilized the exchange price or dealer market price for the particular derivative contract. Therefore, these derivative contracts were classified as Level 2. The Company utilized an independent third party valuation company to validate the dealer prices. In cases where significant credit valuation adjustments were incorporated into the estimation of fair value, reported amounts were considered as Level 3 inputs. The Company also utilized this approach to estimate its own credit risk on derivative liability positions. To date, the Company has not realized any losses due to a counterparty’s inability to pay any net uncollateralized position. As of September 30, 2013, the Company exited its interest rate swap contracts (see Note 6 - Derivative Instruments and Hedging Activities for additional detail).
Assets and Liabilities Measured on a Recurring Basis:
Assets and liabilities measured at fair value on a recurring basis are summarized below.
|
| | | | | | | | | | | | | | | |
| December 31, 2013 |
| Estimated fair value | | Quoted prices in active markets for identical assets (Level 1 inputs) | | Quoted prices for similar assets (Level 2 inputs) | | Significant unobservable inputs (Level 3 inputs) |
Assets: | | | | | | | |
Investment securities available for sale: | | | | | | | |
Tax free municipals | $ | 20,809,320 |
| | $ | — |
| | $ | 20,809,320 |
| | $ | — |
|
Mortgage–backed securities: | | | |
| | |
| | |
|
FNMA certificates | 112,183,881 |
| | — |
| | 112,183,881 |
| | — |
|
GNMA certificates | 1,746,010 |
| | — |
| | 1,746,010 |
| | — |
|
FHLMC certificates | 50,706,308 |
| | — |
| | 50,706,308 |
| | — |
|
Collateralized mortgage-backed securities: | | | | | | | |
FNMA | 7,243,906 |
| | — |
| | 7,243,906 |
| | — |
|
Collateralized mortgage obligations: | | | |
| | |
| | |
|
FNMA | 1,825,018 |
| | — |
| | 1,825,018 |
| | — |
|
FHLMC | 379,096 |
| | — |
| | 379,096 |
| | — |
|
Private-label mortgage securities: | | | |
| | |
| | |
|
Investment grade | 1,823,673 |
| | — |
| | 1,823,673 |
| | — |
|
Split rating (1) | 1,141,423 |
| | — |
| | 1,141,423 |
| | — |
|
Non-investment grade | 10,205,613 |
| | — |
| | 10,205,613 |
| | — |
|
Total investment securities available for sale | 208,064,248 |
| | — |
| | 208,064,248 |
| | — |
|
Assets held for sale | 1,744,584 |
| | — |
| | — |
| | 1,744,584 |
|
Total recurring assets at fair value | $ | 209,808,832 |
| | $ | — |
| | $ | 208,064,248 |
| | $ | 1,744,584 |
|
__________________________________
| |
(1) | Bonds with split ratings represent securities with both investment and non-investment grades. |
|
| | | | | | | | | | | | | | | |
| September 30, 2013 |
| Estimated fair value | | Quoted prices in active markets for identical assets (Level 1 inputs) | | Quoted prices for similar assets (Level 2 inputs) | | Significant unobservable inputs (Level 3 inputs) |
Assets: | | | | | | | |
Investment securities available for sale: | | | | | | | |
Tax free municipals | $ | 14,913,592 |
| | $ | — |
| | $ | 14,913,592 |
| | $ | — |
|
U.S. government sponsored entities | 5,030,043 |
| | — |
| | 5,030,043 |
| | — |
|
Mortgage–backed securities: | | | |
| | | | |
|
FNMA certificates | 116,301,309 |
| | — |
| | 116,301,309 |
| | — |
|
GNMA certificates | 1,845,617 |
| | — |
| | 1,845,617 |
| | — |
|
FHLMC certificates | 53,165,417 |
| | — |
| | 53,165,417 |
| | — |
|
Collateralized mortgage-backed securities: | | | | | | | |
FNMA | 7,256,485 |
| | — |
| | 7,256,485 |
| | — |
|
Collateralized mortgage obligations: | | | |
| | | | |
|
FNMA | 2,274,370 |
| | — |
| | 2,274,370 |
| | — |
|
FHLMC | 407,854 |
| | — |
| | 407,854 |
| | — |
|
Private-label mortgage securities: | | | | | | | |
Investment grade | 1,949,995 |
| | — |
| | 1,949,995 |
| | — |
|
Split rating (1) | 1,238,508 |
| | — |
| | 1,238,508 |
| | — |
|
Non-investment grade | 10,735,217 |
| | — |
| | 10,735,217 |
| | — |
|
Total investment securities available for sale | 215,118,407 |
| | — |
| | 215,118,407 |
| | — |
|
Assets held for sale | 1,744,584 |
| | — |
| | — |
| | 1,744,584 |
|
Total recurring assets at fair value | $ | 216,862,991 |
| | $ | — |
| | $ | 215,118,407 |
| | $ | 1,744,584 |
|
__________________________________
| |
(1) | Bonds with split ratings represent securities with both investment and non-investment grades. |
When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, since Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources), the losses below include changes in fair value due in part to observable factors that are part of the valuation methodology.
A reconciliation of the beginning and ending balances of Level 3 assets and liabilities recorded at fair value on a recurring basis is as follows:
|
| | | | | | | |
| Three Months Ended December 31, 2013 | | Year Ended September 30, 2013 |
| | | |
Fair value, beginning balance | $ | 1,744,584 |
| | $ | 1,054,280 |
|
Purchases | — |
| | — |
|
Sales | — |
| | — |
|
Settlements | — |
| | — |
|
Change in unrealized loss recognized in other comprehensive income | — |
| | — |
|
Valuation loss recognized in noninterest expense | — |
| | (467,841 | ) |
Total realized losses included in income | — |
| | — |
|
Transfers in and/or out of level 3 | — |
| | 1,158,145 |
|
Fair value, ending balance | $ | 1,744,584 |
| | $ | 1,744,584 |
|
Assets and Liabilities Measured on a Nonrecurring Basis:
Assets and liabilities measured at fair value on a nonrecurring basis are summarized below.
|
| | | | | | | | | | | | | | | |
| | | Fair value measurements using: |
| Fair value | | Quoted prices in active markets for identical assets (Level 1 inputs) | | Quoted prices for similar assets (Level 2 inputs) | | Significant unobservable inputs (Level 3 inputs) |
December 31, 2013 | | | | | | | |
Impaired loans: | | | | | | | |
Not covered under loss share | $ | 3,307,671 |
| | $ | — |
| | $ | — |
| | $ | 3,307,671 |
|
Other real estate owned: | |
| | |
| | |
| | |
|
Not covered under loss share | 1,053,406 |
| | — |
| | — |
| | 1,053,406 |
|
Covered under loss share | 10,942,189 |
| | — |
| | — |
| | 10,942,189 |
|
September 30, 2013 | |
| | |
| | |
| | |
|
Impaired loans: | |
| | |
| | |
| | |
|
Not covered under loss share | 3,338,298 |
| | — |
| | — |
| | 3,338,298 |
|
Other real estate owned: | |
| | |
| | |
| | |
|
Not covered under loss share | 1,615,036 |
| | — |
| | — |
| | 1,615,036 |
|
Covered under loss share | 14,068,846 |
| | — |
| | — |
| | 14,068,846 |
|
Loans considered impaired are loans for which, based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are subject to nonrecurring fair value adjustments to reflect write-downs that are based on the market price or current appraised value of the collateral, adjusted to reflect local market conditions or other economic factors. After evaluating the underlying collateral, the fair value of the impaired loans is determined by allocating specific reserves from the allowance for loan and lease losses to the loans. Thus, the fair value reflects the loan balance less the specifically allocated reserve. Certain collateral-dependent impaired loans are reported at the fair value of the underlying collateral. Impairment is measured based on the fair value of the collateral, which is typically derived from appraisals that take into consideration prices in observed transactions involving similar assets and similar locations. Each appraisal is updated on an annual basis, either through a new appraisal or through the Company’s comprehensive internal review process. Appraised values are reviewed and monitored internally and fair value is re-assessed at least quarterly or more frequently when circumstances occur that indicate a change in fair value. The fair value of impaired loans that are not collateral dependent is measured using a discounted cash flow analysis considered to be a Level 3 input.
Other real estate owned ("OREO") is initially accounted for at fair value, less estimated costs to dispose of the property. Any excess of the recorded investment over fair value, less costs to dispose, is charged to the allowance for loan and lease losses at the time of foreclosure. A provision is charged to earnings for subsequent losses on other real estate owned when market conditions indicate such losses have occurred. The ability of the Company to recover the carrying value of other real estate owned is based upon future sales of the real estate. The ability to affect such sales is subject to market conditions and other factors beyond the Company's control, and future declines in the value of the real estate would result in a charge to earnings. The recognition of sales and gain on sales is dependent upon whether the nature and terms of the sales, including possible future involvement of the Company, if any, meet certain defined requirements. If those requirements are not met, sale and gain recognition is deferred. OREO represents real property taken by the Company either through foreclosure or through a deed in lieu thereof from the borrower. The fair value of OREO is based on property appraisals adjusted at management’s discretion to reflect a further decline in the fair value of properties since the time the appraisal analysis was performed. It has been the Company’s experience that appraisals quickly become outdated due to the volatile real-estate environment. Appraised values are reviewed and monitored internally and fair value is re-assessed at least quarterly or more frequently when circumstances occur that indicate a change in fair value. Therefore, the inputs used to determine the fair value of OREO and repossessed assets fall within Level 3. The Company may include within OREO other repossessed assets received as partial satisfaction of a loan. These assets are not material and do not typically have readily determinable market values and are considered Level 3 inputs.
The following table provides information describing the valuation processes used to determine recurring and nonrecurring fair value measurements categorized within Level 3 of the fair value hierarchy at December 31, 2013:
|
| | | | | | | | | | | | | | | |
| Quantitative Information about Level 3 Fair Value Measurements |
| Fair Value | | Valuation Technique | | Unobservable Input | | General Range (Discount) | | Average Discount |
Impaired Loans | $ | 3,307,671 |
| | Property appraisals | | Management discount for property type and recent market volatility | | 8% | | — | | 42% | | 22% |
OREO | $ | 11,995,595 |
| | Property appraisals | | Management discount for property type and recent market volatility | | 34% | | — | | 51% | | 47% |
Assets Held for Sale | $ | 1,744,584 |
| | Valuation analysis | | Management discount for property type and recent market volatility | | —% | | — | | 50% | | 34% |
Accounting standards require disclosures of fair value information about financial instruments, whether or not recognized in the Statement of Condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair value is based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Also, the fair value estimates presented herein are based on pertinent information available to Management as of December 31, 2013 and September 30, 2013.
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS – The carrying amount approximates fair value because of the short maturity of these instruments.
INVESTMENTS AVAILABLE FOR SALE AND FHLB STOCK – The fair value of investments and mortgage-backed securities and collateralized mortgage obligations available for sale is estimated based on bid quotations received from securities dealers. The FHLB stock is considered a restricted stock and is carried at cost which approximates its fair value.
LOANS RECEIVABLE – Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type. The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit risk inherent in the loan. The estimate of maturity is based on the Company’s historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of the current economic and lending conditions.
Fair value for significant nonperforming loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are determined using available market information and specific borrower information. The estimated fair value at December 31, 2013 and September 30, 2013 has been affected by an estimate of liquidity risk of 5.5%.
LOANS HELD FOR SALE – Loans held for sale are carried at the lower of cost or market value. The fair values of loans held for sale are based on commitments on hand from investors within the secondary market for loans with similar characteristics.
CASH SURRENDER VALUE OF LIFE INSURANCE – The Company’s cash surrender value of bank owned life insurance approximates its fair value.
FDIC RECEIVABLE FOR LOSS SHARING AGREEMENTS – Fair value is estimated based on discounted future cash flows using current discount rates for instruments with similar risk and cash flow volatility.
ASSETS HELD FOR SALE – The fair value of assets held for sale by the Company is generally based on the most recent appraisals of the asset or other market information as it becomes available to management.
DEPOSITS – The fair value of deposits with no stated maturity, such as noninterest–bearing demand deposits, savings, NOW accounts, and money market and checking accounts, is equal to the amount payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.
BORROWINGS – The fair value of the Company’s Federal Home Loan Bank advances is estimated based on the discounted value of contractual cash flows. The fair value of securities sold under agreements to repurchase approximates the carrying amount because of the short maturity of these borrowings. The discount rate is estimated using rates quoted for the same or similar issues or the current rates offered to the Company for debt of the same remaining maturities.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES – The Company has used interest-rate swaps to provide long-term fixed rate funding to its customers. The majority of these derivatives were exchange-traded or traded within highly active dealer markets. In order to determine the fair value of these instruments, the Company utilized the exchange price or dealer market price for the particular derivative contract. Therefore, these derivative contracts were classified as Level 2. The Company utilized an independent third party valuation company to validate the dealer prices. In cases where significant credit valuation adjustments were incorporated into the estimation of fair value, reported amounts were classified as Level 3.
ACCRUED INTEREST AND DIVIDENDS RECEIVABLE AND PAYABLE – The carrying amount of accrued interest and dividends receivable on loans and investments and payable on borrowings and deposits approximate their fair values.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT – The value of these unrecognized financial instruments is estimated based on the fee income associated with the commitments which, in the absence of credit exposure, is considered to approximate their settlement value. Since no significant credit exposure existed, and because such fee income is not material to the Company's financial statements at December 31, 2013 and at September 30, 2013, the fair value of these commitments is not presented.
Many of the Company’s assets and liabilities are short-term financial instruments whose carrying amounts reported in the Statement of Condition approximate fair value. These items include cash and due from banks, interest-bearing bank balances, federal funds sold, other short-term borrowings and accrued interest receivable and payable balances. The estimated fair value of the Company’s remaining on-balance sheet financial instruments as of December 31, 2013 and September 30, 2013 is summarized below:
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2013 |
| | | | | Estimated Fair Value |
| Carrying Value | | Total Estimated Fair Value | | Quoted Prices In Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Financial assets: | | | | | | | | | |
Cash and cash equivalents | $ | 157,267,968 |
| | $ | 157,267,968 |
| | $ | 157,267,968 |
| | $ | — |
| | $ | — |
|
Investments available for sale | 208,064,248 |
| | 208,064,248 |
| | — |
| | 208,064,248 |
| | — |
|
FHLB Stock | 3,940,300 |
| | 3,940,300 |
| | — |
| | 3,940,300 |
| | — |
|
Loans receivable, net | 576,566,644 |
| | 561,590,133 |
| | — |
| | — |
| | 561,590,133 |
|
Loans held for sale | 3,576,901 |
| | 3,633,189 |
| | — |
| | 3,633,189 |
| | — |
|
Cash surrender value of life insurance | 46,233,582 |
| | 46,233,582 |
| | — |
| | 46,233,582 |
| | — |
|
FDIC receivable for loss sharing arrangements | 25,332,815 |
| | 25,402,740 |
| | — |
| | — |
| | 25,402,740 |
|
Assets held for sale | 1,744,584 |
| | 1,744,584 |
| | — |
| | — |
| | 1,744,584 |
|
Accrued interest and dividends receivable | 2,584,167 |
| | 2,584,167 |
| | — |
| | 688,873 |
| | 1,895,294 |
|
Financial liabilities: | |
| | |
| | |
| | |
| | |
|
Deposits | $ | 737,654,307 |
| | $ | 705,243,325 |
| | $ | — |
| | $ | 705,243,325 |
| | $ | — |
|
FHLB advances | 60,000,000 |
| | 65,610,969 |
| | — |
| | 65,610,969 |
| | — |
|
Accrued interest payable | 191,835 |
| | 191,835 |
| | — |
| | 191,835 |
| | — |
|
|
| | | | | | | | | | | | | | | | | | | |
| September 30, 2013 |
| | | | | Estimated Fair Value |
| Carrying Value | | Total Estimated Fair Value | | Quoted Prices In Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Financial assets: | | | | | | | | | |
Cash and cash equivalents | $ | 161,452,481 |
| | $ | 161,452,481 |
| | $ | 161,452,481 |
| | $ | — |
| | $ | — |
|
Investments available for sale | 215,118,407 |
| | 215,118,407 |
| | — |
| | 215,118,407 |
| | — |
|
FHLB Stock | 3,940,300 |
| | 3,940,300 |
| | — |
| | 3,940,300 |
| | — |
|
Loans receivable, net | 579,854,293 |
| | 549,751,987 |
| | — |
| | — |
| | 549,751,987 |
|
Loans held for sale | 1,857,393 |
| | 1,883,244 |
| | — |
| | 1,883,244 |
| | — |
|
Cash surrender value of life insurance | 39,825,881 |
| | 39,825,881 |
| | — |
| | 39,825,881 |
| | — |
|
FDIC receivable for loss sharing arrangements | 29,941,862 |
| | 29,369,037 |
| | — |
| | — |
| | 29,369,037 |
|
Assets held for sale | 1,744,584 |
| | 1,744,584 |
| | — |
| | — |
| | 1,744,584 |
|
Accrued interest and dividends receivable | 2,728,902 |
| | 2,728,902 |
| | — |
| | 642,244 |
| | 2,086,658 |
|
Financial liabilities: | |
| | |
| | |
| | |
| | |
|
Deposits | $ | 751,296,668 |
| | $ | 724,702,400 |
| | $ | — |
| | $ | 724,702,400 |
| | $ | — |
|
FHLB advances | 60,000,000 |
| | 66,297,123 |
| | — |
| | 66,297,123 |
| | — |
|
Accrued interest payable | 200,173 |
| | 200,173 |
| | — |
| | 200,173 |
| | — |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of the financial condition and results of operations at and for the three months ended December 31, 2013 and 2012 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto, appearing in Part I, Item 1 of this quarterly report on Form 10-Q.
Forward-Looking Statements
This report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company include, but are not limited to, general economic conditions, either nationally or in our market areas, that are worse than expected; competition among depository and other financial institutions; changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments; adverse changes in the securities markets; changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements; our ability to enter new markets successfully and capitalize on growth opportunities; our ability to successfully integrate acquired entities; our incurring higher than expected loan charge-offs with respect to assets acquired in FDIC-assisted acquisitions; changes in consumer spending, borrowing and savings habits; changes in accounting policies and practices, as may be adopted by the bank regulatory agencies and the Financial Accounting Standards Board; and changes in our organization, compensation and benefit plans. Additional factors are discussed in the Company’s Annual Report on Form 10-K for the year ended September 30, 2013 under Part I Item 1A.- “Risk Factors,” and in the Company’s other filings with the Securities and Exchange Commission. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.
Overview
Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, consisting primarily of loans, investment securities, mortgage-backed securities, collateralized mortgage-backed securities, collateralized mortgage obligations and other interest-earning assets (primarily cash and cash equivalents), and the interest we pay on our interest-bearing liabilities, consisting primarily of deposits and Federal Home Loan Bank advances.
Our principal business consists of attracting deposits from the general public and investing those funds primarily in loans. We make commercial real estate loans, loans secured by first mortgages on owner-occupied, one- to four-family residences, consumer loans, loans secured by first mortgages on non-owner-occupied one- to four-family residences, construction loans secured by one- to four-family residences, commercial business loans and multi-family real estate loans. While our primary business is the origination of loans funded through retail deposits, we also invest in certain investment securities and mortgage-backed securities, and use FHLB advances and other borrowings as additional funding sources or contingency funding.
The Company is significantly affected by prevailing economic conditions, including federal monetary and fiscal policies and federal regulation of financial institutions. Deposit balances are influenced by a number of factors, including interest rates paid on competing personal investment products, the level of personal income, and the personal rate of savings within our market areas. Lending activities are influenced by the demand for housing and other loans, changing loan underwriting guidelines, as well as interest rate pricing competition from other lending institutions. The primary sources of funds for lending activities include deposits, loan repayments, investment income, borrowings, and funds provided from operations.
On a weekly basis, management reviews deposit flows, loan demand, cash levels, and changes in several market rates to assess all pricing strategies. Generally, deposit pricing is based upon a survey of competitors in the Bank’s market areas, and the need to attract funding and retain maturing deposits.
During the first three months of fiscal year 2014, the national economy continued to show signs of recovery, as evidenced by increases in consumer spending and the stabilization of the labor market, the housing sector, and financial markets. However, unemployment levels remained elevated and unemployment periods prolonged, housing prices remained depressed and demand for housing was weak, due to distressed sales and tightened lending standards. The local economy continues to experience many of these same negative trends and seems to be lagging the national economy in exhibiting many of the recovery signs mentioned
above. In an effort to support mortgage lending and housing market recovery, and to help improve credit conditions overall, the Federal Open Market Committee of the Federal Reserve has maintained the overnight lending rate between zero and 25 basis points since December 2008 and the Federal Reserve has been purchasing mortgage-backed securities and treasuries on a monthly basis although recently they have begun to reduce such purchases.
Net income was $1.6 million for the three months ended December 31, 2013 compared to $2.3 million for the three months ended December 31, 2012, a decrease of $697,000.
On April 8, 2013, Charter Financial Corporation, a Maryland corporation (“Charter Financial” or the “Company”), completed its conversion and reorganization pursuant to which First Charter, MHC, our federally chartered mutual holding company, was converted to the stock holding company form of organization. Charter Financial sold 14,289,429 shares of common stock at $10.00 per share, for gross offering proceeds of $142.9 million in its stock offering. CharterBank (the “Bank”), as of April 8, 2013, was 100% owned by Charter Financial and Charter Financial was 100% owned by public shareholders. Concurrent with the completion of the offering, shares of common stock of the former federally chartered corporation (“Charter Federal”) were converted into the right to receive 1.2471 shares of Charter Financial’s common stock for each share of Charter Federal common stock that was owned immediately prior to completion of the transaction. Cash in lieu of fractional shares was paid based on the offering price of $10.00 per share. As a result of the offering and the exchange on April 8, 2013, Charter Financial had 22,752,214 shares outstanding. Also, as of April 8, 2013, Charter Federal and First Charter, MHC ceased to exist. As part of the elimination, the net asset position of First Charter, MHC, in the amount of $229,564, was assumed by Charter Financial. Any reference to the Company following April 8, 2013 refers to Charter Financial Corporation, a Maryland corporation. In regards to weighted average shares outstanding, share and per share amounts held by the public prior to April 8, 2013, have been restated to reflect the completion of the second-step conversion at a conversion ratio of 1.2471 unless noted otherwise.
Critical Accounting Policies
Critical accounting policies are those that involve significant judgments and assessments by management, and which could potentially result in materially different results under different assumptions and conditions. As discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2013, the Company considers its critical accounting policies to be the allowance for loan losses, other-than-temporary impairment of investment securities, real estate owned, goodwill and other intangible assets, deferred income taxes, receivable from FDIC under loss sharing agreements, and estimation of fair value. There have been no material changes in our critical accounting policies during the three months ended December 31, 2013.
Comparison of Financial Condition at December 31, 2013 and September 30, 2013
Assets. Total assets declined by $9.5 million, or 0.9%, to $1.1 billion at December 31, 2013. Cash and cash equivalents declined by $4.2 million, securities available for sale declined by $7.1 million, FDIC loss share receivable declined by $4.6 million and net loans receivable declined $3.3 million.
Cash and cash equivalents. Cash and cash equivalents declined to $157.3 million at December 31, 2013, down from $161.5 million at September 30, 2013. This decrease was primarily due to a $9.3 million decrease in interest earning deposits in other financial institutions attributable to funding a decrease in customer deposits, partially offset by a $5.1 million increase in cash and amounts due from depository institutions.
Loans. At December 31, 2013, total loans were $576.6 million, or 53.4% of total assets. As indicated by the table below, during the three months ended December 31, 2013, our loan portfolio decreased by $3.3 million, or 0.6%. Loans covered by loss share agreements, net, decreased $8.9 million, or 8.2%, to $100.1 million at December 31, 2013 from $109.0 million at September 30, 2013, as we continue to progress through the resolution process on loss share assets. These decreases were partially offset by an increase in loans not covered by loss share agreements, net, of $5.6 million or 1.2%, to $476.5 million at December 31, 2013 from $470.9 million at September 30, 2013.
Non-covered and Covered Loans, net
|
| | | | | | | | | | | |
| Non-covered (1) | | Covered (2) | | Total |
| (dollars in thousands) |
Loan Balances: | | | | | |
December 31, 2013 | $ | 476,466 |
| | $ | 100,101 |
| | $ | 576,567 |
|
September 30, 2013 | 470,863 |
| | 108,991 |
| | 579,854 |
|
June 30, 2013 | 443,581 |
| | 120,712 |
| | 564,293 |
|
March 31, 2013 | 421,175 |
| | 131,359 |
| | 552,534 |
|
December 31, 2012 | 426,370 |
| | 149,268 |
| | 575,638 |
|
September 30, 2012 | 427,676 |
| | 166,228 |
| | 593,904 |
|
June 30, 2012 | 430,292 |
| | 186,545 |
| | 616,837 |
|
March 31, 2012 | 435,424 |
| | 203,626 |
| | 639,050 |
|
December 31, 2011 | 432,108 |
| | 218,623 |
| | 650,731 |
|
__________________________________
| |
(1) | Non-covered loans are shown net of deferred loan fees and allowance for loan losses. |
| |
(2) | Covered loans are shown net of deferred loan fees, allowances and accretable discounts. |
FDIC Receivable for Loss Share Agreements. As of December 31, 2013, 17.4% of our outstanding principal balance of loans and 91.2% of our other real estate owned assets were covered under loss share agreements with the FDIC in which the FDIC has agreed to reimburse us for 80% or 95%, depending on the contract, of all losses incurred in connection with those assets. We estimated the FDIC reimbursement that will result from losses incurred as we dispose of covered loans and other real estate owned assets, and we recorded the estimate as a receivable from the FDIC. The FDIC receivable for loss share agreements was $25.3 million as of December 31, 2013 and $29.9 million as of September 30, 2013. The decrease in the amount of FDIC receivable was attributable to cash proceeds received from the FDIC during the current quarter along with the $225,000 impairment of the indemnification asset recorded. The balance of the FDIC receivable was also reduced or increased as a result of changes in estimated cash flows to be received from the FDIC from transactions in the covered assets. When these transactions are recorded, we also record our portion of the offsetting amount in our consolidated statements of income. The FDIC receivable is analyzed quarterly for collectability. While the current level of loss expectations support the carrying balance of the FDIC receivable, there is doubt as to the collectability of losses on certain loans and OREO by the end of the commercial loss sharing agreement on the NCB acquisition which expires in the summer of 2014. The current quarter and prior year impairment charges have been based on this analysis and the probability of those expected losses recognized prior to the end of loss share.
Investment Securities Portfolio. At December 31, 2013, our investment securities portfolio totaled $208.1 million, compared to $215.1 million at September 30, 2013. The decrease was primarily attributable to $6.0 million in securities that were called or matured.
During the first three months of fiscal 2014, we had no additional other-than-temporary impairment charges on non-agency collateralized mortgage backed securities. Through December 31, 2013, we had recorded a cumulative $380,000 of other-than-temporary impairment charges with respect to one private label security. No other non-agency collateralized mortgage backed securities in our investment portfolio were other- than- temporarily impaired at December 31, 2013. We have analyzed our investment portfolio as of December 31, 2013 for compliance with the new bank investment criteria under the Volcker Rule. We do not believe it currently holds any investments potentially affected by the Volcker Rule.
Bank Owned Life Insurance. The total cash surrender values of bank owned life insurance policies at December 31, 2013 and September 30, 2013 were $46.2 million and $39.8 million, respectively. This increase was primarily due to the purchases of additional policies in the amount of $6.1 million.
Deposits. Total deposits decreased $13.6 million, or 1.8%, to $737.7 million at December 31, 2013 from $751.3 million at September 30, 2013. The decrease was caused primarily by a decline in certificates of deposit of $12.6 million. In recent quarters, we have reduced the rates paid on certificates of deposit to better match the level of our interest-bearing liabilities with loans. At December 31, 2013, $732.7 million of deposits were retail deposits and $5.0 million were brokered deposits. Funds on deposit from internet services and brokered deposits are considered as wholesale deposits. The following table shows deposit fees earned and deposit balances by category for the quarter end periods indicated:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Deposit Balances |
| Deposit & Bankcard Fees | | Transaction Accounts | | Savings | | Money Market | | Total Core Deposits | | Retail Certificates of Deposit | | Wholesale Certificates of Deposit | | Total Deposits |
| (dollars in thousands) |
December 31, 2013 | $ | 2,256 |
| | $ | 295,848 |
| | $ | 47,531 |
| | $ | 131,010 |
| | $ | 474,389 |
| | $ | 258,265 |
| | $ | 5,000 |
| | $ | 737,654 |
|
September 30, 2013 | 2,011 |
| | 296,453 |
| | 48,324 |
| | 130,649 |
| | 475,426 |
| | 270,475 |
| | 5,396 |
| | 751,297 |
|
June 30, 2013 | 1,915 |
| | 302,471 |
| | 49,681 |
| | 129,078 |
| | 481,230 |
| | 280,372 |
| | 8,179 |
| | 769,781 |
|
March 31, 2013 (1) | 1,878 |
| | 293,143 |
| | 49,890 |
| | 131,523 |
| | 474,556 |
| | 292,650 |
| | 13,215 |
| | 780,421 |
|
December 31, 2012 | 1,950 |
| | 284,509 |
| | 48,685 |
| | 130,151 |
| | 463,345 |
| | 312,026 |
| | 30,747 |
| | 806,118 |
|
September 30, 2012 | 1,950 |
| | 275,998 |
| | 51,192 |
| | 129,103 |
| | 456,293 |
| | 323,105 |
| | 20,864 |
| | 800,262 |
|
June 30, 2012 | 1,715 |
| | 281,358 |
| | 52,703 |
| | 133,807 |
| | 467,868 |
| | 332,707 |
| | 20,958 |
| | 821,533 |
|
March 31, 2012 | 1,620 |
| | 285,858 |
| | 55,980 |
| | 128,996 |
| | 470,834 |
| | 353,723 |
| | 20,951 |
| | 845,508 |
|
December 31, 2011 | 1,726 |
| | 266,515 |
| | 54,055 |
| | 130,122 |
| | 450,692 |
| | 385,926 |
| | 22,887 |
| | 859,505 |
|
__________________________________
| |
(1) | March 31, 2013 core deposits were reduced by $138.6 million of deposits held by the Bank for stock orders from the second-step conversion which closed April 8, 2013. |
Borrowings. Our borrowings consist of advances from the Federal Home Loan Bank of Atlanta ("FHLB"). At December 31, 2013 and September 30, 2013, borrowings totaled $60.0 million.
Based upon available investment and loan collateral except cash, additional advances of $178.7 million were available from the Federal Home Loan Bank of Atlanta at December 31, 2013.
At December 31, 2013, approximately $55.2 million of a line of credit was available to us at the Federal Reserve Bank of Atlanta based on loan collateral pledged. The line of credit at the Federal Reserve Bank of Atlanta was not used other than periodic tests to ensure the line was functional.
Stockholders’ Equity. At December 31, 2013, total stockholders’ equity totaled $273.2 million, or $11.88 per net share, a $614,000 decline from September 30, 2013. In addition, tangible book value decreased from $11.81 per share at September 30, 2013 to $11.66 per share at December 31, 2013. The per share decreases were partially due to the decrease in stockholders' equity in conjunction with an increased outstanding share count at quarter end due to shares granted under the recently adopted 2013 Equity Incentive Plan. As previously noted on Form 8-K filed December 19, 2013, we can repurchase up to 571,577 shares of our common stock. During the quarter, we purchased 114,500 shares at a total cost of $1,243,775.
Comparison of Operating Results for the Three Months Ended December 31, 2013 and December 31, 2012
General. Net income decreased $697,000, or 29.9%, to $1.6 million for the quarter ended December 31, 2013 from $2.3 million for the quarter ended December 31, 2012 due to a decrease in net interest income and an increase in noninterest expense, partially offset by an increase in non-interest income. Net interest income decreased $1.3 million, or 14.2%, to $7.7 million for the quarter ended December 31, 2013 from $9.0 million for the quarter ended December 31, 2012 as a result of lower average yields driven largely by declining accretion income on acquired covered loans. For the quarter ended December 31, 2013, our net interest margin decreased to 3.29% from 4.13% for the quarter ended December 31, 2012 due to lower interest rates related to interest-earning assets, including an increase in lower yielding cash and cash equivalents from our capital raise completed on April 8, 2013. The non-covered provision for loan losses was $300,000 for both the quarters ended December 31, 2013 and 2012. Covered provision for loan losses was $2,000 in the quarter ended December 31, 2013 compared to $95,000 for the quarter ended December 31, 2012. Noninterest income increased $905,000, or 28.2%, to $4.1 million for the quarter ended December 31, 2013 from $3.2 million for the quarter ended December 31, 2012 primarily attributable to a true-up receipt from the completion and renegotiation of a processing contract of approximately $1.1 million. Noninterest expense increased by $875,000 to $9.2 million for the quarter ended December 31, 2013 from $8.3 million for the quarter ended December 31, 2012. Noninterest expense was higher primarily due to an increase in the net cost of real estate owned and legal and professional fees.
Interest Income. Total interest income decreased $1.8 million, or 16.2%, to $9.3 million for the quarter ended December 31, 2013 from $11.1 million for the quarter ended December 31, 2012 due primarily to the decrease in interest on loans partially offset by an increase in securities income. Interest on loans decreased $2.0 million, or 19.9%, to $8.2 million for the quarter ended December 31, 2013 as a result of declining yield and a lower average balance on covered loans. The lower average balance was
primarily the result of loan repayments and charge-offs on loans covered by loss share agreements. The average yield on loans declined to 5.55% for the quarter ended December 31, 2013 compared to 6.87% for the quarter ended December 31, 2012. Our loans acquired through FDIC acquisitions carry higher yields than our legacy loan portfolio. Due to lower purchase discount accretion in our covered loan portfolio, average yields decreased during the quarter ended December 31, 2013 as compared to the prior year period. Additionally, as our purchase discount accretion declines in future periods, our net interest margin will likely also decline.
Interest on mortgage-backed securities and collateralized mortgage obligations increased $239,000 to $969,000 for the quarter ended December 31, 2013 from $730,000 for the quarter ended December 31, 2012, as a result of a 21 basis point increase in average yield to 2.01% due in part to higher interest rates on newly purchased mortgage-backed securities but primarily attributable to a $30.1 million, or 18.5%, increase in the average balance of such securities to $192.6 million.
Interest on other investment securities, which consisted of agency and municipal securities decreased $36,000 to $19,000 for the quarter ended December 31, 2013 from $55,000 for the quarter ended December 31, 2012 as other investment securities average balances declined $6.7 million to $19.6 million while the average yield decreased to 0.38% for the quarter ended December 31, 2013 from 0.84% for the quarter ended December 31, 2012 as interest rates remained low.
Interest on interest earning deposits increased $33,000 to $85,000 for the quarter ended December 31, 2013 from $52,000 for the quarter ended December 31, 2012 as average balances on interest earning deposits increased $49.3 million due to the investment of cash proceeds from our conversion and stock offering completed on April 8, 2013.
The following table shows selected yield and rate information for the quarter end periods indicated:
|
| | | | | | | | | | | | | | |
| Three Months Ended |
| December 31, 2013 | | September 30, 2013 | | June 30, 2013 | | March 31, 2013 | | December 31, 2012 |
| | | | | | | | | |
Yield on Loans | 5.55 | % | | 6.14 | % | | 6.83 | % | | 7.08 | % | | 6.87 | % |
Yield on Mortgage Securities | 2.01 | % | | 1.83 | % | | 1.77 | % | | 1.84 | % | | 1.80 | % |
Yield on Assets | 3.95 | % | | 4.13 | % | | 4.33 | % | | 5.00 | % | | 5.07 | % |
| | | | | | | | | |
Cost of Deposits | 0.53 | % | | 0.55 | % | | 0.57 | % | | 0.62 | % | | 0.68 | % |
Cost of CD's | 1.09 | % | | 1.11 | % | | 1.12 | % | | 1.13 | % | | 1.20 | % |
Cost of NOW Accounts | 0.11 | % | | 0.12 | % | | 0.13 | % | | 0.13 | % | | 0.14 | % |
Cost of Rewards Checking | 0.25 | % | | 0.26 | % | | 0.34 | % | | 0.37 | % | | 0.40 | % |
Cost of Savings | 0.03 | % | | 0.04 | % | | 0.05 | % | | 0.05 | % | | 0.05 | % |
Cost of MMDA | 0.21 | % | | 0.21 | % | | 0.19 | % | | 0.26 | % | | 0.29 | % |
Cost of Borrowings | 4.34 | % | | 4.29 | % | | 4.24 | % | | 4.10 | % | | 4.19 | % |
Cost of Liabilities | 0.85 | % | | 0.89 | % | | 0.90 | % | | 0.97 | % | | 1.04 | % |
| | | | | | | | | |
Loan/Deposit Spread | 5.02 | % | | 5.59 | % | | 6.26 | % | | 6.46 | % | | 6.19 | % |
Asset/Liability Spread | 3.10 | % | | 3.24 | % | | 3.43 | % | | 4.03 | % | | 4.03 | % |
Interest Expense. Total interest expense decreased $519,000, or 25.2%, to $1.5 million for the quarter ended December 31, 2013 compared to $2.1 million for the quarter ended December 31, 2012. Interest expense declined due to a 19 basis point, or 18.3%, decline in the average cost of interest-bearing liabilities to 0.85% for the quarter ended December 31, 2013 from 1.04% for the quarter ended December 31, 2012, reflecting continued low market interest rates. In addition, the average balance of interest-bearing liabilities decreased by $66.7 million, or 8.4%, to $725.6 million for the quarter ended December 31, 2013 compared to $792.3 million for the quarter ended December 31, 2012 as a result of a reduction in higher cost certificates of deposit acquired in FDIC acquisitions and higher costing FHLB advances that matured and were repaid.
Interest expense on deposits decreased $332,000 or 27.3%, to $885,000 for the quarter ended December 31, 2013 compared to $1.2 million for the quarter ended December 31, 2012. The decrease was due primarily to a 15 basis point decrease in the average cost of deposits to 0.53% for the current quarter compared to 0.68% for the quarter ended December 31, 2012. The decrease in the average cost of deposits was largely due to low market interest rates and a decrease in higher costing certificates of deposit. Interest expense on certificates of deposit decreased $283,000 to $735,000 for the quarter ended December 31, 2013, from $1.0
million for the quarter ended December 31, 2012, reflecting the $69.7 million, or 20.6%, decrease in the average balance of such deposits and an 11 basis point decrease in average certificate of deposit cost to 1.09%. This represented a continuation of our strategy to run off certificates of deposit accounts from our FDIC acquisitions. The average cost on savings accounts decreased 2 basis points to 0.03% for the quarter ended December 31, 2013, compared to 0.05% for the quarter ended December 31, 2012. The average cost on rewards checking decreased 15 basis points to 0.25% for the quarter ended December 31, 2013 compared to 0.40% for the quarter ended December 31, 2012. Rewards checking is a premium rate demand account based on average balance, electronic transaction activity, and other criteria.
Interest expense on FHLB advances decreased $187,000 to $651,000 for the quarter ended December 31, 2013 compared to $838,000 for the quarter ended December 31, 2012, due to a decrease of $20.0 million, or 25.0%, in the average balance of advances. The average cost of advances increased 15 basis points for the quarter ended December 31, 2013 compared to the quarter ended December 31, 2012 due to lower costing advances maturing in March and September 2013, leaving us with higher rate advances at December 31, 2013.
Net Interest Income. Net interest income decreased $1.3 million, or 14.2%, to $7.7 million for the quarter ended December 31, 2013, from $9.0 million for the quarter ended December 31, 2012. The decrease was primarily due to a decrease in interest income of $1.8 million, partially offset by a decrease in interest expense of $519,000. Interest income decreased largely due to the average yield on assets decreasing 112 basis points during the quarter ended December 31, 2013 as compared to the prior year quarter. This decrease in average yield was due to a lower average yield on loans receivable which was primarily attributable to lower accretion income on acquired covered loans. This decrease in average yield was partially offset by an increase in the average balance of mortgage-backed securities and collateralized mortgage obligations available for sale of $30.1 million for the quarter ended December 31, 2013. The decrease in interest expense was due to a 15 basis point decrease in the average cost of total interest bearing deposits to 0.53% for the quarter ended December 31, 2013 from 0.68% for the quarter ended December 31, 2012, partially offset by an 15 basis point increase in the average cost of borrowings to 4.34% for the quarter ended December 31, 2013 from 4.19% for the quarter ended December 31, 2012. In addition, the average balance of interest-bearing liabilities decreased $66.7 million during the quarter ended December 31, 2013 as compared to the same prior year quarter. As the table indicates below, our net interest margin decreased 84 basis points to 3.29% for the December quarter of 2013 from 4.13% for the December quarter of 2012, while our net interest rate spread decreased 93 basis points to 3.10% for the first quarter of fiscal 2014 from 4.03% for the first quarter of fiscal 2013. Lower average balances and lower average yields on loans outstanding, partially offset by lower average rates paid on certificates of deposits, contributed to reduced net interest margin. Additionally, 52 basis points of purchase discount accretion was included in the net interest margin. At December 31, 2013, there was $3.7 million of discount remaining to accrete into interest income over the remaining life of the loans with the accretion heavily weighted towards the early quarters.
The table below shows discount accretion included in income over the past five years, for the quarter ended December 31, 2013, and the remaining discount to be recognized:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Loan Accretion Income |
| | 2009 | | 2010 | | 2011 | | 2012 | | 2013 | | | 1Q 2014 | | | Remaining |
| | (in thousands) |
NCB | | $ | 1,698 |
| | $ | 4,519 |
| | $ | 2,272 |
| | $ | 751 |
| | $ | 844 |
| | | $ | 86 |
| | | $ | 220 |
|
MCB | | — |
| | 3,242 |
| | 5,742 |
| | 3,740 |
| | 3,086 |
| | | 418 |
| | | 1,655 |
|
FNB | | — |
| | — |
| | 252 |
| | 4,497 |
| | 4,993 |
| | | 688 |
| | | 1,872 |
|
Total | | $ | 1,698 |
| | $ | 7,761 |
| | $ | 8,266 |
| | $ | 8,988 |
| | $ | 8,923 |
| | | $ | 1,192 |
| | | $ | 3,747 |
|
|
| | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended December 31, |
| 2013 | | 2012 |
| Average Balance | | Interest | | Average Yield/Cost | | Average Balance | | Interest | | Average Yield/Cost |
| (dollars in thousands) |
Assets: | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | |
Interest-earning deposits in other financial institutions | $ | 133,312 |
| | $ | 85 |
| | 0.26 | % | | $ | 84,037 |
| | $ | 52 |
| | 0.25 | % |
FHLB common stock and other equity securities | 3,940 |
| | 30 |
| | 3.05 |
| | 5,297 |
| | 35 |
| | 2.64 |
|
Mortgage-backed securities and collateralized mortgage obligations available for sale (1) | 192,594 |
| | 969 |
| | 2.01 |
| | 162,483 |
| | 730 |
| | 1.80 |
|
Other investment securities available for sale (1) | 19,629 |
| | 19 |
| | 0.38 |
| | 26,328 |
| | 55 |
| | 0.84 |
|
Loans receivable (1)(2)(3)(4) | 588,105 |
| | 8,154 |
| | 5.55 |
| | 593,060 |
| | 10,180 |
| | 6.87 |
|
Total interest-earning assets | 937,580 |
| | 9,257 |
| | 3.95 |
| | 871,205 |
| | 11,052 |
| | 5.07 |
|
Total noninterest-earning assets | 147,546 |
| | | | |
| | 142,086 |
| | | | |
|
Total assets | $ | 1,085,126 |
| | | | |
| | $ | 1,013,291 |
| | | | |
|
Liabilities and Equity: | |
| | |
| | |
| | |
| | |
| | |
|
Interest-bearing liabilities: | |
| | |
| | |
| | |
| | |
| | |
|
NOW accounts | $ | 169,631 |
| | $ | 47 |
| | 0.11 | % | | $ | 145,621 |
| | $ | 50 |
| | 0.14 | % |
Reward accounts | 48,738 |
| | 30 |
| | 0.25 |
| | 51,622 |
| | 52 |
| | 0.40 |
|
Savings accounts | 47,877 |
| | 3 |
| | 0.03 |
| | 49,432 |
| | 6 |
| | 0.05 |
|
Money market deposit accounts | 130,433 |
| | 70 |
| | 0.21 |
| | 126,924 |
| | 92 |
| | 0.29 |
|
Certificate of deposit accounts | 268,962 |
| | 735 |
| | 1.09 |
| | 338,674 |
| | 1,017 |
| | 1.20 |
|
Total interest-bearing deposits | 665,641 |
| | 885 |
| | 0.53 |
| | 712,273 |
| | 1,217 |
| | 0.68 |
|
Borrowed funds | 60,000 |
| | 651 |
| | 4.34 |
| | 80,043 |
| | 838 |
| | 4.19 |
|
Total interest-bearing liabilities | 725,641 |
| | 1,536 |
| | 0.85 |
| | 792,316 |
| | 2,055 |
| | 1.04 |
|
Noninterest-bearing deposits | 73,201 |
| | | | |
| | 69,757 |
| | | | |
|
Other noninterest-bearing liabilities | 11,801 |
| | | | |
| | 7,822 |
| | | | |
|
Total noninterest-bearing liabilities | 85,002 |
| | | | |
| | 77,579 |
| | | | |
|
Total liabilities | 810,643 |
| | | | |
| | 869,895 |
| | | | |
|
Total stockholders' equity | 274,483 |
| | | | |
| | 143,396 |
| | | | |
|
Total liabilities and stockholders' equity | $ | 1,085,126 |
| | | | |
| | $ | 1,013,291 |
| | | | |
|
Net interest income | |
| | $ | 7,721 |
| | |
| | |
| | $ | 8,997 |
| | |
|
Net interest-earning assets (5) | |
| | $ | 211,939 |
| | |
| | |
| | $ | 78,889 |
| | |
|
Net interest rate spread (6) | |
| | |
| | 3.10 | % | | |
| | |
| | 4.03 | % |
Net interest margin (7) | |
| | |
| | 3.29 | % | | |
| | |
| | 4.13 | % |
Ratio of average interest-earning assets to average interest-bearing liabilities | | | | | 129.21 | % | | | | | | 109.96 | % |
__________________________________
| |
(1) | Tax exempt or tax-advantaged securities and loans are shown at their contractual yields and are not shown at a tax equivalent yield. |
| |
(2) | Includes net loan fees deferred and accreted pursuant to applicable accounting requirements. |
| |
(3) | Interest income on loans is interest income as recorded in the income statement and, therefore, does not include interest income on non-accrual loans. |
| |
(4) | Interest income on covered loans includes discount accretion. |
| |
(5) | Net interest-earning assets represent total average interest-earning assets less total average interest-bearing liabilities. |
| |
(6) | Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. |
| |
(7) | Net interest margin represents net interest income as a percentage of average interest-earning assets. |
Rate/Volume Analysis. The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rates (changes in rate multiplied by prior
volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The combined column represents the net change in volume between the two periods multiplied by the net change in rate between the two periods. The net column represents the sum of the prior columns.
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended December 31, 2013 Compared to the Three Months Ended December 31, 2012 |
| Increase/(Decrease) Due to |
| Volume | | Rate | | Combined | | Net |
| (dollars in thousands) |
Interest Income: | | | | | | | |
Interest-earning deposits in other financial institutions | $ | 30 |
| | $ | 2 |
| | $ | 1 |
| | $ | 33 |
|
FHLB common stock and other equity securities | (9 | ) | | 5 |
| | (1 | ) | | (5 | ) |
Mortgage-backed securities and collateralized mortgage obligations available for sale | 135 |
| | 87 |
| | 17 |
| | 239 |
|
Other investment securities available for sale | (14 | ) | | (30 | ) | | 8 |
| | (36 | ) |
Loans receivable | (85 | ) | | (1,958 | ) | | 17 |
| | (2,026 | ) |
Total interest-earnings assets | $ | 57 |
| | $ | (1,894 | ) | | $ | 42 |
| | $ | (1,795 | ) |
Interest Expense | | | | | | | |
NOW accounts | $ | 11 |
| | $ | (34 | ) | | $ | (2 | ) | | $ | (25 | ) |
Savings accounts | — |
| | (3 | ) | | — |
| | (3 | ) |
Money market deposit accounts | 3 |
| | (24 | ) | | (1 | ) | | (22 | ) |
Certificate of deposit accounts | (209 | ) | | (92 | ) | | 19 |
| | (282 | ) |
Total interest-bearing deposits | (195 | ) | | (153 | ) | | 16 |
| | (332 | ) |
Borrowed funds | (210 | ) | | 30 |
| | (7 | ) | | (187 | ) |
Total Interest-bearing Liabilities | $ | (405 | ) | | $ | (123 | ) | | $ | 9 |
| | $ | (519 | ) |
Net Change in net interest income | $ | 462 |
| | $ | (1,771 | ) | | $ | 33 |
| | $ | (1,276 | ) |
Provision for Non-Covered Loan Losses. The provision for loan losses for the quarters ended December 31, 2013 and December 31, 2012 were $300,000 each period, for non-covered loans. We had net recoveries on non-covered loans of $6,000 for the quarter ended December 31, 2013, compared to net charge-offs of $108,000 for the quarter ended December 31, 2012. The allowance for loan losses for non-covered loans was $8.5 million, or 1.74% of total non-covered loans receivable at December 31, 2013 compared to $8.4 million, or 1.92% of total non-covered loans receivable, at December 31, 2012. Our nonperforming loans increased to $5.0 million or 1.02% of total noncovered loans at December 31, 2013 from $3.2 million or 0.73% of total noncovered loans at December 31, 2012. As a result, our allowance as a percent of nonperforming loans decreased from 262.64% at December 31, 2012 to170.74% at December 31, 2013.
Provision for Covered Loan Losses. For the quarter ended December 31, 2013, the provision for covered loan losses was $2,000 compared to $95,000 for the quarter ended December 31, 2012 as our estimate of losses on covered loans declined. The provision for covered loans for the quarter ended December 31, 2013 primarily related to a provision benefit of $28,000 related to certain loans of NCB and a provision of $30,000 related to certain loans of FNB. If future losses occur due to declines in the market during the five year period covered by loss share agreements, the losses on loans acquired from both NCB and MCB will be reimbursed at 95% and FNB at 80% based on the terms of the FDIC loss sharing agreements. At December 31, 2013 covered loans totaled $100.1 million and are net of $15.7 million in related nonaccretable and accretable discounts and allowances.
Noninterest Income. Noninterest income increased $905,000, or 28.2%, to $4.1 million for the quarter ended December 31, 2013 from $3.2 million for the quarter ended December 31, 2012. The increase was primarily attributable to a true-up receipt from the completion and renegotiation of a processing contract of approximately $1.1 million. As indicated below, discount accretion on FDIC assisted transactions decreased $238,000 to an expense of $90,000 for the quarter ended December 31, 2013 from income of $148,000 for the quarter ended December 31, 2012. This reduction was due primarily to an impairment of $225,000 recorded on the FDIC indemnification asset during the first quarter of fiscal 2014 based on an assessment of the collectability of previous loss estimates which established the covered portion of the allowance for loan losses. Gains on loans and servicing released fees decreased $178,000 as a result of lower mortgage loan production during the first quarter of fiscal 2014.
|
| | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended |
| December 31, 2013 | | September 30, 2013 | | June 30, 2013 | | March 31, 2013 | | December 31, 2012 |
| (dollars in thousands) |
Deposit and bankcard fees | $ | 2,256 |
| | $ | 2,011 |
| | $ | 1,915 |
| | $ | 1,878 |
| | $ | 1,950 |
|
Gain on the sale of loans | 172 |
| | 192 |
| | 407 |
| | 385 |
| | 350 |
|
Brokerage commissions | 145 |
| | 120 |
| | 153 |
| | 175 |
| | 141 |
|
Bank owned life insurance | 308 |
| | 300 |
| | 211 |
| | 228 |
| | 255 |
|
Gain on sale of investments, net | — |
| | 30 |
| | — |
| | — |
| | 220 |
|
FDIC (net impairment) receivable accretion | (90 | ) | | (186 | ) | | (115 | ) | | 186 |
| | 148 |
|
Other income | 1,325 |
| | 335 |
| | 91 |
| | 125 |
| | 147 |
|
Total Noninterest Income | $ | 4,116 |
| | $ | 2,802 |
| | $ | 2,662 |
| | $ | 2,977 |
| | $ | 3,211 |
|
Noninterest Expense. Total noninterest expense increased $875,000, or 10.5% to $9.2 million for the quarter ended December 31, 2013, compared to $8.3 million for the quarter ended December 31, 2012. The increase was primarily due to increases in the net cost of real estate owned and legal and professional expenses of $481,000 and $231,000, respectively, for the quarter ended December 31, 2013.
The following table shows noninterest expense by category for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended |
| December 31, 2013 | | September 30, 2013 | | June 30, 2013 | | March 31, 2013 | | December 31, 2012 |
| (dollars in thousands) |
Compensation and employee benefits | $ | 4,701 |
| | $ | 4,956 |
| | $ | 4,460 |
| | $ | 4,367 |
| | $ | 4,676 |
|
Occupancy | 1,892 |
| | 1,979 |
| | 1,845 |
| | 1,718 |
| | 1,761 |
|
Legal and professional | 554 |
| | 647 |
| | 459 |
| | 493 |
| | 323 |
|
Marketing | 300 |
| | 367 |
| | 336 |
| | 323 |
| | 268 |
|
Furniture and equipment | 166 |
| | 213 |
| | 203 |
| | 210 |
| | 202 |
|
Postage, office supplies, and printing | 226 |
| | 275 |
| | 283 |
| | 277 |
| | 247 |
|
Core deposit intangible amortization expense | 106 |
| | 112 |
| | 116 |
| | 121 |
| | 128 |
|
Federal insurance premiums and other regulatory fees | 251 |
| | 233 |
| | 254 |
| | (142 | ) | | 245 |
|
Net cost (benefit) of operations of other real estate owned | 289 |
| | 40 |
| | (22 | ) | | 1,192 |
| | (192 | ) |
Other | 715 |
| | 647 |
| | 829 |
| | 1,198 |
| | 667 |
|
Total Noninterest Expense | $ | 9,200 |
| | $ | 9,469 |
| | $ | 8,763 |
| | $ | 9,757 |
| | $ | 8,325 |
|
Income Taxes. Income taxes decreased to $698,000 for the quarter ended December 31, 2013 from $1.2 million for the quarter ended December 31, 2012 due in large part to the decrease in net income before taxes. Our effective tax rate was 29.9% in the quarter ended December 31, 2013 and 33.1% in the quarter ended December 31, 2012.
Asset Quality
Delinquent Loans and Foreclosed Assets. Our policies require that management continuously monitor the status of the loan portfolio and report to the Loan Committee of the Board of Directors on a monthly basis. These reports include information on delinquent loans and foreclosed real estate, and our actions and plans to cure the delinquent status of the loans and to dispose of the foreclosed property. The Loan Committee approves action plans on all loans that are 90 days or more delinquent. The Loan Committee consists of three outside directors. One position on the committee, the chairman, is permanent, and the other two positions alternate between four outside directors.
We generally stop accruing interest income when we consider the timely collectability of interest or principal to be doubtful. We generally stop accruing for loans that are 90 days or more past due unless the loan is well secured and we determine that the ultimate collection of all principal and interest is not in doubt. When we designate loans as nonaccrual, we reverse all outstanding interest that we had previously credited. These loans remain on nonaccrual status until a regular pattern of timely payments is established.
Impaired loans are individually assessed to determine whether the carrying value exceeds the fair value of the collateral or the present value of the expected cash flows to be received. Smaller balance homogeneous loans, such as residential mortgage loans and consumer loans, are collectively evaluated for impairment.
Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned until such time as it is sold. When real estate is acquired through foreclosure or by deed in lieu of foreclosure, it is recorded at the lower of the related loan balance or its fair value as determined by an appraisal, less estimated costs of disposal. If the value of the property is less than the loan, less any related specific loan loss reserve allocations, the difference is charged against the allowance for loan losses. Any subsequent write-down of real estate owned or loss at the time of disposition is charged against earnings.
As of December 31, 2013, our nonperforming non-covered assets totaled $6.0 million and consisted of $5.0 million of nonaccrual loans and other real estate owned of $1.0 million. The table below sets forth the amounts and categories of our non-covered non-performing assets at the dates indicated.
|
| | | | | | | |
| At December 31, 2013 | | At September 30, 2013 |
| (dollars in thousands) |
Non-accrual loans: | | | |
One- to four-family residential real estate | $ | 1,510 |
| | $ | 1,508 |
|
Commercial real estate | 3,232 |
| | 1,121 |
|
Real estate construction | — |
| | — |
|
Commercial | 153 |
| | 161 |
|
Consumer and other loans | 80 |
| | 84 |
|
Total non-accrual loans | 4,975 |
| | 2,874 |
|
Loans delinquent 90 days or greater and still accruing: | |
| | |
|
One- to four-family residential real estate | — |
| | 47 |
|
Commercial real estate | — |
| | — |
|
Real estate construction | — |
| | — |
|
Commercial | — |
| | — |
|
Consumer and other loans | — |
| | — |
|
Total loans delinquent 90 days or greater and still accruing | — |
| | 47 |
|
Total non-performing loans | $ | 4,975 |
| | $ | 2,921 |
|
Real estate owned: | |
| | |
|
One- to four-family residential real estate | $ | 642 |
| | $ | 1,175 |
|
Commercial real estate | 411 |
| | 440 |
|
Real estate construction | — |
| | — |
|
Commercial | — |
| | — |
|
Consumer and other loans | — |
| | — |
|
Total real estate owned | 1,053 |
| | 1,615 |
|
Total non-performing assets | $ | 6,028 |
| | $ | 4,536 |
|
Ratios: | |
| | |
|
Non-performing loans as a percentage of total non-covered loans | 1.02 | % | | 0.61 | % |
Non-performing assets as a percentage of total non-covered assets | 0.64 | % | | 0.49 | % |
Non-performing assets not covered by loss share increased $1.5 million, or 32.9%, to $6.0 million at December 31, 2013 from $4.5 million at September 30, 2013. The increase was due primarily to a $2.1 million increase in non-accrual commercial real estate loans. We have 36 non-covered loans that remain non-performing at December 31, 2013, and the largest non-performing non-covered loan had a balance of $1.8 million at December 31, 2013 and was secured by commercial real estate. The increase
was partially offset by a $562,000 decline in real estate owned. Real estate owned decreased primarily due to the disposition of $540,000 in single family real estate owned by CharterBank as well as $122,000 in additional write downs on real estate owned.
Covered nonperforming assets decreased to $19.6 million at December 31, 2013 from $22.6 million at September 30, 2013. The purchased loans and commitments (“covered loans”) and other real estate owned (“covered other real estate”) acquired in the MCB, NCB and FNB acquisitions are covered by loss sharing agreements between the FDIC and CharterBank. Under these agreements, with respect to the NCB acquisition, the FDIC will assume 80% of losses and share 80% of loss recoveries on the first $82.0 million of losses, and assume 95% of losses and share 95% of loss recoveries on losses exceeding that amount; with respect to the MCB acquisition, the FDIC will assume 80% of losses and share 80% of loss recoveries on the first $106.0 million of losses, and assume 95% of losses and share 95% of loss recoveries on losses exceeding that amount. We have exceeded the threshold level that results in 95% loss sharing with respect to the NCB and MCB acquisitions; with respect to the FNB acquisition, the FDIC will assume 80% of all losses and share 80% of all loss recoveries.
Allowance for Loan Losses on Non-covered Loans. The allowance for loan losses on non-covered loans represents a reserve for probable loan losses in the loan portfolio. The adequacy of the allowance for loan losses is evaluated periodically based on a review of all significant loans with particular emphasis on impaired, non-accruing, past due and other loans that management believes require special attention. The determination of the allowance for loan losses is considered a critical accounting policy.
Additions to the allowance for loan losses are made periodically to maintain the allowance at an appropriate level based on management’s analysis of loss inherent in the loan portfolio. The amount of the provision for loan losses is determined by an evaluation of the level of loans outstanding, loss risk as determined based on a loan grading system, the level of non-performing loans, historical loss experience, delinquency trends, the amount of losses charged to the allowance in a given period, and an assessment of economic conditions. Management believes the current allowance for loan losses is adequate based on its analysis of the estimated losses in the portfolio.
The Company maintained its allowance for loan losses for the three months ended December 31, 2013 in response to continued weak economic conditions, net charge-offs, weak financial indicators for borrowers in the real estate sectors, continuing low collateral values of commercial and residential real estate, and nonaccrual and impaired loans.
The following table sets forth activity in our allowance for loan losses for the period indicated. Loans covered by the loss sharing agreements with the FDIC are excluded from the table.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, 2013 |
| 1-4 family real estate | | Commercial real estate | | Commercial | | Real estate construction | | Consumer and other | | Unallocated | | Total |
Allowance for loan losses: | | | | | | | | | | | | | |
Balance at beginning of period | $ | 862,043 |
| | $ | 5,446,357 |
| | $ | 455,833 |
| | $ | 387,302 |
| | $ | 124,717 |
| | $ | 912,644 |
| | $ | 8,188,896 |
|
Charge-offs | (41,409 | ) | | — |
| | (22,035 | ) | | — |
| | (4,550 | ) | | — |
| | (67,994 | ) |
Recoveries | — |
| | 61,120 |
| | 10,010 |
| | — |
| | 2,380 |
| | — |
| | 73,510 |
|
(Credit) provision | (80,870 | ) | | 495,487 |
| | 240,777 |
| | (24,711 | ) | | (68,480 | ) | | (262,203 | ) | | 300,000 |
|
Balance at end of period | $ | 739,764 |
| | $ | 6,002,964 |
| | $ | 684,585 |
| | $ | 362,591 |
| | $ | 54,067 |
| | $ | 650,441 |
| | $ | 8,494,412 |
|
Ending balance: individually evaluated for impairment | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | |
| | $ | — |
|
Loans: | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Ending balance | $ | 133,330,740 |
| | $ | 267,817,681 |
| | $ | 22,793,335 |
| | $ | 45,199,612 |
| | $ | 16,908,814 |
| | |
| | $ | 486,050,182 |
|
Ending balance: individually evaluated for impairment | $ | 1,569,836 |
| | $ | 11,572,702 |
| | $ | 341,064 |
| | $ | — |
| | $ | — |
| | |
| | $ | 13,483,602 |
|
Our allowance for loan loss methodology is a loan classification-based system. Our allowance for loan losses is segmented into the following four major categories: (1) specific reserves; (2) general allowances for Classified/Watch loans; (3) general allowances for loans with satisfactory ratings; and (4) an unallocated amount. We base the required reserve on a percentage of the loan balance for each type of loan and classification level. Loans may be classified manually and are automatically classified if they are not previously classified when they reach certain levels of delinquency. Unclassified loans are reserved at different percentages based on our loan loss history for the last two years. Reserve percentages are also adjusted based upon our estimate of the effect that the current economic environment will have on each type of loan.
Potential problem loans are non-covered loans that management has serious doubts as to the ability of the borrowers to comply with present repayment terms. Management classifies potential problem loans as either special mention, substandard, or loss. Potential problem loans at December 31, 2013 aggregated $32.0 million with $3.0 million classified special mention and $29.0 million classified substandard compared to potential problem loans at September 30, 2013 which aggregated $35.4 million with $6.0 million classified special mention and $29.4 million classified substandard.
Our largest substandard loan relationship at December 31, 2013 had a balance of $8.2 million. As of December 31, 2013, all loans in the relationship were current and interest due has been paid. The loan relationship is collateralized by properties located in Alabama and Florida. We believe we are adequately collateralized, even at lower current real estate values.
The allowance for loan losses represented 170.7% and 262.6% of non-performing loans at December 31, 2013 and December 31, 2012, respectively. This decrease was due to higher non-performing loans in the current period. The allowance for loan losses as a percentage of non-covered loans was 1.74% and 1.92% at December 31, 2013 and December 31, 2012, respectively. Management continues to retain an unallocated allowance to maintain the overall allowance at a level reflective of continued economic uncertainties. Management reviews the adequacy of the allowance for loan losses on a continuous basis. Management considered the allowance for loan losses on non-covered loans adequate at December 31, 2013 to absorb probable losses inherent in the loan portfolio. However, adverse economic circumstances or other events, including additional loan review, future regulatory examination findings or changes in borrowers' financial conditions, could result in increased losses in the loan portfolio or in the need for increases in the allowance for loan losses.
Nonaccretable Differences and Allowance for Loan Losses on Covered Loans. Through the FDIC-assisted acquisitions of the loans of NCB, MCB and FNB, management established nonaccretable discounts for the acquired impaired loans and also for all other loans of MCB. These nonaccretable discounts were based on estimates of future cash flows. Subsequent to the acquisition dates, management continues to assess the experience of actual cash flows compared to estimates. When management determines that nonaccretable discounts are insufficient to cover expected losses in the applicable covered loan portfolios, the allowance for covered loans is increased with a corresponding provision for covered loan losses as a charge to earnings and an increase in the applicable FDIC receivable based on loss sharing indemnification.
The following table details the nonaccretable discount, including any allowance for covered loan losses, on loans covered by loss sharing by portfolio segment as of and for the three months ended December 31, 2013:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, 2013 |
| 1-4 family real estate | | Commercial real estate | | Commercial | | Real estate construction | | Consumer and other | | Total |
Nonaccretable differences: (1) | | | | | | | | | | | |
Balance at beginning of period | $ | 1,257,419 |
| | $ | 10,606,752 |
| | $ | 1,787,844 |
| | $ | — |
| | $ | 1,105,525 |
| | $ | 14,757,540 |
|
Charge-offs | (54,490 | ) | | (341,657 | ) | | (82,548 | ) | | — |
| | (95,796 | ) | | (574,491 | ) |
Recoveries | 730 |
| | 12,759 |
| | 4,585 |
| | — |
| | 643 |
| | 18,717 |
|
Reduction in previous loss estimates credited to FDIC receivable | — |
| | (1,377,500 | ) | | (285,000 | ) | | — |
| | (801 | ) | | (1,663,301 | ) |
Provision for loan losses charged to FDIC receivable | — |
| | (237,500 | ) | | (95,000 | ) | | — |
| | (197,298 | ) | | (529,798 | ) |
Provision (credit) for loan losses charged to operations | 4,862 |
| | 13,511 |
| | (5,924 | ) | | — |
| | (10,333 | ) | | 2,116 |
|
Transfer to accretable discount | — |
| | (72,500 | ) | | (15,000 | ) | | — |
| | (42 | ) | | (87,542 | ) |
Balance at end of period | $ | 1,208,521 |
| | $ | 8,603,865 |
| | $ | 1,308,957 |
| | $ | — |
| | $ | 801,898 |
| | $ | 11,923,241 |
|
Covered loans: | |
| | |
| | |
| | |
| | |
| | |
|
Ending contractual balance | $ | 10,133,384 |
| | $ | 96,706,073 |
| | $ | 5,881,923 |
| | $ | — |
| | $ | 3,074,252 |
| | $ | 115,795,632 |
|
__________________________________
(1) Amounts include the allowance for covered loan losses.
The total nonaccretable discount and allowance for covered loans as a percentage of the ending contractual balance of acquired loans was 10.3% at December 31, 2013, compared to 11.5% at September 30, 2013. This decrease during the three month period ended December 31, 2013 was related to charge-off activity on covered loans with such losses subject to applicable loss sharing agreements with the FDIC as the Bank reduced its contractual balance on covered loans by $12.8 million during the three months ended December 31, 2013. It is expected that the ratio of nonaccretable discounts and allowance for covered loan losses
to contractual covered principal outstanding will continue to trend downwards as the more significant problem loans are charged-off and submitted for loss sharing reimbursement from the FDIC. If these trends continue and result in the reduction of current loss estimates, the outcome would be increased accretion income and related amortization of the FDIC receivable. Management considered the nonaccretable discounts and allowance for covered loan losses adequate at December 31, 2013 to absorb probable losses inherent in the covered loan portfolio.
Liquidity Management. Liquidity is the ability to meet current and future short-term financial obligations. Our primary sources of funds consist of deposit inflows, advances from the Federal Home Loan Bank, loan payments and prepayments, mortgage-backed securities and collateralized mortgage obligations repayments and maturities and sales of loans and other securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, economic conditions and competition. Our Asset/Liability Management Committee is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs of our customers as well as unanticipated contingencies. At December 31, 2013 and September 30, 2013, we had access to immediately available funds of approximately $391.2 million and $397.1 million, respectively, including overnight funds, FHLB borrowing capacity and a Federal Reserve line of credit.
We regularly adjust our investments in liquid assets based upon our assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short- and intermediate-term securities.
Our most liquid assets are cash and cash equivalents. The levels of these assets are subject to our operating, financing, lending and investing activities during any given period. At December 31, 2013, cash and cash equivalents totaled $157.3 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $208.1 million. At December 31, 2013, we had $60.0 million in advances outstanding from the FHLB. Based on available collateral other than cash, additional advances would be limited to $178.7 million.
Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Consolidated Statements of Cash Flows included in our Consolidated Financial Statements.
At December 31, 2013, we had $7.9 million of new loan commitments outstanding, and $44.3 million of unfunded construction and development loans. In addition to commitments to originate loans, we had $19.9 million of unused lines of credit to borrowers. Certificates of deposit due within one year of December 31, 2013 totaled $168.3 million, or 22.8% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and Federal Home Loan Bank advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before December 31, 2014. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.
Our primary investing activities are the origination of loans and the purchase of securities. During the three months ended December 31, 2013, we originated $69.0 million of loans and purchased $7.1 million of securities and other investments.
Financing activities consist primarily of additions to deposit accounts and Federal Home Loan Bank advances. We experienced a net decrease in total deposits of $13.6 million for the three months ended December 31, 2013, primarily due to a decline in certificates of deposit. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors.
Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank which provides an additional source of funds. Federal Home Loan Bank advances have been used primarily to fund loan demand and to purchase securities.
Capital Management and Resources. CharterBank is subject to various regulatory capital requirements administered by the Office of the Comptroller of the Currency, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At December 31, 2013, CharterBank exceeded all of its regulatory capital requirements. CharterBank is considered “well capitalized” under regulatory guidelines.
|
| | | | | | | | | | | | | | | | | | | | | |
| | Actual | | For Capital Adequacy Purposes | | To be Well Capitalized Under Prompt Corrective Action Provisions |
| | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| | (dollars in thousands) |
December 31, 2013 | | | | | | | | | | | | |
Total Risk Based Capital (to Risk-Weighted Assets) | | $ | 211,923 |
| | 33.8 | % | | $ | 50,110 |
| | 8.0 | % | | $ | 62,637 |
| | 10.0 | % |
Tier 1 Capital (to Risk Weighted Assets) | | 204,043 |
| | 32.6 |
| | 25,055 |
| | 4.0 |
| | 37,582 |
| | 6.0 |
|
Tier 1 Capital (to Average Assets) | | 204,043 |
| | 19.1 |
| | 42,841 |
| | 4.0 |
| | 53,551 |
| | 5.0 |
|
September 30, 2013 | | |
| | |
| | |
| | |
| | |
| | |
|
Total Risk Based Capital (to Risk-Weighted Assets) | | $ | 209,930 |
| | 33.8 | % | | $ | 49,648 |
| | 8.0 | % | | $ | 62,060 |
| | 10.0 | % |
Tier 1 Capital (to Risk Weighted Assets) | | 202,119 |
| | 32.6 |
| | 24,824 |
| | 4.0 |
| | 37,236 |
| | 6.0 |
|
Tier 1 Capital (to Average Assets) | | 202,119 |
| | 18.6 |
| | 43,572 |
| | 4.0 |
| | 54,465 |
| | 5.0 |
|
The Company continues to seek strategic means to deploy the additional capital from the recently completed stock offering. This may include stock buybacks, dividends, additional lending when available and appropriately priced acquisitions.
Off-Balance Sheet Arrangements. In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our consolidated financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit.
For the three months ended December 31, 2013, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Qualitative Aspects of Market Risk. The Company’s most significant form of market risk is interest rate risk. We manage the interest rate sensitivity of our interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment. Deposit accounts typically react more quickly to changes in market interest rates than mortgage loans because of the shorter maturities of deposits. As a result, sharp increases in interest rates may adversely affect our earnings. We employ several strategies to manage the interest rate risk inherent in our mix of assets and liabilities, including:
| |
• | selling fixed rate mortgages we originate to the secondary market; |
| |
• | maintaining the diversity of our existing loan portfolio by originating commercial real estate and consumer loans, which typically have adjustable rates and/or shorter terms than residential mortgages; |
| |
• | emphasizing loans with adjustable interest rates; |
| |
• | maintaining fixed rate borrowings from the Federal Home Loan Bank of Atlanta; and |
| |
• | increasing retail transaction deposit accounts, which typically have long durations. |
We have an Asset/Liability Management Committee to communicate, coordinate and control all aspects involving asset/liability management. The committee establishes and monitors the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals.
Quantitative Aspects of Market Risk. We compute the amounts by which the difference between the present value of an institution's assets and liabilities (the institution's net portfolio value or “NPV”) would change in the event of a range of assumed changes in market interest rates. Our simulation model uses a discounted cash flow analysis to measure the interest rate sensitivity of NPV. Depending on current market interest rates we historically have estimated the economic value of these assets and liabilities under the assumption that interest rates experience an instantaneous and sustained increase of 100, 200, or 300 basis points, or a decrease of 100 and 200 basis points. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below. Given the current relatively low level of market interest rates, a NPV calculation for an interest rate decrease of greater than 100 basis points has not been prepared.
The table below sets forth, as of December 31, 2013, our calculation of the estimated changes in CharterBank’s net portfolio value that would result from the designated instantaneous parallel shift in the interest rate yield curve.
|
| | | | | | | | | | | | | | |
Change in Interest Rates (bp) (1) | | Estimated NPV (2) | | Estimated Increase (Decrease) in NPV | | Percentage Change in NPV | | NPV Ratio as a Percent of Present Value of Assets (3)(4) | | Increase (Decrease) in NPV Ratio as a Percent or Present Value of Assets (3)(4) |
(dollars in thousands) |
300 | | $ | 225,539 |
| | $ | (14,169 | ) | | (5.9)% | | 20.9% | | (1.4)% |
200 | | $ | 230,228 |
| | $ | (9,481 | ) | | (4.0)% | | 21.4% | | (0.9)% |
100 | | $ | 234,959 |
| | $ | (4,749 | ) | | (2.0)% | | 21.8% | | (0.5)% |
— | | $ | 239,709 |
| | $ | — |
| | — | | 22.3% | | — |
(100) | | $ | 237,702 |
| | $ | (2,007 | ) | | (0.8)% | | 22.1% | | (0.2)% |
__________________________________
| |
(1) | Assumes an instantaneous uniform change in interest rates at all maturities. |
| |
(2) | NPV is the difference between the present value of an institution’s assets and liabilities. |
| |
(3) | Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets. |
| |
(4) | NPV Ratio represents NPV divided by the present value of assets. |
The table above indicates that at December 31, 2013, in the event of a 200 basis point increase in interest rates, we would experience a 4.0% decrease in net portfolio value. In the event of a 100 basis point decrease in interest rates, we would experience a 0.8% decrease in net portfolio value. Additionally, our internal policy states that our minimum NPV of estimated present value of assets and liabilities shall range from a low of 5.5% for a 300 basis point change in rates to 7.5% for no change in interest rates. As of December 31, 2013, we were in compliance with our Board approved policy limits.
The effects of interest rates on net portfolio value and net interest income are not predictable. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, prepayments, and deposit run-offs, and should not be relied upon as indicative of actual results. Certain shortcomings are inherent in these computations. Although some assets and liabilities may have similar maturity or periods of repricing, they may react at different times and in different degrees to changes in market interest rates. Rates on other types of assets and liabilities may lag behind changes in market interest rates. Assets, such as adjustable rate mortgages, generally have features that restrict changes in interest rates on a short-term basis and over the life of the asset. After a change in interest rates, prepayments and early withdrawal levels could deviate significantly from those assumed in making the calculations set forth above. Additionally, increased credit risk may result if our borrowers are unable to meet their repayment obligations as interest rates increase.
Item 4. Controls and Procedures
The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, no change in the Company’s internal control over financial reporting occurred during the quarter ended December 31, 2013 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may be party to various legal proceedings incident to our business. At December 31, 2013, we were not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.
Item 1A. Risk Factors
Risk factors that may affect future results were discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2013 and in Charter Federal or Charter Financial’s other filings with the Securities and Exchange Commission. The risks described in our Annual Report on Form 10-K and other filings are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
| |
(c) | The following table presents a summary of the Company's share repurchases during the quarter ended December 31, 2013: |
|
| | | | | | | | | | | | | |
| | Total number of share repurchases | | Average price paid per share | | Total number of shares purchased as part of publicly announced program (1) | | Maximum number of shares that may yet be purchased under the program (1) |
| | | | | | | | |
December 2013 | | 114,500 |
| | $ | 10.86 |
| | 114,500 |
| | 457,077 |
|
Total | | 114,500 |
| | | | 114,500 |
| | 457,077 |
|
__________________________________
(1) On December 19, 2013, the Company's stockholders approved a stock repurchase program which is being used to fund grants of restricted stock under the Company's 2013 Equity Incentive Plan. For the quarter ended December 31, 2013, shares were repurchased at a cost of approximately $1.2 million.
Item 6. Exhibits
|
| |
10.1 | Form of Stock Option Agreement for Directors |
|
| |
10.2 | Form of Stock Option Agreement for Employees |
|
| |
10.3 | Form of Restricted Stock Agreement for Directors |
|
| |
10.4 | Form of Restricted Stock Agreement for Employees |
|
| |
31.1 | Rule 13a-14(a)/15d-14(c) Certification of Chief Executive Officer |
|
| |
31.2 | Rule 13a-14(a)/15d-14(c) Certification of Chief Financial Officer |
|
| |
32.1 | Section 1350 Certifications |
|
| |
101 | Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Statements of Financial Condition as of December 31, 2013 and September 30, 2013, (ii) the Unaudited Condensed Consolidated Statements of Income for the three months ended December 31, 2013 and 2012, (iii) the Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three months ended December 31, 2013 and the year ended September 30, 2013 (iv) the Unaudited Condensed Consolidated Comprehensive Income for the three months ended December 31, 2013 and 2012, (v) the Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2013 and 2012, and (vi) the Notes to the Unaudited Condensed Consolidated Financial Statements. |
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | | |
| | CHARTER FINANCIAL CORPORATION | |
| | | | |
Date: | February 14, 2014 | By: | /s/ Robert L. Johnson | |
| | | Robert L. Johnson | |
| | | Chairman, President and Chief Executive Officer | |
| | | | |
Date: | February 14, 2014 | By: | /s/ Curtis R. Kollar | |
| | | Curtis R. Kollar | |
| | | Senior Vice President and Chief Financial Officer | |