NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1:
Basis of Presentation
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Securities and Exchange Commission (SEC) Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all material adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. The consolidated balance sheet of the Company as of June 30, 2012, has been derived from the audited consolidated balance sheet of the Company as of that date. Operating results for the three-month periods ended September 30, 2012, are not necessarily indicative of the results that may be expected for the entire fiscal year. For additional information, refer to the audited consolidated financial statements included in the Company’s June 30, 2012, Form 10-K, which was filed with the SEC.
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Southern Bank (Bank). All significant intercompany accounts and transactions have been eliminated in consolidation.
Note 2:
Organization and Summary of Significant Accounting Policies
Organization.
Southern Missouri Bancorp, Inc., a Missouri corporation (the Company) was organized in 1994 and is the parent company of Southern Bank (the Bank). Substantially all of the Company’s consolidated revenues are derived from the operations of the Bank, and the Bank represents substantially all of the Company’s consolidated assets and liabilities.
The Bank is primarily engaged in providing a full range of banking and financial services to individuals and corporate customers in its market areas. The Bank and Company are subject to competition from other financial institutions. The Bank and Company are subject to regulation by certain federal and state agencies and undergo periodic examinations by those regulatory authorities.
Basis of Financial Statement Presentation.
The financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States of America and general practices within the banking industry. In the normal course of business, the Company encounters two significant types of risk: economic and regulatory. Economic risk is comprised of interest rate risk, credit risk, and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities reprice on a different basis than its interest-earning assets. Credit risk is the risk of default on the Company’s investment or loan portfolios resulting from the borrowers’ inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of the investment portfolio, collateral underlying loans receivable, and the value of the Company’s investments in real estate.
Principles of Consolidation.
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank. All significant intercompany accounts and transactions have been eliminated.
Use of Estimates.
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 relate to the determination of the allowance for loan losses, estimated fair values of purchased loans, other-than-temporary impairments (OTTI), and fair value of financial instruments.
Cash and Cash Equivalents.
For purposes of reporting cash flows, cash and cash equivalents includes cash, due from depository institutions and interest-bearing deposits in other depository institutions with original maturities of three months or less. Interest-bearing deposits in other depository institutions were $6,582, 000 and $31,048,000 at September 30 and June 30, 2012, respectively. The deposits are held in various commercial banks in amounts not exceeding the FDIC’s deposit insurance limits, as well as at the Federal Reserve, the Federal Home Loan Bank of Des Moines, and the Federal Home Loan Bank of Dallas.
Available for Sale Securities.
Available for sale securities, which include any security for which the Company has no immediate plan to sell but which may be sold in the future, are carried at fair value. Unrealized gains and losses, net of tax, are reported in accumulated other comprehensive income, a component of stockholders’ equity. All securities have been classified as available for sale.
Premiums and discounts on debt securities are amortized or accreted as adjustments to income over the estimated life of the security using the level yield method. Realized gains or losses on the sale of securities is based on the specific identification method. The fair value of securities is based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
The Company does not invest in collateralized mortgage obligations that are considered high risk.
When the Company does not intend to sell a debt security, and it is more likely than not the Company will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. As a result, the Company’s balance sheet as of the dates presented reflects the full impairment (that is, the difference between the security’s amortized cost basis and fair value) on debt securities that the Company intends to sell or would more likely than not be required to sell before the expected recovery of the amortized cost basis. For available-for-sale debt securities that management has no intent to sell and believes that it more likely than not will not be required to sell prior to recovery, only the credit loss component of the impairment is recognized in earnings, while the noncredit loss is recognized in accumulated other comprehensive income. The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security as projected based on cash flow projections.
Federal Reserve Bank and Federal Home Loan Bank Stock.
The Bank is a member of the Federal Reserve and the Federal Home Loan Bank (FHLB) systems. Capital stock of the Federal Reserve and the FHLB is a required investment based upon a predetermined formula and is carried at cost.
Loans.
Loans are generally stated at unpaid principal balances, less the allowance for loan losses and net deferred loan origination fees.
Interest on loans is accrued based upon the principal amount outstanding. The accrual of interest on loans is discontinued when, in management’s judgment, the collectibility of interest or principal in the normal course of business is doubtful. The Company complies with regulatory guidance which indicates that loans should be placed in nonaccrual status when 90 days past due, unless the loan is both well-secured and in the process of collection. A loan that is “in the process of collection” may be subject to legal action or, in appropriate circumstances, through other collection efforts reasonably expected to result in repayment or restoration to current status in the near future. A loan is considered delinquent when a payment has not been made by the contractual due date. Interest income previously accrued but not collected at the date a loan is placed on nonaccrual status is reversed against interest income. Cash receipts on a nonaccrual loan are applied to principal and interest in accordance with its contractual terms unless full payment of principal is not expected, in which case cash receipts, whether designated as principal or interest, are applied as a reduction of the carrying value of the loan. A nonaccrual loan is generally returned to accrual status when principal and interest payments are current, full collectability of principal and interest is reasonably assured, and a consistent record of performance has been demonstrated.
The allowance for losses on loans represents management’s best estimate of losses probable in the existing loan portfolio. The allowance for losses on loans is increased by the provision for losses on loans charged to expense and reduced by loans charged off, net of recoveries. Loans are charged off in the period deemed uncollectible, based on management’s analysis of expected cash flow (for non-collateral dependent loans) or collateral value (for collateral-dependent loans). Subsequent recoveries of loans previously charged off, if any, are credited to the allowance when received. The provision for losses on loans is determined based on management’s assessment of several factors: reviews and evaluations of specific loans, changes in the nature and volume of the loan portfolio, current economic conditions and the related impact on specific borrowers and industry groups, historical loan loss experience, the level of classified and nonperforming loans and the results of regulatory examinations.
Loans are considered impaired if, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Depending on a particular loan’s circumstances, we measure impairment of a loan based upon either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral less estimated costs to sell if the loan is collateral dependent. Valuation allowances are established for collateral-dependent impaired loans for the difference between the loan amount and fair value of collateral less estimated selling costs. For impaired loans that are not collateral dependent, a valuation allowance is established for the difference between the loan amount and the present value of expected future cash flows discounted at the historical effective interest rate or the
observable market price of the loan. Impairment losses are recognized through an increase in the required allowance for loan losses. Cash receipts on loans deemed impaired are recorded based on the loan’s separate status as a nonaccrual loan or an accrual status loan.
As a result of the acquisition of the former First Southern Bank, Batesville, Arkansas, the Company acquired certain loans with an outstanding principal balance of $14.2 million for which it was deemed probable that we would be unable to collect all contractually required payments. These loans are accounted for in accordance with ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. The Company recorded a fair value discount of $3.9 million related to these loans acquired with deteriorated credit quality (“purchased credit impaired loans”), and began carrying them at a value of $10.3 million. For these loans, we determined the contractual amount and timing of undiscounted principal and interest payments (the “undiscounted contractual cash flows”), and estimated the amount and timing of undiscounted expected principal and interest payments, including expected prepayments (the “undiscounted expected cash flows”). Under acquired impaired loan accounting, the difference between the undiscounted contractual cash flows and the undiscounted expected cash flows is the nonaccretable difference. The nonaccretable difference is an estimate of the loss exposure of principal and interest related to the purchased credit impaired loans, and the amount is subject to change over time based on the performance of the loans. The carrying value of purchased credit impaired loans is initially determined as the discounted expected cash flows. The excess of expected cash flows at acquisition over the initial fair value of the purchased credit impaired loans is referred to as the “accretable yield” and is recorded as interest income over the estimated life of the acquired loans using the level-yield method, if the timing and amount of the future cash flows is reasonably estimable. The carrying value of purchased credit impaired loans is reduced by payments received, both principal and interest, and increased by the portion of the accretable yield recognized as interest income. Subsequent to acquisition, the Company evaluates the purchased credit impaired loans on a quarterly basis. Increases in expected cash flows compared to those previously estimated increase the accretable yield and are recognized as interest income prospectively. Decreases in expected cash flows compared to those previously estimated decrease the accretable yield and may result in the establishment of an allowance for loan losses and a provision for loan losses. Purchased credit impaired loans are generally considered accruing and performing loans, as the loans accrete interest income over the estimated life of the loan when expected cash flows are reasonably estimable. Accordingly, purchased credit impaired loans that are contractually past due are still considered to be accruing and performing as long as there is an expectation that the estimated cash flows will be received. If the timing and amount of cash flows is not reasonably estimable, the loans may be classified as nonaccrual loans.
Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest income using the interest method over the contractual life of the loans.
Foreclosed Real Estate.
Real estate acquired by foreclosure or by deed in lieu of foreclosure is initially recorded at fair value less estimated selling costs. Costs for development and improvement of the property are capitalized.
Valuations are periodically performed by management, and an allowance for losses is established by a charge to operations if the carrying value of a property exceeds its estimated fair value, less estimated selling costs.
Loans to facilitate the sale of real estate acquired in foreclosure are discounted if made at less than market rates. Discounts are amortized over the fixed interest period of each loan using the interest method.
Premises and Equipment.
Premises and equipment are stated at cost less accumulated depreciation and include expenditures for major betterments and renewals. Maintenance, repairs, and minor renewals are expensed as incurred. When property is retired or sold, the retired asset and related accumulated depreciation are removed from the accounts and the resulting gain or loss taken into income. The Company reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such assets are considered to be impaired, the impairment loss recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets.
Depreciation is computed by use of straight-line and accelerated methods over the estimated useful lives of the assets. Estimated lives are generally 10 to 40 years for premises, five to seven years for equipment, and three years for software.
Intangible Assets.
Identifiable intangible assets are being amortized on a straight-line basis over periods ranging from five to fifteen years. Such assets are periodically evaluated as to the recoverability of their carrying value. Goodwill is tested periodically for impairment.
Income Taxes.
The Company accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences
between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
The Company recognizes interest and penalties on income taxes as a component of income tax expense.
The Company files consolidated income tax returns with its subsidiary.
Equity Incentive Plan.
The Company accounts for its Equity Incentive Plan (EIP) and Management Recognition Plan (MRP) in accordance with ASC 718, “Share-Based Payment.” Compensation expense is based on the market price of the Company’s stock on the date the shares are granted and is recorded over the vesting period.
Outside Directors’ Retirement.
The Bank adopted a directors’ retirement plan in April 1994 for outside directors. The directors’ retirement plan provides that each non-employee director (participant) shall receive, upon termination of service on the Board on or after age 60, other than termination for cause, a benefit in equal annual installments over a five year period. The benefit will be based upon the product of the participant’s vesting percentage and the total Board fees paid to the participant during the calendar year preceding termination of service on the Board. The vesting percentage shall be determined based upon the participant’s years of service on the Board.
In the event that the participant dies before collecting any or all of the benefits, the Bank shall pay the participant’s beneficiary. No benefits shall be payable to anyone other than the beneficiary, and shall terminate on the death of the beneficiary.
Stock Options.
With limited exceptions, the amount of compensation cost is measured based on the grant-date fair value of the equity instruments issued. Compensation cost is recognized over the vesting period during which an employee provides service in exchange for the award. Stock-based compensation has been recognized for all stock options granted or modified after July 1, 2005.
Earnings Per Share.
Basic earnings per share available to common stockholders is computed using the weighted-average number of common shares outstanding. Diluted earnings per share available to common stockholders includes the effect of all weighted-average dilutive potential common shares (stock options and warrants) outstanding during each period.
Comprehensive Income.
Comprehensive income consists of net income and other comprehensive income, net of applicable income taxes. Other comprehensive income includes unrealized appreciation (depreciation) on available-for-sale securities, unrealized appreciation (depreciation) on available-for-sale securities for which a portion of an other-than-temporary impairment has been recognized in income, and changes in the funded status of defined benefit pension plans.
Treasury Stock.
Treasury stock is stated at cost. Cost is determined by the first-in, first-out method.
Reclassification.
Certain amounts included in the consolidated financial statements have been reclassified to conform to the 2012 presentation. These reclassifications had no effect on net income.
The following paragraphs summarize the impact of new accounting pronouncements:
In July 2012, the Financial Accounting Standards board (FASB) issued Accounting Standards Update (ASU) 2012-02,
Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.
The amendments in this ASU allow an entity to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. An entity would not be required to calculate the fair value of an indefinite-lived intangible assets unless the entity determines, based on qualitative assessment, that it is more likely than not the indefinite-lived intangible asset is impaired. The ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15 2012. The
Company adopted the standard on July 1, 2012, and adoption did not have a significant impact on the Company’s financial statements.
In October 2012, the FASB issued ASU 2012-04,
Technical Corrections and Improvements.
The amendments in this ASU make technical corrections, clarifications, and limited-scope improvements to various Topics throughout the Codification. This ASU is effective for public entities for fiscal periods beginning after December 15, 2012.
Note 3:
Securities
The amortized cost, gross unrealized gains, gross unrealized losses, and approximate fair value of securities available for sale consisted of the following:
|
|
|
September 30, 2012
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment and mortgage backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government-sponsored enterprises (GSEs)
|
|
$
|
14,033,274
|
|
|
$
|
55,190
|
|
|
$
|
(1,633
|
)
|
|
$
|
14,086,831
|
|
|
State and political subdivisions
|
|
|
36,832,089
|
|
|
|
2,129,587
|
|
|
|
(80,612
|
)
|
|
|
38,881,064
|
|
|
Other securities
|
|
|
2,643,778
|
|
|
|
42,014
|
|
|
|
(1,233,735
|
)
|
|
|
1,452,057
|
|
|
Mortgage-backed: GSE residential
|
|
|
11,317,686
|
|
|
|
533,408
|
|
|
|
-
|
|
|
|
11,851,094
|
|
|
Mortgage-backed: other U.S. government agencies
|
|
|
5,706,837
|
|
|
|
47
|
|
|
|
(4,032
|
)
|
|
|
5,702,852
|
|
|
Total investments and mortgage-backed securities
|
|
$
|
70,533,664
|
|
|
$
|
2,760,246
|
|
|
$
|
(1,320,012
|
)
|
|
$
|
71,973,898
|
|
|
|
|
June 30, 2012
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment and mortgage backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government-sponsored enterprises (GSEs)
|
|
$
|
18,046,654
|
|
|
$
|
53,348
|
|
|
$
|
(384
|
)
|
|
$
|
18,099,618
|
|
|
State and political subdivisions
|
|
|
34,656,284
|
|
|
|
1,823,625
|
|
|
|
(98,656
|
)
|
|
|
36,381,253
|
|
|
Other securities
|
|
|
2,646,719
|
|
|
|
14,310
|
|
|
|
(1,267,772
|
)
|
|
|
1,393,257
|
|
|
Mortgage-backed: GSE residential
|
|
|
15,657,921
|
|
|
|
565,989
|
|
|
|
(7,861
|
)
|
|
|
16,216,049
|
|
|
Mortgage-backed: other U.S. government agencies
|
|
|
3,036,637
|
|
|
|
31
|
|
|
|
-
|
|
|
|
3,036,668
|
|
|
Total investments and mortgage-backed securities
|
|
$
|
74,044,215
|
|
|
$
|
2,457,303
|
|
|
$
|
(1,374,673
|
)
|
|
$
|
75,126,845
|
|
The amortized cost and estimated fair value of investment and mortgage-backed securities, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.
|
|
|
September 30, 2012
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
|
Cost
|
|
|
Value
|
|
|
Available for Sale
:
|
|
|
|
|
|
|
|
Within one year
|
|
$
|
215,000
|
|
|
$
|
215,168
|
|
|
After one year but less than five years
|
|
|
8,327,233
|
|
|
|
8,392,528
|
|
|
After five years but less than ten years
|
|
|
16,409,641
|
|
|
|
16,960,995
|
|
|
After ten years
|
|
|
28,557,267
|
|
|
|
28,851,261
|
|
|
Total investment securities
|
|
|
53,509,141
|
|
|
|
54,419,952
|
|
|
Mortgage-backed securities
|
|
|
17,024,523
|
|
|
|
17,553,946
|
|
|
Total investments and mortgage-backed securities
|
|
$
|
70,533,664
|
|
|
$
|
71,973,898
|
|
The following tables show our investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30 and June 30, 2012:
|
|
|
September 30, 2012
|
|
|
|
|
Less than 12 months
|
|
|
More than 12 months
|
|
|
Total
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government-sponsored enterprises (GSEs)
|
|
$
|
993,918
|
|
|
$
|
1,633
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
993,918
|
|
|
$
|
1,633
|
|
|
State and political subdivisions
|
|
|
5,529,636
|
|
|
|
80,612
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,529,636
|
|
|
|
80,612
|
|
|
Other securities
|
|
|
-
|
|
|
|
-
|
|
|
|
318,844
|
|
|
|
1,233,735
|
|
|
|
318,844
|
|
|
|
1,233,735
|
|
|
Mortgage-backed: other U.S. government agencies
|
|
|
2,823,396
|
|
|
|
4,032
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,823,396
|
|
|
|
4,032
|
|
|
Total investments and mortgage-backed securities
|
|
$
|
9,346,950
|
|
|
$
|
86,277
|
|
|
$
|
318,844
|
|
|
$
|
1,233,735
|
|
|
$
|
9,665,794
|
|
|
$
|
1,320,012
|
|
|
|
|
June 30, 2012
|
|
|
|
|
Less than 12 months
|
|
|
More than 12 months
|
|
|
Total
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government-sponsored enterprises (GSEs)
|
|
$
|
999,616
|
|
|
$
|
384
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
999,616
|
|
|
$
|
384
|
|
|
State and political subdivisions
|
|
|
5,525,825
|
|
|
|
98,656
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,525,825
|
|
|
|
98,656
|
|
|
Other securities
|
|
|
-
|
|
|
|
-
|
|
|
|
282,639
|
|
|
|
1,267,772
|
|
|
|
282,639
|
|
|
|
1,267,772
|
|
|
Mortgage-backed: GSE residential
|
|
|
1,943,968
|
|
|
|
7,861
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,943,968
|
|
|
|
7,861
|
|
|
Total investments and mortgage-backed securities
|
|
$
|
8,469,409
|
|
|
$
|
106,901
|
|
|
$
|
282,639
|
|
|
$
|
1,267,772
|
|
|
$
|
8,752,048
|
|
|
$
|
1,374,673
|
|
Other securities
. At September 30, 2012, there were four pooled trust preferred securities with an estimated fair value of $319,000 and unrealized losses of $1.2 million in a continuous unrealized loss position for twelve months or more. These unrealized losses were primarily due to the long-term nature of the pooled trust preferred securities, a lack of demand or inactive market for these securities, and concerns regarding the financial institutions that have issued the underlying trust preferred securities.
The September 30, 2012, cash flow analysis for three of these securities showed it is probable the Company will receive all contracted principal and related interest projected. The cash flow analysis used in making this determination was based on anticipated default and recovery rates, amounts of prepayments, and the resulting cash flows were discounted based on the yield anticipated at the time the securities were purchased. Other inputs include the actual collateral attributes, which include credit ratings and other performance indicators of the underlying financial institutions, including profitability, capital ratios, and asset quality. Assumptions for these three securities included prepayments by banks of $15 billion or more in assets of all fixed rate securities by mid-2013; adjustable rate securities are expected to prepay based on spreads. For banks of less than $15 billion in assets, the only material prepayments are assumed to be those with relatively high fixed rates. No recoveries are assumed for issuers currently in default; recoveries of 29% to 32% on currently deferred issuers within the next two years; no net new deferrals for the next two years; and annual defaults of 36 basis points (with 10% recoveries, lagged two years) thereafter.
One of these three securities continues to receive cash interest payments in full and our cash flow analysis indicates that these payments are likely to continue. Because the Company does not intend to sell this security and it is not more-likely-than-not that the Company will be required to sell the security prior to recovery of its amortized cost basis, which may be maturity, the Company does not consider this investment to be other-than-temporarily impaired at June 30, 2012.
For the other two of these three securities, the Company is receiving principal-in-kind (PIK), in lieu of cash interest. These securities all allow, under the terms of the issue, for issuers to defer interest for up to five consecutive years. After five years, if not cured, the securities are considered to be in default and the trustee may demand payment in full of principal and accrued interest. Issuers are also considered to be in default in the event of the failure of the issuer or a subsidiary. Both deferred and defaulted issuers are considered non-performing, and the trustee calculates, on a quarterly or semi-annual basis, certain coverage tests prior to the payment of cash interest to owners of the various tranches of the securities. The tests must show that performing collateral is sufficient to meet requirements for senior tranches, both in terms of cash flow and collateral value, before cash interest can be paid to subordinate tranches. If the tests are not met, available cash flow is diverted to pay down the principal balance of senior tranches until the coverage tests are met, before cash interest payments to subordinate tranches may resume. The Company is receiving PIK for these two securities due to failure of the required coverage tests described above at senior tranche levels of these securities. The risk to holders of a tranche of a security in PIK status is that the pool’s total cash flow will not be sufficient to repay all principal and accrued interest related to the investment. The impact of payment of PIK to subordinate tranches is to strengthen the position of senior tranches, by reducing the senior tranches’ principal balances relative to available collateral and cash flow, while increasing principal balances, decreasing cash flow, and increasing credit risk to the
tranches receiving PIK. For our securities in receipt of PIK, the principal balance is increasing, cash flow has stopped, and, as a result, credit risk is increasing. The Company expects these securities to remain in PIK status for a period of five to seven years. Despite these facts, because the Company does not intend to sell these two securities and it is not more-likely-than-not that the Company will be required to sell these two securities prior to recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2012.
At December 31, 2008, analysis of the fourth pooled trust preferred security indicated other-than-temporary impairment (OTTI) and the Company performed further analysis to determine the portion of the loss that was related to credit conditions of the underlying issuers. The credit loss was calculated by comparing expected discounted cash flows based on performance indicators of the underlying assets in the security to the carrying value of the investment. The discounted cash flow was based on anticipated default and recovery rates, and resulting projected cash flows were discounted based on the yield anticipated at the time the security was purchased. Based on this analysis, the Company recorded an impairment charge of $375,000 for the credit portion of the unrealized loss for this trust preferred security. This loss established a new, lower amortized cost basis of $125,000 for this security, and reduced non-interest income for the second quarter and the twelve months ended June 30, 2009. At September 30, 2012, cash flow analyses showed it is probable the Company will receive all of the remaining cost basis and related interest projected for the security. The cash flow analysis used in making this determination was based similar inputs and factors as those described above. Assumptions for these three securities included prepayments by banks of $15 billion or more in assets of all fixed rate securities by mid-2013; adjustable rate securities are expected to prepay based on spreads. For banks of less than $15 billion in assets, the only material prepayments are assumed to be those with relatively high fixed rates. No recoveries are assumed for issuers currently in default; recoveries of 48% on currently deferred issuers within the next two years; no net new deferrals for the next two years; and annual defaults of 36 basis points (with 10% recoveries, lagged two years) thereafter. This security is in PIK status due to similar criteria and factors as those described above, with similar impact to the Company. This security is projected to remain in PIK status for a period of two years. Because the Company does not intend to sell this security and it is not more-likely-than-not the Company will be required to sell this security before recovery of its new, lower amortized cost basis, which may be maturity, the Company does not consider the remainder of the investment in this security to be other-than-temporarily impaired at September 30, 2012.
The Company does not believe any other individual unrealized loss as of September 30, 2012, represents OTTI. However, given the continued disruption in the financial markets, the Company may be required to recognize OTTI losses in future periods with respect to its available for sale investment securities portfolio. The amount and timing of any additional OTTI will depend on the decline in the underlying cash flows of the securities. Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in the period the other-than-temporary impairment is identified.
Credit losses recognized on investments.
As described above, some of the Company’s investments in trust preferred securities have experienced fair value deterioration due to credit losses, but are not otherwise other-than-temporarily impaired. During fiscal 2009, the Company adopted ASC 820, formerly FASB Staff Position 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” The following table provides information about the trust preferred security for which only a credit loss was recognized in income and other losses are recorded in other comprehensive income (loss) for the three-month period ended September 30, 2012 and 2011.
|
|
|
Accumulated Credit Losses,
|
|
|
|
|
Three-Month Period
|
|
|
|
|
Ended September 30,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Credit losses on debt securities held
|
|
|
|
|
|
|
|
Beginning of period
|
|
$
|
375,000
|
|
|
$
|
375,000
|
|
|
Additions related to OTTI losses not previously recognized
|
|
|
-
|
|
|
|
-
|
|
|
Reductions due to sales
|
|
|
-
|
|
|
|
-
|
|
|
Reductions due to change in intent or likelihood of sale
|
|
|
-
|
|
|
|
-
|
|
|
Additions related to increases in previously-recognized OTTI losses
|
|
|
-
|
|
|
|
-
|
|
|
Reductions due to increases in expected cash flows
|
|
|
-
|
|
|
|
-
|
|
|
End of period
|
|
$
|
375,000
|
|
|
$
|
375,000
|
|
Note 4:
Loans and Allowance for Loan Losses
Classes of loans are summarized as follows:
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
|
2012
|
|
|
2012
|
|
|
Real Estate Loans:
|
|
|
|
|
|
|
|
Conventional
|
|
$
|
206,916,266
|
|
|
$
|
201,012,698
|
|
|
Construction
|
|
|
31,279,237
|
|
|
|
40,181,979
|
|
|
Commercial
|
|
|
221,912,242
|
|
|
|
200,957,429
|
|
|
Consumer loans
|
|
|
28,349,963
|
|
|
|
28,985,905
|
|
|
Commercial loans
|
|
|
140,553,260
|
|
|
|
137,004,222
|
|
|
|
|
|
629,010,968
|
|
|
|
608,142,233
|
|
|
Loans in process
|
|
|
(12,400,777
|
)
|
|
|
(17,370,404
|
)
|
|
Deferred loan fees, net
|
|
|
160,127
|
|
|
|
184,746
|
|
|
Allowance for loan losses
|
|
|
(8,080,838
|
)
|
|
|
(7,492,054
|
)
|
|
Total loans
|
|
$
|
608,689,480
|
|
|
$
|
583,464,521
|
|
The Company’s lending activities consist of origination of loans secured by mortgages on one- to four-family residences and commercial and agricultural real estate, construction loans on residential and commercial properties, commercial and agricultural business loans and consumer loans. The Company has also occasionally purchased loan participation interests originated by other lenders and secured by properties generally located in the states of Missouri and Arkansas.
Residential Mortgage Lending.
The Company actively originates loans for the acquisition or refinance of one- to four-family residences. This category includes both fixed-rate and adjustable-rate mortgage (“ARM”) loans amortizing over periods of up to 30 years, and the properties securing such loans may be owner-occupied or non-owner-occupied. Single-family residential loans do not generally exceed 90% of the lower of the appraised value or purchase price of the secured property. Substantially all of the one- to four-family residential mortgage originations in the Company’s portfolio are located within the Company’s primary market area.
The Company also originates loans secured by multi-family residential properties that are generally located in the Company’s primary market area. The majority of the multi-family residential loans that are originated by the Bank are amortized over periods generally up to 20 years, with balloon maturities typically up to five years. Both fixed and adjustable interest rates are offered and it is typical for the Company to include an interest rate “floor” in the loan agreement. Generally, multi-family residential loans do not exceed 85% of the lower of the appraised value or purchase price of the secured property.
Commercial Real Estate Lending.
The Company actively originates loans secured by commercial real estate including land (improved, unimproved, and farmland), strip shopping centers, retail establishments and other businesses generally located in the Company’s primary market area.
Most commercial real estate loans originated by the Company generally are based on amortization schedules of up to 20 years with monthly principal and interest payments. Generally, the interest rate received on these loans is fixed for a maturity for up to five years, with a balloon payment due at maturity. Alternatively, for some loans, the interest rate adjusts at least annually after an initial period up to five years. The Company typically includes an interest rate “floor” in the loan agreement. Generally, improved commercial real estate loan amounts do not exceed 80% of the lower of the appraised value or the purchase price of the secured property. Agricultural real estate terms offered differ slightly, with amortization schedules of up to 25 years with an 80% loan-to-value ratio, or 30 years with a 75% loan-to-value ratio.
Construction Lending.
The Company originates real estate loans secured by property or land that is under construction or development. Construction loans originated by the Company are generally secured by mortgage loans for the construction of owner occupied residential real estate or to finance speculative construction secured by residential real estate, land development, or owner-operated or non-owner occupied commercial real estate. During construction, these loans typically require monthly interest-only payments and have maturities ranging from six to twelve months. Once construction is completed, permanent construction loans may be converted to monthly payments using amortization schedules of up to 30 years on residential and generally up to 20 years on commercial real estate.
While the Company typically utilizes maturity periods ranging from 6 to 12 months to closely monitor the inherent risks associated with construction loans for these loans, weather conditions, change orders, availability of materials and/or labor, and other factors may contribute to the lengthening of a project, thus necessitating the need to renew the construction loan at the balloon maturity. Such extensions are typically executed in incremental three month periods to facilitate project completion. The Company’s average term of construction loans is approximately 14 months. During construction, loans typically require
monthly interest only payments which may allow the Company an opportunity to monitor for early signs of financial difficulty should the borrower fail to make a required monthly payment. Additionally, during the construction phase, the Company typically obtains interim inspections completed by an independent third party. This monitoring further allows the Company opportunity to assess risk. At September 30, 2012, construction loans outstanding included 16 loans, totaling $5.8 million, for which a modification had been agreed to; At June 30, 2012, construction loans outstanding included 18 loans, totaling $11.0 million, for which a modification had been agreed to. All modifications were solely for the purpose of extending the maturity date due to conditions described above. None of these modifications were executed due to financial difficulty on the part of the borrower and, therefore, were not accounted for as TDRs.
Consumer Lending
. The Company offers a variety of secured consumer loans, including home equity, direct and indirect automobile loans, second mortgages, mobile home loans and loans secured by deposits. The Company originates substantially all of its consumer loans in its primary market area. Usually, consumer loans are originated with fixed rates for terms of up to five years, with the exception of home equity lines of credit, which are variable, tied to the prime rate of interest and are for a period of ten years.
Home equity lines of credit (HELOCs) are secured with a deed of trust and are issued up to 100% of the appraised or assessed value of the property securing the line of credit, less the outstanding balance on the first mortgage and are typically issued for a term of ten years. Interest rates on the HELOCs are generally adjustable. Interest rates are based upon the loan-to-value ratio of the property with better rates given to borrowers with more equity.
Automobile loans originated by the Company include both direct loans and a smaller amount of loans originated by auto dealers. The Company generally pays a negotiated fee back to the dealer for indirect loans. Typically, automobile loans are made for terms of up to 60 months for new and used vehicles. Loans secured by automobiles have fixed rates and are generally made in amounts up to 100% of the purchase price of the vehicle.
Commercial Business Lending
. The Company’s commercial business lending activities encompass loans with a variety of purposes and security, including loans to finance accounts receivable, inventory, equipment and operating lines of credit, including agricultural production and equipment loans. The Company offers both fixed and adjustable rate commercial business loans. Generally, commercial loans secured by fixed assets are amortized over periods up to five years, while commercial operating lines of credit or agricultural production lines are generally for a one year period.
The following tables present the balance in the allowance for loan losses and the recorded investment in loans (excluding loans in process and deferred loan fees) based on portfolio segment and impairment methods as of September 30, 2012, and June 30, 2012, and activity in the allowance for loan losses for the three-month periods ended September 30, 2012 and 2011:
|
|
|
At period end for the three months ended
|
|
|
|
|
September 30, 2012
|
|
|
|
|
Conventional
|
|
|
Construction
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Consumer
|
|
|
Commercial
|
|
|
Unallocated
|
|
|
Total
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
1,635,346
|
|
|
$
|
243,169
|
|
|
$
|
2,985,838
|
|
|
$
|
483,597
|
|
|
$
|
2,144,104
|
|
|
$
|
-
|
|
|
$
|
7,492,054
|
|
|
Provision charged to expense
|
|
|
92,776
|
|
|
|
(51,385
|
)
|
|
|
469,519
|
|
|
|
45,363
|
|
|
|
54,416
|
|
|
|
-
|
|
|
|
610,689
|
|
|
Losses charged off
|
|
|
(13,872
|
)
|
|
|
-
|
|
|
|
(227
|
)
|
|
|
(8,589
|
)
|
|
|
(3,244
|
)
|
|
|
-
|
|
|
|
(25,932
|
)
|
|
Recoveries
|
|
|
113
|
|
|
|
-
|
|
|
|
1,630
|
|
|
|
2,284
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,027
|
|
|
Balance, end of period
|
|
$
|
1,714,363
|
|
|
$
|
191,784
|
|
|
$
|
3,456,760
|
|
|
$
|
522,655
|
|
|
$
|
2,195,276
|
|
|
$
|
-
|
|
|
$
|
8,080,838
|
|
|
Ending Balance: individually
evaluated for impairment
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
347,815
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
347,815
|
|
|
Ending Balance: collectively
evaluated for impairment
|
|
$
|
1,714,363
|
|
|
$
|
191,784
|
|
|
$
|
3,097,996
|
|
|
$
|
522,655
|
|
|
$
|
1,685,289
|
|
|
$
|
-
|
|
|
$
|
7,212,087
|
|
|
Ending Balance: loans acquired
with deteriorated credit quality
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10,949
|
|
|
$
|
-
|
|
|
$
|
509,987
|
|
|
$
|
-
|
|
|
$
|
520,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance: individually
evaluated for impairment
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
963,384
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
963,384
|
|
|
Ending Balance: collectively
evaluated for impairment
|
|
$
|
205,329,331
|
|
|
$
|
18,878,460
|
|
|
$
|
219,261,405
|
|
|
$
|
28,349,963
|
|
|
$
|
139,241,974
|
|
|
$
|
-
|
|
|
$
|
611,061,133
|
|
|
Ending Balance: loans acquired
with deteriorated credit quality
|
|
$
|
1,586,935
|
|
|
$
|
-
|
|
|
$
|
1,687,453
|
|
|
$
|
-
|
|
|
$
|
1,311,286
|
|
|
$
|
-
|
|
|
$
|
4,585,674
|
|
|
|
|
For three months ended
|
|
|
|
|
September 30, 2011
|
|
|
|
|
Conventional
|
|
|
Construction
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Consumer
|
|
|
Commercial
|
|
|
Unallocated
|
|
|
Total
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
1,618,285
|
|
|
$
|
192,752
|
|
|
$
|
2,671,482
|
|
|
$
|
441,207
|
|
|
$
|
1,514,725
|
|
|
$
|
-
|
|
|
$
|
6,438,451
|
|
|
Provision charged to expense
|
|
|
165,494
|
|
|
|
182,546
|
|
|
|
(389,686
|
)
|
|
|
174,723
|
|
|
|
383,606
|
|
|
|
-
|
|
|
|
516,683
|
|
|
Losses charged off
|
|
|
(76,918
|
)
|
|
|
-
|
|
|
|
(24,825
|
)
|
|
|
(96,604
|
)
|
|
|
(11,156
|
)
|
|
|
-
|
|
|
|
(209,503
|
)
|
|
Recoveries
|
|
|
4,605
|
|
|
|
233
|
|
|
|
-
|
|
|
|
1,592
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,430
|
|
|
Balance, end of period
|
|
$
|
1,711,466
|
|
|
$
|
375,531
|
|
|
$
|
2,256,971
|
|
|
$
|
520,918
|
|
|
$
|
1,887,175
|
|
|
$
|
-
|
|
|
$
|
6,752,061
|
|
|
Ending Balance: individually
evaluated for impairment
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
109,481
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
109,481
|
|
|
Ending Balance: collectively
evaluated for impairment
|
|
$
|
1,711,466
|
|
|
$
|
375,531
|
|
|
$
|
2,024,010
|
|
|
$
|
520,918
|
|
|
$
|
1,775,054
|
|
|
$
|
-
|
|
|
$
|
6,406,979
|
|
|
Ending Balance: loans acquired
with deteriorated credit quality
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
123,480
|
|
|
$
|
-
|
|
|
$
|
112,121
|
|
|
$
|
-
|
|
|
$
|
235,601
|
|
|
|
|
June 30, 2012
|
|
|
|
|
Conventional
|
|
|
Construction
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Consumer
|
|
|
Commercial
|
|
|
Unallocated
|
|
|
Total
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
1,635,346
|
|
|
$
|
243,169
|
|
|
$
|
2,985,838
|
|
|
$
|
483,597
|
|
|
$
|
2,144,104
|
|
|
$
|
-
|
|
|
$
|
7,492,054
|
|
|
Ending Balance: individually
evaluated for impairment
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
347,815
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
347,815
|
|
|
Ending Balance: collectively
evaluated for impairment
|
|
$
|
1,635,346
|
|
|
$
|
243,169
|
|
|
$
|
2,632,679
|
|
|
$
|
483,597
|
|
|
$
|
1,767,967
|
|
|
$
|
-
|
|
|
$
|
6,762,758
|
|
|
Ending Balance: loans acquired
with deteriorated credit quality
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,344
|
|
|
$
|
-
|
|
|
$
|
376,137
|
|
|
$
|
-
|
|
|
$
|
381,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance: individually
evaluated for impairment
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
976,881
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
976,881
|
|
|
Ending Balance: collectively
evaluated for impairment
|
|
$
|
205,418,257
|
|
|
$
|
18,878,460
|
|
|
$
|
219,251,243
|
|
|
$
|
28,349,963
|
|
|
$
|
139,198,551
|
|
|
$
|
-
|
|
|
$
|
611,096,474
|
|
|
Ending Balance: loans acquired
with deteriorated credit quality
|
|
$
|
1,498,009
|
|
|
$
|
-
|
|
|
$
|
1,684,118
|
|
|
$
|
-
|
|
|
$
|
1,354,709
|
|
|
$
|
-
|
|
|
$
|
4,536,836
|
|
Management’s opinion as to the ultimate collectability of loans is subject to estimates regarding future cash flows from operations and the value of property, real and personal, pledged as collateral. These estimates are affected by changing economic conditions and the economic prospects of borrowers.
The allowance for loan losses is maintained at a level that, in management’s judgment, is adequate to cover probable credit losses inherent in the loan portfolio at the balance sheet date. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when an amount is determined to be uncollectible, based on management’s analysis of expected cash flow (for non-collateral-dependent loans) or collateral value (for collateral-dependent loans). Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.
Under the Company’s methodology, loans are first segmented into 1) those comprising large groups of smaller-balance homogeneous loans, including single-family mortgages and installment loans, which are collectively evaluated for impairment, and 2) all other loans which are individually evaluated. Those loans in the second category are further segmented utilizing a defined grading system which involves categorizing loans by severity of risk based on conditions that may affect the ability of the borrowers to repay their debt, such as current financial information, collateral valuations, historical payment experience, credit documentation, public information, and current trends. The loans subject to credit classification represent the portion of the portfolio subject to the greatest credit risk and where adjustments to the allowance for losses on loans as a result of provisions and charge offs are most likely to have a significant impact on operations.
During fiscal 2011, the Company changed its allowance methodology to consider, as the primary quantitative factor, average net charge offs over the most recent twelve-month period. The Company had previously considered average net charge offs over the most recent five-year period as the primary quantitative factor. The impact of the modification was minimal.
A loan is considered impaired when, based on current information and events, it is probable that the scheduled payments of principal or interest will not be able to be collected when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and agricultural loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.
Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, individual consumer and residential loans are not separately identified for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.
The general component covers non-impaired loans and is based on quantitative and qualitative factors. The loan portfolio is stratified into homogeneous groups of loans that possess similar loss characteristics and an appropriate loss ratio adjusted for qualitative factors is applied to the homogeneous pools of loans to estimate the incurred losses in the loan portfolio.
Included in the Company’s loan portfolio are certain loans accounted for in accordance with ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. These loans were written down at acquisition to an amount estimated to be collectible. As a result, certain ratios regarding the Company’s loan portfolio and credit quality cannot be used to compare the Company to peer companies or to compare the Company’s current credit quality to prior periods. The ratios particularly affected by accounting under ASC 310-30 include the allowance for loan losses as a percentage of loans, nonaccrual loans, and nonperforming assets, and nonaccrual loans and nonperforming loans as a percentage of total loans.
The following tables present the credit risk profile of the Company’s loan portfolio (excluding loans in process and deferred loan fees) based on rating category and payment activity as of September 30 and June 30, 2012. These tables include purchased credit impaired loans, which are reported according to risk categorization after acquisition based on the Company’s standards for such classification:
|
|
|
September 30, 2012
|
|
|
|
|
Conventional
|
|
|
Construction
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Consumer
|
|
|
Commercial
|
|
|
Pass
|
|
$
|
203,819,521
|
|
|
$
|
18,878,460
|
|
|
$
|
213,507,013
|
|
|
$
|
28,300,076
|
|
|
$
|
133,830,481
|
|
|
Special Mention
|
|
|
1,845,891
|
|
|
|
-
|
|
|
|
1,319,007
|
|
|
|
32,451
|
|
|
|
5,167,861
|
|
|
Substandard
|
|
|
1,250,854
|
|
|
|
-
|
|
|
|
7,086,222
|
|
|
|
17,436
|
|
|
|
1,554,918
|
|
|
Doubtful
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
$
|
206,916,266
|
|
|
$
|
18,878,460
|
|
|
$
|
221,912,242
|
|
|
$
|
28,349,963
|
|
|
$
|
140,553,260
|
|
|
|
|
June 30, 2012
|
|
|
|
|
Conventional
|
|
|
Construction
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Consumer
|
|
|
Commercial
|
|
|
Pass
|
|
$
|
198,847,363
|
|
|
$
|
22,811,575
|
|
|
$
|
194,280,920
|
|
|
$
|
28,967,594
|
|
|
$
|
129,572,873
|
|
|
Special Mention
|
|
|
1,561,263
|
|
|
|
-
|
|
|
|
149,940
|
|
|
|
-
|
|
|
|
5,398,255
|
|
|
Substandard
|
|
|
604,072
|
|
|
|
-
|
|
|
|
6,526,569
|
|
|
|
18,311
|
|
|
|
2,033,094
|
|
|
Doubtful
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
$
|
201,012,698
|
|
|
$
|
22,811,575
|
|
|
$
|
200,957,429
|
|
|
$
|
28,985,905
|
|
|
$
|
137,004,222
|
|
The above amounts include purchased credit impaired loans. At September 30, 2012, these loans comprised $1.6 million of credits rated “Pass”; no credits rated “Special Mention”; $3.0 million of loans rated “Substandard”; and no credits rated “Doubtful”. At June 30, 2012, these loans comprised $1.5 million of credits rated “Pass”; no credits rated “Special Mention”; $3.0 million of credits rated “Substandard”; and no credits rated “Doubtful”.
Credit Quality Indicators
. The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on all loans at origination, and is updated on a quarterly basis for loans risk rated “Special Mention”, “Substandard”, or “Doubtful”. In addition, lending relationships over $250,000 are subject to an independent loan review following origination, and lending relationships in excess of $2.5 million are subject to an independent loan review annually, as are a sample of lending relationships between $1.0 million and $2.5 million, in order to verify risk ratings.
The Company uses the following definitions for risk ratings:
Watch
– Loans classified as watch exhibit weaknesses that require more than usual monitoring. Issues may include deteriorating financial condition, payments made after due date but within 30 days, adverse industry conditions or management problems.
Special Mention
– Loans classified as special mention exhibit signs of further deterioration but still generally make payments within 30 days. This is a transitional rating and loans should typically not be rated Special Mention for more than 12 months
Substandard
– Loans classified as substandard possess weaknesses that jeopardize the ultimate collection of the principal and interest outstanding. These loans exhibit continued financial losses, ongoing delinquency, overall poor financial condition, and insufficient collateral. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful
– Loans classified as doubtful have all the weaknesses of substandard loans, and have deteriorated to the level that there is a high probability of substantial loss.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be
Pass
rated loans.
The following tables present the Company’s loan portfolio aging analysis (excluding loans in process and deferred loan fees) as of September 30 and June 30, 2012. These tables include purchased credit impaired loans, which are reported according to aging analysis after acquisition based on the Company’s standards for such classification:
|
|
|
September 30, 2012
|
|
|
|
|
30-59 Days
|
|
|
60-89 Days
|
|
|
Greater Than
|
|
|
Total
|
|
|
|
|
|
Total Loans
|
|
|
Total Loans > 90
|
|
|
|
|
Past Due
|
|
|
Past Due
|
|
|
90 Days
|
|
|
Past Due
|
|
|
Current
|
|
|
Receivable
|
|
|
Days & Accruing
|
|
|
Real Estate Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conventional
|
|
$
|
1,237,723
|
|
|
$
|
-
|
|
|
$
|
476,979
|
|
|
$
|
1,714,702
|
|
|
$
|
205,201,564
|
|
|
$
|
206,916,266
|
|
|
$
|
-
|
|
|
Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18,878,460
|
|
|
|
18,878,460
|
|
|
|
-
|
|
|
Commercial
|
|
|
577,110
|
|
|
|
-
|
|
|
|
2,855,511
|
|
|
|
3,432,621
|
|
|
|
218,479,621
|
|
|
|
221,912,242
|
|
|
|
-
|
|
|
Consumer loans
|
|
|
202,316
|
|
|
|
14,287
|
|
|
|
-
|
|
|
|
216,603
|
|
|
|
28,133,360
|
|
|
|
28,349,963
|
|
|
|
-
|
|
|
Commercial loans
|
|
|
135,168
|
|
|
|
10,346
|
|
|
|
-
|
|
|
|
145,514
|
|
|
|
140,407,746
|
|
|
|
140,553,260
|
|
|
|
-
|
|
|
Total loans
|
|
$
|
2,152,317
|
|
|
$
|
24,633
|
|
|
$
|
3,332,490
|
|
|
$
|
5,509,440
|
|
|
$
|
611,100,751
|
|
|
$
|
616,610,191
|
|
|
$
|
-
|
|
|
|
|
June 30, 2012
|
|
|
|
|
30-59 Days
|
|
|
60-89 Days
|
|
|
Greater Than
|
|
|
Total
|
|
|
|
|
|
Total Loans
|
|
|
Total Loans > 90
|
|
|
|
|
Past Due
|
|
|
Past Due
|
|
|
90 Days
|
|
|
Past Due
|
|
|
Current
|
|
|
Receivable
|
|
|
Days & Accruing
|
|
|
Real Estate Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conventional
|
|
$
|
310,046
|
|
|
$
|
66,586
|
|
|
$
|
59,142
|
|
|
$
|
435,774
|
|
|
$
|
200,576,924
|
|
|
$
|
201,012,698
|
|
|
$
|
-
|
|
|
Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,811,575
|
|
|
|
22,811,575
|
|
|
|
-
|
|
|
Commercial
|
|
|
176,642
|
|
|
|
41,187
|
|
|
|
796,794
|
|
|
|
1,014,623
|
|
|
|
199,942,806
|
|
|
|
200,957,429
|
|
|
|
-
|
|
|
Consumer loans
|
|
|
78,762
|
|
|
|
-
|
|
|
|
-
|
|
|
|
78,762
|
|
|
|
28,907,143
|
|
|
|
28,985,905
|
|
|
|
-
|
|
|
Commercial loans
|
|
|
694,044
|
|
|
|
-
|
|
|
|
80,000
|
|
|
|
774,044
|
|
|
|
136,230,178
|
|
|
|
137,004,222
|
|
|
|
-
|
|
|
Total loans
|
|
$
|
1,259,494
|
|
|
$
|
107,773
|
|
|
$
|
935,936
|
|
|
$
|
2,303,203
|
|
|
$
|
588,468,626
|
|
|
$
|
590,771,829
|
|
|
$
|
-
|
|
The above amounts include purchased credit impaired loans. At September 30, 2012, these loans comprised $487,000 credits 30-59 Days Past Due; $0 credits 60-89 Days Past Due; $0 credits Greater Than 90 Days Past Due; $487,000 of Total Past Due credits; $4.1 million of credits Current; and $0 Loans > 90 Days & Accruing. At June 30, 2012, there were no purchased credit impaired loans that were past due.
A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming loans, as well as performing loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.
The tables below present impaired loans (excluding loans in process and deferred loan fees) as of September 30 and June 30, 2012. These tables include purchased credit impaired loans. Purchased credit impaired loans are those for which it was deemed probable, at acquisition, that the Company would be unable to collect all contractually required payments receivable. In an instance where, subsequent to the acquisition, the Company determines it is probable, for a specific loan, that cash flows received will exceed the amount previously expected, the Company will recalculate the amount of accretable yield in order to recognize the improved cash flow expectation as additional interest income over the remaining life of the loan. These loans, however, will continue to be reported as impaired loans. In an instance where, subsequent to the acquisition, the Company determines it is probable, for a specific loan, that cash flows received will be less than the amount previously expected, the Company will allocate a specific allowance under the terms of ASC 310-10-35.
|
|
|
September 30, 2012
|
|
|
|
|
Recorded
|
|
|
Unpaid Principal
|
|
|
Specific
|
|
|
|
|
Balance
|
|
|
Balance
|
|
|
Allowance
|
|
|
Loans without a specific valuation allowance:
|
|
|
|
|
|
|
|
|
|
|
Conventional real estate
|
|
$
|
1,586,935
|
|
|
$
|
2,122,666
|
|
|
$
|
-
|
|
|
Construction real estate
|
|
|
99,200
|
|
|
|
99,200
|
|
|
|
-
|
|
|
Commercial real estate
|
|
|
2,931,965
|
|
|
|
3,261,015
|
|
|
|
-
|
|
|
Consumer loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Commercial loans
|
|
|
754,139
|
|
|
|
770,277
|
|
|
|
-
|
|
|
Loans with a specific valuation allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conventional real estate
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Construction real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Commercial real estate
|
|
|
1,029,330
|
|
|
|
1,085,684
|
|
|
|
358,764
|
|
|
Consumer loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Commercial loans
|
|
|
896,773
|
|
|
|
1,466,650
|
|
|
|
509,987
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conventional real estate
|
|
$
|
1,586,935
|
|
|
$
|
2,122,666
|
|
|
$
|
-
|
|
|
Construction real estate
|
|
$
|
99,200
|
|
|
$
|
99,200
|
|
|
$
|
-
|
|
|
Commercial real estate
|
|
$
|
3,961,295
|
|
|
$
|
4,346,699
|
|
|
$
|
358,764
|
|
|
Consumer loans
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Commercial loans
|
|
$
|
1,650,912
|
|
|
$
|
2,236,927
|
|
|
$
|
509,987
|
|
|
|
|
June 30, 2012
|
|
|
|
|
Recorded
|
|
|
Unpaid Principal
|
|
|
Specific
|
|
|
|
|
Balance
|
|
|
Balance
|
|
|
Allowance
|
|
|
Loans without a specific valuation allowance:
|
|
|
|
|
|
|
|
|
|
|
Conventional real estate
|
|
$
|
1,531,881
|
|
|
$
|
2,160,350
|
|
|
$
|
-
|
|
|
Construction real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Commercial real estate
|
|
|
2,563,744
|
|
|
|
2,935,620
|
|
|
|
-
|
|
|
Consumer loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Commercial loans
|
|
|
845,692
|
|
|
|
868,844
|
|
|
|
-
|
|
|
Loans with a specific valuation allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conventional real estate
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Construction real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Commercial real estate
|
|
|
982,884
|
|
|
|
1,014,082
|
|
|
|
353,159
|
|
|
Consumer loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Commercial loans
|
|
|
930,123
|
|
|
|
1,500,000
|
|
|
|
376,137
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conventional real estate
|
|
$
|
1,531,881
|
|
|
$
|
2,160,350
|
|
|
$
|
-
|
|
|
Construction real estate
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Commercial real estate
|
|
$
|
3,546,628
|
|
|
$
|
3,949,702
|
|
|
$
|
353,159
|
|
|
Consumer loans
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Commercial loans
|
|
$
|
1,775,815
|
|
|
$
|
2,368,844
|
|
|
$
|
376,137
|
|
The above amounts include purchased credit impaired loans. At September 30, 2012, these loans comprised $3.6 million of impaired loans without a specific valuation allowance; $963,000 of loans with a specific valuation allowance; and $4.6 million of total impaired loans. At June 30, 2012, these loans comprised $3.6 million of impaired loans without a specific valuation allowance; $935,000 of loans with a specific valuation allowance; and $4.5 million of total impaired loans.
The following tables present information regarding interest income recognized on impaired loans:
|
|
|
For the three-month period ended
|
|
|
|
|
September 30, 2012
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Investment in
|
|
|
Interest Income
|
|
|
|
|
Impaired Loans
|
|
|
Recognized
|
|
|
Conventional Real Estate
|
|
$
|
1,543
|
|
|
$
|
128
|
|
|
Construction Real Estate
|
|
|
-
|
|
|
|
-
|
|
|
Commercial Real Estate
|
|
|
2,656
|
|
|
|
50
|
|
|
Consumer Loans
|
|
|
-
|
|
|
|
-
|
|
|
Commercial Loans
|
|
|
1,333
|
|
|
|
25
|
|
|
Total Loans
|
|
$
|
5,532
|
|
|
$
|
203
|
|
|
|
|
For the period three-months ended
|
|
|
|
|
September 30, 2011
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Investment in
|
|
|
Interest Income
|
|
|
|
|
Impaired Loans
|
|
|
Recognized
|
|
|
Conventional Real Estate
|
|
$
|
1,556
|
|
|
$
|
79
|
|
|
Construction Real Estate
|
|
|
-
|
|
|
|
-
|
|
|
Commercial Real Estate
|
|
|
3,173
|
|
|
|
121
|
|
|
Consumer Loans
|
|
|
-
|
|
|
|
-
|
|
|
Commercial Loans
|
|
|
2,723
|
|
|
|
329
|
|
|
Total Loans
|
|
$
|
7,451
|
|
|
$
|
529
|
|
Interest income on impaired loans recognized on a cash basis in the three-month periods ended September 30, 2012 and 2011, was immaterial.
For the three-month period ended September 30, 2012, the amount of interest income recorded for impaired loans that represented a change in the present value of cash flows attributable to the passage of time was approximately $117,000, as compared to $386,000 for the three-month period ended September 30, 2011.
The following table presents the Company’s nonaccrual loans at September 30 and June 30, 2012. This table includes purchased impaired loans. Purchased credit impaired loans are placed on nonaccrual status in the event the Company cannot reasonably estimate cash flows expected to be collected. The table excludes performing troubled debt restructurings.
|
|
|
September 30, 2012
|
|
|
June 30, 2012
|
|
|
Conventional real estate
|
|
$
|
1,090,106
|
|
|
$
|
395,374
|
|
|
Construction real estate
|
|
|
99,200
|
|
|
|
-
|
|
|
Commercial real estate
|
|
|
3,229,790
|
|
|
|
976,881
|
|
|
Consumer loans
|
|
|
14,765
|
|
|
|
15,971
|
|
|
Commercial loans
|
|
|
1,060,789
|
|
|
|
1,010,123
|
|
|
Total loans
|
|
$
|
5,494,650
|
|
|
$
|
2,398,349
|
|
The above amounts include purchased credit impaired loans. At September 30, 2012, and June 30, 2012, these loans comprised $900,000 and $930,000 of nonaccrual loans, respectively.
Included in certain loan categories in the impaired loans are troubled debt restructurings (TDRs), where economic concessions have been granted to borrowers who have experienced financial difficulties. These concessions typically result from our loss mitigation activities, and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are classified as nonperforming at the time of restructuring and typically are returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period of at least six months.
When loans and leases are modified into a TDR, the Company evaluates any possible impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan or lease agreement, and uses the current fair value of the collateral, less selling costs, for collateral dependent loans. If the Company determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs, and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance. In periods subsequent to modification, the Company evaluates all TDRs, including those that have payment defaults, for possible impairment and recognizes impairment through the allowance.
During the three-month periods ended September 30, 2011 and 2012, certain loans were classified as TDRs. They are shown, segregated by class, in the table below:
|
|
|
For the three-month periods ended
|
|
|
|
|
September 30, 2012
|
|
|
September 30, 2011
|
|
|
|
|
Number of
|
|
|
Recorded
|
|
|
Number of
|
|
|
Recorded
|
|
|
|
modifications
|
|
|
Investment
|
|
|
modifications
|
|
|
Investment
|
|
|
Conventional real estate
|
|
|
-
|
|
|
$
|
-
|
|
|
|
1
|
|
|
$
|
97,783
|
|
|
Construction real estate
|
|
|
1
|
|
|
|
99,200
|
|
|
|
-
|
|
|
|
-
|
|
|
Commercial real estate
|
|
|
2
|
|
|
|
600,000
|
|
|
|
5
|
|
|
|
1,005,830
|
|
|
Consumer loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Commercial loans
|
|
|
4
|
|
|
|
304,016
|
|
|
|
3
|
|
|
|
1,019,712
|
|
|
Total
|
|
|
7
|
|
|
$
|
1,003,216
|
|
|
|
9
|
|
|
$
|
2,123,326
|
|
At September 30 and June 30, 2012, the Company had $3.5 and $3.1, respectively, of commercial real estate loans, $1.6 and $1.7, respectively, of commercial loans, and $99,000 and $0, respectively, of construction loans, and $6,000 and $40,000 respectively, of conventional real estate loans that were modified in TDRs and considered impaired. All loans classified as TDRs at September 30, 2012, and June 30, 2012, were so classified due to interest rate concessions.
Performing loans classified as troubled debt restructurings and outstanding at September 30 and June 30, 2012, segregated by class, are shown in the table below. Nonperforming TDRs are shown as nonaccrual loans.
|
|
|
September 30, 2012
|
|
|
June 30, 2012
|
|
|
|
|
Number of
|
|
|
Recorded
|
|
|
Number of
|
|
|
Recorded
|
|
|
|
modifications
|
|
|
Investment
|
|
|
modifications
|
|
|
Investment
|
|
|
Conventional real estate
|
|
|
1
|
|
|
$
|
5,691
|
|
|
|
2
|
|
|
$
|
39,835
|
|
|
Construction real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Commercial real estate
|
|
|
11
|
|
|
|
2,711,221
|
|
|
|
10
|
|
|
|
2,290,986
|
|
|
Consumer loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Commercial loans
|
|
|
7
|
|
|
|
553,927
|
|
|
|
6
|
|
|
|
807,386
|
|
|
Total
|
|
|
19
|
|
|
$
|
3,270,839
|
|
|
|
18
|
|
|
$
|
3,138,207
|
|
Note 5:
Accounting for Certain Loans Acquired in a Transfer
The Company acquired loans in a transfer during the fiscal year ended June 30, 2011. At acquisition, certain transferred loans evidenced deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.
Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include information such as past-due and nonaccrual status, borrower credit scores and recent loan to value percentages. Purchased credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC 310-30) and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans is not carried over and recorded at the acquisition date. Management estimated the cash flows expected to be collected at acquisition using our internal risk models, which incorporate the estimate of current key assumptions, such as default rates, severity and prepayment speeds.
The carrying amount of those loans is included in the balance sheet amounts of loans receivable at September 30 and June 30, 2012. The amounts of these loans at September 30 and June 30, 2012, are as follows:
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
|
2012
|
|
|
2012
|
|
|
Real Estate Loans:
|
|
|
|
|
|
|
|
Conventional
|
|
$
|
2,122,666
|
|
|
$
|
2,126,478
|
|
|
Construction
|
|
|
-
|
|
|
|
-
|
|
|
Commercial
|
|
|
2,072,857
|
|
|
|
2,087,192
|
|
|
Consumer loans
|
|
|
-
|
|
|
|
-
|
|
|
Commercial loans
|
|
|
1,897,301
|
|
|
|
1,947,738
|
|
|
Outstanding balance
|
|
$
|
6,092,824
|
|
|
$
|
6,161,408
|
|
|
Carrying amount, net of fair value adjustment of $1,507,150 and
$1,624,572 at September 30, 2012 and June 30, 2012, respectively
|
|
$
|
4,585,674
|
|
|
$
|
4,536,836
|
|
Accretable yield, or income expected to be collected, is as follows:
|
|
|
Three-months period ending
|
|
|
Three-month period ending
|
|
|
|
|
September 30, 2012
|
|
|
September 30, 2011
|
|
|
Balance at beginning of period
|
|
$
|
489,356
|
|
|
$
|
792,942
|
|
|
Additions
|
|
|
-
|
|
|
|
-
|
|
|
Accretion
|
|
|
(147,606
|
)
|
|
|
(420,959
|
)
|
|
Reclassification from nonaccretable difference
|
|
|
496,299
|
|
|
|
570,893
|
|
|
Disposals
|
|
|
-
|
|
|
|
-
|
|
|
Balance at end of period
|
|
$
|
838,049
|
|
|
$
|
942,876
|
|
During the three-month periods ended September 30, 2012 and 2011, the Company increased the allowance for loan losses by a charge to the income statement of $141,777 and $112,121, respectively, related to these purchased credit impaired loans. During the same periods, allowance for loan losses of $2,000 and $0, respectively, was reversed.
Note 6:
Deposits
Deposits are summarized as follows:
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
|
2012
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing accounts
|
|
$
|
52,867,795
|
|
|
$
|
54,812,645
|
|
|
NOW accounts
|
|
|
189,211,569
|
|
|
|
193,870,344
|
|
|
Money market deposit accounts
|
|
|
19,920,614
|
|
|
|
18,099,265
|
|
|
Savings accounts
|
|
|
84,753,806
|
|
|
|
86,717,214
|
|
|
Certificates
|
|
|
225,130,554
|
|
|
|
231,314,155
|
|
|
Total Deposit Accounts
|
|
$
|
571,884,338
|
|
|
$
|
584,813,623
|
|
Note 7:
Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
Three months ended
|
|
|
|
|
September 30,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,590,254
|
|
|
$
|
2,850,392
|
|
|
Charge for early redemption of preferred stock issued at discount
|
|
|
-
|
|
|
|
94,365
|
|
|
Dividend payable on preferred stock
|
|
|
195,115
|
|
|
|
136,033
|
|
|
Net income available to common shareholders
|
|
$
|
2,395,139
|
|
|
$
|
2,619,994
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Common shares – outstanding basic
|
|
|
3,248,369
|
|
|
|
2,095,923
|
|
|
Stock options under treasury stock method
|
|
|
135,071
|
|
|
|
70,999
|
|
|
Average Common shares – outstanding diluted
|
|
|
3,383,440
|
|
|
|
2,166,922
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
0.74
|
|
|
$
|
1.25
|
|
|
Diluted earnings per common share
|
|
$
|
0.71
|
|
|
$
|
1.21
|
|
At September 30, 2012 and 2011, no options outstanding had an exercise price exceeding the market price.
Note 8:
Income Taxes
The Company files income tax returns in the U.S. Federal jurisdiction and various states. The Company is no longer subject to federal and state examinations by tax authorities for fiscal years before 2009. The Company recognized no interest or penalties related to income taxes.
The Company’s income tax provision is comprised of the following components:
|
|
|
For the three-month period ended
|
|
|
|
|
September 30, 2012
|
|
|
September 30, 2011
|
|
|
Income taxes
|
|
|
|
|
|
|
|
Current
|
|
$
|
1,140,886
|
|
|
$
|
1,444,207
|
|
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
|
Total income tax provision
|
|
$
|
1,140,886
|
|
|
$
|
1,444,207
|
|
The components of net deferred tax assets (liabilities) are summarized as follows:
|
|
|
September 30, 2012
|
|
|
June 30, 2012
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Provision for losses on loans
|
|
$
|
3,448,182
|
|
|
$
|
3,247,995
|
|
|
Accrued compensation and benefits
|
|
|
173,696
|
|
|
|
171,113
|
|
|
Other-than-temporary impairment on
available for sale securities
|
|
|
261,405
|
|
|
|
261,405
|
|
|
NOL carry forwards acquired
|
|
|
159,613
|
|
|
|
159,613
|
|
|
Unrealized loss on other real estate
|
|
|
37,400
|
|
|
|
47,600
|
|
|
Total deferred tax assets
|
|
|
4,080,296
|
|
|
|
3,887,726
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
FHLB stock dividends
|
|
|
188,612
|
|
|
|
188,612
|
|
|
Purchase accounting adjustments
|
|
|
893,549
|
|
|
|
893,549
|
|
|
Depreciation
|
|
|
531,644
|
|
|
|
552,633
|
|
|
Prepaid expenses
|
|
|
106,759
|
|
|
|
123,704
|
|
|
Unrealized gain on available for sale
securities
|
|
|
529,050
|
|
|
|
400,554
|
|
|
Other
|
|
|
299,588
|
|
|
|
69,083
|
|
|
Total deferred tax liabilities
|
|
|
2,549,201
|
|
|
|
2,228,135
|
|
|
Net deferred tax asset
|
|
$
|
1,531,095
|
|
|
$
|
1,659,591
|
|
As of September 30, 2012, and June 30, 2012, the Company had approximately $515,000 of federal and state net operating loss carryforwards, which were acquired in the July 2009 acquisition of Southern Bank of Commerce. The amount reported is net of the IRC Sec. 382 limitation, or state equivalent, related to utilization of net operating loss carryforwards of acquired corporations. Unless otherwise utilized, the net operating losses will begin to expire in 2027.
A reconciliation of income tax expense at the statutory rate to the Company’s actual income tax is shown below:
|
|
|
For the three-month period ended
|
|
|
|
|
September 30, 2012
|
|
|
September 30, 2011
|
|
|
Tax at statutory rate
|
|
$
|
1,268,588
|
|
|
$
|
1,460,164
|
|
|
Increase (reduction) in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
Nontaxable municipal income
|
|
|
(124,268
|
)
|
|
|
(104,370
|
)
|
|
State tax, net of Federal benefit
|
|
|
92,400
|
|
|
|
116,655
|
|
|
Cash surrender value of
Bank-owned life insurance
|
|
|
(42,779
|
)
|
|
|
(24,328
|
)
|
|
Other, net
|
|
|
(53,055
|
)
|
|
|
(3,914
|
)
|
|
Actual provision
|
|
$
|
1,140,886
|
|
|
$
|
1,444,207
|
|
Tax credit benefits in the amount of $125,000 were recognized in the three-month period ended September 30, 2012, as compared to $73,000 recognized in the three-month period ended September 30, 2011, under the flow-through method of accounting for investments in tax credits.
Note 9:
401(k) Retirement Plan
The Company established a tax-qualified ESOP in April 1994. During fiscal 2011, the plan was merged with the Company’s 401(k) Retirement Plan (the Plan). The Plan covers substantially all employees who are at least 21 years of age and who have completed one year of service. In fiscal 2012, the Company converted the Plan to provide a safe harbor matching contribution of up to 4% of eligible compensation, and also made additional, discretionary profit-sharing contributions for fiscal 2012; for fiscal 2013, the Company has maintained the safe harbor matching contribution of 4%, and expects to continue to make additional, discretionary profit-sharing contributions. During the three-month period ended September 30, 2012, retirement plan expenses recognized were approximately $112,000, as compared to $100,000 for the three-month period ended September 30, 2011.
Note 10:
Corporate Obligated Floating Rate Trust Preferred Securities
Southern Missouri Statutory Trust I issued $7.0 million of Floating Rate Capital Securities (the “Trust Preferred Securities”) in March, 2004, with a liquidation value of $1,000 per share. The securities are due in 30 years, are now redeemable, and bear interest at a floating rate based on LIBOR. The securities represent undivided beneficial interests in the trust, which was established by the Company for the purpose of issuing the securities. The Trust Preferred Securities were sold in a private transaction exempt from registration under the Securities Act of 1933, as amended (the “Act”) and have not been registered under the Act. The securities may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.
Southern Missouri Statutory Trust I used the proceeds from the sale of the Trust Preferred Securities to purchase Junior Subordinated Debentures of the Company. The Company has used its net proceeds for working capital and investment in its subsidiary.
Note 11:
Small Business Lending Fund
On July 21, 2011, as part of the Small Business Lending Fund (SBLF) of the United States Department of the Treasury (Treasury), the Company entered into a Small Business Lending Fund-Securities Purchase Agreement (Purchase Agreement) with the Secretary of the Treasury, pursuant to which the Company (i) sold 20,000 shares of the Company’s Senior Non-Cumulative Perpetual Preferred Stock, Series A (SBLF Preferred Stock) to the Secretary of the Treasury for a purchase price of $20,000,000. The SBLF Preferred Stock was issued pursuant to the SBLF program, a $30 billion fund established under the Small Business Jobs Act of 2010 that was created to encourage lending to small business by providing capital to qualified community banks with assets of less than $10 billion.
The SBLF Preferred Stock qualifies as Tier 1 capital. The SBLF Preferred Stock is entitled to receive non-cumulative dividends, payable quarterly, on each January 1, April 1, July 1 and October 1, beginning October 1, 2011. The dividend rate, as a percentage of the liquidation amount, can fluctuate on a quarterly basis during the first 10 quarters during which the SBLF Preferred Stock is outstanding, based upon changes in the Bank’s level of Qualified Small Business Lending (QBSL), as defined in the Purchase Agreement. Based upon the increase in the Bank’s level of QBSL over the baseline level calculated under the terms of the Purchase Agreement, the dividend rate for the initial dividend period was set at 2.8155%. For the second through ninth calendar quarters, the dividend rate may be adjusted to between one percent (1%) and five percent (5%) per annum, to reflect the amount of change in the Bank’s level of QBSL. The dividend rate for the quarter ended March 31, 2012, was 1%. For the tenth calendar quarter through four and one half years after issuance, the dividend rate will be fixed at between one percent (1%) and seven percent (7%) based upon the increase in QBSL as compared to the baseline. After four and one half years from issuance, the dividend rate will increase to 9% (including a quarterly lending incentive fee of 0.5%).
The SBLF Preferred Stock is non-voting, except in limited circumstances. In the event that the Company misses five dividend payments, the holder of the SBLF Preferred Stock will have the right to appoint a representative as an observer on the Company’s Board of Directors. In the event that the Company misses six dividend payments, then the holder of the SBLF Preferred Stock will have the right to designate two directors to the Board of Directors of the Company.
The SBLF Preferred Stock may be redeemed at any time at the Company’s option, at a redemption price of 100% of the liquidation amount plus accrued but unpaid dividends to the date of redemption for the current period, subject to the approval of its federal banking regulator.
As required by the Purchase Agreement, $9,635,000 of the proceeds from the sale of the SBLF Preferred Stock was used to redeem the 9,550 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A issued in 2008 to the Treasury in the Troubled Asset Relief Program (TARP), plus the accrued dividends owed on those preferred shares. As part of the 2008 TARP transaction, the Company issued a ten-year warrant to Treasury to purchase 114,326 shares of the Company’s common stock at an exercise price of $12.53 per share. The Company has not repurchased the warrant, which is still held by Treasury.
Note 12:
Fair Value Measurements
ASC Topic 820,
Fair Value Measurements
, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also establishes 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 standard describes three levels of inputs that may be used to measure fair value:
Level 1
Quoted prices in active markets for identical assets or liabilities
Level 2
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities
Recurring Measurements.
The following table presents the fair value measurements of assets recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30 and June 30, 2012:
|
|
|
Fair Value Measurements at
September 30, 2012
, Using
:
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
Active Markets
for Identical Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government sponsored enterprises (GSEs)
|
|
$
|
14,086,831
|
|
|
$
|
-
|
|
|
$
|
14,086,831
|
|
|
$
|
-
|
|
|
State and political subdivisions
|
|
|
38,881,064
|
|
|
|
-
|
|
|
|
38,881,064
|
|
|
|
-
|
|
|
Other securities
|
|
|
1,452,057
|
|
|
|
-
|
|
|
|
1,409,057
|
|
|
|
43,000
|
|
|
FHLMC preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Mortgage-backed GSE residential
|
|
|
17,553,946
|
|
|
|
-
|
|
|
|
17,553,946
|
|
|
|
-
|
|
|
|
|
Fair Value Measurements at June 30, 2012, Using
:
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
Active Markets
for Identical Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government sponsored enterprises (GSEs)
|
|
$
|
18,099,618
|
|
|
$
|
-
|
|
|
$
|
18,099,618
|
|
|
$
|
-
|
|
|
State and political subdivisions
|
|
|
36,381,253
|
|
|
|
-
|
|
|
|
36,381,253
|
|
|
|
-
|
|
|
Other securities
|
|
|
1,393,257
|
|
|
|
-
|
|
|
|
1,360,657
|
|
|
|
32,600
|
|
|
FHLMC preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Mortgage-backed GSE residential
|
|
|
19,252,717
|
|
|
|
-
|
|
|
|
19,252,717
|
|
|
|
-
|
|
Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarch. There have been no significant changes in the valuation techniques during the period ended September 30, 2012.
Available-for-sale Securities.
When quoted market prices are available in an active market, securities are classified within Level 1. The Company does not have Level 1 securities. If quoted market prices are not available, then fair values are estimated using pricing models, or quoted prices of securities with similar characteristics. For these securities, our Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Level 2 securities include U.S. Government-sponsored enterprises, state and political subdivisions, other securities and mortgage-backed GSE residential securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.
The following table presents a reconciliation of activity for available for sale securities measured at fair value based on significant unobservable (Level 3) information for the three-month periods ended September 30, 2012 and 2011:
|
|
|
Three months ended
|
|
|
|
|
September 30, 2012
|
|
|
September 30, 2011
|
|
|
Available-for-sale securities, beginning of year
|
|
$
|
32,600
|
|
|
$
|
71,004
|
|
|
Total unrealized gain (loss) included in comprehensive income
|
|
|
10,400
|
|
|
|
(42,004
|
)
|
|
Transfer from Level 2 to Level 3
|
|
|
-
|
|
|
|
-
|
|
|
Available-for-sale securities, end of period
|
|
$
|
43,000
|
|
|
$
|
29,000
|
|
Nonrecurring Measurements.
The following tables present the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the ASC 820 fair value hierarchy in which the fair value measurements fell at September 30 and June 30, 2012:
|
|
|
Fair Value Measurements at
September 30, 2012
, Using:
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
|
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans (collateral dependent)
|
|
$
|
1,071,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,071,000
|
|
|
Foreclosed and repossessed assets held for sale
|
|
|
1,138,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,138,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at June 30, 2012, Using:
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
|
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans (collateral dependent)
|
|
$
|
1,214,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,214,000
|
|
|
Foreclosed and repossessed assets held for sale
|
|
|
1,435,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,435,000
|
|
The following table presents gains and (losses) recognized on assets measured on a non-recurring basis for the three-month periods ended September 30, 2012 and 2011:
|
|
|
For the three months ended
|
|
|
|
|
September 30, 2012
|
|
|
September 30, 2011
|
|
|
|
|
|
|
|
|
|
|
Impaired loans (collateral dependent)
|
|
$
|
(171,000
|
)
|
|
$
|
146,000
|
|
|
Foreclosed and repossessed assets held for sale
|
|
|
(13,000
|
)
|
|
|
(102,000
|
)
|
|
Total gains (losses) on assets measured on a non-recurring basis
|
|
$
|
(184,000
|
)
|
|
$
|
44,000
|
|
The following is a description of valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets and liabilities pursuant to the valuation hierarch. For assets classified within Level 3 of fair value hierarchy, the process used to develop the reported fair value process is described below.
Impaired Loans (Collateral Dependent).
A collateral dependent loan is considered to be impaired when it is probable that all of the principal and interest due may not be collected according to its contractual terms. Generally, when a collateral dependent loan is considered impaired, the amount of reserve required is measured based on the fair value of the underlying collateral. The Company makes such measurements on all material collateral dependent loans deemed impaired using the fair value of the collateral for collateral dependent loans. The fair value of collateral used by the Company is determined by obtaining an observable market price or by obtaining an appraised value from an independent, licensed or certified appraiser, using observable market data. This data includes information such as selling price of similar properties and capitalization rates of similar properties sold within the market, expected future cash flows or earnings of the subject property based on current market expectations, and other relevant factors. In addition, management applies selling and other discounts to the underlying collateral value to determine the fair value. If an appraised value is not available, the fair value of the collateral dependent impaired loan is determined by an adjusted appraised value including unobservable cash flows.
On a quarterly basis, loans classified as special mention, substandard, doubtful, or loss are evaluated including the loan officer’s review of the collateral and its current condition, the Company’s knowledge of the current economic environment in the market where the collateral is located, and the Company’s recent experience with real estate in the area. The date of the appraisal is also considered in conjunction with the economic environment and any decline in the real estate market since the appraisal was obtained. For all loan types, updated appraisals are obtained if considered necessary. Of the Company’s $5.5 million (carrying value) in impaired loans (collateral-dependent and purchased credit-impaired) at September 30, 2012, the Company utilized a real estate appraisal performed in the past 12 months to serve as the primary basis of our valuation for approximately $2.5 million. Older real estate appraisals were available for impaired loans with an carrying value of approximately $2.1 million. The remaining $933,000 was secured by collateral such as closely-held stock, an assignment of notes receivable, accounts receivable, or inventory. In instances where the economic environment has worsened and/or the real estate market declined since the last appraisal, a higher distressed sale discount would be applied to the appraised value.
The Company records collateral dependent impaired loans based on nonrecurring Level 3 inputs. If a collateral dependent loan’s fair value, as estimated by the Company, is less than its carrying value, the Company either records a charge-off of the portion of the loan that exceeds the fair value or establishes a specific reserve as part of the allowance for loan losses.
Foreclosed and Repossessed Assets Held for Sale.
Foreclosed and repossessed assets held for sale are valued at the time the loan is foreclosed upon or collateral is repossessed and the asset is transferred to foreclosed or repossessed assets held for sale. The value of the asset is based on third party or internal appraisals, less estimated costs to sell and appropriate discounts, if any. The appraisals are generally discounted based on current and expected market conditions that may impact the sale or value of the asset and management’s knowledge and experience with similar assets. Such discounts typically may be significant and result in a Level 3 classification of the inputs for determining fair value of these assets. Foreclosed and repossessed assets held for sale are continually evaluated for additional impairment and are adjusted accordingly if impairment is identified.
Unobservable (Level 3) Inputs.
The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements.
|
|
|
Fair value at
September 30, 2012
|
Valuation
technique
|
Unobservable
inputs
|
Range of
Discounts applied
|
Weighted-average
discount applied
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
(pooled trust preferred
security)
|
|
$ 43,000
|
Discounted cash
flow
|
Discount rate
Prepayment rate
Projected defaults
and deferrals
(% of pool balance)
Anticipated recoveries
(% of pool balance)
|
n/a
n/a
n/a
n/a
|
7.6%
1% annually
(1)
40.9%
4.5%
|
|
Impaired loans (collateral
dependent)
|
|
1,071,000
|
Internal or third-
party appraisal
|
Discount to reflect
realizable value
|
19.9% - 100%
|
40.3%
|
|
Foreclosed and repossessed
assets
|
|
1,138,000
|
Third party
appraisal
|
Marketability
discount
|
0.0% - 35.7%
|
18.2%
|
(1)
The Level 3 fair value measurement also assumes that issuers of asset size of $15 billion and above will generally prepay during 2013, unless issued at a
variable rate with a spread of less than 150 basis points over LIBOR; other issuers are expected to prepay at a rate of 1% annually, unless issued at a fixed
rate of 8% or more by a bank reasonably expected to be able to prepay, based on financial strength.
Fair Value of Financial Instruments.
The following table presents estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fell at September 30 and June 30, 2012.
|
|
|
September 30, 2012
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
Markets for
|
|
|
Significant Other
|
|
|
Unobservable
|
|
|
|
|
Carrying
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Inputs
|
|
|
|
|
Amount
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,006
|
|
|
$
|
9,006
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Interest-bearing time deposits
|
|
|
2,
154
|
|
|
|
-
|
|
|
|
2,154
|
|
|
|
-
|
|
|
Stock in FHLB
|
|
|
2,819
|
|
|
|
-
|
|
|
|
2,819
|
|
|
|
-
|
|
|
Stock in Federal Reserve Bank of St. Louis
|
|
|
1,001
|
|
|
|
-
|
|
|
|
1,001
|
|
|
|
-
|
|
|
Loans receivable, net
|
|
|
608,689
|
|
|
|
-
|
|
|
|
-
|
|
|
|
612,921
|
|
|
Accrued interest receivable
|
|
|
4,432
|
|
|
|
-
|
|
|
|
4,432
|
|
|
|
-
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
571,884
|
|
|
|
346,308
|
|
|
|
-
|
|
|
|
226,135
|
|
|
Securities sold under agreements to repurchase
|
|
|
22,941
|
|
|
|
-
|
|
|
|
22,941
|
|
|
|
-
|
|
|
Advances from FHLB
|
|
|
42,500
|
|
|
|
-
|
|
|
|
28,094
|
|
|
|
-
|
|
|
Accrued interest payable
|
|
|
545
|
|
|
|
-
|
|
|
|
545
|
|
|
|
-
|
|
|
Subordinated debt
|
|
|
7,217
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,404
|
|
|
Unrecognized financial instruments
(net of contract amount)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to originate loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Letters of credit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Lines of credit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
June 30, 2012
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
Markets for
|
|
|
Significant Other
|
|
|
Unobservable
|
|
|
|
|
Carrying
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Inputs
|
|
|
|
|
Amount
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
33,421
|
|
|
$
|
33,421
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Interest-bearing time deposits
|
|
|
1,273
|
|
|
|
-
|
|
|
|
1,273
|
|
|
|
-
|
|
|
Stock in FHLB
|
|
|
2,018
|
|
|
|
-
|
|
|
|
2,018
|
|
|
|
-
|
|
|
Stock in Federal Reserve Bank of St. Louis
|
|
|
1,001
|
|
|
|
-
|
|
|
|
1,001
|
|
|
|
-
|
|
|
Loans receivable, net
|
|
|
583,465
|
|
|
|
-
|
|
|
|
-
|
|
|
|
587,955
|
|
|
Accrued interest receivable
|
|
|
3,694
|
|
|
|
-
|
|
|
|
3,694
|
|
|
|
-
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
584,814
|
|
|
|
353,212
|
|
|
|
|
|
|
|
232,583
|
|
|
Securities sold under agreements to repurchase
|
|
|
25,642
|
|
|
|
-
|
|
|
|
25,642
|
|
|
|
-
|
|
|
Advances from FHLB
|
|
|
24,500
|
|
|
|
-
|
|
|
|
27,923
|
|
|
|
-
|
|
|
Accrued interest payable
|
|
|
627
|
|
|
|
-
|
|
|
|
627
|
|
|
|
-
|
|
|
Subordinated debt
|
|
|
7,217
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,103
|
|
|
Unrecognized financial instruments
(net of contract amount)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to originate loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Letters of credit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Lines of credit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
The following methods and assumptions were used in estimating the fair values of financial instruments:
Cash and cash equivalents and interest-bearing time deposits are valued at their carrying amounts, which approximates book value. Stock in FHLB and the Federal Reserve Bank of St. Louis is valued at cost, which approximates fair value. Fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics are aggregated for purposes of the calculations. The carrying amounts of accrued interest approximate their fair values.
The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities. Non-maturity deposits and securities sold under agreements are valued at their carrying value, which approximates fair value. Fair value of advances from the FHLB is estimated by discounting maturities using an estimate of the current market for similar instruments. The fair value of subordinated debt is estimated using rates currently available to the Company for debt with similar terms and maturities. The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and committed rates. The fair value of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date.